4. Use of Harbor Maintenance Trust Fund for administrative
expenses

Pr Lay

Under present law, amounts in the Harbor Maintenance Trust
Fund are available, as provided by appropriation Acts, for making
expenditures- -

(1) under section 210(a) of the Water Resources Development
Act of 1986 (Corps of Engineers costs for dredging and
Maintaining harbors at U.S. ports);

(2) for payments of rebates of certain St. Lawrence Seaway
tolls or charges; and

(3) for payment of administrative expenses incurred by the
Department of the Treasury in administering the harbor
maintenance excise tax (but not more than $5 million
per fiscal year) for periods during which no Customs
processing fee applies under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("1985 Act").

i The Customs processing fee is currently scheduled to expire
after September 30, 1995.’ Thus, since the Customs processing
fee is in effect under the 1985 Act, the Trust Fund is not
permitted to be used for such Treasury (Customs) administrative
expenses.

i ‘ 1
The proposal would provide up to $5 million per fiscal year
from the Harbor Maintenance Trust Fund for the Department of the
Treasury (Customs Service) to improve compliance with the

existing harbor maintenance excise tax by removing the current
Trust Fund restriction against such use.

Effective Date

The proposal would be effective on the date of enactment.

' A separate Administration budget proposal (not described in

this document) would permanently extend the current Customs
processing fee. (On April 29, 1993, the Ways and Means
Subcommittee on Trade approved a provision to extend the current
Customs processing fee for three years, through September 30,
1998.) :

70



Activities of legally separate (even if related) parties
would not be aggregated for purposes of determining whether an
entity qualifies as an enterprise zone business.

Increased section 179 expensing

The present-law $10,000 expensing allowance for certain
depreciable business property provided under section 179 would be
increased to $75,000 for qualified zone property of an enterprise
zone businesses (as defined above). The types of property
eligible for section 179 expensing would be expanded to include
buildings used in enterprise zone businesses.

"Qualified zone property" would be defined as depreciable
tangible property (including buildings), provided that: (1) such
property was acquired by the taxpayer (but not from a related
party) after the zone. designation took effect; (2) the original
use of the property in the zone commences with the taxpayer; and
(3) substantially all of the use of the property is in the zone
in the active conduct of a trade or business by the taxpayer in
the zone. In the case of property which is substantially
renovated by the taxpayer, however, such property need not be
acquired by the taxpayer after zone designation nor originally
used by the taxpayer within the zone if during any 24-month
period after zone designation the additions to the taxpayer’s
basis in such property exceed 100 percent of the taxpayer’s basis
in such property at the beginning of the period or $5,000
(whichever is greater).

As under present law, the section 179 expensing allowance
would be phased out for certain taxpayers with investment in
depreciable business property during the taxable year above a
specified threshold. However, the present-law phaseout range
(i.e., $20°,000 to $210,000 of investment during the taxable
year) would be increased for enterprise zone businesses to a
phaseout range of $200,000 to $350,000 of investment made by the
taxpayer during the taxable year.

As under present-law section 179, all component members of a
controlled group are treated as one taxpayer for purposes of the
expensing allowance and application of the phaseout range (sec.
179 (a) (6)). The $75,000 expensing allowance is to apply at both
the partnership (and S corporation) and partner (and shareholder
levels. .

The increased expensing allowance would apply for purposes
of the alternative minimum tax (i.e., it would not be treated as
an adjustment for purposes of the alternative minimum tax). The
section 179 expensing deduction would be recaptured if the
property is not used predominantly in a enterprise zone business
(under rules similar to present-law section 179(d) (10)).



However, section 4911(d)(2) specifically excludes the
following activities from the definition of "influencing
legislation":

(A) conducting nonpartisan analysis, study, or research;

{(B) responding to a written request to provide technical
advice or assistance to a governmental body;

{C) appearing before, or communicating with, any legislative
body regarding a possible decision of such body which might
affect the existence of the organization, its powers and
duties, tax-exempt status, or the deduction of contributions
to the organization;

(D) communicating between the organization and its members
with respect to legislation or proposed legislation of direct
interest to the organization and such members, unless the
communication directly encourages members to (1) contact a
legislative body in an attempt to influence legislation, or
(2) urge other persons to attempt to affect the opinions of
the general public or to contact a legislative body in an
attempt to influence legislation; and

{E) communicating with government officials or employees to
the extent that the principal purpose of such communications
is not to influence legislation.

vi ny i --Private foundations (as distinguished
from public charities) generally are subject to penalty excise
taxes under section 4945 if they engage in any direct or grass
roots lobbying, even if not substantial. For purposes of section
4945, lobbying is defined similarly as under section 4911(d).
Specifically, the section 4945 penalty excise taxes do not apply to
nonpartisan analysis, the provision of technical advice to a
governmental body in response to a written request, or lobbying
before a legislative body with respect to a possible decision of
such body which might affect the existence of the private
foundation, its powers and duties, its tax-exempt status, or the
deduction of contributions to such foundation.

nistration’s Pr

Taxpayers would no longer be allowed to deduct certain
lobbying expenses under section 162. Lobbying expenses for
purposes of this disallowance rule would be defined similarly to
the definition of expenditures to influence legislation under
section 4911(d) (1) (B)--that is, no deduction would be allowed for
any amount paid or incurred in connection with any attempt to
influence legislation through communication with any member or
employee of a legislative body, or with any government official or
employee who may participate in the formulation of legislation.

“<7



INTRODUCTION ry

I. REVENUE-RAISING PROVISIONS ........

A. Individual Income and Estate and Gift
Tax Provision. ........4... wee
1. Increased tax rates for higher income
individuals ..............
2. Provisions to prevent conversion of
ordinary income to capital gain ....
3. Repeal health insurance wage base
CAD we ee
4. Reinstate top estate and gift tax rates

at 53 percent and 55 percent ......

5. Reduce deductible portion of business
meals and entertainment expenses to
50 percent... 2... ee ee

6. Deny deduction for club dues ......

7. Deny deduction for executive pay over
$1 million. .............2.

8. Reduce compensation taken into account

for qualified retirement plan purposes .
9. Deduction for moving expenses .....

10. Increase taxable portion of Social
Security and Railroad Retirement

Ta ww» ~F

Tier 1 benefits ...

Business Provisions ...

1.

Increase corporate tax rate for taxable
income over $10 million

Deny deduction for lobbying expenses . .

Mark-to-market accounting method for

dealers in securities

Tax treatment of certain FSLIC

financial assistance

RO
al

al
22

az
3A


130

percent of the area's census tracts must each have a poverty rate
of at least 25 percent; and at least 50 percent of the area’s
census tracts must each have a poverty rate of at least 35
percent.’ For purposes of these measurements, unpopulated census
tracts and census tracts with limited populations and 75 percent
or more zoned for commercial or industrial use will be treated as
satisfying the bill’s 20-percent and 25-percent poverty rate
eriteria. Each census tract located in a central business
district must have a poverty rate of at least 35 percent.® If
the nominated area consists of noncontiguous parcels, each parcel
must separately satisfy the above poverty criteria.

Strategic plan.--A strategic plan must be submitted by the
nominating body for purposes of accomplishing the goals of this
legislation.

n ts of ic

In order for a nominated area to be eligible for
designation, the local government(s) and State(s) in which the
area is located would be required to provide a strategic plan
that: (1) describes the coordinated economic, human, community,
and physical development plan and related activities proposed for
the nominated area; (2) describes the process by which the
affected community is a full partner in the process of developing
and implementing the plan and the extent to which local
institutions and organizations have contributed to the planning
process; (3) identifies the amount of State, local, and private
resources that will be available in the nominated area and the
private/public partnerships to be used, which may include
participation by, and cooperation with, universities, medical
centers, and other private and public entities; (4) identifies
the funding requested under any Federal program in support of the
proposed economic, human, community, and physical development and
related activities; (5) identifies baselines, methods, and
benchmarks for measuring the success of carrying out the
strategic plan, including the extent to which poor persons and
families will be empowered to become economically self-
sufficient, and (6) generally does not include any action to
assist any establishment in relocating from an area outside the
nominated area to the nominated area.

5’ The appropriate Secretary may modify one of these poverty
eriteria by five percentage points for not more than 10 percent
of the population census tracts (up to a maximum of five
population census tracts) in the nominated area.

6 The appropriate Secretary has no discretion to reduce the
35-percent poverty rate threshold for tracts located in a central
business district.



4. Increase withholding rate on supplemental wage payments
Present Law

Under Treasury regulations, withholding on supplemental wage
payments (such as bonuses, commissions, and overtime pay) that
are not paid concurrently with wages (or that are paid
concurrently with wages, but are separately stated) for a payroll
period may be done at.a rate of 20 percent (at the employer’s
election) (Treas. reg. sec. 31.3402(g)-1).

ze on’

The proposal would increase the applicable withholding rate
on supplemental wage payments to 28 percent.

Effective Date

The proposal would be effective for payments made after
December 31, 1993.



wf
wl

program.
ni. nm!

The proposal would permanently and retroactively extend the
targeted jobs tax credit for individuals who begin work for the
employer after June 30, 1992. In addition, the targeted jobs tax
credit would be expanded to include qualified participants in an
approved school-to-work program beginning work after December 31,
1993.

A qualified participant in an approved school-to-work
program would be any individual aged 16 through 20 who was
enrolled in an approved school-to-work program and certified to
be making satisfactory progress in completing the program. A
program would be considered to be an approved school-to-work
program only if it is a planned program of structured job
training designed to integrate academic instruction and
work-based learning and is approved by the Secretaries of Labor
and Education.

The total number of qualified participants in an approved
school-to-work program would be capped in each calendar year.
The cap would be as follows: 125,000 in 1994, 140,000 in 1995,
160,000 in 1996, 180,000 in 1997 and 200,000 in 1998 and each
year thereafter. These amounts will be allocated among the
States in proportion to the number of eligible participants. that
are estimated to be served in approved school-to-work programs
for that year. Such estimates shall be published by the
Secretaries of Labor and Education before the beginning of the
year to which the allocation applies. Each State’s allocation,
in turn, will be allocated among its approved school-to-work
programs in such manner as the Secretaries of Labor and Education
prescribe. Because the approved school-to-work program is a
work-study program, the credit would equal 40 percent of up to
$3,000 of first-year wages, for a maximum credit of $1,200.

Effective Date

The extension of the basic targeted jobs tax credit would be
effective for individuals who begin work for the employer after
June 30, 1992. The targeted jobs tax credit would be expanded to
include qualified participants in an approved school-to-work
program beginning work after December 31, 1993.



6. Deny deduction for club dues
Present Law

No deduction is permitted for club dues unless the taxpayer
establishes that his or her use of the club was primarily for the
furtherance of the taxpayer’s trade or business and the specific
expense was directly related to the active conduct of that trade
or business (Code sec. 274(a)). No deduction is permitted for an
initiation or similar fee that is payable only upon joining a
club if the useful life of the fee extends over more than one
year. Such initial fees are nondeductible capital expenditures.!

Administration's Proposal

Under the proposal, no deduction would be permitted for club
dues. This rule would apply to all types of clubs (other than
those exempted below), including business, social, athletic,
luncheon, and sporting clubs. Specific business expenses (e.g.,
meals) incurred at a club would be deductible only to the extent
they otherwise satisfy the standards for deductiblity.

Dues for airline and hotel clubs would not be subject to the
proposal.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1993.

+ Kenneth D, Smith, 24 TCM 899 (1965).

14



5. Excise tax on certain vaccines for the Vaccine Injury
Compensation Trust Fund

Present Law

vi ini a rOgr:

The Vaccine Injury Compensation Trust Fund ("Vaccine Trust
Fund") provides a source of revenue to compensate individuals who
die or who are injured as a result of the administration of certain
vaccines: diphtheria, pertussis, and tetanus ("DPT"); diphtheria
and tetanus ("DT"); measles, mumps, and rubella ("MMR"); and polio.

All persons who were immunized with a covered vaccine after
October 1, 1988, and before October 1, 1992, are prohibited from
commencing a civil action in State court for vaccine-related
damages unless they first file a petition with the United States
Claims Court, where such petitions are assigned to a special master
and governed by streamlined procedural rules designed to expedite
the proceedings.! Only if the final settlement under the Program
is rejected may the claimant proceed with a civil tort action in
the appropriate State court, where recovery generally will be
governed by State tort law principals.

Vaccine excise tax

The Vaccine Trust Fund is funded by a manufacturer’s excise
tax on DPT, DT, MMR, and polio vaccines (and any other vaccines
used to prevent these diseases). The excise tax per does is $4.56
for DPT, $0.06 for DT, $4.44 for MMR, and $0.29 for polio vaccines.

The vaccine excise tax expired after December 31, 1992.
Amounts in the Vaccine Trust Fund are available for the payment of
compensation under the Program with respect to vaccines
administered after September 30, 1988, and before October 1, 1992.

eR ion’

' Persons who received vaccines before the Program’s effective
date of october 1, 1988 ("retrospective cases") also May be
eligible for compensation under the Program if they had not yet
received compensation and elected to file a petition with the
United States Claims Court on or before January 31, 1991. Under
the Program, awards in retrospective cases are somewhat limited
compared to "prospective cases" (i.e., those where the vaccine was
administered on or after October 1, 1988). Awards in retrospective
cases are not paid out of the Vaccine Trust Fund but are paid out
of funds specially authorized by Congress. See 42 U.S.C. sec.
300aa-15(4), (j) (appropriating $80 million for fiscal year 1989
and for each subsequent year).



section 481(a) adjustment that is attributable to the use of the
LIFO inventory method of accounting for qualified securities could
not exceed the taxpayer’s overall section 481 (a) adjustment for all
securities under the proposal.

The principles of section 8.03(1) and (2) of Rev. Proc. 92-20,
1992-12 I.R.B. 10, would apply to the section 481(a) adjustment by
taking into account all securities of a dealer that are subject to
the mark-to-market rules (including those securities that are not
inventory in the hands of the dealer).

No addition to tax would apply to certain underpayments of
estimated tax to the extent that the underpayments are attributable
to the enactment of this proposal.

3l



“Wy

3. Modify passive loss rules for certain real estate persons

Present Law

The passive loss rules limit deductions and credits from
passive trade or business activities. Deductions attributable to
passive activities, to the extent they exceed income from passive
activities, generally may not be deducted against other income,
such as wages, portfolio income, or business income that is not
derived from a passive activity. A similar rule applies with
respect to credits from passive activities. Deductions and
credits suspended under these rules are carried forward to the
next taxable year, and are allowed in full when the taxpayer
disposes of his entire interest in the passive activity to an
unrelated person. The passive loss rules apply to individuals,
estates and trusts, and in modified form to closely held Cc
corporations.

Passive activities are defined to include trade or business
activities in which the taxpayer does not materially participate.
Rental activities (including rental real estate activities) are
also treated as passive activities, regardless of the level of
the taxpayer’s participation. A special exception to this
treatment of rental activities permits a taxpayer to treat up to
$25,000 of rental real estate losses as nonpassive; this special
exception is phased out ratably as taxpayers’ adjusted gross
incomes increase from $100,000 to $150,000.

inistr: ‘ 1

The proposal would provide a special rule for real estate
professionals. This rule would allow an eligible taxpayer to
deduct the net loss for the taxable year from rental real estate
activities in which he materially participates (or, if less, the
passive activity loss for the year). The deductible loss would
be limited, however, to the lesser of (1) the taxpayer’s net
income from nonpassive real property trade or business
activities, or (2) the taxpayer’s taxable income (determined
without regard to the special rule for real estate
professionals). Losses allowed by reason of the current-law
$25,000 allowance would be determined before the application of
the special rule for real estate professionals. Similar relief
would be provided with respect to credits.

A taxpayer would meet the eligibility requirements for the
special rule if more than half of the personal services the
taxpayer performs in a trade or business during the taxable year
are in real property trades or businesses in which he materially
participates. A real property trade or business is any real
property development, redevelopment, construction,
reconstruction, acquisition, conversion, rental, operation,
management, leasing, or brokerage trade or business. For
purposes of the eligibility requirements, personal services
performed as an employee would not be treated as performed in a



per)

OASDI portion of social security (currently $57,600), with
appropriate adjustments in the cases of part-time employees
and of employees whose principal place of employment is not
within a possession for the entire year. For this purpose,
wages generally would not include amounts paid to employees
assigned by the employer to perform services for another
person.

For purposes of the limitation on the credit against
U.S. tax on QPSII, the amount of a possession corporation’s
QPSII assets for a taxable year is determined by computing
the average of the aggregate adjusted bases (for purposes of
computing earnings and profits) of its assets which generate
QPSII as of the close of each quarter of that year. A
possession corporation’s business property for a taxable year
is determined by computing the average of the aggregate
adjusted bases (for purposes of computing earnings and
profits) of tangible property used in a possession by the
corporation in an active trade or business.

The proposal would allow an affiliated group of
corporations to elect to consolidate related possession
corporations for purposes of determining their section 936
credit. The consolidated credit would be allocated among the
possession corporations under rules prescribed by the
Treasury Secretary.

If the section 936 credit of a possession corporation is
reduced by either of the limitations for a taxable year, then
the proposal would permit the corporation to claim a
deduction for a portion of its income taxes paid or accrued
to a possession for that year. The portion of the taxes so
deductible would be the portion that is allocable on a pro
rata basis to the corporation’s taxable income (computed
before taking into account any possession tax) the U.S. tax
on which is not offset by the section 936 credit.

For purposes of computing alternative minimum tax for a
recipient of dividends from a possession corporation, the
proposal would create a new separate foreign tax credit
limitation category for such dividends.

Effective Date

The proposal would be effective for taxable years
beginning after December 31, 1993, except that, for taxable
years beginning in 1994 or 1995, possession corporations may
elect to claim an alternative credit not subject to the two
limitations described above. Under this alternative, the
credit would be 80 percent of the current law credit for
taxable years beginning in 1994 and 60 percent for taxable
years beginning in 1995. Under the alternative credit, taxes
imposed by the possessions on income the U.S. tax on which is
not offset by the credit would be deductible by the



2. Expansion of 45-day interest-free period for certain refunds

Present Law

No interest is paid by the Government on a refund arising
from an original income tax return if the refund is issued by the
45th day after the later of the due date for the return
(determined without regard to any extensions) or the date the
return is filed (sec. 6611(e)).

There is no parallel rule for refunds of taxes other than
income taxes (i.e., employment, excise, and estate and gift
taxes), for refunds of any type of tax arising from amended
returns, or for claims for refunds of any type of tax.

If a taxpayer files a timely original return with respect to
any type of tax and later files an amended return claiming a
refund, and if the IRS determines that the taxpayer is due a
refund on the basis of the amended return, the IRS will pay the
refund with interest computed from the due date of the original
return.

A: xi ! 2

No interest is to be paid by the Government on a refund
arising from any type of original tax return if the refund is
issued by the 45th day after the later of the due date for the
return (determined without regard to any extensions) or the date
the return is filed.

A parallel rule applies to amended returns and claims for
refunds: if the refund is issued by the 45th day after the date
the amended return or claim for refund is filed, no interest is
to be paid by the Government for that period of up to 45 days
(interest would continue to be paid for the period from the due
date of the return to the date the amended return or claim for
refund is filed). If the IRS does not issue the refund by the
45th day after the date the amended return or claim for refund is
filed, interest would be paid (as under present law) for the
period from the due date of the original return to the date the
IRS pays the refund.

A parallel rule also applies to IRS-initiated adjustments
(whether due to computational adjustments or audit adjustments) .
With respect to these adjustments, the IRS is to pay interest for
45 fewer days than it otherwise would.

Effective Date

The extension of the 45-day processing rule would be
effective for returns required to be filed (without regard to
extensions) on or after January 1, 1994. The amended return rule
would be effective for amended returns and claims for refunds
filed on or after January 1, 1995 (regardless of the taxable

I



any addition to a reserve for bad debts. For this purpose, FSLIC
assistance means any assistance or right to assistance with
respect to a domestic building and loan association (as defined
in Code sec. 7701(a) (19) without regard to subparagraph (C)
thereof) pursuant to section 406(f) of the National Housing Act
or section 21A of the Federal Home Loan Bank Act (or under any
similar provision of law).

The proposal would not apply to any financial assistance to
which the amendments made by section 1401(a) (3) of FIRREA apply.

No_ inference

No inference would be intended as to prior law or as to the
treatment of any item to which the proposal does not apply.

Effective Date
In_general

The proposal would apply to financial assistance credited on
or after March 4, 1991, with respect to: (1) assets disposed of
and charge-offs made in taxable years ending on or after March 4,
1991; and (2) assets disposed of and charge-offs made in taxable
years ending before March 4, 1991, but only for purposes of
determining the amount of any net operating loss carryover to a
taxable year ending on or after March 4, 1991.

For this purpose, financial assistance generally would be
considered to be credited when the taxpayer made an approved
debit entry to a Special Reserve Account required to be
maintained under the assistance agreement to reflect the asset
disposition or charge-off. An amount will also be considered to
be credited prior to March 4, 1991 if the asset was sold, with
prior FSLIC approval, before that date.

Application to certain net operating losses

The proposal would apply to the determination of any net
operating loss carried into a taxable year ending on or after
March 4, 1991, to the extent that the net operating loss is
attributable to a loss or charge-off for which the taxpayer had a
right to FSLIC assistance which had not been credited before
March 4, 1991.

Estimated Tax Payments

The proposal would waive additions to tax for underpayments
relating to certain estimated tax payments.

57



[3

Administration’s Proposal

The proposal would deny a deduction for travel expenses paid
or incurred with respect to a spouse, dependent, or other
individual accompanying a person on business travel, unless (1)
the spouse, dependent, or other individual accompanying the
person is a bona fide employee of the person paying or
reimbursing the expenses, (2) the travel of the spouse,
dependent, or other individual is for a bona fide business
purpose, and (3) the expenses of the spouse, dependent, or other
individual would otherwise be deductible. No inference is
intended as to the deductibility of these expenses under present
law. The proposal would not deny a deduction for expenses that
would otherwise qualify as deductible moving expenses.

Eff i

The proposal would be effective for amounts paid or incurred
after December 31, 1993.



“as

real property trade or business unless the person performing the
services has more than a 5-percent ownership interest in the
employer. In addition, the special rule would not apply to
closely held C corporations.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1993.



The credit would be in lieu of the otherwise available
deduction for the contributions and would be in addition to the
employment and training credit. The credit would be elective.

Low-income housing credit (LIHC) expansion

For purposes of the low-income housing credit (sec. 42)%, a
building located (1) in an empowerment zone or an enterprise
community, and (2) in a census tract having a poverty rate of at
least 30 percent would be treated as being located ina
"difficult to develop" area, within which the eligible basis of
buildings for purposes of computing the credit is 130 percent of

the cost basis. (Thus, the credit would be based on 91 percent
of present value instead of the regular LIHC rate of 70 percent
of present value.) The present-law State credit cap and other

rules would continue to apply.
ff Da

Empowerment zone and enterprise community designations would
be made only during calendar years 1994 and 1995. The tax
incentives would be available during the period that the
designation remains in effect, which generally would be a period
of 10 years.

3 The low-income housing credit expired on June 30, 1992,
but would be permanently extended by another provision contained
in the Administration’s proposal.



14

Require any "U.S. shareholder" of a controlled foreign
corporation to include in income the lesser of (a) its pro rata
share of the controlled foreign corporation’s passive assets that
exceed 25 percent of the foreign corporation’s total assets,
reduced by amounts that were previously included under this
provision in the income of the U.S. shareholder (or a predecessor
in interest); or (b) its pro rata share of the foreign
corporation’s total current or accumulated earnings, excluding
amounts that were previously included under this provision or
section 956 in the income of the U.S. shareholder (or a
predecessor in interest). Such lesser amount, however, shall be
included only (as under present law in the case of an actual
distribution) to the extent that it exceeds the foreign
corporation's undistributed income that was previously included
as subpart F income in the income of the U.S. shareholder (or a
predecessor in interest). All amounts under this provision would
be determined after the application of section 956 (and income
inclusions thereunder) for the taxable year.

The controlled foreign corporation’s assets would be
measured using an average of adjusted basis (as determined for
purposes of calculating earnings and profits), as of the close of
each quarter of the taxable year. Passive assets would be
defined as under the PFIC rules, which themsélves are modified
under the proposal (see description of modifications below). The
PFIC look-through rules would apply.

Property that would be described both as a passive asset
under this provision and as U.S. property under section 956 would
be treated only as U.S. property under section 956.

Proper adjustments would be made to the measurement of
assets and earnings in the case of any foreign corporation that
ceases to be U.S.-controlled during the taxable year.
Modification of section 956

Treat earnings invested by a controlled foreign corporation
in U.S. property under revised rules that parallel those that
would govern the treatment of earnings invested in passive assets
in excess of 25 percent of total assets, as described above.
Under the revised rules, the amount subject to inclusion by each
U.S. shareholder under section 956 would be the lesser of (a) its
pro rata share of the amount of U.S. property held by the
controlled foreign corporation, reduced by amounts that were
previously included under section 956 (as revised or under
present law) in the income of the U.S. shareholder (or a
predecessor in interest); or (b) its pro rata share of the
foreign corporation’s total current or accumulated earnings,
excluding amounts that were previously included under the excess
passive assets provision or under section 956 (as revised or
under present law) in the income of the U.S. shareholder (or a
predecessor in interest). Such lesser amount, however, shall be
included only (as under present law in the case of an actual



2. Permanent extension of R&E credit

Present Law

The research tax credit provides a 20-percent credit to
the extent that a taxpayer’s qualified research expenditures
for the current year exceed its base amount for that year.
The credit expired after June 30, 1992.

The base amount for the current year generally is
computed by multiplying the taxpayer’s "fixed-base
percentage" by the average amount of the taxpayer’s gross
receipts for the four preceding years. If a taxpayer both
incurred qualified research expenditures and had gross
receipts during each of at least three years from 1984
through 1988, then its "fixed-base percentage" is the ratio
that its total qualified research expenditures for the
1984-1988 period bears to its total gross receipts for that
period (subject to a maximum ratio of .16). All other
taxpayers (such as "start-up" firms) are assigned a
fixed-base percentage of .03.

In computing the credit, a taxpayer’s base amount may
not be less than 50 percent of its current-year qualified
research expenditures.

Qualified research expenditures eligible for the credit
consist of: (1) "in-house" expenses of the taxpayer for
research wages and supplies used in research; (2) certain
time-sharing costs for computer use in research; and (3) 65
percent of amounts paid by the taxpayer for contract research
conducted on the taxpayer’s behalf. Expenditures
attributable to research that is conducted outside the United
States do not enter into the credit computation. In
addition, the credit is not available for research in the
social sciences, arts, or humanities, nor is it available for
research to the extent funded by any grant, contract, or
otherwise by another person (or governmental entity).

In addition, the 20-percent tax credit also applies to
the excess of (1) 100 percent of corporate cash expenditures
(including grants or contributions) paid for university basic
research over (2) the sum of (a) the greater of two fixed
research floors plus (b) an amount reflecting any decrease in
nonresearch giving to universities by the corporation as
compared to such giving during a fixed-base period, as
adjusted for inflation.

Deductions for expenditures allowed to a taxpayer under
section 174 (or any other section) are reduced by an amount
equal to 100 percent of the taxpayer's research credit



i nm! ri

The proposal would eliminate the requirement that the
partnership's inventory exceed 10 percent of the value of all
partnership property in order to be substantially appreciated.
Thus, if the inventory is worth more than 120 percent of its
adjusted basis, the inventory would be treated as substantially
appreciated. In addition, any inventory property acquired with a
principal purpose to reduce the appreciation to less than 120
percent in order to avoid ordinary income treatment would be
disregarded in applying the 120-percent test.

Effective Date

The proposal would apply to exchanges of partnership
interests after April 30, 1993.

c. Repeal of certain exceptions to the market discount
rules

Present Law

A market discount bond is a bond that is acquired fora
price that is less than the principal amount of the bond (or less
than the amount of the issue price plus accrued original issue
discount (OID) in the case of an OID bond). Market discount
generally arises when the value of a debt obligation declines
after issuance (typically, because of an increase in prevailing
interest rates or a decline in the credit-worthiness of the
borrower).

Gain on the disposition of a market discount bond generally
must be recognized as ordinary income to the extent of the market
discount that has accrued. This ordinary income rule, however,
does not apply to tax-exempt obligations and to market discount
bonds issued on or before July 18, 1984.

Administration's Proposal

Under the proposal, the ordinary income rule would apply to
tax-exempt obligations and to market discount bonds issued on or
before July 18, 1984, if the obligations are acquired after April
30, 1993. Thus, gain on the disposition of a tax-exempt
obligation (or any other market discount bond) that is acquired
for a price that is less than the principal amount of the bond
generally would be treated as ordinary income (and not as tax-
exempt interest or capital gain) to the extent of accrued market
discount.

Effective Date

The proposal would be effective for bonds purchased on or
after April 30, 1993. Thus, current owners of tax-exempt bonds
and other market discount bonds issued on or before July 18,



F.

4. Modify AMT depreciation schedule

5. Bonds for high-speed intercity rail
facilities ..... oe se
6. Permanent extension of qualified

small-issued bonds ..........

Expansion and Simplification of Earned Income

Tax Credit .........4..

Real Estate Investment Provisions .....

1. Permanent extension of qualified
mortgage bonds and mortgage credit
certificates... ... 2... eee

2. Permanent extension of tax credit for
low-income rental housing .......

3. Modify passive loss rules for certain
real estate persons .........

4. Changes relating to real estate
investments by pension funds and
others... 1. 2 ee ee ee eee :

5. Increase recovery period for depreciation

of nonresidential real property ...

Other Provisions ..........-.

1. Permanent extension of AMT treatment
of gifts of appreciated property...

2. Permanent extension of General Fund
transfer to Railroad Retirement Tier
2 Fund... 2... ee eee ee ee

3. Temporary extension of health
insurance deduction for self-employed
individuals ........+..4.4.-.

Customers Officers Overtime Pay Reform . .

Empowerment Zones and Enterprise Communities

- (oS

107
108
1097
M2.

M2

“3
Hee

UG

faa
(23

123

(as

126
127
1ag



41

apply where the taxpayer controls the guarantor, and in cases,
identified by regulation, where the interest on the indebtedness
would have been subject to net basis tax if the interest had been
paid to the guarantor. Except as provided in regulations, a
guarantee would be defined to include any arrangement under which
a person directly or indirectly assures, on a conditional or
unconditional basis, the payment of another's obligation.

Effective Date

The proposal would apply to any interest paid or accrued in
taxable years beginning after December 31, 1993.



Administration’s Proposal’

The Administration proposes to establish BATF user fees for
the processing of applications for certificates of alcohol label
approval (or exemptions therefrom) required by the Federal
Alcohol Administration Act and formula (and statement of process)
reviews or laboratory tests and analyses performed under that Act
and the Internal Revenue Code and regulations.

The Secretary of the Treasury would be authorized to
implement the user fee program and to establish fee rates: not
less than $50 for each application and not less than $250 for
each formula (and statement of process) review or test and
analysis. No specific maximum fee amounts are stated. Up to $5
million of the fees under the proposal are to be retained and
used by BATF for offsetting the cost of BATF’s Compliance Alcohol
Program; any fees collected in excess of $5 million per year are
to be deposited in the Treasury as miscellaneous receipts.

Effective Date
The proposal would be effective for applications filed and

for formula (and statement of process) reviews or tests and
analyses initiated 90 days from the date of enactment.

3° The Administration’s current proposal is included in the
proposed Treasury Department's appropriation for fiscal year 1994.

uy



The term "structural component" would include, with respect to
a building, property which relates (in whole or in part) to the
operation, maintenance, or appearance of the building, and is
attached to the building (whether or not permanently attached).
Thus, the term would include walls, partitions, floors, ceilings,
windows, doors, paneling, tiling, wall-to-wall carpeting, plumbing
and plumbing fixtures (such as sinks and bathtubs), electric wiring
and lighting fixtures, chimneys, stairs, sprinkler systems, and
fire escapes. The term would include an item relating to the
operation or maintenance of a building even if the item was
designed to accommodate the particular needs of property within the
building. Thus, for example, a floor of unusual thickness or
strength intended to accommodate the demands of heavy machinery
would be a structural component, as would be the electrical system
of a building even if. the system is larger or more extensive than
would be needed to serve the electrical needs of the building
alone.

Eligible property would not include: (1) any property to the
extent the basis of the property is attributable to qualified
rehabilitation expenditures; (2) any energy property; (3) any
property to the extent the basis of the property is attributable to
qualified enhanced oil recovery costs; (4) any qualified electric
vehicle; or (5) an air conditioning or heating unit (including all
system components, such as motors, compressors, pipes and ducts,
etc.). Public utility property would be subject to normalization
rules in order to be eligible for the credit. The basis of any
property would not include any portion of any basis attributable to
a qualified withdrawal from a Merchant Marine capital construction
fund.

For purposes of determining the amount of qualified investment
eligible for the credits, the basis of regular credit property
placed in service would be multiplied by an applicable percentage,
depending on the property’s recovery period. For 3-year property,
(as defined by sec. 168(e)), the applicable percentage would be 33
percent. For 5-year property, the applicable percentage would be
67 percent. For 7-year property, the applicable percentage would

be 80 percent. The applicable percentage for property with.a
recovery period in excess of 7 years would be 100 percent.
Leases

Special rules would apply for property subject to a lease.
Property subject to a qualified short-term lease would be taken
into account by the lessor. A "qualified short-term lease" would
be defined as any lease the term of which is less than one year and
which is made in connection with the active conduct by the lessor
of a qualified leasing trade or business. A "qualified leasing
trade or business" would mean any trade or business that normally
derives 80 percent or more of its gross receipts from leases of
tangible personal property with terms of less than 30 days.

Property subject to a lease with a term of three years or more



WAYS AND MEANS COMMITTEE MARKUP
OF ADMINISTRATION’S REVENUE PROPOSALS

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

May 4, 1993
JCX-1-93


NG

that are organized for the exclusive purposes of acquiring and
holding title to real property, collecting income from such
property, and remitting the income to no more than 35
shareholders or beneficiaries that are: (1) qualified pension,
profit-sharing, or stock bonus plans (sec. 401{a)}; (2)
governmental pension plans (sec. 414(d)); (3) the United States,
a State or political subdivision, or governmental agencies or
instrumentalities; or (4) tax-exempt charitable, educational,
religious, or other organizations described in section 501(c) (3).
However, the IRS has taken the position that a title-holding
company described in section 501(c) (2) or 501(c) (25) will lose
its tax-exempt status if it generates any amount of certain types
of UBTI.

istration’s Pro

The proposal would permit a title-holding company that is
exempt from tax under sections 501(c) (2) or 501(c) (25) to receive
UBTI (that would otherwise disqualify the company) up to 10
percent of its gross income for the taxable year, provided that
the UBTI is incidentally derived from the holding of real
property. For example, income generated from parking or
operating vending machines located on real property owned by a
title-holding company generally would qualify for the 10-percent
de minimis rule, while income derived from an activity that is
not incidental to the holding of real property (e.g.,
manufacturing) would not qualify. In cases where unrelated
income is incidentally derived from the holding of real property,
receipt by a title-holding company of such income (up to the
10-percent limit) will not jeopardize the title-holding company’s
tax-exempt status, but nonetheless, will be subject to tax as
UBTI.

In addition, the proposal provides that a section 501(c) (2)
or 501(c) (25) title-holding company will not lose its tax-exempt
Status if UBTI that is incidentally derived from the holding of
real property exceeds the 10-percent limitation, provided that
the title-holding company establishes to the satisfaction of the
Secretary of the Treasury that the receipt of UBTI in excess of
the 10-percent limitation was inadvertent and reasonable steps
are being taken to correct the circumstances giving rise to such
excess UBTI.

ff e D

The provision would be effective for taxable years beginning
on or after January 1, 1994.

d. Exclusion from UBTI of gains from the disposition of

° IRS Notice 88-121, 1988-2 C.B. 457. Sée also Treas. Reg.
sec. 1.501(c) (2)-1(a).



Ir.

4.

Substantiation and disclosure requirements
for charitable contributions .....

Expansion of 45-day interest-free period
for certain refunds ...........

Deny deductions relating to travel
expenses paid or incurred in connection
with travel of taxpayer’s spouse or
dependents... ...........004

Increase withholding rate on supplemental
wage increase ............040.4

Other Provisions ..............

1.

2.

Access to tax information by the
Department of Veterans Affairs ......

Access to tax information by the
Department of Housing and Urban
Development .............204

Access to tax information by the Health
Care Financing Administration ......

BATF user fees for processing applications
for alcohol certificates of label
approval .................4

Excise tax on certain vaccines for the
Vaccine Injury Compensation Trust
Fund 2... 6 ee ee ee

REVENUE-REDUCTION PROVISIONS ............

A.

Training and Education Provisions

1.

2.

Permanent extension of employer-provided
educational assistance ..........

Permanent extension of targeted jobs tax
credit and expansion to include approved
school-to-work program. .......4..

Investment Incentives .............

1.
2.

3.

Investment tax credits ..........
Permanent extension of R&E credit ....

Capital gains exclusion for certain
small business stock ..........

7
1S

77

77
Bo

BO

ca

s2

33

ws
37

37

87
9!

4
9¢

100


‘£0

real property acquired from financial institutions in
conservatorship or receivership

Present Law

In general, gains or losses from the sale, exchange or
other disposition of property are excluded from UBTI (sec.
512(b) (5)). However, gains or losses from the sale, exchange or
other disposition of property held primarily for sale to
customers in the ordinary course of a trade or business are not
excluded from UBTI (the "dealer UBTI rule") (sec. 512(b) (5) (B)).

Administration’s Proposal

The proposal would provide an exception to the dealer UBTI
rule by excluding gains and losses from the sale, exchange or
other disposition of certain real property and mortgages acquired
from financial institutions that are in conservatorship or
receivership. Only real property and mortgages owned by a
financial institution (or that was security for a loan held by
the financial institution) at the time that the institution
entered conservatorship or receivership are eligible for the
exception.

The exclusion is limited to properties designated as
disposal property within nine months of acquisition, and disposed
of within two-and-a-half years of acquisition. The
two-and-a-half year disposition period may be extended by the
Secretary if an extension is necessary for the orderly
liquidation of the property. No more than one-half by value of
properties acquired in a single transaction may be designated as
disposal property.

The exclusion is not available for properties that are
improved or developed to the extent that the aggregate
expenditures on development do not exceed 20 percent of the net
selling price of the property.

Effective Date

The proposal would be effective for property acquired on or
after January 1, 1994.

e. Exclusion of certain option premiums and loan
commitment fees from UBTI

Present Law

Income from a trade or business that is unrelated to an
exempt organization’s purpose generally is UBTI. Passive income
such as dividends, interest, royalties, and gains or losses from
the sale, exchange or other disposition of property generally is
excluded from UBTI (sec. 512(b)). In addition, gains on the
lapse or termination of options on securities are explicitly



position if: (1) the position is not a security described in the
preceding paragraph; (2) the position is a hedge with respect to a
security described in the preceding paragraph; and (3) before the
close of the day on which the position was acquired or entered into
(or such other time as the Treasury Department may specify in
regulations), the position is clearly identified in the dealer’s
records as a hedge with respect to a security described in the
preceding paragraph. A security, however, generally would not
include a contract to which section 1256(a) applies, unless such
contract is a hedge of a security to which the proposal would
apply.

Exceptions to the mark-to-market rules

Notwithstanding the definition of security, the mark-to-market
rules generally do not apply to: (1) any security that is held for
investment; (2) any evidence of indebtedness that is acquired
(including originated) by a dealer in the ordinary course of a
trade or business of the dealer but only if the evidence of
indebtedness is not held for sale; (3) any security which is a
hedge with respect to a security that is not subject to the
mark-to-market rules (i.e., any security that is a hedge with
respect to (a) a security held for investment or (b) an evidence of
indebtedness described in (2)), or (3) any security which is a
hedge with respect to a position, right to income, or a liability
that is not a security in the hands of the taxpayer.’

In addition, the exceptions to the mark-to-market rules would
not apply unless the security is clearly identified in the dealer’s
records as being described in one of the exceptions listed above.
A dealer may not treat a security that is identified as a hedge or
as an investment as also held in its capacity as.a dealer (thus,
securities identified as qualifying for one of the exceptions to
the mark-to-market rules may not be accounted for using the lower-
of-cost-or-market or other inventory method of accounting). The
Treasury Secretary would be authorized to issue regulations that
would prevent a dealer from avoiding the mark-to-market rules by
treating securities held for sale or as inventory as a security
that qualifies for one of the exceptions listed above. Finally, a
dealer would be required to continue to hold the security in a
capacity that qualifies the security for one of the exceptions
listed above.

Other rules

The uniform cost capitalization rules of section 263A and the

2? Whether or not a security or evidence of indebtedness would

be marked-to-market under the applicable financial accounting rules
would not be dispositive for purposes of determining whether such
security or evidence of indebtedness would be treated as held for
investment or as not held for sale under the proposal.

44


100

3. Capital gains exclusion for certain small business stock

Present Law

Gain from the sale or exchange of stock held for more than
one year generally is treated as long-term capital gain.

Net capital gain (i.e., long-term capital gain less short-
term capital loss) of an individual is taxed at the same rates
that apply to ordinary income, subject to a maximum rate of 28
percent.

Administration’s Proposal
In_general

The proposal generally would permit noncorporate taxpayers
who hold qualified small business stock for at least 5 years to
exclude 50 percent of the gains realized on the disposition of
their stock. The amount of gain eligible for the 50 percent
exclusion is limited to the greater of 10 times the investor’s
basis in the stock or $10 million of gain from stock in that
corporation. For purposes of determining the amount of gain
eligible for the exclusion, no reduction is to be made for any
capital loss, whether from disposition of small business stock or
other asset.

1ifi tock

In order to qualify as small business stock, the following
requirements must be met.

Eligible stock

The stock must be acquired by the taxpayer after December
31, 1992, at the original issuance (directly or through an
underwriter) in exchange for money, other property (not including
stock) or as compensation for services provided to the
corporation (other than services performed as an underwriter of
the stock).

In order to prevent the evasion of the requirement that the
stock be newly issued, the exclusion does not apply if the
issuing corporation purchases stock from the stockholder (or a
related person) or redeems significant amounts of its own stock.
For purposes of this anti-evasion rule, purchases by persons
related to the issuing corporation are treated as purchases by
the issuing corporation.

Qualified corporation
The corporation must be a qualified small business as of the

date of issuance and during substantially all of the period that
the taxpayer holds the stock.



calendar year taxpayer, any property placed in service after
December 3, 1992 and before January 1, 1993, would be treated as
placed in service on January 1, 1993, and the $250,000 limitation
would be increased to $270,000 for taxable years beginning January
1, 1993.

In the case of a partnership (or S corporation) the eligible
small business limitation and the $250,000 basis limitation would
apply at both the entity and the partner (or shareholder) levels.

An eligible small business would not be allowed to claim more
than $675 of credit with respect to a passenger automobile (as
defined by sec. 280F).

Recapture rules similar to the rules in effect for the
investment credit prior to the 1986 Act would apply to early
dispositions of property. The taxpayer's depreciable basis would
be reduced by the amount of the credit.

For taxable years beginning before 1995, an eligible small
business would be allowed to elect to use the incremental
investment tax credit in lieu of the small business regular credit.

inv: ba

In_general

The incremental investment tax credit would be a temporary
credit. Taxpayers not qualifying as eligible small businesses
could elect to claim the incremental credit.

im

For taxable years that include December 31, 1993, or December
31, 1994, taxpayers would be eligible to claim a credit equal to 7
percent of the excess of their qualified net investment for the
calendar year over a base amount for the calendar year.

"Qualified net investment" generally would be equal to the
excess of the taxpayer’s: (1) qualified investment over (2) the
applicable percentage of the amounts realized from the disposition
of regular credit property that had been taken into account in
determining qualified investment. For purposes of determining
qualified investment for periods after December 3, 1992, qualified
progress expenditure rules similar to rules of section 47(d) would
be provided.

The qualified investment taken into account with respect to
any passenger automobile would not exceed $9,600. Only 50 percent
of the adjusted basis of any international intermodal cargo
container of a U.S. person would be taken into account for purposes
of determining qualified investment.

The "base amount" generally would equal 80 percent (70 percent

15


4

3. Repeal health insurance wage base cap

Present Law

As part of the Federal Insurance Contributions Act (FICA), a
tax is imposed on employees and employers up to a maximum amount
of employee wages. The tax is comprised of two parts: old-age,
survivor, and disability insurance (OASDI) and Medicare hospital
insurance (HI). For wages paid in 1993 to covered employees, the
HI tax rate is 1.45 percent on both the employer and the employee
on the first $135,000 of wages and the OASDI tax rate is 6.2
percent on both the employer and the employee on the first
$57,600 of wages.

Under the Self-Employment Contributions Act of 1954 (SECA),
a tax is imposed on an individual's self-employment income..-The
self-employment tax rate is the same as the total rate for
employers and employees (i.e., 2.9 percent for HI and 12.40
percent for OASDI). For 1993, the HI tax is applied to the first
$135,000 of self-employment income and the OASDI tax is applied
to the first $57,600 self-employment income. In general, the tax
is reduced to the extent that the individual had wages for which
employment taxes were withheld during the year.

The cap on wages and self-employment income subject to FICA
and SECA taxes is indexed to changes in the average wages in the
economy. she

on’

The proposal would eliminate the dollar limit on wages and
self-employment income subject to HI taxes.

Ef D

The proposal would be effective for wages and income
received after December 31, 1993.



Ls)

E. Compliance Provisions
1. Reporting rule for service payments to corporations
Present Law

A person engaged in a trade or business who makes payments
during the calendar year of $600 or more to a person for services
performed must file an information return with the Internal
Revenue Service ("IRS") reporting the amount of such payments, as
well as the name, address and identification number of the person
to whom such payments were made. A similar statement must also
be furnished to the person to whom such payments were made.
Treasury regulations generally provide, however, that payments to
corporations (including payments for services) need not be
reported (Treas. Reg.- sec. 1.6041-3(c); Prop. Treas. Reg. sec.
1.6041A-1(d) (2)).!

Pane

Administration’s Proposal

The proposal would provide that payments for services
purchased in the course of the payor’s trade or business will not
be exempt from the information reporting requirements merely
because the payments are made to a corporation.

Effective Date

The proposal would apply to payments for services made by a
payor after December 31, 1993.

' In general, information returns are required regarding
payments to a corporation engaged in providing medical and health
care services or engaged in billing and collecting payments with
respect to medical and health care services.


167

5. Bonds for high-speed intercity rail facilities
Present Law

High-speed intercity rail facilities qualify for tax-exempt
bond financing if trains operating on the facility are reasonably
expected to carry passengers and their baggage at average speeds
in excess of 150 miles per hour between stations. Such facilities
need not be governmentally-owned, but the owner must irrevocably
elect not to claim depreciation or any tax credit with respect to
bond-financed property.

Twenty-five percent of each bond issue for high-speed
intercity rail facilities must receive an allocation from a State
private activity bond volume limitation. If facilities are
located in two or more States, this requirement must be met on a
State-by-State basis for the financing of facilities located in
each State.

Administration’s Proposal

The proposal would exempt private activity bonds to provide
high-speed rail facilities from State private activity bond
volume limitations.

Effective Date

The proposal would be effective for bonds issued after
December 31, 1993.



The proposal would make the Vaccine Compensation Trust Fund
program and vaccine excise tax permanent.

Effective Date

The extension of coverage under the vaccine compensation
program would be effective from October 1, 1992.

The extension of the vaccine excise tax would be effective on
April 1, 1993(?).

so



5. Extend corporate estimated tax rules
Present Law

A corporation is subject to an addition to tax for any
underpayment of estimated tax. For taxable years beginning after
dune 30, 1992, and before 1997, a corporation does not have an
underpayment of estimated tax if it makes four equal timely
estimated tax payments that total at least 97 percent of the tax
liability shown on its return for the current taxable year. A
corporation may estimate its current year tax liability prior to
year-end by annualizing its income through the period ending with
either the month or the quarter ending prior to the estimated tax
payment due date. For taxable years beginning after 1996, the 97-
percent requirement becomes a 91-percent requirement.

A corporation that is not a "large corporation" generally may
avoid the addition to tax if it makes four timely estimated tax
Payments each equal to at least 25 percent of its tax liability for
the preceding taxable year. A large corporation may use this rule
with respect to its estimated tax payment for the first quarter of
its current taxable year. A large corporation is one that had
taxable income of $1 million or more for any of the three preceding
taxable years.

ind ‘s Pr

The proposal would permanently extend the 97-percent
requirement applicable to corporate estimated tax payments. The
proposal would not alter the present-law rules permitting the
payment of estimated taxes based on a corporation's tax liability
for its preceding taxable year.

Bffective Date

The proposal would be effective for taxable years beginning
after 1996.

35



2. Allocation of research expense and treatment of royalties as
passive income for purposes of foreign tax credit limitation

Present Law
In_general

In order that the foreign tax credit will offset only the
U.S. tax on the taxpayer’s foreign source taxable income, a
limitation formula is prescribed in the Code. This foreign tax
credit limitation is computed separately for certain categories
of income, including passive income.

Separate limitation for passive income
Foreign personal holding company income

Subject to the "look-through" rule and other exceptions
described below, passive income generally is any income of a kind
which would be foreign personal holding company income, if earned
by a controlled foreign corporation. Foreign personal holding
company income generally includes royalties. Royalties are not
foreign personal holding company income, however, if received in
the active conduct of a trade or business from unrelated persons.
Also excluded from foreign personal holding company income are
certain rents and royalties received from a related corporation
for the use of property within the country in which the recipient
was created or organized.

Passive income excludes high-taxed income. For this purpose,
high-taxed income is any income which would otherwise be passive
income if the effective rate of foreign tax on the income exceeds
the highest rate of U.S. corporate or individual tax (whichever
applies). In determining the effective rate of foreign tax on
income, regulations provide that taxpayers may group certain
individual items of income, and the taxes associated with those
items, together. Under current regulations, taxpayers are
required, among other things, to group separately income subject
to withholding taxes of 15 percent or greater, income subject to
withholding taxes at rates less than 15 percent, and income
subject to no withholding taxes.

Look-through rules

Royalties received or accrued from a controlled foreign
corporation in which the payee is a U.S. shareholder generally
are treated as income subject to the general limitation or as
income subject to each separate limitation category to the extent
properly allocable to income of the controlled foreign
corporation subject to each of these limitations. A "look-
through rule," as the foregoing rule is commonly known, also
applies to dividends, interest, and rents received or accrued


128

G. Empowerment Zones and Enterprise Communities

Present Law

The Internal Revenue Code does not contain general rules
that target specific geographic areas for special Federal income
tax treatment. Within certain Code sections, however, there are
definitions of targeted areas for limited purposes (e.g.,
low-income housing credit and qualified mortgage bond provisions
target certain economically distressed areas). In addition,
present law provides favorable Federal income tax treatment for
certain U.S. corporations that operate in Puerto Rico, the U.S.
Virgin Islands, or a possession of the United States to encourage
the conduct of trades or businesses within these areas.

Administration’s Proposal
1 le_a:

In_general

A total of 10 empowerment zones and 100 enterprise
communities would be designated (subject to availability of
eligible areas) during 1994 and 1995. Empowerment zones and
enterprise communities would be designated from areas nominated
by State and local governments or a governing body of an Indian
reservation. Empowerment zones would be eligible for additional
tax incentives beyond those provided in the 100 areas which would
be designated as enterprise communities.

The Secretary of Housing and Urban Development (HUD) would
designate in eligible urban areas six empowerment zones and 65
enterprise communities. (The six empowerment zones located in
urban areas would include at least one zone in an urban area the
most populous city of which has a population of 500,000 or less.)
The Secretary of Agriculture would designate in eligible rural
areas! three empowerment zones and 30 enterprise communities. In
addition, the Secretary of the Interior would designate in
eligible Indian reservation areas one empowerment zone and five
enterprise communities. Nominated areas located in Indian
reservations also would be eligible for designation (provided the
bill’s criteria are met) as rural areas. All designations would
be made in consultation with an Enterprise Board (to be
established in the future), which would be composed of officials
from various Federal agencies. The designations would be made
prior to January 1, 1996.

1 For purposes of the proposal, a "rural area" would be any
area which is (1) outside a metropolitan statistical area as
defined by the Secretary of Commerce, or (2) determined by the
Secretary of Agriculture to be a rural area. For purposes of the
proposal, the term "urban area" means an area which is not a
rural area.



3. Increase inland waterways fuel tax

Present Law

A Federal inland waterway fuel tax is imposed on diesel and
other liquid fuels used by commercial cargo vessels on specified
inland or intracoastal waterways of the United States (sec.
4042). Receipts from these tax are transferred to the Inland
Waterways Trust Fund (sec. 9506).

The tax rate on these fuels is 17 cents per gallon for 1993,
19 cents per gallon for 1994, and 20 cents per gallon for 1995
and thereafter. In addition, there is a 0.1-cent-per-gallon tax
on such fuels for the Leaking Underground Storage Tank Trust Fund
(sec. 9508).

Administration’s Proposal

The proposal would increase the Federal inland waterway fuel
tax by $1.00 per gallon in a series of steps. Under the
proposal, inland waterways fuel would be taxed at a rate of 29
cents per gallon in 1994, 60 cents per gallon in 1995, 90 cents
in 1996, and $1.20 per gallon in all years thereafter. The
proposal does not change the additional 0.1-cent-per-gallon fuel
tax.

Effective Date

The proposal would be effective beginning in 1994.

67



4. Transfer pricing initiative

Present Law

A "substantial" valuation misstatement may result in a
penalty of 20 percent of the understatement of tax attributable
to the substantial valuation misstatement (sec. 6662(a) and
(b) (2)). The penalty for a "qross" valuation misstatement is 40

5. Deny portfolio interest exemption for contingent interest

Present Law

Naduabdha ld ba Af Inbacanh

to the tax paid by the power producer on the fossil fuel used in
generation (or to the otherwise applicable tax if the electricity
is not generated from fossil fuel). The independent power producer
would receive a credit for any energy tax paid in the production of
such electricity.

x ra B

Tax rates.--A base rate of $0.257 per million Btus would be
imposed on all taxable energy sources. A supplemental tax of
$0.342 per million Btus (a total rate of $0.599 per million Btus)
would be imposed on all petroleum products other than heating oil
used for residential heating and liquefied petroleum gases.

The stated tax rates would be phased in at one-third of the
full rates beginning July 1, 1994, and at two-thirds of the full

16

50
SZ

27

206

ov


94

2. Permanent extension of targeted jobs tax credit and expansion
to include approved school-to-work program

Present Law
Tax credit

The targeted jobs tax credit is available on an elective
basis for hiring individuals from several targeted groups. The
targeted groups consist of individuals who are either recipients
of payments under means-tested transfer programs, economically
disadvantaged, or disabled.

The credit generally is equal to 40 percent of up to $6,000
of qualified first-year wages paid to a member of a targeted
group. Thus, the maximum credit generally is $2,400 per
individual. With respect to economically disadvantaged summer
youth employees, however, the credit is equal to 40 percent of up
to $3,000 of wages, for a maximum credit of $1,200.

The credit expired for individuals who began work for an
employer after June 30, 1992.

a mn of m zr £ ro}

Generally an individual is not treated as a member of a
targeted group unless certain certification conditions are
satisfied. On or before the day on which the individual begins
work for the employer, the employer has to have received or have
requested in writing from the designated local agency
certification that the individual is a member of a targeted
group. In the case of a certification of an economically
disadvantaged youth participating in a cooperative education
program, this requirement is satisfied if necessary certification
is requested or received from the participating school on or
before the day on which the individual begins work for the
employer.

The deadline for requesting certification of targeted group
membership is extended until five days after the day the
individual begins work for the employer, provided that, on or
before the day the individual begins work, the individual has
received a written preliminary determination of targeted group
eligibility (a "voucher") from the designated local agency (or
other agency or organization designated pursuant to a written
agreement with the designated local agency). The "designated
local agency" is the State employment security agency.

tho: of xiation:

Present law authorized appropriations for administrative and
publicity expenses relating to the credit through June 30, 1992.
These monies are to be used by the Internal Revenue Service and
the Department of Labor to inform employers of the credit



949

determined for the taxable year.!
in! re

The proposal would permanently and retroactively extend
the research tax credit.

The proposal would add a new rule regarding the
determination of the fixed-base percentage of start-up
companies. Under the proposal, a taxpayer that did not have
gross receipts in at least three years during the 1984-1988
period would be assigned a fixed base percentage of .03 for
each of its first five taxable years after 1993 in which it
incurs qualified research expenditures. The taxpayer's
fixed-base percentage for its sixth through tenth taxable
years after 1993 in which it incurred qualified research
expenditures would be as follows: (1) for the taxpayer’s
sixth year, its fixed-base percentage would be one-sixth of
its ratio of qualified research expenditures to gross
receipts for its fourth and fifth years; (2) for its seventh
year, its fixed-base percentage would be one-third of its
ratio for its fifth and sixth years; (3) for its eighth year,
its fixed-base percentage would be one-half of its ratio for
its fifth through seventh years; (4) for its ninth year, its
fixed-base percentage would be two-thirds of its ratio for
its fifth through eighth years; and (5) for its tenth year,
its fixed-base percentage would be five-sixths of its ratio
for its fifth through ninth years. For subsequent taxable
years, the taxpayer's fixed-base percentage would be its
actual ratio of qualified research expenditures to gross
receipts for five years selected by the taxpayer from its
fifth through tenth taxable years.

Effective Date

The proposal would apply to expenditures paid or
incurred after June 30, 1992.

1 Taxpayers may alternatively elect to claim a reduced

research credit amount in lieu of reducing deductions otherwise
allowed (sec. 280C(c) (3)).



Cc. Foreign Tax Provisions

1. Require current taxation of certain earnings of controlled
foreign corporations

Present Law
In_general

U.S. persons generally are taxed currently by the United
States on their worldwide income. U.S. tax on foreign source
income may be reduced by credits for foreign income taxes paid by
the U.S. person. Foreign income earned by a foreign corporation,
the stock of which is owned in whole or in part by U.S. persons,
generally is not taxed by the United States until the foreign
corporation repatriates those earnings by payment of a dividend
to its U.S. stockholders. If a foreign corporation pays a
dividend to a domestic corporation that owns 10 percent or more
of the voting stock of the foreign corporation, the domestic
corporation may receive credits for foreign income taxes paid by
the foreign corporation. This is sometimes known as the
"indirect" foreign tax credit.

Co: 1 ration:

A "U.S. shareholder" of a U.S.-controlled foreign
corporation--i.e., a U.S. person that is treated as owning at
least 10 percent of the foreign corporation’s voting stock--may
be taxed by the United States on certain earnings of the
controlled foreign corporation that have not been distributed by
the foreign corporation to the U.S. shareholder. Such
"inclusions" of undistributed controlled foreign corporation
earnings are triggered by two different provisions of the
controlled foreign corporation rules.

Under one such provision, a U.S. shareholder is taxed
currently on its proportionate share of the controlled foreign
corporation’s "subpart F income" earned during the taxable year.
Subpart F income typically is foreign income that is relatively
movable from one taxing jurisdiction to another and that is
subject to low rates of foreign tax. While subpart F income
generally includes dividends received by the controlled foreign
Corporation, an exception applies to certain dividends from
related corporations organized and operating in the same foreign
country as the controlled foreign corporation.

The other provision taxing U.S. shareholders on
undistributed controlled foreign corporation earnings applies to
the controlled foreign corporation’s total current or accumulated
earnings (other than subpart F income), to the extent of an
increase in the amount of those earnings invested by the
controlled foreign corporation in certain U.S. property (as
defined in Code section 956).



contributions of appreciated property as a tax preference for
AMT purposes. Thus, the deduction allowable for a
contribution of appreciated property generally would be the
same for both regular tax and AMT purposes, and generally
would equal the full fair market value of the contributed
property. Similar rules would be provided for the ACE
component of the corporate AMT.

Effective Date

The proposal would apply to contributions of tangible
personal property made after June 30, 1992, and contributions
of other property made after December 31, 1992.

(24



155

empowerment zone,.!!

As under present-law, an employer’s deduction otherwise
allowed for wages paid would be reduced by the amount of TJTC
claimed for that taxable year.

Definiti "en i "

The investment tax incentives for empowerment zones
described below (but not the labor incentives described above)
would be available only with respect to trade or business
activities that satisfy the criteria for an "enterprise zone
business." Under the proposal, an “enterprise zone business"
would be defined as a corporation or partnership (or
proprietorship) if for the taxable year: (1) the sole trade or
business of the corporation or partnership is the active conduct
of a qualified business within an empowerment zone; (2) at
least 80 percent of the total gross income is derived from the
active conduct of a "qualified business" within a zone; (3)
substantially all of the use of its tangible property occurs
within a zone; (4) substantially all of its intangible property
is used in, and exclusively related to, the active conduct of
such business; (5) substantially all of the services performed by
employees are performed within a zone; (6) at least 35 percent of
the employees are residents of the zone; and (7) no more than
five percent of the average of the aggregate unadjusted bases of
the property owned by the business is attributable to (a) certain
financial property, or (b) collectibles not held primarily for
sale to customers in the ordinary course of an active trade or
business.

A "qualified business" would be defined as any trade or
business other than a trade or business that consists
predominantly of the development or holding of intangibles for
sale or license. In addition, the leasing of real property that
is located within the empowerment zone to others would be treated
as a qualified business only if (1) the leased property is not
residential property, and (2) at least 50 percent of the gross
rental income from the real property is from enterprise zone
businesses. The rental of tangible personal property to others
would not be a qualified business unless substantially all of the
rental of such property is by enterprise zone businesses or by
residents of an empowerment zone.

" Employers located within an empowerment zone would not be
allowed to claim the TUTC with respect to an employee if any of
such employee’s wages were taken into account in determining the
employer’s empowerment zone wage credit.

% This requirement would not apply to a business carried on
by an individual as a proprietorship.



5. Extend corporate estimated tax rules
6. Limitation on section 936 credit ..
7. Enhance earnings stripping .....

Foreign Tax Provisions ........

1. Require current taxation of certain
earnings of controlled foreign
corporations ............

2. Allocation of research expense and

treatment royalties as passive income
for purposes of Foreign tax credit

limitation. .... a
3. Eliminate working capital exception for
foreign oil and gas and shipping income
4. Transfer pricing initiative ... .
5. Deny portfolio interest exemption for

contingent interest ........

6. Regulatory authority to address multiple-

party financing arrangements ....
Energy and Motor Fuels Tax Provisions . .
1. BTU energy tax ...........

2. Extend the 2.5-cents-per-gallon motor

fuels excise tax rate; transfer revenues

to Highway Trust Fund .......
3. Increase inland waterways fuel tax .

Compliance Provisions .........

1. Reporting rule for service payments to
corporations ........... we
2. Raise standard for accuracy-related and
preparer penalties ..........
3. Modify tax shelter rules for purposes of
the substantial understatement penalty .
4. Use of Harbor Maintenance Trust Pund for
administrative expenses ........

Miscellaneous Revenue-Increase Provisions

2394

35°
36

$2

42

47

so
sa

63
c¢
6s

6é
6&

To
VW



The proposal relaxes the leaseback and disqualified person
restrictions to permit a limited leaseback of debt-financed real
property to the seller (or a person related to the seller) or to
a disqualified person.' The exception applies only where (1) no
more than 25 percent of the leasable floor space in a building
{or complex of buildings) is leased back to the seller (or
related party) or to the disqualified person, and (2) the lease
is on commercially reasonable terms.

Re i th xr - financi: r

The proposal relaxes the seller-financing restriction to
permit seller financing on terms that are commercially reasonable
independent of the sale and other transactions. The proposal
grants authority to the Treasury Department to issue regulations
for the purpose of determining commercially reasonable financing
terms.

The proposal does not modify the present-law fixed price and
participating loan restrictions. Thus, for example, income from
real property acquired with seller-financing where the timing or
amount of payment is based on revenue, income, or profits from
the property generally will continue to be treated as income from
debt-financed property, unless some other exception applies.

Rel on of thi ed pri at i mn 3 eti
for acqui om _ £ al i

The proposal relaxes the fixed price and participating loan
restrictions for certain sales of real property foreclosed upon
by financial institutions.? The relaxation of these rules is
limited to cases where: (1) a qualified organization acquires
the property from a financial institution that acquired the real
property by foreclosure (or after an actual or imminent default),
or was held by the financial institution at the time that it
entered into conservatorship or receivership; (2) any gain
recognized by the financial institution with respect to the
property is ordinary income; (3) the stated principal amount of
the seller financing does not exceed the financial institution’s
outstanding indebtedness (including accrued but unpaid interest)
with respect to the property at the time of foreclosure or

' As under present law, a leaseback to a disqualified person
subject to the prohibited transaction rules set forth in section
4975.

> For this purpose, financial institutions include financial
institutions in conservatorship or receivership, certain
affiliates of financial institutions, and government corporations
that succeed to the rights and interests of a receiver or
conservator.

417


771

3. Deny deductions relating to travel expenses paid or incurred
in connection with travel of taxpayer's spouse or dependents

Present Law

In general, a taxpayer is permitted a deduction for all
ordinary and necessary expenses paid or incurred during the
taxable year (1) in carrying on any trade or business and (2) in
the case of an individual, for the production of income. Such
deductible expenses may include reasonable travel expenses paid
or incurred while away from home, such as transportation costs
and the cost of meals and lodging.

In the case of ordinary and necessary business expenses, if
a taxpayer travels to a destination and while at that destination
engages in both business and personal activities, travel expenses
to and from such destination are deductible only if the trip is
related primarily to the taxpayer’s trade or business. If the
trip is primarily personal in nature, expenses while at the
destination that are properly allocable to the taxpayer’s trade
or business are deductible even though the traveling expenses to
and from the destination are not deductible (Treas. reg. sec.
1.162-2(b) (1)).

Under Treasury regulations, if the taxpayer's spouse
accompanies the taxpayer on a business trip, expenses
attributable to the spouse’s travel are not deductible unless it
is adequately shown that the spouse’s presence on the trip has a
bona fide business purpose (Treas. reg. sec. 1.162-2(c)). The
performance of some incidental service by the spouse does not
Cause the expenses to qualify as deductible business expenses.
Under the Treasury regulations, the same rules apply to any other
members of the taxpayer’s family who accompany the taxpayer on
such a trip.

In general, business expenses other than unreimbursed
employee business expenses may be deducted in computing adjusted
gross income (AGI) and are not subject to the 2-percent floor on
miscellaneous itemized deductions. Expenses for the production
of income other than rental or royalty income are generally
deductible as an itemized deduction from AGI (if the activity
does not constitute a trade or business) and are subject to the
2-percent floor on miscellaneous itemized deductions.

Gross income does not include the value of a working
condition fringe (sec. 132(d)). A "working condition fringe" is
any property or service provided to an employee of an employer to
the extent that if an employee paid for the property or service,
the amount paid would be deductible as an ordinary and necessary
business expense (sec. 162) or a depreciation expense (sec. 167).



63

2. Extend the current 2.5-cents-per-gallon motor fuels excise tax
rate; transfer revenues to the Highway Trust Fund

Pregent Law

The Federal motor fuels excise tax generally is imposed on
motor fuels (gasoline, special motor fuels, and diesel fuel) used
for highway transportation, gasoline and special motor fuels used
in motorboats, and diesel fuels used in trains. Off-highway
business uses generally are exempt from motor fuels taxes as are
sales for export, for the exclusive use of State and local
governments and nonprofit educational organizations, and for
certain other uses.

The rate of tax on motor fuels is 14.1 cents per gallon on
gasoline and special motor fuels and 20.1 cents per gallon on
diesel fuel and includes a "deficit reduction rate" (General Fund
rate) of 2.5 cents per gallon. The deficit reduction rate also
is imposed on diesel fuel used in trains. The deficit reduction
rate does not apply after September 30, 1995. Revenues from the
deficit reduction rate are retained in the General Fund, while
the balance of the highway motor fuels tax revenues are
transferred to the Highway Trust Fund through September 30, 1999.

Pat in? Pa

The proposal would extend the additional
2.5-cents-per-gallon motor fuels tax rate from October 1, 1995
through September 30, 1999; these revenues generally would be
transferred into the Highway Trust Fund with revenues equivalent
to 2-cents-per-gallon credited to the Highway Account and one-
half-cent-per-gallon to the Mass Transit Account. Revenues from
the 2.5-cents-per-gallon tax on diesel used in trains would be
retained in the General Fund as would 2.5 cents per gallon of the
tax on motorboat, small-engine, and nonhighway recreational
fuels. The proposal would retain present-law motor fuels tax
exemptions.

Effective Date

The extension of the 2.5-cents-per-gallon rate would apply
after September 30, 1995.



D. Real Estate Investment Provisions

1. Permanent extension of qualified mortgage bonds and mortgage
credit certificates

Present Law
Qualified mortgage bonds

Qualified mortgage bonds ("QMBs") are bonds the proceeds of
which are used to finance the purchase, or qualifying
rehabilitation or improvement, of single-family, owner-occupied
residences located within the jurisdiction of the issuer of the
bonds (sec. 143). Persons receiving QMB loans must satisfy a home
purchase price, borrower income, first-time homebuyer, and other
requirements. Part or all of the interest subsidy provided by
QMBs is recaptured if the borrower experiences substantial
increases in income and disposes of the subsidized residence
within nine years after purchase.

Mortgage credit certificates

Qualified governmental units may elect to exchange QMB
authority for authority to issue mortgage crédit certificates
("mMcCs") (sec. 25). MCCs entitle homebuyers to nonrefundable
income tax credits for a specified percentage of interest paid on
mortgage loans on their principal residences. Once issued, an MCC
remains in effect as long as the loan remains outstanding and the
residence being financed continues to be the
certificate-recipient’s principal residence. MCCs are subject to
the same targeting requirements as QMBs.

Expiration

Authority to issue QMBs and to elect to trade in bond volume
authority to issue MCCs expired after June 30, 1992.

‘sg Pri 1
The proposal would permanently extend the authority to issue
QMBs and to elect to trade in private activity bond volume limit
for authority to issue MCCs.

ve Da

The extension of the QMB and MCC programs would be effective
after dune 30, 1992.



The disallowance rule would apply to attempts to influence
legislation through communications with the executive branch as
well as the legislative branch of the Federal, or any State or
local, government. An exception to the general disallowance rule
would be provided to permit taxpayers to deduct expenditures for
providing technical advice or assistance to a governmental body or
to a committee or other subdivision thereof in response to a
specific written request by such governmental entity. (Exceptions
similar to the other exceptions of present-law section 4911(d) (2),
such as the exception for nonpartisan analysis, would not be
provided.)

The present-law disallowance of business deductions for
expenses of grass roots lobbying and participation in political
campaigns would remain in effect. Existing rules which prevent
charities from engaging in a substantial amount of lobbying also
would remain in effect.

A flow-through rule would apply to disallow a deduction for a
portion of the membership dues (or similar amounts) paid to an
organization which engages in political or lobbying activities.
The disallowed portion of such payments would be the portion
allocable to political or lobbying expenditures incurred by the
organization.” As under current law, however, trade associations
and similar organizations would not lose their tax-exempt status by
conducting lobbying activities. Trade associations and similar
organizations would be required to report to their members (and the
IRS) the portion of membership dues (or similar payments) allocable
to lobbying activities. The Secretary of the Treasury would be
granted authority to provide by regulation that this reporting
requirement generally applicable to organizations would not apply
where unnecessary to effectuate the purposes of the provision
(e.g., where an organization incurs insubstantial lobbying
expenses, or where the disallowed portion of such expenditures
would not materially affect the tax liability of dues-paying
members) .

Penalties would be imposed on an organization for failing to
meet its reporting requirements. In addition to the normal
reporting penalties (generally, $50 for each failure to report to
the IRS or organization member), a special penalty would be imposed
on an organization which materially underreports its lobbying
expenses to its members. This special penalty would be equal to
the amount of lobbying or political expenses not reported
multiplied by the highest corporate tax rate (to approximate the
amount of tax which would have been paid by the organization’s
members had they been notified of the disallowed amounts).

? For this purpose, lobbying expenditures incurred by an
organization would be allocated first to dues paid to the
organization, and any excess amount of lobbying expenditures would
be carried forward and allocated to dues paid to the organization
in the following year.

as


B. Business Provisions

1. Increase corporate tax rate for taxable income over $10 million

Present Law

The highest marginal tax rate imposed on the taxable income of
corporations is 34 percent. The maximum rate of tax on corporate
net capital gains is also 34 percent. This rate applies to income
in excess of $75,000. Rates of 15 and 25 percent apply to taxable
income ranges below $75,000. A corporation with taxable income in
excess of $100,000 is required to increase its tax liability by the
lesser of 5 percent of the excess or $11,750. This increase in tax
phases out the benefits of the 15- and 25-percent rates for
corporations with taxable income between $100,000 and $335,000; a
corporation with taxable income in excess of $335,000, in effect,
pays tax at a flat 34-percent rate.

Administration’s Proposal

The proposal would provide a new 36-percent marginal tax rate
on corporate taxable income in excess of $10 million. The maximum
rate of tax on corporate net capital gains would also be 36
percent.

A corporation with taxable income in excess of $15 million
would be required to increase its tax liability by the lesser of 3
percent of the excess or $200,000. This increase in tax would
recapture the benefits of the 34-percent rate in a manner analogous
to the recapture of the benefits of the 15- and 25-percent rates.
Because the 36-percent rate would apply only to income in excess of
$10 million, the vast majority of corporations would not be subject
to the new rate.

Effective Date

The 36-percent marginal rate would be effective for taxable
years beginning on or after January 1, 1993. Under existing law
provisions regarding changes in tax rates during a taxpayer's
taxable year (Code sec. 15), a fiscal year corporation would be
required to use a "blended rate" for its fiscal year that includes
January 1, 1993. Accordingly, the corporation’s tax liability
would be a weighted average of the tax resulting from applying the
existing corporate rate schedule and the tax resulting from
applying the changes described above, weighted by the number of
days before and after January 1, 1993.

Penalties for the underpayment of estimated taxes would be
waived for underpayments of 1993 taxes attributable to the changes
in tax rates.

Zi


16

4. Changes relating to real estate investments by pension funds
and others

a. Modification of the rules related to debt-financed
income

Present Law

In general, a qualified pension trust or an organization
that is otherwise exempt from Federal income tax is taxed on
income from a trade or business that is unrelated to the
organization’s exempt purposes (Unrelated Business Taxable Income
or "UBTI") (sec. 511). Certain types of income, including rents,
royalties, dividends, and interest are excluded from UBTI, except
when such income is derived from "debt-financed property."

Income from debt-financed property generally is treated as UBTI
in proportion to the amount of debt financing (sec. 514(a)).

An exception to the rule treating income from debt-financed
property as UBTI is available to pension trusts, educational
institutions, and certain other exempt organizations
(collectively referred to as "qualified organizations") that make
debt-financed investments in real property (sec. 514(c) (9) (A)).
Under this exception, income from investments in real property is
not treated as income from debt-financed property. Mortgages are
not considered real property for purposes of the exception.

The real property exception to the debt-financed property
rules is available for investments in debt-financed property,
only if the following six restrictions are satisfied: (1) the
purchase price of the real property is a fixed amount determined
as of the date of the acquisition (the "fixed price
restriction"); (2) the amount of the indebtedness or any amount
payable with respect to the indebtedness, or the time for making
any payment of any such amount, is not dependent (in whole or in
part) upon revenues, income, or profits derived from the property

(the "participating loan restriction"); (3) the property is not
leased by the qualified organization to the seller or to a person
related to the seller (the "leaseback restriction"); (4) in the

case of a pension trust, the seller or lessee of the property is
not a disqualified person (the "disqualified person
restriction"); (5) the seller or a person related to the seller
(or a person related to the plan with respect to which a pension
trust was formed) is not providing financing in connection with
the acquisition of the property (the "seller-financing
restriction"); and (6) if the investment in the property is held
through a partnership, certain additional requirements are
satisfied by the partnership (the "partnership restrictions")
(sec. 514(c) (9) (B) (i) through (vi)).

inistration’s Propos:

Relaxation of e leaseback a: dh: a i e: mn rest: tions



33

eee

the acquirer a minimum return or yield on the value of the
assets. The assistance agreements also generally grant the FSLIC
the right to purchase covered assets. In addition, many of the
assistance agreements permit the FSLIC to order assisted
institutions to write down the value of covered assets on their
books to fair market value in exchange for a payment in the
amount of the write-down.

Under most assistance agreements, one or more Special
Reserve Accounts are established and maintained to account for
the amount of FSLIC assistance owed by the FSLIC to the acquired
entity. The assistance agreements generally specify the precise
circumstances under which amounts with respect to covered assets
are debited to an account. Under the assistance agreements,
these debit entries generally are made subject to prior FSLIC
direction or approval. When amounts are so debited, the FSLIC
generally becomes obligated to pay the debited balance in the
account to the acquirer at such times and subject to such offsets
as are specified in the assistance agreement.

In September 1990, the Resolution Trust Corporation (RTC),
in accordance with the requirements of FIRREA, issued a report to
Congress and the Oversight Board of the RTC on certain
FSLIC-assisted transactions (the "1988/89 FSLIC transactions") .
The report recommended further study of the covered loss and
Other tax issues relating to these transactions. A March 4, 1991
Treasury Department report ("Treasury report") on tax issues
relating to the 1988/89 FSLIC transactions concluded that
deductions should not be allowed for losses that are reimbursed
with exempt FSLIC assistance. The Treasury report states that
the Treasury view is expected to be challenged in the courts and
recommended that Congress enact clarifying legislation
disallowing these deductions.?

tr: ’ ro

General rule

The proposal would treat FSLIC assistance with respect to
any loss of principal, capital, or similar amount upon the
disposition of an asset would be taken into account as
compensation for such loss for purposes of Code section 165.
FPSLIC assistance with respect to any debt would be taken into
account under Code sections 166, 585 and 593 for purposes of
determining whether such debt is worthless (or the extent to
which such debt is worthless) and in determining the amount of

? Department of the Treasury, u
i ri

Vin rt
Assisted Transactions, March 1991, pp. 16-17.



426

3. Temporary extension of health insurance deduction for
self-employed individuals

Pre Ww

Under present law, an incorporated business can generally
deduct, as an employee compensation expense, the full cost of any
health insurance coverage provided for its employees (including
owners serving as employees) and its employees’ spouses and
dependents. By contrast, a self-employed individual operating
through an unincorporated business can only deduct the cost of
health insurance coverage for the individual and his or her
dependents to the extent that it, together with their other
allowable medical expenses, exceeds 7.5 percent of adjusted gross
income. Self-employed individuals can deduct the cost of health
insurance for employees as employee compensation. Other persons
who purchase heath insurance can deduct the cost of the insurance
only to the extent that it, together with their other medical
expenses, exceed 7.5 percent of adjusted gross income.

For coverage prior to July 1, 1992, a self-employed
individual was allowed to deduct as a business expense up to 25
percent of the amount paid for health insurance coverage for the
taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents.
Only amounts paid prior to July 1, 1992 are eligible for
deduction. The deduction was not allowed if the self-employed
individual or his or her spouse was eligible for employer-paid
health benefits.

Administration’s Proposal
The proposal would extend the 25-percent deduction through
December 31, 1993, and provide that the determination of whether

the self-employed individual and his or her spouse are eligible
for employer-paid health benefits is made on a monthly basis.

Effective Date

The proposal would be effective for taxable years ending
after June 30, 1992.



was substantial authority for the treatment of the item claimed on
the return, (2) the taxpayer reasonably believed that the claimed
treatment was more likely than not the proper treatment, and (3)
the reasonably anticipated after-tax benefits from the taxpayer's
investment in the shelter do not significantly exceed the
reasonably anticipated pre-tax economic profit from such
investment.

The proposal does not alter the definition of "tax shelter"
for purposes of the substantial understatement penalty and,
therefore, applies only to investments in arrangements that are
considered tax shelters without regard to this provision.

Effective Date

This proposal would apply to tax returns due (without regard
to extensions) on or after December 31, 1993.

64


(23

E. Other Provisions

1. Permanent extension of AMT treatment of gifts of
appreciated property

Present Law

In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair-market
value of property contributed to a charitable organization.!
However, in the case of a charitable contribution of
inventory or other ordinary-income property, short-term
capital gain property, or certain gifts to private
foundations, the amount of the deduction is limited to the
taxpayer's basis in the property.” In the case of a
charitable contribution of tangible personal property, a
taxpayer’s deduction is limited to the adjusted basis in such
property if the use by the recipient charitable organization
is unrelated to the organization's tax-exempt purpose (sec.
170(e) (1) (B) (i)).

For purposes of computing alternative minimum taxable
income (AMTI), the deduction for charitable contributions of
capital gain property (real, personal, or intangible) is
disallowed to the extent that the fair-market value of the
property exceeds its adjusted basis (sec. 57(a) (6)).

However, in the case of a contribution made in a taxable year
beginning in 1991 or made before July 1, 1992, in a taxable
year beginning in 1992, this rule does not apply to
contributions of tangible personal property.

For taxable years beginning after 1989, the AMTI of a
corporation is increased by 75 percent of the amount by which
adjusted current earnings (ACE) exceeds AMTI (calculated
before this adjustment). ACE generally is computed pursuant
to the rules that a corporation uses to determine its
earnings and profits (sec. 56(g)).

4 tx on! bal

The proposal would eliminate the treatment of

‘ The amount of the deduction allowable for a taxable year
with respect to a charitable contribution may be reduced
depending on the type of property contributed, the type of
charitable organization to which the property is contributed, and
the income of the taxpayer (secs. 170(b) and 170(e)).

? Section 170(e) (3) provides an augmented deduction for
certain corporate contributions of inventory property for the
care of the iil, the needy, or infants.



s/

II. REVENUE-REDUCTION PROVISIONS
A. Training and Education Provisions

1. Permanent extension of employer-provided educational
assistance :

Present Law

Prior to July 1, 1992, an employee’s gross income and wages
for income and employment tax purposes did not include amounts
paid or incurred by the employer for educational assistance
provided to the employee if such amounts were paid or incurred
pursuant to an educational assistance program that met certain
requirements (sec. 127). This exclusion, which expired with
respect to amounts paid after June 30, 1992, was limited to.
$5,250 of educational assistance with respect to an individual
during a calendar year.

In the absence of this exclusion, for purposes of income and
employment taxes, an employee generally is required to include in
income and wages the value of educational assistance provided by
an employer to the employee, unless the cost of such assistance
qualifies as a deductible job-related expense of the taxpayer.

ni f

The proposal would retroactively and permanently extend the
exclusion for employer-provided educational assistance.

The proposal would include a number of transition rules to
deal with cases in which employers provided educational
assistance to employees between July 1, 1992, and December 31,
1992.

First, no interest, penalty, or addition to tax would be
imposed on employers or employees who continued to exclude from
income educational assistance payments made after June 30, 1992.

Second, if an employer included educational assistance
payments made after June 30, 1992, in its employees’ income and
wages (for purposes of income or employment taxes) the amount
included is deducted from wages paid in 1993 rather than
requiring the taxpayers to file a request for refund for 1992.
Under this rule, if an employee receives income and wages from
the employer between the date of enactment and December 31, 1993,
in an amount at least equal to the amount of educational
assistance provided to such employee between July 1, 1992, and
December 31, 1992, then the employee’s income and wages for the
purposes of income and employment taxes for 1993 would be reduced
by such amount of educational assistance. The reduction for
income and employment tax purposes would be carried out
separately with respect to each tax. For purposes of information
reports or tax returns, the employer would be required to report



3. Mark-to-market accounting method for dealers in securities

Pregent Law

A_ taxpayer that is a dealer in securities is required for
Federal income tax purposes to maintain an inventory of securities
held for sale to customers. A dealer in securities is allowed for
Federal income tax purposes to determine (or value) the inventory
of securities held for sale based on: (1) the cost of the
securities; (2) the lower of the cost or market value of the
securities; or (3) the market value of the securities.

Tf the inventory of securities is determined based on cost,
unrealized gains and losses with respect to the securities are not
taken into account for Federal income tax purposes. If the
inventory of securities is determined based on the lower of cost or
market value, unrealized losses (but not unrealized gains) with
respect to the securities are taken into account for Federal income
tax purposes. If the inventory of securities is determined based
on market value, both unrealized gains and losses with respect to
the securities are taken into account for Federal income tax
purposes.

For financial accounting purposes, the inventory of securities
generally is determined based on market value.

Administration's Proposal
In_general

The proposal would provide two general rules (the
"mark-to-market rules") that apply to certain securities that are
held by a dealer in securities. First, any such security that is
inventory in the hands of the dealer would be required to be
included in inventory at its fair market value. Second, any such
security that is not inventory in the hands of the dealer and that
is held as of the close of any taxable year would be treated as
sold by the dealer for its fair market value on the last business
day of the taxable year and any gain or loss would be required to
be taken into account by the dealer in determining gross income for
that taxable year.' For this purpose, fair market value generally

' For purposes of the proposal, a security would be treated as
sold to a person that is not related to the dealer even if the
security is a contract between the dealer and a related person.
Thus, for example, Code sections 267 and 707(b} would not apply to
any loss that would be required to be taken into account under the
proposal.

In addition, a security subject to the proposal would not be
treated as sold and reacquired for purposes of Code section 1091.
Section 1092 would apply to any loss recognized by the mark-to

~


4. Modify AMT depreciation schedule
Present Law

A taxpayer is subject to an alternative minimum tax (AMT) to
the extent that the taxpayer's tentative minimum tax exceeds the
taxpayer's regular income tax liability. A taxpayer’s tentative
minimum tax generally equals 20 percent (24 percent in the case of
an individual) of the taxpayer’s alternative minimum taxable income
in excess of an exemption amount. Alternative minimum taxable
income (AMTI) is the taxpayer’s taxable income increased by certain
tax preferences and adjusted by determining the tax treatment of
certain items in a manner which negates the deferral of income
resulting from the regular tax treatment of those items.

One of the adjustments which is made to taxable income to
arrive at AMTI relates to depreciation. For AMT purposes,
depreciation on most personal property to which the modified
Accelerated Cost Recovery System (MACRS) adopted in 1986 applies is
calculated using the 150-percent declining balance method
(switching to straight line in the year necessary to maximize the
deduction) over the property’s class life. The class lives of
MACRS property generally are longer than the recovery periods
allowed for regular tax purposes.

For taxable years beginning after 1989, the AMTI of a
corporation is increased by an amount equal to 75 percent of the
amount by which adjusted current earnings (ACE) of the corporation
exceed AMTI (as determined before this adjustment). In general,
ACE means AMTI with additional adjustments that generally follow
the rules presently applicable to corporations in computing their
earnings and profits. For purposes of ACE, depreciation is
computed using the straight-line method over the class life of the
property. Thus, a corporation generally must make two depreciation
calculations for purposes of the AMT--once using the 150 percent
declining balance method over the class life and again using the
straight-line method over the class life. Taxpayers may elect to
use either method for regular tax purposes. If a taxpayer uses the
straight-line method for regular tax purposes, it must also use the
straight-line method for AMT purposes.

ion’ sg _P:

The depreciation component of the ACE adjustment would be
eliminated. Taxpayers, including individuals, would compute AMT
depreciation by using the 120-percent declining-balance method over
the recovery periods. applicable for regular tax purposes. The
Proposal would not apply to property eligible only for the
straight-line method for regular tax purposes (e.g., residential
and nonresidential real property). Taxpayers would be allowed to
elect to use the 120-percent declining-balance method for regular
tax purposes.

105


1984, would not be required to treat accrued market discount as
ordinary income.

d. Accrual of income by holders of stripped preferred stock

Present Law

In general, if a bond is issued at a price approximately
equal to its redemption price at maturity, the expected return to
the holder of the bond is in the form of periodic interest
payments. In the case of original issue discount ("OID") bonds,
however, the issue price is below the redemption price, and the
holder receives his expected return in the form of price
appreciation. The difference between the issue price and
redemption price is the OID, and a portion of the OID is required
to be accrued and included in the income of the holder annually.
Similarly, for preferred stock that is issued at a discount from
its redemption price, a portion of the redemption premium must be
included in income annually.

A stripped bond (i.e., a bond issued with interest coupons
that is later stripped of any of its unpaid interest coupons so
that the ownership of the bond is separated from the ownership of
the interest coupons) generally is treated as a bond issued with
OID equal to (1) the stated redemption price of the bond at
maturity minus (2) the amount paid for the stripped bond.

If preferred stock is stripped of some of its dividend
rights, however, the stripped stock is not subject to the rules
that apply to stripped bonds or to the rules that apply to bonds
and preferred stock issued at a discount.

Administration’s Proposal

The proposal would treat the purchaser of stripped preferred
stock (and a person who strips preferred stock and disposes of
the stripped dividend rights) in generally the same way that the
purchaser of a stripped bond would be treated under the OID
rules. Thus, stripped stock would be treated like a bond issued
with OID equal to (1) the stated redemption price of the stock
minus (2) the amount paid for the stock. The "OID" accrued under
the proposal would be treated as ordinary income and not as
interest or dividends.

Stripped preferred stock would be defined as any preferred
stock where the ownership of the stock has been separated from
the right to receive any dividend that has not yet become
payable. The proposal would apply to stock that is limited and
preferred as to dividends, does not participate in corporate
growth to any significant extent, and has a fixed redemption
price.



rf

separately the amount of any such income reduction for an
employee as nontaxable income. This special rule would not apply
if the employer has actual knowledge that the employee treated
the educational assistance as excludable from income. Of course,
even if the special rule does apply, if the employee treated
educational assistance as nontaxable in 1992 the employee would
not be able to exclude such amount from income again in 1993.

Amounts reduced from income and wages under this rule would
not affect other provisions, for example, the amount that could
otherwise be excluded from income as educational assistance in
1993 would not be reduced, nor would the amount of compensation
used in determining whether retirement plans of the employer
satisfy the tax-qualification requirements of the Code.

If an employer included educational assistance payments made
after June 30, 1992, in an employee’s income and wages (for
purposes of income or employment taxes) and the employee does not
receive income and wages from that employer between the date of
enactment and December 31, 1993, at least equal to the amount of
such educational assistance included in income in 1992, then the
employee may seek refund of excess employment taxes in accordance
with existing rules. In such a case, the employer would be
required to provide a corrected Form W-2 to the employee.

The proposal would also clarify the present-law rule under
which educational assistance that does not satisfy section 127
may be excluded from income if and only if it meets the
requirements of a working condition fringe benefit.

Effective Date

The extension of the exclusion would be effective for
taxable years ending after June 30, 1992. The clarification to
the working condition fringe benefit rule would be effective for
taxable years beginning after December 31, 1988.



would be taken into account by the lessee, if the original use of
the property begins with the lessee. For this purpose, the basis
of the property would be its fair market value at the beginning of
the lease. For purposes of determining the applicable percentage,
the recovery period would be the shorter of: ({1) the recovery
period of the type of property subject to the lease or (2) the
lease term.

Property subject to a lease not described above would not
qualify for the credits. Special rules would be provided for
options to renew, successive leases, leases between related
parties, and early lease terminations.

Other rules

The credits generally would be treated as part of the section
38 general business credit and, therefore, would be subject to
present-law limitations on use of that credit. The credits could
be used by any taxpayer to offset up to 25 percent of the tentative
minimum tax. As under present law, any unused general business
credit could be carried back 3 years and forward 15 years, although
no carryback of the investment credits would be permitted to years
prior to the effective date of the proposal. Other limitations
applicable to the use of general business credits, such as the
passive loss limitations and at risk rules, would apply to the
credits.

An estate, trust, regulated investment company (RIC), real
estate investment trust (REIT), real estate mortgage investment
conduit (REMIC), or common trust fund would not be eligible to
claim either of the credits.

Smali_business investment tax credit

The small business investment tax credit would be a permanent
credit. The allowable amount of credit would be 5 percent of the
amount of qualified investment of regular credit property of an

eligible small business (7 percent for property placed in service
after December 3, 1992, and on or before December 31, 1994).

An "eligible small business" generally would be defined as a
business with average annual gross receipts of less than $5 million
in the three years immediately preceding the taxable year, using
principles similar to those provided for determining whether
corporations may use the cash method of accounting under section
448.

The aggregate basis of regular credit property that would be
taken into account by an eligible small business could not exceed
$250,000. If the limitation is exceeded, the $250,000 amount would
be spread, pro rata, among all regular credit property placed in
service by the taxpayer during the year. The $250,000 amount would
be reduced for taxable years that are less than 12 months or that
include any period before December 4, 1992. In the case of a

74



income for an individual, the individual’s spouse, and each
dependent. For 1993, the amount of this deduction is $2,350 for
each exemption claimed. This exemption amount is adjusted for
inflation. The deduction for personal exemptions is phased out for
taxpayers with AGI above a threshold amount (indexed for inflation)
which is based on filing status. For 1993, the threshold amounts
are $162,700 for married taxpayers filing joint returns, $81,350
for married taxpayers filing separate returns, $135,600 for
unmarried taxpayers filing as head of household, and $108,450 for
unmarried taxpayers filing as single.

The total amount of exemptions that may be claimed by a
taxpayer is reduced by 2 percent for each $2,500 (or portion
thereof) by which the taxpayer’s AGI exceeds the applicable
threshold (the phaseout rate is 4 percent for married taxpayers
filing separate returns). Thus, the personal exemptions claimed
are phased out over a $122,500 range, beginning at the applicable
threshold.

This provision does not apply to taxable years beginning after
December 31, 1996.

Administration's Proposal
New marginal tax rates

The proposal would impose a new 36-percent marginal tax rate
to taxable income in excess of the following thresholds:

Filing status Applicable threshold
Married individuals filing joint returns $140,000
Heads of households . $127,500
Unmarried individuals $115,000
Married individuals filing separate returns $ 70,000
Estates and trusts , $ 5,500

For estates and trusts, the 15-percent rate would apply to
income up to $1,500, the 28-percent rate would apply to income
between $1,500 and $3,500, and the 31-percent rate would apply to
income between $3,500 and $5,500. Under this modified tax rate
schedule for estates and trusts, the benefits of the rates below
the 39.6-percent surtax-included rate (described below) for 1993
would approximate the benefits of the 15- and 28-percent rates for
1993 under present law.

As under present law, the tax rate bracket thresholds
{including the thresholds for the new 36-percent rate) would be
indexed for inflation.



5. Increase recovery period for depreciation of nonresidential
real property

Present Law

A taxpayer is allowed to recover, through annual
depreciation allowances, the cost or other basis of
nonresidential real property (other than land) that is used ina
trade or business or that is held for the production of rental
income. For regular tax purposes, the amount of the depreciation
deduction allowed with respect to nonresidential real property
for any taxable year generally is determined by using the
straight-line method and a recovery period of 31.5 years. For
alternative minimum tax purposes, the amount of the depreciation
deduction allowed with respect to nonresidential real property
for any taxable year is determined by using the straight-line
method and a recovery period of 40 years.

Administration’s Proposal

For regular tax purposes, nonresidential real property would
be depreciated using the straight-line method and a recovery
period of 37 years.

Effective Date

The proposal generally would apply to property placed in
service on or after February 25, 1993. The proposal would not
apply to property that a taxpayer places in service before
January 1, 1994, if (1) the taxpayer or a qualified person
entered into a binding written contract to purchase or construct
the property before February 25, 1993, or (2) construction of the
property was commenced by or for the taxpayer or a qualified
person before February 25, 1993. A qualified person for this
purpose is any person who transfers rights in such a contract or
such property to the taxpayer without first placing the property
in service.

lhe



permanent, flat credit for small businesses and a temporary,
incremental credit for larger businesses. Property eligible for
the credits generally would be the same for both credits.

Rul 1 edi
Qualified investment property

The credit would be allowed with respect to qualified
investment in regular credit property. "Regular credit property"
would be defined as eligible property: (1) to which ACRS applies;
(2) which is placed in service after December 3, 1992; and (3) the
construction, reconstruction, or erection of which is completed by
the taxpayer or which is acquired by the taxpayer if the original
use of the property commences with the taxpayer. Thus, used
property would not qualify for the credits. In addition, the rules
of section 50(b) would apply. Thus, the credits would be limited
or denied with respect to property used outside the United States,
property used for lodging, and property used by tax exempt
entities, governments, or foreign persons.

"Eligible property" generally would be defined as: (1)
tangible personal property; (2) other tangible property (not
including a building or its structural components), but only if
such property (a) is used as an integral part of manufacturing,
production, or extraction, or the furnishing of transportation,
communications, electrical energy, gas, water, or sewage disposal
services; (b) constitutes a research facility used in any of the
activities described in (a) above; (c) constitutes a facility used
in connection with any of the activities described in (a) above for
the bulk storage of fungible commodities (including commodities in
a liquid or gaseous state); (3) an elevator or escalator; (4) a
storage facility used in connection with the distribution of
petroleum or any primary product of petroleum; or (5) a single
purpose agricultural or horticultural structure. Eligible property
generally would include livestock (other than horses).

The term "building" would generally mean any structure or
edifice enclosing a space within its walls, and usually covered by
a roof, the purpose of which is, for example, to provide working,
office, parking, display, or sales space. The would term include,
for example, structures such as apartment houses, factory and
office buildings, warehouses, barns, garages, railways or bus
stations, and stores. The term also would include any structure
constructed by or for a lessee even if the structure must be
removed, or ownership of the structure reverts to the lessor, at
the termination of the lease. The term "building" would not
include a structure which is essentially an item of machinery or
equipment. No special exception to the definition of a building
would be provided for single purpose structure (other than a single
purpose agricultural or horticultural structure). Accordingly,
whether such a structure would constitute a building would be
determined under the generally applicable rules.

th



8

default; and (4) the present value of the maximum amount payable
pursuant to any participation feature cannot exceed 30 percent of
the total purchase price of the property (including any
contingent payment) .

Effective Date

The proposal would be effective for acquisitions (and also
for leases entered into) on or after January 1, 1994.

b. Repeal of the automatic UBTI rule for publicly-traded
partnerships

Present Law

In general, the character of a partner’s distributive share
of partnership income is the same as if the income had been
directly realized by the partner. Thus, whether a tax-exempt
organization’s share of income from a partnership (other than
from a publicly-traded partnership) is treated as unrelated
business income depends on the underlying character of the income
(sec. 512(c) (1)).

By contrast, a tax-exempt organization’s distributive share
of gross income from a publicly-traded partnership (that is not
otherwise treated as a corporation) automatically is treated as
gross income derived from an unrelated trade or business (sec.
512(c)(2)(A)). The organization’s share of the partnership
deductions is allowed in computing the organization’s UBTI (sec.
512 (c) (2) (B)).

Administration’ s Proposal

The proposal would repeal the rule that automatically treats
income from publicly-traded partnerships as UBTI. Thus, under
the provision, investments in publicly-traded partnerships are
treated the same as investments in other partnerships for
purposes of the UBTI rules.

Effective Date

The proposal would be effective for partnership years
beginning on or after January 1, 1994.

c. Permit title-holding companies to receive small
amounts of UBTI

Presen Ww

Section 501(c) (2) provides tax-exempt status to certain
corporations organized for the exclusive purpose of holding title
to property and remitting over any income from the property to
one or more related tax-exempt organizations. Section 501(c) (25)
provides tax-exempt status to certain corporations and trusts



Transferees in other cases are not eligible for the
exclusion. Thus, for example, if qualified small business stock
is transferred to a partnership or corporation and such entity
disposes of the stock, any gain from the disposition will not be
eligible for the exclusion.

In the case of certain incorporations and reorganizations
where qualified small business stock is transferred for other
stock, the transferor treats the stock received as qualified
small business stock. The holding period of the original stock
is added to that of the stock received. However, the amount of
gain eligible for the exclusion is limited to the gain accrued as
of the date of the incorporation or reorganization.

Special basis rules

If property (other than money or stock) is transferred to a
corporation in exchange for its stock, the basis of the stock
received is treated as not less than the fair market value of the
property exchanged. Thus, only gains that accrue after the
transfer are eligible for the exclusion.

ey vi 4 in

Stock acquired by the taxpayer through the exercise of
options or warrants, or through the conversion of convertible
debt, is treated as acquired at original issue. The
determination whether the gross assets test is met is made at the
time of exercise or conversion, and the holding period of such
stock is treated as beginning at that time.

In the case of convertible preferred stock, the gross assets
determination is made at the time the convertible stock is
issued, and the holding period of the convertible stock is added
to that of the common stock acquired upon conversion.

Stock received in connection with the performance of
services is treated as issued by the corporation and acquired by
the taxpayer when included in the taxpayer’s gross income in
accordance with the rules of section 83.

Offsetting short positions

A taxpayer cannot exclude gain from the sale of qualified
small business stock if the taxpayer (or a related person) held
an offsetting short position with respect to that stock anytime
before the 5-year holding period is satisfied. If the taxpayer
(or a related person) acquires an offsetting short position with
respect to qualified small business stock after the S-year
holding period is satisfied, the taxpayer must elect to treat the
acquisition of the offsetting short position as a sale of the
qualified small business stock in order to exclude any gain from
that stock.



F. Miscellaneous Revenue-Increase Provisions

1. Substantiation and disclosure requirements for charitable
contributions

Present Law

An individual taxpayer who itemizes deductions must separately
state (on Schedule A to the Form 1040) the aggregate amount of
charitable contributions made by cash or check and the aggregate
amount made by donated property other than cash or check.

A taxpayer is not required to provide specific information on
his or her return regarding a claimed charitable contribution made
by cash or check; nor in such a case is a donee organization
required to file an information return with the IRS, regardless of
the amount of cash or check involved. However, taxpayers must
provide certain information (on Form 8283) if the amount of the
claimed contribution for all noncash contributions exceeds $500.!

A payment to a charity (regardless of whether it is termed a
“contribution") in exchange for which the payor receives an
economic benefit is not deductible under section 170, except to the
extent that the taxpayer can demonstrate that the payment exceeds
the fair-market value of the benefit received from the charity.?

' If the claimed deduction for a noncash gift exceeds $5,000
per item or group of similar items (other than certain publicly
traded securities), a qualified appraiser must sign the Form 8283,
and an authorized representative of the donee charity also must
sign the Form 8283, acknowledging receipt of the gift and providing
certain other information. In certain situations, information
reporting by the donee charity is required if it subsequently
disposes of donated property (sec. 6050L).

? See Rev. Rul. 67-246, 1967-2 C.B. 104.

Under current IRS practice, certain small items and token
benefits (e.g., key chains and bumper stickers) that have
insubstantial value are disregarded, such that the full amount of
the contribution is deductible. Rev. Proc. 90-12, 1990-1 C.B. 471,
provides that tokens or benefits given to the donor in connection
with a contribution will be considered to have insubstantial value
if (1) the payment occurs in the context of a fundraising campaign
in which the charity informs patrons how much of their payment is
a deductible contribution, and (2) either (a) the fair-market value
of all the benefits received in connection with the payment is not
more than two percent of the payment, or $50, whichever is less, Or
(b) the payment made by the patron is $25 or more (adjusted for
inflation) and the only benefits received in connection with the
payment are token items (e.g., key chains or mugs) which bear the
organization’s name or logo and which (in the aggregate) are within

V/



disclosed and is not "frivolous" (Treas. Reg. secs. 1.6694-2(c),
1.6694-3(c) (2)) .3

A "frivolous" position with respect to an item for purposes of
all of these penalty provisions is one that is "patently improper"
(Treas. Reg. sec. 1.6662-3(b) (3), 1.6662-4(e) (2) (i), 1.6694-
2(c) (2), 1.6694-3(c) (2)).

ind ‘ x

Under the proposal, the "reasonable basis" standard would
replace the "not frivolous" standard for purposes of the accuracy-
related and income tax return preparer penalties. "Reasonable
basis" would be defined as a standard that is significantly higher
than "not patently improper." The reasonable basis standard
intended by the proposal, therefore, would be a relatively high
standard of tax reporting. This standard would not be satisfied by
a return position that is merely arguable or that is merely a
colorable claim.

As a result of the proposal, a taxpayer could avoid a
substantial understatement penalty by adequately disclosing a
return position only if the position had at least a reasonable
basis. Similarly, a taxpayer could avoid the penalty that applies
to disregarding rules or regulations by adequately disclosing a
return position only if the position had at least a reasonable
basis. A disclosure exception would no longer. be necessary to
avoid a penalty for negligence, because a taxpayer generally would
not be considered to have been negligent with respect to a return
position, regardless of whether it was disclosed, if the position
had a reasonable basis. Also, as a result of the proposal, a
preparer could avoid a penalty by adequately disclosing a return
position only if the position had at least a reasonable basis.‘

Effective Date

The proposal would apply to tax returns due (without regard to
extensions) on or after December 31, 1993.

3 In the case of a position contrary to a regulation, the
position taken must also represent a good faith challenge to the
validity of the regulation.

‘ The proposal also would eliminate the reasonable cause and
good faith exception for fraud, because fraud is inconsistent with
reasonable cause and good faith.

67


!7

8. Reduce compensation taken into account for qualified
‘retirement plan purposes

Present Law

A limit is provided with respect to the amount of a
participant's compensation that can be taken into account under a
tax-qualified pension plan (sec. 401(a)(17)). This limit on
includible compensation is $235,840 for 1993, and is adjusted
annually for inflation. The limit applies for determining the
amount of the employer's deduction for contributions to the plan
as well as for determining the amount of the participant’s
benefits.

EE ‘8 _P:

Under the proposal, the section 401(a) (17) limit would be
reduced to $150,000. As under present law, the section 401 (a) (17)
limit would be indexed for cost-of-living adjustments on an
annual basis. Corresponding changes also would be made to other
provisions that take into account the section 401(a) (17) limit.

Effective Date

The proposal would be effective for plan years beginning
after December 31, 1993. Benefits accrued prior to the effective
date for compensation in excess of the reduced limit would be
grandfathered.



T6

by any other corporation engaged in the active conduct of a
business as a broker or dealer in securities. As with the asset
valuation rule above, this exclusion would apply only to a
controlled foreign corporation, and only for purposes of the
treatment of its U.S. shareholders.

Inclusions of income on account of investments of earnings
of a controlled foreign corporation in U.S. property, or
ownership of excess passive assets, would be treated as
distributions for purposes of computing the interest charge on
excess distributions to the U.S. shareholders of PFICs that are
controlled foreign corporations.

1 x PFI

In testing any foreign corporation for PFIC status, treat
certain leased property as assets held by the foreign corporation
to the extent of the unamortized portion of the present value of
payments under the lease.

Effective Date

The provisions generally would be effective for taxable
years of foreign corporations beginning after September 30, 1993,
and for taxable years of domestic shareholders in which or with
which such taxable years end.

The excess passive assets proposal would be phased in during
taxable years beginning after September 30, 1993, and before
October 1, 1997. The amount of income included under the
proposal would be 20 percent of the amount otherwise determined
with respect to the first year of the phase-in period, 25 percent
during the second year, 35 percent during the third year, and 50
percent during the fourth year. The proposal would be 100-
percent effective for taxable years beginning after September 30,
1997. Corporations that become subject to the proposal after the
beginning of the phase-in period would join the phase-in schedule
in progress.

The provision modifying the rules for increasing foreign tax
credit limitation upon distributions of previously taxed income
would be effective for actual distributions of earnings that were
included under subpart F in taxable years of U.S. shareholders
beginning after September 30, 1993.



Additional exemptions, generally administered by providing a
credit or refund of taxes paid, would be provided for:

(1) Exports of taxable energy sources, including all
electricity.

(2} Nonfuel uses (e.g., feedstock uses) of fossil fuels.

(3) Ship and jet fuel used in international commercial
transportation.

(4) Methanol, MTBE, and similar ethers.

(5) Refined petroleum products used in the production of
synthetic natural gas.

(6) Coal seam methane from biomass or coal mining operations.

(7) Natural gas and coal used in enhanced oil recovery for
heavy oil.

(8) Heating oil used in residential heating (supplemental
rate only).

The tax would not include any exemptions based on the
character of the purchaser of an otherwise taxable product (e.g.,
fuel and electricity purchased by the U.S. Government would be
subject to tax).

Utilit low- ugh

Utilities would be denied certain tax benefits (i.e.,
accelerated cost recovery deductions on utility property) for
periods during which the energy tax was not passed through to end
users.

Effective Date

The tax would be imposed at one-third of the full rates
beginning July 1, 1994, and at two-thirds of the full rates
beginning July 1, 1995. The full rates would apply beginning July
1, 1996.

Floor stocks taxes would be imposed on taxable products held
beyond the point of collection on July 1, 1994, and on the date of
each subsequent rate change (including each annual indexing
change).

oth



B. Investment Incentives

1. Investment tax credits

Present and Prior Law

In general, there is no investment tax credit under present
law since the Tax Reform Act of 1986 (1986 Act) repealed the
"regular" investment tax credit.

Prior to the 1986 Act, the regular investment credit was a
credit against tax liability for up to 10 percent of a taxpayer's
investment in new "section 38 property." Section 38 property
generally included any tangible personal property and other
tangible property (not including a building or its structural
components) used as an integral part of manufacturing, production,
or extraction, or for furnishing transportation, communications,
electrical energy, gas, water, or sewage disposal services. Under
regulations, a structure (a "single purpose structure") that housed
property used as an integral part of one of the above-specified
activities did not constitute a building if the use of the
structure was so closely related to the use of the property that
the structure could clearly expect to be replaced when the property
it housed was replaced. The credit also was available for up to

$125,000 of the taxpayer’s cost of used property placed in service
during a taxable year.

The amount of the credit was based on the Accelerated Cost
Recovery System (ACRS) recovery period to which the property was
assigned. The 10-percent credit was allowed for 5-year property,
10-year property, and 15-year public utility property. The credit
was limited to 6 percent for 3-year property. The credit was
further limited to $675 with respect to a passenger automobile.

Prior law also required that the basis of property taken into
account in computing the credit be reduced by all or a portion of
the credit. Recapture rules required a taxpayer to increase its
tax due if recovery property taken into account in computing the
credit was disposed of, or otherwise ceased to be section 38
property, before the close of a specified period. This period was
3 years for 3-year property and 5 years for other property.

The regular investment tax credit was subject to the
limitations on the use of the general business credit. Unused
credits could be carried back 3 years and forward 15 years from the
year in which the credit arose. C corporations also were permitted
to offset up to 25 percent of their tentative minimum tax by the
regular investment tax credit.

ni t f
in_general

Two separate investment tax credits would be provided -- a

Wl


4. Reinstate top estate and gift tax rates at 53 percent and
55 percent

Present Law

A Federal gift tax is imposed on transfers by gift
during life and a Federal estate tax is imposed on transfers
at death. The Federal estate and gift taxes are unified, so
that a single progressive rate schedule is applied to an
individual's cumulative gifts and bequests. For decedents
dying (or gifts made) after 1992, the estate and gift tax
rates begin at 18 percent on the first $10,000 of taxable
transfers and reach a maximum of 50 percent on taxable
transfers over $2.5 million. Previously, for the nine year
period beginning after 1983 and ending before 1993, two .
additional brackets applied at the top of the rate schedule,
a rate of 53 percent on taxable transfers exceeding $2.5
million and a maximum marginal tax rate of 55 percent on
taxable transfers exceeding $3 million. The
generation-skipping transfer tax is computed by reference to
the maximum Federal estate tax rate.

In order to phase out the benefit of the graduated
brackets and unified credit, the estate and gift tax is
increased by five percent on cumulative taxable transfers
between $10 million and $18,340,000, for decedents dying and
gifts made after 1992. (Prior to 1993, this phase out of the
graduated rates and unified credit applied to cumulative
taxable transfers between $10 million and $21,040,000.)

nist ‘gs Pr

The top two estate and gift tax rates which expired at
the end of 1992 would be reinstated. For taxable transfers
over $2.5 million but not over $3.0 million, the tax rate
would be 53 percent. For taxable transfers over $3.0
million, the tax rate would be 55 percent. The phase out of
the graduated rates and unified credit would be between $10
million and $21,040,000. Also, the rate of tax on
generation-skipping transfers would be 55 percent.

Effective Date

The proposal would be effective for decedents dying,
gifts made, and generation skipping transfers occurring after
December 31, 1992.



2. Raise standard for accuracy-related and preparer penalties

Present Law

A 20-percent penalty is imposed on any portion of an
underpayment of tax that is attributable either to a substantial
understatement of income tax on a return, or to negligence or
disregard of rules or regulations (sec. 6662).

For this purpose, an understatement’ is "substantial" if it
exceeds the greater of 10 percent of the tax required to be shown
on the year’s return or $5,000 ($10,000 for corporations other than
S corporations and personal holding companies). In determining
whether an understatement is substantial, the amount of the
understatement is reduced by any portion attributable to an item if
(1) the treatment of the item on the return is or was supported by
substantial authority, or (2) facts relevant to the tax treatment
of the item were adequately disclosed on the tax return (or a
statement attached to the return), provided that the item or
treatment disclosed was not "frivolous" (Treas. Reg. sec. 1.6662-
4)). Special rules apply to tax shelters.

The term "negligence" includes any failure to make a
reasonable attempt to comply with the internal revenue laws, a
failure to exercise ordinary and reasonable care in the preparation
of a tax return, and a failure to keep adequate books and records
or to substantiate items properly (Treas. Reg. sec. 1.6662-
3(b)(1)). The term "disregard" includes any careless, reckless, or
intentional disregard of rules or regulations (sec. 6662(c)). The
penalty for negligence or disregard of rules or regulations does
not apply where the position taken is adequately disclosed, the
position is not "frivolous", and the taxpayer has adequate books
and records and has substantiated items properly (Treas. Reg. sec.
1.6662-3(c)).

A $250 penalty with respect to a return or claim for refund of
income tax may be imposed on a preparer if any understatement of
tax liability on the return or claim for refund resulted from a
position that did not have a realistic possibility of being
sustained on its merits and the preparer knew or reasonably should
have known of the position (sec. 6694(a)). The penalty is $1000
per return or claim for refund if the understatement is willful or
due to any reckless or intentional disregard of rules or
regulations (sec. 6694(b)). These penalties may be avoided where
the position taken on the return or claim for refund is adequately

1 Generally, an "understatement" of income tax is the excess
of the tax required to be shown on the return, over the tax imposed
which is shown on the return (reduced by any rebates of tax).

2 In the case of a position contrary to a regulation, the
position taken must also represent a good faith challenge to the
validity of the regulation.

Ad



INTRODUCTION

This document,' prepared by the staff of the Joint
Committee on Taxation, provides a description of the
Administration’s revenue proposals included in President
Clinton’s fiscal year 1994 budget proposal.? The House Ways
and Means Committee is scheduled to mark up revenue
reconciliation provisions under the Budget Resolution for
fiscal year 1994.

Part I describes the revenue-raising provisions and Part
II describes the revenue-reduction provisions. (A separate
staff document presents the estimated budget effects of the
Administration’s revenue proposals.)

' This document may be cited as follows: Joint Committee on

Taxation, n rk ini ion’
Revenue Proposals (JCX-1-93), May 4, 1993.

2 See Department of the Treasury, Summary of the
mi: ion’s Rev , February 1993; supplemented by

"Description of Modified BTU Tax," April 1, 1993, and "Supplement
to Summary of the Administration’s Revenue Proposals, " April 1993.
Also, see Office of Management and Budget, A Vision of Change for
America, February 17, 1993, and i

vi Fisc: - Further, see Joint Committee on
Taxation, Pp id , (JCS-4-93),
March 8, 1993.


4. BATF user fees for processing applications for alcohol
certificates of label approval

Present Law

The Treasury Department’s Bureau of Alcohol, Tobacco, and
Firearms (BATF) is required to approve all alcoholic beverage
labels and conduct various laboratory analyses to assure
compliance with the Federal Alcohol Administration Act (27
U.S.C., Chapter 8) and the Internal Revenue Code and regulations.
There is currently no charge or fee for these BATF services.

Under the Internal Revenue Code, annual alcohol occupational
excise taxes are imposed as follows:

Producers of distilled
spirits, wines or beer
(secs. 5081, 5091) $1,000 per year per premise

Wholesale dealers of
liquors, wines or beer
(sec. 5121) $500 per year

Retail dealers in liquors,
wines or beer (sec. 5121) $250 per year

Nonbeverage use of distilled
spirits (sec. 5131) $500 per year

Industrial use of distilled
spirits (sec. 5276) $250 per year

These annual alcohol occupational tax rates are as enacted
in the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203,
"1987 Act"), effective on January 1, 1988.? The 1987 Act
increased the wholesale and retail alcohol occupational taxes and
imposed new occupational taxes on distilled spirits, wine and
beer producers as well as for industrial users of distilled
spirits.

' Tax is $500 per year per premise for businesses with gross

receipts of less than $500,000 in the preceding taxable year.

2 The increased and new alcohol occupational taxes under the
1987 Act were enacted in lieu of the Reagan Administration's
proposed alcohol labeling and processing fees, which were included
in the fiscal year 1988 budget proposal.

83



Effective Date

The proposal would be effective for amounts paid or incurred
after December 31, 1993.



si

2. Access to tax information by the Department of Housing and
Urban Development

Present Law

The Internal Revenue Code prohibits disclosure of tax
returns and return information of taxpayers, except for
disclosure to certain Governmental entities in certain enumerated
instances (sec. 6103). Unauthorized disclosure is a felony
punishable by a fine not exceeding $5,000 or imprisonment of not
more than five years, or both (sec. 7213). An action for civil
damages also may be brought for unauthorized disclosure (sec.
7431). Any authorized recipient of return information must
maintain a system of safeguards to protect against unauthorized
disclosure of the information.

at on!

The proposal would permit disclosure of certain tax return
information to the Department of Housing and Urban Development
(HUD) to assist HUD in verifying eligibility for certain HUD
programs. Such tax return disclosure would be permitted only
with respect to applicants for and participants in HUD programs
who have executed consent forms under section 904 (b) (3) of the
Stewart B. McKinney Homeless Assistance Amendments Act of 1988.

Under the proposal, HUD would be required to comply with the
safeguards presently contained in the Code (governing the use of
disclosed tax information).

EE. ve D.

The proposal would be effective on the date of enactment.



(in accordance with Treasury regulations) reporting information
sufficient to substantiate the amount of the deductible
contribution.

(2) Information disclosure for quid pro quo
contributions.--Charitable organizations that receive a quid pro

quo contribution (meaning "a payment made partly as a contribution
and partly in consideration for goods or services provided to the
payor by the donee organization") would be required, in connection
with the solicitation or receipt of such a contribution, to (1)
inform the donor that the amount of the contribution that is
deductible for Federal income tax purposes is limited to the excess
of the amount of any money (and the value of any property other
than money) contributed by the donor over the value of the goods or
services provided by the organization, and (2) provide the donor
with a good faith estimate of the value of goods or services
furnished to the donor by the organization.

The disclosure requirement would apply to all
contributions regardless of the dollar amount of the contribution
involved (i.e., even in cases with payments of less than $750), and
the disclosure must be made by the charity in connection with
either the solicitation or receipt of the contribution.” Thus,
for example, if a charity receives a $75 contribution from a donor,
in exchange for which the donor receives a dinner valued at $40,
then the charity must inform the donor that only $35 is deductible
as a charitable contribution. However, the proposal would not
apply if only de minimis, token goods or services are given to a
donor (see Rev. Procs. 90-12 and 92-49, discussed above). Also,
the proposal would not apply to transactions that have no donative
element (e.g., sales of goods by a museum gift shop that are not,
in part, donations).

The proposal also provides that penalties ($10 per
contribution, but capped at $5,000 per particular fundraising event
or mailing) could be imposed upon charities that fail to make the
required disclosure, unless the failure was due to reasonable
cause. The penalties would apply if an organization either fails
to make any disclosure in connection with a i ba
contribution or makes a disclosure that is incomplete or inaccurate
(e.g., an estimate not determined in good faith of the value of
goods or services furnished to the donor).

Effective Date

The proposal would be effective for contributions made after
December 31, 1993.

10 pisclosure must be reasonably likely to come to the

attention of the donor. For example, a disclosure of the required
information in small print set forth within a larger document might
not meet the requirement.

4



inistration’ 1

The proposal would exclude from the definition of moving
expenses: (1) the costs of meals consumed while traveling and
while living in temporary quarters near the new workplace, and
(2) the costs of selling (or settling an unexpired lease on) the
old residence and buying (or acquiring a lease on) the new
residence.

Effective Date

The proposal would be effective for expenses incurred after
December 31, 1993.

19



6. Limitation on section 936 credit
Present Law

Certain domestic corporations with business operations
in U.S. possessions (including, for this purpose, Puerto Rico
and the U.S. Virgin Islands) may elect under section 936 of
the Code generally to. eliminate the U.S. tax (including the
alternative minimum tax) on certain income related to their
operations in the possessions. Income exempt from U.S. tax
under this provision falls into two broad categories:
business income, which in order to be exempt must be income
treated as foreign source income derived from the active
conduct of a trade or business within a U.S. possession; and
investment income, which in order to be exempt must be
derived from certain investments in the possessions or in
certain Caribbean Basin countries. The investment income
exempted under the provision is known as "qualified
possession source investment income" (QPSII).'.. For these and
other purposes, income derived within a possession is
encompassed within the term "foreign source income."

In order to qualify for the section 936 credit, a
domestic corporation must satisfy two requirements. Under
one requirement, the corporation must be treated as deriving
at least 75 percent of its gross income from the active
conduct of a trade or business within a U.S. possession over
a three-year period. Under the other requirement, the
corporation must be treated as deriving at least 80 percent
of its gross income from sources within a possession during
that same three-year period.

Three alternative rules are provided that relate to
allocating income from intangible property between a domestic
corporation that elects the section 936 credit (a "possession
corporation") and its U.S. shareholders. The general rule is
to prohibit the possession corporation from earning any
return on intangible property. A possession corporation can
instead elect to subject itself to one of two alternative
rules, if it satisfies certain conditions.

One such rule is referred to as the "cost sharing
method." Use of this method requires the possession
corporation to pay other members of its affiliated group of
corporations an amount that is the greater of: (1) the total
amount of the affiliated group’s research and development
expenses concerning the possession corporation’s product
area, multiplied by 110 percent of the proportion of its

' In contrast to the foreign tax credit, the possessions tax
credit is a "tax sparing" credit. That is, the credit is granted
whether or not the electing corporation pays income tax to the
possession.



3. Modify tax shelter rules for purposes of the substantial
understatement penalty

Present Law

Under present law, a 20-percent penalty applies to any portion
of an underpayment of income tax required to be shown on a return
that is attributable to a substantial understatement of income tax
(sec. 6662)). For this purpose, an understatement is considered
"substantial" if it exceeds the greater of (1) 10 percent of the
tax required to be shown on the return, or (2) $5,000 ($10,000 in
the case of a corporation other than an S corporation or a personal
holding company). Generally, the amount of an "understatement" of
income tax is the excess of the tax required to be shown on the
return, over the tax imposed which is shown on the return (reduced
by any rebates of tax). .

In determining whether an understatement is substantial, the
understatement generally is reduced by the portion of the
understatement that is attributable to an item for which there was
substantial authority or adequate disclosure (sec. 6662(d)(2)).
However, in the case of tax shelter items, the understatement is
reduced only by the portion of the understatement that is
attributable to an item for which there both was substantial
authority and with respect to which the taxpayer reasonably
believed that the claimed treatment of the item was more likely
than not the proper treatment (sec. 6662(d)(2)(C)(i)). Disclosure
made with respect to a tax shelter item does not affect the amount
of an understatement.

A "tax shelter" is any partnership or other entity, any
investment plan or arrangement, or any other plan or arrangement if
the principal purpose of such partnership, entity, plan or
arrangement is to avoid or evade Federal income tax (sec.
6662 (d) (2) (C) (ii)). An item of income, gain, loss, deduction or
eredit is a "tax shelter item" if the item is directly or
indirectly attributable to the principal purpose of the tax shelter
(Treas. Reg. sec. 1.6662-4(g) (3)).

nistration’

The proposal would tighten the requirements for reducing the
amount of an understatement in the case of tax shelter items for
purposes of the substantial understatement penalty. Under the
proposal, an understatement would be reduced by the portion of the
understatement attributable to a tax shelter item only if, in
addition to satisfying existing requirements, the taxpayer could
demonstrate that the reasonably anticipated after-tax benefits from
the taxpayer’s investment in the shelter do not significantly
exceed the reasonably anticipated pre-tax economic profit from such
investment .

Thus, an understatement would be reduced by the portion of the
understatement attributable to a tax shelter item only if (1) there

o%



2. Deny deduction for lobbying expenses
Present Law
Tr in

Taxpayers engaged in a trade or business generally are allowed
a deduction for all ordinary and necessary expenses paid or
incurred during the taxable year in carrying on such trade or
business (sec. 162). Present-law section 162(e) (1) specifically
provides a deduction for certain so-called "direct lobbying"
expenses (including travel expenses, costs of preparing testimony,
and a portion of dues) paid in carrying on a trade or business if
such expenses are (1) in direct connection with appearances before,
submissions of statements to, or sending communications to,
committees, or individual members, of Congress or of any
legislative body of a State or local government with respect to
legislation or proposed legislation of direct interest to the
taxpayer, or (2) in direct connection with communication of
information between the taxpayer and an organization of which he is
a member with respect to legislation or proposed legislation of
direct interest to the taxpayer and to such organization.

No deduction is allowed for any amount paid for participation
or intervention in any political campaign (i.e., "political
campaign" expenses) or if paid in connection with any attempt to
influence the general public, or segments thereof, with respect to
legislative matters, elections, or referendums (i.e., "grass roots
lobbying") .

Lobbying expenditures which do not meet the "direct lobbying"
requirements of section 162(e) (1) are not deductible as ordinary
and necessary business expenses. Expenditures for institutional or
"good will" advertising which keeps the taxpayer’s name before the
public, however, are generally deductible, provided such
expenditures are related to the patronage the taxpayer might
reasonably expect in the future.!

| prior to 1963, Treasury Department regulations (dating back
to 1915) provided that all expenditures for lobbying purposes, for
political campaign purposes, or for propaganda (including
advertising) related to such purposes, were non-deductible. The
validity of these regulations was upheld by the U.S. Supreme Court
in Cammarano v. United States, 358 U.S. 498 (1959). In response to
the Cammarano decision, Congress enacted, as part of the Revenue
Act of 1962, the statutory rule contained in section 162(e) (1)
specifically allowing a deduction for certain "direct lobbying"
expenses.



anes

A qualified small business is a subchapter C corporation
other than a DISC or former DISC, a corporation with respect to
which an election under section 936 is in effect, a regulated
investment company, a real estate investment trust, a real estate
mortgage investment conduit, or a cooperative. The corporation
also cannot own (i) real property the value of which exceeds 10
percent of its total assets or (ii) portfolio stock or securities
the value of which exceeds 10 percent of its total assets in
excess of liabilities.

Active business

At least 80 percent (by value) of the corporation’s assets
(including intangible assets) must be used by the corporation in
the active conduct of a qualified trade or business. If in
connection with any future trade or business, a corporation. uses
assets in certain start-up activities, research and experimental
activities or in-house research activities, the corporation is
treated as using such assets in the active conduct of a qualified
trade or business.

Assets that are held to meet reasonable working capital
needs of the corporation, or are held for investment and are
reasonably expected to be used within 2 years to finance future
research and experimentation, are treated as used in the active
conduct of a trade or business. In addition, certain rights to
computer software are treated as assets used in the active
conduct of a trade or business.

A qualified trade or business is any trade or business other
than those involving the performance of services in the fields of
health, law, engineering, architecture, accounting, actuarial
science, performing arts, consulting, athletics, financial
services, brokerage services, or any other trade or business
where the principal asset of the trade or business is the
reputation or skill of 1 or more of its employees. The term also
excludes any banking, insurance, financing, investing, or similar
business, any farming business (including the business of raising
or harvesting trees), any business involving the production or
extraction of products for which percentage depletion is
allowable, or any business of operating a hotel, motel,
restaurant or similar business.

Gross_assets

As of the date of issuance, the excess of (1) the amount of
cash and the aggregate adjusted bases of other property held by
the corporation, over (2) the aggregate amount of indebtedness of
the corporation that does not have an original maturity of more
than one year (such as short-term payables), cannot exceed $50
million. For these purposes, amounts received in the issuance
are taken into account.

If a corporation satisfies the gross assets test as of the

40]


Like the U.S. tax on dividends, the U.S. tax on inclusions
of subpart F income and on inclusions based on earnings invested
in U.S. property may be reduced by credits for foreign income
taxes, including "indirect" credits for taxes paid by the
controlled foreign corporation.

Receipt of previously taxed earnings and profits

Barnings and profits of a controlled foreign corporation
that have been included in the income of U.S. shareholders before
actual repatriation are not taxed again when such earnings are in
fact distributed to the U.S. shareholders. A U:S8. shareholder is
permitted to increase. its foreign tax credit limitation in the
year of the distribution of previously taxed earnings and
profits. The increase equals the excess of the amount by which
its foreign tax credit limitation for the year°of the income
inclusion was increased as a result of that inclusion, over the
amount of foreign taxes which were allowable as a credit in that
year and which would not have been so allowable but for the
income inclusion. The increase in the foreign tax credit
limitation may not, however, exceed the amount of the foreign
taxes actually paid with respect to the distribution of x
previously taxed earnings and profits. All such determinations
are made separately for each foreign tax credit limitation
category.

P. fi. i

If any foreign corporation (including a controlled foreign
Corporation) is a "passive foreign investment company" (PFIC),
U.S. persons (including 10-percent "U.S. shareholders") that own
any stock in the PFIC may be subject to one of two other sets of
Operating rules that eliminate or reduce the benefits of
deferral. A PFIC generally is defined as any foreign corporation
if (1) 75 percent or more of its gross income for the taxable
year consists of passive income, or (2) 50 percent or more of its
assets consist of passive assets, defined as assets that produce,
or are held for the production of, passive income.

A U.S. person owning PFIC stock may elect to include
currently in gross income its share of the PFIC’s total earnings,
with a separate election to defer payment of tax, subject to an
interest charge, on income not currently received. A nonelecting
U.S. person owning PFIC stock pays no current tax on the PFIC’s
undistributed income. However, when realizing income earned
through ownership of PFIC stock (such as certain dividends
distributed by the PFIC or capital gains from selling PFIC
stock), the nonelecting U.S. person may pay an additional
interest charge.

ind nm!

inclusions based on excess passive assets

43



in the case of 1993) of the annual average of the indexed base
investment for each of the base period years. A "base period year"
would mean any taxable year beginning after December 31, 1988, and
before January 1, 1992 (or, at the election of the taxpayer, any
taxable year beginning after December 31, 1986, and before January
1, 1992). The "base investment" for any base period year generally
would be determined by applying the applicable percentages to each
regular credit property placed in service in the base year. For
this purpose, regular credit property would include used regular
credit property. In determining its base investment, a lessor
generally would not include property subject to a lease of 3 or
more years and a lessee would not include leased property unless
the property had a fair market value of $1,000,000 or more at the
beginning of the lease. The base amounts would be indexed for
growth in the gross domestic product. In no event would the base
amount for 1993 or 1994 exceed 50 percent of the taxpayer’s
qualified net investment for the year (the "minimum base" rule).

If, for 1993, the taxpayer’s base amount exceeds qualified net
investment, such excess would reduce the taxpayer’s qualified net
investment for 1994.

Recapture rules

The taxpayer would be subject to an addition to tax if, for
calendar years 1994, 1995, 1996 or 1997, the taxpayer’s base amount
exceeds its qualified investment. The addition to tax generally
would equal the least of: (1) 7 percent of the excess, (2) the
balance in the taxpayer’s recapture account, or (3) the aggregate
amount of the credit used by the taxpayer. The opening balance in
the recapture account would be zero and it would be increased as of
the close of any taxable year by the amount of credit determined
for the year and decreased by the sum of the amount of credit that
vests for the year and the amount of credit recaptured. In the
case of credit determined for 1993, such credit would vest ratably
over the next four calendar years. In the case of credit
determined for 1994, such credit would vest ratably over the next
three calendar years. Carrybacks and carryovers of the credit, if
any, would be properly adjusted to reflect recapture. Special
recapture rules would apply to taxpayers subject to the minimum
base rule.

Income inclusion

The amount of credit would not reduce the depreciable basis of
property. Rather, the taxpayer would include the amount of credit
in gross income. In the case of credit determined for 1993, the
amount of credit would be included in income ratably over the 4-
taxable-year period beginning in 1994. In the case of credit
determined for 1994, the amount of credit would be included in
income ratably over the 3-taxable-year period beginning in 1995.
Gross income would not be increased with respect to recaptured
credits.

16



A i ’ al

The proposal would incorporate certain items from H.R. 11 (the
Revenue Act of 1992), including the substantiation and disclosure
requirements relating. to charitable contributions.

H.R. 11, as passed by the Congress in 1992 and vetoed by
President Bush, included the following two provisions that
would require substantiation and disclosure relating to charitable
contributions:

(1) Substantiation requirement .--Section 170 would be amended
to provide that no deduction is allowed under that section for any
contribution of $750 or more’ unless the taxpayer has written
substantiation from the donee organization of the contribution
{including a good faith estimate of the value of any good or
service that has been provided to the donor in exchange for making
the gift to the donee) .°

This provision would not impose an information reporting
requirement upon charities; rather, it would place the
responsibility upon taxpayers who claim an itemized deduction for
a contribution of $750 or more to request (and maintain in their
records) substantiation from the charity of their contribution (and
any good or service received in exchange).° Taxpayers could not
rely solely on a canceled check as substantiation for a donation in
excess of $750.

Under the proposal, the substantiation must be obtained by the
taxpayer prior to filing his or her return for the taxable year in
which the contribution was made (or if earlier, the due date,
including extensions, for such return). Substantiation would not
be required if the donee organization files a return with the IRS

7 Separate payments would generally be treated as separate

contributions and would not be aggregated for the purposes of
applying the $750 threshold. In cases of contributions paid by
withholding from wages, the deductions from each paycheck would be
treated as separate payments.

* If the donee organization provided no goods or services to
the taxpayer in consideration of the taxpayer’s contribution, the
written substantiation must include a statement to that effect.

° In the case where a taxpayer makes a noncash contribution
claimed to be worth more than $750, the taxpayer would be required
to obtain from the charity a receipt that describes the donated
property (and indicates whether any good or service was given to
the taxpayer in exchange), but the charity would not be required to
value the property it receives from the donor.

73


Other rules

Property that ceases to be regular credit property with
respect to a taxpayer would be treated as disposed of at its fair
market value at the time of the cessation. Deemed disposition
rules would also apply to leased property and qualified progress
expenditure property. Transfers by reason of death, transactions
to which section 381(a) applies, dispositions to which sections
1031 or 1033 apply, transfers incident to divorce, and certain
changes in the form of business generally would not be treated as
dispositions.

Rules similar to those of section 41(f) (relating to
aggregation, allocations of the credit, and adjustments for
acquisitions and dispositions) and (g) (relating to certain pass-
through entities) would apply. .,

Property placed in service (or qualified progress expenditures
made) during the period beginning December 4, 1992, and ending
December 31, 1992, would be treated as'placed in service (or made)
on January 1, 1993.

Effective Date

The proposal generally would be effective for qualifying
property placed in service after December 3, 1992.

The proposal generally would not apply to any transition
property (as defined in sec. 49(e) of the Internal Revenue Code of
1986, as in effect on the date before the date of the enactment of
the Revenue Reconciliation Act of 1990), other than for purposes of
determining a taxpayer’s base amount. :

97


under age 19, the expenses are incurred by the employer in
operating a youth training program in conjunction with local
education officials.

The credit would be allowed with respect to full-time and
part-time employees. However, the employee must be employed by
the employer for a minimum period of at least 90 days. Wages
would not be eligible. for the credit if paid to certain relatives
of the employer or, if the employer is a corporation or
partnership, certain relatives of a person who owns more than 50
percent of the business. In addition, wages would not be
eligible for the credit if paid to a person who owns more than
five percent of the stock (or capital or profits interests) of
the employer.?

An employer’s deduction otherwise allowed for wages paid
would be reduced by the amount of credit claimed for that taxable
year.

The credit would be allowable to offset up to 25 percent of
alternative minimum tax liability.

x xX Crt

The present-law targeted jobs tax credit (sec. 51) would be
expanded so that a person who resides in an empowerment zone
automatically would be treated as a member of a targeted group
for purposes of that credit." Thus, employers (including those
located outside of empowerment zones) would be entitled to claim
the 40-percent TJTC credit on up to $6,000 of qualified
first-year wages paid to employees who reside within an

° The wage credit would not be not available with respect

to any individual employed at any facility described in present-
law section 144(c) (6) (B) (i.e., a private or commercial golf
course, country club, massage parlor, hot tub facility, suntan
facility, racetrack or other facility used for gambling, or any
store the principal business of which is the sale of alcoholic
beverages for consumption off premises). In addition, the wage
credit would not be available with respect to any individual
employed by a trade or business the principal activity of which
is farming (within the meaning of subparagraphs (A) and (B) of
section 2032A(e)(5)), but only if, as of the close of the
preceding taxable year, the sum of the aggregate unadjusted bases
of assets of the farm exceed $500,000.

The TUTC expired on June 30, 1992, but would be
permanently extended by another provision contained in the
Administration’s proposal.



at lation

An enterprise zone business (as defined above) would
determine depreciation deductions with respect to "qualified zone
property" (also defined above) by using the following recovery
periods:

3-year property............. -.2 years
5-year property. ..3 years
7-year property. ..4 years
10-year property. . ..6 years
15-year property.. ».9 years
20-year property............ -12 years
Nonresidential real property 2 years

The shorter recovery periods allowed for qualified zone
property of enterprise zone businesses would be allowed for
alternative minimum tax purposes.

The shorter recovery periods would not be allowed for any
property for which either the small business or incremental
investment tax credits are determined. If a lease of property is
of a type that would allow the lessee to claim either credit, the
shorter recovery periods would not apply for the lessor.

Tax- au i in

A new category of tax-exempt facility bonds ("enterprise
zone facility bonds") would be created to finance qualified zone
facilities the principal user of which is an enterprise zone
business. Only 25 percent of the amount of qualified enterprise
zone facility bonds would count against the State private
activity volume cap, provided that enterprise zone residents
possess more than a 50-percent ownership interest in the
principal user of the bond-proceeds. If the resident ownership
requirement is not satisfied, then 50 percent of the qualified
enterprise zone facility bonds (rather than 25 percent) would
count against the State private activity volume cap.

Qualified enterprise zone facilities would include qualified
zone property (as defined above) including: (1) new and used
Property, and (2) land which is functionally related and
subordinate to such property but would not include housing
(rental or owner-occupied). Rules similar to those in Section
144 (a) (8) (B) would apply to the types of facilities that could be
financed with enterprise zone facility bonds. An enterprise
zone business would be eligible for up to an aggregate of $3
million in enterprise zone facility bond financing per zone (a
maximum of $20 million per business for all zones). Unless
otherwise noted, all other tax-exempt bond rules would apply to
bonds for enterprise zone facilities. .

Generally, where the business receiving enterprise zone
facility bond financing ceases to be an enterprise zone business

ww


rules of section 263(g) that require the capitalization of certain
interest and carrying charges in the case of straddles would not
apply to any security to which the mark-to-market rules apply
because the fair market value of the security should include the
costs the dealer would otherwise capitalize.

In addition, the Treasury Department would be authorized to
promulgate such regulations as may be necessary or appropriate to
carry out the proposal, including rules to prevent the use of
year-end transfers, related persons, or other arrangements to avoid
the proposal. :

Effective Date

The proposal would apply to taxable years ending on or after
December 31, 1993. A taxpayer that would be required to change its
method of accounting to comply with the requirements of the
provision is treated as having initiated the change in method of
accounting and as having received the consent of the Treasury
Department to make such change.

The net amount of the section 481(a) adjustment would be taken
into account ratably over a 5-taxable year period beginning with
the first taxable year ending on or after December 31, 1993.

To the extent that a portion of the section 481(a) adjustment
of a taxpayer is attributable to the use of the LIFO inventory
method of accounting for any qualified security, such portion of
the adjustment would be taken into account ratably over the shorter
of (1) a 20-taxable year period or (2) the number of years the
taxpayer (or any predecessor) had utilized the LIFO inventory
method, beginning with the first taxable year ending on or after
December 31, 1993. In no event would the period be less than 5

years. For this purpose, "qualified security" would mean any
security acquired (1) by a floor specialist (as defined in section
1236(d)(2)) in connection with. the specialist’s duties as a

specialist on an exchange, but only if the security is one in which
the specialist is registered with the exchange or (2) by a taxpayer
who is a market maker in connection with the taxpayer’s duties as
market maker, but only if (a) the security is included on the
National Association of Security Dealers Automated Quotation
System, (b) the taxpayer is registered as a market maker in such
security with the National Association of Security Dealers, and (c)
as of the last day of the taxable year preceding the taxpayer's
first taxable year ending on or after December 31, 1993, the
taxpayer (or a predecessor of the taxpayer) has been actively
engaged as a market maker in such security for a 2-year period
ending on such date (or, if shorter, the period beginning 61 days
after the security was listed in such quotation system and ending
on such date.) The portion of the section 481(a) adjustment that
is attributable to the use of the LIFO inventory method of
accounting for any qualified security would be determined under the
rules described in section 312(n)(4) (without regard to the
effective date of such section). In addition, the portion of the

so



2. Provisions to prevent conversion of ordinary income to
capital gain

a. Treatment of net capital gains as investment income

Present Law

In the case of a taxpayer other than a corporation,
deductions for interest on indebtedness that is allocable to
property held for investment ("investment interest") are limited
to the taxpayer's net investment income for the taxable year.
Disallowed investment interest is carried forward to the next
taxable year. Investment income includes gross income (other
than gain on disposition) from property held for investment and
any net gain attributable to the disposition of property held for
investment.

Investment interest that is allowable is deductible at
ordinary rates. The net capital gain (i.e., net long-term
capital gain less net short-term capital loss) of a noncorporate
taxpayer is taxed at a maximum rate of 28 percent.

: Prior to 1986, long-term capital gains were not included in
investment income for purposes of computing the investment
interest limitation.

Administration’ s Proposal

Under the proposal, net capital gain generally would not be
included in investment income for purposes of computing the
investment interest limitation. A taxpayer, however, could
include net capital gain in investment income to the extent that
the taxpayer elects to reduce his net capital gain eligible for
the 28-percent maximum capital gains rate.

Ef ve _D

The proposal would be effective for taxable years beginning
after December 31, 1992.

b. Definition of "substantially appreciated" inventory
Present Law

Under present law, amounts received by a partner in exchange
for his interest in a partnership are treated as ordinary income
to the extent they are attributable to substantially appreciated
inventory of the partnership. For these purposes, inventory is
treated as substantially appreciated if the value of the
partnership’s inventory exceeds both 120 percent of its adjusted
basis and 10 percent of the value of all partnership property
(other than money) .



45

distribution) to the extent that it exceeds the foreign
corporation's undistributed income that was previously included
as subpart F income in the income of the U.S. shareholder (or a
predecessor in interest).

The controlled foreign corporation's assets would be
measured using an average of adjusted basis (as determined for
purposes of calculating earnings and profits), as of the close of
each quarter of the taxable year, less any liability to which the
property is subject (as under present law).

- iv:

Limit the application of the subpart F same-country
exception in the case of certain dividends received by controlled
foreign corporations. Amounts distributed with respect to stock
owned by the controlled foreign corporation would not qualify for
the same-country exception to the extent that the distributed
earnings and profits were accumulated by the distributing
corporation during periods when the controlled foreign
corporation did not hold the stock.

E. m2 A CS}

previously taxed earnings

Receipt of previously taxed income by a U.S. shareholder of
one or more controlled foreign corporations would increase the
U.S. shareholder's foreign tax credit limitation to the extent of
the aggregate amount in a single "excess limitation account"
maintained by that U.S. shareholder for each of its separate
foreign tax credit limitation categories. That account would
reflect the cumulative amount by which the taxpayer’s foreign tax
credit limitation had been increased on account of subpart F
income inclusions (in excess of the foreign taxes allowed as a
credit on account of such inclusions) in taxable years beginning
after September 30, 1993, less the total amount by which the
account was used to increase the U.S. shareholder’s foreign tax
credit limitation upon the actual distribution of such previously
taxed earnings and profits.

UPS : U.S reholders of cont “forei

In testing a controlled foreign corporation for PFIC status
with respect to its "U.S. shareholders," measure assets by
adjusted basis as determined for purposes of calculating earnings
and profits, with no option to use fair market value.

In addition, the proposal would exclude from the definition
of passive income under the PFIC rules all income derived in the
active conduct of a securities business by certain corporations
registered in the United States as brokers or dealers in
securities, and, to the extent provided in Treasury regulations,



Alternative minimum tax

The proposal would provide a two-tiered graduated rate
schedule for the AMT for taxpayers other than corporations. A 26-
percent rate would apply to the first $175,000 of a taxpayer’s AMTI
in excess of the exemption amount, and a 28-percent rate would
apply to AMTI more than $175,000 above the exemption amount. For
married individuals filing separate returns, the 28-percent rate
would apply to AMTI more than $87,500 above the exemption amount.
The proposal would increase the exemption amount to $45,000 for
married individuals filing joint returns, to $33,750 for unmarried
individuals, and to $22,500 for married individuals filing separate
returns, estates and trusts.

Surtax on higher-income taxpayers

The proposal would provide a 10-percent surtax on individuals
with taxable income in excess of $250,000 and on estates and trusts
with taxable income in excess of $7,500. For married taxpayers
filing separate returns, the threshold amount for the surtax would
be $125,000. The surtax would be computed by applying a 39.6-
percent rate to taxable income in excess of the applicable
threshold. Under this method of computation, unlike a simple 10-
percent increase in tax liability, capital gains would not be
subject to tax at a rate in excess of the current 28-percent
maximum rate. The threshold for the surtax would be indexed for
inflation in the same manner as other individual income tax rate
thresholds.

The proposal would make permanent the provisions that limit
itemized deductions and phase out personal exemptions.

Effective Date

The proposal would be effective for taxable years beginning
on or after January 1, 1993. Withholding tables for 1993 would not
be revised to reflect the changes in tax rates. Penalties for the
underpayment of estimated taxes, however, would be waived for
underpayments of 1993 taxes attributable to these changes in tax
rates.



possession corporation.



/3/

ecti ‘oc! cri i

All designated areas would be selected in accordance with
factors to be developed by the Enterprise Board. Generaliy, the
selections of empowerment zones and enterprise communities are to
be based on the effectiveness of the strategic plans submitted
and the written assurances that such plans will be implemented.

Tr. c vi fi erm in.

Employer wage credit

A 25-percent credit against income tax liability would be
available to all employers for the first $20,000 of qualified
wages paid to each employee who (1) is a zone resident (i.e., his
or her principal place of abode is within the zone), and (2)
performs substantially all employment services within the zone in
a trade or business of the employer.

The maximum credit per qualified employee would be $5,000
per year. Wages paid to a qualified employee would continue to
be eligible for the credit if the employee earns more than
$20,000, although only the first $20,000 of wages would be
eligible for the credit.’ The wage credit would be available
with respect to a qualified employee, regardless of the number of
other employees who work for the employer or whether the employer
meets the definition of an "enterprise zone business" (which
applies for the investment tax incentives described below) .*

The credit would be phased out beginning in 2001. The
credit rate would be reduced to 20 percent in 2001, 15 percent in
2002, 10 percent in 2003, and 5 percent in 2004. The credit
would not be available after December 31, 2004.

Qualified wages would include the first $20,000 of "wages,"
defined to include (1) salary and wages as generally defined for
FUTA purposes, and (2) certain training and educational expenses
paid on behalf of a qualified employee, provided that (a) the
expenses are paid to an unrelated third party and are excludable
from gross income of the employee under section 127 (which is
retroactively and permanently extended under another provision of
the Administration’s proposal), or (b) in the case of an employee

’ To prevent avoidance of the $20,000 limit, all employers
of a controlled group of corporations (or partnerships or
proprietorships under common control) would be treated as a
single employer.

® Employers would be required to take reasonable steps to
notify all qualified zone employees of the availability to
eligible individuals of receiving advance payments of the earned
income tax credit (EITC).



18

9. Deduction for moving expenses

Present law

An employee or self-employed individual may claim a
deduction from gross income for certain expenses incurred as a
result of moving to a new residence in connection with beginning
work at a new location (sec. 217). The deduction is not subject
to the floor that generally limits a taxpayer’s allowable
miscellaneous itemized deductions to those amounts that exceed 2
percent of his adjusted gross income. Any amount received
directly or indirectly by such individual as a reimbursement of
moving expenses must be included in the taxpayer's gross income
as compensation (sec. 82). The taxpayer may offset this income by
deducting the moving expenses that would otherwise qualify as
deductible items under section 217.

Deductible moving expenses are the expenses of transporting
the taxpayer and members of his household, as well as his
household goods and personal effects, from the old residence to
the new residence; the cost of meals and lodging enroute; the
expenses for pre-move househunting trips; temporary living
expenses for up to 30 days in the general location of the new
job; and certain expenses related to either the sale or
settlement of a lease on the old residence or the purchase of or
the acquisition of a lease on a new residence in the general
location of the new job.

The moving expense deduction is subject to a number of
limitations. A maximum of $1,500 can be deducted for pre-move
househunting and temporary living expenses in the general
location of the new job. A maximum of $3,000 (reduced by any
deduction claimed for househunting or temporary living expenses)
can be deducted for certain qualified expenses for the sale or
purchase of a residence or settlement or acquisition of a lease.
If both a husband and wife begin new jobs in the same general
location, the move is treated as a single commencement of work.
If a husband and wife file separate returns, the maximum
deductible amounts available to each are one-half the amounts
otherwise allowed.

Also, in order for a taxpayer to claim a moving expense
deduction, his new principal place of work has to be at least 35
miles farther from his former residence than was his former
principal place of work (or at least 35 miles his former
residence, if he has no former place of work).



13

5. Reduce deductible portion of business meals and
entertainment expenses to 50 percent

Present Law

In general, a taxpayer is permitted a deduction for all
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business and, in the
case of an individual, for the production of income. No
deduction generally is allowed for personal, living, or family
expenses.

Meal and entertainment expenses incurred for business or
investment reasons are deductible if certain legal and
substantiation requirements are met. The amount of the deduction
generally is limited to 80 percent of the expense that meets
these requirements. No deduction is allowed, however, for meal
or beverage expenses that are lavish or extravagant under the
circumstances.

i ion’ s_P:

The proposal would reduce the deductible portion of
otherwise allowable business meals and entertainment expenses
from 80 percent to 50 percent.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1993.



I. REVENUE-RAISING PROVISIONS
A. Individual Income and Estate and Gift Tax Provisions
1. Increased tax rates for higher income individuals
Present Law
Re xt.

For 1993, the individual income tax rates are as follows--

If taxable income is: Then income tax equals:
le indivi

$0-$22,100..........15 percent of taxable income.
$22,100-$53,500.....$3,315.00 plus 28% of the amount over $22,100.
Over $53,500........$12,107.00 plus 31% of the amount over $53,500.

Heads of household

$0-$29,600.......... 15 percent of taxable income.
$29,600-$76,400.....$4,440.00 plus 28% of the amount over $29,600.
Over $76,400........$17,544.00 plus 31% of the amount over $76,400.

$0-$36,900..........15 percent of taxable income.
$36,900-$89,150.....$5,535 plus 28% of the amount over $36,900.

Over $89,150........ $20,165 plus 31% of the amount over $89,150.
i indi: is filin
$0-$18,450.......... 15 percent of taxable income.

$18,450-$44,575.....$2,767.50 plus 28% of the amount over $18,450.
Over $44,575........$10,082.50 plus 31% of the amount over $44,575.

Estates and trusts

$0-$3,750...........15 percent of taxable income.
$3,750-$11,250......$562.50 plus 28% of the amount over $3,750.
Over $11,250........$2,662.50 plus 31% of the amount over $11,250.

The individual income tax brackets are indexed for inflation.

Al v

An individual taxpayer is subject to an alternative minimum
tax (AMT) to the extent that the taxpayer's tentative minimum tax
exceeds the taxpayer’s regular tax liability. A taxpayer’s
tentative minimum tax generally equals 24 percent of alternative



gC ERT PE Lt

4Z¢

exempted from UBTI (sec. 512(b)(5)).

Present law is unclear on whether premiums from unexercised
options on real estate and loan commitment fees are UBTI.

distri ‘s Pr 1

The proposal would expand the current exception for gains on
the lapse or termination of options on securities to gains or
losses from such options (without regard to whether they are
written by the organization), from options on real property, and
from the forfeiture of good-faith deposits (that are consistent
with established business practice) for the purchase, sale or
lease of real property.

In addition, the proposal would provide that loan commitment
fees are excluded from UBTI. For purposes of this proposal, loan
commitment fees are non-refundable charges made by a lender to
reserve a sum of money with fixed terms for a specified period of
time. These charges are to compensate the lender for the risk
inherent in committing to make the loan (e.g., for the lender’s
exposure to interest rate changes and for potential lost
opportunities) .

Effective Date

The proposal would be effective for premiums or loan
commitment fees that are received on or after January 1, 1994.



G. Other Provisions

1. Access to tax information by the Department of Veterans
Affairs

Present Law

The Internal Revenue Code prohibits disclosure of tax
returns and return information of taxpayers, except for
disclosure to certain Governmental entities in certain enumerated
instances (sec. 6103). Unauthorized disclosure is a felony
punishable by a fine not exceeding $5,000 or imprisonment of not
more than five years, or both (sec. 7213). An action for civil
damages also may be brought for unauthorized disclosure (sec.
7431).

Among the disclosures permitted under the Code is disclosure
to the Department of Veterans Affairs ("DVA") of self-employment
tax information and certain tax information supplied to the
Internal Revenue Service and Social Security Administration by
third parties. Disclosure is permitted to assist DVA in
determining eligibility for, and establishing correct benefit
amounts under, certain of its needs-based pension and other
programs (sec. 6103(1) (7) (D) (viii)). The income tax returns
filed by the veterans themselves are not disclosed to DVA.

The DVA is required to comply with the safeguards presently
contained in the Code and in section 1137(c) of the Social
Security Act (governing the use of disclosed tax information).
These safeguards include independent verification of tax data,
notification to the individual concerned, and the opportunity to
contest agency findings based on such information.

The DVA disclosure provision is scheduled to expire after
September 30, 1997.

Adm: ‘gs Pr

The proposal would permanently extend the authority to
disclose tax information to the DVA.

£ ive

The proposal would apply after September 30, 1997.



sity

Non- charitable exempt organizations. --Although most tax-exempt
organizations other than charitable organizations (e.g., social
welfare organizations and trade associations) generally may engage
in unlimited lobbying efforts, some restrictions do exist. If
political campaign or grass roots lobbying activities constitute a
substantial part of the activities of an organization, such as a
labor union or a trade association, the portion of dues or other
payments to the organization that is attributable to such
activities cannot be deducted by the payor under section 162.

Charitable organizations. --A charitable organization otherwise
described in section 501(c) (3) is not entitled to tax-exempt status
under that section if lobbying constitutes a substantial part of
its activities. Lobbying activities are defined as attempts to
influence legislation. An organization will be regarded as
"attempting to influence legislation" if it (1) contacts, or urges
the public to contact, members of a legislative body for the
purpose of proposing, supporting, or opposing legislation; or (2)
advocates the adoption or rejection of legislation. However, an
organization will not lose its tax-exempt status merely because it
engages in lobbying as an insubstantial part of its activities.
Conducting nonpartisan research (while not advocating legislative
action) is not considered lobbying for purposes of the section
501(c) (3) restriction, nor is seeking to protect the organization's
own existence or responding to a governmental request for
testimony.

A charity making the section 501(h) election is subject to a
penalty excise tax on any "excess lobbying expenditures", as
defined in section 4911. The excess lobbying expenditures are
calculated on a formula based on the relationship of the exempt
purpose expenditures and the allowable lobbying amounts (or the
grass roots expenditures and the allowable grass roots amounts).
Section 4911 defines lobbying, or attempts to influence
legislation, as--

"(A) any attempt to influence any legislation
through an attempt to affect the opinions of
the general public or any segment thereof, and

(B) any attempt to influence any legislation
through communication with any member or
employee of a legislative body, or with any
government official or employee who may
participate in the formulation of the
legislation."

23



No inference would be intended as to the proper tax
treatment of stripped preferred stock or stripped dividend rights
under present law.

Effective Date

The proposal is effective for stripped stock that is
purchased after April 30, 1993.

e. Recharacterization of capital gain as ordinary income
for certain financial transactions

Present Law

Interest from a loan generally is treated as ordinary
income. Gain from the sale or exchange of a capital asset
generally is treated as capital gain.

Net capital gain (i.e., net long-term capital gain less net
short-term capital loss) of an individual is subject to a maximum
tax rate of 28 percent.

Financial transactions can be designed to generate income
from the sale of capital assets with no economic risks other than
the risks of default and of changing interest rates that all
lenders bear. These financial transactions are functionally
equivalent to loans, and the income is functionally equivalent to
interest.

ni on’

The proposal would treat capital gain from certain
transactions that are functionally equivalent to loans as
ordinary income.' The proposal would apply only to gain that
otherwise would be properly treated as capital gain under present
law. No inference would be intended as to when gain is properly
treated as capital gain under present law.

Under the proposal, capital gain from the disposition of
property that was part of a "conversion transaction" would be
recharacterized as ordinary income. The term "conversion
transaction" would include transactions where substantially all
of the taxpayer's expected net return was attributable to the
time value of the taxpayer’s net investment and where the
taxpayer had (1) bought property and, at about the same time,
agreed to sell the same or substantially identical property for a
higher price in the future, (2) created a straddle of actively

1 This ordinary income would continue to be treated as gain

from the sale of property for purposes such as the unrelated
business income tax for tax-exempt organizations and the gross
income requirement for regulated investment companies.



would be determined by valuing each security on individual security
basis.

If gain or loss is taken into account with respect to a
gecurity by reason of the second mark-to-market rule, then the
amount of gain or loss subsequently realized as a result of a sale,
exchange, or other disposition of the security, or as a result of
the application of the mark-to-market rules, would be appropriately
adjusted to reflect such gain or loss. In addition, the proposal
would authorize the Treasury Department to promulgate regulations
that provide for the application of the second mark-to-market rule
at times other than the close of a taxable year.

Character of gain or loss

Any gain or loss taken into account under the proposal (or any
gain or loss recognized with respect to a security that would be
subject to the proposal if the security had been held at the close
of the taxable year) generally would be treated as ordinary gain or
loss. This special character rule would not apply to any security
that is a hedge of a security that is not subject to the
mark-to-market rules or of a position, right to income, or a
liability that is not a security in the hands of the taxpayer.
Anti-abuse rules would be adopted to prevent straddle
opportunities.

Definitions

A dealer in securities would be defined as any taxpayer that
either (1) regularly purchases securities from, or sells securities
to, customers in the ordinary course of a trade or business, or (2)
regularly offers to enter into, assume, offset, assign, or
otherwise terminate positions in securities with customers in the
ordinary course of a trade or business.

A security would be defined as: (1) any share of stock in a
corporation; (2) any partnership or beneficial ownership interest
in a widely held or publicly traded partnership or trust; (3) any
note, bond, debenture, or other evidence of indebtedness; (4) any
interest rate, currency, or equity notional principal contract (but
not any other notional principal contract such as a notional
principal contract that is based on the price of oil, wheat, or
other commodity); and. (5) any evidence of an interest in, or any
derivative financial instrument in, a security described in (1)
through (4) above or any currency, including any option, forward
contract, short position, or any similar financial instrument in
such a security or currency.

In addition, a security would be defined to include any

market rules, but will have no effect if all offsetting positions
making up the straddle are subject to the mark-to market rules.

ae



104

Cc. Expansion and Simplification of Earned Income Tax Credit
Present Law

Eligible low-income workers can claim a refundable earned
income tax credit (EITC) of up to 18.5 percent of the first
$7,750 of earned income for 1993 (19.5 percent for taxpayers with
more than one qualifying child). The maximum amount of credit
for 1993 is $1,434 ($1,511 for taxpayers with more than one
qualifying child) .

This maximum credit is reduced by 13.21 percent of earned
income (or adjusted gross income, if greater) in excess of
$12,200 (13.93 percent for taxpayers with more than one
qualifying child). The EITC is totally phased out for workers
with earned income (or adjusted gross income, if greater) over
$23,050. 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.

Present law provides that the credit rates for the EITC
increase in 1994, as shown in the following table.

One qualifying 7 Two or more
child-- qualifying children--
Credit Phaseout Credit Phaseout
Year rate rate rate rate
1993 18.5 13.21 19.5 13.93
1994 23.0 16.43 25.0 17.86

and after

A supplemental young child credit is available to taxpayers
with qualifying children under the age of one year. This young
child credit rate is 5 percent and the phase-out rate is 3.57
percent. It is computed on the same income base as the ordinary
roth The maximum supplemental young child credit for 1993 is

388.

A supplemental health insurance credit is available to
taxpayers who provide health insurance coverage for their
qualifying children. This health insurance credit rate is 6
percent and the phase-out rate is 4.285 percent. It is computed
on the same income base as the ordinary EITC, but the credit
claimed cannot exceed the out-of-pocket cost of the health



104

date of issuance but subsequently exceeds the $50 million
threshold, stock that otherwise constitutes qualified small
business stock would not lose that characterization solely as a
result of that subsequent event. If a corporation (or a
predecessor corporation) exceeds the $50 million threshold at any
time after December 31, 1992, the corporation can never again
issue stock that would qualify for the exclusion.

s r= ri

In the case of a corporation that owns at least 50 percent
of the vote or value of a subsidiary, the parent corporation is
deemed to own its ratable share of the subsidiary’s assets, and
to be liable for a ratable share of the subsidiary’s
indebtedness, for purposes of the "qualified corporation,"
"active business," and "gross assets" tests described above,

Pass- bh itd

Gain from the disposition of qualified small business stock
by a partnership, S corporation, regulated investment company or
common trust fund that is taken into account by a partner,
shareholder or participant (other than a C corporation) is
eligible for the exclusion, provided that (1) all eligibility
requirements with respect to qualified small business stock are
met, (2) the stock was held by the entity for more than 5 years,
or (3) the partner, shareholder or participant held its interest
in the entity beginning on the date the entity acquired the stock
and at all times thereafter before the disposition of the stock.
In addition, a partner, shareholder, or participant cannot
exclude gain received from an entity to the extent that the
partner’s, shareholder’s, or participant’s share in the entity’s
gain exceeded the partner’s, shareholder’s or participant’s
interest in the entity at the time the entity acquired the stock.

her tr fer:

If qualified small business stock is transferred by gift or
at death, the transferee is treated as having acquired the stock
in the same manner as the transferor, and as having held the
stock during any continuous period immediately preceding the
transfer during which it was held by the transferor. Qualified
small business stock also may be distributed by a partnership to
one or more of its partners, as long as (1) all eligibility
requirements with respect to qualified small business stock are
met, and (2) the partner held its interest in the partnership
beginning on the date the partnership acquired the stock and at
all times thereafter before the disposition of the stock. In
addition, a partner cannot treat stock distributed by a
partnership as qualified small business stock to the extent that
the partner’s share of the stock distributed by the partnership
exceeded the partner’s interest in the partnership at the time
the partnership acquired the stock.



traded personal property, (3) entered into a transaction that was
marketed or sold as producing capital gains, or (4) entered into
a conversion transaction described in Treasury regulations.

The amount of gain from a disposition that would be
recharacterized as ordinary income is calculated by applying an
interest rate to the taxpayer’s net investment in the conversion
transaction (for a period that begins with the entering of the
conversion transaction and ends with the disposition of the
property (or, if earlier, the termination of the conversion
transaction)).

For example, suppose a taxpayer buys 100 shares of X stock
for $1,000 and, at the same time, enters into a contract to sell
that stock in one year for $1,060. If the taxpayer sells the
stock, and the gain would otherwise be treated as capital gain
under present law, then a portion of the $60 gain would be
recharacterized as ordinary income. That portion would be
calculated by applying an interest rate of 120 percent of the
Federal short-term rate to $1,000 for one year. If the
calculated amount exceeds $60, all $60 of the taxpayer’s gain
would be recharacterized as ordinary income.

Effective Date

The proposal would be effective for conversion transactions
entered into after April 30, 1993.

4u



108

6. Permanent extension of qualified small-issue bonds

Present Law

Interest on certain small issues of private activity bonds
is excluded from income if at least 95 percent of the bond
proceeds is used to finance manufacturing facilities or
agricultural land or property for first-time farmers ("qualified
small-issue bonds"). Qualified small-issue bonds are issues
having an aggregate authorized face amount of $1 million or less.
Alternatively, the aggregate face amount of the issue, together
with the aggregate amount of certain related capital expenditures
during the six-year period beginning three years before the date
of the issue and ending three years after that date, may not
exceed $10 million. Special limits apply to these bonds for
first-time farmers.

Authority to issue qualified small-issue bonds expired after
June 30, 1992.

Administration's Proposal

The proposal would permanently extend the authority to issue
qualified small-issue bonds.

£ iv

The proposal would be effective for bonds issued after June
30, 1992.



“3

2. Permanent extension of the tax credit for low-income rental
housing

Present Law

A tax credit is allowed in annual installments over ten
years for qualifying newly constructed or substantially
rehabilitated low-income rental housing. For most qualifying
housing, the credit has a present value of 70 percent of the
qualified basis of the low-income housing units. For housing also
receiving other Federal subsidies (e.g., tax-exempt bond
financing) and for the acquisition cost {e.g., costs other than
rehabilitation expenditures) of existing housing that is
substantially rehabilitated, the credit has a present value of 30
percent of qualified costs.

The credit amount is based on the qualified basis of the
housing units serving the low-income tenants. A residential
rental project will qualify for the credit only if (1) 20 percent
or more of the aggregate residential rental units in the project
are occupied by individuals with 50 percent or less of area
median income, or (2) 40 percent or more of the aggregate
residential rental units in the project are occupied by
individuals with 60 percent or less of area median income. These
income figures are adjusted for family size. The low income
set-aside is elected when the project is placed in service.

Maximum rents that may be charged families in units on which
a credit is claimed depend on the number of bedrooms in the unit.
The rent limitation is 30 percent of the qualifying income of a
family deemed to have a size of 1.5 persons per bedroom (e.g., a
two-bedroom unit has a rent limitation based on the qualifying
income for a family of three).

To qualify for the credit, a building owner generally must
receive a low-income housing credit allocation from the
appropriate State credit authority. An exception is provided for
Property which is substantially financed with the proceeds of
tax-exempt bonds subject to the State’s private-activity bond
volume limitation. The annual credit ceiling for each State is
$1.25 per resident per year.

The low-income housing credit expired after June 30, 1992.

Administration’s Proposal

The proposal would permanently extend the low-income housing
tax credit.

Effective Date

The proposal would be effective after June 30, 1992.



124

Designations of areas as empowerment zones or enterprise
communities generally would remain in effect for 10 years. An
area's designation could be revoked if the local government /s) or
State(s) modifies the boundaries of the designated area or does
not comply with its agreed-upon strategic plan for the area
(described below) .7

igibili riteria ir e

The eligibility criteria for urban areas, rural areas, and
Indian reservations generally would be the same {except as noted
below). To be eligible for designation, a nominated area would
be required to possess all of the following characteristics:

Resident population.--An eligible urban area would be

subject to a maximum population of the lesser of (1) 200,000, or
(2) the greater of 50,000 or 10 percent of the population of the
most populous city within the nominated area.’ Rural areas would
be subject to a maximum population of 30,000. Indian
reservations would not be subject to a population limit.

General condition.--An eligible area must have a condition
of pervasive poverty, unemployment, and general economic
distress.

Area.--The nominated area must either (1) have a continuous
boundary, or (2) except in the case of a rural area located in
more than one State, consist of not more than three noncontiguous
parcels. Urban areas must be located entirely within no more
than two contiguous States, and rural areas must be located
entirely within no more than three contiguous States.

Size.--The nominated area must not exceed 20 square miles
for urban areas (1,000 square miles for rural areas and Indian
reservations).

Poverty.--Each of the census tracts within a nominated area
must have a poverty rate of at least 20 percent;‘ at least 90

? An area’s designation could be revoked only after a
hearing on the record at which officials of the State and local
governments are given an opportunity to participate.

3 In addition, the Secretary of HUD would be required to
designate empowerment zones located in urban areas in such a
manner that the aggregate population of such zones does not
exceed 750,000.

‘ If areas are not tracted as population census tracts, the
equivalent county divisions as defined by the Bureau of the
Census for purposes of defining poverty areas would be treated as
population census tracts.



period to which they relate). The rule relating to IRS-initiated
adjustments would apply to refunds paid on or after January 1,
1995 (regardless of the taxable period to which they relate).



3. Access to tax information by the Health Care Financing
Administration

See page 57 of the Subcommittee on Health’s markup document
entitled "Amendments Relating to Part A of the Medicare Program."

IZ



7. Deny deduction for executive pay over $1 million

Present Law

The gross income of an employee includes any compensation
received for services rendered. An employer is allowed a
corresponding deduction for reasonable salaries and other
compensation. Whether compensation is reasonable is determined on
a case-by-case basis. However, the reasonableness standard has
been used primarily to limit payments by closely-held companies
where dividends may be disguised as deductible compensation.

Administration’s Proposal

The proposal would preclude any publicly-held corporation
from taking a deduction for compensation in excess of $1 million
for any one of its top five executives. For this purpose, a
corporation would be treated as publicly held if the
corporation’s common equity securities are registered under
section 12 of the Securities Exchange Act of 1934. The
corporation’s top five executives would be defined as under the
SEC rules governing disclosure of executive compensation (i.e.,
the chief executive officer and the four other most highly-
compensated officers of the corporation).

Certain types of compensation would not be subject to the
deduction limit and would not be taken into account in
determining whether other compensation exceeds $1 million. The
following compensation would not be taken into account: (1)
payments to a tax-qualified retirement plan (including salary
reduction contributions), (2) amounts that are excludable from
the executive's gross income, and (3) qualified performance-based
compensation. Qualified performance-based compensation would
include any compensation that is payable on a commission basis
and any performance-based compensation that meets certain
independent director and shareholder approval requirements. The
$1 million cap would be reduced by excess parachute payments that
are not deductible to the corporation.

Commissions would be defined as compensation paid solely on
account of income generated directly by the individual
performance of the executive. Thus, for example, compensation
that equals a percentage of sales made by the executive or a
percentage of business that is directly attributable to the
executive would be treated as a commission. Income would not
fail to be attributable directly to the executive merely because
in generating the income the executive utilizes the support
services of other employees, such as secretarial or research
services. However, where compensation is paid on account of
broader performance standards, such as income produced by a
business unit, the compensation would be not a commission because
it would not be paid with regard to income that is directly
attributable to the individual executive.



“ye

insurance coverage. In addition, the taxpayer is denied an
itemized deduction for medical expenses of qualifying insurance
coverage up to the amount of credit claimed. The maximum
supplemental health insurance credit for 1993 is $465.

Administration's Proposal

For taxpayers with one qualifying child, the EITC would be
increased. For these taxpayers in 1994, the credit rate would be
increased to 26.60 percent. The maximum amount of earned income
on which the credit could be claimed would be $7,750 and the
maximum credit would be $2,062. This maximum credit would be
reduced by 16.16 percent of earned income (or adjusted gross
income, if greater) in excess of $11,000. The credit would be
completely phased out for taxpayers with earned income (or
adjusted gross income, if greater) over $23,760. In 1995 and
thereafter, the credit rate would be increased to 34.37 percent.
The maximum amount of earned income on which the credit could be
claimed would be reduced to (an estimated) $6,170. Thus, the
maximum credit in 1995 would be approximately $2,120 (which
equals the maximum credit available in 1994, adjusted for
projected inflation). The phase-out rate would remain the same
as in 1994.

For taxpayers with two or more qualifying children, the EITC
also would be increased. For these taxpayers in 1994, the credit
rate would be increased to 31.59 percent. The maximum amount of
earned income on which the credit could be claimed would be
$8,500 and the maximum credit would be $2,685. This maximum
credit would be reduced by 15.79 percent of earned income (or
adjusted gross income, if greater) in excess of $11,000. Thus,
in 1994, the credit would be completely phased out for taxpayers
with earned income (or adjusted gross income, if greater) over
$28,000. In 1995 and thereafter, the credit rate would be
increased to 39.66 percent. The maximum amount of earned income
on which the credit could be claimed is expected to be
approximately $8,730 in 1995 (which equals the 1994 level,
adjusted for projected inflation). Thus, the maximum credit in
1995 is expected to be approximately $3,460. The phase-out rate
for 1995 and thereafter would be 19.83 percent.

The EITC would also be extended to low-income workers who
(1) do not have any qualifying children (including workers with
children who are not qualifying children with respect to that
worker); (2) are age 22 or older; and (3) who may not be claimed
as a dependent on another taxpayer’s return. For these
taxpayers, the EITC would be 7.65 percent of the first $4,000 of
earned income (for a maximum credit of $306 in 1994). The
maximum credit would be reduced by 7.65 percent of earned income
(or adjusted gross income, if greater) above $5,000. In 1994 the
credit would be completely phased out for taxpayers with earned
income (or adjusted gross income, if greater) over $9,000. This
credit would not be available on an advance payment basis.



10. Increase taxable portion of Social Security and Railroad
Retirement Tier 1 benefits

Present Law

Under present law, a portion of Social Security and Railroad
Retirement Tier 1 benefits are includible in gross income for
taxpayers whose incomes exceed a threshold amount. For purposes of
this computation, a taxpayer’s income includes modified adjusted
gross income (adjusted gross income plus tax-exempt interest) plus
one-half of the individual’s Social Security or Railroad Retirement

Tier 1 benefit. The threshold amount is $32,000 for married
taxpayers filing joint returns, $25,000 for unmarried taxpayers,
and $0 for married taxpayers filing separate returns. An

individual is required to include in gross income the lesser of:
(1) 50 percent of the individual’s Social Security or Railroad
Retirement Tier 1 benefit, or (2) 50 percent of the excess of the
taxpayer’s income over the applicable threshold amount.

Proceeds from the income taxation of these benefits are
eredited quarterly to the Old-Age and Survivors Insurance Trust
Fund, the Disability Insurance Trust Fund, or the Social Security
Equivalent Benefit Account (of the Railroad Retirement system), as
appropriate.

ion’ 1

The proposal would require that individuals include in gross
income the lesser of: (1) 85 percent of the individual’s Social
Security or Railroad Retirement Tier 1 benefit, or (2) 85 percent
of the excess of the taxpayer’s income over the applicable present
law threshold amounts. A taxpayer’s income for purposes of this
computation (modified adjusted gross income plus one-half of the
individual’s Social Security or Railroad Retirement Tier 1 benefit)
will remain the same as under present law.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1993.



ol

r would collect and
remit the tax

Natural gas Local distribution company
(or end user receiving
gas directly from the
transmission pipeline)
would be liable; pipeline
would collect and remit
the tax

Coal Large users: end user would
be liable and also would
remit the tax

Small and residential users:
seller would be liable
and also would remit the

tax
Hydro- and nuclear-generated Utility (or other producer)
electricity would be liable and also

would remit the tax
Exemptions
The following would not be subject to tax:
(1) Solar, wind, and geothermal energy.
(2) Ethanol, ETBE, and similar ethers.

(3) Biomass, including landfill gas, wood waste, and bagasse
(sugar cane biomass).

{4) Municipal solid waste and tires burned as fuel.

(5) Nonfuel products such as asphalt, lubricants, and
waxes.

(6) Hydroelectricity from pump storage.

(7) Imported electricity if the importer establishes that
an energy source other than fossil fuels, hydropower,
or nuclear power was used to generate the electricity.

(8) Coal used in the production of synthetic natural gas.

(9) Crude oil or natural gas used, on the premises where it
is produced, to produce crude oil or natural gas.

Crude oil or petroleum products (other than natural gas) used
in a refinery or natural gas used in a natural gas processing or
fractionation plant would not be subject to the use tax.



106

Effective Date

The proposal would be effective for property placed in service
after December 31, 1993.



56

4. Tax treatment of certain FSLIC financial assistance

Present Law and Background

A taxpayer may claim a deduction for a loss on the sale or
other disposition of property only to the extent that the
taxpayer's adjusted basis for the property exceeds the amount
realized on the disposition and the loss is not compensated for
by insurance or otherwise (sec. 165 of the Code). In the case of
a taxpayer on the specific charge-off method of accounting for
bad debts, a deduction is allowable for the debt only to the
extent that the debt becomes worthless and the taxpayer does not
have a reasonable prospect of being reimbursed for the loss. If
the taxpayer accounts for bad debts on the reserve method, the
worthless portion of a debt is charged against the taxpayer's
reserve for bad debts, potentially increasing the taxpayer's
deduction for an addition to this reserve.

A special statutory tax rule, enacted in 1981, excluded from
a thrift institution's income financial assistance received from
the Federal Savings and Loan Insurance Corporation (FSLIC)', and
prohibited a reduction in the tax basis of the thrift
institution's assets on account of the receipt of the assistance.
Under the Technical and Miscellaneous Revenue Act of 1988
(TAMRA), taxpayers generally were required to reduce certain tax
attributes by one-half the amount of financial assistance
received from the FSLIC pursuant to certain acquisitions of
financially troubled thrift institutions occurring after December
31, 1988. These special rules were repealed by FIRREA, but still
apply to transactions that occurred before May 10, 1989.

Prior to the enactment of FIRREA, the FSLIC entered into a
number of assistance agreements in which it agreed to provide
loss protection to acquirers of troubled thrift institutions by
compensating them for the difference between the book value and
sales proceeds of "covered assets." "Covered assets" typically
are assets that were classified as nonperforming or troubled at
the time of the assisted transaction but could include other
assets as well. Many of these covered assets are also subject to
yield maintenance guarantees, under which the FSLIC guaranteed

‘until it was abolished by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA), FSLIC
insured the deposits of its member savings and loan associations
and was responsible for insolvent member institutions. FIRREA
abolished FSLIC and established the FSLIC Resolution Fund (FRF)
to assume all of the assets and liabilities of FSLIC (other than
those expressly assumed or transferred to the Resolution Trust
Corporation (RTC)). FRF is administered by the Federal Deposit
Insurance Corporation (FDIC). The term "FSLIC" is used hereafter
to refer to FSLIC and any successor to FSLIC.



(6

Qualified performance-based compensation also would include
any compensation, other than commissions, that is paid solely on
account of the attainment of one or more performance goals,
provided that: (1) the performance goals are established by a
compensation committee consisting solely of two or more
independent directors; (2) the material terms under which the
compensation is to be paid, including the performance goals, are
disclosed to and approved by the shareholders in a separate vote
prior to payment; and (3) prior to payment, the compensation
committee certifies that the performance goals and any other
material terms were in fact satisfied by the executive.
Compensation would not be treated as qualified performance-based
compensation if the executive has a right to receive the
compensation notwithstanding the failure of the compensation
committee to certify attainment of the performance goal or the
absence of shareholder approval. Under the proposal, a
performance goal would be defined broadly to include any
performance standard that is-applied to the individual executive,
a business unit, or the corporation as a whole. For example,
stock options or other stock appreciation rights generally would
be treated as qualified performance-based compensation, provided
that the requirements for independent director and shareholder
approval are met, because the amount of compensation paid to the
executive is based on an increase in the corporation’s stock
price.

Effective Date

The proposal would generally apply to compensation that is
otherwise deductible to the corporation in a taxable year
beginning on or after January 1, 1994. However, the proposal
would not apply to compensation paid under a binding written plan
or agreement in effect on February 17, 1993, and at all times
thereafter. This grandfather rule would not apply to the extent
that significant relevant aspects of the plan or agreement are-
modified after February 17, 1993. For example, compensation that
is deductible on account of stock options or restricted stock
rights granted on or before February 17, 1993, would continue to
be deductible without regard to the $1 million limit.



The Internal Revenue Code does not require a tax-exempt
organization that is eligible to receive tax-deductible
contributions to state explicitly, in its solicitations for support
from members or the general public, whether an amount paid to the
organization is deductible as a charitable contribution or whether
all or part of the payment constitutes consideration for goods or
services furnished to the payor.? In contrast, tax-exempt
organizations that are not eligible to receive tax-deductible
contributions are required to state expressly in certain
fund-raising solicitations that contributions or gifts to the
organization are not deductible as charitable contributions for
Federal income tax purposes (sec. 6113).‘ A penalty is imposed on
such organizations for failure to comply with the section 6113
disclosure requirement, unless reasonable cause is shown (sec.
6710).

Tax-exempt organizations generally are required to file an
annual information return (Form 990) with the IRS. However,
churches (and their affiliated organizations), as well as tax-
exempt organizations (other than private foundations) that normally
have gross receipts in each taxable year of not more than $25,000,
are not required to file the Form 990.5 If a charity is required
to file a Form 990, then it must report, among other items, the
names and addresses of all persons who contributed, bequeathed, or
devised $5,000 or more (in cash or other property) during the
taxable year.

the limits for "low-cost items" under section 513(h)(2). See also
Rev. Proc. 92-49, 1992-26 IRB 18 (amplifying Rev. Proc. 90-12, by
allowing charities to distribute certain low-cost items to
contributors without affecting the deductibility of the
contribution).

3 However, Schedule A to the Form 1040 (and the accompanying
instructions) inform taxpayers that if they made a contribution to
a charity and received a benefit in return, the value of that
benefit must be subtracted in calculating the charitable
contribution deduction.

* However, the disclosure requirement of section 6113 does not
apply to an organization the gross receipts of which in each
taxable year are normally not more than $100,000, nor does the
disclosure requirement apply to any solicitation made by letter or
telephone call if such letter or call is not part of a coordinated
fundraising campaign soliciting more than 10 persons during the
calendar year (sec. 6113(b) (2) (A) and (c) (2)).

5 See section 6033(a) (2) and Rev. Proc. 83-23, 1983-1 C.B.
687.

‘ See section 6033(b)(5) and Treas. Reg. sec. 1.6033-
2(a) (2) (11) (£).

1h



2. Permanent extension of General Fund transfer to Railroad
Retirement Tier 2° Fund

Present Law

A portion of the Railroad Retirement Tier 2 benefits are
included in gross income of recipients (similar to the treatment
accorded recipients of private pensions) for Federal incme tax
purposes. The proceeds from the income taxation of Railroad
Retirement Tier 2 benefits received prior to October 1, 1992,
have been transferred from the General Fund of the Treasury to
the Railroad Retirement Account. Proceeds from the income
taxation of benefits received after September 30, 1992 remain in
the General Fund.

Administration’s Proposal
The transfer of proceeds from the income taxation of
Railroad Retirement Tier 2 benefits from the General Fund of the

Treasury to the Railroad Retirement Account would be made
permanent.

Effective Date

The proposal would be effective for taxes on benefits
received after September 30, 1992.

449


(Z7

F. Customs Officer Overtime Pay Reform
Pr Law

Customs inspectors’ compensation for overtime work is
authorized by 19 U.S.C. 267, and paid at rates different from
most other Federal employees.

Customs inspectors are compensated with overtime pay for
work performed outside the statutorily-defined work week (i.e.,
Monday through Saturday, 8:00 a.m. through 5:00 p.m). Overtime
pay is paid at a rate of two times basic pay, with any amount of
work conducted during a two-hour period treated as four hours pay
(two hour minimum at a rate of two times basic pay). Customs
inspectors who are required to work after their normal duty
(callback), between 5:00 p.m. and 9:00 p.m., are paid overtime
beginning 5:00 p.m. and for hours actually worked, at a rate of
two times basic pay. Customs inspectors who are required to work
after their normal duty (callback), between 9:00 p.m. and 6:00
a.m., are paid for eight hours (four minimum hours at a rate of
two times basic pay), plus hours actually worked of at least four
hours (two minimum hours at a rate of two times basic pay), fora
total of 12 hours pay for any time worked. Customs inspectors
are compensated with overtime pay for work performed at night and
on Sundays and holidays, plus certain minimum hour credits, at a
rate of two times basic pay. At night (after 5:00 p.m. and
before 8:00 a.m.), Customs inspectors are compensated with four
hours pay (two hours minimum at a rate of two times basic pay)
for any time worked. On Sundays, Customs inspectors are
compensated with 16 hours pay (eight hours minimum at a rate of
two times basic pay) for any time worked. On holidays, Customs
inspectors are compensated with 16 hours pay (as on a Sunday)
plus basic pay for any time worked.

Customs inspectors may receive up to $25,000 in overtime
pay, annually.

Inspectional overtime is reimbursed from the Consolidated
Omnibus Reconciliation Act (COBRA) user fee account under a
mandatory, permanent, and indefinite appropriation. The COBRA
account is not subject to apportionment.

on!
The Administration’s proposal would eliminate incentives for
wasteful overtime scheduling practices and other opportunities

for abuse under present law and would apply the savings from
overtime reform to deficit reduction.

Effective Date
Not specified.



minimum taxable income (AMTI) in excess of an exemption amount.
The exemption amount is $40,000 for married taxpayers filing joint
returns and $30,000 for single taxpayers and head of household
filers. The exemption amount is phased out for taxpayers with AMTI
above $150,000 for married taxpayers filing joint returns and
$112,500 for single taxpayers and head of household filers.

bt } see

Under present law, there is no surtax imposed on higher-income
individuals.

I imi

Under present law, individuals who do not elect the standard
deduction may claim itemized deductions (subject to certain
limitations) for certain nonbusiness expenses incurred during the
taxable year. Among these deductible expenses are unreimbursed
medical expenses, unreimbursed casualty and theft losses,
charitable contributions, qualified residence interest, State and
local income and property taxes, unreimbursed employee business
expenses, and certain other miscellaneous expenses.

Certain itemized deductions are allowed only to the extent
that the amount exceeds a specified percentage of the taxpayer's
adjusted gross income (AGI). Unreimbursed medical expenses for
care of the taxpayer and the taxpayer’s spouse and dependents are
deductible only to the extent that the total of these expenses
exceeds 7.5 percent of the taxpayer’s AGI. Nonbusiness,
unreimbursed casualty or theft losses are deductible only to the
extent that the amount of loss arising from each casualty or theft
exceeds $100 and only to the extent that the net amount of casualty
and theft losses exceeds 10 percent of the taxpayer’s AGI.
Unreimbursed employee business expenses and certain other
miscellaneous expenses are deductible only to the extent that the
total of these expenses exceeds 2 percent of the taxpayer's AGI.

The total amount of otherwise allowable itemized deductions
(other than medical expenses, casualty and theft losses, and
investment interest) is reduced by 3 percent of the amount of the
taxpayer’s AGI in excess of $108,450 in 1993 (indexed for
inflation). Under this provision, otherwise allowable itemized
deductions may not be reduced by more than 80 percent. In
computing the reduction of total itemized deductions, all present-
law limitations applicable to such deductions are first applied and
then the otherwise allowable total amount of deductions is reduced
in accordance with this provision.

The reduction of otherwise allowable itemized deductions does
not apply to taxable year beginning after December 31, 1995.

PB. in |

Present law permits a personal exemption deduction from gross


An offsetting short position is defined to be (1) a short
sale of property substantially identical to the qualified small
business stock (including writing a call option that the holder
is more likely than not to exercise or selling the stock for
future delivery) or (2) an option to sell substantially identical
property at a fixed price.

in ve.

Any gain that is excluded from gross income under the
provision is not taken into account in computing long-term
capital gain or in applying the capital loss rules of section
1211 and 1212. In addition, the taxable portion of the gain is
taxed at a maximum rate of 28 percent.

The amount treated as investment income for purposes of the
investment interest limitation does not include any gain that is
excluded from gross income under the provision.

Minimum tax

One-half of any excluded gain is treated as a preference for
purposes of the alternative minimum tax.

Effective Date

The proposal would apply to stock issued after December 31,
1992.



37

sales as compared to total product area sales of the group;
or (2) the amount of the royalty payment or inclusion that
would be required under sections 367(d) and 482 with respect
to intangible assets which the possession corporation is
treated as owning under the cost sharing method, were the
possession corporation a foreign corporation.

The alternative elective rule for allocating income from
intangible property between a possession corporation and its
U.S. shareholders is a "profit split" approach. This method
generally permits allocation to the possession corporation of
50 percent of the affiliated group of U.S. corporations’
combined taxable income derived from sales of products which
are manufactured in a possession.

Dividends paid by a possession corporation to a U.S.
shareholder may qualify for the deduction for dividends
received from a domestic corporation (sec. 243). In cases
where at least 80 percent of the stock of the possession
corporation is owned by a single domestic corporation, the
possession corporation's possession source income generally
may be distributed without incurring any regular U.S. income
tax. However, such a dividend constitutes adjusted current
earnings of the shareholder for purposes of computing the
alternative minimum tax.

Taxes paid or accrued by possession corporations to
foreign countries or possessions on income which is taken
into account in determining the section 936 credit are
neither allowable for purposes of determining the foreign tax
credit nor deductible.

i a id

The section 936 credit would be determined as under
present law, but would be subject to the following two
limitations. First, the credit allowed against U.S. tax on
business income (i.e., income derived from the active conduct
of a possession-based business, or from the sale of assets
used in such a business) would be limited to 60 percent of
the qualified wages the possession corporation pays to its
employees in the possessions. Second, the credit allowed
against U.S. tax on QPSII would be limited in cases where the
possession corporation’s assets that generate QPSII exceed 80
percent of its business property in the possessions. In such
a_case, no credit would be allowed for the portion of its
QPSII attributable to QPSII assets which exceed that 80-
percent threshold.

For purposes of the first limitation, qualified wages
generally are defined by reference to the Federal
Unemployment Tax Act (FUTA) definition of wages. The amount
of wages taken into account for each employee would be
limited to the maximum earnings subject to tax under the



or otherwise falls into noncompliance, the business is required
to make good faith efforts to return to compliance within a
reasonable period of time after the noncompliance is discovered.
Failure to return to compliance will result in a loss of the
interest deduction on such financing.

For purposes of the so-called bank deductibility rules for
interest costs of carrying tax-exempt bonds (sec. 265),
enterprise zone facility bonds would be treated comparably to
bonds issued by a "qualified small issuer."

Tax incentives available in both empowerment zones and enterprise
communities :
- fi

The tax-exempt financing benefits described above would be
available (with one modification) to otherwise qualifying
businesses that are located in enterprise communities. The one
modification to the tax-exempt financing benefits is that 50
percent (rather than 25 percent) of the amount of the enterprise
zone facility bonds would count against the State private
activity volume cap.

Residen wermen Vv

A tax credit would be available to employers for certain
contributions made to a tax-qualified defined contribution plan
on behalf of qualified zone employees. The credit would be equal
to 50 percent of contributions up to two percent of compensation
(as defined in section 414(s)) not in excess of $35,000. If an
area is not designated as a tax enterprise zone for an entire
taxable year, the $35,000 compensation limit would be ratably
reduced to reflect the portion of the year the designation is not
in effect.

The credit would be available for contributions to any tax-
qualified defined contribution plan other than an employee stock
ownership plan, stock bonus plan, or a plan subject to the
minimum funding requirements. Contributions could also be made
to a simplified employee pension. Except as specifically
provided, the rules applicable to qualified plans and SEPs, as
the case may be, would apply to contributions for which the
credit is available.

To be eligible for the credit, the employer contribution
must be 100 percent vested, and must be either a matching or
nonelective contribution; salary reduction contributions would
not be eligible for the credit. The plan would be required to
permit a qualified zone employee to withdraw contributions from
the plan (and earnings thereon) for higher education or health
expenses, first-time home purchase, or to invest in a qualified
enterprise zone business. The 10-percent early withdrawal tax
would not apply to such withdrawals.

136



As under present law, all dollar thresholds for years after
1994 would be indexed for inflation.

The supplemental young child credit and the supplemental
health insurance credit would be repealed.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1993.

4


7. Enhance earnings stripping rules
Present Law

Interest expenses of a U.S. corporate taxpayer are generally
deductible, whether or not the interest is paid to a related
party and whether or not the interest income is subject to U.S.
taxation in the hands of the recipient. In certain cases where
interest is paid by a corporation to a related person, and no
U.S. tax is imposed on the recipient’s interest income, the so-
called "earnings stripping rules" in the Code provide for denial
of interest deductions by the corporate payor to the extent that
the corporation’s net interest expenses exceed 50 percent of its
adjusted taxable income. The disallowance is limited by, among
other things, the amount of tax-exempt interest paid to related
persons. The disallowance does not apply to interest on debt
with a fixed term which was issued on or before July 10, 1989, or
which was issued after that date pursuant to certain written
binding contracts in effect on that date.

The Treasury is authorized to provide such regulations as
May be appropriate to prevent the avoidance of the purposes of
this provision, including regulations that would disallow
deductions for interest paid to unrelated creditors in certain
cases: for example, certain cases that involve guarantees of the
debt by parties related to the debtor. The legislative history
accompanying the bill enacting the provision, however, indicates
an intent that such regulations not generally subject third-party
interest to disallowance whenever a guarantee is given in the
ordinary course. The legislative history further indicates an
expectation that any such regulations would not apply to debt
outstanding prior to notice of the rule if and to the extent that
the regulations depart from positions the Service and Treasury
might properly take under analogous principles of law that would
recharacterize guaranteed debt as equity.

To date, Treasury has promulgated no proposed or final
regulations that interpret the application of the earnings
stripping rules to third-party debt that is guaranteed by a
person related to the debtor.

Administration’ s Proposal

Interest would be subject to disallowance under the earnings
stripping rules without regard to whether it is interest on a
fixed-term obligation issued before, on, or after July 10, 1989.
Interest paid on a loan from an unrelated party generally would
be treated under the earnings stripping rules as interest paid to
a related person with respect to which no U.S. tax is imposed if
no gross-basis U.S. income tax is imposed on the interest
(whether or not the interest recipient is subject to net-basis
U.S. income tax with respect to that interest), a related person
guaranteed the loan, and the related person is either exempt from
U.S. Federal income tax or is a foreign person. Exceptions would

40