-15-

publication is not as widely utilized as Publication 1, Your

Rights As a Taxpayer.
Description of Proposal

The proposal would require the IRS to include a section on
the rights and responsibilities of divorced individuals in

Publication 1, Your Rights As a Taxpayer.
Effective Date

The proposal would be effective on the date of enactment.



-9-

Terminat: of trust and conforming amendment applicable to all

tr and e:

Where the trust terminates before the end of the S$
corporations’s taxable year, the trust would take into account
its pro rata share of income, etc. of the corporation for its
final taxable year. The proposal would make a conforming
amendment applicable to all trusts and estates clarifying that
this is the present law treatment of trusts and estates which
terminate before the end of the S corporation’s taxable year.

Effective Date

The proposal would apply to taxable years beginning after
the date of enactment.

B. Administrative Practice and Procedural Simplification

1. Notification of reasons for termination or denial of
installment agreements

Present Law

Section 6159 authorizes the Internal Revenue Service (IRS)
to enter into written installment agreements with taxpayers to
facilitate the collection of tax liabilities. In general, the
IRS has the right to terminate (or in some instances, alter or
modify) such agreements if the taxpayer provided inaccurate or
incomplete information before the agreement was entered into, if
the taxpayer fails to make a timely payment of an installment or
another tax liability, if the taxpayer fails to provide the IRS
with a requested update of financial condition, if the IRS
determines that the financial condition of the taxpayer has
changed significantly, or if the IRS believes collection of the
tax liability is in jeopardy. If the IRS determines that the
financial condition of a taxpayer that has entered into an
installment agreement has changed significantly, the IRS must
provide the taxpayer with a written notice that explains the IRS
determination at least 30 days before altering, modifying or
terminating the installment agreement. No notice is statutorily
required if the installment agreement is altered, modified, or
terminated for other reasons.

Description of Proposal

The proposal would require the IRS to notify taxpayers 30
days before altering, modifying, or terminating any installment
agreement for any reason ather than that the collection of tax is
determined to be in jeopardy. The IRS must include in the
notification an explanation of why the IRS intends to take this



-19-

In the case of sweepstakes, wagering pools, or lotteries
other than State-conducted lotteries, proceeds from a wager are
subject to withholding at a rate of 28 percent if such proceeds
exceed $5,000, regardless of the odds of the wager.

No withholding tax is imposed on winnings from bingo or
keno.

Description of Proposal

. The proposal would impose withholding on proceeds from bingo
or keno wagering transactions at a rate of 28 percent if such
proceeds exceed $10,000, regardless of the odds of the wager.

Effective Date

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

D. Require Thrift Institutions to Take Net
Operating Loss Carryovers into Account
for Purposes of Calculating Bad Debt Reserves
Under the Percentage of Income Method

Present Law

Thrift institutions may, in general, take a deduction for
bad debts equal to 8 percent of their taxable income ina
particular year (sec. 593).

Treasury regulations provide that taxable income must be
reduced by net operating loss (NOL) carrybacks for purposes of
calculating the bad debt reserve deduction of thrift institutions
(Treas. reg. sec. 1.593-6A(b)(5)). The U.S. Tax Court and a
Federal district court held that the regulations on this point
were invalid.’ However, the U.S. Court of Appeals for the Ninth
and Sixth Circuits overruled such holdings.*

7 See, e.g., ifi irst Federal v.
Commissioner, 94 T.C. 101, (1990); PB es F al vings an

Loan Association of Sidney v. Commissioner, 59 T.C.M. 85 (1990);
and First Federal Savings Bank of Washington v. Commissioner, 766

F. Supp. 897 (E.D. Wa. 1991).

* Pacific First Federal Savings Bank v. Commissioner, 961
F.2d 800 (9th Cir.), cert. denied, 113 §.Ct. 209 (1992); and
PB e era. in id Loan sociati of Si v.

Commissioner, 948 F.2d 289 (6th Cir. 1991).



III. PART THREE: TECHNICAL CORRECTION AND MODIFICATION TO THE
LUXURY TAX IN H.R. 3419

sone -. 31
Indexation of Threshold Applicable to Excise Tax

on Luxury Automobiles (sec. 13161 of the 1993 Act
and sec. 4001(e)(1) of the Code) .-....... 31

A.


-30-

J. Empowerment Zones and Eligibility of Small Farms for Tax
Incentives (sec. 13301 of the 1993 Act and sec. 1397B(d) (5) (B) of
the Code)

Present Law

Under the 1993 Act, during 1994 and 1995, six empowerment
zones and 65 enterprise communities will be designated in
eligible urban areas, and three empowerment zones and 30
enterprise communities will be designated in rural areas.
Special tax incentives (i.e., a wage credit, additional section
179 expensing, and expanded tax-exempt financing) are available
for certain business activities conducted in urban and rural
empowerment zones. Expanded tax-exempt financing benefits are
available for certain facilities located in urban and rural
enterprise communities.

The empowerment zone wage credit is not 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 sec. 2032A(e)(5)) if, as of the
close of the current taxable year, the sum of the aggregate
unadjusted bases (or, if greater, the fair market value) of
assets of the farm exceeds $500,000 (sec. 1396(d)(2)(E)). In
contrast, the additional section 179 expensing (available in
empowerment zones) and expanded tax-exempt financing benefits
(available in both empowerment zones and enterprise communities)
are not allowed for any trade or business the principal activity
of which is farming if, as of the close of the preceding taxable
year, the sum of the aggregate bases (or, if greater, the fair
market value) of the assets of the farm exceeds $500,000 (sec.
1397B(d) (5)).

Description of Proposal

Under the proposal, the $500,000 asset test for determining
whether a farm is eligible for additional section 179 expensing
(in an empowerment zone) and expanded tax-exempt financing
benefits (in an empowerment zone or enterprise community) would
be applied based on the assets of the farm at the end of the
current taxable year. Thus, the $500,000 asset test for
determining farm eligibility would be based on the same taxable
period (i.e., the current taxable year) for purposes of all tax
incentives available in empowerment zones and enterprise
communities.



-16-

PART THREE: REVENUE-RAISING PROVISIONS IN H.R. 3419

A. Require Taxpayers to Include Rental Value of
Residence in Income Without Regard to Period of Rental

Present Law

Gross income for purposes of the Internal Revenue Code
generally includes all income from whatever source derived,
including rents. The Code (section 280A(g)) provides a de
minimis exception to this rule where a dwelling unit is used
during the taxable year by the taxpayer as a residence and such
dwelling unit is actually rented for less than 15 days during the
taxable year. In this case, the income from such rental is not
included in gross income and no expenses arising from such rental
use are allowed as a deduction.

Description of Proposal

Generally, the proposed amendment would repeal the 15-day
rule of Code section 280A(g). However, if the taxpayer rents (at
a rate not greater than the reasonable commercial rate) his or
her principal residence for less than 15 days for the purpose of
providing accommodations to visitors to an event for which
commercial accommodations can provide no more than one-half of
the needed accommodations, then the current-law exclusion (and
denial of deductions) would continue to apply.

Effective Date

The proposal would apply to taxable years beginning after
December 31, 1993.

B. Treat Certain Foreign Corporate Dividends
and Deemed Income Inclusions as Unrelated
Business Taxable Income

Present Law

An organization that is exempt from tax by reason of Code
section 501(a) (e.g., a public charity or a qualified pension
trust) is nonetheless subject to tax on its unrelated business
taxable income (UBTI) (section 511). Unrelated business taxable
income generally excludes dividend income (section 512(b) (1)).

Exceptions to this rule exist, however, in the case of
certain dividends that are either business income of the
recipient or distributions of. business earnings on which the
payor of the dividends was exempt from tax. For example, if a
tax-exempt organization engages in commercial-type insurance



-22-

E. Modify Provision Relating to Treatment of Salvage
and Subrogation of Property and Casualty Insurance
Companies (sec. 101(c) (4) of the bill and
sec. 11305 of the 1990 Act)

H.R. 17 provides that the special deduction that is allowed
over the first four taxable years beginning after December 31,
1989, is to be taken into account in determining earnings and
profits for purposes of applying sections 56, 902, 952(c) (1) and
960 of the Internal Revenue Code of 1986 (the "Code"). This
section would be modified to provide that the special deduction
is to be taken into account in determining earnings and profits
for purposes of applying sections 56 and 902, and subpart F of
part II of subchapter N of chapter 1. This modification to the
bill would be necessary in order to provide those property and
casualty insurance companies that took into account estimated
salvage and subrogation recoverable in determining losses
incurred with substantially the same Federal income tax treatment
as that provided to those property and casualty insurance
companies that prior to the 1990 Act did not take into account
estimated salvage and subrogation recoverable in determining
losses incurred.

F. Delete Provision Relating to Exclusion for Employer-provided
Educational Assistance
(sec. 101(d) (1) of the bill, sec. 11403 of
the 1990 Act, and secs. 127 and 132 of the Code)

The provision of the bill would be deleted because a similar
provision was included in the 1993 Act.

G. Delete Provisions Relating to the Treatment of
Certain Contributions Made Pursuant to Veterans’
Reemployment Rights (sec. 102(j) of the bill and

sec. 414(u) of the Code)

The provisions of the bill relating to the treatment of
certain contributions to the retirement plans of reemployed
veterans would be deleted because the Uniformed Services
Employment and Reemployment Rights Act of 1993 (H.R. 995),
legislation recently reported out by the Veterans Committee,
contains provisions of broader scope than the provisions of the
bill.



-18-
Description of Proposal

The proposai would treat as unrelated business taxable
income certain distributions made by a foreign corporation to a
tax-exempt entity that is otherwise generally subject to taxation
on income from an unrelated business, and that owns sufficient
stock in the foreign corporation to be eligible for an indirect
foreign tax credit with respect to the dividend. Similarly, the
proposal would treat as unrelated business taxable income certain
amounts that would be included in the income of a tax-exempt
entity (if the tax-exempt entity were subject to tax) as a deemed
distribution from a controlled foreign corporation.

Under the proposal, distributions of earnings by a foreign
corporation would be treated as unrelated business taxable income
in the same proportion that the earnings and profits of the
foreign corporation would be treated as unrelated business
taxable income if received directly by the recipient tax-exempt
entity. Income inclusions under subpart F would be treated as
unrelated business taxable income to the extent that the subpart
F income of the controlled foreign corporation would be treated
as unrelated business taxable income if received directly by the
tax-exempt entity.

Effective Date

The proposal would be effective for distributions of
earnings and profits that are generated in taxable years of
foreign corporations beginning after December 31, 1993, and for
inclusions of income under subpart F in respect of taxable years
of foreign corporations beginning after December 31, 1993.

Cc. Withholding on Gambling Winnings from Bingo and Keno
Present Law

In general, proceeds from a wagering transaction are subject
to withholding at a rate of 28 percent if such proceeds exceed
$5,000 and if the amount of such proceeds is at least 300 times
as large as the amount wagered. The proceeds from a wagering
transaction are determined by subtracting from the amount
received the amount wagered. Any non-monetary proceeds that are
received are taken into account at fair market value.

In the case of State-conducted lotteries, proceeds from a
wager are subject to withholding at a rate of 28 percent if such
proceeds exceed $5,000, regardless of the odds of the wager.
This rule applies only if the wager is placed with the State
agency conducting the lottery or with its authorized agents or
employees.



-31-

PART THREE: TECHNICAL CORRECTION AND MODIFICATION
TO THE LUXURY TAX IN H.R. 3419

A. Indexation of Threshold Applicable to Excise Tax on Luxury
Automobiles (sec. 13161 of the 1993 Act and sec. 4001(e) (1) of
the Code)

Present Law

The 1993 Act indexed the threshold above which the excise
tax on luxury automobiles is to apply.

Description of Proposal

The proposal would correct the application of the indexing
adjustment so that the adjustment calculated for a given calendar
year would apply for that calendar year rather than in the
subsequent calendar year. This would conform the indexation to
that described in the conference report to the 1993 Act." The
intent of Congress, as reflected in the conference report, was
that current year indexation be effective on the date of
enactment of the 1993 Act. The proposal would, however, be
effective on January 1, 1994, to alleviate the difficulties that
both taxpayers and the Treasury would experience in administering
a retroactive refund effective to August 10, 1993.

"See Conference Report on H.R. 2264, Omnibus Budget
Reconciliation Act of 1993 (H. Rept. 103-213), August 4, 1993, at
page 558.



-13-
iii. Prompt notification

‘Present Law
The IRS is not required to notify promptly taxpayers who
fall behind in depositing trust fund taxes.

Description of Proposal

The proposal would require IRS, to the maximum extent
practicable, to notify all persons who have failed to make timely
and complete deposit of any taxes described in section 6672 of
the Code of that failure within 30 days after the return was
filed reflecting the delinquency or within 30 days of the first
indication that there has been a failure to make a timely and
complete deposit, whichever is earlier. Failure by the IRS to
provide notice under this provision does not absolve any
individual from any liability for penalties.

The proposal also would require that a taxpaying entity notified
by the Secretary of a failure to pay such taxes must notify,
within 15 days of such notification by the Secretary, all of the
entity’s officers, general partners, trustees or other managers
of the failure to make a timely and complete deposit.

Effective Date

The proposal would be effective on the date of enactment.

6. Required content of certain notices

Present Law

The Code requires the IRS to describe the basis for and
identify the amounts of tax due, interest, penalties, and any
other additional amounts owed in the notice of deficiency sent to
taxpayers.

Description of Proposal

The proposal would require that the IRS set forth the
components of and explanation for each specific adjustment that
is the basis for the total tax deficiency. An inadequate
description does not invalidate the notice.

Effective Date

The proposal would apply to notices sent after the date six
months after the date of enactment.



-5-

foreign corporations) because such a study is required
by the conference report accompanying the 1993 Act.

Move the effective date of section 423 of the bill
(relating to tax on transfers to avoid income tax) from
transfers after the date of enactment to transfers
after December 31, 1994.

Move the effective date of section 424 of the bill
(relating to certain other transfers) from transfers
after December 31, 1993, to transfers after December
31, 1994.

Title V--Treatment of Intangibles

Delete sections 501 and 502 of the bill (relating to
amortization of goodwill and certain other intangibles)
because similar provisions were enacted in the 1993
Act.

Title VI--Other Income Tax Provisions

Delete section 612 of the bill (relating to IRS
regulatory authority with respect to the uniform
capitalization rules of Code section 263A) because the
Treasury Department issued regulations on August 9,
1993, making the provision in the bill obsolete.

Modify section 622 of the bill (relating to basis rules
for shares in open-end regulated investment companies)
by (1) creating a $25 de minimis exception for wash
sale losses from mutual fund accounts that are subject
to the proposed basis reporting rule and (2) moving the
date, from January 15 to December 31, by which the
acquisition of the replacement mutual fund had to be
made for the modification to the load basis deferral
rule to apply.

Delete section 633 of the bill (relating to the
aggregation of issue rules as they apply to certain tax
and revenue anticipation bonds) because the provision
was made duplicative by recent Treasury regulations.

Delete section 634 of the bill (relating to the repeal
of the disproportionate private business use test)
because of revenue constraints.

Delete section 635 of the bill (relating to an expanded
exception from rebate for issuers issuing $10,000,000
or less of bonds) because of revenue constraints.


-28-

stock ownership of more than 50 percent (CFC groups) are treated
as a single corporation for purposes of determining their
earnings invested in excess passive assets. Look-through
treatment applies to certain corporations whose stock is owned at
least 25 percent by a controlled foreign corporation. Some have
argued that these rules permit the assets of one foreign
corporation to be taken into account more than once through a
combination of CFC group treatment and look-through treatment.
In addition, some have argued that these rules permit the assets
of one foreign corporation to be taken into account in more than
one CFC group.

Description of Proposal

The proposal would clarify that, within the regulatory
authority provided to the Secretary of the Treasury under the
1993 Act, regulations are specifically authorized to coordinate
the CFC group treatment and look-through treatment applicable for
purposes of determining a foreign corporation's earnings invested
in excess passive assets. Pending the promulgation of guidance
by the Secretary, it would be intended that taxpayers be
permitted to coordinate such treatment using any reasonable
method for taking assets into account only once, so long as the
method is consistently applied to all controlled foreign
corporations (whether or not members of any CFC group) in all
taxable years.

H. Treatment of Certain Leased Assets for PFIC Purposes (sec.
13231(d) (4) of the 1993 Act and sec. 1297 (d)
of the Code)

Present Law

Under present law, as modified by the 1993 Act, certain
property leased by a foreign corporation may be treated as an
asset actually owned by the foreign corporation in measuring the
assets of the foreign corporation for purposes of the passive
foreign investment company (PFIC) asset test of sec. 1296(a) (2).
The 1993 Act provided a special measurement rule, under which the
adjusted basis of the leased asset for this purpose is determined
by reference to the unamortized portion of the present value of
the payments under the lease for the use of the property. Some
have argued, however, that the special measurement rule does not
apply to PFICs that are permitted to measure their assets by fair
market value, rather than by adjusted basis. Under this
argument, the entire fair market value of the leased asset might
be treated as owned by the foreign corporation.



-25-

Cc. ‘Indexation of the Limitation on Compensation Taken into
Account for Qualified Retirement Plan Purposes
(sec. 13212 of the 1993 Act and sec. 401(a) (17) of the Code)

Present Law

The 1993 Act reduced the limitation on compensation taken
into account for qualified retirement plan purposes to $150,000.
The 1993 Act also provided that for calendar years after 1994,
the compensation limit should be increased for changes in the
cost-of-living on an annual basis and rounded down to the next
lowest increment of $10,000.

Description of Proposal

The proposal would clarify that annual cost-of-living
adjustments to the compensation limit should apply to the
calendar year for which the cost of living adjustment is
determined. The provision would also clarify how the rounding
rules apply to the compensation limit.

D. Reporting and Notification Requirements for Lobbying and
Political Expenditures of Tax-Exempt Organizations (sec. 13222 of
the 1993 Act and sec. 6033(e) of the Code)

Present Law
Tax-exempt organizations which incur political expenditures
are subject to tax under Code section 527(£). The tax is

calculated by applying the highest corporate rate to the lesser
of (a) the net investment income of the organization, or (b) the
amount of political expenditures incurred by the organization
during the taxable year. Expenditures covered by Code section
527(£) are those expended for "influencing or attempting to
influence the selection, nomination, election, or appointment of
any individual to any Federal, State, or local public office or
office in a political organization, or the election of
Presidential or Vice-Presidential electors, whether of not such
individual or electors are selected, nominated, elected, or
appointed."

Code section 162(e), as amended by the 1993 Act, provides a
separate set of rules regarding the tax treatment of lobbying and
political expenditures. Political expenditures include amounts
paid or incurred in connection with "participation in, or
intervention in, any political campaign on behalf of (or in
opposition to) any candidate for public office." Taxpayers may
not deduct the portion of dues or similar amounts paid to a tax-
exempt organization which the organization notifies the taxpayer
are allocable to lobbying or political expenditures.



-2-

revenue-raising provisions in H.R. 3419. These modifications are
reflected in Titles I-IX of H.R. 3419.

Technical Corrections

Technical corrections to the Omnibus Budget Reconciliation
Act of 1990 (the "1990 Act") and other recently-enacted
legislation within the jurisdiction of the Committee on Ways and
Means were included in the conference agreement on H.R. 11.

Chairman Rostenkowski introduced H.R. 17 on January 5, 1993,
based upon the provisions contained in H.R. 11. The staff of the
Joint Committee on Taxation prepared a technical explanation of
H.R. 17 as introduced.’

Part One of the Technical Corrections section of this
document describes certain modifications made to the provisions
of H.R. 17 in drafting H.R. 3419; Part Two describes additional
technical corrections to the Omnibus Budget Reconciliation Act of
1993 (the "1993 Act") included in H.R. 3419; and Part Three
describes a technical correction and modification to the luxury
tax provision of the 1993 Act included in H.R. 3419. H.R. 3419
also includes clerical amendments to the 1993 Act and other
legislation. These modifications are reflected’ in Title X of
H.R. 3419.

5 Joint Committee on Taxation, Explanation of Technical
Corrections Act of 1993 (H.R. 17) (JCS-2-93), January 8, 1993.


INTRODUCTION

The House Ways and Means Committee has scheduled a markup of
possible tax simplification and technical corrections legislation
for November 3, 1993. On November 1, 1993, Chairman Rostenkowski
introduced the Tax Simplification and Technical Corrections Act
of 1993 (H.R. 3419), which combined and modified the provisions
of the Tax Simplification Act of 1993 (H.R. 13) and the Technical
Corrections Act of 1993 (H.R. 17) introduced earlier this year.
This document,’ prepared by the staff of the Joint Committee on
Taxation, describes the modifications made to H.R. 13 and H.R. 17
in the drafting of H.R. 3419.

Simplification

In response to Chairman Rostenkowski’s February 1990 request
for proposals to simplify the tax laws, the Committee on Ways and
Means received proposals from the public, tax professionals, the
Secretary of the Treasury, and congressional tax-writing staff.
Those proposals were published in an 1,100-page Committee Print.”
Certain of these simplification proposals were introduced in
several bills in the 102d Congress, most of which were passed as
part of H.R. 4210 and H.R. 11, which were vetoed by President
Bush.

Chairman Rostenkowski introduced H.R. 13 on January 5, 1993,
generally to mirror the simplification provisions that were
contained in the conference agreement on H.R. 11.° The staff of
the Joint Committee on Taxation prepared a technical explanation
of H.R. 13 as introduced.‘

Part One of the Tax Simplification section of this document
describes modifications made to the provisions of H.R. 13 in the
drafting of H.R. 3419; Part Two describes additional
simplification provisions in H.R. 3419; and Part Three describes

' This document may be cited as follows: Joint Committee

on Taxation, Description of Possible Tax Simplification and

chnical ions Legi ion (H nd H.R 7, as

Modified in H.R. 3419) (JCX-13-93), November 2, 1993.

2? Committee on Ways and Means, Written Proposals on Tax
Simplification (WMCP: 101-27), May 25, 1990.

3
1992.

‘ Joint Committee on Taxation, Technical Explanation of the

Tax Simplification Act of 1993 (H.R. 13) (JCS-1-93), January 8,
1993.

H. Rep. 102-1034, 102d Congress, 2d Session, October 5,


-14-
7. Required notice to taxpayers of certain payments

Present Law

If the IRS receives a payment without sufficient information
to properly credit it to a taxpayer’s account, the IRS may
attempt to contact the taxpayer. If contact cannot be made, the
IRS places the payment in an unidentified remittance file.

Dese i of Proposal

The proposal would require the IRS to make reasonable
efforts to notify, within 60 days, those taxpayers who have made
payments which the IRS cannot associate with any outstanding tax
liability.

ffe ve Da
The proposal would be effective on the date of enactment.

8. Improved procedures for notifying IRS of change of address
or name

Present Law

Generally, the IRS posts the new address of a taxpayer only
upon the filing of the subsequent tax return which contains a new
address or if the taxpayer submits a Form 8822, Change of
Address, to the IRS. IRS does not necessarily update all of its
records with the new address.

Description of Pr

The proposal would require the IRS to provide improved
procedures for taxpayers to notify the IRS of changes in names or
addresses. In addition, the proposal would require that the IRS
institute procedures on or before December 31, 1994 for the
timely updating of all IRS records with change of address
information provided to the IRS by taxpayers.

Effective Date

The proposal would be effective on the date of enactment.

9. Rights and responsibilities of divorced individuals
Present Law

The IRS provides information on the rights and
responsibilities of divorced individuals in Publication 504, Tax
Information for Divorced or Separated Individuals. This



-4-

or after July 1, 1994, and before January 1, 1995, the
filing requirement of the provision is satisfied if
notice is filed with the Secretary of the Treasury by
October 1, 1994. In addition, the date the Secretary
would be required to notify nonelecting plans of the
revenue offset for the transition period would be moved
from January 1, 1994, to January 1, 1995, and the
revenue offset would apply to plan years beginning on
or after July 1, 1994, and before January 1, 1995.

Delete section 242 of the bill (relating to the
definition of affiliated employers for purposes of the
rules relating to voluntary employees’ beneficiary
associations) because of revenue constraints.

Title III--Treatment of Large Partnerships

Add a catch-all category to the list of items froma
large partnership that are separately reported to
partners. The category would be used at the discretion
of the Treasury Secretary, should changes in the law
necessitate separate statement of any items.

Strike the deferred sale provision of the large
partnership rules (Treasury regulations proposed under
section 704(c) of the Code address the issue).

Change the general effective date for the large
partnership simplification provisions from taxable
years ending on or after December 31, 1993, to taxable
years ending on or after December 31, 1994. Change the
effective date for the provision relating to treatment
of partnership items of individual retirement accounts
from taxable years beginning after December 31, 1992,
to taxable years beginning after December 31, 1993.

Title IV--Foreign Provisions

Modify sections 401-404 of the bill (relating to the
deferral of tax on income earned through foreign
corporations and exceptions to deferral) to conform to
the amendments made to the corresponding provisions of
present law by the 1993 Act.

Delete section 412 of the bill (providing regulatory
authority to simplify the rules for determining foreign
tax credits upon receipt of previously taxed earnings)
because a broader simplification of those rules was
enacted in the 1993 Act.

Delete section 415 of the bill (relating to a study of
certain investments in U.S. property by controlled


-20-
Des on Pri al

The proposal would codify that portion of the Treasury
regulations that provide that taxable income must be reduced by
NOL and capital loss carrybacks for purposes of calculating the
bad debt reserve deduction of thrift institutions under the
percentage of taxable income method.

Effective Dat:

The proposal would be effective for losses incurred in
taxable years ending after December 31, 1993. No inference would
be intended as to the validity of the regulations with respect to
losses incurred prior to the effective date of the proposal.



DESCRIPTION OF .
POSSIBLE TAX SIMPLIFICATION
AND TECHNICAL CORRECTIONS LEGISLATION
(H.R. 13 AND H.R. 17, AS MODIFIED IN H.R. 3419)

Scheduled for Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS

on November 3, 1993

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
November 2, 1993

JCX-13-93


-7-
PART TWO: ADDITIONAL SIMPLIFICATION PROVISIONS IN H.R. 3419

A. In General

1. Certain Trusts Eligible to Hold Stock in § Corporations
Present Law

Under present law, trusts other than grantor trusts, voting
trusts, certain testamentary trusts (for a 60-day or two-year
period), and "qualified subchapter s trusts" may not be
shareholders in an S corporation. A "qualified subchapter S
trust" is a trust that is required to have only one current
income beneficiary (for life). All the income (as defined for
local law purposes) must be currently distributed to that
beneficiary. The beneficiary is treated as the owner of the
portion of the trust consisting of the stock in the §
corporation.

Description of Proposal

In ner

H.R. 13 included several simplification proposals relating
to S corporations. This proposal would allow stock in an $
corporation to be held by certain trusts ("electing small
business trusts"). In order to qualify for this treatment, all
beneficiaries of the trust would have to be individuals or
estates, except that charitable organizations could hold
contingent remainder interests. No interest in the trust coula
be acquired by purchase. For this purpose, "purchase" would mean
any acquisition of property with a cost basis (determined under
section 1012). Thus, interests in the trust would have to be
acquired by reason of gift, bequest, etc.

A trust would be required to elect to be treated as an
electing small business trust. An election would apply to the
taxable year for which made and could be revoked only with the
consent of the Secretary of the Treasury or his delegate.

Each potential current beneficiary of the trust would be
counted as a shareholder for purposes of the 35-shareholder
limitation (or, if there were no potential current beneficiaries,
the trust would be treated as the shareholder). A potential
current income beneficiary would mean any person, with respect to
the applicable period, who is entitled to, or at the discretion
of any person may receive, a distribution from the principal or
income of the trust. Where the trust disposes of all the stock
in an S corporation, any person who first became so eligible



-6-

Modify section 638 of the bill (relating to the
clarification of investment-type property) to reflect
provisions of Treasury Department regulations issued
since introduction of H.R. 13.

Delete section 652 of the bill (relating to certain
changes of ownership under the corporate alternative
minimum tax) because of revenue constraints.

Delete section 653 of the bill (relating to
depreciation conformity for the corporate alternative
minimum tax) because a provision of the 1993 Act made
the provision in the bill obsolete.

Title VII--Estate And Gift Tax Provisions
No proposed changes to Title VII as introduced.
Title VIII--Excise Tax Simplification

Delete sections 801-805 of the bill (relating to fuel
excise tax simplification) because the fuel excise
taxes were modified significantly in the 1993 Act.

Title IX--Administrative Provisions

Delete section 901 of the bill (relating to employment
taxes on domestic services) .

Move the effective date of section 904 of the bill
(relating to TEFRA audit rules for S$ corporations) from
taxable years beginning after the date of enactment, to
taxable years ending after the date of enactment.

Move the effective date of section 906 of the bill
(relating to certain notices disregarded under
provision increasing interest rate on large corporate
underpayments) from the determination of interest for
periods after December 31, 1990, to the determination
of interest for periods after December 31, 1993. .

Delete section 907 of the bill (relating to special
rule for corporate estimated taxes where no liability
for preceding year) because of revenue constraints.


-27-

F. Current Taxation of Certain Earnings of Controlled Foreign
Corporations--Measurement of Accumulated Earnings (sec. 13231 (b)
of the 1993 Act and sec. 956A(b) of the Code)

Present Law

Present law, as modified by the 1993 Act, limits the
availability of deferral of U.S. tax on certain earnings of
controlled foreign corporations by requiring U.S. shareholders of
a controlled foreign corporation to include in income the
corporation’s accumulated’ or.current. earnings. invested in excess
passive assets. Some have argued that the Code’s definition of
earnings subject to this treatment permits an accumulated deficit
in earnings to eliminate positive current earnings, resulting in
no income inclusion in a case where an actual distribution would
be treated as a dividend out of current earnings. In addition,
some have argued that the Code’s definition of earnings subject
to this treatment takes current-year earnings into account more
than once.

Description of Proposal

The proposal would clarify that the accumulated earnings and
profits of a controlled foreign corporation taken into account
for purposes of determining the foreign corporation’s earnings
invested in excess passive assets do not include any deficit in
accumulated earnings and profits”, and do not include current
earnings (which are taken into account separately).

G. Current Taxation of Certain Earnings of Controlled Foreign
Corporations--Aggregation and Look-through Rules (sec. 13231(b)
of the 1993 Act and sec. 956A(f) of the Code)

Present Law

Present law, as modified by the 1993 Act, provides certain
aggregation and look-through rules in connection with requiring
U.S. shareholders of a controlled foreign corporation to include
in income certain of the corporation’s earnings invested in
excess passive assets. Under the aggregation rule, certain
groups of controlled foreign corporations that are linked by

° Accumulated earnings and profits are taken into account

only to the extent that they were accumulated in taxable years
beginning after September 30, 1993.

10
1993.

Incurred in taxable years beginning after September 30,



-26-

Code section 6033(e) sets forth reporting and notification
requirements applicable to tax-exempt organizations (other than
charities) that incur lobbying or political expenditures within
the meaning of Code section 162(e). First, the organization must
report on its annual tax return both the total amount of its
lobbying ard political expenditures, and the total amount of dues
(or similar payments) allocable to such expenditures. Second,
the organization must either provide notice to its members of the
portion of dues allocable to lobbying and political expenditures
(so that such amounts are not deductible by members), or may
elect to pay a proxy tax (at the highest corporate rate) on its
lobbying and political expenditures, up to the amount of dues
receipts.

Description of Proposal

The proposal would amend Code section 6033(e) to clarify
that any political expenditures on which tax is paid pursuant to
Code section 527(f) are not subject to the reporting and
notification requirements of Code section 6033(e). In addition,
the proposal would clarify that the reporting and notification
requirements of Code section 6033(e) apply to organizations
exempt from tax under Code section 501(a}), other than charities
described in section 501(c) (3).

E. Estimated Tax Rules for Certain Tax-Exempt Organizations
(sec. 13225 of the 1993 Act and sec. 6655(g) (3) of the Code)

Present Law

A tax-exempt organization is generally subject to an
addition to tax for any underpayment of estimated tax on its
unrelated business taxable income or its net investment income
(as the case may be). Under the 1993 Act, for years beginning
after December 31, 1993, a corporation or tax-exempt organization
does not have an underpayment of estimated tax if it makes four
timely estimated tax payments that total at least 100 percent of
the tax liability shown on its return for the current taxable
year. A corporation or tax-exempt organization may estimate its
current year tax liability prior to year-end by annualizing its
income. The 1993 Act also changed the method by which a
corporation annualizes its current year tax liability.

De. n_of {2} 1
The proposal would clarify that the 1993 Act did not change

the method by which a tax-exempt organization annualizes its
current year tax liability.



-3-

TAX SIMPLIFICATION

PART ONE: MODIFICATIONS TO THE PROVISIONS
OF H.R. 13 IN H.R. 3419

The following modifications to H.R. 13 have been made in the
drafting of H.R. 3419:

Title I--Provisions Relating to Individuals

Delete section 101 of the bill (relating to the earned
income credit) because the provisions of the 1993 Act
made the provision in the bill obsolete.

Move the effective date of section 121 of the bill
(providing a de minimis exception to the passive loss
rules) from taxable years beginning after December 31,
1992, to taxable years beginning after December 31,
1993.

Move the effective date of section 123 of the bill
{relating to modifications to election to include
child’s income on parent’s return) from taxable years
beginning after December 31, 1992, to taxable years
beginning after December 31, 1993.

Move the effective date of section 124 of the bill
(providing a simplified foreign tax credit limitation
for individuals) from taxable years beginning after
December 31, 1992, to taxable years beginning after
December 31, 1993.

Delete section 128 of the bill (relating to luxury
excise tax for certain equipment installed on passenger
vehicles) because the provision was included in the
1993 Act.

Move the effective date of section 129 of the bill
(relating to exclusion of combat pay from withholding
limited to amount excludable from gross income) from
remuneration paid after December 31, 1993, to
remuneration paid after December 31, 1994.

Title II--Pension Simplification

Move the general effective date of section 236 of the
bill (relating to the alternative full funding
limitation) to January 1, 1995. The dates in the
transition rule under the provision would be modified
so that, in the case of an election period beginning on


-17-

activities, such activities are considered to be an unrelated
trade or business and tax is computed on income from the activity
(including income from investment assets that might otherwise
generate tax-exempt income under the unrelated business taxable
income rules) under subchapter L (section 501(m) (2)). As another
example, a Domestic International Sales Corporation (DISC) is a
domestic corporation exempt from U.S. income taxation by reason
of section 991. Any dividend paid or deemed paid by a DISC to an
organization that is exempt from tax under section 501(a) is
treated as unrelated business taxable income (section 995(g)).

Although the Code is generally designed to impose only a
single corporate-level tax on corporate earnings, a dividend paid
by a foreign corporation to a U.S. corporation eligible for an
indirect foreign tax credit on the dividend may have been subject
to foreign tax at a rate lower than the full U.S. (35-percent)
rate, and may therefore be subject to additional U.S. tax in the
hands of the corporate shareholder. For example, if a gross
dividend of $100 carries a total foreign tax credit of $20
(representing either direct or indirect foreign taxes, or both),
the dividend represents a distribution of earnings that were
subject to foreign tax at less than the full U.S. rate. If the
recipient is a taxable U.S. person that is eligible for the
indirect foreign tax credit, $15 of net U.S. tax is imposed on
the recipient, representing the amount by which one full level of
U.S. corporate tax exceeds the foreign taxes that were actually
imposed. However, no similar U.S. tax is imposed on that amount
if the recipient is generally exempt from U.S. tax under section
501(a).

The treatment of subpart F inclusions as unrelated business
taxable income under present law is unclear. While temporary
Treasury regulations specifically provide that subpart F income
attributable to tax-exempt bond interest will retain that
character in the hands of a U.S. shareholder, a similar rule has
not been provided for treatment as unrelated business taxable
income.

6 Some IRS private letter rulings, which are not to be used
or cited as precedent, have held that subpart F inclusions are
treated as if realized directly by the U.S. shareholder (a tax-
exempt entity) for purposes of computing the shareholder’s UBTI
(see, e.g., LTR 9043039 (July 30, 1990)), while other IRS private
letter rulings have held that subpart F inclusions are treated as
dividends received by the U.S. shareholder (a tax-exempt entity)
for purposes of computing the shareholder’s UBTI (see, e.g., LTR
9027051 (April 13, 1990)).



-23-

H. Delete Provision Relating to Treatment of Certain RIC
and REIT Reorganizations (sec. 102(1) of the bill
and sec. 852(a) of the Code)

The provision of the bill regarding the treatment of certain
reorganizations of regulated investment companies and real estate
investment trusts would be deleted because a similar provision
was included in Treasury regulations.

I. Modify Effective Date Provision Relating to the Energy Policy
Act of 1992 (sec. 102(m) (1) of the bill and sec. 53(d) (1) (B) (iii)
and (iv) of the Code)

This provision, which amends Code section 53(d) (1) (B) (iv),
would be modified to correct the effective date to apply to
taxable years beginning after December 31, 1990. A similar
modification would be made to apply the amendment made by the
Energy Policy Act of 1992 to Code section 53(d) (1) (B) (iii) to
taxable years beginning after December 31, 1990.

J. Modify Provision Relating to the Elimination of the Rounding
Distortion in the Calculation of the
Social Security Contribution and Benefit Base
and the Earnings Test Exempt Amounts (sec. 202
of the bill and 42 U.S.C. 430{(b))

References to the Hospital Insurance contribution base would
be deleted because the provisions of the 1993 Act made these
references obsolete, and the effective date would be changed to
apply to determinations of the OASDI contribution and benefit
base for years after 1994 and to determinations of the social
security earnings test exempt amounts for taxable years ending
after 1994,



II.

PART
3419

A.

Modify Provision Relating to the Elimination of

the Rounding Distortion in the Calculation of the
Social Security Contribution and Benefit Base and
the Earnings Test Exempt Amounts (sec. 202 of the
bill and 42 U.S.C. 430(b)) 2... 2...

TWO: TECHNICAL CORRECTIONS TO THE 1993 ACT IN H.R.

Treatment of Full-Time Students Under the Low-
income Housing Credit (sec. 13142 of the 1993 Act
and sec. 42 of the Code) ... +... . 2...

Indexation of the Limitation Based on Modified
Adjusted Gross Income for Income from United
States Savings Bonds Used to Pay Higher Education
Tuition and Fees (sec. 13201 of the 1993 Act and
sec. 135(b) (2) (B) of the Code) ........

Indexation of the Limitation on Compensation Taken
into Account for Qualified Retirement Plan
Purposes (sec. 13212 of the 1993 Act and sec.
401(a) (17) of the Code)... 2... . 2...

Reporting and Notification Requirements for
Lobbying and Political Expenditures of Tax-Exempt
Organizations (sec. 13222 of the 1993 Act and sec.
6033(e) of the Code) . .. 2... ee... :

Estimated Tax Rules for Certain Tax-Exempt
Organizations (sec. 13225 of the 1993 Act and sec.
6655(g) (3) of the Code)... ..... eee ee

Current Taxation of Certain Earnings of Controlled
Foreign Corporations--Measurement of Accumulated
Earnings (sec. 13231(b) of the 1993 Act and sec.
956A(b) of the Code) .............2..

Current Taxation of Certain Earnings of Controlled
Foreign Corporations--Aggregation and Look-through
Rules (sec. 13231(b) of the 1993 Act and sec.

956A(f} of the Code) .... 2... 2... ee

Treatment of Certain Leased Assets for PFIC
Purposes (sec. 13231(d) (4) of the 1993 Act and
sec. 1297(d) of the Code) .............

Amortization of Goodwill and Certain Other
Intangibles (sec. 13261(g) of the 1993 Act and
sec. 197 of the Code)... ...........0.2

Empowerment Zones and Eligibility of Small Farms
for Tax Incentives (sec. 13301 of the 1993 Act and
sec. 1397B(d) (5) (B) of the Code) .........

23

24

24

24

25

25

26

27

27

28

29

30


-10-

action. Any insufficiency in the explanation of the denial has
no effect on the availability of an installment agreement to the
taxpayer. The proposal also would require that the IRS notify
taxpayers 30 days before denying any installment agreement for
any reason other than that the collection of tax is determined to
be in jeopardy.

Effective Date

The proposal would be effective six months after the date of
enactment .

2. Joint return may be made after separate returns without full
payment of tax

Present Law

Taxpayers who file separate returns and subsequently
determine that their tax liability would have been less if they
had filed a joint return are precluded by statute from reducing
their tax liability by filing jointly if they are unable to pay
the entire amount of the joint return liability before the
expiration of the three-year period for making the election to
file jointly.

Description of Proposal

The proposal would repeal the requirement of full payment of
tax liability as a precondition to switching from married filing
separately status to married filing jointly status.

Eff e Da

The proposal would apply to taxable years beginning after
the date of enactment.

3. Offers-in-compromise

Present Law

The IRS has the authority to settle a tax debt pursuant to
an offer-in-compromise. IRS regulations provide that such offers
can be accepted if the taxpayer is unable to pay the full amount
of the tax liability and it is doubtful that the tax, interest,
and penalties can be collected, or there is doubt as to the
validity of the actual tax liability. Amounts over $500 can only
be accepted if the reasons for the acceptance are documented in
detail and supported by an opinion of the IRS Chief Counsel.


-12-

Description of Proposal

The proposal would require the IRS to take such action as
may be appropriate to ensure that employees are aware of their
responsibilities under the Federal tax depository system and the
circumstances under which they may be liable for penalties for
failure to make tax deposits. Among other things, IRS would be
required to print warnings on payroll tax deposit coupon books
and appropriate tax returns indicating that certain employees may
be liable for this penalty, and to develop a special information
packet relating to this penalty.

Effective Date

The proposal would be effective on the date of enactment.

ii. Board members of tax-exempt organizations

Present Law

Under section 6672, "responsible persons" of tax-exempt
organizations are subject to a penalty equal to the amount of
trust fund taxes that are not collected and paid to the
Government on a timely basis.

Description of Proposal

The proposal would clarify that the section 6672 responsible
person penalty is not to be imposed on volunteer, unpaid members
of any board of trustees or directors of a tax-exempt
organization to the extent such members are solely serving in an
honorary capacity and do not participate in the day-to-day or
financial activities of the organization. To be exempt, an
honorary board member cannot have actual knowledge of the failure
to deposit taxes and the proposal would not operate in such a way
as to eliminate all responsible persons from responsibility. The
proposal would require the IRS to develop materials to better
inform board members of tax-exempt organizations (including
voluntary or honorary members) that they may be treated as
responsible persons. The IRS would be required to make such
materials routinely available to tax-exempt organizations. The
proposal also would require the IRS to clarify its instructions
to IRS employees on application of the responsible person penalty
with regard to honorary or volunteer members of boards of
trustees or directors of tax-exempt organizations.

Eff vv ate

The proposal would be effective on the date of enactment.


TECHNICAL

I.

PART
H.R.

A.

Calculating Bad Debt Reserves Under the Percentage
of Income Method . ~~... 2 1 ee ee eee ee

CORRECTIONS . 2... ee eee ee ee ee

ONE: MODIFICATIONS TO THE PROVISIONS OF H.R. 17 IN
3419. we ee

Delete Provision Relating to Minimum Tax Rate on
Certain Nonresident Aliens (sec. 101(a)(2) of the
bill, sec. 11102 of the 1990 Act, and sec. 897 of
the Code) . 2... 6 ee ee ee ee eee

Delete Provision Relating to Tax Rate of Personal
Holding Companies (sec. 101(a) (4) of the bill,

sec. 11101 of the 1990 Act, and sec. 541 of the
Code) 2. 6 ee ee ee ee ee ee eee

Delete Provision Relating to Definition of AGI for
the Earned Income Tax Credit and the Supplemental
Earned Income Tax Credit for Health Insurance
Premiums (sec. 101(a) (5) of the bill, sec. 11111
of the 1990 Act, and sec. 32 of the Code) .....

Delete Provision Relating to Tax on Certain Uses
(sec. 101(b) (2) of the bill, sec. 1703(a) of the
Tax Reform Act of 1986, and sec. 4082 of the

Code) 2. 6 ew ee ee

Modify Provision Relating to Treatment of Salvage
and Subrogation of Property and Casualty Insurance
Companies (sec. 101(c) (4) of the bill and sec.
11305 of the 1990 Act) a  d

Delete Provision Relating to Exclusion for
Employer-provided Educational Assistance (sec.
101(d) (1) of the bill, sec. 11403 of the 1990 Act,
and secs. 127 and 132 of the Code) ........

Delete Provisions Relating to the Treatment of
Certain Contributions Made Pursuant to Veterans’
Reemployment Rights (sec. 102(j) of the bill and
sec. 414(u) of the Code) .. 2... 2... 2... we

Delete Provision Relating to Treatment of Certain
RIC and REIT Reorganizations (sec. 102(1) of the
bill and sec. 852(a) of the Code) ........

Modify Effective Date Provision Relating to the
Energy Policy Act of 1992 (sec. 102(m)(1) of the
bill and sec. 53(d) (1) (B) (iii) and (iv) of the
Code) 2. we ee ee

21

21

21

21

21

22

22

22

23

23


-21-

TECHNICAL CORRECTIONS

PART ONE: MODIFICATIONS TO THE PROVISIONS
OF H.R. 17 IN H.R. 3419

The following modifications to the provisions of H.R. 17
have been made in the drafting of H.R. 3419:

A. Delete Provision Relating to Minimum Tax Rate on
Certain Nonresident Aliens (sec. 101(a) (2) of the bill,
sec. 11102 of the 1990 Act, and sec. 897 of the Code)

The provision of the bill relating to minimum tax rate on
certain nonresident aliens would be deleted because the
provisions of the 1993 Act made the provision obsolete.

B. Delete Provision Relating to Tax Rate
of Personal Holding Companies (sec. 101(a) (4)
of the bill, sec. 11101 of the 1990 Act,
and sec. 541 of the Code)

The provision of the bill relating to tax rate of personal
holding companies would be deleted because the provisions of the
1993 Act made the provision obsolete.

C. Delete Provision Relating to Definition of AGI
for the Earned Income Tax Credit and the Supplemental
Earned Income Tax Credit for Health Insurance
Premiums (sec. 101(a) (5) of the bill, sec. 11111
of the 1990 Act, and sec. 32 of the Code)

The provision of the bill relating to the definition of
adjusted gross income for the earned income tax credit and the
supplemental earned income tax credit for health insurance
premiums would be deleted because the provisions of the 1993 Act
made the provision obsolete.

D. Delete Provision Relating to Tax on Certain Uses
(sec. 101(b) (2) of the bill, sec. 1703(a) of the Tax Reform Act
of 1986, and sec. 4082 of the Code)

The provision of the bill relating to the definition of
certain uses as removal for purposes of manufacturers’ tax on
gasoline would be deleted because the provisions of the 1993 Act
made the provision obsolete.



CONTENTS

IN

INTRODUCTION . .. 2... 2...
TAX SIMPLIFICATION ..............004
I. PART ONE: MODIFICATIONS TO THE PROVISIONS OF H.R.
H.R. 3419 . . . . ee ee ee ee .
A. Title I--Provisions Relating to Individuals
B. Title II--Pension Simplification ....
Cc. Title III--Treatment of Large Partnerships
D. Title IV--Foreign Provisions ....
E. Title V--Treatment of Intangibles ....
F, Title VI--Other Income Tax Provisions . .
G. Title VII--Estate And Gift Tax Provisions
H. Title VIII--Excise Tax Simplification...
I. Title IX--Administrative Provisions... .
II. PART TWO: ADDITIONAL SIMPLIFICATION PROVISIONS IN H.R.
3419 2. we
A. In General .... 2.2... 2...
B. Administrative Practice and Procedural
Simplification .............
III. PART THREE: REVENUE-RAISING PROVISIONS IN H.R. 3419
A. Require Taxpayers to Include Rental Value of
Residence in Income Without Regard to Period of
Rental .. 2... ... eee
B. Treat Certain Foreign Corporate Dividends and
Deemed Income Inclusions as Unrelated Business
Taxable Income ..............
Cc. Withholding on Gambling Winnings from Bingo and
Keno ...... nn
Dd. Require Thrift Institutions to Take Net Operating

Loss Carryovers into Account for Purposes of

16

16

16

18


-29-
Description of Proposal

The proposal would clarify that, in the case of any item of
property leased by a foreign corporation and treated as an asset
actually owned by the foreign corporation in measuring the assets
of the foreign corporation for purposes of the PFIC asset test,
the amount taken into account with respect to the leased property
is the amount determined under the 1993 Act’s special measurement
rule, which is based on the unamortized portion of the present
value of the payments under the lease for the use of the
property. That is, the proposal would clarify that the special
measurement rule of the 1993 Act applies to all PFICs, regardless
of whether they are generally permitted to measure their assets
by fair market value rather than adjusted basis.

I. Amortization of Goodwill and Certain Other Intangibles (sec.
13261(g) of the 1993 Act and sec. 197 of the Code)

Present Law

The 1993 Act allows amortization deductions for certain
intangible assets acquired after the 1993 Act’s effective date
that were not amortizable under prior law. The 1993 Act contains
"antichurning" rules that deny amortization to intangible assets
that were not amortizable under prior law if such assets are
acquired by the taxpayer after the effective date from certain
related parties.

The 1993 Act also contains an election under which a
taxpayer and certain related parties may elect to treat all
acquisitions after July 25, 1991, as subject to the provisions of
the 1993 Act.

ription of Pri

The proposal would clarify that, when a taxpayer and its
related parties have made an election to apply the 1993 Act to
all acquisitions after July 25, 1991, the antichurning rules do
not apply when property acquired from an unrelated party after
July 25, 1991 (and not subject to the antichurning rules in the
hands of the acquirer) is transferred to a taxpayer related to
the acquirer after the date of enactment of the 1993 Act.



-24-

PART TWO: TECHNICAL CORRECTIONS TO THE 1993 ACT IN H.R. 3419

The following technical corrections to the 1993 Act have
been made by H.R. 3419:

A. Treatment of Full-Time Students Under the Low-income Housing
Credit (sec. 13142 of the 1993 Act
and sec. 42 of the Code)

Present Law

The 1993 Act codified prior law rules relating to the
treatment of married students filing joint returns. Further, it
provided that a housing unit occupied entirely by full-time
students may qualify for the credit if the full-time students are
a single parent and his or her minor children and none of the
tenants is a dependent of a third party.

tion of ‘oposal

The proposal provides that the full-time student provision
would be effective on the date of enactment of the 1993 Act.

B. Indexation of the Limitation Based on Modified Adjusted Gross
Income for Income from United States Savings
Bonds Used to Pay Higher Education Tuition and
Fees (sec. 13201 of the 1993 Act and
sec. 135(b) (2) (B) of the Code)

Pr. Law

A taxpayer may exclude from gross income the proceeds from
the redemption of qualified United States savings bonds if the
proceeds are used to pay qualified higher education expenses and
the taxpayer’s modified adjusted gross income is equal to or less
than $60,000 ($40,000 in the case of a single return): The
exclusion is phased out for incomes above these thresholds. The
$60,000 ($40,000) threshold is indexed for inflation occurring
after 1992.

Descri) of Pri a

The proposal would correct the indexing of the $60,000
($40,000) threshold to provide that the thresholds would be
indexed for inflation after 1989, as was provided prior to the
1993 Act.



-8-

during the 60 days before the disposition would not be treated as
a potential current beneficiary.

A qualified subchapter S trust with respect to which an
election is in effect and an exempt trust would not be eligible
to qualify as an electing small business trust.

Treatment of items relating to S corporation stock

The portion of the trust which consists of stock in one or
more S corporations would be treated as a separate trust for
purposes of computing the income tax attributable to the S$
corporation stock held by the trust. The trust would be taxed at
the highest individual rate (currently 39.6 percent) on this
portion of the trust’s income. The taxable income attributable
to this portion would include (1) the items of income, loss, or
deduction allocated to it as an S corporation shareholder under
the rules of subchapter S, (2) gain or loss from the sale of the
S corporation stock, and (3) to the extent provided in
regulations, any state or local income taxes and administrative
expenses of the trust properly allocable to the S corporation
stock. Otherwise allowable capital losses would be allowed only
to the extent of capital gains.

In computing the trust’s income tax on this portion of the
trust, no deduction would be allowed for amounts distributed to
beneficiaries, and no deduction or credit would be allowed for
any item other than the items described above. This income would
not be included in the distributable net. income of the trust, and
thus would not be included in the beneficiaries’ income. No item
relating to the S corporation stock could be apportioned to any
beneficiary.

On the termination of all or any portion of an electing
small business trust, the loss carryovers or excess deductions
referred to in section 642(h) would be taken into account by the
entire trust, subject to the usual rules on termination of the
entire trust.

Tre inder of i a tru:

In determining the tax liability with regard to the
remaining portion of the trust, the items taken into account by
the subchapter S portion of the trust would be disregarded.
Although distributions from the trust would be deductible in
computing the taxable income on this portion of the trust, under
the usual rules of subchapter J, the trust’s distributable net
income would not include any income attributable to the $
corporation stock.


-11-

Description of Proposal

The proposal would allow acceptance of an
offer-in-compromise where the compromise would be in the best
interest of the Government. The proposal also would increase
from $500 to $50,000 the amount requiring a written opinion from
the Office of Chief Counsel. Compromises below the $50,000
threshold must be subject to continuing quality review by the
IRS.

Effective Date

The proposal would be effective on the date of enactment.

4. Preliminary notice requirements relating to penalty for
failure to collect and pay over tax

Present Law

A "responsible person" is subject toa penalty equal to the
amount of trust fund taxes that are not collected or paid to the
government on a timely basis. An individual the IRS has
identified as a responsible person is permitted an administrative
appeal on the question of responsibility.

Deser4) n TOPO.

The proposal would require the IRS to issue a notice to an
individual the IRS had determined to be a responsible person with
respect to unpaid trust fund taxes at least 60 days prior to
issuing a notice and demand for the penalty. The statute of
limitations would not expire before the date 60 days after the
date on which the notice was mailed. The proposal would not
apply if the Secretary finds that the collection of the penalty
is in jeopardy.

Effectiv ate
The proposal would apply to assessments made after June 30,
1995.
5. Penalties relating to failure to collect and pay over tax
i. Public information requirements

Present Law

Under section 6672, a "responsible person" is subject to a
penalty equal to the amount of trust fund taxes that are not
collected and paid to the Government on a timely basis.