-13-

Effective Date
The provision is effective on February 1, 1992.

2. Penalty-Free Withdrawals for First Home Purchase and for
Certain Educational and Medical Expenses (secs. 142 and 213
of the bill and sec. 72 of the Code)

Present Law

Under present law, withdrawals from an individual
retirement arrangement (IRA) (other than withdrawals of
nondeductible contributions) are includible in gross income.
In addition, amounts withdrawn prior to age 59 1/2, death, or
disability are subject to an additional 10-percent income
tax, unless the distribution is in the form of substantially
equal periodic payments over the life (or life expectancy) of
the IRA owner or over the joint lives (or life expectancies)
of the IRA owner and his or her beneficiary. The 10-percent
additional tax also applies to early withdrawals from
tax-qualified retirement plans.

There is an exception.to the additional 10-percent
income tax for distributions from a tax-qualified retirement
plan that do not exceed the amount allowable as a deduction
for medical care for the year. This exception does not apply
to IRAs.

Explanation of Provisions

The bill permits certain individuals. to withdraw up to
$10,000 from an IRA for the purchase of a first home without
imposition of the 10-percent additional tax on early
withdrawals. This provision applies to individuals who did
not own a home in the last 3 years and who are not in an
extended period for rolling over gain from the sale of a
principal residence.

The bill also provides an exception to the 10-percent
additional tax for distributions from an IRA that do not
exceed the amount of qualifying educational expenses of the
taxpayer or the taxpayer's spouse or child. Qualifying
educational expenses are expenses for higher education and
post-secondary vocational education. The amount of qualified
higher educational expenses for any taxable year is reduced
by any amount excludable from gross income under the
provision in the Code pertaining to U.S. education savings
bonds.

In addition, the bill extends to IRAs the present-law
exception to the l0-percent additional income tax for
distributions from qualified retirement plans used to pay
deductible medical expenses. Moreover, for purposes of the
medical expense exception (with regard to both IRAs and


-34-

gain by 60 percent, and the remainder was taxed as ordinary
income--effectively establishing a maximum 20-percent rate.
Before 1987, the maximum tax rate for long-term corporate
capital gains was 28 percent.

Explanation of Provision

The provisions would provide the following three tax
incentives for certain employment and investment occurring in
up to 50 enterprise zones to be selected over a 4-year
period.

(1) Qualified employees with annual wages of less than
$20,000 would be allowed a S-percent refundable income tax
credit for the first $10,500 of wages earned in an enterprise
zone. (The credit would be phased out for employees with
annual wages between $20,000 and $25,000.)

(2) A taxpayer would be allowed a deduction of up to
$50,000 annually (subject to a lifetime maximum of $250,000)
for contributions to the capital of certain small
corporations that are engaged in the conduct of enterprise
zone businesses if the contributions are used to acquire
tangible assets located within enterprise zones.

(3) A taxpayers would be allowed to exclude from income
any capital gain realized with respect to tangible property
located within an enterprise zone and used in an enterprise
zone business for at least two years.

Effective Date

The tax incentives contained in the enterprise zone
provisions would apply beginning in 1993.


-30-

The business energy tax credits currently are scheduled
to expire with respect to property placed in service after
June 30, 1992.

The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. An unused
general business credit generally may be carried back 3 years
and carried forward 15 years.

Explanation of Provision

The provision would extend the business credits for
solar and geothermal property for eighteen months, through
December 31, 1993.

6. Qualified Small-Issue Bonds (sec. 316 of the bill and
sec. 144 of the Code)

Present Law

Interest on certain small issues of private activity
bonds is excludable from gross income if at least 95 percent
of the bond proceeds is to be used to finance manufacturing
facilities or certain agricultural land or equipment
("qualified small-issue bonds").

Qualified small-issue bonds are bond-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.

Qualified small-issue bonds for agricultural land
("first-time farmer bonds") may be used only to provide
financing to first-time farmers who will materially
participate in the farming operation to be conducted on the
financed land. Up to 25 percent of the proceeds of a
first-time farmer bond issue ($250,000 lifetime maximum) may
be used to finance farm equipment to be used on the financed

2 For purposes of the credit, a geothermal deposit is
defined as a domestic geothermal reservoir consisting of
natural heat which is stored in rocks or in an aqueous liquid
or vapor, whether or not under pressure (sec. 613(e)(2)).


-39-

The bill permits any portion of a qualified plan
distribution to be rolled over, unless the distribution is
part of a stream of periodic payments payable over a period
of 10 years or more, or over the life (or life expectancy) of
the plan participant or the joint lives (or joint life
expectancies) of the plan participant and his or her
beneficiary. As under present law, minimum required
distributions and distributions attributable to after-tax
employee contributions cannot be rolled over.

Effective Date

The provisions generally are effective for years
beginning after December 31, 1991. However, distributions
made before February 1, 1992, are taxed in accordance with
the law in effect prior to the amendments made by the
provisions.

2. Simplified method for taxing annuity distributions under
certain employer plans

Present Law

Distributions from qualified plans are generally
includible in income in the year received, except to the
extent the distribution consists of a return of the
employee's investment (i.e., basis). The portion of an
annuity payment that represents a nontaxable return of basis
is determined by applying an exclusion ratio equal to the
employee's total investment in the contract divided by the
total expected payments over the term of the annuity. The
IRS has issued a notice (Notice 88-118) containing an
elective, simplified method for determining basis recovery.

The beneficiary or estate of a deceased employee
generally may exclude from gross income up to $5,000 in
benefits paid by or on behalf of an employer by reason of the
employee's death. The $5,000 exclusion is generally added to
the employee's basis before determining the exclusion ratio.

Explanation of Provision

The provision repeals the exclusion from gross income of
up to $5,000 of employer-provided death benefits and replaces
the general rule for calculating the taxable portion of a
distribution with the simplified method currently provided in
IRS Notice 88-118.

Effective Date

The provision is effective for annuity starting dates on
or after February 1, 1992.


-7-

Finally, the remaining adjusted basis of $17,000 ($20,000
adjusted basis less $3,000 additional first-year
depreciation) is to be recovered in 1992 and subsequent years
pursuant to the depreciation rules of present law.

Effective Date

The provision applies to property acquired on or after
February 1, 1992.

3. Elimination of ACE Depreciation Adjustment (sec. 123 of
the bill and sec. 56 of the Code)

Present Law

Under present law, a corporation is subject to an
alternative minimum tax (AMT) which is payable, in addition
to all other tax liabilities, to the extent that it exceeds
the corporation's regular income tax liability. Alternative
minimum taxable income (AMTI) is the corporation's taxable
income increased by the corporation's 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. Depreciation on
personal property to which the modified ACRS system 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 life described
in Code section 168(g) (generally the ADR’class life of the

property).

For taxable years beginning after 1989, AMTI is
increased by an amount equal to 75 percent of the amount by
which adjusted current earnings (ACE) exceed AMTI (as
determined before this adjustment). The ACE adjustment
replaced the book-income adjustment applicable to tax years
1987 through 1989. 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 and again using the
straight-line method.

Explanation of Provision

Effective for property placed in service on or after
February 1, 1992, the provision would eliminate the
depreciation component of ACE for corporate AMT purposes.


-49-

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.

Payments or transfers of property that qualify as a
“contribution or gift" within the meaning of section 170(c)
are deductible by the donor as a charitable contribution. In
general, the phrase “contribution or gift" is construed as
requiring a voluntary transfer of property to a qualified
organization, made without consideration. A payment
(regardless of whether it is termed a "contribution") in
exchange for which the payor receives an economic benefit or
privilege (e.g., the right to admission to an event,
merchandise, or raffle tickets) is not deductible under
section 170, except to the extent that the taxpayer can
demonstrate that his or her payment exceeded the fair-market
value of the benefit or privilege received.

The Internal Revenue Code does not require a tax-exempt
organization that is entitled to receive tax-deductible
contributions to state explicitly, in its solicitations for
support from members or the general public, whether an amount
paid to it is deductible as a charitable contribution or
whether all or part of the payment constitutes consideration

7 (continued)

taxpayer identification number (TIN) of the donor, the amount
received on the disposition, and certain other information
about the disposed property (sec. 6050L).

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

Under current IRS practice, certain small items or token
benefits given to a contributor in connection with a
contribution are considered to have insubstantial value, such
that the full amount of the contribution is deductible. Rev.
Proc. 90-12, 1990-1 C.B. 471, provides that tokens or
benefits will be considered to have insubstantial value if:
(1) the payment occurs in the context of a fund-raising
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 2 percent of the
payment, or $50, whichever is less, or (b) the payment made
by the patron is $25 or more (adjusted for inflation after
1990) and the only benefits received in connection with the
payment are token items (e.g., key chains, mugs, posters, tee
shirts) which bear the organization's name or logo and which
(in the aggregate) are within the limits for “low cost
articles" under section 513(h)(2).



-47-

Effective Date

The repeal would be effective for contributions made in
calendar years ending on or after December 31, 1992.

2. Allocation and Apportionment (sec. 362 of the bill and
sec. 864 of the Code)

Present Law

Computation of the foreign tax credit limitation
requires the taxpayer to distinguish between taxable income
from U.S. sources and taxable income from foreign sources.
The greater the taxable income from foreign sources, the
higher the limitation. Depending on other factors, a higher
foreign tax credit limitation can result in lower U.S. tax
liability.

In order to compute taxable income from foreign sources,
it is necessary to allocate and apportion U.S. income tax
deductions between gross income from U.S. sources, on the one
hand, and gross income from foreign sources, on the other.
Deductions which are not definitely related to any gross
income are apportioned ratably; that is, they are apportioned
to foreign source gross income in the same proportion that
foreign source gross income bears to worldwide gross income.
Furthermore, deductions of a member of an affiliated group,
which deductions are not directly allocable or apportioned to
any specific income producing activity, are allocated and
apportioned as if all members of the affiliated group were a
single corporation (that is, a so-called ."one-taxpayer rule"
applies to such deductions) (Code sec. 864(e)(6)).

Current Treasury regulations provide that deductions
which generally are considered as not definitely related to
any gross income, and which therefore are ratably apportioned
on the basis of gross income, include the deduction for
charitable contributions. Further, in Notice 89-91, the
Tréasury Department announced that the deduction for
charitable contributions allowed by section 170 generally
would be subject tg allocation and apportionment under the
one-taxpayer rule.

4 reas. Reg. sec. 1.861-8(e)(9) (iv).

5 1989-2 C.B. 408, 409. Accord, Proposed Treas. Reg. sec.
1.862-8(e)(12)(v), INTL-116-90, 1991-1 C.B. 949.



-53-

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.

Explanation of Provision

The bill conforms the financial accounting and Federal
income tax treatment of securities held as inventory by
requiring the securities to be included in inventory at
market value for Federal income tax purposes.

Effective Date

The. bill applies to taxable years ending on or after
December 31, 1992. Any increase in inventory required by
this.change in method of accounting is included in gross
income ratably over 10 taxable years.

3. Disallowance of Interest Deductions on Corporate Owned
Life Insurance (sec. 373 of the bill and sec. 264 of the
Code) :

Present Law

The undistributed investment income (“inside buildup")
earned on premiums credited under a life insurance contract
generally is not included in the income of the owner of the
contract. In addition, the death benefit paid under a life
insurance contract is not included in the income of the
beneficiary of the contract, so that neither the owner of the
contract nor the beneficiary of the contract is ever taxed on
the inside buildup if the proceeds of the contract are paid
to the beneficiary by reason of the death of the insured.

Interest paid or incurred on indebtedness that is
incurred or continued to purchase or carry tax-exempt
obligations is not allowed as a deduction for Federal income
tax purposes. In contrast, interest paid or incurred on
indebtedness with respect to life insurance contracts that
cover the life of an employee of a taxpayer generally is
deductible by the taxpayer to the extent that the amount of
the indebtedness does not exceed $50,000 per insured
employee.



-57-

In the case of amounts received as an annuity under the
contract, a pro rata portion of each payment is excludable
from gross income as a return of the taxpayer's investment in
the contract, and the remainder is subject to tax as ordinary
income. The excludable portion is determined on the basis of
an exclusion ratio, the numerator of which is the taxpayer's
investment in the contract and the denominator of which is
the expected return under the contract. Thus, the contract
holder is not subject to tax on the amount of investment
earnings that continue to be earned under the contract during
the payout phase except in accordance with the exclusion
ratio as amounts are paid out.

Explanation of Provision

The bill retains the present-law treatment of annuities
(i.e., the deferral of tax on inside buildup during the
accumulation phase and the pro rata exclusion of basis) only
for annuities with substantial life contingencies. For other
annuities, investment income is taxed as earned. The
distinction between annuities is based on whether there
exists a substantial risk of loss of investment if the
annuitant were to die prematurely. A contract generally is
to be considered an annuity contract for Federal income tax
purposes only if payments are guaranteed (1) for a period of
time that does not exceed one-third of the annuitant's
remaining life expectancy on the annuity starting date, and
(2) for an amount that does not exceed one-third of the
annuity's cash value on the annuity starting date (or date of
death, if earlier). The bill does not apply to pension
annuities and annuities that are part of structured
settlements. a

Effective Date

The bill applies to annuity contracts entered into on or
after the date of enactment.

7.° Expansion of 45-Day Interest-Free Period (sec. 377 of the
bill and sec. 6611 of the Code)

Present Law

No interest is paid by the Government on a refund
arising from an 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 (Code sec. 661ll(e)).

There is no 45-day processing rule for refunds of taxes
other than income taxes (i.e., employment, excise, and estate
and gift taxes), for refunds arising from amended returns, or
for claims for refunds.



-45-
9. Elimination of special vesting rules for multiemployer

Plans

Present Law

Qualified plans generally must conform to a 5-year cliff
vesting schedule or a 3-to-7 year graduated vesting schedule.
Multiemployer plans are permitted to have a l0-year cliff
vesting schedule.

Explanation of Provision

The provision repeals the special vesting rule for
multiemployer plans. Multiemployer plans are required to
comply with the vesting schedules applicable to other
qualified plans.

Effective Date

The provision is effective for plan years beginning on
or after the earlier of (1) the later of January 1, 1993, or
the date on which the last of the collective bargaining
agreements pursuant to which the plan is maintained
terminates, or (2) January 1, 1995, with respect to
participants with an hour of service after the effective
date.



-17-

2. Flexible Individual Retirement Accounts (sec. 212 of the
bill; secs. 4975, 6693 and 408 of the Code; and new sec. 292
of the Code)

Present Law

Under present law, contributions to savings by an
individual generally are not deductible when made and
earnings on amounts saved generally are included in the
income of the individual. An exception to these general rules
exists with respect to individual retirement arrangements
(IRAs) and certain other types of tax-favored retirement
savings plans. The maximum annual deductible contribution
that may be made to an IRA generally is the lesser of $2,000
or 100 percent of an individual's compensation. In addition,
a married taxpayer who files a joint return with his or her
spouse can make an additional contribution of up to $250 to
an IRA established for the benefit of the spouse, if the
spouse has no compensation or elects to be treated as having
no compensation. The $2,000 deduction limit is phased out
over certain levels of adjusted gross income (AGI) in the
case of taxpayers who are active participants in an
employer-sponsored retirement plan. An individual may make
nondeductible IRA contributions up to the $2,000 limit to the
extent the individual does not make deductible IRA
contributions.

A single taxpayer is permitted to deduct the maximum
permitted contribution for a year if the individual is not an
active participant in an employer-sponsored retirement plan
for the year or the individual has AGI of less than $25,000.
A married taxpayer filing a joint return ‘is permitted to
deduct the maximum permitted IRA contribution for a year if
neither spouse is an active participant in an
employer-sponsored plan or the couple has combined AGI of
less than $40,000.

7: If a single taxpayer or either spouse (in the case of a
married taxpayer) is an active participant in an
employer-sponsored retirement plan, the IRA maximum deduction
is phased out over certain AGI levels. For single taxpayers,
the maximum IRA deduction is phased out between $25,000 and
$35,000 of AGI. For married taxpayers, the maximum deduction
is phased out between $40,000 and $50,000 of AGI. In the case
of a married taxpayer filing a separate return, the deduction
is phased out between $0 and $10,000 of AGI.

Deductible IRA contributions and earnings thereon
generally are includible in income when withdrawn from the
IRA. Similarly, earnings on nondeductible contributions
generally are includible in income when withdrawn. In
addition, a 10-percent additional income tax generally is
imposed on the taxable portion of withdrawals made prior to
attainment of age 59-1/2, death, or disability unless the



-35-

Subtitle C--Excise Tax Provisions

1. Repeal of Luxury Excise Tax on Boats and Aircraft (sec.
341 of the bill and secs. 4002-4004 of the Code)

Present Law

Present law imposes a 10-percent excise tax on the
portion of the retail price of boats and yachts that exceeds
$100,000, and on that portion of the retail price of
airplanes that exceeds $250,000.

Boats and yachts that are used exclusively (other than a
de minimis amount) in a trade or business (except for
entertainment or recreation purposes, including the trade or
business of providing entertainment or recreation) are exempt
from this tax. In addition, boats and yachts that are used
exclusively in the trade or business of commercial fishing or
of transporting persons or property for compensation or hire
are exempt from this tax. The tax on airplanes provides
‘exceptions for aircraft 80 percent of the use of which is in
a trade or business, and certain other uses.

In addition, present law imposes a 10-percent excise on
the portion of the retail price of the following items that
exceeds the thresholds specified: automobiles above $30,000;
jewelry above $10,000; and furs above $10,000.

Explanation of Provision

The provision would repeal the excise tax imposed on
boats, yachts, and airplanes.

Effective Date

The repeal would be effective for sales on or after
February 1, 1992.

2. Repeal of Exemption for the Use of Diesel Fuel in
Pleasure Boats (sec. 342 of the bill and secs. 4041, 4092,
and 9503 of the Code)

Present Law

Federal excise taxes generally are imposed on gasoline
(14 cents per gallon) and special motor fuels (14 cents per
gallon) used in highway transportation and by motorboats. A
Federal excise tax also is imposed on diesel fuel (20 cents
per gallon) used in highway transportation. Diesel fuel used
in trains is taxed at 2.5 cents per gallon.


Definition of highly compensated
employee (SEC. 358)... se eeeeeeeee

Elimination of special vesting
rules for multiemployer plans

(sec.

cL) Pee ee er)

Subtitle E--Other Provisions......ssseeeeee

Part I--Provisions Relating to
Charitable Contributions...........06-

Part

1.

2.

3,

The alternative minimum
tax (S@C. B61)... ccc e ew eceee

Allocation and apportion-
ment (SEC. 362)... .seceeesaeee

Information reporting of
large donations (sec. 363)...

II--Other Provisions......eeeeeee

1.

Extend Medicare hospital
insurance (HI) coverage

to all State and local
employees (sec. 371)....+-..-

2. Conform tax accounting to
financial accounting for
securities dealers

3.

4.

5.

6.

(sec.

B72) cececencacvceaceces

Disallowance of interest
deductions on corporate
owned life insurance

(sec.

B73) cccecenrenccsnceeee

Clarification of treatment
of certain FSLIC assist-
ance (S@C. 374)...cceeecceeee

Equalizing tax treatment of
large credit unions and
thrifts (sec. 375).........2.

Treatment of annuities with-
out life contingencies

(sec.

376) ececccccceececeees

(iv)

44

45
46

46

46

47

48
52

52

52

53

54

56

56


-28-

3. Extension of Low-Income Housing Credit (sec. 313 of the
bill and sec. 42 of the Code)

Present Law

A tax credit is allowed in annual installments over 10
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
cost of low-income housing units. For housing receiving
other Federal subsidies (e.g., tax-exempt bond financing) and
for the acquisition cost of existing housing that is
substantially rehabilitated (e.g., costs other than
rehabilitation expenditures), the credit has a present value
of 30 percent of qualified costs. Generally, the part of the
building for which the credit is claimed must be rented to
qualified low-income tenants at restricted rents for 15 years
after the building is placed in service. In addition, a
subsequent additional 15-year period of low-income use
generally is required. :

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. The maximum rent that may be charged a
family in a unit on which a credit is claimed depends 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).

Each State receives an annual low-income housing credit
volume ceiling of $1.25 per resident. To qualify for the
credit, a building owner generally must .receive a 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 low-income housing credit is scheduled to expire
after June 30, 1992.

Explanation of Provision

The bill extends the low-income housing credit for 18
months, through December 31, 1993.



-14-

qualified retirement plans), a child, grandchild, or lineal
ascendant of the taxpayer is treated as a dependent of the
taxpayer in determining whether medical expenses are
deductible.

Effective Date

The provisions are effective for withdrawals on or after
February 1, 1992.


-20-

Subtitle B -- Other Provisions

1. Casualty Loss on Sale of Home; Basis Adjustment (sec. 221
of the bill and secs. 165 and 1016 of the Code)

Present Law

Capital gains and losses

In general, individuals with capital losses may offset
such losses against capital gains; any remaining capital
losses may be deducted against ordinary income, up to $3,000
each year. Net capital losses in excess of the $3,000 limit
may be carried forward indefinitely.

Under present law, a loss on the sale of a principal
residence cannot offset capital gain and is not deductible
against ordinary income.

Rollover of gain on sale of principal residence

No gain is. recognized on the sale of a principal
residence if a. new residence at least equal in cost to the
sales price of the old residence is purchased and used by the
taxpayer as his or her principal residence within a specified
period of time (sec. 1034). The basis of the new residence
is reduced by the amount of any gain not recognized on the
sale of the old residence by reason of section 1034.

Casualty losses

If an individual sustains a casualty or theft loss not
connected with a trade or business or a transaction entered
into for profit, such loss generally is deductible against
ordinary income. Each loss is subject to a $100 floor and
the annual amount of net losses is deductible to the extent
that it exceeds 10 percent of the individual's adjusted gross
income. A taxpayer can deduct casualty or theft losses only
if the taxpayer itemizes deductions.

Explanation of Provision

The provision would allow homeowners who sell a
principal residence at a loss to deduct the loss as a
casualty loss, subject to the existing limitations on the
deductibility of casualty losses. To the extent the loss is
not deductible, a homeowner who purchases a new residence
within the rollover period would be permitted to add the
nondeductible amount to the tax basis of the new principal
residence. Thus, the basis attributable to the nondeductible
loss could be carried forward to offset future gain on the
sale of the new residence.


-16-

the taxpayer's spouse or child. The student would have to be
a high school graduate or over age 18 and would have to be
pursuing a course of study leading to a degree or certificate
or relating to present or future full-time employment. The
expenses would have to be paid or incurred reasonably
contemporaneously with the time the loan proceeds are
received. Tuition or related expenses would not be eligible
if a third party reimbursed the taxpayer or the taxpayer's
spouse or child for the expenses.

The provision would coordinate the deduction for
qualified educational interest with the deduction for home
equity indebtedness interest. If a taxpayer with qualified
educational indebtedness also has a home equity loan, the
amount of the home equity loan the taxpayer could otherwise
treat as home equity indebtedness for any period would be
reduced by any amount treated as qualified educational
indebtedness for that period.

Thus, if the taxpayer has a home equity loan, the amount
of home equity loans eligible for interest deductions would
be reduced by the amount of qualified educational
indebtedness. This offset would apply after the application
of the present law limits on home equity indebtedness to the
lesser of $100,000 or the amount of the taxpayer's equity in
the residence. For example, if the taxpayer had an existing
home equity loan of $120,000 in 1993 and incurred qualified
educational indebtedness of $10,000 in 1993, the taxpayer
could only treat $90,000 of the home equity loan as home
equity indebtedness in 1993 ($100,000 limit less $10,000
qualified educational indebtedness). The.taxpayer could
elect for any taxable year to forego the deduction for
educational indebtedness interest and deduct interest on the
home equity loan subject to the same restrictions as under
present law.

Lenders receiving interest on qualified educational
indebtedness would be required to file annual information
returns with the IRS.

Effective Date
The deduction would be allowed for interest paid on or

after July 1, 1992, and would be available for interest on
existing loans as well as loans incurred after enactment.


~29-

4. Extension of Targeted Jobs Tax Credit (sec. 314 of the
bill and sec. 51 of the Code)

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. An employer's deduction for wages is reduced by the
amount of credit claimed.

The credit is scheduled to expire for individuals who
begin work for an employer after June 30, 1992.

Authorization of appropriations

Present law authorizes 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 program.

Explanation of Provision

The provision would extend the targeted jobs tax credit
for 18 months, through December 31, 1993.

5. Extension of Solar and Geothermal Investment Credit (sec.
315 of the bill and sec. 48 of the Code)

Present Law

Under present law, nonrefundable business energy tax
credits are allowed for 10 percent of the cost of qualified
solar and geothermal energy property (Code sec. 48(a)). Solar
energy property that qualifies for the credit includes any
equipment that uses solar energy to generate electricity, to
heat or cool (or provide hot water for use in) a structure,
or to provide solar process heat. Qualifying geothermal
property includes equipment that produces, distributes, or
uses energy derived from a geothermal deposit, but, in the
case of electricity generated by geothermal power, only up to
(but not including) the electrical transmission stage.



-ll-

pursuant to any equity participation feature (including an
equity kicker) does not exceed 25 percent of the stated
principal amount of the seller-provided loan and must be paid
no later than the earlier of the repayment of the stated
principal amount or disposition of the property. Standards
would be provided for determining a commercialiy reasonable
interest rate for this purpose.

Relax 514(c)(9)(B)} restrictions for investments through
partnerships

The restrictions in section 514(c){9)(B) generally would
not apply to an investment made by a qualified trust or
educational institution in (i) certain "large" partnerships
and (ii) certain other partnerships.

A "large" partnership is a partnership having at least
250 partners that satisfies the following four tests: (1)
investment units in the partnership are marketed primarily to
individuals expected to be taxable at the highest marginal
rate; (2) a significant percentage (at least 50 percent) of
each class of interests is owned by such taxable individuals;
(3) the partners that are qualified trusts or educational
institutions participate on substantially the same terms as
taxable individuals owning interests of the same class; and
(4) a principal purpose of the partnership allocations is not
tax avoidance.

In the case of any partnership (other than a "large"
partnership) in which taxable partners own a significant (at
least 25 percent) interest, the restrictions contained in
514(c)(9)(B) would not apply to an investment made by a
qualified trust or educational institution if the partnership
satisfies the allocation rules (in section 514(c)(9)(E))
presently applicable to debt-financed investments in real
estate through partnerships.

Repeal special UBIT rule for publicly-traded partnerships

The rule that automatically subjects investments in
publicly traded partnerships to UBIT would be repealed.
Thus, investments in. publicly-trade partnerships would be
treated the same as investments in other partnerships for
purposes of the UBIT rules (in general, the UBIT character of
income of the partnership is flowed through to the partners)
(sec. 512(c)).

Effective date

The proposal would generally be effective for
debt-financed acquisitions of real estate on or after
February 1, 1992, and for partnership interests acquired on
or after February 1, 1992.


-55-

nonperforming or troubled at the time of the assisted
transaction. Many of these covered assets are also subject
to yield maintenance guarantees, under which the FSLIC
guarantees 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 at market or book value. In addition, many of the
assistance agreements permit the FPSLIC 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.

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 PSLIC-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
FPSLIC transactions concludes 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 enagy clarifying legislation
disallowing these deductions.

Explanation of Provision

Under the provision, Federal financial assistance with
respect to (1) any loss would be taken. into account as
compensation for purposes of section 165 of the Code and (2)
any debt would be taken into account in determining the
worthlessness of that debt.

Effective Date

The provision 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.

12 Department of the Treasury, Report on Tax Issues Relating
to the 1988/89 Federal Savings and Loan Insurance Corporation
Assisted Transactions, March, 1991 at p. 16.



Subtitle B--Provisions Relating to Passive Losses and
Depreciation

1. Passive Loss Relief for Real Estate Developers (sec. 121
of the bill and sec. 469 of the Code)

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.
Deductions that are suspended under this rule are carried
forward and treated as deductions from passive activities in
the next year. The suspended losses from a passive activity
are allowed in full when a taxpayer disposes of the entire
interest in the passive activity to an unrelated person.

Passive activities are defined to include trade or
business activities in which the taxpayer does’ not materially
participate. Material participation requires a taxpayer to
be involved in the operations of the activity on a regular,
continuous, and substantial basis.

Rental activities are also included in the definition of
passive activities (regardless of the level of the taxpayer's
participation). In general, rental activities are treated as
separate from other business activities. “A special rule
permits the deduction of up to $25,000 of losses from certain
rental real estate activities (even though they are
considered passive), if the taxpayer actively participates in
them. This $25,000 amount is allowed for taxpayers with
adjusted gross incomes of $100,000 or less, and is phased out
for. taxpayers with adjusted gross incomes between $100,000
and $150,000. The President's budget proposal states that
active participation is a lesser standard of involvement than
material participation and generally requires that the
taxpayer participate in making management. decisions or
arrange for others to provide services such as repairs ina
significant and bona fide sense. A taxpayer is generally
deemed not to satisfy the active participation standard with
respect to property he holds through a limited partnership
interest.

Explanation of Provision

Under the proposal, a taxpayer who materially
participates in a real estate development activity during the
taxable year may treat the rental of certain real property
("Qualified Property") as a non-rental activity that is part


-26-

Deductions for qualified research expenditures allowed
to a taxpayer under section 174 are reduced by an amount
equal to 100 percent of the taxpayer's research credit
determined for that year.

Explanation of Provision

The provision would extend permanently the 20-percent
research tax credit for qualified research expenditures and
university basic research expenditures.

2. Allocation of Research and Experimental Expenditures
(sec. 312 of the bill and sec. 864 of the Code)

Present Law

Computation of the foreign tax credit requires the
taxpayer to distinguish between taxable income from U.S.
sources and taxable income from foreign sources, and thus to
allocate and apportion deductions among items of U.S.-source
and foreign-source gross income. Treasury regulations
prescribe detailed methods for allocating and apportioning
research and experimental (R&E) expenses.

The R&E allocation regulation was suspended in part by a
succession of statutes, effective for taxable years beginning
after August 13, 1981, and on or before August 1, 1987, for
each taxpayer's first taxable year beginning after August l,
1987, and for each taxpayer's first three taxable years
beginning after August 1, 1989, and on or before August 1,
1992. In taxable years beginning after August 13, 1981 and
on or before August 1, 1986, all U.S.-incurred R&E expenses
were allocated to U.S.-source income. In taxable years
beginning after August 1, 1986 and on or before August 1,
1987, 50 percent of such expenses (other than amounts
incurred to meet certain legal requirements, and thus
allocable to one geographic source) were allocated to U.S.-
source income, with the remainder allocated and apportioned
either on the basis of sales or gross income.

Expenses incurred during a taxpayer’ s first taxable year
beginning after August 1, 1987 were given. bifurcated
treatment. Generally, for one third of the year's R&E
expenses (other than amounts incurred to meet certain legal
requirements, and thus allocable to one geographical source),
64 percent of U.S.-incurred R&E expenses was allocated to
U.S.-source income, 64 percent of foreign-incurred R&E
expenses was allocated to foreign-source income, and the
remainder of R&E expenses was allocated and apportioned
either on the basis of sales or gross income, but subject to
the condition that if income-based apportionment was used,
the amount apportioned to foreign-source income could be no
less than 30 percent of the amount that would have been


-23-

4. Adoption Expenses (sec. 224 of the bill; sec. 62 of
the Code; and new sec. 220 of the Code)

Present Law

The Tax Reform Act of 1986 ("1986 Act") repealed the
deduction for adoption expenses associated with special needs
children, effective for taxable years beginning on or after
January 1, 1987. Under prior law, a deduction of up to $1,500
of expenses associated with the adoption of special needs
children was allowed. The 1986 Act provided, as a substitute
for the deduction, a new outlay program under the existing
Adoption Assistance Program to reimburse expenses associated
with the adoption process of these children. The Title IV-E
Adoption Assistance outlay program provides assistance for
adoption expenses for these special needs children receiving
Federally assisted adoption assistance payments as well as
special needs children in private and State-only programs.

One component of the Adoption Assistance Program
requires States to reimburse certain costs incurred for
special needs children. The Federal Government shares 50
percent of these costs up.to a maximum Federal share of
$1,000 per child. Reimbursable expenses include those
associated directly with the adoption process such as legal
costs, social service review, and transportation costs.

Explanation of Provision

The provision would permit a deduction for certain
incurred expenses associated with the adoption of special
needs children up to a maximum of $3,000 per child. The
deduction for qualified adoption expenses would be allowed
above-the-line in calculating adjusted gross income, and thus
would be directly available to non-itemizers. Eligible
expenses would be limited to those: (1) directly associated
with the adoption process and (2) that are of a type eligible
for. reimbursement under the Adoption Assistance Procram.
These include court costs, legal expenses, social service
review, and transportation costs. This deduction would be
allowed for eligible expenses regardless of the level of
reimbursement allowed under the Adoption Assistance Program.
Any reimbursement of expenses that were previously deducted
would be included in income in the year in which the
reimbursement occurred.

The provision also clarifies that all reimbursements are
includible in income to the recipient unless deductible under
this provision.

Effective Date

The provision would be effective for adoptions on or
after February 1, 1992.



INTRODUCTION

This document ,+ prepared by the staff of the Joint
Committee on Taxation, provides a description of the
Presidegt' s tax proposals included in the Fiscal Year 1993
Budget,“ and as included in H.R. 4210 (intgoduced by Mr.
Gephardt by request on February 11, 1992).

Part I of the document is a description of the tax
proposals which are divided into three titles:

Title I-- Economic Growth Acceleration Act of

1992;
Title II-- Tax Relief for Families Act of 1992; and
Title III--Long Term Growth Act of 1992.

Part II presents a table showing the Joint Committee on
Taxation staff estimates of the budget effect of the
President's tax proposals for fiscal years 1992-1997.

1 this document may be cited as follows: Description of the
President's Tax Proposals Included in the Fisca year 1993,
Budget and As s Introduced in H.R. 4210 (3CX-4-92), February

T —- 1992.

2 Budget of the United States Government for Fiscal Year
1993, Part Two. See also Department of the Treasury, General
Explanations of the President's Budget Proposals Affecting

Receipts, January 1992.

3° the provisions of H.R. 4210 are the tax provisions of H.R.
4150 as introduced by Mr. Michel on February 4, 1992, that
are exclusively within the jurisdiction of the Committee on
Ways and Means.

(vi)


Il.

7. Expansion of 45-day
interest-free period
(SOC. B77). ccc ccc cw cccesecee 57

8. Use of taxpayer information
by Department of Veterans
Affairs (sec. 378)........... 58

ESTIMATED BUDGET EFFECTS OF REVENUE PROVISIONS

IN THE PRESIDENT'S FISCAL YEAR 1993 BUDGET

WITHIN THE JURISDICTION OF THE COMMITTEE ON

WAYS AND MEANS ....cce sees ccc ceccnccscencssvenee 59

(v)


-12-

Subtitle D--Provisions Affecting Homebuyers

1. Credit for Pirst-Time Homebuyers (sec. 141 of the bill
and new sec. 23 of the Code)

Present Law

There is no tax credit for the purchase of a principal
residence under present law.

Explanation of Provision

Under the provision, individuals who purchase a first
home generally will receive an income tax credit equal to 10
percent of the purchase price of the home, up to a maximum
credit of $5,000. The provision applies to a principal
residence if the taxpayer acquires the residence on or after
February 1, 1992, and before January 1, 1993, or the taxpayer
enters into, on or after February 1, 1992, and before January
1, 1993, a binding contract to acquire the residence, and
acquires and occupies the residence before July 1, 1993.
One-half of the credit would be allowed on the taxpayer's tax
return in 1992.-and the other half on the tax return for 1993.
Only a single credit could be claimed per residence.

The credit is available to all first-time homebuyers,
regardless of income. First-time homebuyers are individuals
who did not have a present interest in a residence in the 3
years preceding the purchase of a home. | If an individual is
deferring tax on gain from the sale of a previous principal
residence and is permitted an extended rollover period, he or
she is not considered a first-time homebuyer until after the
end of the extended rollover period.

The first-time homebuyer credit is nonrefundable, and
thus would be available only to the extent the taxpayer had
income tax liability to offset. However, any unused portion
of the credit can be carried forward for up to 5 years and
applied against future income tax liability.

The credit would be recaptured if the residence on which
the credit was'claimed was sold or otherwise disposed of
within 3 years of the date the residence was purchased. The
recapture rule would not apply, however, to dispositions by
reason of the taxpayer's death or divorce. If the taxpayer
sold the residence within 3 years but purchased a new home
within the rollover period, the credit would be recaptured to
the extent the taxpayer would have claimed a smaller credit
on the new residence had it been purchased during the period
when the credit was available.


Effective Date

The provision would apply to dispositions (and
installment payments received) on or after February 1, 1992.
For the portion of 1992 to which the proposal would apply, a
45-percent exclusion would apply for all assets held more
than one year. For 1993, the exclusion would be 30 percent
for assets held more than one year but not more than two
years, and 45 percent for assets held more than two years.


-18-

distribution is in the form of substantially equal periodic
payments over the life (or life expectancy) of the IRA owner
or the lives (or life expectancies) of the IRA owner and his
or her beneficiary.

Explanation of Provision

Under the provision, certain individuals can make
nondeductible contributions to a flexible individual
retirement account (FIRA). If these contributions remain in
the account for 7 years or more, amounts withdrawn (including
both the contributions and earnings thereon) are excluded
from gross income.

The maximum annual amount that can be contributed by an
individual under the provision generally is limited to the
lesser of $2,500 or 100 percent of the individual's
compensation for the year. Married taxpayers filing a joint
return are treated as each earning one-half of the
compensation reported on the return. Thus, married taxpayers
who together have compensation of at least $5,000 can make a
contribution to a FIRA of up to $5,000. Dependents cannot
make contributions to the account.

Only individuals meeting certain AGI limitations can
make a contribution to a FIRA. Contributions are permitted
for single taxpayers with AGI of no more than $60,000, for
heads of households with AGI of no more than $100,000, and
for married taxpayers filing joint returns with AGI of no
more than $120,000. Amounts contributed to a FIRA do not
affect the amount that can otherwise be contributed to
employer-provided retirement plans (e.g.,:section 401(k)
plans) or to other tax-~-favored forms of saving (e.g., IRAs).

Special rules apply with respect to withdrawals of
earnings allocable to contributions not held in the account
for 7 years. If the amount withdrawn constitutes earnings
allocable to contributions held less than 3 years, the
earnings are includible in gross income and are subject to an
additional l0-percent tax. If the amount withdrawn
constitutes earnings allocable to amounts held at least 3
years but less than 7 years, the earnings are includible in
gross income, but the additional 10-percent tax does not

apply.

In addition to the annual limits for new contributions,
individuals otherwise eligible to contribute to a FIRA can be
able to transfer amounts in existing IRAs (other than IRAs
formed with amounts rolled over from qualified pension or
profit-sharing plans) to a FIRA from February 1 through
December 31, 1992. Amounts so transferred are includible in
income ratably over a 4-year period. The l0-percent tax on
early withdrawals does not apply.



DESCRIPTION OF THE PRESIDENT'S TAX PROPOSALS
INCLUDED IN THE FISCAL YEAR 1993 BUDGET
AND AS INTRODUCED IN H.R. 4210

Scheduled for Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS
on February 12, 1992

Prepared by the Staff
of the . :
JOINT COMMITTEE ON TAXATION
February 11, 1992
ICX-4-92


-41-

An employer may maintain a salary reduction SEP only if
at least 50 percent of the employer's employees elect to have
amounts contributed to the SEP.

Elective deferrals to a salary reduction SEP are subject
to special nondiscrimination standards. The amount deferred
as a percentage of each highly compensated employee's
compensation cannot exceed 125 percent of the average
deferral percentage for nonhighly compensated employees.

Explanation of Provision

The provision provides that an employer that (1) at any
time during the preceding year employed no more than 100
employees who were eligible (or who would have been eligible
if a plan had been maintained) to participate and (2)
maintains no other retirement plan, may establish a Small
Business Model Retirement Plan. The Small Business Model
Retirement Plan rules generally replace the present-law rules
for salary reduction SEPs.

Under a Small Business Model Retirement Plan, an
employer is required to contribute 1 percent of pay (not in
excess of $100,000) to an account with respect to each
eligible employee. In addition, employees can elect to
contribute up to $3,000 to their accounts, subject to the
overall limitations on contributions and benefits under
qualified retirement plans. The employer is required to make
matching contributions equal to the first 3 percent of
compensation that an employee elects to contribute plus 50
percent of the employee's elective contributions between 3
percent and 5 percent of compensation.

Effective Date

The provision generally is effective for years beginning
after December 31, 1991. However, the provision does not
apply to a SEP that was in effect on the date of enactment
and that maintained a salary reduction arrangement on such
date, unless the employer elects to have the proposal apply
for any year and all subsequent years.

5. Tax-exempt organizations eligible under section 401(k)
Present Law

Under present law, except with respect to plans
established before certain dates, State and local governments
and tax-exempt employers are generally prohibited from
maintaining qualified cash or deferred arrangements. Some of
these employers may be permitted under present law to
maintain similar arrangements, such as tax-sheltered annuity
programs or section 457 plans.



-s-

property generally are assigned applicable recovery periods
and depreciation methods. The recovery periods applicable to
most tangible personal property (generally tangible property
other than residential rental property and nonresidential
real property) range from 3 to 20 years. The depreciation
methods generally applicable to tangible personal property
are the 200-percent and 150-percent declining balance
methods, switching to the straight-line method for the
taxable year in which the depreciation deduction would be
maximized.

For purposes of the alternative minimum tax (AMT),
tangible personal property generally is depreciated using the
150-percent declining balance method over useful lives that
are typically longer than the applicable recovery periods for
regular tax purposes. In addition, for purposes of the
adjusted current earnings (ACE) component of the corporate
AMT, tangible personal property is depreciated using the
straight-line method over these longer useful lives.

Expensing election

In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to deduct up to
$10,000 of the cost of qualifying property placed in service
for the taxable year. In general, qualifying property is
defined as depreciable tangible personal property that is
purchased for use in the active conduct of a trade or
business. The $10,000 amount is reduced by the amount by
which the cost of qualifying property placed in service
during the taxable year exceeds $200,000. -In addition, the
amount eligible to be expensed for a taxable year may not
exceed the taxable income of the taxpayer for the year that
is derived from the active conduct of a trade or business
(determined without regard to this provision). Any amount
that is not allowed as a deduction because of the taxable
income limitation may be carried forward to succeeding
taxable years (subject to similar limitations).

Explanation of Provision

The bill allows an additional first-year depreciation
deduction equal to 15 percent of the adjusted basis of
certain qualified property that is placed in service before
July 1, 1993. The additional depreciation deduction is
allowed for both regular tax and AMT purposes for the taxable
year in which the property is placed in service. The basis
of the property and the depreciation allowances in the year
of purchase and later years are appropriately adjusted to
reflect the additional first-year depreciation deduction. A
taxpayer may elect to not claim the additional first-year
depreciation for qualified property.


of such taxpayer's real estate development activity. The
consequences of this treatment are: (1) income and loss for
the taxable year from Qualified Property will not be treated
as passive and (2) losses arising from Qualified Property in
a prior year that were suspended and carried forward under
the passive loss rules will be treated as losses from a
former passive activity and, as such, will be allowed to the
extent of the taxpayer's income from his real estate
development activity in the current year.

In order to be Qualified Property, rental real property
must meet the following criteria: (1) the rental real
property was constructed or substantially renovated in a real
estate development activity of the taxpayer at a time when
the taxpayer materially participated in the activity; (2) the
taxpayer has had an ownership interest (other than as a
limited partner) in the rental real property continuously
since it was developed; and (3) the taxpayer actively
participates in such rental real property during the current
taxable year.

For purposes of this rule, a taxpayer's real estate
development activity will be considered a single trade or
business activity which will consist of all activities in
which the taxpayer actively participates and which consist of
{1) construction, substantial renovation, or management
services provided with respect to real property, (2) sales or
lease-up services provided with respect to real property in
which the taxpayer has at least a 10% ownership interest, and
(3) the rental of Qualified Property. Material participation
and active participation are generally to have the same
meaning as under present law; however, active participation
does not require a 10 percent ownership interest.

Effective Date
The proposal is effective with respect to taxable years
ending on or after December 31, 1992.
2. Special Allowance for Equipment Acquired in 1992 (sec.
122 of the bill and secs. 56 and 168 of the Code)
Present Law

Depreciation deductions

A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in
a trade or business or for the production of income. The
amount of the depreciation deduction allowed with respect to
tangible property for a taxable year is determined under the
accelerated cost recovery system (ACRS) as modified by the
Tax Reform Act of 1986. Under ACRS, different types of


-54-

Explanation of Provision

The bill denies a deduction for interest paid or
incurred on indebtedness with respect to any life insurance
contract that is owned by a taxpayer and that covers the life
of any individual who is an officer or employee of, or is
financially interested in, any trade or business carried on
by the taxpayer.

Effective Date

The bill applies to interest incurred on or after February l,
1992.

4. Clarification of Treatment of Certain FSLIC Assistance
(sec. 374 of the bill and secs. 165, 166, 585, and 593 of
the Code)

Present Law

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. 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.

Before it was amended by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a
special tax rule exempted financial assistance received by a
thrift institution from the Federal Savings and Loan
Insurance Corporation (FSLIC) from the thrift's income and
prohibited a reduction in the tax basis of the thrift's
assets on account of the receipt of the assistance. Under
the Technical and Miscellaneous Revenue Act of 1988 (TAMRA),
thrift institutions generally were required to reduce certain
tax attributes by one-half the amount of financial assistance
received from the FSLIC pursuant to certain acquisitions
occurring after December 31, 1988. These special rules were
repealed by FIRREA.

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



-37-

Explanation of Provision

The bill extends the three-percent communications excise
tax to amounts paid for long-distance digital transmission of
data on private communications systems used primarily for
such transmissions.

The bill also repeals the exemption for coin-operated
telephone service.

Effective Date

Both provisions are effective after June 30, 1992.



-25-

TITLE III -- LONG TERM GROWTH ACT OF 1992
Subtitle A--Extension of Expiring Provisions

1. Credit for Research and Experimentation (sec. 311 of the
bill and secs. 41 and 28 of the Code)

Present Law

A 20-percent tax credit is allowed to the extent that a
taxpayer's qualified research expenditures for the current
year exceed its base amount for that year. The credit will
not apply to amounts paid or incurred 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.



-42-

Explanation of Provision

The provision allows all tax-exempt employers to
maintain qualified cash or deferred arrangements for their
employees. State and local governments continue to be
subject to present law.

Effective Date

The provision is effective for years beginning on or
after February 1, 1992.

6. Duties of sponsors of certain prototype plans
Present Law

The IRS master and prototype program is an
administrative program under which trade and professional
associations, banks, insurance companies, brokerage houses,
and other financial institutions can obtain IRS approval of
model retirement plan language and then make the preapproved
plans available for adoption by their customers, investors,
or association members. The IRS also maintains related
administrative programs that authorize advance approval of
model plans prepared by law firms and others.

Explanation of Provision

The provision permits the IRS to define the duties of
sponsors of master and prototype and other model plans.
Sponsors of such plans that did not comply. with the
prescribed duties could be precluded from: continuing to
sponsor model plans. The provision also permits the
Secretary of the Treasury to relax the rule prohibiting
cutbacks in accrued benefits when an employer replaces an
individually-designed plan with a model plan.

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

7. Simplification of nondiscrimination tests applicable
under sections 401(k) and 401(m)

Present Law

Under a qualified cash or deferred arrangement, an
employee may elect to have the employer make payments as
contributions to a plan on behalf of the employee or to the
employee directly in cash. The maximum annual amount of such
elective deferrals that can be made by an individual is
$8,728 for 1992.



-24-

5. Public Transit Fringe Benefit Exclusion (sec. 225 of the
bill and sec. 132 of the Code)

Present Law

Under Treasury regulations, monthly transit passes,
tokens, etc., provided by an employer are excluded from an
employee's income as a de minimis fringe benefit if the total
value of the transit pass does not exceed $21. Transit
passes valued at greater than $21 per month are fully
includible in income.

Explanation of Provision

The provision allows taxpayers to exclude up to $60 per
month of employer~provided mass transit passes, tokens, etc.
as a working condition fringe benefit. The $60 exclusion
applies regardless of whether the total value exceeds $60 per
month,

Effective Date

The provision is effective with respect to discounts and
reimbursements for transit expenses provided on or after
February 1, 1992.


I. EXPLANATION OF PROVISIONS
TITLE I--ECONOMIC GROWTH ACCELERATION ACT OF 1992

Subtitle A--Provisions Relating to Capital Gains
(secs. 111 and 112 of the bill; secs. 1222, 170, 56, 62,
163, 172, 221, 642, 643, 691, 871, 1402, 1250, 453, 48,
267, 291, 265, 1277, 1017, and 7701 of the Code; and new
sec. 1202 of the Code)

Present Law

Under present law, the net capital gain of an individual
is taxed at the same rates applicable to ordinary income,
subject to a maximum marginal rate of 28 percent.

Individuals with a net capital loss generally may deduct up
to $3,000 of the loss each year against ordinary income. Net
capital losses in excess of the $3,000 limit may be carried
forward indefinitely.

Explanation of Provision

The provisions would allow noncorporate taxpayers an
exclusion of a percentage of the gain realized upon the
disposition of qualified capital assets. Assets held more
than three years would qualify for a 45-percent exclusion;
assets held more than two years but not more than three years
would qualify for a 30-percent exclusion; and assets held
more than one year but not more than two years would qualify
for a 15-percent exclusion. For a taxpayer whose capital
gains would otherwise be subject to a 28-percent rate, this
would result in a regular tax rate of 15.4 percent for assets
held more than three years, 19.6 percent for assets held more
than two years but not more than three years, and 23.8
percent for assets held more than one year but not more than
two years.

Qualified capital assets generally would be capital
assets as defined under present law, except that collectibles
would be excluded. In addition, gain on the disposition of
depreciable real property would be taxed as ordinary income
to the extent of all previous depreciation allowances with
respect to the property.

The capital gains exclusion would be a preference for
purposes of the alternative minimum tax. The amount treated
as investment income for purposes of the investment interest
limitation would be reduced by the capital gains exclusion
attributable to investment assets.


-15-

TITLE II--TAX RELIEF FOR FAMILIES ACT OF 1992
Subtitle A--Provisions Relating to Education and Savings

1. Deduction for Interest on Certain Educational Loans (sec.
211 of the bill; sec. 163 of the Code; and new sec. 60500 of
the Code)

Present Law

The Tax Reform Act of 1986 repealed the deduction for
personal interest. Student loan interest is generally
treated as personal interest and thus is not allowable as an
itemized deduction from income.

Under present law, individuals generally are allowed an
itemized deduction for interest on qualified residence
indebtedness, which includes interest on a home equity loan
that is secured by a qualified residence. The interest ona
home equity loan is deductible only to the extent that the
aggregate amount of home equity indebtedness does not exceed
the lesser of $100,000 or the amount of the taxpayer's equity
in the residence. There are no restrictions on the use of
the proceeds of home equity loans. Thus, proceeds of a home
equity loan may be used to finance educational expenditures
and the interest on such loans may be claimed as an itemized
deduction if the above requirements are -met.

Explanation of Provision

The provision would allow an itemized deduction for
interest paid on or after July 1, 1992, on qualifying
educational loans for eligible educational expenses incurred
above the high school level, including post-secondary
vocational education and job-related courses. The deduction
would be available for interest on existing loans as well as
on loans incurred after the date of enactment.

To be a qualifying educational loan, a loan would have
to be made pursuant to a Federal or State guarantee or
insurance program, by a tax-exempt nonprofit organization, by
a financial institution under a program requiring payment to
an educational institution, or by an accredited educational
or vocational institution. The loan would have to be a
conventional student loan with conventional repayment terms,
and the proceeds of the loan would have to be used to pay for
eligible educational expenses.

Eligible educational expenses would include tuition,
fees, books, supplies, and reasonable living expenses (if the
student lived away from home while attending the educational
institution). The student would have to be the taxpayer or



-52-

Part II--Other Provisions

1. Extend Medicare Hospital Insurance (HI) Coverage to All
State and Local Employees (sec. 371 of the bill; sec. 3121
of the Code; and sec. 210 of the Social Security Act)

Present Law

Under present law, State and local government employees
hired before April 1, 1986, are not covered under Medicare
unless a voluntary agreement is in effect. Although the
hospital insurance payroll tax does not apply to such
employees, they may receive Medicare benefits, for example,
through their spouse. Medicare coverage (and the hospital
insurance payroll tax) is mandatory for Federal employees.

For wages paid in 1992 to Medicare-covered employees,
the total hospital insurance tax rate is 2.9 percent of the
first $130,200 of wages (Code secs. 3101, 3111, and 3121).
One-half of this tax is imposed on the employee and one-half
on the employer. The wage base is indexed for inflation.

Explanation of Provision

The provision would extend Medicare coverage on a
mandatory basis to all employees of State and local
governments not otherwise covered under present law, without
regard to their dates of hire. These employees and their
employers would become liable for the hospital insurance
portion of the FICA tax, and the employees would earn credit
toward Medicare eligibility based on their. covered earnings.

Effective Date
This provision would be effective on July 1, 1992.

2... Conform Tax Accounting to Financial Accounting for
Securities Dealers (sec. 372 of the bill; sec. 471
and new sec. 475 of the Code)

Present 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.

If 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



#92-4 022

PRELIMINARY
. 11-Feb-92
Ir. -HLR. 4210 -
ESTIMATED BUDGET EFFECTS OF REVENUE PROVISIONS
IN THE PRESIDENTS FISCAL YEAR 1993 BUDGET
WITHIN THE JURISDICTION OF THE COMMITTEE ON WAYS AND MEANS
Fiscal Years 1992-1997
[Billions of Dollars}
Provision 1992 1993 1994 1995 1996 1997 1992-97
A. Income Tax Provisions

1. Capital gains tax rate reduction for individuals (1)...... 0.8 3.7 3.4 5.7 5.6 5.2 15.4
2. Increase personal exemption for certain dependent children. ~ 3.4 -5.0 -5.0 $1 5.3 -23.8
3. Establish flexible individual retirement accounts (FIRAS)....... seese - 20 0.8 0s 0.8 1.9 0.6

4. Waive penalty for withdrawals from IRAs for first-time homebuyers,
-0.3 0.7 0.7 -0.6 0.5 -0.3 3.0
0.1 0.3 0.4 0.4 -0.4 0.4 -2.0
0.3 27 25 05 0.1 (2) 61
(2) 0.4 04 0.4 0.4 04 “24
0s 0s 0.9 05 0.2 02 0.5
(2) (2) (2) 04 0.1 0.1 0.2
(6) 0.1 02 03 os 08 19
(2) (2) (2) (2) (2) (2) (2)
1. 6.1 1.6 36 1.0 08 06 17
2. 0.2 0.3 0.3 -0.3 0.2 0.1 -1.4
3. Modify passive loes rule for active real estate developers. 0.1 -0.4 0.4 ~0.4 -0.5 -0.5 -24
4. Modify UBIT rules for certain tax-exempt investors (6) (2) (2) (2) (2) (2) (2) 0.2
5. Establish enterprise zones (7)...... - 0.1 0.4 0.8 -1.0 -1.0 33
6. Conform book and tax accounting for securities invento! O41 04 05 05 05 05 25
7. Prohibit double dipping by thrifts recelving Federal financial assistance. 02 02 O41 O41 01 0.1 05
8. Equalize tax treatment of large credit unions and thiitts, 01 0.3 0.4 04 0.4 04 2.0
9. Disallow interest deductions on corporate-owned Mie Insurance (COL!) 01 03 04 06 07 08 28

Cc. Charitable Contribution Provisions

1. Allocation and apportionment of charitable contribution deduction. ~ 0.1 0.2 0.2 0.2 0.2 -0.9
2. Charitable appreciated property (AM7)...... (2) (2) 01 0.1 0.1 0.1 -0.3
3. Charitable information reporting by nonprofits. (5) O41 0.1 01 0.1 01 04

- 66 -


-32-

Expiration

Authority to issue QMBs and to elect to trade in private
activity bond volume authority to issue MCCs is scheduled to
expire after June 30, 1992.

Explanation of Provision

The bill extends authority to issue QMBs and to elect to
trade in bond volume authority to issue MCCs for 18 months,
through December 31, 1993.

8. Expenses for Drugs for Rare Conditions (sec. 318 of the
bill and sec. 28 of the Code)

Present Law

A 50-percent nonrefundable tax credit is allowed for a
taxpayer's qualified clinical testing expenses paid or
incurred in the testing of certain drugs for rare diseases or
conditions, generally referred to as "orphan drugs."
Qualified testing expenses are costs incurred to test an
orphan drug after the drug has been approved for human
testing by the Food and Drug Administration (FDA) but before
the drug has been approved for sale by the FDA. Present law
defines a rare disease or condition as one that (1) affects
less than 200,000 persons in the United States or (2) affects
more than 200,000 persons, but for which there is no
reasonable expectation that businesses could recoup the costs
of developing a drug for it from U.S. sales of the drug.
These rare diseases and conditions include. Huntington's
disease, myoclonus, ALS (Lou Gehrig's disease), Tourette's
syndrome, and Duchenne's dystrophy (a form of muscular
dystrophy).

The orphan drug tax credit is scheduled to expire after
June 30, 1992.

Explanation of Provision

The provision would extend permanently the orphan drug
tax credit.


-33-

Subtitle B--Provisions Relating to Enterprise Zones (secs.
321-330 of the bill; secs. 1016, 56, and 62 of the Code;
and new secs. 7880 and 1391-1394 of the Code)

Present Law

Targeted geographic areas

The Internal Revenue Code does not contain general rules
that target geographic areas for special tax treatment.
Within certain Code sections, however, certain areas are
provided special tax treatment for limited purposes. For
example, the provisions relating to qualified mortgage bonds
target certain economically distressed areas for the purpose
of promoting housing development within such areas.

Tax credits for employers and employees

An employer's or employee's tax liability does not vary
under present law based on the location of the employment.
The targeted jobs tax credit however, provides a tax credit
for a portion of the wages ‘paid to certain groups of
employees. In addition, certain low-income workers with
minor children are eligible for a refundable earned income
tax credit (EITC) of up to 17.6 percent (18.4 percent for
taxpayers with 2 or more qualifying children) of the first
$7,520 of earned income for 1992. The BITC is phased out for
taxpayers with earned income (or adjusted gross income, if
higher) above $11,840, and is not available to a taxpayer
with adjusted gross income over $22,370. ©

Deduction for purchase of stock

In general, amounts paid to purchase corporate stock are
not currently deductible, but instead are treated as the cost
basis of such stock. Certain taxpayers are allowed a
deduction under present law for contributions to an
individual retirement account (IRA), and such contributions
may be used to purchase corporate stock. Generally, all or a
portion of the amounts withdrawn from an IRA are includible
in income when withdrawn.

Capital gains

Under present law, the net gain from the sale or
exchange of capital assets of an individual is taxed at the
same rates applicable to ordinary income, subject to a
maximum rate of 28 percent. Between 1988 and 1990, net
capital gain was taxed at the same rates applicable to
ordinary income. Before 1987, the net gain from the sale or
exchange of a capital asset was taxable at a reduced rate.
Noncorporate taxpayers could reduce net long-term capital


-48-

Explanation of Provision

For purposes of computing the foreign tax credit and
making related computations, the provision would allocate all
deductions for charitable contributions to U.S. source
income.

Effective Date

The provision would be effective for contributions made
in calendar years ending on or after December 31, 1992.

3. Information Reporting of Large Donations (sec. 363 of the
bill and new sec. 6050P of the Code)

Present Law

With certain limitations, taxpayers who itemize
deductions generally are allowed a deduction for the
fair-market value of property donated to charity (sec. 170).
An individual taxpayer 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. In
addition, if the amount of the claimed deduction for all
noncash contributions exceeds $500, then, on a separate form
(Form 8283) attached to the Form 1040, taxpayers must
separately identify noncash charitable contributions of
property. On the Form 8283, the donor must provide certain
specified information, including a description of the
property and the date it was acquired, and.the method used to
determine its fair-market value. 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 organization js required
if it subsequently disposes of donated property.

6 In the case of donated art for which a deduction of
$20,000 or more is claimed, a complete copy of the signed
appraisal must be attached to the Form 8283.

7 T£, within two years after a charity receives donated

property (other than certain publicly traded securities) for

which a deduction exceeding $5,000 was claimed by the donor,

the charity sells or otherwise disposes of such property,

then the charity must file an information return with the IRS

(and furnish a copy to the donor) showing the name and
(Footnote continued)


-21-

Effective Date

The provision would be effective for sales of principal
residences on or after February 1, 1992. In addition,
homeowners who sustained a loss on the sale of a principal
residence on or after January 1, 1991, would be permitted to
add the entire loss to the basis of a new principal residence
purchased within the rollover period.

2. Pamily Tax Allowance (sec. 222 of the bill and sec. 151
of the Code)

Present Law

Taxpayers are allowed to subtract from adjusted gross
income a personal exemption for the taxpayer (and spouse, in
the case of a joint return) and each dependent of the
taxpayer. The level of the personal exemption was set at
$2,000 for taxable years beginning in 1989 and has been
indexed for inflation in subsequent years. For taxable years
beginning in 1992, the personal exemption equals $2,300.

Under present law, the deduction for the personal
exemptions claimed by a taxpayer is phased out: for taxpayers
with adjusted gross income (AGI) above a threshold amount.
For each $2,500 (or fraction thereof) of AGI above the
threshold, the deduction for personal exemptions is reduced
by 2 percentage points. The thresholds were set for 1991 and
are indexed for inflation. For 1992, the threshold is
$157,900 for married individuals filing joint returns,
$131,550 for individuals filing as heads of household, and
$105,250 for individuals filing single returns. This
phaseout provision is effective for taxable years beginning
after December 31, 1990, and before January 1, 1996.

Explanation of Provision

,. The provision would increase the personal exemption for
dependent children who are under age 19 at the end of the
taxable year by $500 per child. This amount would be indexed
for inflation. The provision would be effective beginning
October 1, 1992. For taxable years beginning in 1992, the
amount of the personal exemption increase would be prorated.

Effective Date

The provision would be effective beginning October 1,
1992.



-5l-

Effective Date

The provision would apply to contributions made on
after July 1, 1992.

or



Page 2

Provision 1992 1993 1994 1995 1996 1997 1992-97
D.

-0.1 -0.6 02 - = ~ -0.9
2. “0.2 -0.8 1.4 1.6 1.8 2.4 78
3. Extend fow-income housing tax credit (through 12/31/93)... (2) 0.1 0.2 03 -0.3 -0.4 42
4. Extend targeted jobs tax credit (through 12/31/93)... (2) 0.1 0.2 0.1 (2) (2) 0.5
5. Extend business energy tax credits (through 12/31/93). (2) (2) (2) (2) (2) (2) 0.1
6. es (2) (2) (2) (2) (2) (2) (2)
7. 0.1 0.2 0.3 cd ~ - 0.6
8 (2) (2) (2) (2) (2) (2) (2)
9. (2) 0.4 0.1 01 0.1 01 -0.5
10. - - - - - - _

E. Compliance Provision
1. Extend 45-day processing rule to alll roturns (8)..cscsessssssssssssssssscescessesessesee (5) 0.2 02 0.2 03 03 1.2

F. Other Tax Provisions
1. Repeal luxury excise tax on airplanes and boats (9)... (2) (2) (2) (2) (2) (2) 0.2
2. Repeal diesel tue! exemption for boats (9)......... (5) (5) (5) (5) (5) (5) 0.2
3. Expand telephone tax (digital); coin-operated telephones. (5) (5) (5) (5) O41 0.1 02
4. Extend Medicare (HI) coverage to State and local employees 0.4 17 17 17 16 1.6 87
G. Withholding Table Changes.. - - ~ - ” ~ ~
GRAND TOTALS. 5A -26 00 17 -123 128 $3.7

Joint Committee on Taxation

NOTES: Detalle may not add to totals due to rounding. .
Proposais have been estimated without accounting for possible interaction.

NA Not available.

(1) Assumed effective February 1, 1992.

(2) Loss of $50 million or less.

(3) Excludes revenue loss from Social Security Trust Fund of $0.1 billion over the period.

(4) Estimate assumes the adoption of appropriate anti-abuse rules.

(5) Gain of $50 miliion or less.

(6) This estimate is based on the following assumptions: [1] capital gains are taxed as ordinary income; [2] “commercially reasonable" implies the market interest rate;

[3] in the case of partnerships, the “fractions rule” remains in effect; and [4] the seller and the buyer are not related parties.

”m Based on information provided by the Department of Housing & Urban Development regarding probable size and economic characteristics of zones to be designated.
(8) These estimates of negative outlays include amended income tax retums and current-year excise, git, estate, and employment returns.

(9) Net of income tax offsets.
(10) Estimate for this provision provided by the Congressional Budget Office.

- 09 -


Subtitle C--Excise Tax Provisions..........

1.

2.

Repeal of luxury excise tax on
boats and aircraft (sec. 341)....

Repeal of exemption for the use
of diesel fuel in pleasure

boats

(SOC. 342)... cree eweeeeeee

Additional services subject to
communications excise tax; repeal
of exemption for certain coin-
operated telephone services

(secs.

343 and 344)....cceeeeeaee

Subtitle D--Provisions Related to
Retirement Savings and Pension
Distributions. ...cceeceececccerccescceceree

1.

2.

Taxability of beneficiary of
qualified plan (sec. 351)........

Simplified method for taxing
annuity distributions under
certain employer plans

(sec.

B52) cece cere ec ee eeeeene

Requirement that qualified plans
include optional trustee-to-
trustee transfers of eligible
rollover distributions

(sec.

CLK Se ea

Salary reduction arrangements of
simplified employee pensions

(sec.

7 6

Tax-exempt organizations
eligible under section 401(k)

(sec.

B55) ccc ecceceeccecceeceeees

Duties of sponsors of certain
prototype plans (sec. 356).......

Simplification of nondiscrim-
ination tests applicable under
sections 401(k) and 401(m)

(sec.

cL) eee

(iii)

35

35

36

38

38

38

39

40

40

41

42

42


-40-

3. Requirement that qualified plans include optional
trustee-to-trustee transfers of eligible rollover
distributions

Present Law

Under present law, a qualified plan making a
distribution that is eligible for rollover treatment may, but
is not required to, offer the participant the option of
having the distribution transferred directly to an IRA or
another qualified plan.

Explanation of Provision

Under the provision, a qualified plan making a
distribution that is eligible for rollover is required to
offer the participant the option of having the distribution
transferred directly to an IRA, or to a qualified defined
contribution plan the terms of which permit the acceptance of
rollover distributions.

Effective Date

The provision is effective for plan years beginning on
or after February 1, 1992.

4. Salary reduction arrangements of simplified employee
pensions

Present Law

Under a simplified employee pension (SEP) contributions
are made to an individual retirement arrangement (IRA) on
behalf of each participant. The contribution limits
applicable to tax-qualified retirement plans generally apply
to SEPs. In general, the employer is required to make a
contribution for each employee who has attained age 21, has
performed service for the employer during at least 3 out of
the last 5 years, and received at least $374 (indexed) in
compensation in the year. Employer contributions to a SEP
are not includible in income until withdrawn from the SEP.

Under present law, employers (other than tax-exempt and
governmental employers) with 25 or fewer employees may
include a salary reduction arrangement in a SEP under which
employees may elect to have contributions made to the SEP or
to receive the contributions in cash. Amounts contributed to
a salary reduction SEP are not included in income until
distributed from the SEP. Elective deferrals under a SEP are
generally treated in the same manner as elective deferrals
under a qualified cash or deferred arrangements and, thus,
are subject to the $8,728 cap on elective deferrals.


-38-

Subtitle D--Provisions Related to Retirement Savings and
Pension Distributions (secs. 351-359 of the bill and secs.
402, 101, 55, 62, 72, 219, 292, 401, 403, 406, 407, 408, 414,
415, 457, 691, 871, 877, 1441, 3121, 3306, 3405, 4973, 4908A,
7701, 404, and 411 of the Code)

1. Taxability of beneficiary of qualified plan
Present Law

Distributions from tax-qualified pension plans are
generally includible in income in the year received.
Lump-sum distributions from qualified plans are eligible for
special 5-year forward income averaging. Under transition
rules in the Tax Reform Act of 1986 (1986 Act), other rules
apply with respect to an employee who attained age 50 before
January 1, 1986. Under these rules, an individual, trust, or
estate may elect (1) 5-year forward averaging (using
present-law tax rates), (2) 10-year forward averaging (using
the tax rates in effect before the 1986 Act), or (3)
long-term.capital gains treatment of the pre-1974 portion of
a lump-sum distribution.

A taxpayer is not required to include in gross income
amounts received in the form of a lump-sum distribution to
the extent that the amounts are attributable to net
unrealized appreciation in employer securities. Such
unrealized appreciation is includible in gross income when
the securities are sold or exchanged. This treatment also
applies to the net unrealized appreciation attributable to
employee contributions regardless of whether the distribution
is a lump-sum distribution.

A distribution from a qualified plan generally can be
rolled over tax free to another qualified plan or an IRA
within 60 days of the date of receipt of the distribution if
the distribution is a lump-sum distribution or is a
qualifying partial distribution.

Explanation of Provision

The bill repeals 5-year forward income averaging for
lump-sum distributions and phases out the 1986 Act transition
rules over a number of years. In 1992, the 1986 Act rules
apply to 100 percent of any lump-sum distribution. In 1993,
the rules apply to 70 percent of any lump-sum distribution.
In 1994, the rules apply to 35 percent of any lump-sum
distribution. In 1995, the rules apply to 20 percent of any
lump-sum distribution. In 1993, the rules apply to 10
percent of any lump-sum distribution.

The bill also repeals the special treatment of net
unrealized appreciation in employer securities.


Thus, in computing ACE, a corporation would use the same
depreciation methods and lives that it uses in computing AMTI
(generally, the 150-percent declining balance method for
tangible personal property).

Effective Date

The provision is effective for property placed in
service on or after February 1, 1992.


-50-

for property or a service furnished by the organization 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 this
requirement (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 990.9 tf an organization that is eligible to
receive tax-deductible contributions 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 $5,009 or more (in cash or other Property) during the
taxable year. 1

Explanation of Provision

The provision provides that organizations eligible to
receive tax-deductible contributions would generally be
required to file information returns with the IRS (and with
the donor) reporting charitable contributions received from
any individual in excess of $500 (in cash or Property) during
the calendar year. The organization would: determine whether
the amount received is potentially eligible for the
charitable contribution deduction, based on whether the
organization provided goods or services to the donor.
Organizations with annual gross receipts of less than $25,000
would be exempt from this reporting requirement. The
provision states that it is expected that the IRS would
revise Schedule A to the Form 1040 to require individuals who
itemize deductions to separately report contributions of more
than $500 (whether in cash or in kind) made in the calendar
year to a single organization.

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

10 see section 6033 and Rev. Proc. 83-23, 1983-1 C.B. 687.

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



-56-

S. Equalizing Tax Treatment of Large Credit Unions and
Thrifts (sec. 375 of the bill and secs. 501, 591, and 593 of
the Code)

Present Law

Federally chartered and State chartered credit unions
are exempt from Federal income tax regardless of whether
their income is retained or distributed. Federally chartered
credit unions are exempt pursuant to section 122 of the
Federal Credit Union Act; State chartered credit unions are
exempt pursuant to Code section 501(c)}(14)(A).

In general, thrift institutions (e.g., savings and loans
and mutual savings banks) are allowed a deduction in
computing taxable income for amounts paid or credited as
dividends or interest on withdrawable deposits or accounts
(sec. 591).

Explanation of Provision _

The provision would repeal the tax exemption of credit
unions that have assets with an adjusted basis of more than
$50 million in any taxable year ending on or after
December 31, 1992. Such credit unions would be subject to
tax under the same rules that apply to thrift institutions.

Effective Date

The repeal would be effective for taxable years ending
on or after December 31, 1992. wt

6. Treatment of Annuities Without Life Contingencies (sec.
376 of the bill and sec. 72 of the Code)

Present Law

The undistributed investment income ("inside buildup")
earned under an annuity contract generally is not included in
the income of an annuity contract owner who is a natural
person. Amounts distributed under an annuity contract prior
to the annuity starting date (i.e., during the accumulation
phase of a deferred annuity) generally are included in income
only to the extent allocable to income on the contract. The
portion of the distribution that constitutes income generally
is also subject to a 10-percent additional tax if the
distribution occurs before the holder reaches age 59-1/2.

The additional tax is not imposed if substantially equal
periodic payments are made over the life (or life expectancy)
of the holder or over the joint lives (or joint life
expectancies) of the holder and a beneficiary.



-10-

Under a separate UBIT provision, a tax-exempt
organization's 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 taxable unrelated business
income (sec. 512(c)(2)(B)).

Explanation of Provision

Modify leaseback and disqualified person restrictions

The leaseback and disqualified person restrictions would
be modified to permit a de minimis leaseback of debt-financed
real property to the seller (or a party related to the
seller) or to a disqualified person. The de minimis
exception would apply only if (1) no more than 10 percent of
the leasable floor space in a building is leased back to the
seller (or related party) or to the disqualified person and
(2) the lease is on commercially reasonable terms.

Modify seller-financing restriction.

The seller-financing restriction would be modified to
permit seller financing on terms that are commercially
reasonable. Standards would be provided for determining a
commercially reasonable interest rate for this purpose. The
present-law "participating loan" restriction generally would
remain in effect, so that a financing arrangement (such as an
equity kicker) based on revenue, income, ‘or profits would not
be considered a commercially reasonable term.

Relax the participating loan restriction for property
foreclosed on by financial institutions

_. In the case of certain sales of property foreclosed on
by. financial institutions, the prohibition on participating
loans would be relaxed as part of a further modification to
the proposal described above relating to seller-financing.
This special rule would apply only in a case where (1) the
qualified trust or educational institution acquires the
property from a financial institution (including an
institution in conservatorship or receivership) that acquired
the property by foreclosure; (2) the financial institution
treats any income from the sale of the property as ordinary
income and the stated principal amount of the seller
financing does not exceed the stated principal amount of the
financial institution's outstanding indebtedness (determined
without regard to accrued but unpaid interest) with respect
to the property at the time of foreclosure; (3) the terms of
the financing are commercially reasonable and are comparable
to those of sales of foreclosure property not involving
tax-exempt entities; and (4) the total amount payable


Subtitle B--Other Provisions.......e...e006

1.

2.

3.

4,

5.

Casualty loss on sale of home;
basis adjustment (sec. 221)......

Family tax allowance (sec. 222)..

Extend health insurance
deduction for self-employed
(SOC. 223). cece ccccccsccrnceceece

Adoption expenses (sec. 224).....

Public transit fringe benefit
exclusion (sec. 225)....seeeeeeee

TITLE III--LONG TERM GROWTH ACT OF 1992.......

SUBTITLE A--Extension of Expiring
PrOViSiONS. cccce cece cece acer eee erscseecene

i.

2.

Credit for research and .
experimentation (sec. 311).......

Allocation of research and

experimental

expenditures

(SEC. 312)... cree ccc r ase cceenves

Extension of
credit (sec.

Extension of
credit (sec.

Extension of

low-income housing
313)....4.

targeted jobs tax
B14) cece eee cee eneee

solar and geo-

thermal investment credit
(SOC. 315)... cece ewer ccc c cet vrecce

Qualified small-issue bonds
(SOC. 316) ccc cceccceecesercsecace

Qualified mortgage bonds and
mortgage credit certificates
(SOC. 317)... eee c wee e ween ence ene

Expenses for

drugs for rare

conditions (sec. 318)........66.

Subtitle B--Provisions Relating to

Enterprise Zones (secs.

321 - 330).....00.

(ii)

20

20

21

22

23

24
25

25

25

26

28

29

29

30

31

32

33


-31-

land; however, no more than $62,500 of the bond proceeds may
be used to finance used farm equipment.

Qualified small-issue bonds, like most other private
activity bonds, are subject annual State private activity
bond volume limitations.

Authority to issue qualified small-issue bonds
(including first-time farmer bonds) is scheduled to expire
after June 30, 1992.

Explanation of Provision

The bill extends authority to issue first-time farmer
bonds for 18 months, through December 31, 1993.

7. Qualified Mortgage Bonds (sec. 317 of the bill and secs.
143 and 25 of the Code)

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. Persons receiving QMB loans must
satisfy principal residence, 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
its purchase.

The volume of QMBs that a State may issue is limited by
an annual State private activity bond volume limit.

Mortgage credit certificates

Qualified governmental units may elect to exchange
private activity bond volume authority for authority to issue
mortgage credit certificates ("MCCs"). MCCs entitle home
buyers to nonrefundable income tax credits for a specified
percentage of the 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 MCC-recipient's principal
residence. MCCs are subject to the same targeting
requirements as QMBs. MCCs also are subject to recapture
rules like those applicable to QMBs.



-19-

Effective Date

The provision is effective for taxable years beginning
after December 31, 1991.



CONTENTS

INTRODUCTION... cc eee ee ccc e reece eee rerereeees

EXPLANATION OF PROVISIONS......ceccccccsveceeees

TITLE I~-ECONOMIC GROWTH ACCELERATION ACT

OF 1992

Subtitle A--Provisions Relating to Capital
Gains (secs. 111 and 112)

Subtitle B--Provisions Relating to Passive
Losses and Depreciation....ccccccceereveece

1.

2.

3.

Passive loss relief for real
estate developers (sec. 121).....

Special allowance for equipment
acquired in 1992 (sec. 122)......

Elimination of ACE depreciation
adjustment (Sec. 123)...+.eeeeeee

Subtitle C--Provisions Relating to Real
Estate Investments by Pension Funds

(secs.

131 and 132).........

Subtitle D--Provisions Affecting
HOMEDUYETS. cece reece ees c secre se sccceevanes

1.

2.

Credit for first-time home-
buyerS (SeC. 141)... .ceeeeeeaveees

Penalty-free withdrawals for
first home purchase and for
certain educational and medical

expenses (secs.

142 and 213).....

TITLE II--TAX RELIEF FOR FAMILIES ACT OF

af): Pe ed

Subtitle A--Provisions Relating to
Education and SavingS....-..csseceeccssesece

1.

Deduction for interest on
certain educational loans

(sec. 211).....

Flexible individual retirement

accounts (sec.

(i)

ZZ) cecveceeeceeee

12

12

13

15

15

15

17


-43-

Under a special nondiscrimination test applicable to
qualified cash or deferred arrangements, the actual deferral
percentage (ADP) for eligible highly compensated employees
for a plan year must be equal to or less than either (1) 125
percent of the ADP of all nonhighly compensated employees
eligible to defer under the arrangement, or (2) the lesser of
200 percent of the ADP of all eligible nonhighly compensated
employees or such ADP plus 2 percentage points (the
"alternative limitation"). The ADP for a group of employees
is the average of the ratios (calculated separately for each
employee in the group) of the contributions paid to the plan
on behalf of the employee to the employee's compensation. A
similar special nondiscrimination test (the ACP test) also
applies to employer matching contributions and after-tax
employee contributions. A multiple use test generally
prohibits use of the alternative limitation to pass both the
ADP and ACP test.

Explanation of Provision

Under the provision, the special nondiscrimination test
applicable to elective deferrals under a qualified cash or
deferred arrangement is modified in two ways.

First, the determination of the amount that a highly
compensated employee can defer under a qualified cash or
deferred arrangement is based on the ADP for nonhighly
compensated employees for the preceding plan year.

Second, the provision allows employers to elect to apply
the present-law nondiscrimination test or.a simplified ADP
test. Under the simplified ADP test, the’ maximum amount each
eligible highly compensated employee can defer is (1) 200
percent of the ADP for nonhighly compensated employees (if
such ADP is between zero and 3 percent) or (2) the ADP for
nonhighly compensated employees plus 3 percentage points (if
such ADP exceeds 3 percent). Corresponding changes are made
to-the nondiscrimination test applicable to employer matching
and after-tax employee contributions.

In addition, the prohibition against multiple use of the
alternative limitation is repealed.

Effective Date

The provision is effective for plan years beginning on
or after February 1, 1992.



-27-

apportioned to foreign-source income had the sales method
been used.

Generally, for the remainder of a taxpayer's first
taxable year beginning after August 1, 1987 (and for
subsequent taxable years), the rules set forth in regulation
section 1.861-8 were applicable with respect to the
allocation and apportionment of research and experimental
expenditures.

The statutory rules for allocating research expenditures
that applied to one-third of the research expenses incurred
in a taxpayer's first taxable year beginning after August 1,
1987, were extended, again on a temporary basis, in 1989, and
were codified in section 864(f) of the Internal Revenue Code.
As codified in 1989, these rules were effective only for the
first nine months of a taxpayer's first taxable year
beginning after August 1, 1989, and before August 2, 1990
(treating all applicable expenditures in that taxable year as
if they were incurred ratably over the year). For the
remainder of a taxpayer's first taxable year beginning after
August 1, 1989, and before August 2, 1990 (and for subsequent
taxable years), the rules set forth in regulation section
1.861-8 would have applied with respect to the: allocation and
apportionment of research and experimental expenditures.

The statutory allocation rules that were codified in
1989 were further extended in 1990 and 1991, so that the
rules of section 864(f) generally apply to the taxpayer's
first three taxable years beginning after August 1, 1989, and
on or before August 1, 1992. In the case. of the taxpayer's
first taxable year beginning after August*1, 1991, however,
the rules of section 864(f) apply only to research expenses
paid or incurred during the first six months of that year.

Explanation of Proposal

The bill temporarily extends, generally for 18 months,
the period for the application of Code section 864(£), which
provides statutory allocation rules that supersede the
Treasury's research and experimentation expense allocation
regulation for purposes of determining taxable income from
U.S. and foreign. sources.

Effective Date

The provision extends the application of the Code
section 864(f£) so that it applies to research expenses paid
or incurred during the taxpayer's first four taxable years
beginning after August 1, 1989, and on or before August 1,
1993. Thus, under the provision, Code section 864(f) applies
to the remainder of the year covered by the 1991 Act as well
as to the subsequent year.



-36-

The revenues from these tax rates, less 2.5 cents per
galion, are deposited in the Highway Trust Fund ("HTF")
through September 30, 1999; (the revenues from the taxes on
motorboat and small engine gasoline fuels deposited in the
HTF are transferred to the Aquatic Resources Trust Fund).
The revenues from the remaining 2.5 cents per gallon are
retained in the General Fund through September 30, 1995,
after which the 2.5 cents-per-gallon portion of the taxes is
scheduled to expire.

A separate 0.l-cent-per-gallon tax applies to these
fuels to finance the Leaking Underground Storage Trust Fund
("LUST Fund"), generally through December 31, 1995.

No Federal excise taxes are imposed on diesel fuel used
by motorboats.

Explanation of Provision

The bill imposes the 20-cents-per-gallon diesel fuel
excise tax (and the 0.1-cent-per-gallon LUST Fund tax) on
diesel fuel used by pleasure motorboats. The revenues from
the 20.1-cents-per-gallon tax on diesel fuel used by these
boats will be retained in the General Fund. ‘

Effective Date
The provision is effective after June 30, 1992.

3. Additional Services Subject to Communications Excise Tax;
Repeal of Exemption for Certain Coin-Operated Telephone
Services (secs. 343 and 344 of the bill and secs. 4252 and
4253 of the Code)

Present Law

A three-percent excise tax is imposed on amounts paid
for local and toll (long-distance) telephone service and
teletypewriter exchange service. The tax is collected by the
provider of the service from the consumer (business and
personal service). The tax does not apply to amounts paid
for access to private communications systems, both local or
long distance.

Exemptions from the telephone excise tax are provided
for international organizations, the American Red Cross,
servicemen in combat zones, nonprofit hospitals and
educational organizations, State and local governments, and
certain communications services furnished to news services
for use in collection or dissemination of news (except local
telephone service to news services). Other exemptions include
amounts paid for installations charges, and certain calls
from coin-operated telephones.


-22-

3. Extend Health Insurance Deduction for Self-Employed (sec.
223 of the bill and sec. 162 of the Code)

Present Law

Under present law, the tax treatment of health insurance
expenses depends on whether or not the taxpayer is an
employee and whether or not the taxpayer is covered under a
health plan paid for by the employee's employer. An
employer's contribution to a plan providing accident or
health coverage is excludable from an employee's income. In
addition, businesses can generally deduct, as an employee
compensation expense, the full cost of any health insurance
coverage provided for their employees. The exclusion and
deduction are generally available in the case of owners of
the business who are also employees.

In the case of self-employed individuals (i.e., sole
proprietors or partners in a partnership) no equivalent
exclusion applies. However, present law provides a deduction
for 25 percent of the amount paid for health insurance for a
self-employed .individual and the individual's spouse and
dependents. The.-25-percent deduction is also available to
more than 2-percent shareholders of S ‘corporations.

Other individuals who purchase their own health
insurance can deduct their insurance premiums to the extent
that the premiums, when combined with other unreimbursed
medical expenses, exceed 7.5 percent of adjusted gross
income. .

The 25-percent deduction expires for, taxable years
beginning after June 30, 1992. In the case of years
beginning in 1992, only amounts paid before July 1, 1992, for
coverage before July 1, 1992, are taken into account in
determining the amount of the deduction.

Explanation of Provision

The provision extends the 25-percent deduction through
December 31, 1993.

Effective Date

The provision would be effective on the date of
enactment.


Property qualifies for the additional first-year
depreciation deduction if (1) the property is section 1245
property to which ACRS applies (other than property that is
required to be depreciated under the alternative depreciation
system of ACRS) and (2) the griginal use of the property
commences with the taxpayer. In addition, the property must
be acquired by the taxpayer (1) on or after February 1, 1992,
but only if no binding contract for the acquisition is in
effect before such date, or (2) pursuant to a binding
contract which was entered into on or after February 1, 1992,
and before January 1, 1993. Finally, property that is
manufactured, constructed, or produced by the taxpayer for
use by the taxpayer will qualify if the taxpayer begins
manufacturing, construction, or production of the property on
or after February 1, 1992, and before January 1, 1993 (and
all other requirements are met).

The limitations on the amount of depreciation deductions
allowed with respect to certain passenger automobiles and.
certain other listed property used for personal purposes
(sec. 280F of the Code) are adjusted to reflect the
additional first year depreciation deduction.

The following examples illustrate the operation of the
provision.

Example 1.--Assume that on July 1, 1992, a calendar year
taxpayer acquires and places in service qualified property
that costs $1 million. Under the provision, the taxpayer is
allowed an additional first-year depreciation deduction of
$150,000. The remaining $850,000 of adjusted basis is to be
recovered in 1992 and subsequent years pursuant to the
depreciation rules of present law.

Example 2.--Assume that on July 1, 1992, a calendar year
taxpayer acquires and places in service qualified property
that costs $30,000. In addition, assume that the property
qualifies for the expensing election under section 179 of
present law. Under the provision, the taxpayer is first
allowed a $10,000 deduction under section 179. The taxpayer
then is allowed an additional first-year depreciation
deduction of $3,000 based on $20,000 ($30,000 original cost
less the section 179 deduction of $10,000) of adjusted basis.

loa special rule applies in the case of certain leased
property. In the case of any property that is originally
placed in service by a person and that is sold and leased
back by such person (or is leased to such person) within
three months after the date that the property was placed in
service, the property is to be treated as originally placed
in service not earlier than the date that the property is
used under the leaseback (or lease).


-58-

Explanation of Provision

The provision would extend the 45-day processing rule to
all returns, as well as to amended returns and claims for
refunds.

Effective Date

This provision would be effective for returns filed on
or after July 1, 1992.

8. Use of Taxpayer Information by Department of Veterans
Affairs

Present Law

The Internal Revenue Code prohibits disclosure of tax
returns and return information of taxpayers, with exceptions
for authorized 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 IRS and SSA 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 disclosure provision is scheduled to expire
after September 30, 1992. The U.S. General Accounting Office
(GAO) is required to submit a detailed report on the effects
of this provision by January 1, 1992 (the report was issued
on December 23, 1991).

Explanation of Provision. _

The provision would permanently extend this authority to
disclose tax information.

Effective Date

The provision would be effective on the date of
enactment.



-44-

8. Definition of highly compensated employee
Present Law

Under present law, an employee is highly compensated if
(1) at any time during the preceding year, the employee (a)
was a S-percent owner, (b) earned more than $90,803, (c)
earned more than $60,535 and was in the top-paid 20 percent
of employees, or (d) was an officer and earned more than
$54,482; or (2) during the current year, the employee is (a)
a S-percent owner or (b) is one of the 100 employees paid the
greatest compensation for the year and (i) earns more than
$93,518, (ii) earns more than $62,345 and is in the top-paid
20 percent of employees, or (iii) is an officer and earns
more than $56,111. If no officer is treated as being highly
compensated under these rules, the highest paid officer is
treated as highly compensated. All dollar values are indexed
for inflation.

If an employee is a family member of either a 5-percent
owner or one of the top 10 most highly compensated employees,
the employee and the family member are treated as one highly
compensated employee. Similar family aggregation rules apply
under other provisions affecting qualified plans (e.g., the
$228,860 (indexed) limit on compensation that can be taken
into account under qualified plans).

Explanation of Provision

The provision amends the definition of a highly
compensated employee to include any employee who (1) at any
time during the preceding year was a 5-pefcent owner or
received compensation from the employer in excess of $50,000
(indexed; $60,535 in 1991); or (2) during the current year is
(i) a S-percent owner or (ii) in the top 100 employees by
compensation and receives compensation from the employer in
excess of $50,000 (indexed; $62,345 in 1992). If no employee
qualifies as highly compensated under this definition, then
the employee with the highest compensation is treated as a
highly compensated employee.

The provision also repeals the family aggregation rules.
Effective Date

The provision is effective for years beginning on or
after Pebruary 1, 1992.



-46-

Subtitle E--Other Provisions
Part I--Provisions Relating to Charitable Contributions

1. The Alternative Minimum Tax (Sec. 361 of the bill and
sec. 57 of the Code)

Present Law

In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair-market
value of property contributed to a charitable organization.?
In the case of a charitable contribution of tangible personal
property, however, a taxpayer's deduction for regular tax
purposes 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. 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. : .

Explanation of Provision

The provision would repeal for all property (real,
personal, and intangible) the alternative minimum tax (AMT)
provision which treats as a preference item the amount by
which the value of contributed capital gain property exceeds
the basis of the property.

3 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)).
Special rules also limit the amount of a charitable
contribution deduction to less than the contributed
property's fair-market value in cases of contributions of
inventory or other ordinary income property and short-term
capital gain property.


Subtitle C--Provisions Relating to Real Estate Investments
by Pension Funds (secs. 131 and 132 of the bill and
secs. 512 and 514 of the Code)

Present Law

A qualified pension trust or an organization that is
otherwise exempt from Federal income tax generally is taxed
on any income from a trade or business that is unrelated to
the organization's exempt purposes (the Unrelated Business
Income Tax or "UBIT") (sec. 511). Certain types of income,
including rents, royalties, dividends, and interest, are
excluded from the UBIT, except where such income is derived
from “debt-financed property." Income from debt-financed
property, the use of which is unrelated to the organization's
exempt purpose, generally is subject to the UBIT in
proportion to which the property is financed by debt (sec.
514(a)).

An exception to the rule requiring taxation of income
from debt-financed property is available to pension trusts,
educaticnal institutions, and certain other exempt
organizations (collectively referred to as "qualified
organizations") that make debt-financed investments in real
property (sec. 514(c)(9)). Under this exception, income from
investments in real property is not treated as income from
debt-financed property.

The debt-financed exception, however.,-is available for
investments in debt-financed property only if the following
restrictions of section 514(c)(9)(B) are satisfied: (1) the
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 derived from the property (the
“participating loan" restriction); (3) the property is not
leased by the qualified organization to the seller or toa
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 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 must be satisfied by the
partnership (the "partnership" restrictions) (sec.
5§14(c)(9)(B)(i) through (vi)).