-ll-

transaction but could include other assets as well. Many of
these covered assets are also subject to yield maintenance
guarantees, under which the FSLIC guaranteed the acquirer a
minimum return or yield on the value of the assets. The
assistance agreements also generally grant the FSLIC the
right to purchase covered assets. In addition, many of the
assistance agreements permit the FSLIC to order assisted
institutions to write down the value of covered assets on
their books to fair market value in exchange for a payment in
the amount of the write-down.

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

Description of Proposal

General rule

Any FSLIC assistance with respect to any loss of
principal, capital, or similar amount upon the disposition of
an asset would be taken into account as compensation for such
loss for purposes of section 165 of the Code. Any FSLIC
assistance with respect to any debt would be taken into
account for purposes of determining whether such debt is
worthless (or the extent to which such debt is worthless) and
in determiping the amount of any addition to a reserve for
bad debts. For this purpose, FSLIC assistance means any
assistance or right to assistance with respect to a domestic
building and loan association (as defined in section

5 Department of the Treasury, Report on Tax Issues Relating
to the 1988/89 Federal Savings and Loan Insurance Corporation
Assisted Transactions, March, 1991 at pp. 16-17.

6 tt is expected that, for purposes of the adjusted current
earnings adjustment of the corporate alternative minimum tax,
there will not be any net positive adjustment to the extent
that FPSLIC assistance is taken into account as compensation
for a loss or in determining worthlessness and there is,
therefore, no deductible loss or bad debt charge-off.



-2-

without regard to the length of the deferral period of the
taxable year elected if the annual financial statements (if
any) of the entity used for credit purposes or provided to
the partners, shareholders, or other proprietors of the
entity cover the same period as the taxable year elected.

The proposal would increase the amount of the required
payment that must be made by a partnership or S corporation
that elects a taxable year other than the required taxable
year (including any partnership or S corporation that has an
election in effect on the date of enactment of the pill).

In addition, the proposal would require an additional
required payment for any taxable year that a partnership or S$
corporation first makes a taxable year election or changes a
taxable year election to increase the deferral period.

The proposal would also increase the minimum.
distribution requirement that must be satisfied by a personal
service corporation that elects a taxable year other than the
required taxable year (including a personal service
corporation that has an election in effect on the date of
enactment of the bill).

The proposal was included in H.R. 4210 as passed by the
House and Senate.

Effective Date

The proposal would apply to taxable years beginning
after December 31, 1991.

3° the required payment would be determined by using the
highest rate of tax in effect under section 1 of the Code
plus 2 percentage points.


or business.

A security would be defined as: {1) any share of stock
in a corporation; (2) any partnership or beneficial ownership
interest in a widely held or publicly traded partnership or
trust; (3) any note, bond, debenture, or other evidence of
indebtedness; (4) any interest rate, currency, or equity
notional principal contract; and (5) any evidence of an
interest in, or any derivative financial instrument in, a
security described in (1) through (4) above or any currency,
including any option, forward contract, short position, or
any similar financial instrument in such a security or
currency.

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

A hedge would be defined as any position that reduces
the dealer's risk of interest rate or price changes or
currency fluctuations. In addition, any
security that is reasonably expected to become a hedge within
60 days after the acquisition of the security would be
treated as a hedge.

Exceptions to the mark-to-market rules

Notwithstanding the definition of security, the
mark-to-market rules generally would not apply to: (1) any
security that is held for investment; (2) any evidence of
indebtedness that is acquired (including originated) by a
dealer in the ordinary course of a trade or business of the
dealer but only if the evidence of indebtedness is not held
for sale; (3) any security that is acquired, entered into, or
originated by a floor specialist (as defined in section
1236(d) of the Code) in connection with the specialist's
duties on the exchange; (4) any security which is a hedge
with respect to a security that is not subject to the
mark-to-market rules; and (5) any security which is a hedge
with respect to a position, right to income, or a liability
that is not a security in the hands of the taxpayer. Except
as otherwise provided in regulations to be promulgated by the
Treasury Department, the exceptions to the mark-to-market
rules for certain hedges would not apply to any security that
is held by a taxpayer in its capacity as a dealer in such
security.



-4-

eligible transferee plan. Payees could not elect to forego
withholding.

A similar proposal was included in H.R. 4210, except
that that provision does not change the withholding rules.

Effective Date

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



-3-

2. Rollover and Withholding on Nonperiodic Pension
Distributions

Present Law

Distributions from tax-qualified pension plans,
qualified annuity plans and tax-sheltered annuities generally
are includible in gross income in the year paid or
distributed under the rules relating to the taxation of
annuities. A total or partial distribution of the balance to
the credit of an employee under a qualified plan, a qualified
annuity plan, or a tax-sheltered annuity may, under certain
circumstances, be rolled over tax free to another plan, or
annuity or to an individual retirement arrangement (IRA). A
rollover of a partial distribution is permitted if (1) the
distribution equals at least 50 percent of the balance to the
credit of the employee, (2) the distribution is not one of a
series of periodic payments, (3) the distribution is made on
account of death, disability, or separation from service, and
(4) the employee elects rollover treatment. Minimum required
distributions and after-tax employee contributions may not be
rolled over.

Withholding on pension distributions is not required if
the payee elects not to have withholding apply. If no
election is made, tax is withheld from nonperiodic payments
at a 10-percent rate, unless the payments are part of a
qualified total distribution, in which case tables published
by the Internal Revenue Service are used to determine the
withholding rate. A qualified total distribution generally
is a payment within one year of the entire interest ina
plan.

Description of Proposal

Under the proposal, any portion of a distribution from a
qualified pension or annuity plan or a tax-sneltered annuity
(other than a minimum required distribution) could be roiled
over tax free to an IRA or another qualified plan or annuity,
unless the distribution is part of a series of substantially
equal payments made (1) over the life (or life expectancy) of
the participant or the joint lives (or joint life
expectancies) of the participant and his or her beneficiary,
or (2) over a specified period of 10 years of more.

In addition, a qualified plan or annuity or
tax-sheltered annuity would be required to permit
participants to elect to have any distribution that is
eligible for rollover treatment transferred directly to an
eligible transferee plan specified by the participant.

Under the proposal, withholding would be imposed at a
rate of 20 percent on any distribution that is eligible to be
rolled over but that is not transferred directly to an



-6-

4. Mark-to-Market Accounting Method for Dealers in
Securities

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 heid 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
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.

Description of Proposal

In general

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

Definitions

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



DESCRIPTION OF REVENUE PROVISIONS FOR H.R. 5260
(UNEMPLOYMENT COMPENSATION AMENDMENTS OF 1992)

Scheduled for a Markup
by the
SENATE COMMITTEE ON FINANCE

on June ll, 1992

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

June 10, 1992

JCX-21-92


by the House and Senate.
Effective Date

The proposal would apply to taxable years endina on or
after December 31, 1992. A taxpayer that is requirec to
change its method of accounting to comply with the
requirements of the proposal would be treated as having
initiated the change in method of accounting and as having
received the consent of the Treasury Department to make such
change.

The net amount of the section 481(a) adjustment would be
taken into account ratably over a 10-taxable year period
beginning with the first taxable year ending on or after
December 31, 1992, to the extent that such amount does not
exceed the net amount of the section 481(a) adjustment that
would have been determined had the change in method of
accounting occurred for the last taxable year beginning
before March 20, 1992.

The excess (if any) of (1) the net amount of the section
481(a) adjustment for the first taxable year ending on or
after December 31, 1992, over (2) the net amount of the
section 481({a) adjustment that would have been determined had
the change in method of accounting occurred for the last
taxable year beginning before March 20, 1992, would be taken
into account ratably over a 4-taxable year period beginning
with the first taxable year ending on or after December 31,
1992.

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

No addition to tax would apply to any underpayment of
estimated tax that is due before the date of enactment of
this proposal to the extent that the underpayment is
attributable to the enactment of this proposal.



-8-

The axceptions to the mark-to-market rules would nact
apply unless before the close of the day on which the
security is acquired, originated, or entered into (or such
other time as the Treasury Department may specify in
regulations), the security is clearly identified in the
dealer's records as being described in one of the exceptions
listed in the preceding paragraph.

In addition to clearly identifying a security as
qualifying for one of the exceptions to the mark-to-market
rules listed above, a dealer would be required to continue to
hold the security in a capacity that qualifies the security
for one of the exceptions listed above. If at any time after
the close of the day on which the security was acquired,
originated, or entered into (or such other time as the
Treasury Department may specify in regulations), the security
is not held in a capacity that qualifies the security for one
of the exceptions listed above, then the mark-to-market rules
would apply to the security after the date that the security
no longer qualifies for one of the exceptions (i.e., only
gains and losses attributable to the period that the security
no longer qualifies for one of the exceptions would be taken
into account under the mark-to-market rules).

Improper identification

If (1) a dealer identifies a security as qualifying for
an exception to the mark-to-market rules but the security
does not qualify for that exception, or (2) a dealer fails to
identify a position that is not a security as a hedge of a
security but the position is a hedge of a security, then the
mark-to-market rules would apply to any such security or
position, except that loss would be recognized under the
mark-to-market rules prior to the disposition of the security
or position only to the extent of gain previously recognized
under the mark-to-market rules (and not previously taken into
account under this provision) with respect to the security or
position.

Other rules

The uniform cost capitalization rules of section 263A of
the Code and the rules of section 263(g) of the Code that
require the capitalization of certain interest and carrying
charges in the case of straddles would not apply to any
security to which the mark-to-market rules apply.

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

A similar proposal was included in H.R. 4210 as passed



-5-

3. Modify Estimated Tax Payment Rules for Large Corporations
Present Law

A corporation is subject to an addition to tax for any
underpayment of estimated tax. For taxable years beginning
in 1993, 1994, 1995, and 1996, a corporation does not have an
underpayment of estimated tax if it makes four equal timely
estimated tax payments that total at least 95 percent of the
tax liability shown on the return for the current taxable
year. In addition, a corporation may annualize its taxable
income and make estimated tax payments based on 95 percent of
the tax liability attributable to such annualized income.

For taxable years beginning in 1992, the 95-percent
requirement is a 93-percent requirement; the 95-percent
requirement becomes a 90-percent requirement for taxable
years beginning in 1997 and thereafter.

A corporation that is not a “large corporation"
generally may avoid the addition to tax if it makes four
timely estimated tax payments each equal to at least 25
percent of the tax liability shown on its return for the
preceding taxable year (the "100 percent of last year's
liability safe harbor"). A large corporation may use this
rule with respect to its estimated tax payment for the first
quarter of its current taxable year. A large corporation is
one that had taxable income of $1 million or more for any of
the three preceding taxable years.

Description of Proposal

For taxable years beginning after June 30, 1992, and
before 1997, a corporation would be required to base its
estimated tax payments on 96 percent (rather than 93 or 95
percent) of its current year tax liability, whether such
liability is determined on an actual or annualized basis.
For taxable years beginning after 1996, a corporation would
be required to base its estimated tax payments on 91 percent
(rather than 90 percent) of its current year tax liability.

The proposal would not change the present-law
availability of the 100 percent of last year's liability safe
harbor for large or small corporations.

A similar proposal was included in H.R. 4210 as passed
by the House and Senate.

Effective Date
The proposal would be effective for estimated tax

payments applicable to taxable years beginning after June 30,
1992.



-1-

DESCRIPTION OF REVENUE PROVISIONS FOR H.R. 5260

1. Taxable Year Election for Partnerships, S Corporations,
and Personal Service Corporations

Present Law

A partnership is generally required for Federal income
tax purposes to use the taxable year that is used by a
majority of its partners. An S corporation is generally
required for Federal income tax purposes to use the calendar
year as its taxable year. A personal service corporation
also is generally required for Federal inegme tax purposes to
use the calendar year as its taxable year.

A partnership, S corporation, or personal service
corporation, however, may elect to use a taxable year other
than the required taxable year. In the case of a
partnership, S corporation, or personal service corporation
that is adopting a taxable year or changing a taxable year,
the taxable year that may be elected generally may not result
in a deferral period of more than three months. For this
purpose, the deferral period generally is the number of
months between (1) the beginning of the taxable year of the
partnership, S corporation, or personal service corporation,
and (2) the close of the first required taxable year that
ends within such year.

A partnership or S corporation that elects a taxabie
year other than the required taxable year is required to make
a payment to the Internal Revenue Service (a "required
payment") that is designed to compensate the Federal
government for the deferral of tax that results from the use
of a taxable year other than the required taxable year. A
personal service corporation that elects a taxable year other
than the required taxable year is required to satisfy a
minimum distribution requirement that applies to certain
amounts paid by the personal service corporation to
employee-owners.

Description of Proposal

A partnership, S corporation, or personal service
corporation would be allowed to elect any taxable year

2 Por this purpose, a personal service corporation is
defined as a C corporation the principal activity of which is
the performance of services if (1) the services are
substantially performed by employee-owners, and (2) more than
10 percent of the stock of the corporation is owned by
employee-owners.



-12-

7701(a){19} cf the Code without regard to subparagraph (C)
thereof) under section 406(£) of the National Housing Act or
section 21A of the Federal_Home Loan Bank Act (or under any
similar provision of law).

Financial assistance to which the FIRREA amendments apply

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

No inference

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

apply.

The proposal was included in H.R. 4210 as passed by the
House and Senate.

Effective Date

In general

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

For this purpose,. financial assistance generally would
be considered to be credited when the taxpayer makes an
approved debit entry to a Special Reserve Account” required

7 FPSLIC assistance for purposes of the proposal does not
include "net worth assistance". "Net worth assistance" is
generally computed at the time of an acquisition, without
targeting loss coverage to ultimate dispositions or
write-downs with respect to particular assets.

8 under most assistance agreements, one or more Special
Reserve Accounts are established and maintained to account
for the amount of FSLIC assistance owed by the FSLIC to the
acquired entity. The assistance agreements generally-specify
the precise circumstances under which amounts with respect to
covered assets are debited to an account. Under the
assistance agreements, these debit entries generally are made
subject to prior FSLIC direction or approval. When amounts
(Footnote continued)


INTRODUCTION

This document,+ prepared by the staff of the Joint
Committee on Taxation, provides a description of
revenue-raising provisions for Senate Committee on Finance
markup of H.R. 5260 (Unemployment Compensation Amendments of
1992). The Finance Committee markup is scheduled for June

11, 1992.

H.R. 5260 was passed by the House of Representatives on
June 9, 1992,

1 this document may be cited as follows: Joint Committee on
Taxation, Description of Revenue Provisions for H.R. 5260
(Unemployment Compensation Amendments of 1992) (JCX-21-92),
June 10, 1992.

(iii)


CONTENTS

INTRODUCTION... cece eee eee eee e eee e cece eee etneeanee

DESCRIPTION OF REVENUE PROVISIONS
FOR H.R. S260... cee e eee c cece c etre nc cer eteteeesens

il. Taxable year election for
partnerships, S corporations,
and personal service corpora-
bob No) \- rary

2. Rollover and withholding on
nonperiodic pension distri-
DULLONS. . eee cece eee e eee r ere e neces

3. Modify estimated tax payment
rules for large corporations.......

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

5. Tax treatment of certain FSLIC
financial assistance. .....eeeeeeees

(ii)

10



-10-
5. Tax Treatment of Certain FSLIC Financial Assistance

Present Law and Background

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

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

Prior to the enactment of FIRREA, the FSLIC entered into
a number of assistance agreements in which it agreed to
provide loss protection to acquirers of troubled thrift
institutions by compensating them for the difference between
the book value and sales proceeds of “covered assets."
“Covered assets" typically are assets that were classified as
nonperforming or troubled at the time of the assisted

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


-13-

to be maintained under the assistance agreement to reflect
the asset disposition or write-down. An amount would also be
considered to be credited prior to March 4, 1991 if the asset
was sold, with prior FSLIC approval, before that date.

An amount would not be deemed to be credited for
purposes of the provision merely because the FSLIC has
approved a management or business plan or similar plan with
respect to an asset or group of assets, or has otherwise
generally approved a value with respect to an asset.

Application to certain net operating losses

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

8 (continued)

are so debited, the FSLIC generally becomes cbligated to pay
the debited balance in the account to the acquirer at such
times and subject to such offsets as are specified in the
assistance agreement.

9 For purposes of determining any alternative minimum tax
net operating loss carryover to periods ending on or after
March 4, 1991, it is expected that the principles described
in the foootnote above, regarding the adjusted current
earnings adjustment, will apply.