/l

6. Request for administrative adjustments (sec. 216 of
the bill)

The bill extends the time for filing a request for
administrative adjustment.

Effective date.--The bill is effective as if included in
the amendments made by section 402 of the Tax Equity and
Fiscal Responsibility Act of 1982.

7. Innocent spouse relief (sec. 217 of the bill)

The bill provides innocent spouse relief for TEFRA
proceedings.

Effective date.--The bill is effective as if included in
the amendments made by section 402 of the Tax Equity and
Fiscal Responsibility Act of 1982.

8. Partnership level penalties (sec. 218 of the bill)
The bill-determines penalties at the partnership level.

Effective date.--The bill is effective for partnership
taxable years ending after December 31, 1991.

9. Tax Court jurisdiction (sec. 219 of the bill)
The bill clarifies jurisdiction of the Tax Court.

Effective date.--The bill is effective for partnership
taxable years ending after the date of enactment.

10. Premature petitions (sec. 220 of the bill)

The bill modifies the treatment of premature petitions
filed by certain partners.

Effective date.--The bill is effective with respect to
petitions filed after the date of enactment.

11. TEFRA bond requirements (sec. 221 of the bill)

The bill clarifies the bond requirement for appeals from
TEFRA proceedings.

Effective date.--The bill is effective as if included in
the amendments made by section 402 of the Tax Equity and
Fiscal Responsibility Act of 1982.

12. Interest suspension (sec. 222 of the bill)

The bill suspends interest where there is a delay in
computational adjustment resulting from TEFRA settlements.



32

B. Accounting Provisions

1. Modifications to the look-back method for long-term
contracts (sec. 411 of the bill)

Description of Bill

Election not to apply the look-back method for de minimis
amounts

The bill provides that a taxpayer may elect not to apply
the look-back method with respect to a long-term contract if
for each prior contract year, the cumulative taxable income
(or loss) under the contract as determined using estimated
contract price and costs is within 10 percent of the
cumulative taxable income (or loss) as determined using
actual contract price and costs.

Thus, under the election, upon completion of a long-term
contract, a taxpayer would be required to apply the first
step of the -look-back. method (the reallocation of gross
income using actual, rather than estimated, contract price
and costs), but would not be required to apply the additional
steps of the look-back method if the application of the first
step resulted in de minimis changes to the amount of income
previously taken into account for each prior contract year.

The election applies to-all long-term contracts
completed during the taxable year for which the election is
made and to all long-term contracts completed during
subsequent taxable years, unless the election is revoked with
the consent of the Secretary of the Treasury.

Election not to reapply the look-back method

The bill provides that a taxpayer may elect not to
reapply the look-back method with respect to a contract if,
as of the close of any taxable year after the year the
contract is completed, the cumulative taxable income (or
loss) under the contract is within 10 percent of the
cumulative look-back income (or loss) as of the close of the
most recent year in which the look-back method was applied
(or would have applied but for the other de minimis exception
described above). In applying this rule, amounts that are
taken into account after completion of the contract are not
discounted.

Thus, an electing taxpayer need not apply or reapply the
look-back method if amounts that are taken into account after
the completion of the contract are de minimis.


tax credit. The election applies to all subsequent taxable
years, and may be revoked only with the permission of the
Secretary of the Treasury.

Effective date.--The provision applies to taxable years
beginning after December 31, 1991.

Proposed Modification

None.

Effective date.--Taxable years beginning after
December 31, 1992.

6. Authority to simplify regulations relating to certain
transfers of property involving foreign corporations

Description of Bill
No provision.

Proposed Modification

In inbound cases where nonrecognition treatment must be
based on the status of a foreign corporation as a
corporation, permit the Secretary to require certain income
inclusions without regard to a gain limitation, in cases
where anti-abuse rules would otherwise apply. Permit better
coordination between inbound and outbound reorganization
provisions.

Effective date.--Transfers after December 31, 1993.
7. Simplification of tax on transfers to avoid income tax
Description of Bill
No provision.

Proposed Modification

Outbound transfers now subject to section 1491 would
continue to be subject to tax, but the tax would be an income
tax, rather than an excise tax, and recognized gain would
result in a step-up of basis of the property transferred.

Effective date.--Transfers after date of enactment.

28


37

Proposed Modification

Financial institutions that invest in tax-exempt bonds
are preciuded from deducting a pro rata portion of their
interest expense determined by reference to the percentage of
their assets that consist of such bonds. This pro rata
disallowance rule does not apply to governmental bonds issued
by entities that issue no more than $10 million of such bonds
during a calendar year (the “small issuer exception"). Bond
issues in excess of $10 million do not qualify for the
small-issuer exception even if the proceeds are re-loaned to
issuers borrowing less than $10 million in a calendar year.

The proposed modification would increase the $10 million
annual issuance limit to $25 million, and would provide that
pooled financing bonds would qualify for the exception if all
borrowers from the pool would qualify if borrowing directly
from a financial institution, and if certain other
requirements were satisfied.

Effective date.--The proposed modification would apply
to bonds issued after December 31, 1992.

8. Recharacterize qualified 501(c)(3) bonds and repeal

$150 million per-organization limit on certain of these
bonds

Description of Bill
No provision.

Proposed Modification

Tax-exempt bonds for use by private, nonprofit
organizations ("section 501(c)(3) organizations") are
characterized as private activity bonds, and except for
qualified hospital bonds, are subject to a per-organization
limit of $150 million of bonds that may be outstanding at any
time.

The proposed modification would reinstate the pre-1986
characterization of these bonds which treated them as more
similar to governmental (rather than private activity) bonds,
and would repeal the $150 million limit and made other
technical and conforming amendments.

Effective date.--The proposed modification would apply
to bonds issued after December 31, 1992.



fhe bill also requires that the Secretary submit a
report to the Congress on the actions undertaken pursuant to
this provision, together with any recommendations he may deem
advisable.

Effective date.--The report is due no later than one
year after the date of enactment.

10. Simplification of tax treatment of rural letter
carriers' vehicle expenses (sec. 110 of the bill)

Description of Bill

The bill repeals the special reimbursement rate
availabie to rural letter carriers who are employees of the
U.S. Postal Service of 150 percent of the standard mileage
rate. In its place, the bill provides that the rate of
reimbursement provided by the Postal Service to rural letter
carriers is considered to be equivalent to their expenses.
The rate of reimbursement that is considered to be equivalent
to their expenses is the current rate of reimbursement
contained in the 1991 :collective bargaining agreement, which
may in:the future be increased by no.more than the rate of
inflation.

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

11. Exemption from luxury excise tax for certain equipment
installed on. passenger vehicles for use by disabled
individuals (sec. 111 of the bill)

Description of Bill

The bill provides that the luxury excise tax does not
apply to a part or accessory installed on a passenger vehicle
which compensates for the effect of the disability and
enables or assists an individual with a disability to operate
the vehicle, or to enter or exit the vehicie.

Effective date.--The provision is effective for
purchases after December 31, 1990.



9. Treatment of amounts received by telephone cooperatives
Description of Bill
No provision.

Proposed Modification

Mutual or cooperative telephone companies ("telephone
cooperatives") are exempt from Federal income tax if 85
percent or more of their income consists of amounts collected
from members for the sole purpose of meeting losses and
expenses (sec. 501(c)(12)(A)). In applying this 85-percent
test, certain income received by a telephone cooperative is
disregarded, including income received from a nonmember
telephone company for the performance of communication
services which involve members of the telephone cooperative,
certain pole rental income, and income from the sale of
display listings in a telephone directory sold to members of
the telephone cooperative (sec. 501(c)(12)(B)).

The proposal would amend section 501(c)(12) to provide
that a 50 percent of the income received by a telephone
cooperative from a nonmember telephone company (e.g., fees
received for originating a long-distance call placed by a
member) would be treated as collected from members of the
telephone cooperative. The remaining 50 percent of income
received by a telephone cooperative from a nonmember
telephone company would, as under present law, be excluded
from the 85-percent test under section 501(c)(12)(B)(i).

The proposal also would exclude from the 85-percent test
under section 501(c)(12) amounts received by a telephone
cooperative from billing and collection services performed
for another telephone company (e.g., a long-distance
carrier).

In addition, the proposal would provide that tax-exempt
telephone cooperatives would be permitted to earn certain
investment income in excess of 15 percent of their total
income (but not in excess of 35 percent of total income)
without losing their tax-exempt status. Tax-exempt telephone
cooperatives would be subject to the unrelated business
income tax (UBIT) on such investment income between the
15-percent and 35-percent range.

Effective date.--The proposal would be effective for
taxable years beginning before, on, or after the date of
enactment.



47

Under present law, when unmerchantable wine is returned
to bonded production premises, tax that has been paid is
refunded or credited to the proprietor of the bonded wine
cellar to which the wine is delivered (sec. 5044). In
contrast, when beer is returned to a brewery, tax that has
been paid is refunded or credited, regardless of whether the
beer is unmerchantable (sec. 5056(a)). The bill deletes the
requirement that wine returned to bonded premises be
“unmerchantable" in order for tax to be refunded or credited
to the proprietor of the bonded wine cellar to which the wine
is delivered.

Effective date.--The provision is effective beginning
180 days after enactment.

7. Use of ameliorating material in certain wines (sec. 617
of the bill)

Description of Bill

The Code contains rules governing the extent to which
ameliorating material (e.g., sugar) may be added to wines
made from high acid fruits and ‘the product still be labelled
as a standard, natural wine. In general, ameliorating
material may not exceed 35 percent of the volume of juice and
ameliorating material combined (sec. 5383(b)(1)). However,
wines made exclusively from loganberries, currants, or
gooseberries are permitted a volume of ameliorating material
of up to 60 percent (sec. 5384(b)(2)(D)). The bill modifies
the wine labeling restrictions to allow any wine made
exclusively from a fruit or berry with a natural fixed acid
of 20 parts per thousand or more (before any correction of
such fruit or berry) to contain a volume of ameliorating
material not in excess of 60 perze2nt.

Effective date.--The provision is effective beginning
180 days after enactment.

8. Domestically produced beer for use by foreign embassies,
etc. (sec. 618 of the bill)

‘Description of Bill

Under present law, domestically produced distilled
spirits and wine may be removed from bond, without payment of
tax, for transfer to any customs bonded warehouse for storage
pending removal for the official or family use of
representatives of foreign governments or public
international organizations (secs. 5066 and 5362(e)). (A
similar rule also applies under present law to imported
distilled spirits, wine, and beer.) The bill extends this
rule to domestically produced beer.



B. Provisions Relating to Distilled Spirits, Wine, and Beer

1. Refund of tax on certain imported bottled distilled
spirits (sec. 611 of the bill)

Description of Bill

Present law provides that when tax-paid distilled
spirits which have been withdrawn from bonded premises of a
distilled spirits plant are returned for destruction or
redistilling, the excise taxes are refunded (sec. 5008(c)),
but this provision does not apply to imported bottled
distilled spirits, which are withdrawn from customs custody
and not from bonded premises. The bill conforms the
procedures for refunds of tax collected on imported bottled
distilled spirits returned to bonded premises to the rules
for domestically produced and imported bulk distilled
spirits. Thus, refunds would be available for all distilled
spirits on their return to a bonded distilled spirits plant.

Effective date.--The provision is effective beginning
180 days after enactment.

2. Bond for exported distilled spirits (sec. 612 of the
bill)

Description of Bill

Bond generally must be furnished to the Department of
the Treasury when distilled spirits are removed from bonded
premises for exportation without payment of tax. Under
present law, these bonds are cancelled or credited when
evidence is submitted to the Department of the Treasury that
the distilled spirits have been exported (sec. 5175(c)). The
bill authorizes the Department of the Treasury to permit
records of exportation to be maintained by the exporter,
rather than requiring submission to it of proof of
exportation in all cases.

Effective date.--The provision is effective beginning
180 days after enactment.

3. Distilled spirits plant records (sec. 613 of the bill)

Description of Bill

Under present law, distilled spirits plant proprietors
are required to maintain records of their production,
storage, denaturation, and other processing activities on the
premises where the operations covered by the records are
carried on (sec. 5207(c)). The bill permits distilled plant
proprietors to maintain records of their activities at
locations other than the premises where the operations

45



3. Use of reproductions of returns stored in digital image
format (sec. 703 of the bill)

Description of Bill

The bill provides that the term reproduction includes a
reproduction from a digital image.

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

4. Repeal of requirement to register tax shelters (sec. 704
of the bill)

Description of Bill

The bill repeals the tax shelter registration
requirements.

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

Proposal Modification

Drop provision.

5. Repeal of authority to disclose whether prospective juror
has been audited (sec. 705 of the bill)

Description of Bill

The bill repeals the requirement that the Secretary
disclose, upon the written request of either party to the
lawsuit, whether an individual who is a prospective juror has
or has not been the subject of an audit or other tax
investigation by the Internal Revenue Service.

Effective date.--The provision is effective for judicial
proceedings pending on, or commenced after, the date of
enactment.

6. .Repeal of special audit provisions for subchapter S items
(sec. 706 of the bill)

Description of Bill

The bill repeals the unified audit procedures for §
corporations.

Effective date.--The provision is effective for taxable
years beginning after the date of enactment.

S/



C. Cooperative Agreements with State Tax Authorities (sec.
721 of the bill)

Description of Bill

The bill authorizes the Secretary to enter into
cooperative agreements with State tax authorities to enhance
joint tax administration. These agreements may include (1)
joint filing of Federal and State income tax returns, (2)
single processing of these returns, and (3) joint collection
of taxes (other than Federal income taxes).

Effective date.--This provision is effective on the date
of enactment.

55-



Title VI.--Excise Tax Provisions
A. Motor Fuel Excise Tax Provisions

1. Consolidate provisions imposing diesel and aviation fuel
excise taxes (sec. 601 of the bill)

Description of Bill

The bill combines the diesel and aviation fuel tax
provisions currently divided between Code sections 4041 and
4091 into a revised section 4091.

Effective date.--The provision is effective for sales or
uses on or after January 1, 1992.

Proposed Modification

Delay effective date to sales or uses on or after
January 1, 1993,

2. Revision of fuel ‘tax credit and refund procedures
{sec. 602 of the bill)

Description of Bill

The bill allows a refund or credit to taxpayers for
diesel and aviation fuel sold tax-paid to certain persons who
resell for tax-exempt uses. The bill also consolidates the
user credit and refund provisions for the fuels excise taxes
into one section of the Code. Finally, the bill eliminates
the waiver requirement for fuels tax refunds for cropdusters
and other fertilizer applicators.

Effective date.--The provision is effective for sales or
uses on or after January 1, 1992.

Proposed Modification

Delay effective date to sales or uses on or after
January 1, 1993.

3. Authority to provide exceptions from information
reporting with respect to diesel fuel and aviation fuel
{sec. 603 of the bill)

Description of Bill

The bill permits the IRS by regulation to provide
exceptions to the mandatory information return requirement
for certain sales or uses of diesel and aviation fuel.

Effective date.--The provision applies to sales or uses
on or after January 1, 1992.

4 3



IS

The bill provides a special rule regarding the
application of the PFC rules to tax-exempt organizations that
own stock in passive foreign corporations. The passive
foreign corporation rules, under the bill, do not apply to
any organization exempt from tax under section 501 unless the
organization is subject to unrelated business income taxation
on its investment income under section 512({a)(3) of the Code.
In the case of a tax-exempt organization that is subject to
tax on its investment income, the PFC rules apply with
respect to amounts taken into account in computing unrelated
business taxable income in the same manner as if the
organization were fully taxable.

Tax treatment under full elimination of deferral

The benefits of deferral are eliminated with respect to
the income of a PFC under three alternative methods: current
inclusion, mark-to-market, or interest charge on excess
distributions.

Current inclusion method

Mandatory current inclusion.--If.a passive foreign
corporation is U.S. controlled, the bill will subject every
U.S. person owning (directly or indirectly) stock in the PFC
to income inclusions under a modified version of the
controlled foreign corporation rules. If a PFC is not U.S.
controlled, every U.S. person owning (directly or indirectly)
25 percent or more of the vote or value of the stock of the
PFC will be subject to the same rules. Under the bill, the
entire gross income of the passive foreign corporation
(subject to applicable deductions) is treated as foreign
personal holding company income, and thus is included (net of
appropriate deductions) on a pro rata basis in the income of
each U.S. person directly or indirectly owning stock in the
PFC, under a modified application of the rules of sections
951 and 961. Actual distributions of earnings by such a PFC
are treated similarly to distributions of previously taxed
income under section 959 and 961. These rules supersede ail
application of the present-law rules applicable to foreign
personal holding companies, under which earnings are deemed
distributed and then contributed to the capital of the
foreign personal holding company.

In applying the subpart F inclusion rules to PFC
inclusions, the bill departs from subpart F in that foreign
personal holding company income is included in the income of
U.S. persons without regard to otherwise applicable
reductions pursuant to the high-tax exception (under sec.
954(b)(4)) or the export trade corporation rules (secs. 970
and 971). This modification to the application of the
controlled foreign corporation rules preserves present law in
that no high-tax exception generally is available to PFICs or



33

The election applies to all long-term contracts
completed during the taxable year for which the election is
made and te all long-term contracts completed during
subsequent. taxable years, unless the election is revoked with
the consent of the Secretary of the Treasury.

Interest rates used for purposes of the look-back method

The bill provides that for purposes of the look-back
method, only one rate of interest is to apply for each
accrual period. An accrual period with respect to. a taxable
year begins on the day after the return due date (determined
without regard to extensions) for the taxable year and ends
on such return due date for the following taxable year. The
applicable rate of interest is the overpayment rate in effect
for the calendar quarter in which the accrual period begins.

Effective date.--Contracts completed in taxable years
ending after the date of enactment.

2. Simplified method for applying uniform cost
Capitalization rules (sec. 412 of the bill)

Description of Bill

The bill authorizes (but does not require) the Treasury
Department to issue regulations that allow taxpayers in
appropriate circumstances to determine the costs of any
administrative, service, or support function or department
that are allocable to production or resale activities by
multiplying the total amount of costs of any such function or
department by a fraction, the numerator of which is the
amount of costs of the function or department that was
allocable to production or resale activities for a base
period and the denominator of which is the total amount of
costs of the function or department for the base period.

Effective date.--Generally taxable years beginning after
the date of enactment of the bill.



8. Taxabis Year Election for Partnerships, S Corporations,
and Personal Service Corporations
Description of Bill
No provision.

Proposed Modification

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

In addition, the proposal would require an additional 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 modify 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).

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

1 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.



4. Simultaneous issuance of certain

discrete issues not aggregated

(SOC. 434). cece ccc c cece reer reeseccccees§ 36
5. Authority for Treasury Department

to exempt certain taxpayers from

tax-exempt interest reporting

requirements (S@C. 435)....eeneeeeeeees 36
6. Repeal of deadwood provisions

(SOC. 436). ccc cece cree cence ncccccceces§ 36
7. Expansion of exception to prorata

disallowances of bank interest

expense related to investment in

tax-exempt bonds... essecseccereecereee 36
8. Recharacterize qualified 501(c)(3)

bonds and repeal $150 million per-

organization limit on certain of

these DondS.....eeeeceesecsncereeeeceee 37

E. Other ProvisionS....cccecececccececececseeses 38

‘1. Treatment of certain revocable trusts as

estates (SEC. 41)... crc e wwe c ewer ees 38
2. Matching rules for payment to partners

(SOC. 442). cc ccc cecencrenrccsececsscece 39
3. Close partnership taxable year with

respect to deceased partner (sec. 443). 39
4. Clarification of amount of gain

recognized by.a securityholder in

a reorganization, etc. (sec.444)....... 40

TITLE V. ESTATE AND GIFT TAX PROVISIONS........... 41

1. Waiver of right of recovery for certain

marital deduction property

(SOC. 501). ccc cece cece cece ccc e cree eee ee) Al
2. Inclusion in gross estate of certain

gifts made within three years of death

(SEC. SOZ). ccc cece eee c cannes csereenee§ 41
3. Definition of qualified terminable

interest. property (sec. 503)........... 41
4. Requirements for qualified domestic

trust (SEC. 504)... .. ccc eee eee eee eee = 42
5. Election of special use valuation of

farm property for estate tax purposes

(sec. 505)..

Peer ee eee cece eee eceese 42

(iv)


67

11. Determinations of gas produced from qualifying sources
under the nonconventional fuels production credit

Description of Bill
No provision.

Proposed Modification

With respect to determinations required under the
Internal Revenue Code of whether gas is produced from
geopressured brine, Devonian shale, coal seams, or from a
tight formation, in the event that such a determination is
not made by the Federal Energy Regulatory Commission in
accordance with section 503 of the Natural Gas Policy Act of
1978 due to the expiration of that statute through, enactment
of the Natural Gas Wellhead Decontrol Act of 1989,+ the
proposed modification would require the Secretary of Treasury
to make such a determination. For this purpose, the proposal
would mandate that any such determination by the Treasury
Department be made using the guidelines set forth in section
503 of the Natural Gas Policy Act of 1978 prior to its
repeal.

In addition, the proposed modification would clarify
that for purposes of the nonconventional fuels production
credit, the definitions of gas produced from geopressured
brine, Devonian shale, coal seams, or from a tight formation
yould be as established by the Federal Energy Regulatory
Commission under the Natural Gas Policy Act of 1978 prior to
repeal of provisions of that statute relating to such
definitions.

ective date.--With respect to well and formation
determinations required to be made by the Treasury
Department, the proposed modification would be effective for
determinations with respect to which no such determination is
made by the Federal Energy Regulatory Commission as a result
of the repeal of section 503 of the Natural Gas Policy Act of
1978. The proposed modification clarifying the definitions
of certain qualifying fuels would be effective after December
31, 1992.

1 p.L. 101-60; 103 Stat. 157 (1989).



i

Aa

10. Mod: !ications to the Reforestation Trust Fund

Description of Bill

No provision.

Proposed Modification

The maximum amount that may be transferred to the
Reforestation Trust Fund for any fiscal year would be
increased from $30 million to $45 million. The additional
$15 million that is transferred to the Reforestation Trust
Fund for any fiscal year would be available to the Department
of the Interior for the reforestation and forest conservation
activities of the Bureau of Land Management in any State and
related administrative costs. To the extent that the wood
product tariffs are insufficient to provide an additional $15
million for any fiscal year, the Treasury Department would be
required to transfer to the Reforestation Trust Fund an
amount equal to the Federal portion of the receipts from the
sale of certain timber located on Federal land.

Effective date.--The proposal would be effective on
October 1, 1992.



13. Treatment of safe harbor leases of membership
organizations

Description of Bill
None.

Proposed Modification

A membership organization cannot offset losses from
transactions with members with income from transactions with
nonmembers. The Internal Revenue Service has taken the
position that interest income derived from a safe-harbor
sale-leaseback transaction is not derived from transactions
with members while the rental expense from the transaction
must be allocated between income derived from members and
nonmembers.

Under the modification, the interest income and rental
expense from the sale and leaseback of the property under a
safe-harbor lease are to be first netted and the difference
allocated between members and nonmembers in proportion to the
business done with each group.

Effective date:--All open taxable years.

69



3. Foreign tax credit in year of receipt of previously taxed
earnings and profits (sec. 312 of the bill)

Description of Bill

The bill repeals the rules that permit an indirect
foreign tax credit to be claimed with respect to a
distribution of previously taxed earnings and profits. Under
the bill, foreign taxes paid by a foreign corporation with
respect to previously taxed earnings and profits remain in
that corporation's pool (or pools) of foreign taxes which are
available for the indirect foreign tax credit upon subsequent
distributions or deemed distributions of earnings and profits
that have not been previously taxed at the U.S. shareholder
level.

Effective date.--Generally for taxable years beginning
after December 31, 1991. However, the provision is not
effective with respect to distributions of previously taxed
income which occur in taxable years beginning prior to
January 1, 1997, if the distributions relate to subpart F
income inclusions for taxable years of the U.S. ‘corporate
shareholders ‘beginning before January 1, 1992.

Proposed Modification

The proposed modification would retain the present-law
provision that permits an indirect foreign tax credit to be
claimed with respect to a distribution of previously taxed
earnings and profits. However, it would provide authority for
Treasury regulations to establish a simplified method for
computing the increase in foreign tax credit limitation that
results from the application of that provision.

4. Translation of foreign taxes into U.S. dollar amounts
(section 321 of the bill)

Description of Bill

The bill grants the Secretary of the Treasury authority
to issue regulations that.would allow foreign tax payments
made by a foreign corporation or by a foreign branch of a
U.S. person to be translated into.U.S. dollar amounts using
an average U.S. dollar exchange rate for a specified period.
It is anticipated that the applicable average exchange rate
would be the rate as published by a qualified source of
exchange rates for -he period during which the tax payments
were made.

26


Effective date.--The bill is effective with respe-t to
settlements entered into after December 31, 1991.

Proposed Modification

Change the effective date of (3) to make it prospective;
add a new provision to allow the IRS to rely on extensions of
the statute of limitations that are signed by a tax matters
partner who is bankrupt.

/2


The mark-to-market method does not apply to the stock of
a U.S. person in any PFC that is U.S. controlled (as
discussed above), to the stock of a person choosing qualified
electing fund treatment, or to stock of a U.S. person who is
a 25-percent shareholder (as defined above).

In the case of a controlled foreign corporation
(including a passive foreign corporation that is treated
under the bill as a controlled foreign corporation) that owns
or is treated as owning stock in a passive foreign
corporation, the mark-to-market method generally is applied
as if the controlled foreign corporation were a U.S. person.
For purposes of the application of subpart F to the
controlled foreign corporation, mark-to-market gains are
treated as if they were foreign personal holding company
income of the character of dividends, interest, royalties,
rents or annuities, and allowable deductions for
mark-to-market losses are treated as deductions allocable to
that category of foreign personal holding company income.

The source of such income or loss, however, is determined by
reference to the actual (foreign) residence of the controlled
foreign ‘corporation.

Interest-charge method

Nonelecting shareholders of a PFC with stock that is not
marketable are subject to the interest-charge method, based
on the PFIC interest-charge method that is currently provided
in Code section 1291, with certain modifications.

First, although allowable foreign tax credits may reduce
a U.S. person's net U.S. tax liability on an excess
distribution, the interest charge computed on that excess
distribution is computed, under the bill, without regard to
reductions in net U.S. tax liability on account of direct
foreign tax credits.

The PFIC provisions of present law, to the extent
provided in regulations, impose recognition of gain in the
case of a transfer of PFIC stock in a transaction that would
otherwise qualify for the nonrecognition provisions of the
Code. The bill imposes that result as a general rule, except
as otherwise provided in Treasury regulations. In addition,
the bill requires that proper adjustment be made to the basis
of property, held by the U.S. person, through which the U.S.
person is treated as owning stock in the passive foreign
corporation.

The PFIC provisions of present law provide special rules
for the application of the interest-charge method in the case
of PFIC stock held by an U.S. person through an intermediary
entity. These rules describe the dispositions that are
treated as dispositions of PFIC stock by the U.S. person, and
include rules to eliminate the possibility of double taxation

/8


to measure its assets based on their adjusted bases rather
than their value.

As uncer present law, passive income for this purpose is
defined in the bill generally as any income of a kind which
would be foreign personal holding company income as’ defined
in section 954(c), subject to the current law exceptions for
banking and insurance income and the current look-through
rules for certain payments from related persons (current sec.
1296(b)(2)). In addition, the bill provides two
clarifications to present law. First, the bill clarifies
that, as indicated in the legislative history of the 1988
Act, the same-country exceptions from the definition of
foreign personal holding company income in section 954(c) are
disregarded. Second, the bill clarifies that any foreign
trade income of a foreign sales corporation does not
constitute passive income for purposes of the PFIC definition
(cf. sec. 951(e)).

The bill modifies the present-law application of the
asset test by treating certain leased property as assets held
by the foreign-corporation for purposes of the PFC asset
test. This rule applies to tangible ‘personal property with
respect to which the foreign corporation is the lessee under
a lease with a term of at least 12 months.

The bill also modifies the present-law rules that
provide an exception from the definition of a PFIC in the
case of a company changing businesses. Under the bill, if a
foreign corporation holds 25 percent or more of the stock of
a second corporation that qualifies for the
change-of-business exception (current sec. 1297(b)(3)), then
in applying the look-though rules (current sec. 1296(c)), the
first corporation may treat otherwise passive assets or
income of the second corporation as active.

The bill provides a new election that will allow certain
passive foreign corporations to be treated as domestic
corporations. A foreign corporation is eligible to make this
election if (1) it would qualify for treatment as a regulated
investment company (RIC) under the relevant provisions of the
Code if it actually :were a domestic. corporation, (2) it meets
such requirements as the Secretary may prescribe to ensure
the collection of taxes imposed by the Internal Revenue Code
on the passive foreign corporation, and (3) the electing
passive foreign corporation waives all benefits which are
granted by the United States under any treaty (including
treaties other than tax treaties) and to which the
corporation is otherwise entitled by reason of being a
resident of another country. The rules governing such an
election will be similar to those applicable to the election
by a foreign insurance company to be treated as a domestic
corporation under Section 953(d).

/4


Effective date.--Date of enactment.

Proposed Modification

The proposed modification generally would permit
accrual-basis taxpayers to accrue foreign taxes at the
average exchange rate for the taxable year to which such
taxes relate. If at the close of the second taxable year
after the close of the accrual year any tax so accrued has
not yet been paid, a redetermination of foreign tax under
section 905(c) would be required for the amount of such
unpaid tax. That is, the accrual of any tax that is unpaid
as of that date would be retroactively denied. In the case
of a direct foreign tax credit under section 901, a section
905(c) adjustment for the year of accrual would be required
-- generally resulting in the requirement to file an amended
tax return for that year. In the case of an indirect foreign
tax credit under section 902, an adjustment to the taxpayer's
pool of foreign taxes generally would be required.

If tax in excess of the accrued amount (or in excess of
cthe net accrual. amount following a section 905(c) adjustment)
is actually paid, such excess amount would be translated at
the average exchange rate in effect for the year of payment.

Rules similar to those set forth in the bill would apply
(1) to tax payments in inflationary currencies, (2) to
taxpayers that are not on the accrual basis for determining
creditable foreign taxes, or.(3) with respect to taxes of an
accrual-basis taxpayer that are actually paid in a year prior
to the year to which they relate.

Effective date.--Taxes paid or accrued in taxable years
beginning after December 31, 1991.

5. Foreign tax credit limitation under the alternative
minimum tax (sec. 322 of the bill and sec. 59(a) of the
Code)

Description of Bill

For purposes of the alternative minimum tax, the bill
permits taxpayers to elect to use as their foreign tax credit
limitation fraction the ratio of foreign source regular
taxable income to entire alternative minimum taxable income,
rather than the ratio of foreign source alternative minimum
taxable income to entire alternative minimum taxable income.
Foreign source regular taxable income may be used, however,
only to the extent it does not exceed entire aiternative
minimum taxable income.

The election under the bill is available only in the
first taxable year beginning after December 31, 1991, for
which the taxpayer claims an alternative minimum tax foreign

£7



Effective date.--Partnership taxable years ending on or
after December 31, 1992.

Proposed Modification

Effective date.--For partnerships that are large
partnerships (aS defined in the simplified reporting
provision), effective for partnership taxable years ending on
or after December 31, 1992. For partnerships that are not
large partnerships (as defined) but that have 250 or more
partners, effective for partnership taxable years ending on
or after December 31, 1998.



12. Treatment of housing cooperatives
Present Law

Unlike other corporations, a cooperative association is
not taxable on income from patronage sources.

A membership organization operated primarily to furnish
services or goods to its members may deduct costs
attributable to furnishing services or goods to its members
only to the extent of income derived from the members (sec.
277).

Explanation of Proposal

The proposal provides that section 277 would not apply
to a cooperative housing corporation and that patronage
losses of such a corporation could not offset earnings that
are not patronage earnings.

Patronage earnings and losses would generally include
earnings and losses derived from business done with or for
patrons of the corporation. In -addition, the proposal would
treat as patronage sourced: (1) interest on reasonable
reserves established in connection with the corporation, (2)
income from laundry and parking attributable to
tenants-stockholders and their guests, and (3) (in the case
of a limited equity cooperative housing corporation) rental
income attributable to a housing project operated by the
corporation,

Effective Date

The proposal applies to taxable years beginning after
date of enactment.

o

8


53

B. Tax Court Provisions

1. Overpayment determinations of Tax Court (sec. 711 of the
bill)

Description of Bill

The bill clarifies that an order to refund an
overpayment is appealable in the same manner as a decision of
the Tax Court.

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

2. Awarding of administrative costs (sec. 712 of the bill)

Description of Biil

The bill provides that a taxpayer who seeks an award of
administrative costs must apply for ‘such costs within 90 days
of-the date on which the taxpayer was determined to be a
prevailing party. The bill also provides that a taxpayer who
seeks to appeal an IRS denial of an administrative cost award
must petition the Tax Court within 90 days after the date
that the IRS mails the denial notice.

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

3. Redetermination of interest pursuant to motion (sec. 713
of the bill)

Description of Bill

The bill provides that a taxpayer must file a “motion"
(rather than a "petition") to seek a redetermination of
interest in the Tax Court.

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

4. Application of net worth requirement for awards of
litigation costs (sec. 714 of the bill)

Description of Bill

The bill provides that the net worth limitations
currently applicable to individuals also apply to estates and
trusts for purposes of awards of litigation costs. The bill
also provides that individuals who file a joint tax return
shall be treated as one individual for purposes of computing
the net worth limitations.



S. 1394 -- THE TAX SIMPLIFICATION ACT OF 1991
Title I.--Individual Tax Provisions

1. Rollover of gain on sale of principal residence
{sec. 101 of the bill)

Description of Bill

Under present law 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. This replacement period generally
begins two years before and ends two years after the date of
sale of the old residence. The basis of the replacement
residence is reduced by the amount of any gain not recognized
on the sale of the old residence by reason of section 1034.

The determination whether property is used by a taxpayer
as a principal residence depends upon all the facts and
circumstances in each case, including the good faith of the
taxpayer. No safe harbor is provided for sales of principal
residences incident to divorce or marital separation.

In general, nonrecognition treatment is available only
once during any two-year period. In addition, if the
taxpayer purchases more than one residence during the
replacement period and such residences are each used as the
taxpayer's principal residence within two years after the
date of sale of the old residence, only the last residence so
used is treated as the new replacement residence.

Special rules apply, however, if residences are sold in
order to relocate for employment reasons. First, the number
of times nonrecognition treatment is available during a
two-year period is not limited. Second, if a residence is
sold within two years after the sale of the old residence,
the residence sold is treated as the last residence used by
the taxpayer and thus as the only replacement residence.

Under the bill, gain is rolled over from one residence
to another residence in the order the residences are
purchased and used, regardless of the taxpayer's reasons for
the sale of the old residence. In. addition, gain may be
rolled over more than once within a two-year period. Thus,
the rules that formerly applied only if a taxpayer sold his
or her residence in order to relocate for employment purposes
will apply in all cases.

As under present law, the basis of each succeeding
residence is reduced by the amount of gain not recognized on
the sale of the prior residence.

KN


ZY

b. Subpart F inclusions in year of disposition

Where a U.S. shareholder acquires the stock of a
controlled foreign corporation from. another U.S. shareholder
during the middle of a year in which the controlled foreign
corporation earns subpart F income, the bill reduces the
acquirer's subpart F inclusion for that year by a portion of
the amount of the dividend deemed (under sec. 1248) to be
received by the transferor. The portion by which the
inclusion is reduced would not exceed the subpart F inclusion
for that year times the proportion of the year for which the
acquirer did not own the stock.

Effective date.--Effective with respect to dispositions
occurring after the date of enactment of the bill.

c. Adjustments to basis of stock held by foreign
corporations

The bill provides that when a lower-tier controlled
foreign corporation earns subpart F income, and stock in that
corporation is later sold by an upper-tier .controlled foreign
corporation, the resulting income inclusion of the U.S.
shareholders are, under regulations, adjusted to account for
previous inclusions, in a manner similar to the adjustments
now provided to the basis of stock in a first-tier controlled
foreign corporation.

Effective date.--Effective for adjustments attributable
to inclusions for taxable years of U.S. shareholders
beginning after December 31, 1991.

d. Avoiding double inclusions in other cases

The bill contemplates that in the case of a cross-chain
section 304 dividend out of the earnings of controlled
foreign corporations that were previously included in the
income of a U.S. shareholder under subpart F, the Treasury
Secretary in his discretion may by regulation treat such
dividends as distributions of previously taxed income, with
appropriate basis adjustments. In addition to cases
involving section 304, the bill provides that the Secretary
may by regulation modify the application of subpart F in any
other case where there would otherwise be a multiple
inclusion of any item of income (or an inclusion or exclusion
without an appropriate basis adjustment) by reason of the
structure of a U.S. shareholder's holdings in controlled
foreign corporations or by reason of other circumstances.

Effective date.--Date of enactment of the bill.

e. Treatment of United States income earned by a
controlled foreign corporation



4. Firearms Excise Tax Exemption for Custom Gunsmiths
Description of Bill
No provision.

Proposed Modification

The proposal would exempt small manufacturers and
importers from the present-law ll-percent excise tax on
firearms (rifles and shotguns) and ammunition and the
present-law 10-percent tax on pistols and revolvers, if such
manufacturer or importer manufactures or imports less than 50
such articles per year. :

Effective date.--The proposal would be effective for
articles sold after September 30, 1983. In the case of any
taxable year ending before the date of enactment, the period
for claiming a credit or refund of any overpayment of tax
resulting from the proposed exemption from tax shall not
expire before one year after the date of enactment.

60


6. Privat2 Foundation Common Investment Fund
Description of Bill
No provision.

Proposed Modification

Section 501(c)(3) requires that an organization be
organized and operated exclusively for an exempt purpose in
order to qualify for tax-exempt status under that section.
Section 501(f£) provides that an organization is treated as
organized and operated exclusively for charitable purposes if
it is comprised solely of members that are educational
institutions and is organized and operated solely to
collectively invest in stocks and securities on behalf of the
members.

The proposed modification would provide that a
cooperative service organization comprised solely of members
that are tax-exempt private foundations and community
foundations shall be treated as organized and operated
exclusively for charitable purposes if: (1) it has at least
20 members; (2) no one member holds (after the organization's
second taxable year) more than 10 percent (by value) of the
interests in the organization; (3) no one member controls the
organization or any other member; (4) the members are
permitted to dismiss any of the organization's investment
advisors upon a vote of members holding a majority of
interest in the account managed by such advisor; (5) the
organization is organized and operated solely to collectively
invest in stocks and securities.

A cooperative service organization meeting the criteria
of the proposed modification would be subject to the
present-law excise tax provisions applicable to private
foundations, other than sections 4940 and 4942. For purposes
of section 4940, the proportionate share (whether or not
distributed) for each member of the net income of the
organization would be flowed through to the member.

Effective date.--The proposed modification would apply
to taxable years beginning after December 31, 1991.

ty



7. ‘Treatment of Nuclear Decommissioning Funds
Description of Bill
No provision.

Proposed Modification

The present-law investment restrictions applicable to
nuclear decommissioning funds would be repealed.

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

63



Proposed Modifications

a.. Mark-to-market attribution rule.--The attribution
rule which, for purposes of the mark-to-market method, treats
stock owned (directly or indirectly) by or for a foreign
partnership or foreign trust or foreign estate as owned
proportionately by its partners or beneficiaries, applies
except as provided in regulations.

b. Mark-to-market transition rules.--Mark-to-market
gain representing appreciation in the value of PFC stock
prior to the effective date of the bill is subject to tax
under the interest-charge method, and each shareholder may
elect to defer the payment of the tax. Subsequent mark-to-
market losses may be deducted to the extent of the pre-
effective-date appreciation, and an election to defer the
payment of tax is terminated to the extent of such deductions
taken and to the extent of excess distributions received. In
the case of a regulated investment company, in place of
applying the interest-charge method to pre-effective-date
gain, a separate nondeductible interest charge is added to
the company's tax. ‘The mark-to-market method does not apply
to appreciation in the value of the PFC stock prior to ‘the
time that a shareholder becomes subject to tax in the United
States.

c. Fiscal year for regulated investment companies.--
Regulated investment companies are permitted to compute their
mark-to-market gain on the basis of a fiscal year ending two
months before the close of the calendar year, solely for
purposes of determining their ordinary income for purposes of
the excise tax on the undistributed income of regulated
investment companies.

d. Look-through treatment of capital gains.--As under
present law, pass through the characterization of capital
gains realized by the PFC to those shareholders who are
subject to the current-inclusion method and who are not
otherwise treated as "U.S. shareholders" of a CFC under
subpart F. Unlike present law, make this treatment also
available to qualifying shareholders of corporations that
would also be foreign personal holding companies under
present law.

e. High-tax exception.--As under present law, make the
high-tax exception from current inclusion of PFC income
available to shareholders who are otherwise treated as "U.S.
shareholders" of a CFC under subpart F. Unlike present law,
make this treatment also available t. qualifying shareholders
of corporations that would also be foreign personal holding
companies under present law.

£14



B. Tax Court Provisions... cece ccc eee ese seneees

Ll.
2.
3.
4.

Overpayment determinations of Tax

Court (SEC. T11L). cc cece c eee cece ac eccace
Awarding of- administrative costs

(SOC. 712) ccc wcrc cree srcrccee res vaccccee
Redetermination of interest pursuant

to motion (SEC. 713)... rece ec ccc c cree
Application of net worth requirement

for awards of litigation costs

(SOC. 714) ccc cece c cece nse r ccc cneccncee

Cc. Cooperative Agreements with State Tax
Authorities (SEC. 721))..ccceeeenecccvenscces

TITLE VIII.

1.

2.

10.

ADDITIONAL PROVISIONS......+eeeeececcece

Income taxation of accumulation

ELUSES cece eee e eee w cece cence ens sccsvees

Include fractional share of property

qualifying for the marital deduction
in the gross estate...... cece cece ewes

Simplify payroll tax deposit require-

MOENES cece cscs ccc r rece eeeccccserecescceee

Firearms excise tax exemption for
CUSTOM GUNSMItHS.... eee re creer ence e cee

Discharge of indebtedness income from
prepayment of REA loans at discount.....

Private foundation common investment

5k 5 oc ne

Treatment of nuclear decommissioning

EUNdS eee c eee e cece eee e ener e reece scene

Taxable year election for partnerships,
S corporations, and personal service
COLPOTAtiONS.....ceeeeec eee ececcaseeeees

Treatment of amounts received by tele-
Phone cooperatives... . ee ceees ec ccssccece

Modifications to the Reforestation Trust

FUNG. cece ec eee cece cece cece eee e nee eeecens

(vi)

53
53
53

53

55
56

56

57

58

60

61

62

63

64

65

66


TITLE Vi.

A.

EXCISE TAX PROVISIONS......eseceeseeeeees

Motor Fuel Excise Tax Provisions..........6+.

i.

Consolidate provisions imposing diesel
and aviation fuel excise taxes

(SEC. GOL)... ee eee cee ee nec cece eenne
Revision of fuel tax credit and

refund procedures (sec. 602)........60.
Authority to provide exceptions

from information reporting for

certain sales of diesel and

aviation fuel (sec. 603)...........206-

Provisions Relating to Distilled Spirits,
Wines, and Beer (secs. 611-621)............4.

Other Excise Tax ProvisionS........+.eeseeee

B.
Cc.

1.

2.

3.

TITLE VIl.
A.

Authority for IRS to grant exemptions
from registration requirements

(SOC. 631). eee ccc cece ent eeeeceeeeeee
Repeal reduction in tax on piggyback
trailers (sec. 632(a)).....e ec ec ences
Repeal expired deep seabed minerals
excise tax (sec. 632(b))...... cree weee

ADMINISTRATIVE PROVISIONS........-e---00-

General Administrative Provisions...........

1.

2.

Simplification of employment taxes

on domestic services (sec. 701)........
Penalties for failure to provide
reports relating to pension payments
(sec. 702)............ rr ea
Use of reproductions of returns stored
in digital image format (sec. 703).....
Repeal of requirement to register

tax shelters (S€C. 704)... ccc eeeceasecs
Repeal of authority to disclose whether
prospective juror has been audited
(S@C. 705).....eeeeeee see e cee eeeeeeees
Repeal of special audit provisions

for subchapter S items (sec. 706)......
Clarification of statute of limitations
(SOC. 707) cc ccc cee cree reer ecenesecevene
Clarification of employment tax status
Of Fishermen. ...... cece eect eee

(v)

Pa
43
43

43
43

43

45

49

49
49
49
50
50

50

50
51

51

51
51
52
52

e


B. Modification to TEFRA Partnership Proceedings
(secs. 211 through 222 of the bill)

Description of Bill

The bill modifies the TEFRA partnership audit
proceedings as follows:

1. Treatment of partnership items (sec. 211 of the bill)

The bill clarifies the treatment of partnership items in
deficiency proceedings.

Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.

2. Determination of proper audit procedures (sec. 212 of
the bill)

The bill permits the IRS to rely on partnership returns
to:determine the proper audit. procedures.

Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.

3. Suspension of statute of limitations for untimely
petitions and during bankruptcy proceedings (sec. 213
of the bill) .

The bill suspends the statute of limitations for
untimely petitions and during bankruptcy proceedings.

Effective date.--The bill shall take effect as if
included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.

4. TEFRA small partnership exception (sec. 214 of the bill)

The bill expands the small partnership exception from
TEFRA.

Effective date.--The bill is effective for partnership
taxable years ending after the date of enactment.

5. Exclude partial settlements from 1-year assessment
rules (sec. 215 of the bill)

The bill excludes partial settlements from l-year
assessment rules.

Effective date.--The bill is effective for partnership
taxable years ending after the date of enactment.

/0


INTRODUCTION

This document ,+ prepared by the staff of the Joint
Committee on Taxation, provides a brief description of the
provisions of S. 1394 ("Tax Simplification Act of 1991") and
proposed modifications. These provisions are scheduled for
markup by the Senate Committee on Finance on March 3, 1992.

1 this document may be cited as follows: Joint Committee,
Description of S. 1394 (Tax Simplification Act of 1991) and
Proposed Modifications (JCX-8-92), March 3, 1992.

(viii)


foreign personal holding companies, and that the PFIC
provisions apply in full force to export trade corporations.

A passive foreign corporation is treated under the bill
as U.S. controlled for this purpose either if it would be
treated as a controlled foreign corporation under the rules
of subpart F, or if, at any time during the taxable year,
more than 50 percent of the vote or value of the
corporation's stock were owned directly or indirectly by five
or fewer U.S. persons (including but not limited to
individuals, and including all U.S. citizens regardless of
their residence).

Elective current inclusion.--A U.S. person not subject
to the above mandatory current inclusion rules--that is, a
U.S. person owning less than 25 percent of the stock in a PFC
that is not U.S. controlled--may elect application of those
rules. As under current law, the PFC is characterized as a
"qualified electing fund" with respect to such a U.S. person.
In the application of the elective current-inclusion rules,
the passive foreign corporation is treated as a controlled
foreign corporation with respect to the taxpayer, and the
taxpayer is treated as a U.S. shareholder of ‘the corporation.
For foreign tax credit purposes, amounts included in the
taxpayer's gross income under this modified application of
the controlled foreign corporation rules are treated as
dividends received from a foreign corporation which is not a
controlled foreign corporation.

Mark-to-market method

Less~than~25-percent shareholders of passive foreign
corporations that are not U.S.-controlled, and who do not
elect current inclusion ("nonelecting shareholders"), are
subject under the bill to one of two methods for taxing the
economic equivalent of the PFC's current income: the
mark-to-market method or the interest-charge method.

Under the bill, nonelecting shareholders of a PFC with
marketable stock are required to mark their PFC shares to
market annually. .Under the. mark-to-market method, the U.S.
person is required to include in:gross income each taxable
year an.amount equal to the excess (if any) of the fair
market value of the PFC stock as of the close of the taxable
year over the adjusted basis of the stock. In the event the
adjusted basis of the stock exceeds its fair market value,
the U.S. person is allowed a deduction for the taxable year
equal to the lesser of the amount of the excess or the
“unreversed inclusions" with respect to the stock. The bill
defines the term “unreversed inclusions" to mean, with
respect to any stock in a passive foreign corporation, the
excess (if any) of the total amount of mark-to-market gains
with respect to the stock included by the taxpayer for prior
taxable years, over the amount of mark-to-market losses with

/6


DESCRIPTION OF S. 1394
(TAX SIMPLIFICATION ACT OF 1991)

AND PROPOSED MODIFICATIONS

Scheduled for Markup
by the
SENATE COMMITTEE ON FINANCE

On March 3, 1992

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
March 3, 1992

JICX~-8-92
REVISED


2. Matching rules for payments to partners (sec. 442 of
the bill)

Description of Bill

The bill defers the deduction of guaranteed payments by
a partnership until the year in which they are includible in
the partner's income.

Effective date.--Amounts taken into account after date
of enactment.

Proposed Modification

Delete the provision of the bill.

3. Close partnership taxable year with respect to
deceased partner (sec. 443 of the bill)

Description of Biil

The bill provides that the taxable year of a partnership
closes with respect to a partner whose entire interest in the
partnership terminates, whether by death, liquidation or
otherwise.

Effective date.--Partnership taxable years beginning

after December 31, 1991.

SF


The bill adjusts for inflation the dollar amounts
entered on the Federal income tax return of a parent electing
to report 3 child's unearned income. It likewise indexes the
fixed dollar amount used in computing the child's exemption
under the alternative minimum tax.

Effective date.--Taxable years beginning after
December 31, 1991.

5. Simplified foreign tax credit limitation for individuals
(sec. 105 of the bill)

Description of Bill

The bill allows individuals with no more than $200 of
creditable foreign taxes, and no foreign source income other
than income which is in the passive basket, to elect a
simplified foreign tax credit limitation equal to the lesser
of 25 percent of the individual's foreign source gross income
or the amount of the creditable foreign taxes paid or accrued
by the individual during the taxable year. A person who
elects the simplified foreign tax credit limitation is not
allowed a credit for any foreign tax not shown on a payee
statement furnished to him.or her, nor is the person entitled
to treat any excess credits for a taxable year to which the
election applied as a carryover to another taxable year.

For purposes of the simplified limitation, passive
income generally is defined to include all types of income
that would be foreign personal holding company income under
the subpart F rules, plus income inclusions from passive
foreign corporations (as defined by the bill), so long as the
income is shown on a payee statement furnished to the
individual. The statutory exceptions to treating these types
of income as passive for foreign tax credit limitation
purposes, such as the exceptions for high-taxed income and
high withholding tax interest, are not applicable in
determining eligibility to use the simplified limitation.

Effective date.--Taxable years beginning after
December 31, 1991.

6. Personal transactions by individuals in foreign currency
(sec. 106 of the bill)

Description of Bill

In a case where an individual acquires nonfunctional
currency and then disposes of it ina personal transaction,
and where exchange rates have changed in the intervening
period, the bill provides for nonrecognition of an
individual's resulting exchange gains not exceeding $200.
The bill does not change the treatment of resulting exchange
losses. It is understood that under other Code provisions,


Effective date.--The provision applies to sales of old
residences {within the meaning of section 1034) after the
date of enactment.

Proposed Modification

Delete the provision relating to multiple residences
within the rollover period.

Also, provide a safe harbor in the determination of
principal residence in certain cases incident to divorce or
marital separation. Specifically, provide that a residence
is treated as the taxpayer's principal residence at the time
of sale if (1) the residence is sold pursuant to a divorce or
Marital separation, and (2) the taxpayer used such residence
as his or her principal residence at any time during the
two-year period ending on the date of sale.

Effective date.--The provision applies to sales of old
residences (within the meaning of section 1034) after the
date of enactment.

-2. Due dates for estimated tax payments of individuals
(sec. 102 of the bill)

Description of Bill
Under the bill, the due date for the second estimated
tax payment of individuals is July 15th of the taxable year
for which the payment relates.

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

Proposed Modification

Delete the provision.
3. Payment of tax by credit card (sec. 103 of the bill)

Description of Bill

The bill permits payment of taxes by credit card, to
the extent and under the conditions provided by regulations.

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

4. Election by parent to claim unearned income of certain
children on parent's return (sec. 104 of the bill)

Description of Bill


7. Clarification of statute of limitations (sec. 707 of the
bill)

Description of Bill

The bill clarifies that the return that starts the
running of the statute of limitations for a taxpayer is the
return of the taxpayer and not the return of another person
from whom the taxpayer has received an item of income, gain,
loss, deduction, or credit.

Effective date.--The provision is effective for taxable
years beginning after the date of enactment.

8. Clarification of employment tax status of fishermen
Description of Bill
No provision.

Proposed Modification

The present-law exemption from employment :taxes for
certain fishermen on boats with a normal operating crew of
fewer than 10 individuals would be modified. The operating
crew of a boat would be treated as normally made up of fewer
than 10 individuals if average size of the operating crew on
trips made during the preceding 4 calendar quarters consisted
of 10 or fewer individuals. In addition, the exemption would
continue to apply if the crew member receives, in addition to
the cash remuneration permitted under present law, cash
remuneration which does not exceed $100 per trip, is
contingent on a minimum catch, and is paid solely for
additional duties (e.g., mate, engineer, or cook) for which
additional cash remuneration is traditional.

Effective date.--The proposal would generally apply to
remuneration paid after December 31, 1991. In addition, the
amendments would apply to remuneration paid after
December 31, 1984, and before January 1, 1992, unless the
payer treated such remuneration when paid as being subject to
employment taxes.

5L


D. Tax-Exempt Bond Provisions

1. Simplification of arbitrage rebate requirement for
governmental bonds (sec. 431 of the bill)

Description of Bill

The bill expands an exception to the arbitrage rebate
requirement to exempt from rebate certain governmental and
qualified 501(c)(3) bonds if at least 95 percent of the bond
proceeds are spent within six months after the bonds are
issued, and the remainder is spent within one year. Present
law requires that no more than the lesser of five percent of
$100,000 remain unspent after six months.

Effective date.--The provision applies to bonds issued
after the date of the bill's enactment.

2. Simplification of compliance with 24-month arbitrage
rebate exception for construction bonds (sec. 432 of
the bill)

Description of Bill

The bill exempts earnings on construction bond proceeds
invested in bona fide debt service funds from rebate if the
spending and penalty requirements of the 24-month exception
to the arbitrage rebate requirement for such bonds otherwise
are satisfied.

Effective date.--The provision applies to bonds issued
after the date of the bill's enactment.

3. Automatic extension of initial temporary period for
certain construction bonds (sec. 433 of the bill)

Description of Biil

The bill provides that the initial temporary period for
construction bonds is automatically extended for a period of
12 months if at least 85 percent of the available
construction proceeds are spent within the original initial
temporary period and the issuer reasonably expects to spend
the remaining proceeds within the 12-month extension period.
Construction bonds eligible for this automatic extension
include only those bonds currently eligible for the 24-month
rebate exception for construction bonds.

Effective date.--The provision applies to bonds issued
after the date of the bill's enactment.


£3

o. Installment sale treatment.--The denial of
installment sale treatment to dispositions of PFC stock is
limited to stock in interest-charge PFCs.

p- Effect of income with respect to CFCs and PFCs on
RICs.--Confirm that a RIC's income from a CFC or PFC, derived
from the business of investing in stock or securities, counts
toward satisfying the RIC's mandatory 90-percent income
threshold (sec. 851(b)(2)).

Effective date.--Generally effective for taxable years
of U.S. persons beginning after December 31, 1992, and
taxable years of foreign corporations ending with or within
such taxable years of U.S. persons.

The denial of installment sales treatment is effective
for sales or dispositions after December 31, 1992.

The determination of the basis of stock that was
acquired from a decedent in a taxable year beginning before
January 1, 1992 is not affected.

2. Modifications to provisions affecting controlled foreign
corporations (secs. 311 and 313 of the bill)

Description of Bill

a. Characterization of gain on disposition of stock
ier controlled foreign corporations

of lower

The bill provides that if a controlled foreign
corporation is treated as having gain from the sale or
exchange of stock in a foreign corporation, the gain is
treated as a dividend to the same extent that it would have
been so treated under section 1248 if the controlled foreign
corporation were a U.S. person. However, this rule does not
affect the determination of whether the second corporation is
a controlled foreign corporation.

Gain on disposition of stock in a related corporation
created or organized under the laws of, and having
substantial part of assets in a trade or business in, the
same foreign country as the gain recipient, even if
recharacterized as a dividend under the bill, is not
therefore excluded from foreign personal holding company
income under the same-country exception that applies to
actual dividends.

Effective date.--Effective for gains recognized on
transactions occurring after date of enactment of the bill.



40

4. Clarification of Amount of Gain Recognized by a
Securityholder in a Reorganization, Etc. (sec. 444
of the bill)

Description of Bill

The bill provides that for purposes of determining the
amount of gain recognized to a securityholder ina
reorganization (or a sec. 355 distribution), the excess of
the issue price (as defined in secs. 1273 and 1274) of the
securities received over the adjusted issue price of the
securities surrendered will be treated as other property. If
securities are received and none surrendered, the entire
issue price is treated as other property. If the issue price
of the securities received does not exceed the adjusted issue
price of the securities surrendered, then no amount of the
securities is treated as other property.

The adjusted issue price of a security surrendered means
the issue price of the security, increased by the OID
previously included in the gross income of any holder of the
security (determined without to the special rule for
subsequent holders), or decreased by the amount of bond
premium which would have been allowed as a deduction (or
offset) if the bond had always been held by the original
holder. Where section 1273(b)(4) applies to a security, the
stated redemption price is reduced by the amount of the
redemption price which is treated as interest (for exampie,
under sec. 483).

Effective date.--Exchanges and distributions after the

date of enactment.

Proposed Modification

Delete the provision from the bill.


Sage nl EB AG §

f. Character of income.--Clarify that, as under present
law, PFC income included under subpart F is treated as base
company income rather than foreign personal holding company
income, and is eligible for look-through treatment for
foreign tax credit limitation purposes, assuming the

look-through rule would otherwise apply under present law.

g. Special basis rules applicable to stock in
interest-charge PFCs acquired from decedents.--As under
present law, apply the rules that deny basis step-up at death
only to interest-charge PFCs. Unlike present law, conform to
these basis rules the basis rules for stock acquired from a
decedent in a corporation that would also be a foreign
personal holding company under present law.

h. Nonrecognition override rules.--As under present
law, apply the rules that override nonrecognition
transactions only to interest-charge PFCs.

i. Attribution rules for pass-through entities.--Apply
the bill's rules attributing stock ownership from
partnerships, S corporations, estates, and trusts to their
partners, shareholders, or beneficiaries except as provided
in regulations.

j. Tiered PFCs.--Under regulations, apply the bill's
recognition rules for dispositions by, and distributions to,
entities through which U.S. persons own PFC stock.

k. Conform treatment of all income from active assets
to the treatment of the asséts.--Exclude from the definition
Of passive income for purposes of the definition of a PFC any
income derived from assets that are treated as active assets

for purposes of the definition of a PFC.

1. Application to tax exempts.--In the case of a
tax-exempt organization, clarify that the PFC rules apply to
stock held in a PFC only to the extent that a dividend on
that stock would be taken into account in determining the
unrelated business taxable income of the organization, and
only to that extent.

m. Application to residents of U.S. possessions.--The
PFC rules apply equally to all U.s. citizens, without regard
to their residence. Special tax treatment available to
possessions residents is unaffected by the bill.

n. Regulatory authority to prevent avoidance through
renunciation of citizenship.--Give regulatory authority to
prevent avoidance of interest charge through changes in
citizenship, as well as through changes in residence.

ZZ


New companies would initially be treated as small
depositors. For purposes of performing the base period
determination, a company would be considered to have
employment taxes of zero for any calendar quarter in which a
company did not exist. Consequently, new companies would,
for at least the first two calendar quarters of their
existence, be required to deposit only once a month (unless
they fall within the $100,000 rule).

Safe harbor

The proposal would provide a statutory safe harbor with
respect to certain shortfalls in deposits. An employer would
be treated as having. deposited the required amount of
employment taxes in any deposit if the shortfall did not
exceed the greater of $100 or two percent of the amount of
employment taxes otherwise required to be deposited. A
shortfall would be the excess of the amount required to be
deposited (without regard to this rule) over the amount
actually deposited on or before the last day on which that
deposit is required. Any shortfall would be required to be
deposited as required by Treasury regulations.

Definitions and other rules

The proposal would provide that deposits are required
only on banking days. If a deposit would be required to be
made on or before a day that is not a banking day, the
deposit would be considered to have been made on a timely
basis if made on or before the close of the next banking day.

Effeccive date.--The proposal would be effective for
amounts attributable to payments made after December 31,
1992.



il.

12.
13.

Determination of gas produced from
qualifying sources under the nonconven-
tional fuels production credit.......... 67
Treatment of housing cooperatives........68

Treatment of safe harbor leases of
membership organizations... ..c.eeeeveee ee 69

(vii)


/3

Title III.--Foreign Provisions

1. Deferral of tax on income earned through foreign
corporations and exceptions to deferral (secs. 301-304 of
the bill and secs. 453, 532, 535, 542, 543, 551-558, 563,
954, 1246-1247, and 1291-1297 of the Code)

Description of Bill

In general

The bill replaces the separate anti-deferral regimes of
present law with a unified set of rules providing for either
partial or full elimination of deferral depending on the
circumstances. The bill preserves the present-law approach
under which partial current taxation is a function of the
type of income earned by the foreign corporation and a level
of U.S. ownership in the corporation exceeding some threshold
{as currently embodied in subpart F). The bill also
preserves the present-law approach under which full current
taxation is a function of a type of income or assets of the
corporation exceeding some threshold (as currently embodied
in subpart F, the PFIC rules, and the foreign personal
holding company rules). In both cases, the bill generally
applies current taxation through the operating rules of
subpart F. The bill eliminates regimes that are redundant or
marginally applicable, and ensures that no more than one set
of rules generally will apply to a shareholder's interest in
any one corporation in any one year.

Replacement of current law regimes for full elimination of
deferral

The bill creates a single definition of a passive
foreign corporation (PFC) that will unify and replace the
foreign personal holding company and PFIC definitions. The
rules applicable to PFCs represent a hybrid of
characteristics of the foreign personal holding company
rules, the PFIC rules, and the controlled foreign corporation
rules (subpart F), plus a new mark-to-market regime, as well
as a variety of simplifying or technical changes to rules
under the existing systems. The differences between the PFIC
provisions of present law and the PFC provisions that will be
applicable under the bill are explained below.

A PFC is any foreign corporation if (1) 60 percent or
more of its gross income is passive income, (2) 50 percent or
more of its assets (on average during the year, measured by
value) produce passive income or are held for the production
of passive income, or (3) it is registered under the
Investment Company Act of 1940 (as amended) either as a
Management company or as a unit investment trust. As under
the PFIC rules, the foreign corporation is permitted to elect



Title VII -- Administrative Provisions
A. General Administrative Provisions

1. Simplification of employment taxes on domestic services
(sec. 701 of the bill)

Description of Bill

The bill changes the threshold for withholding and
paying social security taxes from $50 a quarter to $300 a
year. The bill requires an individual who employs only
household employees to report any social security or Federal
unemployment tax obligation for wages paid to such employees
on his or her income tax return for the year.

Effective date.--The provision is effective for
remuneration paid in calendar years beginning after
December 31, 1991.

Proposed Modification

Effective date.--Remuneration paid in calendar years
beginning after December 31, 1992.

2. Penalties for failure to provide reports relating to
pension payments (sec. 702 of the bill)

Description of Bill

The bill incorporates into the general penalty structure
for failure to file information reports the penalties for
failure to provide information reports relating to pension
payments to the IRS and to recipients.

Effective date.--The bill applies to returns and
statements the due date for which is after December 31, 1991.

Proposed Modification

. E€fective date.--Returns and statements the due date for
which is after December 31, 1992.

1 this provision is also in section 310 of S. 1364, the
Employee Benefits Simplification and Expansion Act of 1991.



37

2. Include fractional share of property qualifying for
the marital deduction in the gross estate

Description of Bill
No provision.

Proposed Modification

To qualify for the marital deduction under present law,
a trust generally must grant the surviving spouse an income
interest in, or a power of appointment over, a specified
portion of property.. The modification would require that the
specified portion be expressed as a fraction or percentage of
trust property.

Effective date.--Gifts made, and decedents dying, after
date of enactment. The bill exempts a transfer under a will
or revocable trust executed before the date of enactment if
either (1) on that date the decedent was under a mental
disability to change the disposition of his property and did
-not regain his competence to dispose of such property before
the date of death, or (2) the decedent dies within three
years after the date of enactment. The exemption does not
apply if the will or trust is amended after the date of
enactment in any respect that increases the amount of the
transfer or alters the terms by which the interest passes.



The $111 also provides that in determining the amount in
the accunulated adjustment account for purposes of
determining the tax treatment of distributions made during a
taxable year by an S corporation having accumulated earnings
and profits, net negative adjustments (i.e., the excess of
losses and deductions over income) for that taxable year are
disregarded.

Effective date.--Distributions made in taxable years
beginning after December 31, 1991.

4. Treatment of S corporations as shareholders in C
corporations (sec. 404(a) of the bill)

Description of Bill

The bill repeals the rule that treats an S corporation
in its capacity as a shareholder of another corporation as an
individual. Thus, the liquidation of a C corporation into an
S corporation will be governed by the generally applicable
subchapter C rules, including the provisions of sections 332
and 337 allowing the tax-free liquidation of a corporation
into its parent corporation. An S corporation will also be
eligible to make a section 338 election (assuming all the
requirements are otherwise met), resulting in immediate
recognition of all the acquired C corporation's gains and
losses (and the resulting imposition of a tax).

Effective date.--Taxable years beginning after
December 31, 1991.

5. S corporations permitted to hold subsidiaries (sec.
404(b) of the bill)

Description of Bill

The bill repeals the rule that an S corporation may not
be a member of an affiliated group of corporations. Thus, an
S corporation will be allowed to own up to 100 percent of the
stock of a C corporation. However, an S corporation cannot
be included in a group filing a consolidated return.

Effective date.--Taxable years beginning after

December 31, 1991.

6. Elimination of pre-1983 earnings and profits of $
corporations (sec. 404(c) of the bill)

Description of Bill

The bill provides that if a corporation is an S$
corporation for its first taxable year beginning after
December 31, 1991, the accumulated earnings and profits of
the corporation as of the beginning of that year are reduced

30


by the accumulated earnings and profits (if any) accumulated
in any taxable year beginning before January 1, 1983, for
which the corporation was an electing small business
corporation under subchapter S.

Effective date.--Taxable years beginning after
December 31, 1991.

7. Determination of shareholder's pro rata share where
disposition of entire interest (sec. 404 (d) of the
bill)

Description of Bill

Under the bill, the present-law rule, allowing an S
corporation to elect to close its books for purposes of
determining shares of income on the termination of a
shareholder's interest, will be the mandatory rule in the
case of the disposition of a shareholder's entire interest in
the corporation.

Effective date.—-Taxable years beginning after
December 31, 1991.

Proposed Modification

Delete the provision from the bill.

8. Treatment of items of income in respect of a decedent
held by an S corporation (sec. 404(e) of the bill)

Description of Bill

The bill provides that a person acquiring stock in an S$
corporation from a decedent will treat as income in respect
of a decedent ("IRD") his pro rata share of any item of
income of the corporation which would have been IRD if that
item had been acquired directly from the decedent. Where a
item is treated as IRD, a deduction for the estate tax
attributable to the item generally will be allowed under the
provisions of section 691l(c). The stepped-up basis in the
stock will be reduced by the extent to which the value of the
stock is attributable to items consisting of IRD. This basis
rule is comparable to the present-law partnership rule.

Effective date.--Decedents dying after date of enactment
of the bill.

3 /



46

covered by the records are carried on (e.g., corporate
headquarters), provided that the records are available for
inspection by the Treasury Department during business hours.

Effective date.--The provision is effective beginning
180 days after enactment.

4. Transfers from breweries to distilled spirits plants
{sec. 614 of the bill)

Description of Bill

Under present law, beer may be transferred without
payment of tax from a brewery to a distilled spirits plant to
be used in the production of distilled spirits, but only if
the brewery is contiguous to the distilled spirits plant
(sec. 5222(b)). The bill allows beer to be transferred
without payment of tax from a brewery to a distilled spirits
plant to be used in the production of distilled spirits,
regardless of whether the brewery is contiguous to the
distilled spirits plant.

Effective date.--The provision is effective beginning
180 days after enactment.

Proposed Modification |

Allow brewers to receive credits/refunds on beer
transferred directly from wholesale and retail outlets to
distilled spirits plants as well as that transferred from or
through brewery premises.

5. Posting of sign by wholesale liquor dealers (sec. 615 of
the bill)

Description of Bill

Under present law, wholesale liquor dealers (i.e.,
dealers, other than wholesale dealers in beer alone, who sell
distilled spirits, wine, or beer to other persons who re-sell
such products) are required to post a sign conspicuously on
the outside of ‘their. place of business indicating that they
are wholesale liquor dealers (sec. 5115). The bill repeals
this requirement. :

Effective date.--The provision is effective upon
enactment.

6. Refund of tax for wine returned to bond (sec. 616 of the
bill)

Description of Bill


(sec. 1297{b)(5)). . The bill clarifies that these rules apply
to any transaction that results in the U.S. person being
treated as no longer owning the PFC stock, as well as any
disposition of the PFC stock by the entity actually owning
the PFC stcck. These rules apply regardless of whether the
transaction involves a disposition of the PFC stock, and
regardless of whether the parties to the transaction include
the U.S. person, the entity actually owning the PFC stock, or
some other entity. The bill also clarifies that an income
inclusion under the interest-charge method takes precedence
over an income inclusion under subpart F resulting from the
same disposition.

Under the bill, the interest-charge method applies to
any stock in a passive foreign corporation unless either the
stock is marketable (and therefore the mark-to-market method
applies) as of the time of the distribution or disposition
involved, or the stock in the passive foreign corporation was
subject to the current inclusion method (under the bill or
under prior law) for each taxable year beginning after
December 31, 1986 which includes any portion of the
.taxpayer's holding period in the PFC stock. In the event
that PFC stock, not subject to the current inclusion method,
becomes marketable during the taxpayer's holding period, the
interest-charge method applies to any distributions and
dispositions during the year in which the stock becomes
marketable, as well as to the mark-to-market gain (if any) as
of the close of that year. In the event that PFC stock was
initially marketable, and later becomes unmarketable and
subject to the interest-charge method, the taxpayer's holding
period in the PFC stock for purposes of the interest-charge
method is treated as beginning on the first day of the first
taxable year beginning after the last taxable year for which
the mark-to-market method applies to the taxpayer's stock in
the PFC.

The bill also provides for full basis adjustment for
partnerships and §S corporations that own stock in a passive
foreign corporation subject to the interest-charge method.
Although tax is imposed on a distribution or disposition
under the interest-charge method without including the
distribution or disposition in gross income, thus. precluding
the natural basis adjustments for amounts included in gross
income, the bill grants regulatory authority for appropriate
basis adjustments to partnerships and S corporations based on
the amount of income subject to tax under the interest-charge
method and thereby excluded from gross income.

The bill also includes a special rule to coordinate the
application of the interest-charge method to nonelecting
shareholders of a passive foreign corporation who are or were
residents of Puerto Rico. Under the bill, no interest charge
is applicable to amounts of an excess distribution that, were
the amounts actually earned in the year to which they are

/9



44

Cc. Other Excise Tax Provisions

1. Authority to grant exemptions from registration
requirements (sec. 631 of the bill)

Description of Bill

The bill gives the IRS authority to exempt parties to
the transfer of articles subject to Federal excise taxes from
certain registration requirements.

Effective date.--The provision applies to sales after
the 180th day after the date of enactment.

2. Repeal expired reduction in tax on piggyback trailers
(sec. 632(a) of the bill)

Description of Bill

Piggyback trailers and semitrailers sold within the
l-year period beginning on July 18, 1984 were permitted a
temporary reduction in the retail ‘excise tax on trailers.

The bill repeals as "deadwood" the temporary reduction in tax
on piggyback trailers.

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

3. Repeal expired deep seabed minerals excise tax (sec.
632(b) of the bill)

Description of Bill

The bill deletes as deadwood certain expired Code
provisions imposing an excise tax on certain minerals mined
on the deep seabed. The tax had been imposed in anticipation
of a Law of the Sea Treaty which the United States did not
sign.

Effective date.--The provision is effective on the date
of the bill's enactment.



3. Simplify payroll tax deposit requirements
Description of Bill
No provision.

Proposed Modification

In general

The proposal would replace the entire payroll tax
deposit system. In general, the new system would consist of
three basic deposit timetables. The first, which would be
most generally applicable (and would replace the
eighth-monthly system), would require deposits twice a week,
on Tuesdays and Fridays. The second, which would apply to
large depositors, would retain the requirement of present law
that cumulations of an amount to be deposited of $100,000 or
More must be deposited on the next day. The third, which
would apply to many small depositors, would provide generally
that if the amount required to be deposited was $12,000 or
less per quarter for a previous one-year base period,
deposits must be made only once a month, on or before the
fifteenth day of the following month.

Tuesday, Friday deposit rule

The Tuesday/Friday rule would operate in the following
manner. Amounts attributable to wage payments made on
Wednesday, Thursday, or Friday would be required to be
deposited on or before the following Tuesday. Amounts
attributable to wage payments made on Saturday, Sunday,
Monday, or Tuesday would be required to be deposited on or
before the following Friday.

Small depositor rules

The small depositor rules would operate as follows. If
an employer is a small depositor, deposits of employment
taxes attributable to wage payments during a month must be
made on or before the fifteenth day of the following month.

A person would be a small depositor for a calendar
quarter if, for each calendar quarter in the base period, the
amount of employment taxes attributable to payments in each
of those calendar quarters was $12,000 or less. The base
period would be defined to be the four calendar quarters
ending with the second preceding calendar quarter before the
quarter with respect to which the deposit requirements were
being determined. The only exception to this would be that
the $100,000 rule would apply to all depositors, including
small depositors.

58



Page

2. Authority to validate certain invalid

elections (SEC. 402)... eeeeecceeeeeee 29
3. Treatment of distributions by

S corporations during loss year

(SOC. 403)... ccc ccc ecw crew e reece eene 29
4. Treatment of S corporations as share-

holders in C corporations (sec. 404(a)).30
5. S$ corporations permitted to hold

subsidiaries (sec. 404(b))....e-eeeeee- 30
6. Elimination of pre-1983 earnings and

profits of S corporations (sec. 404(c)).30
7. Determination of shareholder's pro rata

share where disposition of entire

interest (sec. 404(d))........eeeeeeeee SL
8. Treatment of items of income in respect

of a decedent held by an S corporation

(sec. 404(e)). ccc eee cece cece eee ee eee SL

B. Accounting Provisions...........ceee eee e cree ee 32

1. ‘Modifications to the look-back method
for long-term contracts (sec. 411)..... 32
2. Simplified method for applying uniform
cost capitalization rules (sec. 412)... 33

C. Minimum Tax ProvisSions.....ceeeeeeceeeseceeeee 34

1. Depreciation under the corporate
alternative minimum tax (sec. 421)..... 34
2. Treatment of built-in losses for
purposes of the corporate alternative
minimum tax (Sec. 422).........e0-ee00- 34

D. Tax-Exempt Bond ProvisionS.......eeeeeeeeeeeee 35

1. Simplification of arbitrage rebate

requirement for governmental bonds

(SOC. ABL) ccc cece ccc ee ee ee eee rect eeee 35
2. Simplification of compliance with

24-month arbitrage rebate exception

for construction bonds (sec. 432)....... 35
3. Automatic extension of initial

temporary period for certain

construction bonds (sec. 433)........... 35

(iii)


E. Other Provisions

1... Treatment of Certain Revocable Trusts as Estates
(sec. 441 of the bill)

Description of Bill

The bill treats as estates certain grantor trusts
receiving the residue of the probate estate under the
grantor's will. If no will is admitted to probate, the
revocable trust that is primarily responsible for paying
taxes, debts and expenses of administration is treated as an
estate. The bill applies only to years beginning within
three years, nine months of the decedent's death.

Effective date.--Decedents dying after date of
enactment.

Proposed Modification

Delete the provision of the bill.

38


4. Simultaneous issuance of certain discrete issues not
aggregated (sec. 434 of the bill)

' Description of Bill

The bill allows discrete issues of governmental bonds to
be issued simultaneously without being treated as a single
issue if one of ‘the issues is a tax and revenue anticipation
note that is reasonably expected to be exempt from the
arbitrage rebate requirement.

Effective date.--The provision applies to bonds issued
after the date of the bill's enactment.

Proposed Modification

Include no inference language with respect to the proper
treatment of bonds issued before the date of the bill's
enactment.

5. Authority for Treasury Department to exempt certain
taxpayers from tax-exempt interest reporting requirement
(sec. 435 of the bill)

Description of Bill

The bill authorizes the Internal Revenue Service to
provide exceptions from the requirement that taxpayers report
interest on State and local government bonds on their Federal
income tax returns.

Effective date.--The provision is effective for taxable
years beginning after the date of the bill's enactment.

6. Repeal deadwood provisions (sec. 436 of the bill)
Description of Bill
The bill deletes as deadwood two expired exceptions to
the arbitrage rebate requirement which applied to certain
student loan bonds issued before January 1, 1989.

Effective date.--The provision is effective on and after
the date of the bill's enactment.

7. Expansion of exception to pro rata disallowance of

bank interest expense related to investment in
tax-exempt bonds

Description of Bill

No provision.

36


G/

5. Discharge of Indebtedness Income from Prepayment of REA
Loans at a Discount

Description of Bill
No provision.

Proposed Modification

Under Code section 501(c)12), a rural electric
cooperative is exempt from tax if at least 85 percent of its
income is derived from its members. In two prior technical
corrections, Congress has provided that the 85-percent test
would be determined without regard to discharge of
indebtedness income arising from the prepayment at a discount
of loans made by the Rural Electrification Administration
pursuant to the provisions of the 1988 and 1989 Budget
Reconciliation Acts. The proposed amendment would extend
that treatment to certain prepayment of REA loans provided by
the 1990 Farm Act.



Title II. Treatment of Large Partnerships
A. General Provisions

1. Simplified flow-through for large partnerships
(sec. 201 of the bill)

Description of Bill

The bill modifies the tax treatment of a large
partnership (generally, a partnership with at least 250
partners, or an electing partnership with at least 100
partners) and its partners. The bill provides that each
partner takes into account separately the partner's
distributive share of the following items, which are
determined at the partnership level: (1) taxable income or
loss from passive loss limitation activities; (2) taxable
income or loss from other activities (e.g., portfolio income
or loss); (3) net capital gain to the extent allocable to
passive loss limitation activities and other activities; (4)
net alternative minimum tax adjustment separately computed
for passive loss limitation activities and other activities;
(5) general credits; (6) low-income housing credit; (7)
rehabilitation credit; (8) for certain partnerships,
tax-exempt interest; and (9) for certain partnerships,
foreign taxes paid and foreign source partnership items.

All limitations and other provisions affecting the
computation of taxable income or any credit generally are
applied at the partnership (and not the partner) level. In
addition, all elections affecting the computation of taxable
income or any credit are made by the partnership.

In general, the large partnership rules do not apply to
an excluded partner's distributive share of partnership
items. An excluded partner is any partner (1) owning more
than a five percent partnership interest, or (2) materially
participating in the partnership's activities and holding any
interest that is not a limited partnership interest.

The large partnership rules do not apply to a
Partnership if at least 50 percent of the value of its assets
consists of oil or gas properties. In addition, the rules do
not apply to any item attributable to any partnership oil or
gas property. An election to apply these rules, however,
generally can be made, in which event depletion is computed
without regard to percentage depletion, and integrated oil
companies and partners holding working interests in oil and
gas are treated as excluded partners.

For all partners contributing property to a large
Partnership, the bill replaces section 704(c) with a
"deferred sale" approach. Under the bill, a large
partnership takes a fair market value basis in the property,


48

Effective date.--The provision is effective beginning
180 days sfter enactment.

9. Withdrawal of beer for destruction (sec. 619 of the bill)

Description of Bill

Present law does not specifically permit beer to be
removed from a brewery for destruction without payment of
tax. The bill allows beer to be removed from a brewery
without payment of tax for purposes of destruction, subject
to Treasury Department regulations.

Effective date.--The provision is effective beginning
180 days after enactment.

10. Records of exportation of beer (sec. 620 of the bill)

Description of Bill

Present law provides that a brewer is allowed a refund
of tax paid on exported beer upon submission to Department of
the Treasury of certain records indicating that the beer has
been exported (sec. 5055). The bill repeals the requirement
that proof of exportation be submitted to the Treasury
Department in all cases as a condition of receiving a refund
of tax. This proof will continue to be required to be
maintained at the exporter's place of business.

Effective date.--The provision is effective beginning
180 days after enactment.

ll. Transfer to brewery of beer imported in buik (sec. 621
of the bill)

Description of Bill

Under present law, distilled spirits imported into the
United States in bulk containers may (under certain
circumstances) be transferred from customs custody to bonded
premises of a distilled spirits plant without payment of tax
(sec. 5232). The bill extends this rule to beer imported
into the United States in bulk containers and transferred to
a brewery, subject to Treasury Department regulations.

Effective date.--The provision is effective beginning
180 days after enactment.



Effective date.--The provision applies to proceedings
commenced after the date of enactment.

54



average daily production of more than 500 barrels of cil and
gas, would be disqualified from the large partnership
simplified reporting regime with respect to items related to
partnership oil or gas property.

In addition to the modifications described above, other
clarifying, conforming, clerical and miscellaneous
modifications are proposed to the simplified reporting
provisions.

2. Simplified audit procedures for large partnerships
{sec. 202 of the bill)

Description of Bill

The bill creates a new audit system for large
partnerships. The bill defines "large partnership" the same
way for audit and reporting purposes (generally, partnerships
with at least 250 partners) except that certain oil and gas
partnerships are large partnerships for the audit rules but
are not subject to the large partnership reporting
requirements.

As under present law, large partnerships and their
partners are subject to unified audit rules. Unlike present
law, however, partnership adjustments generally will flow
through to the partners for the year in which the adjustment
takes effect. Thus, the current-year partners will adjust
their current-year share of partnership items of income,
gains, losses, deductions, or credits to reflect partnership
adjustments that take effect that year. The adjustments
generally will not affect prior year returns of any partners
(except in the case of changes to any partner's distributive
shares).

Effective date.--The bill applies to partnership taxable
years ending on or after December 31, 1992.

Proposed Modification

None (other than modifications to conform to the
modifications described in 1., above).

3. . Partnership returns on magnetic media (sec. 203
of the bill)

Description of Bill

The bill authorizes the IRS to require large
partnerships, and other partnerships with 250 or more
partners, to provide the tax return of the partnership and
copies of the schedules sent to each partner, to the IRS on
magnetic media.



Page

B. Modification to TEFRA partnership
PLOCEEGINGS... cece cece creer eee wccnccees 10

1. Treatment of partnership
items (SEC. 211)... cece ee ee ence eee aee 10
2. Determination of proper audit
procedures (SeC. 212)...... cere eens 10
3. Suspension of statute of limitations
for untimely petitions during
bankruptcy proceedings (sec. 213).... 10
4, TEFRA partnership exception
(SOC. 214). cece cece reer ecrecacesccees 10
5. Exclude partial settlements from
l-year assessment rule (sec. 215).... 10
6. Request for administrative
adjustment (sec. 216)........0006 . 11
7. %Imnocent spouse relief (sec. 217).... 11
8. Partnership level penalties (sec. 218). 11
9. Tax Court jurisdiction (sec. 219)...... 11
10. Premature petitions (sec. 220)... eee Ll
-11. TEFRA bond requirements (sec. 222)..... 11
12. <Interest suspension (sec. 222).......... 11

TITLE III. FOREIGN PROVISIONS......--seeceeeeeeseeee 13

1. Deferral of tax on income earned

through foreign corporations and

exceptions to deferral (secs. 301-304). 13
2. Modifications to provisions affecting

controlled foreign corporations

(secS. 311 and 313). ..... ccc eee ee eeeeee 23
3. Foreign tax credit in year of receipt

of previously taxed earnings and

profits (sec. 312)....c see eee ee ewes teee 26
4. Translation of foreign taxes into

U.S. dollar amounts (sec. 321)......... 26
5. Foreign tax credit limitation under

the alternative minimum tax (sec. 322). 27
6. Authority to simplify regulations

relating to certain transfers of

property involving foreign.corporations.28
7. Simplification of tax on transfers to

avoid income tax......ccececceceecevess 28

TITLE IV. OTHER INCOME TAX PROVISIONS.......+.00.00. 29
A. Provisions Relating to S Corporations....... 29

1. Determination of whether an S corporation
has one class of stock (sec. 401).......29

(ii)


Ld

Title IV.--Other Income Tax Provisions
- A. Provisions Relating to S Corporations

1. Determination of whether an S corporation has one class
of stock (sec. 401 of the bill)

Description of Bill

The bill provides that for purposes of determining
whether a corporation meets the subchapter S$
one-class-of-stock requirement, a corporation is treated as
having only one class of stock if all outstanding shares of
stock of the corporation confer identical rights to
distribution and liquidation proceeds.

Effective date.--Taxable years beginning after
December 31, 1982.

2. Authority to validate certain invalid elections (sec. 402
of the bill)

Description of Bill

Under the bill, the authority of the Internal Revenue
Service to waive the effect of an inadvertent termination is
extended to allow the Service to waive the effect of an
invalid election caused by an inadvertent failure to qualify
as a small business corporation or to obtain the required
shareholder consents.

The bill also allows the Internal Revenue Service to
treat a late Subchapter S election as timely where the
Service determines that there was reasonable cause for the
failure to make the election timely.

Effective date.--Taxable years beginning after
December 31, 1982.

3. Treatment of distributions by S corporations during loss
year (sec. 403 of the bill)

Description of Proposal

The bill provides that the adjustments for distributions
made by an S corporation during a taxable year are taken into
account before applying the loss limitation for the year.
Thus, distributions during a year reduce the adjusted basis
for purposes of determining the allowable loss for the year,
but the loss for a year does not reduce the adjusted basis
for purposes of determining the tax status of the
distributions made during that year.



/7

respect to such stock that were allowed as deductions for
prior taxable years.

The adjusted basis of stock in a passive foreign
corporation is increased by the amount of mark-to-market gain
included in gross income, and is decreased by the amount of
mark-to-market losses allowed as deductions with respect to
such stock.

All amounts of mark-to-market gain on PFC stock, as well
as gain on the actual sale or distribution of PFC stock, are
treated as ordinary income. Similarly, ordinary loss
treatment applies to the deductible portion of any
mark-to-market loss on PFC stock, as well as to any loss
realized on the actual sale or other disposition of PFC stock
to the extent that the amount of such loss does not exceed
the unreversed inclusions with respect to that stock. These
loss deductions are treated as deductions allowable in
computing adjusted gross income.

The source of any amount of mark-to-market gain on PFC
stock is-determined :in the same manner as if ‘the amount of
income were actual gain from the sale of stock in the passive
foreign corporation. Similarly, the source of any amount
allowed as a deduction for mark-to-market loss on PFIC stock
is determined in the same manner as if that amount were an
actual loss incurred on the sale of stock in the passive
foreign corporation.

The mark-to-market method under the bill only applies to
passive foreign corporations the stock of which is
"marketable." PFC stock is treated as marketable if it is
regularly traded on a qualified exchange, whether inside or
outside the United States. PFC stock is also treated as
marketable, to the extent provided in Treasury regulations,
if the PFC continuously offers for sale or has outstanding
any stock (of which it is the issuer) that is redeemable at
its net asset value in a manner comparable to a U.S.
regulated investment company (RIC).

In addition,.the bill treats as marketable any stock in
a passive foreign corporation that is owned by a RIC that
continuously offers for sale or has outstanding any stock (of
which it is the issuer) that is redeemable at its net asset
value. The bill also treats as marketable any stock in a
passive foreign corporation that is held by any other RIC,
except to the extent provided in regulations.

The bill coordinates the application of the
mark-to-market method with the tax rules generally applicable
to RICs. The bill treats mark-to-market gain on PFC stock as
a dividend for purposes of both the 90-percent investment
income test of section 851(b)(2) and the 30-percent
short-short limitation of section 851(b)(3).



CONTENTS

Page
INTRODUCTION. «2 cc cec ceca cece cc ncnccccccceecescccecces Vii
DESCRIPTION OF S. 1394 AND PROPOSED
MODIFICATIONS. 2... sce ec ce cence cece c cece ren ccscseneeece 1
TITLE I. INDIVIDUAL TAX PROVISIONS......e.ceceeceee 1
1. Rollover of gain on sale of principal
residence (Sec. LOL)... cece ee eeeeeace 1
2. Due dates for estimated tax payments of
individuals (sec. 102).....cceccceeeee 2
3. Permit payment of taxes by credit
Card (SOC. 103)... cece eee ee eee ences 2
4. Election by parent to claim unearned
income of certain children on parent's
return (SCC. 1L04). Lee eee ece cece cecces 2
5. Simplified foreign tax credit limitation
for individuals (sec. 105)...........4- 3
6. Personal transactions by individuals in
foreign currency (sec. 106).........4. 3
7. Due date for furnishing information to
Partners (SEC. 107)... rec w cece ceneeces 4
8. Make income tax withholding rules
parallel to rules for exclusion from
income for combat pay (sec. 108)...... 4
9. Expanded access to simplified income
tax returns (S@C. 109)... cc cece ewe wees 4
10. Simplification of tax treatment of
rural letter carriers' vehicle expenses
(SOC. LO). cc cece eee cece ener rene 5
11. Exemption from luxury excise tax for
certain equipment installed on
passenger vehicles for use by disabled
individuals (sec. 111). .......eceeeeee 5
TITLE II. TREATMENT OF LARGE PARTNERSHIPS......000- 6
A. General Provisions........ ee rs 6
1. Simplified flow-through for large
partnerships (sec. 201).........eceeee 6
2. Simplified audit procedures for large
partnerships (Se@C. 202)......eceeeeeee 8
3. Partnership returns on magnetic media
(SOC. 203)... cece cece eee eee eee nee 8

(i)


Title V.--Estate and Gift Tax Provisions

1. Waiver of right of recovery for certain marital deduction
property (sec. 501 of the bill)

Description of Bill

Under the bill, a surviving spouse's estate has a right
of recovery with respect to qualified terminable interest
property (QTIP) unless the spouse otherwise directs ina
provision of the will (or revocable trust) specifically
referring to Code section 2207A, which grants such right.

Effective date.--Decedents dying after the date of
enactment.

Proposed Modification

Revise the bill to provide that the right of recovery
with respect to QTIP is waived by language specifically
indicating intent to waive the right, rather than by language
“specifically referring to section 2207A. Adopt the same rule
‘for waiving the right of contribution with respect to
property over which the decedent retained the right to
enjoyment or income.

2. Inclusion in gross estate of certain gifts made
within three years of death (sec. 502 of the bill)

Description of Bill

The bill provides that a transfer from a revocable trust
within three years of death does not result in including the
transfer in the gross estate. The bill also revises section
2035 to improve its clarity.

Effective date.--Decedents dying after the date of
enactment.

Proposed Modification

Revise the bill to provide that a transfer from a trust
over which the grantor held the power to revoke would be
treated as if made directly by the grantor (and not
includible in the grantor's gross estate).

3. Definition of qualified terminable interest property
(sec. 503 of the bill)

Description of Bill

Under the bill, an income interest does not fail to be
a qualified income interest, a prerequisite for the marital
deduction, solely because income accumulated prior to death

4)



£5

The bill provides that an.exemption or reduction by
‘treaty of the branch profits tax that would be imposed under
section 884 on a controlled foreign corporation does not
affect the general statutory exemption from subpart F income
that is granted for U.S. source effectively connected income.

Effective date.--Taxable years ending after the date of
enactment.

Proposed Modification

a. Characterization of gain on disposition of stock
of lower-tier controlled foreign corporations

The proposed modification would repeal the provision
added to section 904(d)(2)(E) by the 1988 Act which, except
as provided by regulations, requires a recipient of a
distribution from a controlled foreign corporation to have
been a United States shareholder in that controlled foreign
corporation for the period during which the earnings and
profits which gave rise to the distribution were generated in
order to.avoid treating the distribution as one coming from a
noncontrolled section 902 corporation.

Effective date.--Effective for distributions after date
of enactment.

b. Subpart F inclusions in year of disposition

None.

c. Adjustments to basis of stock held by foreign
corporations . a

None.

Effective date.--Effective for purposes of determining
U.S. Shareholder inclusions in taxable years of U.S.
shareholders beginning after December 31, 1992.

d. Avoiding double inclusions in other cases

-None.

e. Treatment of United States income earned by a
controlled foreign corporation

None.

Effective date.--Taxable years beginning after
December 31, 1986.



34

C. Minimum Tax Provisions

1. Depreciation under the corporate alternative minimum tax
(sec. 421 of the bill)

Description of Bill

The bill applies a 120-percent declining balance method
(switching to straight-line at a point maximizing
depreciation deductions) for personal property (other than
transition property to which the ACRS system in effect before
the Tax Reform Act of 1986 applies) for determining the
alternative minimum taxable income (AMTI) of a corporation.
No further depreciation adjustment for this property would be
required for the adjusted current earnings (ACE) component of
the corporate alternative minimum tax (AMT).

Corporate taxpayers may elect to use the 120-percent
declining balance method of depreciation for regular tax
purposes.

‘Effective Date:--The provision is effective for property
placed in. service in taxable years beginning after
December 31, 1990.

Proposed Modification

Delete provision. (Another item in the Chairman's
proposal would provide that no additional adjustment be made
for adjusted current earnings for property placed in service
on or after February 1, 1992.)

2. Treatment of built-in losses for purposes of the
corporate alternative minimum tax (sec. 422 of the bill)

Description of Bill

The bill repeals the ACE rule relating to the treatment
of built-in losses after a change of ownership. Thus, for
ACE purposes, the treatment of built-in losses would be
similar to the treatment of net operating loss carryovers (in
the same way that the treatment of built-in losses is similar
to the treatment of net.operating losses for regular <:ax
purposes).

Effective date.--The provision is effective for changes
of ownership occurring after December 31, 1991.


treated as earned under the interest-charge method, would
have been eligible for the exclusion under section 933 (for
income derived by residents of Puerto Rico from sources
within Puerto Rico).

Modification or repeal of other antideferral regimes

The bill treats as foreign personal holding company
income for subpart F purposes an amount received under a
personal service contract if a person other than the
corporation has the right to designate (by name or by
description) the individual who is to perform the services,
or if the individual who is to perform the services is
designated (by name or by description) in the contract. The
bill similarly treats as foreign personal holding company
income for subpart F purposes any amount received from the
sale or distribution or disposition of such a contract. This
rule applies only if at some time during the taxable year 25
percent or more of the value of the corporation's stock is
owned (directly, indirectly, or constructively) by or for the
individual who may be designated to perform the services.
Income from such personal service contracts isnot, however,
treated as passive for foreign tax credit :purposes.

The bill repeals the foreign personal holding company
provisions, the PFIC provisions (except as modified and
preserved as the passive foreign corporation provisions), and
the foreign investment company provisions. ‘The bill also
excludes all foreign corporations from the application of the
accumulated earnings tax and the personal holding company
tax.

In addition, the bill denies installment sales treatment
for any installment obligation arising out of a sale of stock
in a passive foreign corporation. This will prevent
shareholders in passive foreign corporations from avoiding
the interest charge by means of an installment sale of their
PFC stock.

Effective date.--The bill generally is effective for
taxable years of U.S.. persons beginning after December 31,
1991, and taxable years'of foreign corporations ending with
or within such taxable years of U.S. persons.

The denial of installment sales treatment is effective
for sales or dispositions after December 31, 1991.

The bill does not affect the determination of the basis
of stock in a PFIC that was acquired from a decedent in a
taxable year beginning before January 1, 1991.

S


such losses typically are not deductible by individuals
(e.g., sec. 165(c)).

Effective date.--Taxable years beginning after
December 31, 1991.
7. Due date for furnishing information to partners of

large partnerships (sec. 107 of the bill)

Description of Bill

The bill provides that a large partnership must furnish
information returns to partners by the 15th day of the third
month following the close of the partnership's taxable year.
A large partnership is any partnership with 250 or more
partners as well as any partnership subject to the simplified
reporting rules for large partnerships (contained in sec. 201
of this bill, described below).

Effective date.--The provision is effective for taxable
years ending on or after December 31, 1992.

Proposed Modification

Require information returns to be furnished by the first
March 15 following the close of the partnership's taxable
year, applicable only to those partnerships subject to the
simplified reporting rules for large partnerships.

8. Make income tax withholding rules parallel to rules
for exclusion from income for combat pay (sec. 108
of the bill)

Description of Bill

The bill makes the income tax withholding exemption
rules parallel to the rules providing for an exclusion from
gross income for combat pay.

Effective date.--The provision is effective as of
January 1, 1992.

9. . Expanded access to simplified income tax returns
(sec. 109 of the bill)

Description of Bill

The bill provides that the Secretary of the Treasury (or
his delegate) shall take such actions as may be appropriate
to expand access to simplified individual income tax forms
and to otherwise simplify the individual income tax returns.


56

Title VIII--Additional Provisions _
1. Income taxation of accumulation trusts
Description of Bill
No provision.

Proposed Modification

Exempt amounts accumulated in domestic trusts after
December 31, 1992, from the so-called “throwback rule," under
which distributions of accumulated income to the
beneficiaries are thrown back to the year in which the income
would have been taxed to the beneficiary if it had been
distributed currently. Also provide that precontribution
gain on property sold by a domestic trust is no longer taxed
at the contributor's marginal tax rates. These modifications
would not apply to any trust created before March 1, 1984,
unless the taxpayer establishes that the trust would not have
been aggregated under the standard contained in section
643(f£).

Effective date.--Taxable years beginning after
December 31, 1992.



42

is not required to be distributed to the surviving spouse's
estate. Such income is included in the surviving spouse's
gross estate.

Effective date.--Decedents dying, and gifts made,
after date of enactment.

4. Requirements for qualified domestic trust (sec. 504 of
the bill)

Description of Bill

A transfer to an noncitizen spouse qualifies for the
marital deduction only if made to a qualified domestic trust.
The bill provides that, if the governing instrument requires
all trustees be U.S. citizens or domestic corporations, the
requirement that U.S. trustees have the right to withhold
estate tax on distributions shall be waived.

Effective date.--As if included in the Technical and
Miscellaneous Revenue Act of 1988 (i.e., decedents dying
after November 10, 1988).

5. Election of special use valuation of farm property
for estate tax purposes (sec. 505 of the bill)

Description of Bill

The bill allows an estate to use special use valuation
if the executor makes an election and submits the required
recapture agreement, so long as the executor supplies missing
requisite information within a reasonable period of time (not
exceeding 90 days) after IRS notification. The bill also
allows signatures to be added to the agreement during that
time period.

Effective date.--Decedents dying after the date of
enactment.


Proposed Modification

Delay effective date to sales or uses on or after
January 1, 1993.

44


and the contributing partner's precontribution gain or loss
is deferred until the occurrence of specified recognition

events.

Effective date.--The provisions generally apply to
partnership taxable years ending on or after December 31,
1992.

Proposed Modifications

The modifications proposed to be made to the simplified
reporting provisions of the large partnership proposal
include the following: (1) generally eliminating the excluded
partner concept; (2) separately stating creditable foreign
taxes and foreign source items for all large partnerships,
regardless of whether foreign source income is at least 25
percent of the partnership's gross income; (3) separately
stating tax-exempt interest for all large partnerships,
regardless of whether at least 50 percent of the value of the
partnership's assets consists of tax-exempt obligations; (4)
separately stating net capital loss as well as net capital
gain, ‘and treating.such gain or loss as long-term capital
gain or loss; (5).with respect to corporate partners,
determining: the net AMT adjustment by using the adjustments
applicable to corporations; (6) excluding REMIC excess
inclusion income from the gross income of the partnership;
(7) separately stating a large partnership's discharge of
indebtedness income, and clarifying that the provisions of
section 108 apply without regard to the large partnership
rules; (8) applying certain installment sale rules at the
partnership level; (9) modifying the exclusion for service
partnerships; (10) allowing the partnership (and not the
partners) any credit for RIC capital gains; (11) excluding
from the simplified reporting and audit regimes any
partnership the principal activity of which is the buying and
selling of commodities, or options, futures or forwards with
respect to commodities; (12) modifying the deferred sale
rules so that certain nonrecognition transactions would not
be treated as dispositions that would trigger a contributing
partner's deferred gain or loss; and (13) separately stating
the credit for producing fuel from a nonconventional source.

The special rules applicable to large partnerships
holding oil and gas properties would be modified as follows:
(a) the simplified reporting regime would be made elective
for large partnerships with at least 25 percent {measured by
value) of their assets in oil or gas properties; (b) the
computation of both cost depletion and percentage depletion
(without application of either the "65-percent of taxable
income" limitation or the 1,000-barrel-per-day limitation)
would be made at the partnership level; and (c) partners who
either do not qualify for percentage depletion deductions or
for full expensing of intangible drilling and development
costs (i.e., integrated oil and gas companies), or who have