/4

principal amount of such loans plus any accrued interest
minus the sum of any amounts collected from such borrower,
and (3) the percentage of income each borrower has agreed to
repay. A copy of such certification with respect to a
borrower would be sent to such borrower.

Demonstration program

In general

The Secretary of Education would select institutions of
higher education for participation in the Self-Reliance Loan
program from those institutions submitting applications that
are eligible to participate in part B loan programs. Not
later than May 1, 1993, the Secretary would select not more
than 500 institutions to participate in the program. The
participating institutions would be chosen so as to represent
a cross-section by educational sector, length of academic
program, default experience, annual loan volume, highest
degree offered, enrollment size, and geographic location.

The Secretary would also select participating institutions in
such a manner that the projected volume of student borrowing
under the demonstration program would not exceed the
following amounts:

$450,000,000 in fiscal year 1994

$550,000,000 in fiscal year 1995

$650,000,000 in fiscal year 1996

$900,000,000 in fiscal year 1997.

Each institution wishing to offer an Income-Dependent
Education Assistance program would be required to submit an
application to the Secretary of Education and, if accepted,
enter into an agreement with the Secretary of Education for
receipt of funds. Each participating school would agree to
follow procedures specified by the Secretary of Education in
consultation with the Secretary of the Treasury in disbursing
such loans; to accept liability stemming from mismanagement
of loans or false origination of loans; to provide the
Secretary of Education at least once a month with a list of
Self-Reliance Loan participants and any change in their
enrollment status; and to counsel borrowers on their
repayment options and their obligations.

The Secretary of Education would have the same authority
to limit, suspend, or terminate an institution's
participation in the Income-Dependent Education Assistance
program as applies to an institution's participation in loan
programs under Part B of the Higher Education Act of 1965,
and could also impose additional regulations or criteria for
participation. The demonstration program would conclude at
the end of fiscal year 1997.



property generally is excluded from UBTI (sec. 512(b)). In
addition, gains on the lapse or termination of options on
securities are explicitly exempted from UBTI (sec. 512(b)(5).

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

Description of Proposal

The proposal would clarify that loan commitment fees
and premiums from unexercised options on real estate are
excluded from UBTI.

Effective Date

The proposal would be effective for premiums or loan
commitment fees that are received after February 1, 1992.

£. Exclude certain hotel rental income from UBTI
Present Law

Rents from real property generally are excluded from
UBTI unless the rents are measured by reference to the net
income derived by any person from the leased property (sec.
512(b)(3)). Payments for the use or occupancy of rooms and
other space where services are also rendered to the occupant,
such as for the use or occupancy of rooms or other quarters
in hotels, do not constitute rents from real property (Treas.
Reg. sec. 1.512(b)-1(c)(5)).

Description of Proposal

The proposal would exclude from UBTI any hotel rental
income when (i) the hotel has been acquired from a financial
institution in receivership or conservatorship, (ii) the
hotel has been designated as disposal property within six
months of acquisition, and (iii) the hotel either is disposed
within two-and-a-half years of acquisition or, after
two-and-a-half years, any related services are rendered by an
independent contractor pursuant to a contract that does not
permit the exempt organization to share any of the net income
of the independent contractor.

Effective Date

The proposal would be effective for hotels acquired
after February 1, 1992.

35


at the time of sale does not exceed 25 percent of the value
of the property.

Reguiations would be authorized for the purpose of
clarifying these limitations. In particular, these
regulations would be expected to establish standards for
determining when the value of a participation feature at the
time of sale does not exceed 25 percent of the value of the
property. For example, a participation feature that provides
the seller with less than a 25 percent interest in net
proceeds, net income, or. gain on sale of the property would
be expected to be valued at less than 25 percent of the value
of the property.

Eliminate section 514(c)(9)(B) restrictions for investments
through certain large partnerships

The proposal also would eliminate the six section
514(c)(9)(B) restrictions for qualified organizations that
invest in real property through certain "large" partnerships.

A “large” partnership would be a partnership having at
least 250 partners that satisfies the following three tests:
(1) investment units in the partnership are registered with
the Securities and Exchange Commission; (2) a significant
percentage (at least 50 percent) of each class of interests
is owned by taxable individuals; and (3) a principal purpose
of the partnership allocations is not tax avoidance.
Partnership interests that are subject to the same terms
would be considered to be in the same class, regardless of
whether the interests are subject to different ownership
restrictions (a partnership can therefore monitor the 50
percent ownership restriction by requiring that designated
interests be held only by taxable persons).

Treat certain mortgages as real property

The proposal would treat mortgages as real property for
purposes of section 514(c)(9), under the following
conditions: (1) the mortgages have been acquired from a
financial institution that is in conservatorship or
receivership, (2) the mortgages have been acquired with a
cash down payment of at least 50% of the sales price (i.e.,
the acquisition indebtedness is less than 50% of the price of
the mortgages), (3) the mortgages are not debt-financed
property except on account of acquisition indebtedness that
is granted by the seller, and (4) the mortgages are acquired
prior to January 1, 1994. Mortgages would be eligible for
treatment as real property for two-and-a-half years after
they are acquired by the tax-exempt purchaser.

3/


15. Extension of Low-Income Housing Tax Credit
Present Law

A tax credit is allowed in annual installments over 10
years for qualifying newly constructed or substantially
rehabilitated low-income rental housing. For most qualifying
housing, the credit has a present value of 70 percent of the
cost of low-income housing units. For housing receiving
other Federal subsidies (e.g., tax-exempt bond financing) and
for the acquisition cost of existing housing that is
substantially rehabilitated (e.g., costs other than
rehabilitation expenditures), the credit has a present value
of 30 percent of qualified costs. Generally, the portion of
the building for which the credit is claimed must be rented
to qualified low-income tenants at restricted rents for 15
years after the building is placed in service. In addition,
a subsequent additional 15-year period of low-income use is
required.

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

The low-income housing credit is scheduled to expire
after June 30,:1992.

Description of Proposal

The low-income housing credit would be extended for 18
months, through December 31, 1993.

The proposal also would make several modifications to
the credit:

(1) For purposes of the carryforward rules, credits
carried forward from previous years would be treated as used
before current year credits. Under present law, current year
credits are deemed to be used before credits which have been
carried forward.

(2} A waiver from the credit's ten-year anti-churning
rule would be provided for certain projects substantially
assisted, financed, or operated under sec 221(d)(4) of the
National Housing Act. Absent such waiver these properties are
not eligible for the credit if they were placed in service
within the previous ten years.

(3) The eligible basis of each unit of a credit project
would be limited to an amount equal to the maximum FHA single

40



Effective Date

The provision generally would apply to taxable years
beginning after December 31, 1992. However, the rule
permitting penalty-free withdrawals in certain cases would be
effective for taxable years beginning after December 31,
1991. In addition, the rule permitting transfers from
deductible IRAs to special IRAs would be effective for
taxable years beginning after December 31, 1991. Thus,
special IRAs could be established and maintained in taxable
years beginning before January 1, 1993, only with funds
transferred from a deductible IRA.


68

circumstances, are required for business purposes to conduct
significant amounts of R&D at foreign sites and should not be
penalized by the allocation rules.

Effective Date

The report would state that the committee expects and
requests the Treasury Department to issue regulations no
later than June 1, 1992, to be effective after the
termination of the current temporary rules.



20. Elimination of ACE Depreciation Adjustment
Present Law

Under present law, a corporation is subject to an
alternative minimum tax ("AMT") which is payable, in addition
to all other tax liabilities, to the extent that it exceeds
the corporation's regular income tax liability. Alternative
minimum taxable income ("AMTI") is the corporation's taxable
income increased by the corporation's tax preferences and
adjusted by determining the tax treatment of certain items in
a manner which negates the deferral of income resulting from
the regular tax treatment of those items.

One of the adjustments which is made to taxable income
to arrive at AMTI relates to depreciation. Depreciation on
personal property to which the modified ACRS system adopted
in 1986 applies is calculated using the 150-percent declining
balance method (switching to straight line in the year
necessary to maximize the deduction) over the life described
in Code section 168(g) (generally the ADR class life of the
property).

For taxable years beginning after 1989, AMTI is
increased by an amount equal to 75 percent of the amount by
which adjusted current earnings ("ACE") exceed AMTI (as
determined before this adjustment). The ACE adjustment
replaced the book-income adjustment applicable to tax years
1987 through 1989. In general, ACE means AMTI with
additional adjustments that generally follow the rules
presently applicable to corporations in computing their
earnings and profits. For purposes of ACE, depreciation is
computed using the straight-line method over the class life
of the property. Thus, a corporation generally must make two
depreciation calculations for purposes of the AMT--once using
the 150-percent declining balance method and again using the
straight-line method.

Description of Proposal

Effective for property placed in service on or after
February 1, 1992, the proposal would eliminate the
depreciation component of ACE for corporate AMT purposes.
Thus, in computing ACE, a corporation would use the same
depreciation methods and lives that it uses in computing AMTI
(generally, the 150-percent declining balance method for
tangible personal property).

Effective Date

The proposal would be effective for property placed in
service on or after February 1, 1992.

50



19. Alternative Minimum Tax Relief for Intangible Drilling
Costs of Oil and Gas Independent Producers

Present Law

Independent oil and gas producers who pay or incur
intangible drilling or development costs ("IDCs") in the
development of domestic oil or gas properties or certain
geothermal wells, may elect either to expense or capitalize
such amounts. If an election to expense IDCs is made, the
taxpayer deducts the amount of the IDCs as an expense in the
taxable year the cost is paid or incurred. Generally, if IDCs
are not expensed, but are capitalized, they can be recovered
through depletion or depreciation, as appropriate; or at the
election of the taxpayer, they may be amortized over a
60-month period.

The difference between the amount of a taxpayer's IDC
deductions and the amount which would have been currently
deductible had IDCs been capitalized and recovered over a
10-year period constitute an item of tax preference for the
alternative minimum tax (AMT) to the extent that this
difference exceeds 65 percent of the taxpayer's net income
from oil, gas, and geothermal properties for the taxable
year. Moreover, for purposes of computing the "adjusted
current earnings" (ACE) adjustment of the corporate AMT, IDCs
are capitalized and amortized over the 60-month period
beginning with the month in which they are paid or incurred.

A portion of the IDC tax preference and IDC-related ACE
adjustment (together with a portion of preference and ACE
adjustment related to percentage depletion from marginal
properties) may operate to reduce an independent oil and gas
producer's alternative minimum taxable income under a
provision enacted as part of the Omnibus Budget
Reconciliation Act of 1990 (the so-called “special energy
deduction"). The special energy deduction is initially
determined by determining the taxpayer's (1) IDC preference?
and (2) marginal production depletion preference. The IDC
preference is apportioned between the portion of the
preference related to exploratory drilling costs and the

1 the Ipc preference is the amount by which the taxpayer's
alternative minimum taxable income would be reduced if it
were computed without regard to the excess IDC preference and
the ACE IDC adjustment.

2 the marginal production depletion preference is the amount
by which the taxpayer's alternative minimum taxable income
would be reduced if it were computed without regard to the
excess depletion preference and the ACE depletion adjustment
related to marginal property.

43



proposal would be fully phased in, and the new rates would
apply for qualified capital assets held more than two years.



58

25. Business Energy Tax Credits for Solar and Geothermal
Property

Present Law

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

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

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

Description of Proposal

The proposal would extend the business credits for solar
and geothermal property for 18 months, through December 31,
1993.

Effective Date

The proposal would be effective for qualifying solar and
geothermal property placed in service after June 30, 1992.

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



18. Extension of Relief for AMT Purposes for Contributions
of Appreciated Property

Present Law

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

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

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

Description of Proposal

AMT treatment of donated appreciated property

The proposal provides that all charitable contributions
of appreciated property (real, personal, or intangible
property) made during 1992 and 1993 would not be treated as a
tax preference item for alternative minimum tax (AMT)
purposes.

Advance determination of IRS position of value of donated
tangible personal property

The Secretary of the Treasury would be directed to
develop and implement a procedure under which the Secretary's
position as to the value of tangible personal property could
be ascertained for Federal income tax purposes prior to the

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

46



excluded from gross income under Code section 135 (relating
to the redemption of United States savings bonds to pay for
higher education expenses) and by the amount of the reduction
described in Code section 135(d)(1) (relating to certain
scholarships and veterans benefits).

Limitation on claiming deduction

A taxpayer may not claim a deduction for interest on a
qualified education loan if the taxpayer claims a deduction
for qualified residence interest that is allocable to
indebtedness used to pay for qualified higher education
expenses of the taxpayer or the taxpayer's spouse or
dependent.

Limitations on claiming credit

In general

No credit is allowed to an individual if that individual
is claimed as a dependent on another taxpayer's return for
the taxable year beginning in the calendar year in which such
individual's taxable year begins.

No credit is allowed for interest on any amount of
education loan indebtedness for which a deduction is claimed
under any other provision.

If the taxpayer is under 23 years old (or, in the case
of a joint return, if both spouses are under 23) at the end
of the calendar year ending with or within the taxable year,
the amount of the credit is not to exceed the taxpayer's
regular tax liability multiplied by the ratio of the
taxpayer's earned income (defined in Code section 911(d)(2))
to the taxpayer's adjusted gross income.

Credit claimed for interest on borrowing for expenses
of taxpayer's dependent

In the case of qualified education loans used to pay the
qualified higher education expenses of an individual other
than the taxpayer or the taxpayer's spouse, no credit is
allowed unless the individual is claimed as a dependent of
the taxpayer for that taxable ,:ar and the individual is at
least a half-time student during that taxable year.

Effective Date
The provision would be effective for taxable years

beginning after December 31, 1991 and only for loans whose
first payments are due after that date.

/3



36

12. Tax Credit for First-Time Homebuyers
Present Law

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

Description of Proposal

Under the proposal, individuals who purchase a new
principal residence would be eligible to receive a tax credit
equal to 10 percent of the purchase price of the residence,
up to a maximum credit of $5,000. The credit would apply to
a new principal residence if the original use of the
residence commences with the taxpayer and if the taxpayer (1)
acquires such residence on or after February 1, 1992, and
before January 1, 1994, or (2) enters into a binding contract
to acquire the residence on or after February 1, 1992, and
before January 1, 1994, and purchases the residence within 90
days of entering into that binding contract. Only one tax
credit could be claimed per residence.

First-time homebuyers would be defined as individuals
who did not have a present interest in a residence in the 3
years preceding the purchase of a home. If an individual is
deferring tax on gain from the sale of a previous principal
residence and is permitted an extended rollover period, he or
she would not be considered a first-time homebuyer until
after the end of the extended rollover period.

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

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

Effective Date

The proposal would be effective for purchases on or
after February 1, 1992.


34. Allocation and Apportionment of Research Expenses
Present Law

U.S. persons are taxable on their worldwide income,
including their foreign income. Foreign source taxable
income equals foreign source gross income less the expenses,
losses and other deductions properly apportioned or allocated
to that income. The Internal Revenue Code generally
articulates only the broad principles of how expenses reduce
U.S. and foreign source gross income, leaving the Treasury
Department to provide detailed rules for the task of
allocating and apportioning expenses.

Treasury regulations issued in 1977 described methods
for allocating expenses between U.S. and foreign source
income, including rules for the allocation of research and
development (R&D) expenses. Upon issuance of these
regulations, a significant dispute regarding the appropriate
allocation of R&D expenses developed between taxpayers and
the Treasury Department. This unresolved dispute between
taxpayers and the Treasury Department precipitated
Congressional involvement on this issue, and since 1981, the
R&D allocation regulations have been subject to a series of
eight suspensions and temporary modifications. The current
temporary provision is applicable generally for the first six
months of the first taxable year beginning after August 1,
1991, and among other rules, automatically allocates 64
percent of U.S. performed R&D to U.S. source income, and
generally permits a greater amount of taxable income to be
classified as foreign source than under the 1977 regulations.
This will increase the benefits of the foreign tax credit to
Many taxpayers.

Description of Proposal

The report of the Senate Finance Committee on the bill
would contain language indicating that it believes that the
Administration has broad authority under current law to
revise the current R&D allocation regulations. The report
would state that since the Administration has indicated its
support of an allocation system that provides incentives to
increase the performance of U.S.-based research activities,
the committee expects, and in the strongest terms, urges the
Treasury Department to revise its permanent regulations in a
manner consistent with the Administration's stated objectives
and proposals. The report would state that the committee
believes that such a revision would be consistent both with
current law regulatory authority and with the stated goals of
the Administration.

The report would state that the committee further urges
the Treasury Department, when revising its regulations, to
take into consideration that taxpayers, in appropriate

67


29,

30.—
31.
32.

33.

34.

Repeal of luxury excise tax on boats,
aircraft, jewelry, and furs; modifi-
cation of luxury excise tax on
VENICLES. cece cece reece eer eet reesecces
Impose excise tax on diesel fuel used
in noncommercial motorboats........2ee.
Access to tax information by the
Department of Veterans Affairs.........
Extension of excise tax on certain
vaccines for the Vaccine Injury
Compensation Trust Fund....seesssseroes
Permanent extension of general fund
transfer to Railroad Retirement Tier

2 PUNG.. cece cece cece ee wesc een ravens
Allocation and apportionment of re-
search EXPENSES... see ecesecceeeeecees

C. Provisions To Ensure High-Income Taxpayers

Pay
1.
2.
3.
4.
5.
6.
7.

Their Fair Share. cscs see eee ecewcevoes

Individual income tax rates (36-
PETCeNt Dracket) cree eceeseecevecccece
Surtax on taxable income in excess

Of SL Million... eee eee e eee e eee neeee
Extension of itemized deduction
LIMitatiOn...crecececnrcecceccsesenvas
Extension of personal exemption

bo) et - t-\_.o)) | a
Conform book and tax accounting for
securities inventorieS.....eeceeeeeees
Modify estimated tax payment rules

for large corporations.....sseeeseeeee
Modify individual estimated tax
LEQUITEMENES.. eee eee eee eee eee tee eeee

(iv)

62
63
64

65

66
67

69

69
72
73
75
76
77
78


70

Estates and trusts

$0-3,600 . . . ... . + +. 415 percent of taxable income.

$3,600-S10,900 . . . . .. . $540 plus 28% of the amount
over $3,600.

Over $10,900... .... . $2,584 plus 31% of the amount
over $10,900.

Description of Proposal

The proposal would create a 36-percent bracket for
taxable incomes above: $150,000 (unmarried individuals
filing single returns); $162,500 (unmarried individuals
filing as heads of households); $175,000 (married individuals
filing joint returns); $87,500 (married individuals filing
separate returns); and $3,500 (estates and trusts). The
thresholds for the 36-percent bracket would be adjusted for
inflation in the same manner as under present law. The
individual income tax rate schedules for 1992 would be as
follows--

If taxable income is Then income tax equals

Single individuals

$0-$21,450 . . . .... . =. «45 percent of taxable income.

$21,450-$51,900 ..... . $3,217.50 plus 28% of the
amount over $21,450.

$51,900-$150,000 .... . . $11,743.50 plus 31% of the
amount over $51,900.

Over $150,000 . . .... . . $42,154.50 plus 36% of the
amount over $150,000.

Heads of households

$0-$28,750 ee ee ee 15 percent of taxable income.

$28,750-$74,i150 ..... . $4,312.50 plus 28% of the
amount over $28,750.

$74,150-$162,500 . . . . . « $17,024.50 plus 31% of the
amount over $74,150.

Over $162,500 ...... . $44,413 plus 36% of the
amount over $162,500.

Married individuals filing joint returns

$0-$35,800 ........ =. #415 percent of taxable income.
$35,800-$86,500 ..... . $5,370 plus 28% of the amount
over $35,800.



Cc. Provisions to Ensure High-Income Taxpayers
Pay Their Fair Share

1.. Individual Income Tax Rates (36-Percent Bracket)
Present Law

For 1992, the individual income tax rate schedules are
as follows--

If taxable income is Then income tax equals

Single individuals

$0-$21,450 . . . ... +. =. «(15 percent of taxable income.

$21,450-$51,900 .... . . $3,217.50 plus 28% of the
amount over $21,450.

Over $51,900 . ...... +. $11,743.50 plus 31% of the
amount over $51,900.

Heads of households

$0-$28,750 . ...... =. . $15 percent of taxable income.

$28,750-$74,150 ..... +. $4,312.50 plus 28% of the
amount over $28,750.

Over $74,150 . ..... . + $17,024.50 plus 31% of the
amount over $74,150.

Married individuals filing joint returns

$0-$35,800 oe ee ee e © 615 percent of taxable income.

$35,800-$86,500 .... . . $5,370 plus 28% of the amount
over $35,800.

Over $86,500 . ..... . . $19,566 plus 31% of the amount
over $86,500.

Married individuals filing separate returns

$0-17,900 ....... .. +15 percent of taxable income.

$17,900-$43,250 ..... . $2,685 plus 28% of the amount
over $17,900.

Over $43,250 . .... +... $9,783 plus 31% of the amount
over $43,250.

64


TZ

2. Surtax on Taxable Income in Excess of $1 Million
Present Law

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

Description of Proposal

The proposal would impose a 10-percent surtax on
individuals with. taxable income over $1,000,000 ($500,000 for
married taxpayers filing separate returns). The surtax would
equal 10 percent of otherwise computed tax liability
multiplied by the ratio of taxable income in excess of
$1,000,000 to total taxable income. The effect of the
proposal would be that the more that taxable income exceeds
$1,000,000, the closer the surtax approaches a 10-percent
increase in total tax liability.

A 2.4-percentage point surtax would apply to individuals
with alternative minimum taxable income above $1,000,000
($500,000 for married taxpayers filing separate returns).

The surtax would be applied by increasing the taxpayer's
tentative minimum tax by 2.4 percent of the amount by which
the taxpayer's alternative minimum taxable income exceeds
$1,000,000 ($500,000 for married taxpayers filing separate
returns).

Effective Date

The proposal would be effective for taxable years
beginning after December 31, 1991.



11. UBIT Changes Relating to Real Estate Investments
by Pension Funds and Others

a. Relax debt-finance restrictions
Present Law

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

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

The debt-financed exception, however, is available for
investments in debt-financed property only if the following
six restrictions of section 514(c)(9)(B) are satisfied: (1)
the price of the real property is a fixed amount determined
as of the date of the acquisition (the "fixed price"
restriction); (2) the amount of the indebtedness or any
amount payable with respect to the indebtedness, or the time
for making any payment of any such amount, is not dependent
(in whole or in part) upon revenues, income, or profits
derived from the property (the "participating loan"
restriction); (3) the property is not leased by the qualified
organization to the seller or to a person related to the
seller (the “leaseback" restriction); (4) in the case of a
pension trust, the seller or lessee of the property is not a
disqualified person (the “disqualified person" restriction);
(5) the seller or a person related to the seller (or a person
related to the plan with respect to which a pension trust was
formed) is not providing financing in connection with the
acquisition of the property (the "seller-financing"
restriction); and (6) if the investment in the property is
held through a partnership, certain additional requirements
are satisfied by the partnership (the “partnership”
restrictions) (sec. 514(c)(9)(B)(i) through {vi)).

249


Administrative costs

There would be available to the Secretaries of Education
and the Treasury for administrative costs amounts not to
exceed the following:

Piscal year Treasury Education
1992 $0 $0
1993 $1,000,000 $40,000,000
1994 $7,500,000 $20,000,000
1995 $4,500,000 $20,000,000
1996 $3,600,000 $20,000,000
1997 $4,000,000 $20,000,000

Evaluation and reporting

Beginning one year after enactment, the Secretary of
Education, in consultation with the Secretary of the
Treasury, would make annual reports to Congress describing
and evaluating the implementation and administration of the
Income~Dependent Education Assistance program and identifying
problems that require legislative action.

Not later than January 1, 1997, the Secretary of
Education, in consultation with the Secretary of the
Treasury, would make a report to the Senate Committee on
Labor and Human Resources and the House Committee on
Education and Labor analyzing the administrative capacity of
the Department of Education and any other Federal agency to
operate this program; the administrative burden and costs
imposed on the Department of Education and any other Federal
agency by this program; the accuracy of information provided
by the Secretary of Education; the administrative and
financial factors that would affect the ability of all
schools to participate in the program; the impact of this
program on repayments, delinquencies and defaults under all
federal student loan programs; and any other relevant
information. The report would also publish the tuition and
cost of attendance at each institution participating in the
program and analyze changes in those costs compared to
changes occurring at institutions not participating in the
program. The report would examine the feasability of
integrating the Income-Dependent Education Assistance program
with a national service program. The report would also make
recommendations for legislative actions necessary to
implement the Income-Dependent Education Assistance program
at all eligible institutions of higher education.

Effective Date
The proposal would be effective upon date of enactment.

Amendments made to the Internal Revenue Code would be
effective for taxable years beginning after December 31,

/


5. Extension of Exclusion for Employer-Provided Educational
Assistance

Present Law

An employee's gross income and wages for income and
employment tax purposes do not include amounts paid or
incurred by the employer for education assistance provided to
the employee if such amounts are paid or incurred pursuant to
an educational assistance program that meets certain
requirements. This exclusion, which expires with respect to
amounts paid after June 30, 1992, is limited to $5,250 of
educational assistance with respect to an individual during a
calendar year.

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

Description of Proposal

The exclusion for employer-provided educational
assistance would be extended for 18 months, through December
31, 1993.

Effective Date

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

Z/


!7

3. Choice of Credit or Deduction for Interest on Student
Loans

Present Law

The Tax Reform Act of 1986 repealed the deduction for
personal interest. Student loan interest is generally
treated as personal interest and thus is not allowable as an
itemized deduction from income. There is no tax credit
allowed for student loan interest paid by a taxpayer.

Description of Proposal

In general

The provision would allow individuals who have paid
interest on qualified education loans to choose either a
deduction for such interest or a nonrefundable credit against
regular tax liability generally equal to 15 percent of such
interest, subject to a maximum credit of $300. In order to
qualify for either the deduction or the credit in a given
taxable year, the interest must be paid during that taxable
year and during the first 48 months (need not be consecutive)
that payment on the loan is due. Unused amounts of credit
could not be carried forward or backward to other taxable
years.

A qualified education loan generally is any indebtedness
incurred to pay for qualified higher education expenses of
the taxpayer or the taxpayer's spouse or dependents with
respect to higher education institutions and certain area
vocational education schools (i.e., eligible educational
institutions defined in Code section 135(c)(3)) and
institutions conducting internship or residency programs
leading to a degree or certificate from an institution of
higher education, a hospital, or a health care facility
conducting postgraduate training.

The qualified higher education expenses must be paid or
incurred within a reasonable period of time before or after
the indebtedness is incurred and must be attributable to
education furnished during a period of time that the
individual benefiting from the loan proceeds was at least a
half-time student. Indebtedness that is used to refinance
any indebtedness described in the previous sentence is also
treated as a qualified education loan.

Qualified higher education expenses include tuition,
fees, books, supplies, and reasonable living expenses while
the student lives away from home. At the time the expenses
are incurred, the student must be the taxpayer or the
taxpayer's spouse or dependent (as defined under Code section
152). Qualified higher education expenses taken into account
for the purpose of this credit are reduced by the amount


Description of Proposal

Relax the leaseback and disqualified person restrictions

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

Relax the seller-financing restriction

The proposal would relax the seller-financing
restriction to permit seller financing on terms that are
commercially reasonable. Regulations would be authorized for
the purpose of determining commercially reasonable financing
terms. In addition, seller financing that is on terms that
include a down payment of at least 15% of the sales price and
an interest rate of at least 150% of the applicable Federal
rate ("AFR") on any indebtedness would be deemed to be
commercially reasonable.

The present-law “fixed price" and "participating loan"
restrictions would not be affected by this modification.
Thus, for example, income from a financing arrangement
(including an equity kicker) based on revenue, income, or
profits generally would continue to be treated as income from
debt-financed property, unless some other exception applies.

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

The proposal also would relax the fixed price and
participating loan restrictions for certain sales of real
property foreclosed upon by financial institutions. The
relaxation of these rules would be limited to cases where:
(1) a qualified organization acquires the property from a
financial institution that acquired the real property by
foreclosure (or after an actual or imminent default); (2) the
financial institution treats any income from the sale of the
property as ordinary income; (3) the stated principal amount
of the seller financing does not exceed the financial
institution's outstanding indebtedness (including accrued but
unpaid interest) with respect to the property at the time of
foreclosure; and (4) the value of the participation feature

1 Pinancial institutions include institutions in
conservatorship or receivership and certain affiliates of
financial institutions.

30



indebtedness. Students with “high" indebtedness (as
determined by the Secretary of Education) would have a
repayment rate of 7 percent. Students with “moderate"
indebtedness would choose between a repayment rate of 5
percent or 7 percent. Students with "low" indebtedness would
choose among a repayment rate of 3 percent, 5 percent, or 7
percent. The Secretary of Education would make the
determination of "low" and "moderate" indebtedness ranges so
that the average borrower in each indebtedness status would
be projected to repay the Self-Reliance Loan over a similar
number of years as the average borrower with “high”
indebtedness status.

A borrower would be in repayment status through the
taxable year during which the loan obligation is repaid or,
if earlier, 25 taxable years after the borrower was last
enrolled in an institution of higher education on at least a
half-time basis.

A borrower would be able to prepay all or part of a
Self-Reliance Loan without penalty.

Repayment tax payments received on or before the due
date (without regard to any extension) for filing of the
income tax return for a given taxable year would be credited
to the taxpayer's Self-Reliance Loan account as if received
on the last day of the previous taxable year. Repayment tax
payments received after the due date (without regard to any
extension) for filing of the income tax return for a given
taxable year would be credited to the taxpayer's
Self-Reliance Loan account as if received on the last day of
the following taxable year.

Exceptions for at least half-time students

A borrower would not be in repayment status. for any
taxable year during which either (1) the borrower was
enrolled as at least a half-time student in an institution of
higher education for 7 months of such taxable year or (2) the
borrower was enrolled as at least a half-time student in an
institution of higher education for final 3 months of such
taxable year and such taxable year was the first in which the
borrower was such a student (e.g., the borrower was a
freshman).

A borrower would be able to defer payment of interest on
a Self-Reliance Loan while he or she attends an institution
of higher education on at least a half-time basis.

2


$86,500-$175,000 .. 2...
Over $175,000 ....ee-s

Married individuals filing

$19,566 plus 31% of the amount
over $86,500.

$47,001 plus 36% of the
amount over $175,000.

individuals separate returns

$0-$17,900 . . 2. 2. se eee
$17,900-$43,250 ......

$43,250-$87,500 ......
Over $87,500 . . . - - . « ©

Estates

$0-3,500 2. 2. 2. we ee ew eee
Over $3,500 ...-+ + see

15 percent of taxable income.

$2,685 plus 28% of the amount
over $17,900.

$9,783 plus 31% of the amount
over $43,250.

$23,500.50 plus 36% of the
amount over $87,500.

and trusts
15 percent of taxable income.

$525 plus 36% of the amount
over $3,500.

Effect

The proposal would be ef
beginning after December 31,

ive Date

fective for taxable years
1991.

TI


the aggregate adjusted bases of the corporation's assets,
over (ii) the, corporation's short-term debt, must not exceed
$100 million; and (4) the stock must be originally issued
on or after February 1, 1992 to the taxpayer in exchange for
money or other property (ngt including stock) or as
compensation for services.

In the case of stock acquired through the exercise of an
option or through the conversion of convertible debt, the
determination whether the $100 million assets test is met
would be made at the time of exercise or conversion. In
addition, the holding period of such stock would be treated
as beginning on the date of exercise or conversion.

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

Stock received in connection with the performance of
services would be treated as issued when included in the
taxpayer's gross income.

The exclusion would be a preference for purposes of the
alternative minimum tax.

Any gain from the sale or exchange of small business
stock that is eligible for the exclusion would not also be
eligible for the new progressive capital gains rate system
(as added by the proposal).

Effective Date

The proposal would apply to stock issued on or after
February 1, 1992.

3 If a corporation exceeds this limit at any time on or
after February 1, 1992, the corporation could never issue
stock that would qualify for the exclusion. A corporation
that exceeds this limit could not split itself into smaller
companies in an attempt to qualify new stock issued by such
companies for the exclusion. If a corporation acquires
substantially all the assets of a trade or business from
another corporation whose assets exceed $100 million, stock
in the acquiring corporation also would not qualify for the
exclusion.

4 In order to prevent evasion of the requirement that the
stock be newly issued, the exclusion would not apply if the
issuing corporation purchases any of its stock either one
year before or one year after the new issuance, unless the
corporation has a business purpose for the redemption.

56



computed on the same income base as the ordinary EITC, but
the credit claimed cannot exceed the out-of-pocket cost of
the health insurance coverage. In addition, the taxpayer is
denied an itemized deduction for medical expenses of
qualifying insurance coverage up to the amount of credit
claimed. The maximum supplemental health insurance credit
for 1992 is $451.

Description of Proposal

The proposal would increase the basic EITC rate for
taxpayers with two or more qualifying children as shown in
the following table.

One qualifying Two or more
child-- qualifying children--
Credit Phaseout Credit Phaseout
Year rate rate rate rate
1992 17.6 12.57 20.15 14.39
1993 18.5 13.21 21.25 15.17
1994 23.0 16.43 26.75 19.10

and after

The proposal would permit taxpayers to include all
health insurance expenses as medical expenses, subject to the
7.5 percent of adjusted gross income floor on deductible
medical expenses, regardless of whether these expenses had
been used to claim the health insurance component of the
EITC. The proposal would also permit a self-employed
taxpayer to claim the allowable deduction for health
insurance costs and to use the full amount of these expenses
that are related to coverage of dependent children to claim
the health insurance component of the EITC.

The proposal would repeal the supplemental young child
credit.

Effective Date

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


27

9. Increase Base Tax Rate on Ozone-Depleting Chemicals
and Expand List of Taxed Chemicals

Present Law

A excise tax is imposed.on certain ozone-depleting
chemicals. The amount of tax generally is determined by
multiplying the base tax rate applicable for the calendar
year by an ozone-depleting factor assigned to the chemical.
Certain chemicals are subject to a reduced rate of tax for
years prior to 1994.

Between 1992 and 1995 there are two base tax rates
applicable, depending upon whether the chemicals were
initially listed in the Omnibus Reconciliation Act of 1989 or
whether they were newly listed in the Omnibus Reconciliation
Act of 1990. The base tax rate applicable to initially
listed chemicals is $1.67 per pound for 1992, $2.65 per pound
for 1993 and 1994, and an additional 45 cents per pound per
year for each year thereafter. The base tax rate applicable
to newly listed chemicals is $1.37 per pound for 1992, $1.67
per pound for 1993, $3.00 per pound for 1994, $3.10 per pound
for 1995, and an additional 45 cents per pound per year for
each year thereafter.

The initially listed chemicals are CFC-11l, CFC-12,
CFC-113, CFC-114, CFC-115, Halon-1211, Halon-1301,
Halon-2402. The newly listed chemicals are carbon
tetrachloride, methyl chloroform, CFC-13, CFC-111l, CFC-112,
CFC-211, CFC-212, CFC-213, CFC-214, CFC-215, CFC-216,
CFC-217.

Description of Proposal

The proposal would increase and apply the same base tax
rate to both initially listed chemicals and newly listed
chemicals. The new base tax rate would be $1.85 per pound
for 1992, $2.75 per pound in 1993, $3.65 per pound in 1994,
and $4.55 per pound in 1995. For years after 1995, the base
tax amount would be increased by 45 cents per pound per year.
Present law rates would be retained for chemicals used in
rigid foam insulation.

Effective Date

The proposal would be effective for taxable chemicals
sold or used on or after July 1, 1992. Appropriate floor
stocks taxes would be imposed on taxed chemicals held on the
effective dates of changes in the base tax rate.



30. Impose Excise Tax on Diesel Fuel Used in Noncommercial
Motorooats

Present Law

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

The revenues from these taxes, minus 2.5 cents per
gallon, are deposited in the Highway Trust Fund (“HTF"), the
National Recreational Trails Trust Fund, or the Aquatic
Resources Trust Fund through September 30, 1999. Revenues
from the remaining 2.5 cents per gallon are retained in the
General Fund through September 30, 1995, after which time the
2.5-cents-per-gallon portion of the taxes (including the tax
on diesel fuel used in trains) is scheduled to expire.

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

Diesel fuel used in motorboats is not taxed.

Description of Proposal

The provision would extend the current
20.1-cents-per-gallon diesel fuel excise taxes to diesel fuel
used by recreational motorboats. Fuel used by motorboats for
commercial fishing, transportation for compensation or hire,
or for business use other than predominantly for
entertainment, amusement, or recreation, would remain exempt.

As under the President's budget proposal, the tax is
collected at the same point in the distribution chain as the
highway diesel fuel tax (i.e., on sale to a retailer).
However, to prevent unnecessary tax-paid sales followed by
refunds, retailers that sell diesel fuel exclusively to
commercial (i.e., nonpleasure) boats are permitted to buy the
fuel tax-free.

The revenues from the entire 20.1l-cents-per-gallon tax
on diesel fuel used by motorboats would be retained in the
General Fund.

Effective Date

The provision would be effective after June 30, 1992.

63



32. Extension of Excise Tax on Certain Vaccines for the
Vaccine Injury Compensation Trust Fund

Present Law

The Vaccine Injury Compensation Trust Fund ("Vaccine
Trust Fund") provides a source of revenue to compensate
individuals who are injured (or die) as a result of the
administration of certain vaccines: diphtheria, pertussis,
and tetanus ("DPT"); diphtheria and tetanus ("DT"); measles,
mumps, and rubella ("MMR"); and polio. The Vaccine Trust
Fund provides the funding source for the National Vaccine
Injury Compensation Program ("Program"), which provides a
substitute, Federal "no-fault" insurance system for the
State-law tort and private liability insurance systems
otherwise applicable to vaccine manufacturers.

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

The vaccine excise tax will expire after the later of:
(1) December 31, 1992; or (2) the date on which the Vaccine
Trust Fund revenues exceed the projected liabilities with
respect to compensable injuries from vaccines administered
before October 1, 1992. Amounts in the Vaccine Trust Fund
are available for the payment of compensation under the
Program with respect to vaccines administered after
September 30, 1988, and before October 1, 1992.

Description of Proposal

The present-law excise taxes imposed on certain vaccines
and the Vaccine Trust Fund would be extended for two years
(through December 31, 1994, and October 1, 1994,
respectively).

The Treasury and Health and Human Services Departments
would be required to study and report to the Committees on
Finance and Ways and Means by January 1, 1994, certain issues
regarding Vaccine Trust Fund funding needs and
appropriateness of imposition and rate of tax on covered
vaccines.

Effective Date

The provisions would be effective on the date of
enactment.

65


33. Permanent Extension of General Fund Transfer to
Railroad Retirement Tier 2 Fund

Present Law

The proceeds from the income taxation of railroad
retirement Tier 2 benefits are transferred from the general
fund of the Treasury to the Railroad Retirement Account.
This transfer applies only to proceeds from the taxation of
benefits which have been received prior to October 1, 1992.
Proceeds from the taxation of benefits received after this
date remain in the general fund.

Description of Proposal

The transfer of proceeds from the income taxation of
railroad retirement Tier 2 benefits from the general fund of
the Treasury to the Railroad Retirement Account would be made
permanent.

Effective Date

The provision would be effective beginning September 30,
1992.

66



7. kExpansion of 45-Day Interest-Free Period
Present Law

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

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

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

Description of Proposal

The provision provides that no interest is to be paid by
the Government on a refund arising from any type of original
tax return if the refund is issue¢ by the 45th day after the
later of the due date for the return (determ:-ed without
regard to any extensions) or the date the return is filed.

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

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

Effective Date
The extension of the 45-day processing rule is effective

for returns required to be filed (without regard to
extensions) on or after July 1, 1992.

24



76

5. Conform Book and Tax Accounting for Securities
Inventories

Present Law

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

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

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

Description of Proposal

Under the proposal, taxpayers who hold securities as
inventory would be required to include such securities in
inventory at market value for Federal income tax purposes.

Effective Date

The proposal would apply to taxable years ending on or
after December 31, 1993. Any increase in inventory required
by this change in method of accounting would be included in
gross income ratably over 10 taxable years.



DESCRIPTION OF TAX PROPOSALS
A. Provisions for Fair Treatment of Working Families
1. Tax Credit for Taxpayers with Children under Age 16
Present Law

Present law provides no income tax credit to taxpayers
on the basis of whether taxpayers have a child residing with
them. However, present law permits a personal exemption
deduction from gross income for each of the taxpayer's
dependent children. For 1992, the amount of this deduction
is $2,300 for each exemption claimed. This exemption amount
is adjusted annually for inflation.

In addition, low-income workers with children are able
to claim a refundable earned income tax credit (EITC) of up
to 17.6 percent (18.4 percent for taxpayers with more than
one qualifying child) of the first $7,520 of earned income
for 1992. The maximum amount of credit for 1992 is $1,324
($1,384 for taxpayers with more than one qualifying child).
This maximum credit is reduced by 12.57 percent (13.14
percent for taxpayers with more than one qualifying child) of
earned income (or adjusted gross income, if greater) in
excess of $11,840. The EITC is totally phased out for
workers with earned income (or adjusted gross income, if
greater) over $22,370. The maximum amount of earned income
on which the EITC may be claimed and the income threshold for
the phaseout of the EITC are indexed for inflation. Earned
income consists of wages, salaries, other employee
compensation, and net self-employment income.

The credit rates for the EITC change over time under
present law, as shown in the following table.

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

and after



INTRODUCTION

This document , prepared by the staff of the Joint
Committee on Taxation, provides a description of Chairman
Bentsen's Mark on tax proposals relating to working families,
long-term economic growth, and tax fairness. The tax
proposals are scheduled for markup by the Senate Committee on
Finance on March 3, 1992.

{Separate Joint Committee on Taxation staff documents
are prepared describing proposals relating to pension
simplification, other tax simplification, and Taxpayer Bill
of Rights.)

1 This document may be cited as follows: Joint Committee on
Taxation, Description of Chairman's Mark: Tax Proposals
Relating to Working Families, Long-Term Economic Growth, and
Tax Fairness (JCX-7-92), March 3, 1992.

(v)


Exception for borrowers not required to file a
tax return

No repayment of a Self-Reliance Loan would be required
in any year in which the borrower is not required to file an
income tax return.

Discharge of liability of the borrower

in general.--The Secretary of Education would discharge
the liability to repay a Self-Reliance Loan in the event of
the death or total permanent disability of a borrower. If a
loan were discharged because of death or disability of the
borrower or because of expiration of the 25-year repayment
status period, the borrower (or his or her estate) would not
be considered to have discharge of indebtedness income (under
Code section 108(f)).

Bankruptcy.--A Self-Reliance Loan would not be
dischargeable in bankruptcy. The Secretary of Treasury,
however, could postpone payment on past-due amounts owed by
bankrupt individuals.

Delinquent taxpayers

Borrowers who are delinquent in repaying their
Self-Reliance Loan and who subsequently make interest
payments to the Secretary of the Treasury on their
underpayment would be entitled to have interest that is
properly allocable to such loans credited by the Secretary of
Education to their Self-Reliance Loan repayment.

Administration of the loan program

The Secretary of the Treasury would enter into an
agreement with the Secretary of Education to process
information on repayments and credit such repayments to the
Department of Education.

The Secretary of the Treasury would make appropriate
provisions to require borrowers to make Self-Reliance Loan
repayments through payroll withholding and estimated tax
Payments to the extent practicable and would determine the
liability of borrowers for incorrect withholding according to
rules on estimated tax payments.

The Secretary of Education would develop a central data
system to administer the Income-Dependent Education
Assistance program. Such data system would provide borrowers
with information on their Self-Reliance Loan balance and on
prepayment options. Not later than January 1 of each year,
the Secretary of Education would certify to the Secretary of
the Treasury (1) a@ list of borrowers in repayment status for
that year, (2) the sum of each such borrower's total


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

Eligible low-income workers are able to claim a
refundable earned income tax credit (EITC) of up to 17.6
percent (18.4 percent for taxpayers with more than one
qualifying child) of the first $7,520 of earned income for
1992. The maximum amount of credit for 1992 is $1,324
($1,384 for taxpayers with more than one qualifying child).
This maximum credit is reduced by 12.57 percent (13.14
percent for taxpayers with more than one qualifying child) of
earned income (or adjusted gross income, if greater) in
excess of $11,840. The EITC is totally phased out for
workers with earned income (or adjusted gross income, if
greater) over $22,370. The maximum amount of earned income
on which the EITC may be claimed and the income threshold for
the phaseout of the EITC are indexed for inflation. Earned
income consists of wages, salaries, other employee
compensation, and net self-employment income.

The credit rates for the EITC change over time under
present law, as shown in the following table.

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

and after

A supplemental young child credit is available to
taxpayers with qualifying children under the age of one year.
This young child credit rate is 5 percent and the phase-out
rate is 3.57 percent. It is computed on the same income base
as the ordinary EITC. The maximum supplemental young child
credit for 1992 is $376. If a taxpayer claims the
supplemental young child credit, the child that qualifies the
taxpayer for such credit is not a qualifying individual for
purposes of the dependent care tax credit (sec. 21).

A supplemental health insurance credit is available to
taxpayers who provide health insurance coverage for their
qualifying children. This health insurance credit rate is 6
percent and the phase-out rate is 4.285 percent. It is


78

7. Modify Individual Estimated Tax Requirements
Present Law

Under present law, an individual taxpayer generally is
subject to an addition to tax for any underpayment of
estimated tax. An individual generally does not have an
underpayment of estimated tax if he or she makes timely
estimated tax payments at least equal to: (1) 100 percent of
the tax liability of the prior year (the "100 percent of last
year's liability safe harbor") or (2) 90 percent of the tax
liability of the current year. Income tax withholding from
wages is considered to be a payment of estimated taxes.

In addition, under a special rule, for taxable years
beginning after 1991 and before 1997, a taxpayer generally
may not use the 100 percent of last year's liability safe
harbor if (1) the taxpayer has an adjusted gross income (AGI)
in the current year that exceeds the taxpayer's AGI in the
prior year by more than $40,000 ($20,000 in the case of a
separate return by a married individual) and (2) the taxpayer
has an AGI in excess of $75,000 in the current year ($37,500
in the case of a separate return by a married individual).

Description of Proposal

The special rule that denies the use of the 100 percent
of last year's liability safe harbor would be made permanent.

In addition, the proposal would clarify the application
of the special rule to estates and trusts.

Effective Date
The proposal would be effective for estimated tax

payments applicable to taxable years beginning after
December 31, 1991.



4. Formation of, and Contributions to, Tax-Exempt Youth
Training Organizations

Present Law

In order to qualify as a tax-exempt organization under
section 501(c)(3) and be eligible to receive tax-deductible
contributions, an organization must be organized and operated
exclusively for charitable, educational, or other exempt
purposes specified in section 501(c)(3), and no part of the
organization's net earnings may inure to the benefit of any
private shareholder or individual. Section 501(c) also
provides tax-exempt status for other types of organizations
(e.g., social welfare organizations and business
associations), provided certain requirements are satisfied.

Charitable contributions to organizations described in
section 501(c)(3) are allowed as an itemized deduction,
subject to certain percentage limitations (sec. 170). In
addition, donations to States or political subdivisions are
deductible as charitable contributions, provided that the
donation is made for exclusively public purposes. Depending
on the type of property contributed and the type of the donee
organization, the amount of a taxpayer's charitable
contribution deduction generally is allowed in an amount up
to the contributed property's fair market value. However,
special rules provide for an augmented charitable
contribution deduction for certain contributions made by
corporations of inventory property used for the care of the
ill, the needy, or infants, and certain scientific research
Property donated to educational or scientific organizations
(sec. 170(e)(3) and (4)). The deduction allowed for such
donations is equal to the corporation's basis in the property
plus one-half of the amount of ordinary income that would
have been realized if the property had been sold (but in no
event may the deduction exceed twice the basis in the
contributed property).

Payments made by a taxpayer to a tax-exempt organization
are deductible as ordinary and necessary business expenses
under section 162, provided that the taxpayer has a
reasonable expectation of financial return to his trade or
business commensurate with the amount of the transfer. In
such a case, a “gift or gontribution" has not been made for
purposes of section 170.

1 see Treas. Reg. sec. 1.170A-1(c)(5); Rev. Rul. 84-110,
1984-2 C.B. 35.

/4


DESCRIPTION OF CHAIRMAN'S MARK:
TAX PROPOSALS RELATING TO WORKING FAMILIES,

LONG-TERM ECONOMIC GROWTH, AND TAX FAIRNESS

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

ICX-7-92


16. Extension of Qualified Mortgage Bond and Mortgage Credit
Certificate Programs

Present Law

Qualified mortgage bonds

Qualified mortgage bonds ("QMBs") are tax-exempt bonds
the proceeds of which are used to finance the purchase, or
qualifying rehabilitation or improvement, of single-family,
owner-occupied residences located within the jurisdiction of
the issuer of the bonds. Persons receiving QMB loans must
satisfy principal residence, purchase price, borrower income,
first-time homebuyer, and other requirements. Part or all of
the interest subsidy provided by QMBs is recaptured if the
borrower experiences substantial increases in income and
either disposes of the residence acquired with the QMB loan
or no longer uses the residence as his or her principal
residence, within nine years after its purchase.

Mortgage credit certificates

Qualified governmental units may elect to exchange
private activity bond volume authority for authority to issue
mortgage credit certificates ("MCCs"). MCCs entitle home
buyers to nonrefundable income tax credits for a specified
percentage of the interest paid on mortgage loans on their
principal residences. Once issued, an MCC remains in effect
as long as the loan remains outstanding and the residence
being financed continues to be the MCC-recipient's principal
residence. MCCs are subject to the same targeting
requirements as QMBs. MCCs also are subject to recapture
rules like those applicable to QMBs.

Expiration

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

Description of Proposal

Authority to issue QMBs and to elect to trade in bond
volume authority to issue MCCs would be extended for 18
months, through December 31, 1993.

Effective Date

The proposal would apply to bonds issued after June 30,
1992.

42



B. Provisions for Long-Term Economic Growth

1. Individual Retirement Arrangements (IRAs)

Present Law

Under present law, certain individuals are allowed to
deduct contributions (up to the lesser of $2,000 or 100
percent of the individual's compensation or earned income) to
an individual retirement arrangement (IRA). The amounts held
in an IRA, including earnings on contributions, generally are
not included in taxable income until withdrawn.

The $2,000 deduction limit is phased out over certain
adjusted gross income (AGI) levels ($25,000 for individuals,
$40,000 for joint filers) if the individual or the
individual's spouse is an active participant in an
employer-sponsored retirement plan. An individual may make
nondeductible IRA contributions (up to the $2,000 or 100
percent of compensation limit) to the extent the individual
is not permitted to make deductible IRA contributions.

Description of Proposal

The provision would restore the deductibility of IRA
contributions for all taxpayers under the rules in effect
prior to the Tax Reform Act of 1986 and would provide for the
indexing of the limits on contributions to IRAs, in
increments of $500.

In addition, the provision would permit nondeductible
contributions to new special IRAs. Withdrawals from a special
IRA would not be includible in income if attributable to
contributions that had been held by the special IRA for at
least 5 years. The limits on contributions to deductible IRAs
and special IRAs would be coordinated. Furthermore, the limit
on contributions to deductible IRAs and special IRAs would be
coordinated with the limit on elective deferrals to certain
tax-deferred plans (e.g., sec. 401(k) plans). Thus, for
example, in no case could the sum of contributions to an IRA,
contributions to a special IRA, and elective contributions to
a 401(k) plan exceed the limit on elective deferrals ($8,728
in 1992).

The provision would permit transfers from deductible
IRAs to special IRAs without imposition of the 10-percent tax
on early withdrawals. The amount transferred to a special IRA
generally would be includible in income in the year
withdrawn. However, in the case of a transfer before January
1, 1994, the transferred amount would be includible in income
ratably over a 4-taxable year period.


3. Extension of Targeted Jobs Tax Credit
Present Law
Tax credit

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

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

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

Authorization of appropriations

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

Description of Proposal

The proposal would extend the targeted jobs tax credit
and the authorization for appropriations for 18 months,
through December 31, 1993.

Effective Date

The proposal would be effective on the date of
enactment.


23. Exclusion for Capital Gains on Certain Small Business
Stock

Present Law

Under present law, ordinary income of an individual is
taxed at a maximum marginal rate of 31 percent. The net
capital gain of an individual is taxed at the same rates
applicable to ordinary income, subject to a maximum marginal
rate of 28 percent. For corporations, the maximum rate on
net capital gain is the same as the maximum rate on ordinary
income, i.e., 34 percent.

The Tax Reform Act of 1986 repealed a provision allowing
a noncorporate taxpayer a deduction for 60 percent of its net
capital gain for the taxable year. Also under prior law,
corporations were subject to an alternative tax of 28 percent
on net capital gain. Net capital gain is the excess of net
long-term capital gain for the taxable year over net
short-term capital loss for that year. Gain or loss from the
sale or exchange of a capital asset is treated as long term
if the asset is held for more than one year.

Description of Proposal

Taxpayers would be entitled to exclude 50 percent of the
gain realized on the sale or exchange of certain small
business stock held for more than five years.

In order to qualify as small business stock, the
following requirements must be met: (1) the stock must be in
a domestic corporation (other thag a corporation engaged in
certain disqualified activities);* (2) the corporation must
satisfy an active business test (certain start-up activities
would qualify); (3) the excess of (i) the amount of cash and

loa corporation would not be entitled to the exclusion if it
owns more than 50 percent of the vote or value of the
corporation issuing the small business stock.

2 an eligible corporation would not include a corporation
predominantly engaged in a disqualified business (i.e.,
farming business, any business of operating a hotel, motel,
restaurant or similar property, or any banking, insurance,
financing or similar business). An eligible corporation also
would not include a corporation with more than 10 percent of
its assets in portfolio stock investments or real property
not used in an active business (owning, renting or dealing in
real property would not be active), a corporation the
principal activity of which is the performance of personal
services, a DISC, a 936 company, a RIC, REIT or REMIC, or any
cooperative.

55



38

from Qualified Property and 80 percent of the taxpayer's
taxable income for the year that is attributable to real
estate development activities other than the rental of
Qualified Property. Losses from Qualified Property that
exceed this amount for the year are carried forward and
treated as losses from Qualified Property in the next year.
Losses arising from Qualified Property in a prior year that
were suspended and carried forward as passive activity losses
would be subject to the same limitation as losses from
Qualified Property. Credits from Qualified Property would be
treated similarly.

In order to be Qualified Property, rental real property
must meet the following criteria: (1) the taxpayer owns a
non-de minimis interest in the rental real property; and (2)
the taxpayer actively participates in the rental real
property during the current taxable year.

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

The proposal would apply only to property placed in
service before the date of Committee action. Property that
is substantially improved after that date would be treated as
placed in service after that date.

Effective Date

The proposal would be effective with respect to taxable
years ending on or after December 31, 1992.



26

8. Extend Health Insurance Deduction for Self-Employed
Individuals

Present Law

Under present law, the tax treatment of health insurance
expenses depends on whether the taxpayer is an employee and
whether the taxpayer is covered under a health plan paid for
by the taxpayer's employer. An employer's contribution to a
plan providing accident or health coverage for the employee
and the employee's spouse and dependents is excludable from
an employee's income and wages for income and employment tax
purposes. In addition, businesses can generally deduct, as
an employee compensation expense, the full cost of any health
insurance coverage provided for their employees. The
exclusion and deduction are generally available in the case
of owners of the business who are also employees.

In the case of self-employed individuals (i.e., sole
proprietors or partners in a partnership) no equivalent
exclusion applies. However, present law provides a deduction
for 25 percent of the amount paid for health insurance for a
self-employed individual and the individual's spouse and
dependents. The 25-percent deduction is also available to
more than 2-percent shareholders of S corporations. The
amount of expenses in excess of the deductible amount can be
taken into account in determining whether the individual is
entitled to deduct medical expenses as an itemized deduction
(sec. 213). Thus, such amounts are deductible to the extent
that, when combined with other unreimbursed medical expenses,
they exceed 7.5 percent of adjusted gross income.

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

Description of Proposal

The proposal would extend and increase the 25-percent
deduction for health insurance expenses of self-employed
individuals. For 1992, the deduction would be 25 percent of
health insurance expenses. For 1993 and 1994, the deduction
would be 100 percent of health insurance expenses. The
deduction would expire after December 31, 1994.

Effective Date

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



17. Special Depreciation Allowance for Certain Equipment
Acquired in 1992

Present Law

Depreciation deductions

A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in
a trade or business or for the production of income. The
amount of the depreciation deduction allowed with respect to
tangible property for a taxable year is determined under the
accelerated cost recovery system ("ACRS"), as modified by the
Tax Reform Act of 1986. Under ACRS, different types of
property are assigned applicable recovery periods and
depreciation methods. The recovery periods applicable to
most tangible personal property (generally tangible property
other than residential rental property and nonresidential
real property) range from 3 to 20 years. The depreciation
methods generally applicable to tangible personal property
are the 200-percent and 150-percent declining balance
methods, switching to the straight-line method for the
taxable year in which the depreciation deduction would be
maximized.

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

Expensing election

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

Description of Proposal

The proposal would allow an additional first-year
depreciation deduction equal to 10 percent of the adjusted

43



£25

The amended return rule is effective for amended returns
and claims for refunds filed on or after July 1, 1992

(regardless of the taxable period to which they relate).

The rule relating to IRS-initiated adjustments is
applicable to refunds paid on or after July 1, 1992

{regardless of the taxable period to which they relate).



29. Repeal of Luxury Excise Tax on Boats, Aircraft,
Jewelry, and Furs; Modification of Luxury Excise Tax
on Vehicles

Present Law

Present law imposes ten-percent excise taxes on the
portion of the retail price of the following items that
exceeds the thresholds specified: automobiles above $30,000;
boats above $100,000; aircraft above $250,000; jewelry above
$10,000; and furs above $10,000.

The tax generally applies only to the first retail sale
after manufacture, production or importation of items subject
to the tax. It does not apply to subsequent sales of these
items. The taxes on automobiles, boats, and aircraft
generally do apply to items used in a trade or business.

The tax applies to sales before January 1, 2000.

Description of Proposal

The proposal would repeal the excise taxes imposed on
boats, airplanes, jewelry, and furs.

The proposal also would modify the tax on automobiles to
provide that the $30,000 threshold is indexed for inflation
occurring after 1990.

Effective Date

The repeal of the taxes on boats, aircraft, jewelry, and
furs would be effective for sales on or after January l,
1992. The indexation of the threshold applicable to
automobiles would be effective for sales on or after
January 1, 1992.

62



Description of Proposal

The proposal would provide a $300 income tax credit for
each qualifying child of the taxpayer. A "qualifying child"
would be defined as a child under age 16 who resided with the
taxpayer for more than 6 months during the taxable year. The
tax credit would offset regular tax liability and would not
be refundable (though through the offset of tax liability,
the tax credit could act to increase the amount of refund
from the earned income tax credit that a taxpayer might
receive). The credit amount would be indexed for inflation.
In addition, the credit would be phased out ratably for

higher-income taxpayers with adjusted gross income between
$50,000 and $70,000.

Effective Date

The proposal would be effective January 1, 1992.


1992. The first Self-Reliance Loans would be issued on or
after September 1, 1993.

16



22. Progressive Capital Gains Tax Rates
Present Law

Under present law, ordinary income of an individual is
taxed at a maximum marginal rate of 31 percent. The net
capital gain of an individual is taxed at the same rates
applicable to ordinary income, subject to a maximum marginal
rate of 28 percent. Individuals with a net capital loss
generally may deduct up to $3,000 of the loss each year
against ordinary income. Net capital losses in excess of the
$3,000 limit may be carried forward indefinitely.

Description of Proposal

An individual's net capital gain from the sale or
exchange of qualified capital assets held more than two years
("qualified capital gain") would be taxed pursuant to a new
progressive rate system.

A capital gains tax rate of 5, 19, 23, or 28 percent
would apply depending on the individual's taxable income.
The applicable capital gains tax rate would be determined by
first taking into account taxable income computed without
regard to the qualified capital gain. The qualified capital
gain then would be added to such amount. The portion of
qualified capital gain otherwise taxed at a 15-percent rate
would be taxed at a rate of 5 percent; the portion otherwise
taxed at a 28-percent rate would be taxed at a rate of 19
percent; the portion otherwise taxed at a 3l-percent rate
would be taxed at a rate of 23 percent; and the portion
otherwise taxed at the 36-percent rate (as added by the
proposal) would be taxed at a rate of 28 percent.

Qualified capital assets generally would be capital
assets as defined under present law, except that collectibles
would be excluded.

The entire amount of qualified capital gain would be
included in alternative minimum taxable income.

Gain on the disposition of depreciable real property
would be taxed as ordinary income to the extent of all
previous depreciation allowances with respect to the
property, subject to a maximum marginal rate of 31 percent.

Effective Date

The proposal would apply to dispositions (and
installment payments received) on or after February 1, 1992.
For the portion of 1992 to which the proposal would apply,
the new capital gains rates would apply for qualified capital
assets held more than one year. For 1993 and thereafter, the



71

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

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

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

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

Description of Proposal

For taxable years beginning after 1996, a corporation
that does not use the 100 percent of last year's liability
safe harbor for its estimated tax payments would be required
to base its estimated tax payments on 95 percent (rather than
90 percent) of its current year tax liability, whether such
liability is determined on an actual or annualized basis.

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

Effective Date
The proposal would be effective for estimated tax

payments with respect to taxable years beginning after
December 31, 1996.



27. Limit Deduction for Executive Compensation
Present Law

Under present law, a deduction is allowed in computing
Federal income tax liability for ordinary and necessary
expenses paid or incurred during the taxable year in carrying
on a trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually
rendered.

Description of Proposal

For purposes of the regular income tax and the
alternative minimum tax, the otherwise allowable deduction
for compensation paid or accrued with respect to a covered
employee would be limited to no more than $1 million per
year. A covered employee means any employee of the taxpayer
who is an officer of the taxpayer, other than an
employee-owner of a personal service corporation.

The term covered employee would include former
employees. Thus, for example, the proposal would apply to
compensation paid to former employees (e.g., nonqualified
deferred compensation that is not paid until after
termination of employment) as well as current employees.

The proposal would not apply to compensation paid to
employees who are not officers. Similarly, the proposal
would not apply to payments to partners in a partnership
because they are not employees. The proposal also would not
apply to payments to independent contractors.

The deduction limitation generally would apply to all
remuneration for services, including the cash value of all
remuneration (including benefits) paid in a medium other than
cash. The limit would not apply to fringe benefits excludable
from income under section 132, meals and lodging furnished on
the business premises of the employer that are excludable
under section 119, or contributions to qualified pension and
annuity plans or tax-sheltered annuities.

Effective Date

The proposal would be effective for taxable years
beginning on or after January 1, 1992.

6b



33

collecting income from such property, and remitting the
income therefrom to no more than 35 shareholders or
beneficiaries that are: (1) qualified pension,
profit-sharing, or stock bonus plans (sec. 40l(a)); (2)
governmental pension plans (sec. 414(d)); (3) the United
States, a State or political subdivision, or governmental
agencies or instrumentalities; or (4) tax-exempt charitable,
educational, religious, or other organizations described in
section 501(c)(3).

Ordinarily, a tax-exempt organization will not lose its
exempt status because it generates unrelated business taxable
income (UBTI), so long as the activities producing such
taxable income are not substantial in comparison to the
organization's activities that further its exempt purposes.
However, the IRS has taken the position that a title-holding
company described in section 501(c)(2) or 501(c)(25) will
lose its tax-exempt status if it generates any amount of
income subject to the UBIT.

Description of Proposal

The proposal would permit a title-holding company that
is exempt from tax under sections 501(c)(2) or 501(c)(25) to
receive UBTI up to 10 percent of its gross income for the
taxable year, provided that the UBTI is incidentally derived
from the holding of real property. For example, income
generated from parking or operating vending machines located
on real property owned by a title-holding company generally
would qualify for the 10-percent de minimis rule, while
income derived from an activity that is not incidental to the
holding gt real property (e.g., manufacturing) would not
qualify.

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

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

3 In cases where unrelated income is incidentally derived
from the holding of real property, receipt by a title-holding
company of such income (up to the 10-percent limit) will not
jeopardize the title-holding company's tax-exempt status, but
nonetheless, will be subject to tax under the general UBIT
rules.



73

3. Extension of Itemized Deduction Limitation
Present Law

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

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

The total amount of otherwise allowable itemized
deductions (other than medical expenses, casualty and theft
losses, and investment interest) is reduced by 3 percent of
the amount of the taxpayer's AGI in excess of $105,250 in
1992 (indexed for inflation). Under this provision,
otherwise allowable itemized deductions may not be reduced by
more than 80 percent. In computing the reduction of total
itemized deductions, all present-law limitations applicable
to such deductions are first applied and then the otherwise
allowable total amount of deductions is reduced in accordance
with this provision.

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

Description of Proposal

The proposal would extend permanently the present-law
itemized deduction limitation applicable to higher-income
individuals.



taken to correct the circumstances giving rise to such excess
UBTI.

Effective Date

The proposal would be effective for taxable years
beginning after December 31, 1991.

d. Exclude from UBTI any gains from the disposition
of property acquired from financial institutions in
conservatorships or receiverships

Present Law

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

Description of Proposal

The proposal would create an exception to the dealer
UBTI rule by excluding gains from the sale, exchange or other
disposition of real property and mortgages acquired from
financial institutions that are in conservatorship or
receivership. The exclusion would be limited to properties
designated as disposal property within six months of
acquisition, and disposed of within two-and-a-half years of
acquisition. The two-and-a-half year period may be extended
by the Secretary if an extension is necessary for the orderly
liquidation of the property. The exclusion would not be
available for properties that are substantially improved or
renovated after acquisition and before disposition. The
exclusion generally would not be available for property that
is developed except if the property is developed only ina
limited manner (e.g., by securing zoning permits).

Effective Date

The proposal would be effective for property acquired
after February 1, 1992.

e. Exclude loan commitment fees and certain option
premiums from UBTI

Present Law

Income from a trade or business that is unrelated to an
exempt organization's purpose generally is UBTI. Passive
income such as dividends, interest, royalties, and gains or
losses from the sale, exchange or other disposition of

34



portion related to all other drilling costs. The portion of
the preference related to exploratory IDCs is multiplied by
75 percen* and the remaining portion is multiplied by 15
percent. The marginal production depletion preference is
multiplied by 50 percent. These three products are then
added together to arrive at the taxpayer's special energy
deduction. The special energy deduction, however, may not
reduce the taxpayer's alternative minimum taxable income by
more than 40 percent.

Description of Proposal

For purposes of computing the AMT preference for IDCs of
an independent oil and gas producer, the proposal would raise
the 65~percent net oil and gas income offset to 80 percent.
Thus, the difference between the amount of a taxpayer's IDC
deductions and the amount which would have been currently
deductible had IDCs been capitalized and recovered over a
10-year period would constitute an item of tax preference for
an independent producer to the extent that this difference
exceeds 80 percent of the taxpayer's net income from oil,
gas, and geothermal properties for the taxable year.

In addition, for purposes of computing adjusted current
earnings, the proposal would eliminate the requirement that
independent oil and gas producers make an adjustment to
alternative minimum taxable income for IDCs.

The proposal also would alter the special energy
deduction. Under the proposal, the IDC component of the
special energy deduction would be computed by multiplying the
IDC preference by 50 percent. Thus, the proposal would
eliminate any necessity to apportion the IDC preference
between exploratory and all other IDCs. As under present
law, the special energy deduction would be allowed to reduce
a taxpayer's alternative minimum taxable income by no more
than 40 percent.

Effective date

The proposal would be effective for taxable years
beginning after December 31, 1991.

44


6. Expansion of Educational Savings Bond Provisions
Present Law

Code section 135 provides that interest income earned on
a qualified U.S. Series EE savings bond issued after December
31, 1989, is excludible from gross income if the proceeds of
the bond upon redemption do not exceed qualified higher
education expenses paid by the taxpayer during the taxable
year.~ "Qualified higher education expenses" include tuition
and required fees for the enrollment or attendance of the
taxpayer, the taxpayer's spouse, or a dependent of the
taxpayer at an eligible educational institution. A taxpayer
cannot qualify for the interest exclusion by paying for the
education expenses of another person (such as a grandchild or
other relative) who is not a dependent of the taxpayer.

The exclusion provided by section 135 is phased out for
certain higher-income taxpayers. A taxpayer's AGI for the
year the bond is redeemed (not the year the bond was issued)
determines whether or not the phaseout applies. For
taxpayers filing a joint return, the phaseout range is for
AGI between $60,000 and $90,000 (adjusted for inflation).
For single taxpayers and heads of households, the phaseout
range is for AGI between $40,000 and $55,000 (adjusted for
inflation).

To prevent taxpayers from effectively avoiding the
income phaseout limitation (through the issuance of bonds
directly in the child's name), section 135(c){1)({B) provides
that the interest exclusion is available only with respect to
U.S. Series EE savings bonds issued to taxpayers who are at
least 24 years old.

The interest rate on Series EE savings bonds varies,
depending on how long the bonds are held. The interest rate
on such bonds held for more than five years is based on the
market rate for Treasury outstanding obligations with five
years to maturity. Bonds held for less than five years earn
interest on a fixed, graduated scale (generally below current
rates on comparable Treasury instruments). Interest earned
on Series EE bonds is paid when the bonds are redeemed.

1 te the aggregate redemption amount (i.e., principal plus
interest) of all Series EE bonds redeemed by a taxpayer
during the taxable year exceeds the qualified education
expenses incurred, then the excludable portion of interest
income is based on the ratio that the education expenses
bears to the aggregate redemption amount.

22



Description of Proposal

The research tax credit would be extended for 18 months
(i.e., for qualified research expenditures and university
basic research expenditures incurred through December 31,

1993).

Effective Date

The proposal would apply to qualified expenditures
incurred during the period July 1, 1992, through December 31,

1993.

52



28. Employer-Provided Transportation Benefits
Present Law

Under Treasury regulations, monthly transit passes,
tokens, etc., provided by an employer are excludable from an
employee's income and wages for income and employment tax
purposes as a de minimis fringe benefit if the total value of
the transit pass does not exceed $21. If the total value of
such benefits exceeds $21 per month, the full value of the
benefits is includible in income.

Parking at or near the employer's business premises that
is paid for by the employer is excludable from the gross
income of the employee as a working condition fringe benefit,
regardless of the value of the parking.

Description of Proposal

Under the proposal, gross income would not include
qualified transportation fringe benefits. In general, a
qualified transportation fringe would be (1) transportation
in a commuter highway vehicle if such transportation is in
connection with travel between the employee's residence and
place of employment, (2) a transit pass, or (3) qualified
parking. The maximum amount of qualified parking that could
be excluded from an employee's gross income would be $160 per
month (regardless of the total value of the parking). Other
qualified transportation fringes would be excludable from
gross income to the extent that the aggregate value of the
benefits does not exceed $60 per month. Both dollar limits
would be indexed for inflation.

A transit pass would include any pass, token, farecard,
voucher, or similar item entitling a person to transportation
on mass transit facilities (whether or not publicly owned).
Types of transit facilities that could qualify for the
exclusion include, for example, rail, bus, and ferry.

Qualified parking would be parking provided to an
employee on or near the business premises of the employer or
on or near a location from which the employee commutes to
work by mass transit, in a commuter highway vehicle, or by
carpool.

Effective Date

The proposal would apply to benefits provided by the
employer on or after January 1, 1992, except that the $160
per month limit on the exclusion for qualified parking
benefits would apply to benefits provided after the date of
enactment.

Gl



12.
13.

14.

15.
16.

17.

18.

19.

20.
21.

22.
23.

24,
25.
26.
27.

28.

c. Permit title-holding companies
to receive small amounts of income
that is subject to UBIT............
ad. Exclude from UBTI any gains from
the disposition of property ac-
quired from financial institutions
in conservatorship or re-
CELVEFSNIPS. cece cece eee esanecace
e. Exclude loan commitment fees and
certain option premiums from
16) =)
£. Exclude certain hotel rental income
from UBTI......
Tax credit for first-time homebuyers...
Passive loss relief for real estate
GEVELOPErS.. cee weer ec cc ccc reccecccneee
Increase recovery period for depre-
ciation of nonresidential real
PLOPErty. ces ccecsc cc cc cc ee ec esecceerece
Extension of low-income housing
sot-b kos (ob ant ee ad
Extension of qualified mortgage
bond and mortgage credit certificate
PIOGFAMS. cece cece cece cece eee e snes eceeee
Special depreciation allowance for
certain equipment acquired in 1992.....
Extension of relief for AMT purposes
for contributions of appreciated
PLOPELty. ccc e eee c eee e cece twee eeee reese
Alternative minimum tax relief for
intangible drilling costs of oil
and gas independent producers..........
Elimination of ACE depreciation
AGJUSEMENt Lc. Lee eee cee cece cece nes
Research and experimentation tax
fos od -to 6
Progressive capital gains tax rates
Exclusion for capital gains on certain
small business StOCk.......eeeceeseeees
Extension of qualified small-issue
DONS... cece eee eee e renee eeeeeetoes
Business energy tax credits for solar
and geothermal property. ..cccereeeeseee
Classification of multi-purpose
VENICLES. .. cece eee cece eee ee eneee
Limit deduction for executive
COMPENSACLON..... eee e eee e cece cervcnces
Employer-provided transportation
benefits......... es eeeee see ee ee eencens

(iii)

32

34

34

35
36

37

39
40

42
43

46

48
50

51
53

55
57
58
59
60
61


eee

4 |

family insurance amount (currently $124,875). This amount
would be indexed for inflation.

(4) Clarification would be provided that a unit occupied
entirely by full-time students may qualify for the credit if
the full-time students are a parent and his or her minor
children and the tenants are not dependents of a third party.

{5) The Treasury Department would be authorized to grant
a waiver of penalties for de minimis errors in the
application of the low-income tenant set-aside rules.

(6) The Treasury Department would be authorized to grant
a waiver from the annual recertification of tenant income,
for tenants in a building, if the population of a building is
composed entirely of low-income tenants.

(7) The bill would provide that community service
buildings in projects in qualified census tracts are included
in eligible basis as functionally related and subordinate
facilities if (a) the size of the facilities is commensurate
with tenant needs, and (b) the use of the facilities is
predominantly (although not exclusively) by tenants and
employees of the project owner, and (c) no more than 20
percent of the credit project's eligible basis is
attributable to the aggregate basis of such facilities.

Effective Date

The proposal would be effective on the date of
enactment.

The modifications to the low-income housing tax credit
program rules generally would be effective for allocations of
low-income credit volume limitation (and bond-financed
buildings financed with tax-exempt bonds issued after) June
30, 1992. The change to the credit carryforward rules would
be effective on and after January 1, 1992.



14. Increase Recovery Period for Depreciation of
Nonresidential Real Property

Present Law

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

Description of Proposal

The depreciation deduction allowed with respect to
nonresidential real. property for any taxable year would be
determined by using the straight-line method and a recovery
period of 40 years for purposes of the regular tax and the
alternative minimum tax.

Effective Date

The proposal generally would apply to property placed in
service after February 12, 1992. The proposal would not
apply to property that is placed in service by a taxpayer
before January 1, 1995, if (1) the taxpayer or a qualified
person entered into a binding written contract to purchase or
construct the property before February 13, 1992, or (2)
construction of the property was commenced by or for the
taxpayer or a qualified person before Pebruary 13, 1992. For
this purpose, a qualified person would be defined as any
person who transfers his or her rights in such a contract or
in the property to the taxpayer, but only if the property is
not placed in service by such person before such rights are
transferred to the taxpayer.

39


64

31. Access to Tax Information by the Department of Veterans
Affairs

Present Law

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

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

The DVA disclosure provision is scheduled to expire
after September 30, 1992.

Description of Proposal

The proposal would extend this authority to disclose tax
information for six years.

Effective Date

The DVA disclosure provision would expire after
September 30, 1998.



2. Income-Dependent Education Assistance: Self-Reliance
Loans

Present Law

The Department of Education subsidizes student loans
under the Guaranteed Student Loan (GSL) and Parent Loans to
Undergraduate Students (PLUS) programs. These loan programs
generally are available for certain postsecondary educational
expenses, regardless of a student's financial need. The
subsidies provided under the GSL and PLUS programs generally
take three forms. First, the Department of Education
guarantees repayment of qualified student loans made by
banks. Second, the Department pays special allowance
payments as an interest subsidy on qualifying student loans
so that student borrowers are required to pay less interest
on the loans. Third, with so-called "Stafford" loans, the
Department pays an additional interest subsigy on qualified
loans while the student is attending school.

In addition, through the National Direct Student Loan
(NDSL) program, the Federal government has made available
revolving, direct-loan fugds at certain participating
educational institutions. Such loans (commonly referred to
as "Perkins loans") are available only to low-income students
with significant demonstrated financial need. The schools
participating in the NDSL program are responsible for
collecting amounts due from student borrowers.

Federal agencies are authorized to notify the IRS that a
person owes a past-due, legally enforceable debt (such as a
delinquent student loan) to that agency. The IRS then is
required to reduce the amount of any Federal tax refund due
such person by the amount of the debt and pay that amount to
the agency. The refund offset program applies with respect
to debts of individuals and corporations (sec. 6402(d)).

1 In the case of Supplemental Loans for Students ("SLS"
loans) there is no in-school interest subsidy provided by the
Federal government. SLS loans are available only to
independent students.

Stafford loans generally are limited to $3,500 for
freshmen and sophomores, $5,500 for juniors and seniors, with
a total undergraduate cap of $23,000. SLS loans generally
are limited to $4,000 for freshmen and sophomores, $5,000 for
juniors and seniors, with a total undergraduate cap of
$23,000.

2 Currently, a total lending pool of about $850 million is
available at over 3300 participating schools.


21. Rese2zrch and Experimentation Tax Credit
Present Law

A 20-percent tax credit is allowed to the extent that a
taxpayer's qualified research expenditures for the current
year exceed its base amount for that year. The credit will
not apply to amounts paid or incurred after June 30, 1992.

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

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

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

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

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

Ss!


51

24. Extension of Qualified Small-Issue Bonds
Present Law

Interest on certain small issues of private activity
bonds ("qualified small-issue bonds") is excluded from gross
income if certain conditions are met. First, at least 95
percent of the bond proceeds must be used to finance
manufacturing facilities or certain agricultural land or
equipment. Second, the bond issues must have an aggregate
face amount of $1 million or less, or the aggregate face
amount of the issue, together with the aggregate amount of
certain related capital expenditures during the six-year
period beginning three years before the date of the issue and
ending three years after that date, may not exceed $10
million.

Authority to issue qualified small-issue bonds is
scheduled to expire after June 30, 1992.

Description of Proposal

Authority to issue qualified small-issue bonds would be
extended for 18 months, through December 31, 1993.

Effective Date

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



eh ke age Sia too

//

Limit by cost of attendance

In any fiscal year, a student could not receive
Self-Reliance Loans in an amount greater than such student's
qualified education expenses (tuition, fees, books, supplies,
and reasonable living expenses away from home) to attend a
postsecondary school (as defined in section 481(a) of the
Higher Education Act of 1965) less any other Federal
educational financial assistance received by such student.

Interest rate on loans

The interest rate on a Self-Reliance Loan would be
established at the time of issuance and would be equal to the
average of the interest rates on the 10-year and 30-year
Treasury bonds. The Secretary of Education would establish
the interest rate on Self-Reliance Loans at the same time
(and with the same frequency) as is done for the Supplemental
Loans for Students program.

Repayment procedure
In general

Repayment on an individual's Self-Reliance Loan
obligations would be collected through the individual income
tax. For a taxpayer in repayment status, the taxpayer's
income tax liability generally would be increased by the
applicable Self-Reliance Loan repayment tat¢ multiplied by
the taxpayer's adjusted gross income (AGI). This repayment
would be treated as a tax imposed by section 1 of the Code
except for purposes of determining the amount of any tax
credit or the amount of minimum tax.

The applicable repayment rate would be fixed at the time
the taxpayer first enters repayment status and would depend
upon the taxpayer's amount of outstanding Self-Reliance Loan

3 as determined in section 428A of the Higher Education Act
of 1965.

4 In the case of a married individual whose spouse has not
received a Self-Reliance Loan and who files a joint return,
the income tax liability on the joint return would be
increased by the individual's repayment rate multiplied by
the AGI on the joint return. In the case of a married
individual whose spouse has not received a Self-Reliance Loan
and who files a separate return, such individual's income tax
liability would increased by the individual's repayment rate
multiplied by the sum of the AGI of that individual and the
AGI of the individual's spouse (from the spouse's separate
return).


CONTENTS

INTRODUCTION... cece cece cere e sce c secre serra nenseces

DESCRIPTION OF TAX PROPOSALS.....cesseecsenccuveees

A.

Provisions for Fair Treatment of
Working Families. ... cece eee eeeecerecvccece

1.
2.
3.

Tax credit for taxpayers with
children under age 16.........cse coos
Simplification and expansion of
earned income tax credit...........006
Extension of targeted jobs tax

Col te 6 as

Provisions for Long-Term Economic
GFOWLD . cece cece cere cece cree eeseeeccnecces

1.
2.

10.

ll.

Individual retirement arrangements
(65:).\-) ee a
Income-dependent education

assistance: self-reliance loans.......
Choice of credit or deduction

for interest on student loans.........
Formation of, and contributions
to, tax-exempt youth training
Organizations... .ceeceeccesecevecs
Extension of exclusion for employer-
provided educational assistance.......
Expansion of educational savings

bond provisions... ...cesececerecescvece
Expansion of 45-day interest-free

[oo Cole Ps
Extend health insurance deduction for
self-employed individuals.............
Increase base tax rate on ozone-
depleting chemicals and expand list

of taxed chemicals......seceeerececeee
Extension of tax credit for orphan
drug clinical testing expenses........
UBIT changes relating to real estate
investments by pension funds and

Ko) eS fn

a. Relax debt-finance restrictions...
b. Repeal UBIT rule for publicly-
traded partnerShipS....sseceseoees

(ii)

19
21
22
24
26

27
28

29
29
32


Effective Date

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

b. Repeal UBIT rule for publicly-traded partnerships
Present Law

In general, the character of a partner's distributive
share of income is the same as if the income had been
directly realized by the partner. Thus, a tax-exempt
organization's share of income from a partnership (other than
from a publicly-traded partnership) is treated as unrelated
business income, or not, depending on the underlying
character of the income (sec. 512(c)(1)).-

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

Description of Proposal

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

Effective Date

The proposal would be effective for partnership
interests acquired on or after February 1, 1992.

c. Permit title-holding companies to receive small
amounts of income that is subject to UBIT

Present Law

Code section 501(c)(2) provides tax-exempt status to
certain corporations organized for the exclusive purpose of
holding title to property and turning over any income from
the property to one or more related tax-exempt organizations.
Section 501(c)(25) provides tax-exempt status to certain
corporations and trusts that are organized for the exclusive
purposes of acquiring and holding title to real property,

32



Effective Date

The proposal would be effective for taxable years
beginning in 1996 and thereafter.



Zo

Description of Proposal

Tax-exempt status

The proposal would specifically provide tax-exempt
status for certain youth training organizations that are
organized and operated solely for the purpose of
administering a training program that (1) combinés supervised
on-the-job training for full-time high school students with
theoretical academic instruction, (2) requires student
participants be provided broad-based competencies and
transferable skills suitable for career progression within
the industry or trade in which the student is employed, (3)
requires student trainees to be treated as employees for
purposes of section 6 of the Fair Labor Standards Amendments
of 1989, or section 6 or 14 of the Fair Labor Standards Act
of 1938, and (4) prohibits the use of contributions to the
organization for actual employment training expenses or
compensation of student trainees.

The youth training organization would be required to be
controlled by representatives of businesses contributing to
the organization, schools participating in the training
program, State or local governments, and student trainees.

Augmented deduction

The proposal also would provide an augmented deduction
for cash contributions made to a tax-exempt youth training
organization. The allowable deduction would be 150 percent
of the contributed amount.

Department Studies

The Treasury, Labor, and Education Departments would be
directed to report to Congress within three years after
enactment on the effects of the proposal and any
recommendations for legislative modifications.

Effective Date

The proposal would be effective for taxable years
beginning after the date of enactment.



ERRATA FOR JCX-7-92

o On page 20, a new paragraph should be inserted before
Effective Date, to read as follows:

Youth Training Program

The proposal would establish an independent national
board to develop a system of industry-based, occupational
proficiency standards and certifications of mastery for
occupations within each major industry, and occupations that
involve more than one industry, for which no recognized
training standards currently exist.

o On page 49, first sentence under Description of Proposal
should read as follows:

For purposes of computing the AMT preference for IDCs of
an independent oil and gas producer, the proposal would raise
the 65-percent net oil and gas income offset to 70 percent.


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

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

The limitations on the amount of depreciation deductions
allowed with respect to certain passenger automobiles (sec.
280F of the Code) would be adjusted to reflect the additional
first year depreciation deduction.

The following examples illustrate the operation of the
proposal.

Example 1.-~-Assume that on July 1, 1992, a calendar year
taxpayer acquires and places in service qualified property
that costs $1 million. Under the proposal, the taxpayer
would be allowed an additional first-year depreciation
deduction of $100,000. The remaining $900,000 of adjusted
basis would be recovered in 1992 and subsequent years
pursuant to the depreciation rules of present law.

Example 2.--Assume that on July 1, 1992, a calendar year
taxpayer acquires and places in service qualified property
that costs $30,000. In addition, assume that the property
qualifies for the expensing election under section 179.

Under the proposal, the taxpayer first would be allowed a
$10,000 deduction under section 179. The taxpayer would then
be allowed an additional first-year depreciation deduction of
$2,000 based on $20,000 ($30,000 original cost less the
section 179 deduction of $10,000) of adjusted basis.

4Y



10. Extension of Tax Credit for Orphan Drug Clinical
Testing Expenses

Present Law

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

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

Description of Proposal

The proposal would extend the orphan drug tax credit for
18 months (i.e., for qualified clinical testing expenses
incurred through December 31, 1993).

Effective Date

The proposal would be effective for expenses incurred
during the period July 1, 1992, through December 31, 1993.

23



37

13. Passive Loss Relief for Real Estate Developers
Present Law

The passive loss rules limit deductions and credits from
passive trade or business activities. Deductions |
attributable to passive activities, to the extent they exceed
income from passive activities, generally may not be deducted
against other income, such as wages, portfolio income, or
business income that is not derived from a passive activity.
Deductions that are suspended under this rule are carried
forward and treated as deductions from passive activities in
the next year. The suspended losses from a passive activity
are allowed in full when a taxpayer disposes of the entire
interest in the passive activity to an unrelated person.

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

Rental activities are also included in the definition of |
passive activities (regardless of the level of the taxpayer's
Participation). In general, rental activities are treated as
separate from other business activities. A special rule
permits the deduction of up to $25,000 of losses from certain
rental real estate activities (even though they are
considered passive), if the taxpayer actively participates in
them. This $25,000 amount is allowed for taxpayers with
adjusted gross incomes of $100,000 or less, and is phased out
for taxpayers with adjusted gross incomes between $100,000
and $150,000. In general, active participation is a lesser
standard of involvement than material participation and
generally requires that the taxpayer participate in making
Management decisions or arrange for others to provide
services such as repairs in a significant and bona fide
sense. The active participation standard requires an
ownership interest of no less than 10 percent in the rental
real estate. A taxpayer generally is deemed not to satisfy
the active participation standard (or the material
participation standard) with respect to property he holds
through a limited partnership interest.

Description of Proposal

Under the proposal, a taxpayer who materially
participates in a real estate development activity during the
taxable year may treat the rental of certain real property
("Qualified Property") as a non-rental activity that is part
of such taxpayer's real estate development activity. Income
and loss for the taxable year from Qualified Property would
not be treated as passive, but net losses from Qualified
Property would be allowed only to the extent of net income



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23

Description of Proposal

The proposal would expand the definition of “qualified
higher education expenses" under section 135 to include
tuition and required fees paid by a taxpayer for the
enrollment or attendance of any individual at an eligible
educational institution (not simply dependents).

The proposal also would repeal the present-law AGI
phaseout limitation under section 135 (and the related rule
requiring that bonds be issued to a person who is at least 24
years old). Thus, interest earned on a Series EE savings
bond would not be subject to tax regardless of the taxpayer's
AGI during the year the bond is redeemed if, during that
year, the taxpayer pays for qualified education expenses of
any individual and the education expenses exceed the proceeds
(principal plus interest) received upon redemption.

Effective Date
The proposal would apply to U.S. Series EE savings bonds

issued after December 31, 1989, and redeemed after
December 31, 1991.



eS,

The provision would allow withdrawals from an IRA and
from amounts attributable to elective deferrals under (1) a
section 401(k) plan, (2) a tax-sheltered annuity (sec. 403(b)
annuity, or (3) a section 501(c)(18) plan without imposition
of the 10-percent additional income tax on early withdrawals
to the extent the amount withdrawn is used to pay qualified
acquisition, construction, or reconstruction costs with
respect to a principal residence of a first-time homebuyer
who is the taxpayer, the taxpayer's spouse, or the taxpayer's
child or grandchild. A first-time homebuyer would be defined
as any individual (and if married, such individual's spouse)
who had no present interest in a principal residence during
the 2-year period prior to the purchase of a home.

The waiver of the 10-percent additional tax on early
withdrawals would also apply to the extent distribution did
not exceed qualified higher education expenses. Qualified
higher educational expenses means tuition, fees, books,
supplies, and equipment required for the enrollment of or
attendance of the taxpayer, the taxpayer's spouse, or the
taxpayer's child or grandchild at a college, university, or
post-secondary vocational school. The amount of qualified
higher educational expenses for any taxable year would be
reduced by any amount excludable from gross income under the
provision in the Code pertaining to U.S. education savings
bonds.

The provision would extend to IRAs the present-law
exception to the 10-percent additional income tax for
distributions from qualified retirement plans used to pay
deductible medical expenses. For purposes of the medical
expense exception (with regard to both IRAs and qualified
retirement plans), a child, grandchild, or ancestor of the
taxpayer would be treated as a dependent of the taxpayer in
determining whether medical expenses are deductible.

Finally, the provision would provide that the
present-law rule permitting penalty-free IRA withdrawals
after an individual reaches 59-1/2 would not apply in the
case of amounts attributable to contributions made during the
previous 5 years. Thus, IRA contributions generally would
have to remain in the account for at least 5 years to avoid
withdrawal penalties. This restriction would only apply to
contributions (and earning allocated thereto) that are made
after December 31, 1991. Moreover, for purposes of applying
the rule, distributions would be treated as having been made
first from the earliest contribution (and earnings) remaining
in the account, and then from other contributions in the
order in which made.


26. Classification of Multi-Purpose Vehicles
Present Law

Under present regulations, multi-purpose vehicles (MPVs)
such as mini-vans and sport utility vehicles are
inconsistently classified as autos or trucks. For purposes
of emission and fuel economy standards, most MPVs are
classified as trucks. However, for customs purposes, MPVs
with more than two doors are generally classified under the
Harmonized Tariff System (HTS) as vehicles “principally
designed for the transport of persons" (HTS heading 8703),
subject to a 2.5 percent duty. Two-door MPVs are generally
classified as vehicles "principally designed for the
transport of goods" (HTS heading 8704), subject to a 25
percent duty. The current tariff classification resulted
from a controversial Treasury Department ruling in 1989
reversing an earlier Customs Service ruling which classified
all MPVs under HTS heading 8704 and subjected them to the 25
percent duty.

Description of Proposal

The amendment would incorporate into the HTS language
from the regulations of the Environmental Protection Agency
and the Department of Transportation such that MPVs
classified as trucks for emission and fuel economy standards
would also be classified as trucks for tariff purposes. The
effect would be to raise the duty on certain MPVs from 2.5
percent to 25 percent.

Effective Date

The proposal would be effective 15 days after the bill's
enactment.

34



75°

4. Extension of Personal Exemption Phaseout
Present Law

Present law permits a personal exemption deduction from
gross income for an individual, the individual's spouse, and
each dependent. For 1992, the amount of this deduction is
$2,300 for each exemption claimed. This exemption amount is
adjusted for inflation. The deduction for personal
exemptions is phased out for taxpayers with adjusted gross
income (AGI) above a threshold amount (indexed for inflation)
which is based on filing status. For 1992, the threshold
amounts are $157,900 for married taxpayers filing joint
returns, $78,950 for married taxpayers filing separate
returns, $131,550 for unmarried taxpayers filing as head of
household, and $105,250 for unmarried taxpayers filing as
single.

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

This provision does not apply to taxable years beginning
after December 31, 1995.

Description of Proposal

The proposal would extend permanently the present-law
personal exemption phaseout.

Effective Date

The proposal would be effective for taxable years
beginning in 1996 and thereafter.



Finally, the remaining adjusted basis of $18,000 ($20,000
adjusted basis less $2,000 additional first-year
depreciation) would be recovered in 1992 and subsequent years
pursuant to the depreciation rules of present law.

Effective Date

The proposal would apply to property placed in service
on or after February 1, 1992.

AS


transfer cf such property to a charitable organization. The
Secretary would be required to submit a report not later than
December 31, 1992, to the Senate Committee on Finance and the
House Committee on Ways and Means, reporting on the
development of such a procedure and the projected timetable
for its implementation.

Study of tax treatment of corporate sponsorship payments to
Charitable organizations

The Treasury Department would be directed to conduct a
study on the tax treatment of corporate sponsorship payments
received by charitable and other tax-exempt organizations in
connection with athletic (and other) events and the
ramifications of IRS proposed examination guidelines
contained in Announcement 92-15, 1992-5 I.R.B. 51. Within
one year after the date of enactment, the Treasury Department
would be required to report the results of this study to the
Senate Committee on Finance and the House Committee on Ways
and Means.

Effective Date

The proposal governing the AMT treatment of gifts of
appreciated property would be effective for contributions
made in 1992 and 1993.

The Secretary of Treasury would be required to report to
Congress prior to December 31, 1992, on the development of an
advance valuation procedure for certain donations, and within
one year after the date of enactment, the results of a study
of corporate sponsorship payments received by tax-exempt
organizations.

47



Description of Proposal

In general

The proposal would create a program ("Income-Dependent
Education Assistance") of direct loans ("Self-Reliance
Loans") for higher education expenses. The Secretary of
Education would make payments to participating institutions
on the basis of estimated borrowing needs of the students at
such institution. Eligible students who borrow funds under
the program would have an account established with the
Secretary of Education to record interest on and repayment of
the Self-Reliance Loans. Such borrowers would make
income-dependent repayments through the income tax system by
means of a specially computed addition to tax that represents
both principal and interest on the loan.

Eligible students

Eligible students would be United States citizens at
least 17 years old, but not yet 51 years old, who are
enrolled at a participating institution (which, for fiscal
years 1994-1997, are selected by the Secretary of Education).
Eligible students would be able to receive Self-Reliance
Loans without regard to financial need. Notwithstanding any
other provision of law, an eligible student would not receive
a Self-Reliance Loan in any fiscal year unless such student's
eligibility for assistance under section 428 and subpart 1 of
part A of the Higher Education Act had been assessed.

Limits on amounts borrowed

In general

The maximum amount of Self-Reliance Loans that could be
borrowed by a student in his or her lifetime would be
$30,000, with no more than $25,000 of that amount for
undergraduate education. A student could receive a
Self-Reliance Loan in the amount of no more than $5,000 per
fiscal year in the case of an undergraduate student and no
more than $15,000 per fiscal year in the case of a graduate
student.

Coordination with other Federal loan programs

The combined maximum amount of loans a student could
borrow under the Income-Dependent Education Assistance
program, Part B (Stafford and Perkins loans), and Part E
(Supplemental Loans for Students) of the Higher Education Act
of 1965 could not exceed $52,000 for a dependent
undergraduate, $62,000 for an independent undergraduate? who
borrows at least $10,000 in Self-Reliance Loans, and $115,000
for a graduate student.

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