11.. 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, appropriateness of
imposition and rate of tax on covered vaccines, new vaccines and
immunization practices, and the treatment of vaccines produced
by State governmental entities.

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

Effective Date

The proposal would be effective on the date of enactment.

-17-



Eligible basis

The proposal would make two changes to the eligible basis
rules:

First, the eligible basis of each building in a credit
project would be limited to an amount equai to the maximum FHA
single family insurance amount (currently $124,875). This
amount would be indexed for inflation. In high-cost areas this
maximum basis amount would be increased to 130 percent of the
otherwise allowable maximum amount.

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

‘Ten-year anti-churning rule

The Treasury Department would be authorized to grant
waivers from the credit's ten-year anti-churning rule for
certain projects substantially assisted, financed, or operated
under sec. 221(d)(4) of the National Housing Act.

Minimum set~aside requirement for low-income individuals

The Treasury Department would be authorized to: (1) provide
a waiver of penalties for de minimis errors in the application
of the low-income tenant occupancy requirement and (2) grant a
waiver from the annual recertification of tenant income, for
tenants in a building, if the population of a building is
composed entireiy of low-income tenants.

Students

Housing units occupied entirely by full-time students could
qualify for the credit if the full-time students were a single
parent and his or her minor children and none of the tenants was
a dependent of a third party.

State low-income housing credit authority Limitation

For purposes of the carryforward rule, credits carried
forward from previous years would be treated as used before
current year credits.

The proposal was included in H.R. 4210 as passed by the
Senate, and is similar to the provisions of that bill as passed
by the House and Senate except that in that version of H.R. 4210

-11-



B. Luxury Excise Tax and Diesel Fuel Excise Tax on Motorboats

1. Repeai of Luxury Excise Tax on Boats, Aircraft,
Jeweiry, and Furs; Index 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 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.

The proposal further would modify the tax on automobiles to
provide that the tax does not apply to a part or accessory
installed on a passenger vehicle to enable or assist an
individual with a disability to operate the vehicle, or to enter
or exit the vehicle, in order to compensate for the effect of
the disability.

The proposals to repeal of the luxury excise tax on boats,
furs, airplanes, and jewelry, to index the threshold of the tax
with respect to automobiles, and to exclude from tax accessories
to assist handicapped individuals were included in H.R. 4210 as
passed by the House of Representatives and Senate.

Effective Date
The proposal generally would be effective for sales on or
after January 1, 1992. The indexation of the threshold

applicable to automobiles would be effective for sales on or
after July 1, 1992.

-21-



DESCRIPTION OF TAX PROVISIONS
A. Certain Expiring Tax Provisions
1. 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 educational 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.

A similar proposal was included in H.R. 4210 as passed by
the House and Senate, except that in H.R. 4210 the exclusion was
extended for 12 months rather than 18 months.

Effective Date

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


The p:cposal is included in H.R. 776 as passed by the House
and was alsc included in H.R. 4210 as passed by the House and
the Senate.

Effective Date

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

~32-


12.. 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

Under the 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.

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

Effective Date

The proposal would be effective beginning September 30,
1992.

-18-


Cc. Other Revenue-Raising Provisions
1. 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 (P.L. 102-44, Feb. 7, 1992).

On June 11, .1992,-the Senate. Finance Committee voted to
provide that for taxable years beginning after June 30, 1992,
and before 1997, the present-law 93-percent and 95-percent
requirements would become 96-percent requirements. Also under
the provision, for taxable years beginning after 1996, the
present-law 90-percent requirement would become a 9l-percent
requirement.

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

Description of Proposal

For taxable years beginning after 1996, the percentage of
current-year tax liability upon which a corporation is required
to base its estimated tax payments would be increased by five
percentage points, 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.

-24-



R&D at foreign sites and should not be penalized by the
allocation rules. Similar language appeared in the Technical
Explanaticn of the Senate Finance Committee amendment to H.R.

4210 (March 6, 1992), and was approved by the conferees on H.R.
4210.

Effective Date

The report would state that the committee expects and
requests the Treasury Department to issue regulations as soon as

possible, to be effective after the termination of the current
temporary rules.

-20-



4. Increase in Base Tax Rate of Excise Tax on Ozone-Depleting
Chemicals

Present Law

An excise tax is imposed on certain ozone-depieting
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 Budget Reconciliation Act of 1989 or
whether they were newly listed in the Omnibus Budget
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.

Description of Proposal

The proposal would increase the base tax rate of beth
initially listed chemicals and newly listed chemicals. For both
originally listed chemicals and newly listed chemicals, the base
tax rate would be increased by $0.15 per pound in 1992, by $0.25
per pound in 1993, by $0.35 per pound in 1994, and by $0.45 per
pound in 1995 and thereafter. These increases in the base tax
rates of originally listed and newly listed chemicais would be
in addition to those currently scheduled to occur under present
law.

Effective Date
The proposal would be effective for taxable chemicals sold
or used on or after October 1, 1992. Floor stocks taxes are

imposed on taxed chemicals held on the effective dates of
changes in the base tax rate.

-33-



10. Contributions of Appreciated Property
Present Law

In computing taxable income, a taxpayer who itexizes
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

The proposal provides that all charitable contributions of
appreciated property (real, personal, or intangible property)
made during the period January 1, 1992, through December 31,
1993, would not be treated as a tax preference item for
alternative minimum tax (AMT) purposes.

In addition, the Treasury Department is directed to report
to Congress not later than one year after enactment on the
development of a procedure under which taxpayers could elect to
seek an agreement with the IRS as to the value of tangible
personal property prior to the donation of such property to a
qualifying charitable organization, including the setting of
possible threshold amounts for claimed value (and the payment of
fees by taxpayers), possible limitations on appiying the
procedure only to items with significant artistic or cultural
value, and recommendations for legislative action needed to
implement the proposed procedure.

The proposal was included in H.R. 4210 as passed by the
House and Senate (except that the provision in H.R. 4210 applied
to charitable contributions made during the period January 1,
1992, through June 30, 1993, and the Treasury Department report
on an advance valuation procedure was required to be submitted
to Congress by December 31, 1992).

-15-



5S. Qualified Small-Issue Bonds
Present Law

Interest on small issues of private activity bonds issued
by States or local governments ("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 issue must have an aggregate face
amount of $1 million or less, or alternatively the aggregate
face amount of the issue, together with the aggregate amount of
certain related capital expenditures during the six-year period
beginning three years before the date of the issue and ending
three years after that date, must not exceed $10 million.

Issuance of qualified small-issue bonds, like most other
private activity bonds, is subject to annual State volume
limitations and to other rules.

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

Description of Proposal

The proposal would extend the authority to issue qualified
small-issue bonds for 18 months (through December 31, 1993).

A similar proposal was included in H.R 4210 as passed by
the House and Senate, except that in H.R. 4210 the program was
extended for 12 months rather than 18 months.

Effective Date

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


intangibles and-non-amortizable intangibles as reflected on the
Federal income tax return for the taxable year of acquisition
would be binding on the electing taxpayer and the IRS. In
addition, the amortization deduction for any taxable year would
be determined based on the amortization method and period used
by the taxpayer in determining the amortization deduction for
the taxabie year of acquisition.

Interest would be payable by the taxpayer with respect to
any underpayment of tax that is attributable to the election.
The election would be required to be made before January l,
1993, and any additional tax and interest that is due by reason
of the election would be required to be paid before January 1,
1993,

A special rule would apply to an electing taxpayer with
respect to section 197 intangibles that are acquired on or
before the date of enactment and during an "open taxable year"
for which a Federal income tax return has not been filed as of
June 16, 1992. Under this rule, 75 percent of the basis of the
section 197 intangibles would be amortized ratably over a
16-year period and the remaining basis would be treated as
goodwill that is not amortizable.

Treatment of certain payments to retired or deceased partners

The portion of the proposal relating to the treatment of
certain payments to retired or deceased partners generally would
apply to partners retiring or dying after February 12, 1992.

Anti-churning rules

Special rules would be provided to prevent taxpayers from
converting existing goodwill, going concern value, or any other
section 197 intangible for which a depreciation deduction would
not have been allowable under present law into amortizable
property to which the proposal applies. These “anti-churning"
rules would not apply to any section 197 intangible that is
acquired from a person with less than a 50-percent relationship
to the acquirer if: (1) the seller recognizes gain on the
transaction with respect to such intangible; and (2) the seller
agrees, notwithstanding any other provision of the Code, to pay
a tax on such gain equal to the highest rate of tax imposed by
section 1 or 1l of the Code, whichever is applicable. The
seller would be treated as satisfying the second requirement if
the excess of (1) the total tax liability for the year of the
transaction over (2) what its tax liability for such year would
have been had the sale of the intangible (but not the remainder
of the transaction) been excluded from the computation equals or
exceeds the product of the gain on that asset times the relevant
maximum rate.

-30-


swap or other similar finangial contract; (3) any interest in
land; (4) computer software” that is readily available for
purchase by the general public, is subject to a ngnexciusive
license, and has not been substantially modified;* (5) other
computer software that is not acquired in a transaction (or a
series of related transactions) that involves the acquisition of
assets which constitute a trade or business (or a substantial
portion thereof); (6) any interest in a film, sound recording,
video tape, book, or other similar property (including the right
to broadcast or transmit television or radio programming that
includes live events) that is not acquired in a transaction (or
a series of related transactions) that involves the acquisition
of assets which constitute a trade or business (or a substantial
portion thereof); (7) certain rights to receive tangible
property or services; (8) certain interests in patents or
copyrights; (9) any interest under an existing lease of tangible
property; (10) any interest under an existing indebtedness
(except for the deposit base and similar items of a financial
institution); and (11) a franchise to engage in any professional
sport and any item acquired in connection with such a franchise.

In-addition, :the term "section 197 intangible" would not
include any right to service indebtedness that is secured by
residential real property (a "purchased mortgage servicing
right") but only if the right is not acquired in a transaction
(or a series of related transactions) that involves the
acquisition of other assets that constitute a trade or business
or a substantial portion of a trade or business.

Further, the term "section 197 intangible” would not
include any intangible property that is acquired from another
entity if the following requirements are satisfied: (1) the fair
market value of the entity as of the date of the acquisition
does not exceed $50 million (for this purpose, fair market value
includes the adjusted issue price of debt that has a maturity of
more than one year at the time of issuance and that is issued by
the seller or to which the
sold assets are subject); (2) the entity did not have gross

3 Computer software would be defined as any program that is
designed to cause a computer to perform a desired function but
does not include any data base other than a data base that is in
the public domain and that is incidental to the software (e.g.,
a dictionary).

4 tf a depreciation deduction is allowed with respect to any
computer software that is not a section 197 intangible because
of this clause (4) or the following clause (5), the amount of
such deduction would be determined by amortizing the adjusted
basis of the computer software ratably over a 36-month period
that begins with the month that the computer software is placed
in service.

-27-



3. Deduction for Health Insurance Costs of Self-Employed
Individuais

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 the 25-percent deduction for
health insurance expenses of self-employed individuals for 18
months, through December 31, 1993.

A similar proposal was included in H.R. 4210 as passed by
the House and Senate, except that in H.R. 4210 the deduction was
extended for 12 months rather than 18 months.

Effective Date |

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


2. Exclusion for Employer-Provided Group Legal Services; Tax
Exemption for Qualified Group Legal Services Organizations

Present Law

Certain amounts contributed by an employer to and benefits
provided under a qualified group legal services plan are
excluded from an employee's gross income and wages for income
and employment tax purposes. The exclusion is limited to an
annual premium value of $70. The exclusion expires after June
30, 1992.

Present law provides tax-exempt status for an organization
the exclusive function of which is to provide legal services or
indemnification against the cost of legal services as part of a
qualified group legal services plan. The tax exemption for such
an organization expires after June 30, 1992.

Description of Proposal

The proposal would extend the exclusion from income for
employer-provided.group legal services and the tax exemption for
group legal services organizations for 18:months, through
December 31, 1993.

A similar proposal was included in H.R. 4210 as passed by
the House and Senate, except that in H.R. 4210 the exclusion and
exemption were extended for 12 months rather than 18 months.

Effective Date

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


Effective Date

The proposal would be effective for contributions made
during the period January 1, 1992, through December 31, 1993.
The Secretary of the Treasury would be required to report on the
development of an advance valuation procedure not later than one
year after date of enactment.

-16-


A similar proposal was included in H.R. 4210 as passed by
the House and Senate, except that in H.R. 4210 the program was
extended for 12 months rather than 18 months and did not include
the program change.

Effective Date

The proposal would be effective for bonds issued and
elections made to trade-in QMB authority to issue MCCs after
June 30, 1992.


2. Impose Excise Tax on Diesel Fuel Used in Noncommercial
Motorboats

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 gallon) 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, 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 0.1l-cent-per-gallon tax applies to these
fuels to finance the Leaking Underground Storage Trust Fund,
generally through December 31, 1995.

Description of Proposal

The provision would extend the current
20.1-cents-per-gallon diesel fuels 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 20.1-cents-per-gallon tax on
diesel fuel used by motorboats would be retained in the General
Fund.

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

-22-



DESCRIPTION OF A PROPOSAL TO EXTEND
CERTAIN EXPIRING TAX PROVISIONS,
REPEAL THE LUXURY EXCISE TAX ON CERTAIN ITEMS,
AND ADOPT REVENUE-RAISING PROVISIONS

Scheduled for Markup
by the
SENATE COMMITTEE ON FINANCE

on June 16, 1992

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
June 16, 1992

JCX-23-92


7. ‘Tax Credit for Low-Income Rental Housing

Present Law

In general

A tax credit is allowed in annual installments over 10
years for qualifying newly constructed or substantially
rehabilitated low-income rental housing. For most qualifyinec
housing, the maximum credit is an amount having a present value
of 70 percent of the eligible basis of the 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 maximum
credit is an amount having a present value of 30 percent of
qualified basis. Generally, that part of the building for which
the credit is claimed must be rented to qualified low-income
tenants at restricted rents for 15 years after the building is
placed in service. In addition, a subsequent additional 15-year
period of low-income use generally is required.

Eligible basis

The basis on which the credit is computed is determined as
a percentage of the eligible basis of a qualified low-income
building that is attributable to low-income rental housing
units. This percentage is the lesser of (1) the percentage of
low-income units to all residential units or (2) the percentage
of the floor space of the low-income units to the floor space of
all residential rental units. Generally, eligible basis is
limited to the adjusted basis of the residential rental units,
facilities for use by the tenants, and other facilities
reasonably required by the project. There is no per-housing unit
limit on the amount of eligible basis. _

Ten-year anti-churning rule

The credit is not allowed on buildings, or substantial
improvements to buildings, that have been previously placed in
service within ten years of placement in service for credit
purposes. Waivers from the ten-year rule may be granted by the
Treasury Department under certain circumstances.

Minimum set-aside requirement for low-income individuals

Under the general low-income tenant occupancy requirement a
residential rental project qualifies for the credit only if: (1)
20 percent or more of the aggregate residential rental units in
the project are occupied by individuals with incomes of 50
percent or less of area median income or (2) 40 percent or more
of the aggregate residential rental units in the project are
occupied by individuals with incomes of 60 percent or less of
area median income. Also, a special set-aside may be elected

-9-


6. Research 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. 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, or research in the
social sciences, arts, or humanities, do not enter into the
credit computation.

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.

Description of Proposal

The research tax credit would be extended for 18 months
(i.e., for qualified research and university basic research
expenditures incurred through December 31, 1993). A 12-month
extension of the research credit was included in H.R. 4210 as
passed by the House and Senate.

Effective Date
The proposal would apply to expenditures incurred during
the period July 1, 1992, through December 31, 1993.

-8-


period. _

Effective Date

In general

The proposal generally would apply to property acquired
after the date of enactment. A taxpayer would be allowed to
elect to apply the proposal to ail property acquired after July
25, 1991, by the taxpayer and any other person under ccmmon
control with the electing taxpayer (within the meaning of
sections 52(a) and (b) of the Internal Revenue Code).

In addition, a taxpayer would be allowed to elect to apply
present law (rather than the proposal) to property that is
acquired after the date of enactment if the property is acquired
pursuant to a binding written contract in effect on the date of
enactment and at all times thereafter until the property is
acquired. A taxpayer would not be allowed to make this election
if (1) the taxpayer makes the election described above that
applies the proposal to all property acquired after July 25,
1991, or (2) the taxpayer makes the -election-described below to
amortize 75 percent of the basis of the section 197 intangibles
identified on a Federal income tax return as amortizable.

Special election to amortize 75 percent of the basis of
the section 197 intangibles identified on mn return as amortizable

A taxpayer that acquired a section 197 intangible on or
before July 25, 1991, would be allowed to elect to amortize 75
percent of the basis of all section 197 intangibles that (1)
were acquired on or_before the date of enactment and during an
“open taxable year"? for which a Federal income tax return has
been filed as of June 16, 1992, and (2) were claimed as
amortizable on the Federal income tax return for the taxable
year of acquisition. The 25 percent of the basis of any section
197 intangible that is not amortizable under this election would
be treated as goodwill and would only be recovered at the time
that the trade or business to which the goodwill relates is
disposed of (or becomes worthless).

The allocation of purchase price between amortizable

5 An open taxable year would be defined as any taxable year
for which either (1) the statute of limitations on the
assessment of tax has not expired as of June 16, 1992, or (2) a
refund claim is pending as of June 16, 1992, but only if the
refund claim involves the issue of the proper Federal income tax
treatment of intangibles, acquired in such year, that are
defined as section 197 intangibles under the proposal. An open
taxable year, however, would not include any taxable year that
occurs before a taxable year that is not an open taxable year.

-29-



receipts (cther than earnings on short-term investments) more
than five years prior to-the transaction; (3) the aggregate
research «id experimental expenditures (as defined in section
174 of the Code) of the entity during its entire existence are
at least $500,000 and at least 30 percent of its aggregate gross
receipts; (4) at all times at least 50 percent of the equity of
the entity is directly owned by five or fewer non-corporate
entities; (5) at all times at least 50 percent of the equity of
the entity is owned by individuals on a look-through basis
(other than ownership attributed through a corporation); and
(6) no material part of the acquired assets were in turn
acquired by the selier from another person in a transaction
which would not have qualified under this provision.

Finally, the Treasury Department would be authorized to
issue regulations that exclude from the definition of a section
197 intangible a right received under a contract (or any right
granted by a governmental unit or an agency or instrumentality
thereof) if (1) the right is fixed in duration or amount, and
(2) the right is not acquired in a transaction (or a series of
related transactions) that involves the acquisition of assets
which constitute a trade or business (or a substantial portion
thereof).

Other rules

Special rules would apply if a taxpayer disposes of a
section 197 intangible that was acquired in a transaction or
series of related transactions and, after the disposition, the
taxpayer retains other section 197 intangibles that were
acquired in such transaction or series or related transactions.
First, no loss would be recognized by reason of such a
disposition. Second, the adjusted bases of the retained section
197 intangibles that were acquired in connection with such
transaction or series of related transactions would be increased
by the amount of any loss that is not recognized.

An acquisition of (or distribution with respect to) an
interest in a partnership would not be treated as an acquisition
of the section 197 intangibles of the partnership except to the
extent of any positive adjustment to the basis
of the section 197 intangibles that occurs in connection with
such acquisition (or distribution). Furthermore, the special
treatment of liquidation payments made to a retiring or deceased
partner, under which payments for goodwill and certain
"unrealized receivables" may be treated as a distributive share
of partnership income, would no longer be available except in
the case of a general partner of a partnership in which capital
is not a material income-producing factor.

Prior action

A similar proposal was included in H.R. 4210 as passed by
the House and the Senate, but with a 14-year amortization

-28-


4. Qualified Mortgage Bonds and Mortgage Credit Certificates
Present Law

Qualified mortgage bonds

Qualified mortgage bonds ("QMBs") are bonds the proceeds of
which are used to finance the purchase, or qualifying
rehabilitation or improvement of single-family, owner-occupied
residences located within the jurisdiction of the issuer cf the
bonds. Persons receiving QMB loans must satisfy principal
residence, purchase price, borrower income, first-time
homebuyer, and other requirements. Part or all of the interest
subsidy provided by QMBs is recaptured if the borrower
experiences substantial increases in income and disposes of the
subsidized residence within nine years after it was purchased.

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

Mortgage credit certificates

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

The proposal would extend the authority to issue QMBs and
to elect to trade in bond volume authority to issue MCCs for 18
months (through December 31, 1993).

The proposal also would provide that certain contracts for
deed do not violate the requirement that QMB- and MCC-financed
homebuyers be first-time homebuyers in the case of homebuyers
whose income does not exceed $15,000. Thus, loans would be
allowed to these homebuyers to repay the contract for deed and
to construct a new residence on the property. (Qualified home
improvement loans would continue to be allowed for renovation of
existing residences on this property.)

-5-


13. 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
equais 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 circumstances, are
required for business purposes to conduct significant amounts of

~-19-



Effective Date

The proposal would be effective for estimated tax payments
applicable to taxable years beginning after December 31, 1996.

-25-



INTRODUCTION

This document,? prepared by the staff of the Joint
Committee on Taxation, provides a description of a proposal to
exteng certain tax provisions scheduled to expire after June 30,
1992,“ repeal the luxury excise tax on certain items, and
provide revenue offsets.

The Senate Committee on Finance has scheduled a markup on
the proposal on June 16, 1992.

The document includes a reference to whether the proposal
described was also in H.R. 4210 ("Tax Fairness and Economic
Growth Act of 1992") as passed by the House and the Senate and
vetoed by the President.

1 This document may be cited as follows: Joint Committee on
Taxation, Description of a Proposal to Extend Certain Expiring
Tax Provisions, Repeal the Luxury Excise Tax on Certain Items,
and Adopt Revenue-Raising Provisions (JCX-23-92), June 16, 1992.

2 The expiring tax provisions are also described in Joint

Committee on Taxation, Description and Analysis of Tax
Provisions Expiring in 1992 (JCS-2-92), January 27, 1992.

-1-


the credit was extended permanently rather than for 12 months.
Effective Date

Generally, the proposal 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 provisions relating to the Treasury Department's
authority to grant waivers would be effective on date of
enactment. The provision relating to the credit carryforward
rules would be effective on and after January 1, 1992.

-12-


9. 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). A 12-month extension of
the orphan drug tax credit was included in H.R. 4210 as passed
by the House and Senate.

Effective Date

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

-14-


B.

Luxury Excise Tax and Diesel Fuel Excise
Tax ON MOLOrbOatS.... ee eeccee seer esereareeee

Repeal of luxury excise tax on boats,
jewelry, furs, and airplanes; index
luxury excise tax on automobiles.......

Impose excise tax on diesel fuel
used in noncommercial motorboats.......

Revenue-Raising ProvisionsS........eeeee

Modify estimated tax payment rules for
Large COrporationS.....ee eee eeeeeeecees

Amortization of goodwill and certain
other intangibles... cee ee eee sewer ecee

Require reporting of taxpayer identi-
fication numbers of parties in seller-
financed mortgage transactions.........

Increase in base tax rate of excise tax
on ozone-depleting chemicals.....

(44)

21

21

22
24

24

26

31

33


Effective Date

The proposal would be effective after September 30, 1992.

-23-



INTRODUCTION

CONTENTS

DESCRIPTION OF TAX PROVISIONS 2... cece cece ee ever cence

A.

Certain Expiring Tax Provisions..............

i. Exclusion for employer-provided

educational assistance...... cece eeeeees
2. Exclusion for employer-provided

group legal services; tax exemption

for qualified group legal services

OTGANiZationSs wo eceeeeeeeccereesecccece
3. Deduction for health insurance costs

of self-employed individuals ..........
4. Qualified mortgage bonds and mortgage

credit certificates ... cc cece w cece eee
5. Qualified small-issue bonds............
6. Research and experimentation tax

CLEGIt. cece e cece eww e reece ee reeesecs
7. Tax credit for low-income rental

HOUSING weceeee rece cece esc crescsccesene
8. Targeted jobs tax credit ...........50.
9. Tax credit for orphan drug clinical

testing expenses ........ beeen eee neee
10. Contributions of appreciated

$2) ke) 6) bh oh) Se ee a
11. Excise tax on certain vaccines for

the Vaccine Injury Compensation

TLUSt FUNG. . cece cece eect eee e ne ceeees
12. Permanent extension of General Fund

transfer to Railroad Retirement Tier

2 PUN. ccc cccrececccccseccsenevesessees
13. Allocation and apportionment of

research @CxPeNnSeS... ee eeee cece ces eneee

(ii)

13

14

15

17

18

19


3. Require Reporting of Taxpayer Identification Numbers of
Parties in Seller-Financed Mortgage Transactions

Present Law

Taxpayers are generally allowed an itemized deduction from
adjusted gross income for the amount of qualified residence
interest paid. If qualified residence interest is paid to an
individual, the name and address (but not the taxpayer
identification number®) of the interest recipient must be
reported on Schedule A of the payor's tax return.

Individuals receiving taxable interest in excess of $400
are required to report the amounts received and the names (but
not the addresses or taxpayer identification numbers) of the
payors on Schedule B of the payee's tax return.

Description of Proposal

If any taxpayer claims a deduction for qualified residence
interest on.any seller-provided financing, such taxpayer (the
buyer) would be required to include on his or.her tax return the
name, address, and taxpayer identification number of the person
(the seller) to whom the interest is paid or accrued. In
general, this information would be required to be furnished on
Schedule A of the buyer's tax return for every year in which the
buyer deducts this interest.

If any person receives or accrues interest from
seller-provided financing, such person (the seller) would be
required to include on his or her tax return the name, address,
and taxpayer identification number of the person (the buyer)
from whom the interest is received or accrued. In general, this
information would be required to be furnished on Schedule B of
the seller's tax return for every year in which the seller is
required to include this interest in income.

If any person involved in seller-provided financing is
required to include on his or her tax return the taxpayer
identification number of another person, such other person would
be required to furnish his or her taxpayer identification number
to such person. Information would not be required to be
reported under this provision to the extent it would be
duplicative of existing information reporting requirements.

Failure to meet the requirements for information reporting
described above would be subject to information reporting
penalties under sec. 6723. In general, these penalties are $50
for each failure.

6 an individual's taxpayer identification number is generally
that individual's Social Security number.

-31-



2. Amortization of Goodwill and Certain Other Intangibles
Present Law

In determining taxable income for Federal income tax
purposes, a taxpayer is allowed depreciation or amortization
deductions for the cost or other basis of intangibie property
that is used in a trade or business or held for the production
of income if the property has a limited useful life that may be
determined with reasonable accuracy. No depreciation or
amortization deductions are allowed with respect to goodwill or
going concern value.

Description of Proposal

In general

An amortization deduction would be allowed with respect to
certain intangible property (defined as a “section 197
intangible") that is acquired by a taxpayer and that is held by
the taxpayer in connection with the conduct of a trade or
business or an activity.engaged in for the production of income.
The amount of the deduction would be determined by amortizing
the adjusted basis of the intangible ratably over a 16-year
period.

The proposal generally would apply to a section 197
intangible whether it is acquired as part of a trade or business
or as a Single asset. The proposal generally would not change
the Federal income tax treatment of self-created intangible
Property, such as goodwill that is created through advertising
or other similar expenditures.

Definition of section 197 intangible

The term “section 197 intangible" would be defined as any
property that is included in any one or more of the following
categories: (1) goodwill and going concern vaiue;

(2) certain specified types of intangible property that
generally relate to workforce, information base, know-how,
customers, suppliers, or other similar items; (3) any license,
permit, or other right granted by a governmental unit or an
agency or instrumentality thereof; (4) any covenant not to
compete (or other arrangement to the extent that the arrangement
has substantially the same effect as a covenant not to compete)
entered into in connection with the direct or indirect
acquisition of an interest in a trade or business (or a
substantial portion thereof); and (5) any franchise, trademark,
or trade name.

The term “section 197 intangible” would not include: (1)
any interest in a corporation, partnership, trust, or estate;
(2) any interest under an existing futures contract, foreign
currency contract, notional principal contract, interest rate

~26-



for projects that satisfy a stricter requirement and that
significantly restrict the rents on the low-income units
relative to the other residential units in the building.

Students

A housing unit generally is not eligible for the low-income
housing tax credit if the tenants are full-time students who are
not married individuais filing joint returns. Exceptions to
this rule allow the credit to be claimed on housing units
eccupied by persons who are enrolled in certain job training
programs or students who are receiving AFDC payments.

State low-income housing credit authority limitation

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

That portion of a. State's credit authority which is
unallocated in the year in which it originally arises may be
carried forward and added to the State's credit authority for
the subsequent calendar year. If allocations in the subsequent
year exceed that year's annual credit authority, but do not
exhaust the sum of that year's annual credit authority plus any
credit authority carried forward from the preceding year, any
remaining carried-forward credit authority is allocated in the
next subsequent year to a national pool.

Expiration

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

Description of Proposal

The proposal would extend the low-income housing tax credit
for 18 months (through December 31, 1993), with several
modifications.

-10-


8. Targeted Jobs Tax Credit

Present Law

Tax credit

The targeted jobs tax credit is available on an elective
basis for hiring individuals from nine targeted groups. These
targeted groups consist of individuals who are either recipients
of payments under means-tested programs, economically
disadvantaged (as measured by family income), or disabled.

The credit generally is equal to 40 percent of up to $6,000
of qualified first-year wages. A credit equal to 40 percent of
up to.$3,000 of wages paid to qualified summer youth employees
is also allowed. Thus, the maximum credit is generally $2,400
per qualified employee, with a $1,200
maximum credit per summer youth employee. The employer's
deduction for wages is reduced by the amount of the credit
claimed.

The credit is :scheduled to expire for individuals who begin
work for an employee 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). The proposal would also restore individuals
aged 23 and 24 to the category of economically disadvantaged
youth.

A similar proposal without the change to the category of
economically disadvantaged youth was included in H.R. 4210 as
passed by the House and Senate, except that in H.R. 4210 the
credit was extended for 12 months rather than 18 months.

Effective Date

The proposal would be effective for individuals who begin
work for an employer after June 30, 1992.

-13-