A person would be treated as related to another person if the person bears a relationship to the
other person described in Code section 267(b) or 707(b)(1). An exception to the general rule
would provide that a taxpayer could purchase replacement property or stock from a related
person and defer gain under Code section 1033 to the extent the related person acquired the
replacement property or stock from an unrelated person within the period prescribed under Code
section 1033.

Mi Jocati .

The Chairman's Mark would provide that sales or exchanges that are certified by the FCC
as having been made by a taxpayer in connection with the relocation of the taxpayer from the
1850-1990 MHz spectrum by reason of the FCC's reallocation of that spectrum for use for PCS
would be treated as involuntary conversions to which Code section 1033 applies.

Effective Date

The provision prohibiting purchases of replacement property from related parties would
apply to involuntary conversions occurring on or after February 6, 1995.

The provision treating certain microwave relocation transactions as involuntary
conversions would apply to sales or exchanges occurring before January 1, 2000.

11



I DESCRIPTION OF THE CHAIRMAN'S MARK

A. PERMANENTLY EXTEND DEDUCTION FOR HEALTH INSURANCE
COSTS OF 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
employee'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. The exclusion is generally available in the case of owners of a 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, prior law provided 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 was not available for any month if the taxpayer was
eligible to participate in a subsidized health plan maintained by the employer of the taxpayer or the
taxpayer's spouse. In addition, no deduction was available to the extent that the deduction
exceeded the taxpayer's earned income. The amount of expenses paid for health insurance in -
excess of the deductible amount could be taken into account in determining whether the individual
was entitled to an itemized deduction for medical expenses. The 25-percent deduction expired for
taxable years beginning after December 31, 1993. .

For purposes of these rules, more than 2-percent shareholders of $ corporations are
treated the same as self-employed individuals. Thus, they were entitled to the 25-percent
deduction.

Other individuals who purchase their own health insurance (e.g., someone whose
employer does not provide health insurance) can deduct their insurance premiums only to the
extent that the premiums, when combined with other unreimbursed medical expenses, exceed 7.5
percent of adjusted gross income.

Description of H.R. 831

Section 1 of the bill retroactively reinstates for 1994 the deduction for 25-percent of
health insurance costs of self-employed individuals and extends the deduction permanently.

Effective date.--The bill is effective for taxable years beginning after December 31, 1993.

Description of Chairman's Mart

Same as H.R. 831.



minority-controlled entity within the first year after the license necessary to operate the property is
issued to the minority. An investor can qualify for a tax certificate even if the sale of the interest
occurs after participation by a minority in the entity has ceased. In these situations, the status of
the divesting investor and the purchaser of the divested interest is irrelevant, because the goal is to
increase the financing opportunities available to minorities.

nae . ip poli

In 1993, Congress provided for the orderly transfer of frequencies, including frequencies
that can be licensed pursuant to competitive bidding procedures.” The FCC has adopted rules to
conduct auctions for the award of more than 2,000 licenses to provide personal communications
services ("PCS"). PCS will be provided by means of a new generation of communication devices
that will include small, lightweight, multi-function portable phones, portable facsimile and other
imaging devices, new types of multi-channel cordless phones, and advanced paging devices with
two-way data capabilities. The PCS auctions (which began last year) will constitute the largest
auction of public assets in American history and are expected to generate billions of dollars for the
United States Treasury.”

The FCC has designed procedures to ensure that small businesses, rural telephone
companies and businesses owned by women and minorities have "the opportunity to participate in
the provision" of PCS, as Congress directed in 1993.” To help minorities and women participate
in the auction of the PCS licenses, the FCC took several steps including up to a 25-percent
bidding credit, a reduced upfront payment requirement, a flexible installment payment schedule,
and an extension of the tax certificate program for businesses owned by minorities and women.”

The FCC will employ the tax certificate program in three ways: (1) initial investors (who
provide "start-up" financing or purchase interests within the first year after license issuance) in
minority and woman-owned PCS businesses will be eligible for FCC tax certificates upon the sale
of their investments; (2) holders of PCS licenses will be able to obtain FCC tax certificates upon
the sale of the business to a company controlled by minorities and women; and (3) a cellular
operator that sells its interest in an overlapping cellular system to a minority or a woman-owned
business to come into compliance with the FCC PCS/cellular cross-ownership rule will be eligible
for a tax certificate.

19 Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title VI.

© Fifth Report and Order, 9 FCC Red 5532 (1994).

21 Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, section 6002(a).

2 Installment payments are available to small businesses and rural telephone companies.

7



generally is the same as the taxpayer's basis in the converted property, decreased by the amount of
any money or loss recognized on the conversion, and increased by the amount of any gain
recognized on the conversion.

Only involuntary conversions that result from destruction, theft, seizure, or condemnation
(or threat or imminence thereof) are eligible for deferral under Code section 1033. In addition,
the term "condemnation" refers to the process by which private property is taken for public use
without the consent of the property owner but upon the award and payment of just compensation,
according to a ruling by the Internal Revenue Service (IRS).° Thus, for example, an order by a
Federal court to a corporation to divest itself of ownership of certain stock because of anti-trust
Tules is not a condemnation (or a threat or imminence thereof), and the divestiture is not eligible
for deferral under this provision.’ Under another IRS ruling, the "threat or imminence of
condemnation" test is satisfied if, prior to the execution of a binding contract to sell the property,
“the property owner is informed, either orally or in writing by a representative of a governmental
body or public official authorized to acquire property for public use, that such body or official has
decided to acquire his property, and from the information conveyed to him has reasonable
grounds to believe that his property will be condemned if a voluntary sale is not arranged."*
However, under this ruling, the threatened taking also must constitute a condemnation, as
defined above.

Special mules under Code section 107

Under Code section 1071, if the FCC certifies that a sale or exchange of property is
necessary or appropriate to effectuate a change in a policy of, or the adoption of a new policy by,
the FCC with respect to the ownership and control of "radio broadcasting stations,” a taxpayer
may elect to treat the sale or exchange as an involuntary conversion. The FCC is not required to
determine the tax consequences of certifying a sale or to consult with the IRS about the
certification process.’ No other provision of the Internal Revenue Code grants a Federal agency
or any other party the type of complete discretion conveyed to the FCC by section 1071.

Under Code section 1071, the replacement requirement in the case of FCC-certified sales
may be satisfied by purchasing stock of a corporation that owns broadcasting property, whether
or not the stock represents control of the corporation. In addition, even if the taxpayer does not
reinvest all the sales proceeds in similar or related replacement property, the taxpayer nonetheless

® Rev. Rul. 58-11, 1958-1 C.B. 273.
7 Id.
* Rev. Rul. 74-8, 1974-1 C.B. 200.

° The FCC allows sellers applying for FCC certificates in cable transactions to delete both
the sales price and the number of subscribers from the transaction documents submitted with the
request for the certificates.



B. REPEAL SPECIAL RULES APPLICABLE TO FCC-CERTIFIED SALES OF
BROADCAST PROPERTIES

Present Law and Background
Tax treatment of a seller of broadcast property
General tax mules

Under generally applicable Code provisions, the seller of a business, including a broadcast
business, recognizes gain to the extent the sale price (and any other consideration received)
exceeds the seller's basis in the property. The recognized gain is then subject to the current
income tax unless the gain is deferred or not recognized under a special tax provision.

Special rules under Code section 103

Under Code section 1031, no gain or loss is recognized if property held for productive use
in a trade or business or for investment is exchanged for property of a “like kind" that is to be held
for productive use in a trade or business or for investment. The nonrecognition rules do not apply
to an exchange of one class or kind of property for property of a different class or kind.* The
different classes of property are: (1) depreciable tangible personal property; (2) intangible"
personal property; and (3) real property.*

If an exchange consists not only of like-kind property, but also of other property or
money, then gain from the transaction is recognized to the extent of the money and the fair
market value of the other property, and no loss from the transaction may be recognized. The
basis of property received in a like-kind transaction generally is the same as the basis of any
property exchanged, decreased by the amount of money received or loss recognized on the
exchange and increased by the amount of gain recognized on the exchange. Special rules apply to
exchanges between related persons, which generally require the parties to the transaction to hold
the exchanged property for at least two years after the exchange.

Special rul Code section 1033

Under Code section 1033, gain realized by a taxpayer from certain involuntary
conversions of property is deferred to the extent the taxpayer purchases property similar or
related in service or use to the converted property. The replacement property may be acquired
directly or by acquiring control of a corporation (generally, 80 percent of the stock of the
corporation) that owns replacement property. The taxpayer's basis in the replacement property

* Treas. Reg. sec. 1.1031(a)-1(b).

5 Treas. Reg. sec. 1.1031(a)-2.



Minori hip poli

In 1978, the FCC announced a policy of promoting minority ownership of broadcast
facilities by offering an FCC tax certificate to those who voluntarily sell such facilities (either in
the form of assets or stock) to minority individuals or minority-controlled entities."> The FCC's
policy was based on the view that minority ownership of broadcast stations would provide a

- Significant means of fostering the inclusion of minority views in programming, thereby serving the
needs and interests of the minority community as well as enriching and educating the non-minority
audience. The FCC subsequently expanded its policy to include the sale of cable television
systems to minorities as well.!

"Minorities," within the meaning of the FCC's policy, include "Blacks, Hispanics,
American Indians, Alaska Natives, Asians, and Pacific Islanders." As a general rule, a minority-
controlled corporation is one in which more than 50 percent of the voting stock is held by
minorities. A minority-controlled limited parmership is one in which the general partner is a
minority or minority-controlled, and minorities have at least a 20-percent interest in the
partnership.’* The FCC requires those who acquire broadcast properties with the help of the FCC
tax certificate policy to hold those properties for at least one year.'7 An acquisition can qualify
even if there is a pre-existing agreement (or option) to buy out the minority interests at the end of
the one-year holding period, providing that the transaction is at arm’'s-length.

In 1982, the FCC further expanded its tax certificate policy for minority ownership. At
that time, the FCC decided that, in addition to those who sell properties to minorities, investors
who contribute to the stabilization of the capital base of a minority enterprise would be entitled to
a tax certificate upon the subsequent sale of their interest in the minority entity."* To qualify for
an FCC tax certificate in this circumstance, an investor must either (1) provide start-up financing
that allows a minority to acquire either broadcast or cable properties, or (2) purchase shares in a

© Minority Ownership of Broadcasting Facilities, 68 FCC2d 979 (1978).
* Minority Ownership of Cable Television Systems, 52 R.R.2d 1469 (1982).
8 52 R.R.2datn. 1.

‘© Commission's Policy Regarding the Advancement of Minority Ownership in
Broadcasting, Policy Statement, and Notice of Proposed Rulemaking, 92 FCC2d 853-855 (1982).

” See Amendment of Section 73.3597 of the Commission's Rules (Applications for
Voluntary Assignments or Transfers of Control), 57 R.R.2d 1149 (1985). Anti-trafficking rules
require cable properties to be held for at least three years (unless the property is sold pursuant to
a tax certificate).

** Commission Policy Regarding the Advancement of Minority Ownership in
Broadcasting, 92 FCC2d 849 (1982).



DESCRIPTION OF CHAIRMAN'S MARK OF H.R. 831

Scheduled for Markup
by the
SENATE COMMITTEE ON FINANCE |

on March 15, 1995

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

March 15, 1995

JCX-12-95



C ‘onal iations rid

Since fiscal year 1988, in appropriations legislation, the Congress has prohibited the FCC
from using any of its appropriated funds to repeal, to retroactively apply changes in, or to
continue a reexamination of its comparative licensing, distress sale and tax certificate policies.”
This limitation has not prevented an expansion of the existing program.”’ The rider will expire at
the end of the 1995 fiscal year, September 30, 1995.

Description of LR. 831

Section 2 of H.R. 831 repeals Code section 1071. Thus, a sale or exchange of broadcast
properties would be subject to the same tax rules applicable to all other taxpayers engaged in the
sale or exchange of a business.

Effective Date--The repeal of section 1071 is effective for (1) sales or exchanges on or
after January 17, 1995,” and (2) sales or exchanges before that date if the FCC tax certificate
with respect to the sale or exchange is issued on or after that date. The provision does not apply
to taxpayers who have entered into a binding written contract (or have completed a sale or
exchange pursuant to a binding written contract) before January 17, 1995, and who have applied
for an FCC tax certificate by that date. A contract is treated as not binding for this purpose if the
sale or exchange pursuant to the contract (or the material terms of the contract) were contingent“ ~
on January 16, 1995, on issuance of an FCC tax certificate. A sale or exchange would not be
contingent on January 16, 1995, on issuance of an FCC tax certificate if the tax certificate had
been issued by the FCC by that date.

Description of Chairman's Mark

Same as H.R. 831 (See pages 10 and 11 for the treatment of sales or exchanges pursuant
to the FCC's microwave relocation policy).

6 Pub. L. No. 100-202 (1987).

27 The appropriations restriction "does not prohibit the agency from taking steps to create
greater opportunity for minority ownership." H. Rept. No. 103-708 (Conf. Rept.), 103d Cong.
2d Sess. 40 (1994).

% On January 17, 1995, House Committee on Ways and Means Chairman Archer issued
a press release announcing that the Committee on Ways and Means would immediately review the
operation of section 1071 to explore possible legislative changes to section 1071, including the
possibility of repeal. The press release stated that any changes to section 1071 may apply to
transactions completed, or certificates issued by the FCC, on or after the date of the
announcement.



Mi Jocation pol

PCS can operate only on frequencies below 3GHz. However, because that frequency
tange is currently occupied by various private fixed microwave communications systems (such as
railroads, oil pipelines, and electric utilities), there are no large blocks of unallocated spectrum
available to PCS. To accommodate PCS, the FCC has reallocated the spectrum; a portion of the
2GHz spectrum will be used exclusively for PCS, and the microwave systems will be required to
move to higher frequencies. Current occupants of the 2GHz spectrum allocated to PCS must
relocate to higher frequencies not later than three years after the close of the bidding process
(anticipated to end in March or April, 1995). In accordance with FCC rules, these current
occupants have the right to be compensated for the cost of replacing their old equipment, which
can operate only on the 2GHz spectrum, with equipment that will operate at the new, higher
frequency. At a minimum, the winners of the new PCS licenses must pay for and install new
facilities to enable the incumbent microwave operators to relocate. The amount of these
payments and characteristics of the new equipment will be the subject of negotiation between the
incumbent microwave operators and the PCS licensees; thus, the nature of the compensation (i.e.,
solely replacement equipment, or a combination of teplacement equipment plus a cash payment) is
unknown at present. If no agreement is reached within the 3-year voluntary negotiation period,
the microwave operators will be required by the FCC to vacate the spectrum; however, the
timing of such relocation is uncertain because the relocation would take place only after
completion of a formal negotiation process in which the FCC would be a participant.

The FCC will employ the tax certificate program for PCS to encourage fixed microwave
operators voluntarily to relocate from the 2GHz band to clear the band for PCS technologies.
Tax certificates will be available to incumbent microwave operators that relocate voluntarily
within three years following the close of the bidding process. Thus, the certificates are intended
to encourage such occupants to relocate more quickly that they otherwise would and to clarify the
tax treatment of such transactions.*

> The PCS auctions for portions of the 2GHz spectrum commenced in December, 1994.

* See, Third Report and Order and Memorandum Opinion and Order, 8 FCC Red 6589
(1993).

* The transaction between the PCS licensee and the incumbent microwave operator
might qualify for tax-free treatment as a like kind exchange under Code section 1031 or as an
involuntary conversion under Code section 1033. However, the availability of these Code
provisions may be limited by certain technical Tequirements, including the treatment of cash in a
like-kind exchange, and whether the transaction would qualify as an involuntary conversion under
currently applicable IRS standards.



may elect to defer recognition of gain if the basis of depreciable property that is owned by the
taxpayer immediately after the sale or that is acquired during the same taxable year is reduced by
the amount of deferred gain.

Tax treatment of a buyer of broadcast property.

Under generally applicable Code provisions, the purchaser of a broadcast business, or any
other business, acquires a basis equal to the purchase price paid. In an asset acquisition, a buyer
must allocate the purchase price among the purchased assets to determine the buyer's basis in
these assets. In a stock acquisition, the buyer takes a basis in the stock equal to the purchase
price paid, and the business retains its basis in the assets. This treatment applies whether or not
the seller of the broadcast property has received an FCC certificate exempting the sale transaction
from the normal tax treatment.

FCC tax certificate program
tuto _

The FCC originally adopted multiple ownership rules in the early 1940s."° These rules
prohibited broadcast station owners from owning more than one station in the same service area,
and, generally, more than six high frequency (radio) or three television stations. Owners wishing
to acquire additional stations had to’divest themselves of stations they already owned in order to
remain in compliance with the FCC's rules.

In November 1943, the FCC adopted a rule that prohibited duopolies (ownership of more
than one station in the same city).!’ After these rules were adopted, owners wishing to acquire
additional stations in excess of the national ownership limit had to divest themselves of stations
they already owned in order to remain in compliance with the FCC's rules. After Code section
1071 was adopted in 1943, in some cases, parties petitioned the FCC for tax certificates pursuant
to Code section 1071 when divesting themselves of stations. These divestitures were labeled
"voluntary divestitures” by the FCC. When the duopoly rule was adopted, 35 licensees that held

- more than one license in a particular city were required by the rule "involuntarily" to divest
themselves of one of the licenses.’

10 5 Fed. Reg. 2382 (June 26, 1940) (multiple ownership rules for high frequency
broadcast stations); 5 Fed. Reg. 2284 (May 6, 1941) (multiple ownership rules for television
stations).

"1 8 Fed. Reg. 16065 (Nov. 23, 1943).

2 FCC Announces New Policy Relating to Issuance of Tax Certificates, 14 FCC2d 827
(1956).



L SUMMARY OF THE CHAIRMAN'S MARK

The Chairman's Mark would adopt H.R. 831, with the following modifications:

1. The prohibition against purchases from related parties for purposes of Code
section 1033 would apply only to subchapter C corporations. This provision would apply to
involuntary conversions occurring on or after February 6, 1995.

2. The related party purchase prohibition would not apply if the related person
acquired the replacement property or stock from an unrelated person within the period prescribed
in Code section 1033.

3. Certain sales or exchanges made in connection with the relocation of taxpayers
from the 1850-1990 MHz spectrum as a result of the FCC's reallocation of that spectrum for use
by personal communications services ("PCS") would be treated as involuntary conversions for
purposes of Code section 1033. This provision would apply to dispositions occurring before
January 1, 2000.

4. A taxpayer would not be eligible for the EITC if the aggregate amount of interest
and dividends includible in his or her income for the taxable year exceeds $2,500. The $2,500
amount would be indexed for inflation. This provision would be effective for taxable years
beginning after December 31, 1995.



D. INTEREST AND DIVIDEND TEST FOR EARNED INCOME TAX CREDIT
Present Law

Eligible low-income workers are able to claim a refundable earned income tax credit
EITC). The amount of the credit an eligible taxpayer may claim depends upon whether the
taxpayer has one, more than one, or no qualifying children and is determined by multiplying the
credit rate by the taxpayer's earned income up to an eamed income threshold. The maximum
amount of the credit is the product of the credit rate and the earned income threshold. For
taxpayers with earned income (or adjusted gross income, if greater) in excess of the phaseout
threshold, the credit amount is reduced by the phaseout rate multiplied by the amount of earned
income (or adjusted gross income, if greater) in excess of the phaseout threshold. The credit is
not allowed if earned income (or adjusted gross income, if greater) exceeds the phaseout limit.
There is no additional limitation on the amount of uneamed income that the taxpayer may receive.

The parameters for the EITC depend upon the number of qualifying children the taxpayer
claims. For 1995, the parameters are as follows:

Two or more One qualifying No qualifying
qualifying : child-- children--
children--

Credit rate 36.00% 34.00% 7.65%
Phaseout rate 20.22% 15.98% 7.65%
Earned income
threshold $8,640 $6,160 $4,100
Maximum credit $3,110 $2,094 $314
_Phaseout threshold $11,290 $11,290 $5,130
Phaseout limit $26,673 $24,396 $9,230

The earned income threshold and the phaseout threshold are indexed for inflation; because
the phaseout limit depends on those amounts, the phaseout rate, and the credit rate, the phaseout
limit will also increase if there is inflation. Earned income consists of wages, salaries, other
employee compensation, and net self-employment income.

The credit rates and phaseout rates for the EITC change over time under present law. For
1996 and after, the credit rate will be 40.00 percent and the phaseout rate will be 21.06 percent
for taxpayers with two or more qualifying children. The credit rate and the phaseout rate for
taxpayers with one qualifying child or no qualifying children will be the same as those listed in the
table above.

12



INTRODUCTION AND LEGISLATIVE BACKGROUND

This document,’ prepared by the staff of the Joint Committee on Taxation, provides a
description of the Chairman's Mark of H.R. 831.

H.R. 831 was passed by the House of Representatives on February 21, 1995, by a vote of
381 to 44. As passed, H.R. 831 would: (1) extend permanently the 25-percent deduction for
health insurance costs for self-employed individuals; (2) repeal the provision (Code sec. 1071)
permitting nonrecognition of gain on sales and exchanges effectuating policies of the Federal
Communications Commission ("FCC"); (3) provide that the nonrecognition of gain on involuntary
conversions is not to apply if replacement property is acquired from a related person (Code sec.
1033); and (4) deny the earned income tax credit ("EITC") to individuals who have more than
$3,150 of taxable interest and dividend income and phase out the EITC for individuals with more
than $2,500 of taxable interest and dividend income.”

On March 7, 1995, the Senate Committee on Finance held a public hearing on the
application of Internal Revenue Code section 1071 under the FCC's tax certificate program.* The
Senate Committee on Finance has scheduled a markup of the Chairman's Mark of H.R. 831 on
March 15, 1995.

Part I of the document summarizes the modifications made to H.R. 831 by the Chairman's
Mark. Part II of the document describes the Chairman's Mark. Section A discusses extension of
the deduction for health insurance costs of self-employed individuals; Section B discusses rules
applicable to FCC-certified sales of broadcast properties; Section C discusses nonrecognition of
gain on involuntary conversions in certain related-party transactions and application of Code
section 1033 to certain microwave relocation transactions; and Section D discusses an interest
and dividend test for the EITC.

* This document may be cited as follows: Joint Committee on Taxation, Description of
the Chairman's Mark of H.R. 831 (JCX- 12-95), March 15, 1995,

? For a description of H.R. 831, as Teported by the House Committee on Ways and
Means, see H. Rept. No. 104-32, 104th Cong., Ist Sess. (1995).

> See Joint Committee on Taxation, Background and Issues Relating to:(1) the
Application of Code Section 1071 Under the Federal Communications Commission's Tax
Certificate Program; (2) Involuntary Conversions Under Code Section 1033 ; and (3) the Earned
Income Tax Credit (JCX-8-95), March 6, 1995.



CONTENTS

INTRODUCTION AND LEGISLATIVE BACKGROUND ..........-...00se eee eeeeee

I.

i.

SUMMARY OF THE CHAIRMAN'S MARK ............ 0500s eee een e eee ee 1

DESCRIPTION OF THE CHAIRMAN'S MARK ..............0 00-22 e eee eee 2

A. PERMANENTLY EXTEND DEDUCTION FOR HEALTH INSURANCE

COSTS OF SELF-EMPLOYED INDIVIDUALS ..........0.-2.5 02. ee eee 2

B. REPEAL SPECIAL RULES APPLICABLE TO FCC-CERTIFIED SALES

OF BROADCAST PROPERTIES ........... 00 c cece cece eee eee ences 3

C. PROHIBIT NONRECOGNITION OF GAIN ON INVOLUNTARY
CONVERSIONS IN CERTAIN RELATED-PARTY TRANSACTIONS;
APPLICATION OF SECTION 1033 TO CERTAIN MICROWAVE
RELOCATION TRANSACTIONS ..........0 00: e eee e eee eee eee eens

D. INTEREST AND DIVIDEND TEST FOR EARNED INCOME TAX CREDIT ..



C. PROHIBIT NONRECOGNITION OF GAIN ON INVOLUNTARY
CONVERSIONS IN CERTAIN RELATED-PARTY TRANSACTIONS; APPLICATION
OF SECTION 1033 TO CERTAIN MICROWAVE RELOCATION TRANSACTIONS

Present Law

As described in Part LB., under Code section 1033, gain realized by a taxpayer from
certain involuntary conversions of property is deferred to the extent the taxpayer purchases
property similar or related in service or use to the converted Property within a specified period.

Under rulings issued by the IRS to taxpayers, property (stock or assets) purchased from a
Telated person may, in some cases, qualify as property similar or related in service or use to the
converted property.” Thus, in certain circumstances, related taxpayers may obtain significant
(and possibly indefinite or permanent) tax deferral without any additional cash outlay to acquire
new properties. In cases in which a taxpayer purchases stock as replacement property, section
1033 permits the taxpayer to reduce basis of stock, but does not require any reduction in the basis
of the underlying assets. Thus, the reduction in basis of stock does not result in reduced
depreciation deductions.

Description of HR. 831

Under section 3 of H.R. 831, a taxpayer may not defer gain under Code section 1033
when the replacement property or stock is purchased from a related person. For purposes of the
bill, a person is treated as related to another person if the relationship between the persons would
result in a disallowance of losses under the rules of Code section 267 or 707(b). This provision is
intended to apply to all cases involving Telationships to the taxpayer described in Code sections
267(b) or 707(b)(1), including members of controlled groups under Code section 267(f).

Effective date.-The prohibition against nonrecognition of gain in certain related-party

transactions applies to replacement property or stock acquired on or after February 6, 1995 (the
date of introduction of H.R. 831).

Description of Chai 's Mark
Related-party transactions

Under the Chairman's Mark, subchapter C corporations would not be entitled to defer gain
under Code section 1033 if the replacement Property or stock is purchased from a related person.

® See, e.g., PLR 8132072, PLR 8020069. Private letter rulings do not have precedential
authority and may not be relied upon by any taxpayer other than the taxpayer receiving the ruling
but are some indication of IRS administrative practice.

10



In order to claim the EITC, a taxpayer must either have a qualifying child or must meet
other requirements. A qualifying child must meet a relationship test, an age test, and a residence
test. In order to claim the EITC without a qualifying child, a taxpayer must not be a dependent
and must be over age 24 and under age 65.

Description of HR. 831

Under section 4 of H.R. 831, a taxpayer is not eligible for the EITC if the aggregate
amount of interest and dividends includible in his or her income for the taxable year exceeds
$3,150. The otherwise allowable EITC amount is phased out ratably for taxpayers with aggregate
taxable interest and dividend income between $2,500 and $3,150. For taxable years beginning
after 1996, the $2,500 threshold and the $650 size of the phaseout will be indexed for inflation
with rounding to the nearest multiple of $10.

Effective date.--The provision is effective for taxable years beginning after December 31,
1995.

Description of Chai +s Mark
Under the Chairman's Mark, a taxpayer would not be eligible for the EITC if the
aggregate amount of interest and dividends includible in his or her income for the taxable year

exceeds $2,500. For taxable years beginning after 1996, the $2,500 limit would be indexed for
inflation with rounding to the nearest multiple of $50.

Effective Date

The provision would be effective for taxable years beginning after December 31, 1995.

13