**DESCRIPTION OF PROVISIONSIN S. 2622,THE TAX RELIEF EXTENSION ACT OF 1998**
******Prepared by the Staff**

**of the**

**JOINT COMMITTEE ON TAXATION**

**October 10, 1998**

**JCX-70R-98**

**CONTENTS**

**INTRODUCTION**

**TITLE I.	EXTENSION OF EXPIRING PROVISIONS**

	Subtitle A. - Tax Provisions		

		A.	Extension of Research Tax Credit (sec. 101)		

		B.	Extension of the Work Opportunity Tax Credit (sec. 102)		

		C.	Extension of the Welfare-to-Work Tax Credit (sec. 103)		

		D.	Extend the Deduction Provided for Contributions of Appreciated Stock to Private Foundations (sec. 104)		

		E.	Exceptions under Subpart F for Certain Active Financing Income			(sec. 105)		

		F.	Extend Placed in Service Date for Certain Nonconventional Fuels			Facilities (sec. 106)		

		G.	Disclosure of Return Information to Department of Education in Connection	With Income Contingent Loans (sec. 107)		

	Subtitle B - Trade Provisions		

		A.	Extension of the Generalized System of Preferences (sec. 111)		

		B.	Extension of the Trade Adjustment Assistance Program (sec. 112)		

**TITLE II.	OTHER TAX PROVISIONS**

		A.	Increase Deduction for Health Insurance Expenses of Self-Employed			Individuals (sec. 201)		

		B.	Farm Production Flexibility Contract Payments (sec. 202)		

		C.	Permanent Extension of Income Averaging for Farmers (sec. 203)		

		D.	Personal Credits Fully Allowed Against Regular Tax Liability		During 1998 (sec. 204)		

**TITLE III.	REVENUE OFFSET PROVISION**

		A.	Treatment of Certain Deductible Liquidating Distributions of Regulated		Investment Companies and Real Estate Investment Trusts (sec. 301)		

**TITLE IV.	TAX TECHNICAL CORRECTIONS**

		A.	Technical Corrections to the 1998 Act		

			1.	Burden of proof (sec. 402(b))		

			2.	Relief for innocent spouses (sec. 402(c))		

			3.	Interest netting (sec. 402(d))		

			4.	Effective date for elimination on 18-month holding period for capital			gains (sec. 402(i))		

		B.	Technical Corrections to the 1997 Act		

			1.	Treatment of interest on qualified education loans (sec. 403(a))		

			2.	Capital gain distributions of charitable remainder trusts (sec. 403(b))		

			3.	Gifts may not be revalued for estate tax purposes after expiration of			statute of limitations (sec. 403(c))		

			4.	Coordinate Vaccine Injury Compensation Trust Fund expenditure				purposes with list of taxable vaccines (sec. 403(d))		

			5.	Abatement of interest by reason of Presidentially declared				disaster (sec. 403(e))		

			6.	Treatment of certain corporate distributions (sec. 403(f))		

			7.	Treatment of affiliated group including formerly tax-exempt				organization (sec. 403(g))		

			8.	Treatment of net operating losses arising from certain eligible		losses (sec. 403(h))		

			9.	Determination of unborrowed policy cash value under COLI				pro rata interest disallowance rules (sec. 403(i))		

			10.	Payment of taxes by commercially acceptable means (sec. 403(k))		

		C.	Technical Corrections to the 1984 Act		

			1.	Casualty loss deduction (sec. 404)		

		D.	Disclosure of Tax Return Information to the Department of			Agriculture (sec. 405(a))		

		E.	Technical Corrections to the Transportation Equity Act for the 21st		Century (sec. 405(b))		

		F.	Repeal of Provisions Relating to District of Columbia Judicial Retirement		Program (sec. 405(c) of the bill)		

		G.	Perfecting Amendments Related to Withholding From Social Security			Benefits and Other Federal Payments (sec. 406)		

**INTRODUCTION**

	S. 2622, the Tax Relief Extension Act of 1998 ("the Tax Extension Act"), was introducedby Senator William V. Roth, Jr., Senator Daniel Patrick Moynihan, and others on October 10,1998.

	This document,(1)  prepared by the staff of the Joint Committee on Taxation, describes theproposals contained in the Tax Extension Act.  Part I of this document contains the expiringprovision proposals, Part II contains other proposals, Part III contains a revenue offset proposal,and Part IV contains tax technical corrections.

**TITLE I.  EXTENSION OF EXPIRING PROVISIONS**

**Subtitle A-Tax Provisions**

**A.  Extension of Research Tax Credit(sec. 101 of the bill and sec. 41 of the Code)**

**Present Law**

**General rule**

	Section 41 provides for a research tax credit equal to 20 percent of the amount by which ataxpayer's qualified research expenditures for a taxable year exceeded its base amount for thatyear. The research tax credit expired and generally does not apply to amounts paid or incurredafter June 30, 1998.

	A 20-percent research tax credit also applied to the excess of (1) 100 percent of corporatecash expenditures (including grants or contributions) paid for basic research conducted byuniversities (and certain nonprofit scientific research organizations) over  (2) the sum of (a) thegreater of two minimum basic 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. This separate credit computation is commonlyreferred to as the "university basic research credit" (see sec. 41(e)).

**Computation of allowable credit**

	Except for certain university basic research payments made by corporations, the researchtax credit applies only to the extent that the taxpayer's qualified research expenditures for thecurrent taxable year exceed its base amount. 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 (so-called "start-up firms") are assigned a fixed-basepercentage of 3 percent.(2)

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

**Alternative incremental research credit regime**

	Taxpayers are allowed to elect an alternative incremental research credit regime. If ataxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tieredfixed-base percentage (that is lower than the fixed-base percentage otherwise applicable underpresent law) and the credit rate likewise is reduced. Under the alternative credit regime, a creditrate of 1.65 percent applies to the extent that a taxpayer's current-year research expenses exceed abase amount computed by using a fixed-base percentage of 1 percent (i.e., the base amountequals 1 percent of the taxpayer's average gross receipts for the four preceding years) but do notexceed a base amount computed by using a fixed-base percentage of 1.5 percent. A credit rate of2.2 percent applies to the extent that a taxpayer's current-year research expenses exceed a baseamount computed by using a fixed-base percentage of 1.5 percent but do not exceed a baseamount computed by using a fixed-base percentage of 2 percent. A credit rate of 2.75 percentapplies to the extent that a taxpayer's current-year research expenses exceed a base amountcomputed by using a fixed-base percentage of 2 percent.  An election to be subject to thisalternative incremental credit regime may be made for any taxable year beginning after June 30,1996, and such an election applies to that taxable year and all subsequent years (in the event thatthe credit subsequently is extended by Congress) unless revoked with the consent of theSecretary of the Treasury.

**Eligible expenditures**

	Qualified research expenditures eligible for the research tax credit consist of: (1)"in-house" expenses of the taxpayer for wages and supplies attributable to qualified research; (2)certain time-sharing costs for computer use in qualified research; and (3) 65 percent of amountspaid by the taxpayer for qualified research conducted on the taxpayer's behalf (so-called "contractresearch expenses").(3)

	To be eligible for the credit, the research must not only satisfy the requirements ofpresent-law section 174 but must be undertaken for the purpose of discovering information that istechnological in nature, the application of which is intended to be useful in the development of anew or improved business component of the taxpayer, and must involve a process ofexperimentation related to functional aspects, performance, reliability, or quality of a businesscomponent.

	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).

**Relation to deduction**

	Deductions allowed to a taxpayer under section 174 (or any other section) are reduced byan amount equal to 100 percent of the taxpayer's research tax credit determined for the taxableyear.  Taxpayers may alternatively elect to claim a reduced research tax credit amount undersection 41 in lieu of reducing deductions otherwise allowed (sec. 280C(c)(3)).

**Description of Proposal**

	The bill extends the research tax credit for 12 months--i.e., generally, for the period July1, 1998, through June 30, 1999.

	In extending the credit, the scope of the term "qualified research" is reaffirmed.  Section41 targets the credit to research which is undertaken for the purpose of discovering informationwhich is technological in nature and the application of which is intended to be useful in thedevelopment of a new or improved business component of the taxpayer.  However, eligibility forthe credit does not require that the research be successful-- *i.e.*, the research need not achieve itsdesired result.  Moreover, evolutionary research activities intended to improve functionality,performance, reliability, or quality are eligible for the credit, as are research activities intended toachieve a result that has already been achieved by other persons but is not yet within the commonknowledge (*e.g.*, freely available to the general public) of the field (provided that the researchotherwise meets the requirements of section 41, including not being excluded by subsection(d)(4)).

	Activities constitute a process of experimentation, as required for credit eligibility, if theyinvolve evaluation of more than one alternative to achieve a result where the means of achievingthe result are uncertain at the outset, even if the taxpayer knows at the outset that it may betechnically possible to achieve the result.  Thus, even though a researcher may know of aparticular method of achieving an outcome, the use of the process of experimentation to effect anew or better method of achieving that outcome may be eligible for the credit (provided that theresearch otherwise meets the requirements of section 41, including not being excluded bysubsection (d)(4)).

	Lastly, the lack of clarity in the interpretation of the distinction between internal-usesoftware, the costs of which may be eligible for the credit if additional tests are met, and othersoftware has been observed.  The application of the definition of internal-use software shouldfully reflect Congressional intent.

**Effective Date**

	The extension of the research credit is effective for qualified research expenditures paidor incurred during the period July 1, 1998, through June 30, 1999.

**B.  Extension of the Work Opportunity Tax Credit (sec. 102 of the bill and sec. 51 of the Code)**
**Present Law**

**In general**

	The work opportunity tax credit ("WOTC"), which expired on June 30, 1998, wasavailable on an elective basis for employers hiring individuals from one or more of eight targetedgroups.  The credit equals 40 percent (25 percent for employment of 400 hours or less) ofqualified wages.  Qualified wages are wages attributable to service rendered by a member of atargeted group during the one-year period beginning with the day the individual began work forthe employer.  For a vocational rehabilitation referral, however, the period begins on the day theindividual began work for the employer on or after the beginning of the individual's vocationalrehabilitation plan.

	The maximum credit per employee is $2,400 (40% of the first $6,000 of qualified first-year wages).  With respect to qualified summer youth employees, the maximum credit is $1,200(40 percent of the first $3,000 of qualified first-year wages).

	The employer's deduction for wages is reduced by the amount of the credit.

**Targeted groups eligible for the credit**

	The eight targeted groups are: (1) families eligible to receive benefits under theTemporary Assistance for Needy Families (TANF) Program; (2) high-risk youth; (3) qualifiedex-felons; (4) vocational rehabilitation referrals; (5) qualified summer youth employees; (6)qualified veterans; (7) families receiving food stamps; and (8) persons receiving certainSupplemental Security Income (SSI) benefits.

**Minimum employment period**

	No credit is allowed for wages paid to employees who work less than 120 hours in thefirst year of employment.

**Expiration date**

	The credit is effective for wages paid or incurred to a qualified individual who beganwork for an employer before July 1, 1998.

**Description of Proposal**

	The proposal extends the work opportunity tax credit, for 12 months, through June 30,1999.

**Effective Date**

	The proposal is effective for wages paid or incurred to a qualified individual who beginswork for an employer on or after July 1, 1998, and before July 1, 1999.

**C.  Extension of the Welfare-To-Work Tax Credit (sec. 103 of the bill and sec. 51A of the Code)**
**Present Law**

	The Code provides to employers a tax credit on the first $20,000 of eligible wages paid toqualified long-term family assistance (AFDC or its successor program) recipients during the firsttwo years of employment.  The credit is 35 percent of the first $10,000 of eligible wages in thefirst year of employment and 50 percent of the first $10,000 of eligible wages in the second yearof employment.  The maximum credit is $8,500 per qualified employee.

	Qualified long-term family assistance recipients are: (1) members of a family that hasreceived family assistance for at least 18 consecutive months ending on the hiring date; (2)members of a family that has received family assistance for a total of at least 18 months (whetheror not consecutive) after the date of enactment of this credit if they are hired within 2 years afterthe date that the 18-month total is reached; and (3) members of a family who are no longereligible for family assistance because of either Federal or State time limits, if they are hiredwithin 2 years after the Federal or State time limits made the family ineligible for familyassistance.

	Eligible wages include cash wages paid to an employee plus amounts paid by theemployer for the following: (1) educational assistance excludable under a section 127 program(or that would be excludable but for the expiration of sec. 127); (2) health plan coverage for theemployee, but not more than the applicable premium defined under section 4980B(f)(4); and (3)dependent care assistance excludable under section 129.

	The welfare to work credit is effective for wages paid or incurred to a qualified individualwho begins work for an employer on or after January 1, 1998, and before May 1, 1999.

**Description of Proposal**

	The proposal extends the welfare-to-work credit effective for wages paid or incurred to aqualified individual who begins work for an employer on or after May 1, 1999, and before July 1,1999.

**Effective Date**

	The proposal is effective for wages paid or incurred to a qualified individual who beginswork for an employer on or after May 1, 1999, and before July 1, 1999.

**D.  Extend the Deduction Provided for Contributions of Appreciated Stock to PrivateFoundations (sec. 104 of the bill and sec. 170(e)(5) of the Code)**

**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.(4)   However, inthe case of a charitable contribution of short-term gain, inventory, or other ordinary incomeproperty, the amount of the deduction generally is limited to the taxpayer's basis in the property. In the case of a charitable contribution of tangible personal property, the deduction is limited tothe taxpayer's basis in such property if the use by the recipient charitable organization isunrelated to the organization's tax-exempt purpose.

	In cases involving contributions to a private foundation (other than certain privateoperating foundations), the amount of the deduction is limited to the taxpayer's basis in theproperty.  However, under a special rule contained in section 170(e)(5), taxpayers are allowed adeduction equal to the fair market value of "qualified appreciated stock" contributed to a privatefoundation prior to July 1, 1998.  Qualified appreciated stock is defined as publicly traded stockwhich is capital gain property.  The fair-market-value deduction for qualified appreciated stockdonations applies only to the extent that total donations made by the donor to private foundationsof stock in a particular corporation did not exceed 10 percent of the outstanding stock of thatcorporation.  For this purpose, an individual is treated as making all contributions that were madeby any member of the individual's family.

**Description of Proposal**

	The proposal extends the special rule contained in section 170(e)(5) for one year--forcontributions of qualified appreciated stock made to private foundations during the period July 1,1998, through June 30, 1999.

**Effective Date
	The proposal is effective for contributions of qualified appreciated stock to privatefoundations made during the period July 1, 1998, through June 30, 1999.

**E.  Exceptions Under Subpart F for Certain Active Financing Income (sec. 105 of the bill and secs. 953 and 954 of the Code)**

**Present Law**

**In general**

	Under the subpart F rules, certain U.S. shareholders of a controlled foreign corporation("CFC") are subject to U.S. tax currently on certain income earned by the CFC, whether or notsuch income is distributed to the shareholders. The income subject to current inclusion under thesubpart F rules includes, among other things, "foreign personal holding company income" andinsurance income. The U.S. 10-percent shareholders of a CFC also are subject to currentinclusion with respect to their shares of the CFC's foreign base company services income (i.e.,income derived from services performed for a related person outside the country in which theCFC is organized).

	Foreign personal holding company income generally consists of the following:  (1)dividends, interest, royalties, rents and annuities; (2) net gains from the sale or exchange of (a)property that gives rise to the preceding types of income, (b) property that does not give rise toincome, and (c) interests in trusts, partnerships, and REMICs; (3) net gains from commoditiestransactions; (4) net gains from foreign currency transactions; (5) income that is equivalent tointerest; (6) income from notional principal contracts; and (7) payments in lieu of dividends.

	Insurance income subject to current inclusion under the subpart F rules includes anyincome of a CFC attributable to the issuing or reinsuring of any insurance or annuity contract inconnection with risks located in a country other than the CFC's country of organization. SubpartF insurance income also includes income attributable to an insurance contract in connection withrisks located within the CFC's country of organization, as the result of an arrangement underwhich another corporation receives a substantially equal amount of consideration for insurance ofother-country risks. Investment income of a CFC that is allocable to any insurance or annuitycontract related to risks located outside the CFC's country of organization is taxable as subpart Finsurance income (Prop. Treas. Reg. sec. 1.953-1(a)).

	Temporary exceptions from foreign personal holding company income and foreign basecompany services income apply for subpart F purposes for certain income that is derived in theactive conduct of a banking, financing, insurance, or similar business.(5)  These exceptions(described below) are applicable only for taxable years beginning in 1998.

**Income from the active conduct of a banking, financing, or similar business**

	A temporary exception from foreign personal holding company income applies to incomethat is derived in the active conduct of a banking, financing, or similar business by a CFC that ispredominantly engaged in the active conduct of such business. For this purpose, income derivedin the active conduct of a banking, financing, or similar business generally is determined underthe principles applicable in determining financial services income for foreign tax credit limitationpurposes. However, in the case of a corporation that is engaged in the active conduct of abanking or securities business, the income that is eligible for this exception is determined underthe principles applicable in determining the income which is treated as nonpassive income forpurposes of the passive foreign investment company provisions. In this regard, the income of acorporation engaged in the active conduct of a banking or securities business that is eligible forthis exception is the income that is treated as nonpassive under the regulations proposed undersection 1296(b) (as in effect prior to the enactment of the Taxpayer Relief Act of 1997). SeeProp. Treas. Reg. secs. 1.1296-4 and 1.1296-6. The Secretary of the Treasury is directed toprescribe regulations applying look-through treatment in characterizing for this purposedividends, interest, income equivalent to interest, rents and royalties from related persons.

	For purposes of the temporary exception, a corporation is considered to be predominantlyengaged in the active conduct of a banking, financing, or similar business if it is engaged in theactive conduct of a banking or securities business or is a qualified bank affiliate or qualifiedsecurities affiliate. In this regard, a corporation is considered to be engaged in the active conductof a banking or securities business if the corporation would be treated as so engaged under theregulations proposed under prior law section 1296(b) (as in effect prior to the enactment of theTaxpayer Relief Act of 1997); qualified bank affiliates and qualified securities affiliates are asdetermined under such proposed regulations. See Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-6.

	Alternatively, a corporation is considered to be engaged in the active conduct of abanking, financing, or similar business if more than 70 percent of its gross income is derivedfrom such business from transactions with unrelated persons located within the country under thelaws of which the corporation is created or organized. For this purpose, income derived by aqualified business unit ("QBU") of a corporation from transactions with unrelated personslocated in the country in which the QBU maintains its principal office and conducts substantialbusiness activity is treated as derived by the corporation from transactions with unrelated personslocated within the country in which the corporation is created or organized. A person other than anatural person is considered to be located within the country in which it maintains an officethrough which it engages in a trade or business and by which the transaction is effected. Anatural person is treated as located within the country in which such person is physically locatedwhen such person enters into the transaction.

**Income from the active conduct of an insurance business**

	A temporary exception from foreign personal holding company income applies forcertain investment income of a qualifying insurance company with respect to risks located withinthe CFC's country of creation or organization. These rules differ from the rules of section 953 ofthe Code, which determines the subpart F inclusions of a U.S. shareholder relating to insuranceincome of a CFC. Such insurance income under section 953 generally is computed in accordancewith the rules of subchapter L of the Code.

	A temporary exception applies for income (received from a person other than a relatedperson) from investments made by a qualifying insurance company of its reserves or 80 percentof its unearned premiums. For this purpose, in the case of contracts regulated in the country inwhich sold as property, casualty or health insurance contracts, unearned premiums and reservesare defined as unearned premiums and reserves for losses incurred determined using the methodsand interest rates that would be used if the qualifying insurance company were subject to taxunder subchapter L of the Code. Thus, for this purpose, unearned premiums are determined inaccordance with section 832(b)(4), and reserves for losses incurred are determined in accordancewith section 832(b)(5) and 846 of the Code (as well as any other rules applicable to a U.S.property and casualty insurance company with respect to such amounts).

	In the case of a contract regulated in the country in which sold as a life insurance orannuity contract, the following three alternative rules for determining reserves apply. Any one ofthe three rules can be elected with respect to a particular line of business.

	First, reserves for such contracts can be determined generally under the rules applicableto domestic life insurance companies under subchapter L of the Code, using the methods therespecified, but substituting for the interest rates in Code section 807(d)(2)(B) an interest ratedetermined for the country in which the qualifying insurance company was created or organized,calculated in the same manner as the mid-term applicable Federal interest rate ("AFR") (withinthe meaning of section 1274(d)).

	Second, the reserves for such contracts can be determined using a preliminary termforeign reserve method, except that the interest rate to be used is the interest rate determined forthe country in which the qualifying insurance company was created or organized, calculated inthe same manner as the mid-term AFR. If a qualifying insurance company uses such apreliminary term method with respect to contracts insuring risks located in the country in whichthe company is created or organized, then such method is the method that applies for purposes ofthis election.

	Third, reserves for such contracts can be determined to be equal to the net surrender valueof the contract (as defined in section 807(e)(1)(A)).

	In no event can the reserve for any contract at any time exceed the foreign statementreserve for the contract, reduced by any catastrophe or deficiency reserve. This rule applieswhether the contract is regulated as a property, casualty, health, life insurance, annuity or anyother type of contract.

	A temporary exception from foreign personal holding company income also applies forincome from investment of assets equal to: (1) one-third of premiums earned during the taxableyear on insurance contracts regulated in the country in which sold as property, casualty, or healthinsurance contracts; and (2) the greater of 10 percent of reserves, or, in the case of a qualifyinginsurance company that is a startup company, $10 million. For this purpose, a startup company isa company (including any predecessor) that has not been engaged in the active conduct of aninsurance business for more than 5 years. In general, the 5-year period commences when theforeign company first is engaged in the active conduct of an insurance business. If the foreigncompany was formed before being acquired by the U.S. shareholder, the 5-year periodcommences when the acquired company first was engaged in the active conduct of an insurancebusiness. In the event of the acquisition of a book of business from another company through anassumption or indemnity reinsurance transaction, the 5-year period commences when theacquiring company first engaged in the active conduct of an insurance business, except that ifmore than a substantial part (e.g., 80 percent) of the business of the ceding company is acquired,then the 5-year period commences when the ceding company first engaged in the active conductof an insurance business. Reinsurance transactions among related persons may not be used tomultiply the number of 5-year periods.

	Under rules prescribed by the Secretary, income is allocated to contracts as follows. Inthe case of contracts that are separate account-type contracts (including variable contracts notmeeting the requirements of sec. 817), only the income specifically allocable to such contractsare taken into account. In the case of other contracts, income not specifically allocable isallocated ratably among such contracts.

	A qualifying insurance company is defined as any entity which: (1) is regulated as aninsurance company under the laws of the country in which it is incorporated; (2) derives at least50 percent of its net written premiums from the insurance or reinsurance of risks situated withinits country of incorporation; and (3) is engaged in the active conduct of an insurance businessand would be subject to tax under subchapter L if it were a domestic corporation.

	The temporary exceptions do not apply to investment income (includable in the incomeof a U.S. shareholder of a CFC pursuant to sec. 953) allocable to contracts that insure relatedparty risks or risks located in a country other than the country in which the qualifying insurancecompany is created or organized.

**Anti-abuse rule**

	An anti-abuse rule applies for purposes of these temporary exceptions. For purposes ofapplying these exceptions, items with respect to a transaction or series of transactions aredisregarded if one of the principal purposes of the transaction or transactions is to qualify incomeor gain for these exceptions, including any change in the method of computing reserves or anyother transaction or transactions one of the principal purposes of which is the acceleration ordeferral of any item in order to claim the benefits of these exceptions.

**Foreign base company services income**

	A temporary exception from foreign base company services income applies for incomederived from services performed in connection with the active conduct of a banking, financing,insurance or similar business by a CFC that is predominantly engaged in the active conduct ofsuch business or is a qualifying insurance company.

**Description of Proposal**

	The proposal extends for one year the present-law temporary exceptions from foreignpersonal holding company income and foreign base company services income for income that isderived in the active conduct of a banking, financing, insurance or similar business.

**Effective Date**

	The proposal applies only to the first full taxable year of a foreign corporation beginningin 1998 and to the taxable year of such corporation immediately following such first full taxableyear, and to taxable years of U.S. shareholders with or within which such taxable years of suchforeign corporation end. If a foreign corporation does not have such a first full taxable yearbeginning in 1998, the proposal applies only to the first taxable year of the foreign corporationbeginning in 1999, and to taxable years of U.S. shareholders with or within which such taxableyear of such foreign corporation ends.

**F.  Extend Placed in Service Date for Certain Nonconventional Fuels Facilities (sec. 106 of the bill and sec. 29 of the Code)**

**Present Law**

	Under present law, certain fuels produced from "nonconventional sources" and sold tounrelated parties are eligible for an inflation-adjusted income tax credit (equal to $6.10 in 1997)per barrel of oil or British Thermal Unit barrel oil equivalent.  The credit is available forqualified fuels produced through December 31, 2007, by coal or biomass facilities placed inservice before July 1, 1998, pursuant to a binding written contract in effect before January 1,1997.

**Description of Proposal**

	The proposal extends the placed in service date, but not the binding contract date, forfacilities producing nonconventional fuels from coal and biomass through June 30, 1999.

**Effective Date**

	This proposal is effective on the date of enactment (i.e., applies to facilities placed inservice after June 30, 1998 and before July 1, 1999).

**G.  Disclosure of Return Information to Department of Education in Connection with Income Contingent Loans (sec. 107 of the bill and sec. 6103(l)(13) of the Code)**

**Present Law**

	Under section 6103(l)(13) of the Code, the Secretary of Treasury was authorized todisclose to the Department of Education certain return information with respect to any taxpayerwho has received an "applicable student loan."  An "applicable student loan" is any loan madeunder (1) part D of title IV of the Higher Education Act of 1965 or (2) parts B or E of title IV ofthe Higher Education Act of 1965 which is in default and has been assigned to the Department ofEducation, if the loan repayment amounts are based in whole or in part on the taxpayer's income. The Secretary is permitted to disclose only taxpayer identity information and the adjusted grossincome of the taxpayer.  The Department of Education may use the information only to establishthe appropriate income contingent repayment amount for an applicable student loan.

	The disclosure authority under section 6103(l)(13) terminated with respect to requestsmade after September 30, 1998.

**Description of Proposal**

	The provision reinstates the disclosure authority under section 6103(l)(13) with respect torequests made after the date of enactment and before October 1, 2004.

**Effective Date**

	The disclosure authority under section 6103(l)(13) applies to requests made after the dateof enactment and before October 1, 2004.

**Subtitle B - Trade Provisions**

**A.  Extension of the Generalized System of Preferences(sec. 111 of the bill and sec. 505 of the Trade Act of 1974)**

**Present Law**

	Title V of the Trade Act of 1974, as amended, grants authority to the President to provideduty-free treatment on imports of certain articles from beneficiary developing countries subjectto certain conditions and limitations.  To qualify for GSP privileges, each beneficiary country issubject to various mandatory and discretionary eligibility criteria.  Import sensitive products areineligible for GSP.  The GSP program, which is designed to promote development through traderather than traditional aid programs, expired after June 30, 1998.

**Description of Proposal**

	The proposal reauthorizes the GSP program to terminate after December 31, 1999. Refunds are authorized, upon request of the importer, for duties paid between July 1, 1998, andthe date of enactment of the bill.

**Effective Date**

	The proposal is effective for duties paid on or after July 1, 1998, and before December31, 1999.

**B.  Extension of the Trade Adjustment Assistance Program(sec. 112 of the bill and sec. 245 of the Trade Act of 1974)**

**Present Law**

	Title II of the Trade Act of 1974, as amended, authorizes three trade adjustmentassistance (TAA) programs for the purpose of providing assistance to individual workers andfirms that are adversely by the reduction of barriers to foreign trade.  Those programs include -

	(1)  The general TAA program for workers provides training and income support forworkers adversely affected by import competition.

	(2)  The TAA program for firms provides technical assistance to qualifying firms.

	(3)  The third program, the North American Free Trade Agreement ("NAFTA") programfor workers (established by the North American Free Trade Agreement Implementation Act of1993) provides training and income support for workers adversely affected by trade with orproduction shifts to Canada and/or Mexico.

	All three TAA programs expired on September 30, 1998.  The TAA program for firms isalso subject to annual appropriations.

**Description of Proposal**

	The proposal reauthorizes each of the three TAA programs through June 30, 1999.

**Effective Date**

	The proposal is effective on the date of enactment.

**TITLE II.  OTHER TAX PROVISIONS**

**A.  Increase Deduction for Health Insurance Expenses of Self-Employed Individuals(sec. 201 of the bill and sec. 162(l) of the Code)**

**Present Law**

	Under present law, self-employed individuals are entitled to deduct a portion of theamount paid for health insurance for the self-employed individual and the individual's spouse anddependents.  The deduction for health insurance expenses of self-employed individuals is notavailable for any month in which the taxpayer is eligible to participate in a subsidized health planmaintained by the employer of the taxpayer or the taxpayer's spouse.  The deduction is availablein the case of self insurance as well as commercial insurance.  The self-insured plan must in factbe insurance (e.g., there must be appropriate risk shifting) and not merely a reimbursementarrangement.

	The portion of health insurance expenses of self-employed individuals that is deductibleis 45 percent for taxable years beginning in 1998 and 1999, 50 percent for taxable yearsbeginning in 2000 and 2001, 60 percent for taxable years beginning in 2002, 80 percent fortaxable years beginning in 2003, 2004, and 2005, 90 percent for taxable years beginning in 2006,and 100 percent for taxable years beginning in 2007 and thereafter.

	Under present law, employees can exclude from income 100 percent of employer-provided health insurance.

**Description of Proposal**

	The proposal increases the deduction for health insurance of self-employed individuals to70 percent for taxable years beginning in 2001 and to 100 percent for taxable years beginning in2002 and thereafter.

**Effective Date**

	The proposal is effective for taxable years beginning after December 31, 2000.

**B.  Farm Production Flexibility Contract Payments (sec. 202 of the bill)**

**Present law**

	A taxpayer generally is required to include an item in income no later than the time of itsactual or constructive receipt, unless such amount properly is accounted for in a different periodunder the taxpayer's method of accounting.  If a taxpayer has an unrestricted right to demand thepayment of an amount, the taxpayer is in constructive receipt of that amount whether or not thetaxpayer makes the demand and actually receives the payment.

	The Federal Agriculture Improvement and Reform Act of 1996 (the "FAIR Act")provides for production flexibility contracts between certain eligible owners and producers andthe Secretary of Agriculture.  These contracts generally cover crop years from 1996 through2002.  Annual payments are made under such contracts at specific times during the Federalgovernment's fiscal year.  Section 112(d)(2) of the FAIR Act provides that one-half of eachannual payment is to be made on either December 15 or January 15 of the fiscal year, at theoption of the recipient.(6)   This option to receive the payment on December 15 potentially resultsin the constructive receipt (and thus potential inclusion in income) of one-half of the annualpayment at that time, even if the option to receive the amount on January 15 is elected.

	The remaining one-half of the annual payment must be made no later than September 30of the fiscal year. The Emergency Farm Financial Relief Act of 1998 added section 112(d)(3) tothe FAIR Act which provides that all payments for fiscal year 1999 are to be paid at such time ortimes during fiscal year 1999 as the recipient may specify.  Thus, the one-half of the annualamount that would otherwise be required to be paid no later than September 30, 1999 can bespecified for payment in calendar year 1998. This potentially results in the constructive receipt(and thus required inclusion in taxable income) of such amounts in calendar year 1998, whetheror not the amounts actually are received or the right to their receipt is fixed.

**Description of Proposal**

	The time a production flexibility contract payment under the FAIR Act properly isincludible in income is determined without regard to the options granted by section 112(d)(2)(allowing receipt of one-half of the annual payment on either December 15 or January 15 of thefiscal year) or section 112(d)(3) (allowing the acceleration of all payments for fiscal year 1999)of that Act.

**Effective Date**

	The proposal is effective for production flexibility contract payments made under theFAIR Act in taxable years ending after December 31, 1995.

**C.  Permanent Extension of Income Averaging for Farmers (sec. 203 of the bill and sec. 1301 of the Code)**

**Present Law**

	An individual engaged in a farming business may elect to compute his or her current yeartax liability by averaging, over the prior three-year period, all or a portion of the taxable incomethat is attributable to the farming business.

	In general, an individual who makes the election (1) designates all or a portion of his orher taxable income attributable to any farming business from the current year as "elected farmincome;"(7) (2) allocates one-third of the elected farm income to each of the three prior taxableyears; and (3) determines the current year section 1 tax liability by combining (a) his or hercurrent year section 1 tax liability excluding the elected farm income allocated to the three priortaxable years, plus (b) the increases in the section 1 tax liability for each of the three prior taxableyears caused by including one-third of the elected farm income in each such year.  Any allocationof elected farm income pursuant to the election applies for purposes of any election in asubsequent taxable year.

	The provision does not apply for employment tax purposes, or to an estate or a trust.  Theprovision also does not apply for purposes of the alternative minimum tax.  The provision iseffective for taxable years beginning after December 31, 1997, and before January 1, 2001.

**Description of Proposal**

	The proposal permanently extends the income averaging provision for farmers.

**Effective Date**

	The proposal is effective for taxable years beginning after December 31, 2000.

**D.  Personal Credits Fully Allowed Against Regular Tax Liability During 1998(sec. 204 of the bill and sec. 26 of the Code)**

**Present Law
	Present law provides for certain nonrefundable personal tax credits (i.e., the dependentcare credit, the credit for the elderly and disabled, the adoption credit, the child tax credit, thecredit for interest on certain home mortgages, the HOPE Scholarship and Lifetime Learningcredits, and the D.C. homebuyer's credit).  Generally, these credits are allowed only to the extentthat the individual's regular income tax liability exceeds the individual's tentative minimum tax(determined without regard to the AMT foreign tax credit).

	The tentative minimum tax is an amount equal to (1) 26 percent of the first $175,000($87,500 in the case of a married individual filing a separate return) of alternative minimumtaxable income ("AMTI") in excess of a phased-out exemption amount and (2) 28 percent of theremaining AMTI.  The maximum tax rates on net capital gain used in computing the tentativeminimum tax are the same as under the regular tax.  AMTI is the individual's taxable incomeadjusted to take account of specified preferences and adjustments.  The exemption amounts are:(1) $45,000 in the case of married individuals filing a joint return and surviving spouses; (2)$33,750 in the case of other unmarried individuals; and (3) $22,500 in the case of marriedindividuals filing a separate return, estates and trusts.  The exemption amounts are phased out byan amount equal to 25 percent of the amount by which the individual's AMTI exceeds (1)$150,000 in the case of married individuals filing a joint return and surviving spouses, (2)$112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of marriedindividuals filing separate returns or an estate or a trust.  These amounts are not indexed forinflation.

	For families with three or more qualifying children, an additional child credit is providedwhich may offset the liability for social security taxes to the extent that tax liability exceeds theamount of the earned income credit.  The additional child credit is reduced by the amount of theindividual's minimum tax liability (i.e., the amount by which the tentative minimum tax exceedsthe regular tax liability).

**Description of Proposal**

	The proposal allows the nonrefundable personal credits to offset the individual's regulartax in full for taxable years beginning in 1998 (as opposed to only the amount by which theregular tax exceeds the tentative minimum tax, as under present law).

	The provision of present law that reduces the additional child credit by the amount of anindividual's AMT will not apply for taxable years beginning in 1998.

**Effective Date
	The proposal is effective for taxable years beginning in 1998.

**TITLE III.  REVENUE OFFSET PROVISION**

**A.  Treatment of Certain Deductible Liquidating Distributions of Regulated Investment Companies and Real Estate Investment Trusts(sec. 301 of the bill and secs. 332 and 334 of the Code)**

**Present Law**

	Regulated investment companies ("RICs") and real estate investment trusts ("REITs") areallowed a deduction for dividends paid to their shareholders.  The deduction for dividends paidincludes amounts distributed in liquidation which are properly chargeable to earnings and profits,as well as, in the case of a complete liquidation occurring within 24 months after the adoption ofa plan of complete liquidation, any distribution made pursuant to such plan to the extent ofearnings and profits.  Rules that govern the receipt of dividends from RICs and REITs generallyprovide for including the amount of the dividend in the income of the shareholder receiving thedividend that was deducted by the RIC or REIT.  Generally, any shareholder realizing gain froma liquidating distribution of a RIC or REIT includes the amount of gain in the shareholder'sincome.  However, in the case of a liquidating distribution to a corporation owning 80-percent ofthe stock of the distributing corporation, a separate rule generally provides that the distribution istax-free to the parent corporation.  The parent corporation succeeds to the tax attributes,including the adjusted basis of assets, of the distributing corporation.  Under these rules, aliquidating RIC or REIT might be allowed a deduction for amounts paid to its parent corporation,without a corresponding inclusion in the income of the parent corporation, resulting in incomebeing subject to no tax.

	A RIC or REIT may designate a portion of a dividend as a capital gain dividend to theextent the RIC or REIT itself has a net capital gain, and a RIC may designate a portion of thedividend paid to a corporate shareholder as eligible for the 70-percent dividends-receiveddeduction to the extent the RIC itself received dividends from other corporations.  If certainconditions are satisfied, a RIC also is permitted to pass through to its shareholders the tax-exempt character of the RIC's net income from tax-exempt obligations through the payment of"exempt interest dividends," though no deduction is allowed for such dividends.

**Description of Proposal**

	Any amount which a liquidating RIC or REIT may take as a deduction for dividends paidwith respect to an otherwise tax-free liquidating distribution to an 80-percent corporate owner is includible in the income of the recipient corporation. The includible amount is treated as adividend received from the RIC or REIT.  The liquidating corporation may designate the amountdistributed as a capital gain dividend or, in the case of a RIC, a dividend eligible for the 70-percent dividends received deduction or an exempt interest dividend, to the extent provided bythe RIC or REIT provisions of the Code.

	The provision does not otherwise change the tax treatment of the distribution to theparent corporation or to the RIC or REIT.  Thus, for example, the liquidating corporation will notrecognize gain (if any) on the liquidating distribution and the recipient corporation will hold theassets at a carryover basis, even where the amount received is treated as a dividend..

**Effective Date**

	The provision is effective for distributions on or after May 22, 1998, regardless of whenthe plan of liquidation was adopted.

	No inference is intended regarding the treatment of such transactions under present law.

**TITLE IV.  TAX TECHNICAL CORRECTIONS**

Except as otherwise provided, the technical corrections contained in the bill generally areeffective as if included in the originally enacted related legislation.

**A.  Technical Corrections to the 1998 Act**

**1.  Burden of proof (sec. 402(b) of the bill, sec. 3001 of the 1998 Act, and sec. 7491 (a)(2)(C)of the Code)**

**Present Law**

	The Treasury Secretary has the burden of proof in any court proceeding with respect to afactual issue if the taxpayer introduces credible evidence with respect to any factual issuerelevant to ascertaining the taxpayer's tax liability, provided specified conditions are satisfied(sec. 7491).  One of these conditions is that corporations, trusts, and partnerships must meetcertain net worth limitations.  These net worth limitations do not apply to individuals or toestates.

**Description of Proposal**

	The proposal removes the net worth limitation from certain revocable trusts for the sameperiod of time that the trust would have been treated as part of the estate had the trust made theelection under section 645 to be treated as part of the estate.

**2.  Relief for innocent spouses (sec. 402(c) of the bill, sec. 3201 of the 1998 Act, and secs.6015(e) and 7421(a) of the Code)**

**Present Law**

	A taxpayer who is no longer married to, is separated from, or has been living apart for atleast 12 months from the person with whom he or she originally joined in filing a joint Federalincome tax return may elect to limit his or her liability for a deficiency arising from such jointreturn to the amount of the deficiency that is attributable to items that are allocable to suchelecting spouse.  The election is limited to deficiency situations and only affects the amount ofthe deficiency for which the electing spouse is liable.  Thus, the election cannot be used togenerate a refund, to direct a refund to one spouse or the other, or to allocate responsibility forpayment where a balance due is reported on, but not paid with, a joint return.

	In addition to the election to limit the liability for deficiencies, a taxpayer may be eligiblefor innocent spouse relief.  Innocent spouse relief allows certain taxpayers who joined in thefiling of a joint return to be relieved of liability for an understatement of tax that is attributable toitems of the other spouse to the extent that the taxpayer did not know or have reason to know ofthe understatement.  The Secretary is also authorized to provide equitable relief in situationswhere, taking into account all of the facts and circumstances, it is inequitable to hold anindividual responsible for all or a part of any unpaid tax or deficiency arising from a joint return. Under certain circumstances, it is possible that a refund could be obtained under this authority.

**Description of Proposal**

	The proposal clarifies that the ability to obtain a credit or refund of Federal income tax islimited to situations where the taxpayer qualifies for innocent spouse relief or where theSecretary exercises his authority to provide equitable relief. 

**3.  Interest netting (sec. 402(d) of the bill and sec. 3301 (c)(2) of the 1998 Act)**

**Present Law**

	For calendar quarters beginning after July 22, 1998, a net interest rate of zero applieswhere interest is payable and allowable on equivalent amounts of overpayment andunderpayment of any tax imposed by the Internal Revenue Code.  In addition, the net interest rateof zero applies to periods on or before July 22, 1998, providing (1) the statute of limitations hasnot expired with respect to either the underpayment or overpayment, (2) the taxpayer identifiesthe periods of underpayment and overpayment where interest is payable and allowable for whichthe net interest rate of zero would apply, and (3) on or before December 31, 1999, the taxpayerasks the Secretary to apply the net zero rate.

**Description of Proposal**

	The proposal restores language originally included in the Senate amendment that clarifiesthat the applicability of the zero net interest rate for periods on or before July 22, 1998 is subjectto any applicable statute of limitations not having expired with regard to either a taxunderpayment or overpayment.

**4.  Effective date for elimination of 18-month holding period for capital gains (sec. 402(i) ofthe bill, sec. 5001 of the 1998 Act, and sec. 1(h) of the Code)**

**Present Law
	The 1998 Act repealed the provision in the 1997 Act providing a maximum 28-percentrate for the long-term capital gain attributable to property held more than one year but not morethan 18 months.  Instead, the 1998 Act treated this gain in the same manner as gain from propertyheld more than 18 months.  The provision in the 1998 Act is effective for amounts properly takeninto account after December 31, 1997.  For gains taken into account by a pass-thru entity, such asa partnership, S corporation, trust, estate, RIC or REIT, the date that the entity properly took thegain into account is the appropriate date in applying this provision.  Thus, for example, amountsproperly taken into account by a pass-thru entity after July 28, 1997, and before January 1, 1998,with respect to property held more than one year but not more than 18 months which areincluded in income on an individual's 1998 return are taken into account in computing 28-percent rate gain.

**Description of Proposal**
	Under the proposal, in the case of a capital gain dividend made by a RIC or REIT after1997, no amount will be taken into account in computing the net gain or loss in the 28-percentrate gain category by reason of property being held more than one year but not more than 18months, other than amounts taken into account by the RIC or REIT from other pass-thru entities(other than in structures, such as a "master-feeder structure", in which the RIC invests asubstantial portion of its assets in one or more partnerships holding portfolio securities andhaving the same taxable year as the RIC).  A similar rule applies to amounts properly taken intoaccount by a RIC or REIT by reason of holding, directly or indirectly, an interest in another RICor REIT to which the rule in the preceding sentence applies.  

	For example, if a RIC sold stock held more than one year but not more than 18 months onNovember 15, 1997, for a gain, and makes a capital gain dividend in 1998, the gain is not takeninto account in computing 28-percent rate gain for purposes of determining the taxation of the1998 dividend.  (Thus, all the netting and computations made by the RIC need to be redone withrespect to all post-1997 capital gain dividends, whether or not dividends of 28-percent rate gain.) If, however, the gain was taken into account by a RIC by reason of holding an interest in acalendar year 1997 partnership which itself sold the stock, the gain will not be recharacterized byreason of this proposal (unless the RIC's investment in the partnership satisfies the exception formaster-feeder structures).  If the gain was taken into account by a RIC be reason of holding aninterest in a REIT and the gain was excluded from 28-percent rate gain by reason of theapplication of this proposal to the REIT, the gain will be excluded from 28-percent rate gain indetermining the tax of the RIC shareholders.

	The proposal also corrects a cross reference.

**B. Technical Corrections to the 1997 Act**

**1.  Treatment of interest on qualified education loans (sec. 403(a) of the bill, sec. 202 of the1997 Act, and secs. 221 and 163(h) of the Code)**

**Present Law
	Present law, as modified by the 1997 Act, provides that certain individuals who have paidinterest on qualified education loans may claim an above-the-line deduction for such interestexpense, up to a maximum dollar amount per year ($1,000 for taxable years beginning in 1998),subject to certain requirements (sec. 221).  The maximum deduction is phased out ratably forindividual taxpayers with modified AGI between $40,000 and $55,000 ($60,000 and $75,000 forjoint returns).  Present law also provides that in the case of a taxpayer other than a corporation,no deduction is allowed for personal interest (sec. 163(h)).  For this purpose, personal interestmeans any interest allowable as a deduction, other than certain types of interest listed in thestatute.  This proposal does not specifically provide that otherwise deductible qualified educationloan interest is not treated as personal interest.

	Present law provides that a qualified education loan does not include any indebtednessowed to a person who is related (within the meaning of sec. 267(b) or 707(b)) to the taxpayer(sec. 221(e)(1)).

**Description of Proposal
	The proposal clarifies that otherwise deductible qualified education loan interest is nottreated as nondeductible personal interest.

	The proposal also clarifies that, for purposes of section 221, modified AGI is determinedafter application of section 135 (relating to income from certain U.S. saving bonds) and section137 (relating to adoption assistance programs).

	The proposal also provides that a qualified education loan does not include anyindebtedness owed to any person by reason of a loan under any qualified employer plan (asdefined in section 72(p)(4)) or under any contract purchased under a qualified employer plan (asdescribed in sec. 72(p)(5)).

**2.  Capital gain distributions of charitable remainder trusts (secs. 402(i)(3) and 403(b) ofthe bill, sec. 311 of the 1997 Act and sec. 5001 of the 1998 Act, and sec. 1(h) of the Code)**

**Present Law**

	Under present law, the income beneficiary of a charitable remainder trust ("CRT")includes the trust's capital gain in income when the gains are distributed to the beneficiary (sec.664(b)(2)).  Internal Revenue Service Notice 98-20 provides guidance with respect to thecategorization of long-term capital gain distributions from a CRT under the capital gain rulesenacted by the 1997 Act.  Under the Notice, long-term capital gains properly taken into accountby the trust before January 1, 1997, are treated as falling in the 20-percent group of gain (i.e.,gain not in the 28-percent rate gain or unrecaptured sec. 1250 gain).  Long-term capital gains properly taken into account by the trust after December 31, 1996, and before May 7, 1997, areincluded in 28-percent rate gain.  Long-term capital gains properly taken into account by the trustafter May 6, 1997, are treated as falling into the category which would apply if the trust itselfwere subject to tax. 

**Description of Proposal**

	The proposal provides that, in the case of  a capital gain distribution by a CRT afterDecember 31, 1997,  with respect to amounts properly taken into account by the trust during1997, amounts will not be included in the 28-percent rate gain category solely by reason of being properly taken into account by the trust before May 7, 1997, or by reason of the propertybeing held not more than 18 months.  Thus, for example, gain on the sale of stock by a CRT onFebruary 1, 1997, will not be taken into account in determining 28-percent rate gain where thegain is distributed after 1997.(8)

**Effective Date**
	The proposal applies to taxable years beginning after December  31, 1997.

**3.  Gifts may not be revalued for estate tax purposes after expiration of statute oflimitations (sec. 403(c) of the bill, sec. 506 of the 1997 Act, and sec. 2001(f)(2) of the Code)**

**Present Law**

Basic structure of Federal estate and gift taxes.--The Federal estate and gift taxes areunified so that a single progressive rate schedule is applied to an individual's cumulative gifts andbequests.  The tax on gifts made in a particular year is computed by determining the tax on thesum of the taxable gifts made in that year and in all prior years and then subtracting the tax on theprior years taxable gifts and the unified credit.  Similarly, the estate tax is computed bydetermining the tax on the sum of the taxable estate and prior taxable gifts and then subtractingthe tax on taxable gifts, the unified credit, and certain other credits.

	This structure raises two different, but related, issues: (1) what is the period beyondwhich additional gift taxes cannot be assessed or collected -- generically referred to as the"period of limitations" -- and (2) what is the period beyond which the amount of prior transferscannot be revalued for the purpose of determining the amount of tax on subsequent transfers.

Gift and estate tax period of limitations.--Section 6501(a) provides the general rule thatany tax (including gift and estate tax) must be assessed, or a proceeding begun in a court for thecollection of such tax without assessment, within three years after the return is filed by thetaxpayer. Under section 6501(e)(2), the period for assessments of gift or estate tax is increased tosix years where there is more than a 25 percent omission in the amount of the total gifts or grossestate disclosed on the gift or estate tax return.  Section 6501(c)(9) provides an exception to theserules under which gift tax may be assessed, or a proceeding in a court for collection of gift taxmay be begun, at any time unless the gift is disclosed on a gift tax return or a statement attachedto a gift tax return.

	Revaluation of gifts for estate tax purposes.--The value of a gift is its value as finallydetermined under the rules for purposes of determining the applicable estate tax bracket andavailable unified credit.  The value of a gift is finally determined if (1) the value of the gift isshown on a gift tax return for that gift and that value is not contested by the Treasury Secretarybefore the expiration of the period of limitations on assessment of gift tax even where the valueof the gift as shown on the return does not result in any gift tax being owed (e.g., through use ofthe unified credit), (2) the value is specified by the Treasury Secretary pursuant to a final noticeof redetermination of value (a "final notice") within the period of limitations applicable to the giftfor gift tax purposes (generally, three years) and the taxpayer does not timely contest that value,or (3) the value is determined by a court or pursuant of a settlement agreement between thetaxpayer and the Treasury Secretary under an administrative appeals process whereby a taxpayercan challenge a redetermination of value by the IRS prior to issuance of a final notice.  In theevent the taxpayer and the IRS cannot agree on the value of a gift, the 1997 Act provided theU.S. Tax Court with jurisdiction to issue a declaratory judgment on the value of a gift (section7477).  A taxpayer who is mailed a final notice may challenge the redetermined value of the gift(as contained in the final notice) by filing a motion for a declaratory judgment with the U.S. TaxCourt.  The motion must be filed on or before 90 days from the date that the final notice wasmailed.  The statute of limitations is tolled during the pendency of the Tax Court proceeding.

	Revaluation of gifts for gift tax purposes.--Similarly, under a rule applicable to thecomputation of the gift tax (sec. 2504(c)), the value of gifts made in prior years is its value asfinally determined if the period of limitations for assessment of gift tax on the prior gifts hasexpired.

**Description of Proposal**

	The bill clarifies the rules relating to revaluations of prior transfers for computation of theestate or gift tax to provide that the value of a prior transfer cannot be redetermined after theperiod of limitations if the transfer was disclosed in a statement attached to the gift tax return, aswell as on a gift tax return, in a manner to adequately apprise the Treasury Secretary of the naturethe transfer, even if there was no gift tax imposed on that transfer.

**4.  Coordinate Vaccine Injury Compensation Trust Fund expenditure purposes with list oftaxable vaccines (sec. 403(d) of the bill, sec. 904 of the 1997 Act, and sec. 9510(c) of theCode)**

**Present Law**

	A manufacturer's excise tax is imposed on certain vaccines routinely recommended foradministration to children (sec. 4131).  The tax is imposed at a rate of $0.75 per dose on anylisted vaccine component.  Taxable vaccine components are vaccines against diphtheria, tetanus,pertussis, measles, mumps, rubella,  polio, HIB (haemophilus influenza type B), hepatitis B, andvaricella (chicken pox).   Tax was imposed on vaccines against diphtheria, tetanus, pertussis,measles, mumps, rubella, and polio by the Omnibus Budget Reconciliation Act of 1987.  Taxwas imposed on vaccines against HIB, hepatitis B, and varicella by the 1997 Act.

	Amounts equal to net revenues from this excise tax are deposited in the Vaccine InjuryCompensation Trust Fund ("Vaccine Trust Fund") to finance compensation awards under theFederal Vaccine Injury Compensation Program for individuals who suffer certain injuriesfollowing administration of the taxable vaccines.  Present law provides that payments from theVaccine Trust Fund may be made only for vaccines eligible under the program as of December22, 1987 (sec. 9510(c)(1)).  Thus, payments may not be made for injuries related to the HIB,hepatitis B or varicella vaccines.

**Description of Proposal**

	The proposal provides that payments are permitted from the Vaccine Trust Fund forinjuries related to the administration of the HIB, hepatitis B, and varicella vaccines.  Theproposal also clarifies that expenditures from the Vaccine Trust Fund may occur only asprovided in the Code and makes conforming amendments.

**5.  Abatement of interest by reason of Presidentially declared disaster (sec. 403(e) of thebill, sec. 915 of the 1997 Act, and sec. 6404(h) of the Code)**

**Present Law
	The Taxpayer Relief Act of 1997 ("1997 Act") provided that, if the Secretary of theTreasury extends the filing date of an individual tax return for 1997 for individuals living in anarea that has been declared a disaster area by the President during 1997, no interest shall becharged as a result of the failure of an individual taxpayer to file an individual tax return, or paythe taxes shown on such return, during the extension.

	The Internal Revenue Service Restructuring and Reform Act of 1998 ("1998 Act")contains a similar rule applicable to all taxpayers for tax years beginning after 1997 for disastersdeclared after 1997.  The status of disasters declared in 1998 but that relate to the 1997 tax yearis unclear.

**Description of Proposal**

	The proposal amends the 1997 Act rule so that it is available for disasters declared in1997 or in 1998 with respect to the 1997 tax year.

**6.  Treatment of certain corporate distributions (sec. 403(f) of the bill, sec. 1012 of the 1997Act, and secs. 351(c) and 368(a)(2)(H) of the Code)**

**Present Law**

	The 1997 Act (sec. 1012(a)) requires a distributing corporation to recognize corporatelevel gain on the distribution of stock of a controlled corporation under section 355 of  the Codeif, pursuant to a plan or series of related transactions, one or more persons acquire a 50-percent orgreater interest (defined as 50 percent or more of the voting power or value of the stock) of eitherthe distributing or controlled corporation (Code sec. 355(e)).  Certain transactions are exceptedfrom the definition of acquisition for this purpose.  Under the technical corrections included inthe Internal Revenue Service Restructuring and Reform Act of 1998,  in the case of acquisitionsunder section 355(e)(3)(A)(iv), the acquisition of stock in the distributing corporation or anycontrolled corporation is disregarded to the extent that the percentage of stock owned directly orindirectly in such corporation by each person owning stock in such corporation immediatelybefore the acquisition does not decrease. (9)

	In the case of a 50-percent or more acquisition of either the distributing corporation or thecontrolled corporation, the amount of gain recognized is the amount that the distributingcorporation would have recognized had the stock of the controlled corporation been sold for fairmarket value on the date of the distribution.  No adjustment to the basis of the stock or assets ofeither corporation is allowed by reason of the recognition of the gain.(10)****

	The 1997 Act (as amended by the technical corrections contained in the Internal RevenueService Restructuring and Reform Act of 1998) also modified certain rules for determiningcontrol immediately after a distribution in the case of certain divisive transactions in which acontrolled corporation is distributed and the transaction meets the requirements of section 355. In such cases, under section 351 and modified section 368(a)(2)(H) with respect toreorganizations under section 368(a)(1)(D), the fact that the shareholders of the distributingcorporation dispose of part or all of the distributed stock shall not be taken into account.

	The effective date (Act section 1012(d)(1)) states that the relevant  provisions of the 1997Act apply to distributions after April 16, 1997, pursuant to a plan (or series of relatedtransactions) which involves an acquisition occurring after such date (unless certain transitionprovisions apply).

**Description of Proposal**

	The proposal clarifies the "control immediately after" requirement of section 351(c) andsection 368(a)(2)(H)  in the case of certain divisive transactions in which a corporationcontributes assets to a controlled corporation and then distributes the stock of the controlledcorporation in a transaction that meets the requirements of section 355 (or so much of section356 as relates to section 355).  In such cases, not only the fact that the shareholders of thedistributing corporation dispose of part or all of the distributed stock,  but also the fact that thecorporation whose stock was distributed issues additional stock, shall not be taken into account.

**7.  Treatment of affiliated group including formerly tax-exempt organization (sec. 403(g) ofthe bill and sec. 1042 of the 1997 Act)**

**Present Law
	Present law provides that an organization described in sections 501(c)(3) or (4) of theCode is exempt from tax only if no substantial part of its activities consists of providingcommercial-type insurance.  When this rule was enacted in 1986, certain treatment applied toBlue Cross and Blue Shield organizations providing health insurance that were subject to thisrule and that met certain requirements.  Treasury regulations were promulgated providing rulesfor filing consolidated returns for affiliated groups including such organizations (Treas. Reg. sec.1.1502-75(d)(5)).

	The 1997 Act repealed the grandfather rules provided in 1986 (permitting the retention oftax-exempt status) that were applicable to that portion of the business of the Teachers InsuranceAnnuity Association and College Retirement Equities Fund which is attributable to pensionbusiness and to the portion of the business of Mutual of America which is attributable to pensionbusiness.  The 1997 Act did not specifically provide rules for filing consolidated returns foraffiliated groups including such organizations.

	Present law with respect to consolidated returns provides for an election to treat a lifeinsurance company as an includible corporation, and also provides that a life insurance companymay not be treated as an includible corporation  for the 5 taxable years immediately precedingthe taxable year for which the consolidated return is filed (sec. 1504(c)(2)).  Present law alsoprovides that a corporation that is exempt from taxation under Code section 501 is not anincludible corporation (sec. 1504(b)(1)).

**Description of Proposal
	The proposal provides rules for filing consolidated returns for affiliated groups includingany organization with respect to which the grandfather rule under Code section 501(m) wasrepealed by section 1042 of the 1997 Act.  The proposal provides that rules similar to the rules ofTreasury Regulation section 1.1502-75(d)(5) apply in the case of such an organization.  Thus, anaffiliated group including such an organization may make the election described in section1504(c)(2) (relating to a 5-year period) without regard to whether the organization waspreviously exempt from tax under Code section 501.

**8.  Treatment of net operating losses arising from certain eligible losses (sec. 403(h) of thebill, sec. 1082 of the 1997 Act, and sec. 172(b)(1)(F) of the Code)**

**Present Law**

	The 1997 Act changed the general net operating loss ("NOL") carryback period of ataxpayer from three years to two years.  The three-year carryback period was retained in the caseof an NOL attributable to an eligible loss.  An eligible loss is defined as (1) a casualty or theftloss of an individual taxpayer, or (2) an NOL attributable to a Presidentially declared disasterarea by a taxpayer engaged in a farming business or a small business.  Other special rules applyto real estate investment trusts (REITs) (no carrybacks), specified liability losses (10-yearcarryback), and excess interest losses (no carrybacks). 

**Description of Proposal**

	The proposal coordinates the use of eligible losses with the general rule for NOLs in thesame manner as a loss arising from a specified liability loss.  Thus, an eligible loss for any year istreated as a separate net operating loss and is taken into account after the remaining portion of thenet operating loss for the taxable year.			

**9.  Determination of unborrowed policy cash value under COLI pro rata interestdisallowance rules (sec. 403(i) of the bill, sec.  1084 of the 1997 Act, and sec. 264(f) of theCode)**

**Present Law
	In the case of a taxpayer other than a natural person, no deduction is allowed for theportion of the taxpayer's interest expense that is allocable to unborrowed policy cash surrendervalues with respect to any life insurance policy or annuity or endowment contract issued afterJune 8, 1997.  Interest expense is allocable to unborrowed policy cash values based on the ratioof (1) the taxpayer's average unborrowed policy cash values of life insurance policies andannuity and endowment contracts, issued after June 8, 1997, to (2) the sum of (a) in the case ofassets that are life insurance policies or annuity or endowment contracts, the average unborrowedpolicy cash values and (b) in the case of other assets the average adjusted bases for all such otherassets of the taxpayer.  The unborrowed policy cash values means the cash surrender value of thepolicy or contract determined without regard to any surrender charge, reduced by the amount ofany loan with respect to the policy or contract.  The cash surrender value is to be determinedwithout regard to any other contractual or noncontractual arrangement that artificially depressesthe unborrowed policy cash value of a contract.

**Description of Proposal**

	The proposal clarifies the meaning of "unborrowed policy cash value" under section264(f)(3), with respect to any life insurance, annuity or endowment contract.  The technicalcorrection clarifies that under section 264(f)(3), if the cash surrender value (determined withoutregard to any surrender charges) with respect to any policy or contract does not reasonablyapproximate its actual value, then the amount taken into account for this purpose is the greater of(1) the amount of the insurance company's liability with respect to the policy or contract, asdetermined for purposes of the annual statement approved by the National Association orInsurance Commissioners, (2) the amount of the insurance company's reserve with respect to thepolicy or contract for purposes of such annual statement; or such other amount as is determinedby the Treasury Secretary.  No inference is intended that such amounts may not be taken intoaccount in determining the cash surrender value of a policy or contract in such circumstances forpurposes of any other provision of the Code.

**10.  Payment of taxes by commercially acceptable means (sec. 403(k) of the bill, sec. 1205 ofthe 1997 Act, and sec. 6311 (d)(2) of the Code)**

**Present Law
	The Code generally permits the payment of taxes by commercially acceptable means(such as credit cards) (sec. 6311(d)).  The Treasury Secretary may not pay any fee or provide anyother consideration in connection with this provision.  This fee prohibition may have anunintended impact on Treasury contracts for the provision of services unrelated to the payment ofincome taxes by commercially acceptable means.

**Description of Proposal**

	The proposal clarifies that the prohibition on paying any fees or providing any otherconsideration applies to the use of credit, debit, or charge cards for the payment of income taxes.

**C.  Technical Corrections to the 1984 Act**

**1.  Casualty loss deduction (sec. 404 of the bill, sec. 711(c) of the 1984 Act, and secs.172(d)(4), 67(b)(3), 68(c)(3), and 873(b) of the Code)**

**Present Law**

	The Tax Reform Act of 1984 ("1984 Act") deleted casualty and theft losses from propertyconnected with a nonbusiness transaction entered into for profit from the list of losses set forth insection 165(c)(3).  This amendment was made in order to provide that these losses weredeductible in full and not subject to the $100 per casualty limitation or the 10-percent adjustedgross income floor applicable to personal casualty losses.  However, the amendmentinadvertently eliminated the deduction for these losses from the computation of the net operatingloss.  Also, the Tax Reform Act of 1986 provided that casualty losses described in section165(c)(3) are not  miscellaneous itemized deductions subject to the 2-percent adjusted grossincome floor, and the Revenue Reconciliation Act of 1990 provided that these losses are nottreated as itemized deductions in computing the overall limitation on itemized deductions.  Thelosses of  nonresident aliens are limited to deductions described in section 165(c)(3).  Because ofthe change made by the 1984 Act, the reference to section 165(c)(3) does not include casualtyand theft losses from nonbusiness transactions entered into for profit.

**Description of Proposal**
****The proposal provides that all deductions for nonbusiness casualty and theft losses aretaken into account in computing the net operating loss.  Also, these deductions are not treated asmiscellaneous itemized deductions subject to the 2-percent adjusted gross income floor, or asitemized deductions subject to the overall limitation on itemized deductions, and are allowed tononresident aliens.

**Effective Dates**
	The proposal relating to the net operating loss and the deduction for nonresident aliensapplies to taxable years beginning after December 31, 1983.

	The proposal relating to miscellaneous itemized deductions applies to taxable yearsbeginning after December 31, 1986.

	The proposal relating to the overall limitation on itemized deductions applies to taxableyears beginning after December 31, 1990.

**D.  Disclosure of Tax Return Information to the Department of Agriculture (sec. 405(a) of the bill and sec. 6103 (j) of the Code)**

**Present Law**

	Tax return information generally may not be disclosed, except as specifically provided bystatute.  Disclosure is permitted to the Bureau of the Census for specified purposes, whichincluded the responsibility of structuring, conducting, and preparing the census of agriculture(sec. 6103(j)(1)).   The Census of Agriculture Act of 1997 (P.L. 105-113) transferred thisresponsibility from the Bureau of the Census to the Department of Agriculture.

**Description of Proposal**

	The proposal permits the continuation of disclosure of tax return information for thepurpose of structuring, conducting, and preparing the census of agriculture by authorizing theDepartment of Agriculture to receive this information.

**Effective Date**

	The proposal is effective on the date of enactment of this technical correction.

**E.  Technical Corrections to the Transportation Equity Act for the 21st Century (sec. 405(b) of the bill, sec. 9004 of the Act, and sec. 9503(f) of the Code)**

**Present Law
	The Transportation Equity Act for the 21st Century ("Transportation Equity Act") (P.L.105-178) extended the Highway Trust Fund and accompanying highway excise taxes.  TheTransportation Equity Act also changed the budgetary treatment of Highway Trust Fundexpenditures, including repeal of a provision that balances maintained in the Highway TrustFund pending expenditure earn interest from the General Fund of the Treasury.

**Description of Proposal**

	The proposal clarifies that the Secretary of the Treasury is not required to invest HighwayTrust Fund balances in interest-bearing obligations (because any interest paid to the Trust Fundby the General Fund would be immediately returned to the General Fund).

**F.  Repeal of provisions relating to District of Columbia judicial retirement program (sec. 405(c) of the bill)**

**Present Law**

	Section 804 of the Treasury and General Government Appropriations Act, 1999, makescertain technical and clarifying amendment to the Judicial Retirement Program of the District ofColumbia.  Included in these amendments were certain amendments that applied for purposes ofthe Internal Revenue Code of 1986.

**Description of Proposal**

	Section 804 of the Treasury and General Government Appropriations Act, 1999, isrepealed.

**Effective Date**

	The proposal is effective on the date of enactment.

**G.  Perfecting Amendments Related to Withholding From Social Security Benefits and Other Federal Payments (sec. 406 of the bill and secs. 201 and 207 of the Social Security Act)**

**Present Law**

	The Uruguay Round Agreements Act (P.L. 103-465) contained a provision requiring thatU.S. taxpayers who receive specified Federal payments (including Social Security benefits) begiven the option of requesting that the Federal agency making the payments withhold Federalincome taxes from the payments.

**Description of Proposal**

	Due to a drafting oversight, the Uruguay Round Agreements Act included only thenecessary changes to the Internal Revenue Code ("Code") and failed to make certain conformingchanges to the Social Security Act (specifically a section that prohibits assignment of benefits). The proposal amends the Social Act anti-assignment section to allow the Code provisions to beimplemented.  The proposal also allocates funding for the Social Security Administration toadminister the tax-withholding provisions.

**Effective Date**

	The proposal applies to benefits paid on or after the first day of the second monthbeginning after the month of enactment.

1.     This document may be cited as follows: Joint Committee on Taxation, *Description ofProvisions in S. 2622, the Tax Relief Extension Act of 1998* (JCX-70R-98), October 10, 1998. (References in this document to the "1997 Act" refer to the Taxpayer Relief Act of 1997.)
2.     A special rule is designed to gradually recompute a start-up firm's fixed-basepercentage based on its actual research experience. Under this special rule, a start-up firm will beassigned a fixed-base percentage of 3 percent for each of its first five taxable years after 1993 inwhich it incurs qualified research expenditures. In the event that the research credit is extendedbeyond the scheduled expiration date, a start-up firm's fixed-based percentage for its sixththrough tenth taxable years after 1993 in which it incurs qualified research expenditures will be aphased-in ratio based on its actual research experience. For all subsequent taxable years, thetaxpayer's fixed-based percentage will be its actual ratio of qualified research expenditures togross receipts for any five years selected by the taxpayer from its fifth through tenth taxableyears after 1993 (sec. 41(c)(3)(B)). 
3.     Under a special rule, 75 percent of amounts paid to a research consortium for qualifiedresearch is treated as qualified research expenses eligible for the research credit (rather than 65percent under the general rule under sec. 41(b)(3) governing contract research expenses) if (1)such research consortium is a tax-exempt organization that is described in section 501(c)(3)(other than a private foundation) or section 501(c)(6) and is organized and operated primarily toconduct scientific research, and (2) such qualified research is conducted by the consortium onbehalf of the taxpayer and one or more persons not related to the taxpayer. 
4.     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)).
5.    The President canceled these exceptions in 1997 pursuant to the Line Item Veto Act.On June 25, 1998, the U.S. Supreme Court held that the cancellation procedures set forth in theLine Item Veto Act are unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June 25,1998).
6.    This rule applies to fiscal years after 1996.  For fiscal year 1996, this payment was tobe made not later than 30 days after the production flexibility contract was entered into.
7.   The amount of elected farm income of a taxpayer for a taxable year may not exceed thetaxable income attributable to any farming business for the year. 
8.    The bill contains a similar amendment to section 1(h)(13), as amended by section 5001of the 1998 Act, to provide that, for purposes of taxing the recipient of a distribution made after1997 by a CRT, amounts will not be taken into account in computing 28-percent rate gain byreason of being properly taken into account before May 7, 1997, or by reason of the propertybeing held for not more than 18 months.  Thus, no amount distributed by a CRT after 1997 willbe treated as in the 28-percent category (other than by reason of the disposition of collectibles orsmall business stock).
9.     This exception (as certain other exceptions) does not apply if the stock held before theacquisition was acquired pursuant to a plan (or series of related transactions) to acquire a 50-percent or greater interest in the distributing or a controlled corporation.
10.     The 1997 Act does not limit the otherwise applicable Treasury regulatory authorityunder section 336(e) of the Code. Nor does it limit the otherwise applicable provisions of section1367 with respect to the effect on shareholder stock basis of gain recognized by an S corporationunder this provision.************************