b. Modify treatment of domestic segments of international transportation

The amendment in the nature of a substitute would delete the provisions in the
Chairman’s mark that provide special rules for taxation of the domestic segments of international
transportation. Thus, the definition of international transportation would remain as under present
law, i.e., international transportation would be defined to include separate domestic flights that
connect to international flights, provided that stopover time at any point within the United States
does not exceed 12 hours. Such transportation would be subject only to the $10 excise tax on
international departures and arrivals, and would not be subject to the domestic air transportation
taxes.

c. Modify air passenger ticket tax deposit rules

The amendment in the nature of a substitute would modify the deposit rules with respect
to domestic and international air passenger ticket taxes to provide that any deposits that would be
due during the period from August 15, 1997, to September 30, 1997, would not be due until
October 10, 1997. The amendment in the nature of a substitute would be effective on the date of
enactment. .

8. Treatment of computer software as FSC export property (sec. 1101) james

The Chairman’s mark included a proposal regarding the treatment of computer software
as export property for purposes of the foreign sales corporation rules that generally was effective
for computer licenses granted after December 31, 1997, with a three year phase-in. The
amendment in the nature of a substitute would modify the effective date of the Chairman’s mark
proposal. Pursuant to the amendment in the nature of a substitute, the proposal generally would
apply to gross receipts from computer software licenses attributable to periods after December
31, 1997. In the case of gross receipts attributable to calendar year 1998, the proposal would
apply to 1/3 of such gross receipts. In the case of gross receipts attributable to calendar year
1999, the proposal would apply to-2/3 of such gross receipts.

9, Simplify foreign tax credit limitation for dividends from 10/50 companies (sec. 1107)
The amendment in the nature of a substitute would delay the effective date of the
proposal included in the Chairman’s mark regarding modifications to the foreign tax credit

lumitations for dividends from 10/50 companies to taxable years beginning after December 31,
2001.

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exceeds the principal amount of the securities surrendered (secs. 354, 356(a)(1)). If such an
exchange has the effect of distribution of a dividend, then the portion of the distributee's gain
that does not exceed his ratable share of the corporation's earnings and profits is treated as a
dividend (sec. 356(a)(2))

Rules for life insurance companies

A life insurance company generally is permitted to deduct the amount of policyholder
dividends paid or accrued during the taxable year (sec. 808). In the case of a mutual life
insurance company, the amount of the deduction for policyholder dividends is reduced (but not
below zero) by the differential earnings amount (sec. 809). The term policyholder dividend
includes (1) any amount paid or credited (including as an increase in benefits) if the amount is
not fixed in the contract but depends on the experience of the company or the discretion of the
management; (2) excess interest; (3) premium adjustments; and (4) experience-rated refunds.

Description of Proposal

The amendment in the nature of a substitute would provide that the consolidation of two
or more life insurance departments of mutual savings banks into a single life insurance company
by requirement of State law would be treated as a tax-free reorganization described in section
368(a)(1)(E) (i.e., a recapitalization). Any payments required to be made to policyholders in
connection with the consolidation would be treated as policyholder dividends deductible by the
company under section 808, provided that certain requirements are met. The requirements
would be: (a) the payments are only with respect to policies in effect immediately before the
consolidation; (b) the payments are only with respect to policies that are participating (i.e., on
which policyholder dividends are paid) before and after the consolidation; (c) the payments
cease with respect to any policy if the policy lapses after the consolidation; (d) the policyholders
before the consolidation had no divisible right to the surplus of any life insurance department
and had no right to vote; and (e) the approval of the policyholders was not required for the
consolidation.

Effective Date
The proposal would be take effect on December 31, 1991.

4. Liberalize qualified mortgage bond eligibility rules for financing in Presidentially
declared disaster areas

Present Law
Qualified mortgage bonds are private activity tax-exempt bonds issued by States and

local governments acting as conduits to provide mortgage loans to first-time homebuyers who
satisfy specified income limits and who purchase homes that cost less than statutory maximums.

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3. Amendment to extension of research tax credit regarding taxpayers electing alternative
incremental research credit regime (sec. 601)

The amendment in the nature of a substitute provides that, notwithstanding the general
termination date for the research credit of December 31, 1998, if a taxpayer elects to be subject
to the alternative incremental research credit regime for its first taxable year beginning after June
30, 1996, and before July 1, 1997, the alternative incremental research credit would be available
during the entire 30-month period beginning with the first month of such taxable year--i.e., the
equivalent of the 11-month extension provided for by the Small Business Job Protection Act of
1996 plus an additional 19-month extension. However, to prevent taxpayers from effectively
obtaining more than 30-months of research credits, the 30-month period for taxpayers electing
the alternative incremental research credit regime would be reduced by the number of months (if
any) after June 1996 with respect to which the taxpayer claimed research credit amounts under
the regular, 20-percent research credit rules.

4. Vaccine excise tax (secs. 901 and 902)

The provisions contained in the Chairman’s mark relating to the vaccine excise tax would
be deleted.

5. Nondiscrimination rules for governmental plans (sec. 912)

The amendment in the nature of a substitute would modify the moratorium on the
application of nondiscrimination rules to governmental pension plans by making the moratorium
permanent.

6. Deferral of gain on certain sales of farm product refiners and processors (sec. 958)

The Chairman’s mark would provide for deferral of gain on certain sales of stock of a
qualified refiner or processor to an eligible farmers’ cooperative. Under the Chairman’s mark,
the definition of an eligible farmer’s cooperative includes a provision that a majority of the board
of directors be elected by members on the basis of one person one vote. The amendment in the
nature of a substitute would delete this requirement in order to conform to the election processes
of most farm cooperatives, which reflects the amount of items contributed to the cooperative.

“7. Modifications to the Airport and Airway Trust Fund taxes (sec. 1041)

a. Transfer 4.3 cents per gallon tax to the Airport and Airway Trust Fund

The amendment in the nature of a substitute would provide that the 4.3-cents-per-gallon
excise tax on aviation gasoline and jet fuel would be deposited in the Airport and Airway Trust

Fund, rather than in the General Fund. The amendment in the nature of a substitute would be
effective for fuels removed or sold after September 31, 1997.

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ADDITIONAL MODIFICATIONS INCLUDED IN THE AMENDMENT IN THE
NATURE OF A SUBSTITUTE

1. Estimated tax requirements for individuals for 1997
Present Law

Under present law, an individual taxpayer generally is subject to an addition to tax for
any underpayment of estimated tax. An individual generally does not have an underpayment of
estimated tax if he or she makes timely estimated tax payments at least equal to: (1) 100 percent
of the tax shown on the return of the individual for the preceding year (the "100 percent of last
year's liability safe harbor") or (2) 90 percent of the tax shown on the return for the current year.
The 100 percent of last year's liability safe harbor is modified to be a 110 percent of last year’s
liability safe harbor for any individual with an AGI of more than $150,000 as shown on the
return for the preceding taxable year. If a married individual files a separate return for the year
for which an estimated tax installment payment is due, the $150,000 amount becomes $75,000.

Description of Proposal

The amendment in the nature of a substitute changes the 110 percent of last year's
liability safe harbor to be a 109 percent of last year’s liability safe harbor for taxable years

beginning in 1997.
Effective Date

The proposal would be effective for estimated tax payments applicable to taxable years
beginning in 1997.

2. Offset of past-due, legally enforceable state tax obligations of state residents against
Federal overpayments

Present Law

Overpayments of Federal tax may be credited against any liability in respect of an
internal revenue tax on the part of the person who made the overpayment. Any overpayment not
so credited may be offset against any past-due support payments and past-due legally
enforceable debts owed to Federal agencies of the person making the overpayment. Any
remaining overpayment is required to be refunded.

Description of Proposal

The amendment in the nature of a substitute would allow any overpayment of Federal tax
to be offset by the amount of any past-due, legally enforceable State tax obligation, provided the
person making the overpayment has shown on the return establishing the overpayment an

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Present law waives the three buyer targeting requirements for a portion of the loans made
with proceeds of a qualified mortgage bond issue if the loans are made to finance homes in
statutorily prescribed economically distressed areas.

Description of Proposal

The amendment in the nature of a substitute would waive the first time homebuyer
requirement, the income limits, and the purchase price limits for loans to finance homes in
certain Presidentially declared disaster areas. The waiver would apply only during the one-year
period following the date of the disaster declaration.

Effective Date

The proposal would apply to loans financed with bonds issued after December 31, 1996,
and before January 1, 2000.

5. Suspension of duty on certain shipbuilding repairs
The amendment in the nature of a substitute would suspend, for a one-year period
beginning on the date of enactment, the current 50-percent duty, established under section 466 of

the Tariff Act of 1930, on repairs to U.S. flag vessels made in countries that are signatories to the
OECD Shipbuilding Agreement.

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DESCRIPTION OF THE MODIFICATIONS CONTAINED IN
AN AMENDMENT IN THE NATURE OF A SUBSTITUTE
TO THE CHAIRMAN’S MARK RELATING TO REVENUE PROVISIONS
AS RELEASED TO
MEMBERS OF THE COMMITTEE ON WAYS AND MEANS
ON JUNE 9, 1997

Scheduled for Markup
Before the
HOUSE COMMITTEE ON WAYS AND MEANS

on June 11, 1997

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

June 11, 1997

JCX-27-97



address that is within the State seeking the offset. For this purpose, a past-due, legally
enforceable State tax obligation is a debt which resulted from a judgement rendered by a court of
competent jurisdiction, or a determination after an administrative hearing, which determined an
amount of State tax to be due and which is no longer subject to judicial review, as well as from _
an assessment the time for which redetermination has expired that has not been delinquent for
more than 10 years.

The offset for a past-due, legally enforceable state tax obligation of a state resident would
apply after the offsets provided in present law for internal revenue tax liabilities, past-due
support, and past-due, legally enforceable obligations owed a Federal agency. The Secretary of
the Treasury would be authorized to issue regulations establishing procedures for the
implementation of this proposal.

Effe Date
The proposal would be effective for refunds payable after December 31, 1998.
3. Treatment of consolidation of certain mutual savings bank life insurance departments

Present Law

Special rules for mutual savings banks with life insurance business

Present law provides for special treatment of a mutual savings bank conducting a life
insurance business in a separate life insurance department (Code sec. 594). Under the special
rule, the insurance and noninsurance businesses of such banks are bifurcated, and the tax
imposed is the sum of the partial taxes computed on (a) the taxable income of the mutual savings
bank determined without regard to items properly allocable to the life insurance business, and (b)
the income of the life insurance department, calculated in accordance with the rules applicable to
life insurance companies (subchapter L of the Code). This special treatment applies so long as
the mutual savings bank is authorized under State law to engage in the business of issuing life
insurance contracts, the life insurance business is conducted in a separate department the
accounts of which are maintained separately from the other accounts of the mutual savings bank,
and the life insurance department would qualify as a life insurance company under Code section
816 if it were treated as a separate corporation.

Rules for corporate reorganizations

Present law provides that certain corporate reorganization transactions, including
recapitalizations, generally are treated as tax-free transactions (sec. 368(a)(1)(E)). No gain or
loss is recognized if stock or securities in a corporation that is a party to a reorganization are (in
pursuance of the plan of reorganization) exchanged solely for stock or securities in-that
corporation or in another corporation that is a party to the reorganization, except that gain (if
any) to the recipient is recognized to the extent the principal amount of securities received

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INTRODUCTION

The House Committee on Ways and Means has scheduled a markup of revenue
reconciliation provisions, beginning on June 11, 1997. This document,' prepared by the staff of
the Joint Committee on Taxation, provides a description of the amendment in the nature of a
substitute to be offered by Chairman Archer to the Chairman’s Mark.”

1 This document may be cited as follows: Joint Committee on Taxation,

Description of the Modifications Contained in an Amendment in the Nature of a Substitute to the
Chairman's Mark Relating to Revenue Provisions as Released to Members of the Committee on
Ways and Means on June 9, 1997 (JCX-27-97), June 11, 1997.

2 For descriptions of the revenue provisions contained in the Chairman’s mark, see

Joint Committee on Taxation, Description of Chairman’s Mark Relating to Revenue
Reconciliation Provisions (JCX-20-97), June 9, 1997; Joint Committee on Taxation, Description
of Chairman’s Mark Relating to Tax Simplification Provisions (JCX-21-97), June 9, 1997; and
Joint Committee on Taxation, Description of Chairman’s Mark Relating to Technical
Correction Provisions ()CX-22-97), June 9, 1997.

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DESCRIPTION OF THE MODIFICATIONS CONTAINED IN
AN AMENDMENT IN THE NATURE OF A SUBSTITUTE
TO THE CHAIRMAN’S MARK RELATING TO REVENUE PROVISIONS
AS RELEASED TO
MEMBERS OF THE COMMITTEE ON WAYS AND MEANS
ON JUNE 9, 1997

The Chairman’s mark would be adopted with the following modifications:
1. Modifications to alternative minimum tax applicable to business activities (sec. 403)

The Chairman's mark would make the following modifications to the alternative
minimum tax ("AMT") applicable to business activities: (1) repeal the corporate AMT for small
corporations, effective for taxable years beginning after December 31, 1997; (2) repeal various
adjustments and preferences, generally effective for investments made or transactions entered
into after December 31, 2000 (depreciation adjustment repeal effective for property. placed. in
service after December 31, 1997); and (3) repeal the corporate AMT for all other corporations,
effective for taxable years beginning after December 31, 2006.

The amendment in the nature of a substitute would modify the Chairman's mark with’
respect to the AMT applicable to business activities. Under the amendment in the nature of a
substitute, the depreciation adjustment would be repealed for property placed in service after
December 31, 1998. The corporate AMT would be repealed for small businesses (as under the
Chairman's mark). Small businesses that become large would become subject to the AMT with
Tespect to new transactions and investments. No other changes to the present-law AMT
applicable to businesses would be made.

2. Estate and gift tax unified credit (sec. 501)

The amendment in the nature of a substitute would modify the phase-in schedule for the
increase in the unified credit to provide an effective exemption of $650,000 for decedents dying,
and gifts made, in 1998; $750,000 in 1999; $765,000 in 2000; $775,000 in 2001 through 2004;
$800,000 in 2005; $825,000 in 2006; and $1 million in 2007. The effective exemption amount
would be indexed for inflation beginning in 2008 (for inflation occurring after 2006).

Indexing of the other estate and gift tax provisions would not be changed.