A bill to extend for 5 years a tax provision to encourage employers to provide legal services for their employees.
PL 98-612 (H.R.5361), enacted 10/31/1984

98 STAT. 3180 
PUBLIC LAW 98-612—OCT. 31, 1984 
Public Law 98-612 
98th Congress 
An Act 
Oct. 31, 1984 
[H.R. 5361] 
To amend the Internal Revenue Code of 1954 to extend for one year the exclusion 
from gross income with respect to group legal services plans, and for other 
purposes. 
Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, 
SECTION 1. AMENDMENTS RELATING TO QUALIFIED GROUP LEGAL SERV-
ICES PLANS. 
(a) 1-YEAR EXTENSION OF EXCLUSION FROM GROSS INCOME.—Sub-
section (e) of section 120 of the Internal Revenue Code of 1954 
(relating to amounts received under qualified group legal services 
plans) is amended by striking out "December 31,1984" and inserting 
in lieu thereof "December 31,1985". 
(b) REPORTING AND RECORDKEEPING REQUIREMENTS.— 
(1) IN GENERAL.—Subpart A of part III of subchapter A of 
chapter 61 of such Code is amended by inserting after section 
6039C the following new section: 
26 u s e 6039D. 
"SEC. 6039D. RETURNS AND RECORDS WITH RESPECT TO CERTAIN FRINGE 
BENEFIT PLANS. 
"(a) IN GENERAL.—Every employer maintaining a specified fringe 
benefit plan during any year beginning after December 31, 1984, for 
any portion of which the applicable exclusion applies, shall file a 
return (at such time and in such manner as the Secretary shall by 
regulations prescribe) with respect to such plan showing for such 
year— 
"(1) the number of employees of the employer, 
"(2) the number of employees of the employer eligible to 
participate under the plan, 
"(3) the number of employees participating under the plan, 
"(4) the total cost of the plan during the year, and 
"(5) the name, address, and taxpayer identification number of 
the employer and the type of business in which the employer is 
engaged. 
"(b) RECORDKEEPING REQUIREMENT.—Each employer maintaining 
a specified fringe benefit plan during any year shall keep such 
records as may be necessary for purposes of determining whether 
the requirements of the applicable exclusion are met. 
"(c) ADDITIONAL INFORMATION WHEN REQUIRED BY THE SECRE-
TARY.—Any employer— 
"(1) who maintains a specified fringe benefit plan during any 
year for which a return is required under subsection (a), and 
"(2) who is required by the Secretary to file an additional 
return for such year, 
shall file such additional return. Such additional return shall be 
filed at such time and in such manner as the Secretary shall 
prescribe and shall contain such information as the Secretary shall 
prescribe. 
PUBLIC LAW 98-612—OCT. 31, 1984 
98 STAT. 3181 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) SPECIFIED FRINGE BENEFIT PLAN.—The term 'specified 
fringe benefit plan' means— 
"(A) any quahfied group legal services plan (as defined in 
section 120), and 
"(B) any cafeteria plan (as defined in section 125). 
"(2) APPLICABLE EXCLUSION.—The term 'applicable exclusion' 
means— 
"(A) section 120, in the case of a qualified group legal 
services plan, and 
"(B) section 125, in the case of a cafeteria plan." 
(2) PENALTY.—Subsection (f) of section 6652 of such Code 26 use 6652. 
(relating to failure to file certain information returns, regis-
tration statements, etc.) is amended by striking out "125(h) 
(relating to information with respect to cafeteria plans)" and 
inserting in lieu thereof "6039D (relating to returns and records 
with respect to certain fringe benefit plans)". 
(3) CONFORMING AMENDMENTS.— 
(A) Section 120 of such Code is amended by adding at the 
26 USC 120. 
end thereof the following new subsection: 
"(f) CROSS REFERENCE.— 
"For reporting and recordkeeping requirements, see section 6039D." 
(B) Section 125 of such Code (relating to cafeteria plans) is 26 USC 125. 
amended by striking out subsection (h) and inserting in lieu 
thereof the following: 
"(h) CROSS REFERENCE.— 
"For reporting and recordkeeping requirements, see section 6039D." 
(4) CLERICAL AMENDMENT.—The table of sections for subpart A 
of part III of subchapter A of chapter 61 of such Code is 
amended by inserting after the item relating to section 6039C 
the following new item: 
"Sec. 6039D. Returns and records with respect to certain fringe benefit 
plans." 
(c) EXCLUSION FROM RAILROAD RETIREMENT TAXES FOR AMOUNTS 
WHICH MAY BE EXCLUDED UNDER SECTION 120.—Subsection (e) of 
section 3231 of such Code (defining compensation for purposes of the 
26 USC 3231. 
railroad retirement taxes) is amended by adding at the end thereof 
the following new paragraph: 
"(6) The term 'compensation' shall not include any contribu-
tion, payment, or service provided by an employer which may 
be excluded from the gross income of an employee, his spouse, 
or his dependents, under the provisions of section 120 (relating 
to amounts received under qualified group legal services 
plans)." 
(d) EFFECTIVE DATES.— 
(1) SUBSECTION (A) .—The amendment made by subsection (a) 26 use 120 note. 
shall apply to taxable years ending after December 31, 1984. 
(2) SUBSECTION (B) .—The amendments made by subsection (b) 26 use 6039D 
shall take effect on January 1,1985. 
note. 
(3) SUBSECTION (C) .—The amendment made by subsection (c) 26 use 3231 
shall apply to remuneration paid after December 31, 1984. "o*^e. 
98 STAT. 3182 
PUBLIC LAW 98-612—OCT. 31, 1984 
SEC. 2. TRANSITIONAL RULE FOR PURPOSES OF IMPUTED INTEREST 
RULES. 
Ante, p. 559. 
Subsection (b) of section 44 of the Tax Reform Act of 1984 (relating 
to effective date for treatment of debt instruments received in 
exchange for property) is amended by adding at the end thereof the 
following new paragraphs: 
"(4) SPECIAL RULES FOR SALES BEFORE JULY i, 1985.— 
"(A) IN GENERAL.—In the case of any sale or exchange 
before July 1, 1985, of property other than new section 38 
property— 
"(i) sections 483(c)(1)(B) and 1274(c)(3) of the Internal 
Revenue Code of 1954 shall be applied by substituting 
the testing rate determined under subparagraph (B) for 
110 percent of the applicable Federal rate determined 
under section 1274 (d) of such Code, and 
"(ii) sections 483(b) and 1274(b) of such Code shall be 
applied by substituting the imputation rate determined 
under subparagraph (C) for 120 percent of the applica-
ble Federal rate determined under section 1274(d) of 
such Code. 
"(B) TESTING RATE.—For purposes of this paragraph— 
"(i) IN GENERAL.—The testing rate determined under 
this subparagraph is the sum of— 
(I) 9 Dercent DIUS 
"(II) if the borrowed amount exceeds $2,000,000, 
the excess determined under clause (ii) multiplied 
by a fraction the numerator of which is the bor-
rowed amount to the extent it exceeds $2,000,000, 
and the denominator of which is the borrowed 
amount, 
"(ii) EXCESS.—For purposes of clause (i), the excess 
determined under this clause is the excess of 110 per-
cent of the applicable Federal rate determined under 
section 1274(d) of such Code over 9 percent. 
"(C) IMPUTATION RATE.—For purposes of this paragraph— 
"(i) IN GENERAL.—The imputation rate determined 
under this subparagraph is the sum o
f
—
-
"(I) 10 percent, plus 
"(II) if the borrowed amount exceeds $2,000,000, 
the excess determined under clause (ii) multiplied 
by a fraction the numerator of which is the bor-
rowed amount to the extent it exceeds $2,000,000, 
and the denominator of which is the borrowed 
amount. 
"(ii) EXCESS.—For purposes of clause (i), the excess 
determined under this clause is the excess of 120 per-
cent of the applicable Federal rate determined under 
section 1274(d) of such Code over 10 percent. 
"(D) BORROWED AMOUNT.—For purposes of this para-
graph, the term 'borrowed amount' means the stated princi-
pal amount. 
"(E) AGGREGATION RULES.—For purposes of this para-
graph— 
"(i) all sales or exchanges which are part of the same 
transaction (or a series of related transactions) shall be 
treated as one sale or exchange, and 
PUBLIC LAW 98-612—OCT. 31, 1984 
98 STAT. 3183 
"(ii) all debt instruments arising from the same 
transaction (or a series of related transactions) shall be 
treated as one debt instrument. 
"(F) CASH METHOD OF ACCOUNTING.—In the case of any 
sale or exchange before July 1,1985, of property (other than 
new section 38 property) used in the active business of 
farming and in which the borrowed amount does not exceed 
$2,000,000— 
"(i) section 1274 of the Internal Revenue Code of 1954 
shall not apply, and 
"(ii) interest on the obligation issued in connection 
with such sale or exchange shall be taken into account 
by both buyer and seller on the cash receipts and 
disbursements method of accounting. 
The Secretary of the Treasury or his delegate may by regulation 
prescribe rules to prevent the mismatching of interest income 
and interest deductions in connection with obligations on which 
interest is computed on the cash receipts and disbursements 
method of accounting. 
"(5) GENERAL RULE FOR ASSUMPTIONS OF LOANS.—Except as 
provided in paragraphs (6) and (7), if any person— 
"(A) assumes, in connection with the sale or exchange of 
property, any debt obligation, or 
"(B) acquires any property subject to any debt obligation, 
sections 1274 and 483 of the Internal Revenue Code of 1954 shall 
apply to such debt obligation by reason of such assumption (or 
such acquisition). 
"(6) EXCEPTION FOR ASSUMPTIONS OF LOANS MADE ON OR BEFORE 
O
C
T
O
B
E
R 15, 1984.— 
"(A) IN GENERAL.—If any person— 
"(i) assumes, in connection with the sale or exchange 
of property, any debt obligation described in subpara-
graph (B) and issued on or before October 15, 1984, or 
"(ii) acquires any property subject to any such debt 
obligation issued on or before October 15,1984, 
sections 1274 and 483 of the Internal Revenue Code of 1954 
shall not be applied to such debt obligation by reason of 
such assumption (or such acquisition) unless the terms and 
conditions of such debt obligation are modified in connec-
tion with the assumption (or acquisition). 
"(B) OBLIGATIONS DESCRIBED IN THIS SUBPARAGRAPH.—A 
debt obligation is described in this subparagraph if such 
obligation— 
"(i) was issued on or before October 15, 1984, and 
"(ii) was assumed (or property was taken subject to 
such obligation) in connection with the sale or ex-
change of property (including a deemed sale under 
section 338(a)) the sales price of which is greater than 
$100,000,000. 
"(C) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be appropriate to effect the purpose of 
this paragraph and paragraph (5), including regulations 
relating to tax-exempt obligations, government subsidized 
loans, or other instruments. 
"(D) 
CERTAIN 
EXEMPT TRANSACTIONS.—The Secretary 
shall prescribe regulations under which any transaction 
shall be exempt from the application of this paragraph if 
98 STAT. 3184 
PUBLIC LAW 98-612—OCT. 31, 1984 
such exemption is not likely to significantly reduce the tax 
liability of the purchaser by reason of the overstatement of 
the adjusted basis of the acquired asset. 
"(7) EXCEPTION FOR ASSUMPTIONS OF LOANS WITH RESPECT TO 
CERTAIN PROPERTY.— 
"(A) IN GENERAL.—If any person— 
"(i) assumes, in connection with the sale or exchange 
of property described in subparagraph (B), any debt 
obligation, or 
"(ii) acquires any such property subject to any such 
debt obligation, 
sections 1274 and 483 of the Internal Revenue Code of 1954 
shall not be applied to such debt obligation by reason of 
such assumption (or such acquisition) unless the terms and 
conditions of such debt obligation are modified in connec-
tion with the assumption (or acquisition). 
"(B) SALES OR EXCHANGES TO WHICH THIS PARAGRAPH 
APPLIES.—This paragraph shall apply to any of the follow-
ing sales or exchanges: 
"(i) RESIDENCES.—Any sale or exchange of a residence 
by an individual, an estate, or a testamentary trust, but 
only if— 
"(I) either— 
"(aa) such residence on the date of such sale 
or exchange (or in the case of an estate or 
testamentary trust, on the date of death of the 
decedent) was the principal residence (within 
the meaning of section 1034) of the individual 
or decedent, or 
"(bb) during the 2-year period ending on 
such date, no substantial portion of such 
residence was of a character subject to an 
allowance under this title for depreciation (or 
amortization in lieu thereof) in the hands of 
such individual or decedent, and 
"(II) such residence was not at any time, in the 
hands of such individual, estate, testamentary 
trust, or decedent, described in section 1221(1) (re-
lating to inventory, etc.). 
"(ii) FARMS.—Any sale or exchange by a qualified 
person of— 
"(I) real property which was used as a farm 
(within the meaning of section 6420(c)(2)) at all 
times during the 3-year period ending on the date 
of such sale or exchange, or 
"(II) tangible personal property which was used 
in the active conduct of the trade or business of 
farming on such farm and is sold in connection 
with the sale of such farm, 
but only if such property is sold or exchanged for use in 
the active conduct of the trade or business of farming 
by the transferee of such property, 
"(iii) TRADES OR BUSINESSES.— 
"(I) IN GENERAL.—Any sale or exchange by a 
qualified person of any trade or business. 
"(II) 
APPLICATION WITH SUBPARAGRAPH (B).— 
This subparagraph shall not apply to any sale or 
PUBLIC LAW 98-612—OCT. 31, 1984 
98 STAT. 3185 
exchange of any property described in subpara-
graph (B). 
"(Ill) NEW SECTION 38 PROPERTY.—This subpara-
graph shall not apply to the sale or exchange of 
any property which, in the hands of the transferee, 
is new section 38 property. 
"(iv) SALE OF BUSINESS REAL ESTATE.—Any sale or 
exchange of any real property used in an active trade 
or business by a person who would be a qualified person 
if he disposed of his entire interest. 
This subparagraph shall not apply to any transaction de-
scribed in the last sentence of paragraph (6)(B) (relating to 
transaction in excess of $100,000,000). 
"(C) DEFINITIONS.—For purposes of this paragraph— 
"(i) QUALIFIED PERSON DEFINED.—The term 'qualified 
person' means— 
"(I) a person who— 
"(aa) is an individual, estate, or testamen-
tary trust, 
"(bb) is a corporation which immediately 
prior to the date of the sale or exchange has 35 
or fewer shareholders, or 
"(cc) is a partnership which immediately 
prior to the date of the sale or exchange has 35 
or fewer partners, 
"(II) is a 10-percent owner of a farm or a trade or 
business, 
"(III) pursuant to a plan, disposes of— 
"(aa) an interest in a farm or farm property, 
or 
"(bb) his entire interest in a trade or business 
and all substantially similar trades or busi-
nesses, and 
"(IV) the ownership interest of whom may be 
readily established by reason of qualified alloca-
tions (of the type described in section 168(j)(9)(B), 
one class of stock, or the like), 
"(ii) 10-PERCENT OWNER DEFINED.—The term '10-
percent owner' means a person having at least a 10-
percent ownership interest, applying the attribution 
rules of section 318 (other than subsection (a)(4)). 
98 STAT. 3186 
PUBLIC LAW 98-612—OCT. 31, 1984 
"(iii) TRADE OR BUSINESS DEFINED.— 
"(I) IN GENERAL.—The term 'trade or business' 
means any trade or business, including any line of 
business, qualifying as an active trade or business 
within the meaning of section 855. 
"(II) RENTAL OF REAL PROPERTY.—For purposes of 
this clause, the holding of real property for rental 
shall not be treated as an active trade or business." 
Approved October 31, 1984. 
LEGISLATIVE HISTORY—H.R. 5361: 
HOUSE REPORT No. 98-1050 (Comm. on Ways and Means). 
CONGRESSIONAL RECORD, Vol. 130 (1984): 
Oct. 1, considered and passed House. 
Oct. 11, considered and passed Senate, amended; House concurred in Senate 
amendment with an amendment; Senate concurred in House amendment 
with an amendment; House concurred in Senate amendment.