Senate Finance Committee Summary of Conference Agreement on Taxpayer Relief Act of 1997 (HR 2014), Issued July 31, 1997

• Family Tax Relief
• Education Tax Incentives
• Economic Growth, Savings, and Investment Incentives
• Alternative Minimum Tax
• Estate and Gift Tax Relief
• Expiring Tax Provisions
• District of Columbia Tax Incentives
• Miscellaneous Provisions
• Revenue Offsets
• Tax Simplification
• Technical Corrections

I. FAMILY TAX RELIEF

1. $500 Child Tax Credit

A new child tax credit will be allowed for children under age 17. The credit will be effective on January 1, 1998, in the amount of $400. For taxable years beginning on January 1, 1999, and thereafter, the credit will be in the amount of $500.

The $500 credit will be phased out beginning at $75,000 of adjusted gross income (AGI) for single individuals and $110,000 for married couples.

The credit will be considered before the calculation of the earned income credit (EIC). For low-income families with three or more children, a refundable supplemental child credit is available.

2. Expand High Risk Pools

Permit certain state high risk pools to expand to include children of high risk pools.

II. EDUCATION TAX INCENTIVES

1. HOPE Scholarship Tax Credit and the Lifetime Learning Tax Credit

For the first two years of post-secondary education, a new nonrefundable 100% tax credit for up to $1,000 of tuition expenses and 50% of the next $1,000 of tuition expenses will be allowed.

A "Lifetime Learning Tax Credit" will be permitted for all subsequent education. The Lifetime Learning tax credit is a 20% nonrefundable tax credit on $5,000 of tuition expenses. In 2003, the credit is increased to 20% of the first $10,000 of tuition expenses.

Tuition expenses eligible for both credits are reduced by grants, scholarships, and employer-provided educational assistance.

The credits will be phased out between $40,000 and $50,000 for single individuals, and between $80,000 and $100,000 for married couples.

The HOPE Scholarship tax credit will be effective for tuition paid after December 31, 1997, and the Lifetime Learning tax credit is effective for tuition paid after June 30, 1998.

2. Student Loan Interest Deduction

An above-the-line deduction for interest paid on student loans will be allowed. The deduction will be limited to $2,500 (phased up from $1,000 in 1998) for each of the first 5 years of repayment.

The deduction will be phased out between $40,000 and $55,000 for single individuals, and between $60,000 and $75,000 for married couples.

The deduction will be effective for interest payments due after December 31, 1997.

3. Employer-Provided Education

Employer-provided education assistance will be extended for undergraduate education through June 30, 2000 (effective July 1, 1997).

4. Prepaid Tuition Plans

State-sponsored prepaid tuition plans will be expanded to allow savings for room and board expenses. Withdrawals for tuition, room, and board will be treated as tax-deferred (effective January 1, 1998).

5. Penalty-Free Withdrawals from Individual Retirement Accounts (IRAs) for Education

Penalty-free withdrawals from all IRAs will be permitted for undergraduate and graduate education expenses (tuition, books, room, and board). Effective for taxable years beginning after December 31, 1997.

6. Education IRAs

Parents will be allowed to establish an education IRA for each child and make nondeductible contributions of up to $500 annually. Income will accumulate tax-free and withdrawals will be tax-free if used for undergraduate or graduate education expenses (tuition, books, room, and board).

Account must be used for educational purposes by the child by age 30. Any unused inside buildup is taxable when distributed. Income limits begin at $95,000 for singles and $150,000 for married couples. Effective for taxable years after December 31, 1997.

7. 501(c)(3) Bond Cap

Eliminate the $150 million limitation on 501(c)(3) bonds issued for new financing. Effective January 1, 1998.

8. School Construction Bonds

Raise the small issuer arbitrage rebate exception for governmental bonds used to finance schools from $5 million to $10 million. Effective for bonds issued after December 31, 1997.

9. School Maintenance and Renovation

Provide a $400 million tax credit program to finance public/private partnerships aimed at school renovation, repairs, and equipment purchases in empowerment zones and certain other areas.

10. Donations of Computers

Provide enhanced deduction for donations of computers and technology to schools.

11. Forgiveness of Student Loans

Permit student loans that are made by a tax-exempt organization and later discharged to be excluded from gross income.

III. ECONOMIC GROWTH, SAVINGS, AND INVESTMENT INCENTIVES

1. Capital Gains Tax Cut for Individuals

The maximum capital gains rate for individuals will be reduced to 20% [if held (i) for 18 months or (ii) for 12 months if sold after May 6,1997, and before July 29, 1997]. A 10% rate would apply to individuals in the 15% rate bracket for the same time period.

Beginning in 2001, the 20% rate drops to 18% for assets purchased on or after January 1, 2001, (or existing assets that are "marked-to-market") and held for 5 years. Similarly, the 10% rate drops to 8% for assets sold on or after that date and held for 5 years (without having to mark-to-market).

Depreciation deductions for real estate is taxed at 25%. Collectibles will remain at the current law 28% capital gains rate. The same rates apply for the individual AMT.

There will be no capital gains tax on up to $250,000 for single individuals and $500,000 for married couples of gain from the sale of a principal residence. To qualify, taxpayers generally must own and use the residence as a principal residence for at least 2 of 5 years prior to the sale. Sales of a remainder interest are eligible for the exclusion.

Effective for sales and exchanges after May 6, 1997.

2. Venture Capital Galas Proposals

Gains from small business stock held more than 6 months can be rolled over to purchase other small business stock. In addition, the individual AMT tax on gain from small business stock is adjusted to 20% (to conform with the AMT rate on broad-based capital gains).

3. Individual Retirement Accounts (IRA)

a. Tax-Deductible IRAs

i. Effective January 1,1998, homemakers with family income of less than $150,000 (and whose spouse is covered by an employer pension plan), would be permitted to make a full $2,000 tax deductible IRA contribution.

ii. The current law income limits for a full $2,000 tax deductible IRAs would be phased-up as follows:

Couples: Year Income Limit 1998 - $50,000; 1999 - $51,000; 2000 - $52,000; 2001 - $53,000; 2002 - $54,000; 2003 - $60,000; 2004 - $65,000; 2005 - $70,000; 2006 - $75 000; 2007 -$80,000 - $100,000.

Singles: Year Income Limit 1998 - $30,000; 1999 - $31,000; 2000 - $32,000; 2001 - $33,000; 2002 - $34,000; 2003 - $40,000; 2004 - $45,000; 2005 - $50,000-60,000.

b. A new back-loaded IRA (called the "Roth IRA") is created effective January 1, 1998. Up to $2,000 may be contributed to the Roth IRA (coordinated with deductible IRAs). The contribution is not tax deducible but the income can be withdrawn tax-free if the IRA has been open for at least 5 years and the IRA holder is at least 59. Contributions are phased out at income levels of $95,000-$110,000 for singles and $150,000-$160,000 for couples.

c. Penalty-free withdrawals from both the tax deductible IRA and Roth IRA are allowed for first home purchases and education expenses.

d. Taxable rollovers from a tax-deductible IRA to a Roth IRA are permitted for IRA account holders with income of less than $100,000.

e. Tax deductible IRAs and Roth IRA would be permitted to invest in gold, silver and platinum bullion.

IV. ALTERNATIVE MINIMUM TAX

1. Small Business

Small businesses with average gross receipts of less than $5 million will be exempt from the corporate alternative minimum tax.

2. Depreciation Adjustment

Depreciable lives will be conformed beginning in 1999.

V. ESTATE AND GIFT TAX RELIEF

1. Increase in Unified Credit

The unified credit will be phased up to $1,000,000 by 2006.

2. Exclusion for Family-Owned Farms and Businesses

Up to $675,000 of qualified family owned business and farm assets will be excluded from estate tax (the total is $1.3 million with the unified credit - as the unified credit increases, the family owned business exclusion decreases). The family owned business or farm must be at least 50% of estate. Heirs (or heir's family) must participate in the business for 10 years after decedent's death.

3. Index Other Items

A. $10,000 annual exclusion for gifts. B. $750,000 special use valuation. C. $1 million generation-skipping transfer tax. D. $1 million in value of property eligible for special interest rate on installment payment of estate tax. 5. Installment Payment of Estate Tax

a. Two percent interest will be payable on estate tax attributable to the first $1 million in taxable value of closely held businesses.

b. 45% of the regular interest rate will apply to the estate tax attributable to closely held businesses in excess of $1 million.

c. Interest on installment payments will no longer be deductible.

d. Judicial review will be allowed for IRS determinations regarding installment payment of estate tax.

6. Special Use Valuation for Farm Property

Certain cash leases will not cause recapture of special use valuation.

7. Expand Exception from Generation-Skipping Transfer Tax

The generation-skipping transfer tax exception will be expanded for transfers to collateral heirs.

8. Exclusion for Qualified Conservation Easements

A portion of land subject to a qualified conservation easement may be excluded from estate tax. Up to $500,000 (phased up from $100,000) exclusion. Conservation contributions for land with severed mineral interests will be expanded.

9. No Gift Revaluation

Gifts may not be revalued for estate tax purposes after the expiration of the statute of limitations.

10. Repeal of Certain Throwback Rules

The throwback rules will be repealed for domestic trusts except for pre-1984 multiple trusts.

VI. EXPIRING TAX PROVISIONS

1. Extend the full deduction of contributions of appreciated stock to private foundations through June 30, 1998 (effective June 1, 1997).

2. Permanent extension of orphan drug tax credit effective June 1, 1997.

3. Work Opportunity Tax Credit:

a. Extend through June 30, 1998. b. Replace the current credit with a two-tiered system that provides a 25% credit for an individual who works more than 120 hours and a 40% credit for employees who work more than 400 hours. c. Modify the eligibility requirement with respect to AFDC recipients so that those recipients receiving benefits for any 9 months of the previous 18 months. d. Category of eligible workers expanded to include SSI recipients. e. Effective: September 30, 1997.

4. Extend R&E Credit through June 30, 1998.

5. Extend the General System of Preferences (GSP) through June 30, 1998.

VII. DISTRICT OF COLUMBIA TAX INCENTIVES

1. Provide a $5,000 tax credit (for married couples and individuals) for first-time home buyers of a principal residence in the District of Columbia. Subject to income phaseout of $70,000-$90,000 for individuals and $110,000-$130,000 for married couples. This proposal applies to purchases after the date of enactment and before January 1, 2001.

2. Exclude capital gains from the sale of qualifying D.C. zone business property in D.C. census tracts with a greater than 10% poverty rate. To qualify, the property must be purchased after 1997 and held for more than 5 years. This proposal sunsets after December 31, 2002.

3. Provide a designation of portions of the District of Columbia as an empowerment zone. This zone will have available a wage credit, expensing, and tax-exempt financing.

VIII. MISCELLANEOUS PROVISIONS

1. Amtrak would be permitted to carryback net operating losses and obtain a refund of taxes paid by passenger railroads whose passenger rail obligations were assumed by Amtrak. A portion of the refund would be divided between Amtrak and non-Amtrak States. The carryback is contingent upon the enactment of Amtrak reforms.

2. Transfer the 4.3 cents per gallon transportation motor fuels tax to the Highway Trust Fund.

3. Provide an above-the-line deduction for certain state and local officials' expenses.

4. Repeal the provision that treats certain income items of an S corporation as unrelated business taxable income in the case of employee stock ownership plans (ESOPs) that own stock in the S corporation and exempt ESOPS from the prohibited transaction rules for sales of stock to an ESOP.

5. Clarify tax-exempt status of certain state workmen's compensation funds.

6. Clarify tax treatment of corporate sponsorship of charitable organization events.

7. Raise the charitable mileage rate from current law amount of 12 cents per mile to 14 cents per mile.

8. Conform tax treatment of income earned on certain amounts set aside for maintenance of timeshare residences to that of homeowner associations and modify the definition of property for timeshares.

9. Eliminate overlap between controlled foreign corporations (CFCs) and Passive Foreign Investment Companies (PFICs), and allow mark-to market election.

10. Provide foreign sales corporation benefits for computer software.

11. Provide exception from U.S. property definition under subpart F for certain securities positions.

12. Provide for a limitation on treaty benefits for certain payments to hybrid entities and direct Treasury to issue regulations.

13. Equalize the tax rates among alternative fuels (retaining current rate for CNG).

14. Repeal the excise tax on recreational motorboat diesel fuel.

15. Provide that environmental cleanup costs of "Brownfields" located in empowerment zones, enterprise communities, and the 76 EPA projects are deductible.

16. Reduce the excise tax rate on draft cider to the beer rate.

17. Provide involuntary conversion treatment for livestock sold on account of certain weather-related conditions.

18. Provide minimum tax relief to farmers who have income from deferred sales contracts.

19. Require study on a simplified method of collection of distilled spirits taxes.

20. Restore meals deduction to 80% in 5% increments every other year for persons subject to Federal hours of service limitation and clarify the treatment of meals provided for the convenience of the employer.

21. Delay electronic federal tax payment system (EFTPS) penalties until July 1, 1998.

22. Allow grandfathered publicly traded partnerships to continue partnership treatment if they elect to pay a PTP tax.

23. Increase in the self-employed health insurance deduction to 100 percent as follows:

Year Percentage: 1997 - 40; 1998-99 - 45; 2000-01 - 50; 2002 - 60; 2003-05 - 80; 2006 - 90; 2007 - 100.

24. Montana will be permitted to implement a 5-year demonstration project for combined state and Federal employment tax reporting.

25. Clarify that billing and collection services performed by a cooperative hospital service organization under section 501 (e) (1) (A) of the Internal Revenue Code includes purchasing patron receivables on a recourse basis.

26. Clarify that, in determining the status of retail securities brokers for Federal tax purposes, no weight will be given to a broker-dealer's duty-to-supervise.

27. Suspend the 100% net income limitation for percentage depletion for marginal oil and gas production for 2 years.

28. Waive certain requirements for mortgage revenue bonds in Presidentially declared disaster areas.

29. Designate 20 additional empowerment zones, 2 supplemental empowerment zones, and modify the empowerment zone and enterprise community criteria.

30. Exclude ministers from nondenominational retirement plan testing.

31. Deduction for contributions to church plans for chaplains.

32. Treat the service income of nonresident alien individuals earned on foreign ships as foreign source income.

33. Provide exemption from subpart F for active financing income.

34. Codify Bureau of Alcohol, Tobacco, and Firearms regulations on wine labeling.

35. Equalize the vaccine excise tax rates to 75 cents per vaccine and add certain vaccines.

36. Clarify tax treatment of certain disability benefits received by police officers and firefighters.

37. Exempt benefits paid to survivors of police officers and other public safety workers killed in the line of duty.

38. Postpone IRS deadlines in cases of Presidentially declared disaster areas.

39. Provide that certain termination payments made to insurance agents are not subject to self-employment

40. Clarify the deduction for home office expenses.

41. Permit taxpayers to estimate inventory shrinkage.

42. Provide that an employee stock ownership plan (ESOP) can be substituted for a charitable remainder beneficiary in a charitable remainder trust.

43. Modify the tax treatment of structured settlements with respect to the liability to pay compensation under workers compensation laws.

44. Allow refunding of certain tax-exempt Virgin Island bonds.

45. Provide a rollover of capital gains when stock in an agricultural processing company is sold to a farmer cooperative.

46. Exempt the incremental cost of clean fuel vehicles from the auto luxury tax and limits on depreciation.

47. Treat certain gasoline retailers as wholesalers for gasoline excise tax refund purposes.

48. Modify excise tax deposit rules for gasoline and special motor fuels, diesel fuel and kerosene, aviation fuels and air cargo taxes.

49. Simplify foreign tax credit limitation for dividends from 10/50 companies to provide look-through beginning in 2003.

50. Increase dollar limitation of section 911 and index after 2007.

51. Repeal registration requirement for tax-free sales of trucks for resale.

52. Move taxation of arrows from tax on assembled arrows to tax on component parts.

53. Clarify tax treatment of skydiving flights.

54. Eliminate double taxation for certain purchases of aviation fuel from fixed-base operators.

55. Interest on underpayment will be abated if the IRS extends deadlines for individuals in Presidentially declared disaster areas.

56. Treasury will be prohibited from issuing regulations relating to collecting self-employment tax on limited partners through June 30, 1998.

57. Information reporting will not be required on the sale of principal residences less than $250,000 single ($500,0000 for married couples).

58. Permanently exempt state and local government retirement plans from the pension nondiscrimination rules.

59. Permit state and local government employees to purchase retirement credits without violating pension contribution and benefit limits.

60. Permit 3-year income averaging for farmers for 2 years.

IX. REVENUE OFFSETS

1. Extend the Airport and Airway Trust Fund excise taxes at reduced rates and impose new flight segment tax. Provision effective through September 30, 2007; modify the airline ticket tax deposit rule. Dedicate 4.3 cents per gallon tax on aviation fuel to the Airport and Airway Trust Fund.

2. Reduce the passenger ticket tax to 7.5% with respect to flights to and from certain rural airports.

3. With respect to international flights, increase the $6 departure tax to $12; impose a $12 tax on international arrivals. Present law would be retained for domestic flights to and from Alaska and Hawaii.

4. Impose the aviation excise tax on cash payments to airlines for air travel under credit card and similar programs.

5. Eliminate a technique corporations were using to convert gains from a redemption of stock into dividend income (which corporations prefer because they get to use the dividends received deduction).

6. Prevent corporations from using the tax-free spin-off rules in ways that resemble a sale. Intragroup distributions of stock that are not part of these transactions are not subject to the proposal.

7. Require a taxpayer to recognize capital gain if the taxpayer uses the short-against-the-box and other similar investment techniques.

8. Reduce the carryback period to 2 years and extends the carryforward period to 20 years for NOLs. The 3-year rule continues to apply to (i) casualty losses of individuals and (ii) losses incurred in a Presidentially declared disaster area by taxpayers engaged in a farming business or a small business.

9. Reduce the carryback period for certain business credits (such as the orphan drug credit) to 1 year (from 3 years), and extend the carryforward period to 20 years (from 15 years).

10. Provide that a corporation that acquires stock of a related company will treat a portion of the gain as capital gains.

11. Modify holding period for dividends-received deduction with transition relief.

12. Treat certain preferred stock with debt-like characteristics as debt under the tax-free reorganization rules.

13. Deny interest deduction on debt that the issuer can force repayment into equity.

14. Inclusion of income from notional principal contracts and stock lending transactions under subpart F.

15. Further restrict like-kind exchanges involving foreign personal property.

16. Extend the excise tax with respect to the Leaking Underground Storage Tank Trust Fund to 3-31-05.

17. Extend the Federal Unemployment Tax (ANITA) Surcharge of .2 percent of taxable wages through December 31, 2007, and increase the limit on the Federal Unemployment Account in the Unemployment Trust Fund from .25 percent of covered wages to .50 percent of covered wages.

18. Expand requirement that involuntarily converted property must be replaced with property from an unrelated person.

19. Require corporate tax shelter reporting.

20. Decrease threshold for reporting payments to corporations performing services for Federal agencies.

21. Extend disclosure of tax return information to Department of Veteran Affairs.

22. Modify holding period for certain foreign tax credits.

23. Restrict the income forecast method.

24. Treat certain terminations of a right or obligation with respect to property as capital gains.

25. Interest on underpayment reduced by foreign tax credit carryback.

26. Modify basis allocation rules for distributes partners.

27. Eliminate substantial appreciation requirement for inventory of a partnership.

28. Lengthen the period that a partner is taxed on gain prior to its contribution to a partnership to 7 years (from 5 years).

29. Extend UBIT rules to second-tier subsidiaries of tax-exempt organizations and modify control test.

30. Tax kerosene in the same manner as diesel fuel with modifications to address home heating concerns.

31. Three modifications to corporate-owned life insurance:

a. Denies a deduction for premiums paid on life insurance if the taxpayer is directly or indirectly a beneficiary under the contract

b. Denies a deduction for interest paid on borrowing from life insurance on any life; and

c. Requires a pro rata disallowance of interest deduction on debt to fund life insurance with respect to contracts issued after June 8, 1997. This rule would not apply to any policy owned by a business covering individuals who were employees, officers, or directors of the business at the time first covered by the policy.

32. Termination of suspense accounts for family farm corporations. Eliminates additional suspense account income from being included in income.

33. Repeal installment sales grandfather rules of 1986 Act.

34. Repeal 1986 Act grandfather rule for pension business of TLAA-CREF and Mutual of America.

35. Apply an excise tax of 3% to certain pre-paid phone cards.

36. Estate and trust beneficiaries will be required to disclose on their tax returns if they take a position that is inconsistent with the trust or estate.

37. Certain sales of a personal residence will not be required to be reported.

38. Clarify determination of period of limitations relating to foreign tax credits.

39. Provide for additional earned income credit compliance provisions and modify adjusted gross income calculation for purposes of the credit. Provide that workfare payments do not qualify as earned income for purposes of the credit.

40. Increase cash-out amounts from retirement plans from $3,500 to $5,000.

41. Repeal of 15 percent excess distribution and excess accumulation taxes.

42. Repeal special rule which permits certain companies to eliminate their minimum tax liability.

43. Permit employers the option of providing taxable compensation in lieu of tax-free parking.

44. The deduction allowed under current law for the fair market value of tires in determining the taxable value of a truck would be replaced with a tax credit against the truck excise tax for tire tax already paid.

45. Prohibit charitable remainder trusts from distributing in one year more than 50% of the initial fair market value of all property placed in the trust. Charitable remainders will be required to be at least 10% of the trust.

46. Establish IRS continuous levy on certain payments and modify exemption amount.

47. Increase prohibited transaction tax to 15 percent and direct Treasury to issue a joint and survivor annuity taxation table.

48. Modify excise tax on imported haloes.

49. Require credit card issuing companies report interest income based on their reasonable estimates of how much interest they will receive.

50. Include new earned income credit compliance proposals relating to Federal case register data and social security numbers of parents of children applying for a social security number.

X. TAX SIMPLIFICATION

The conference agreement includes a package of tax simplification measures in the following areas:

1. Individual Provisions; 2. Business Provisions; 3. Partnership Provisions; 4. Real Estate Investment Trust 5. Regulated Investment Companies (mutual funds) 6. Estate and Gift Tax Provisions; 7. Excise Taxes; 8. Tax-Exempt Bonds; 9. Administrative Provisions; 10. Pension Provisions; and 11. Foreign Provisions.

XI. TECHNICAL CORRECTIONS

The conference agreement includes a package of technical corrections to previous tax legislation.

-- August 1, 1997, Daily Tax Report, The Bureau of National Affairs, Inc., www.bna.com

Lee, Sperling, Hisamune
550 North Brand Boulevard, Suite 525
Glendale, California 91203
Phone: (818) 507-6645 - Fax: (818) 507-7891
Email: lsh@leesperling.com