SMALL BUSINESS JOB PROTECTION ACT OF 1996 REFERENCES AND BACKGROUND Acronym: SBJPA Bill Reference: H.R. 3448 Law Reference: P.L. 104-188 Date of Enactment : August 21, 1996 SMALL BUSINESS TAX PROVISIONS Underpayments Of Estimated Tax. No addition to the tax shall be made under section 6654 or 6655 of the Internal Revenue Code of 1986 (relating to failure to pay estimated tax) with respect to any underpayment of an installment required to be paid before the date of the enactment of this Act to the extent such underpayment was created or increased by any provision of this title. SBJPA §1002. Increase of Section 179 Expense Limitation: Current annual limitation of $17,500 is increased to $25,000, phased in as follows: For taxable years beginning in: 1997 - $18,000; 1998 - $18,500; 1999 - $19,000; 2000 - $20,000; 2001 - $24,000; 2002 - $24,000; 2003 and thereafter - $25,000. Effective for property placed in service in taxable years after December 31, 1996. SBJPA §1111. IRC §179(b)(1). Tax Credit for Social Security Taxes Paid with Respect to Employee Cash Tips: Overrules temporary regulations related to the business tax credit for certain employer FICA taxes paid with respect to tips as adopted by The Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"). Now The credit is (1) available whether or not the employee reported the tips on which the employer FICA taxes were paid pursuant to section 6053(a), and (2) effective with respect to taxes paid after December 31, 1993, regardless of when the services with respect to which the tips are received were performed. The provision also modifies the credit so that it applies with respect to tips received from customers in connection with the delivery or serving of food or beverages, regardless of whether the food or beverages are for consumption on the premises of the establishment. Effective date: The clarifications relating to the effective date and nonreported tips are effective as if included in OBRA 1993. The provision expanding the tip credit to the provision of food or beverages not for consumption on the premises of the establishment is effective with respect to FICA taxes paid on tips received with respect to services performed after December 31, 1996. SBJPA §1112. IRC §45B(b)(1)(A) and 45B(b)(2). Revenue Reconciliation Act of 1993 §13443(d). Home Office Deduction For Storage Of Product Samples: The special rule contained in IRC section 280A(c)(2) is amended to allow deductions for expenses related to a storage unit in a taxpayer's home regularly used for inventory or product samples (or both) of the taxpayer's trade or business of selling products at retail or wholesale, provided that the home is the sole fixed location of such trade or business. Effective for taxable years beginning after December 31, 1995. SBJPA §1113 IRC §280A(c)(2). Charitable Risk Pools: Tax-exempt status is extended to certain organizations that pool insurable risks of a group of tax exempt organizations described in section 501(c)(3). Effective for taxable years beginning after August 21, 1996. SBJPA §1114. IRC §501(n). Dues Paid To Agricultural Or Horticultural Organizations: Modifies Rev. Proc. 95-21 with respect to the determination of whether dues of an agricultural or horticultural organization described in section 501(c)(5) are subject to "UBTI". Effective for taxable years beginning after December 31, 1996 but also provides transitional relief for prior taxable years. SBJPA §1115. IRC §512(d). Employment Tax Status Of Certain Fishermen: Modifies the rules for determining whether service as a crew member on a fishing vessel is excluded from the definition of employment for purposes of income tax withholding on wages and for FICA and FUTA taxes and includes certain cash payments within the exclusion. Applies to remuneration paid after December 31, 1996. In addition, the provision applies to remuneration paid after December 31, 1984, and before January 1, 1997, unless the payor treated such remuneration when paid as subject to FICA taxes. SBJPA §1116(a). IRC §3121(b) and §6050A(a) and Social Security Act §210(a) Reporting Requirements For Purchasers Of Fish: Persons engaged in the trade or business of purchasing fish for resale who pay more than $600 in cash in a calendar year for fish or other forms of aquatic life from any seller engaged in the trade or business of catching fish are required to file information reports with the Secretary regarding such purchases. A copy of the report must be provided to the seller. Effective for purchases made after December 31, 1997. SBJPA §1116(b). IRC §6050R and §6724(d)(2)(R). Modification Of Tax-Exempt Bond Rules For First-Time Farmer: The definition of first-time farmer is broadened to include an individual who has at no time owned farm land in excess of 30 percent of the median size farm in the county and these bonds may be used to finance purchases between related parties provided that: (1) the price paid reflects the fair market value of the property and, (2) the seller has no financial interest in the farming operation conducted on the land after the bond-financed sale occurs. Effective for financing provided with bonds issued after August 21, 1996. SBJPA §1117 IRC §147(c)(2). Treatment Of Newspaper Distributors And Carriers As Direct Sellers: Special rules for determining whether newspaper distributors and carriers operating under either a buy-sell distribution system or an agency distribution system are "direct sellers" for purposes of income and employment taxes. Effective for services performed after December 31, 1995. SBJPA §1118. IRC §3508(b)(2)(A). Application Of Involuntary Conversion Rules To Presidentially Declared Disasters: Any tangible property acquired and held for productive use in a business is treated as similar or related in service or use to property that (1) was held for investment or for productive use in a business and (2) was involuntarily converted as a result of a Presidentially declared disaster. Effective for disasters for which a Presidential declaration is made after December 31, 1994, in taxable years ending after that date. SBJPA §1119. IRC § 1033(h)(2). 15-Year Recovery Period For Gas Station Convenience Stores And Similar Structures: 15-year property includes any section 1250 property (generally, depreciable real property) that is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet). A retail motor fuels outlet does not include any facility related to petroleum or natural gas trunk pipelines or to any section 1250 property used only to an insubstantial extent in the retail marketing of petroleum or petroleum products. Effective for property placed in service on or after August 21, 1996 and to which the amendments made by section 201 of the Tax Reform Act of 1986 apply (i.e., property subject to the modified Accelerated Cost Recovery System of sec. 168). The taxpayer may elect the application of the provision for property placed in service prior to the date of enactment. if a taxpayer has already treated qualified property that was placed in service before the date of enactment as 15-year property, the taxpayer will be deemed to have made the election with respect to such property. SBJPA §1120. IRC §168(e)(3)(E)(iii). Treatment Of Abandonment Of Lessor Improvements At Termination Of Lease: A lessor of leased property that disposes of a leasehold improvement which was made by the lessor for the lessee of the property may take the adjusted basis of the improvement into account for purposes of determining gain or loss, if the improvement is irrevocably disposed of or abandoned by the lessee at the termination of the lease. The provision does not apply to the extent section 280B of present law applies to the demolition of a structure, a portion of which may include leasehold improvements. Effective for leasehold improvements disposed of after June 12, 1996. No inference is intended as to the proper treatment of such dispositions before June 13, 1996. SBJPA §1121. IRC §168(i)(8). Modifications To Section 530 Of The Revenue Act Of 1978 - Independent Contractor/ Employee Status For Employment Tax Purposes: Includes several significant substantive and procedural rules for the application of Section 530 of the Revenue Act of 1978 with respect to the employee-independent contractor determination for employment tax liability. Several changes specifically reverse prior positions of the IRS as set forth in the Service's recently issued Training Manual. SBJPA §1122. Revenue Act of 1978 §530 Treatment Of Housing Provided To Employees By Academic Health Centers: For purposes of Code section 119(d) "educational institutions" now include certain medical research institutions ("academic health centers") that engage in basic and clinical research, have a regular faculty and teach a curriculum in basic and clinical research to students in attendance at the institution and certain entities ("university systems") organized under State law composed of public institutions described in Code section 170(b)(A)(ii). For purposes the requirement of Code section 119(d)(3)(A) that the employee housing be provided on (or in the proximity of) a campus of the employer, a campus of one of the component educational institutions of a university system should be considered to be a campus of the university system. Effective for taxable years beginning after December 31, 1995. SBJPA §1123. IRC §119(d)(4). EXTENSION OF CERTAIN EXPIRING PROVISIONS IRC § Work Opportunity Tax Credit. A new tax credit, called the Work Opportunity Tax Credit, replaces the targeted jobs tax credit that expired on December 31, 1994. ". The new credit is available on an elective basis for employers hiring individuals from one or more of eight targeted groups. The credit generally is equal to 35 percent of qualified first-year wages. Effective for wages paid or incurred to a qualified individual who begins work for an employer after September 30, 1996, and before October 1, 1997. SBJPA §1201. IRC §51(a), §51(c)(4), §51(d), and §51(i)(3). Employer-Provided Educational Assistance. For taxable years beginning before January 1, 1995, an employee's gross income and wages did not include amounts paid or incurred by the employer for educational assistance provided to the employee if such amounts were paid or incurred pursuant to an educational assistance program that met certain requirements. This exclusion, which expired for taxable years beginning after December 31, 1994, was limited to $ 5,250 of educational assistance with respect to an individual during a calendar year. The exclusion applied whether or not the education was job related. In the absence of this exclusion, educational assistance is excludable from income only if it is related to the employee's current job. The exclusion is extended retroactively for taxable years beginning after December 31, 1994 and before January 1, 1998. The exclusion expires with respect to courses beginning after May 31, 1997 The exclusion for graduate courses applies in 1995. In 1996, the exclusion for graduate courses does not apply to courses beginning after June 30, 1996. SBJPA §1202. IRC § 127(c)(1) and §127(d). Permanent Extension Of FUTA Exemption For Alien Agricultural Workers. Generally, the Federal unemployment tax ("FUTA") is imposed on farm operators who (1) employ 10 or more agricultural workers for some portion of 20 different days, each being in a different calendar week or (2) have a quarterly payroll for agricultural services of at least $ 20,000. An exclusion from FUTA was provided, however, for labor performed by an alien admitted to the United States to perform agricultural labor under section 214(c) and 101(a)(15)(H) of the Immigration and Nationality Act. This exclusion was effective for labor performed before January 1, 1995. The exclusion is retroactively permanently extended effective for labor performed on or after January 1, 1995. SBJPA §1203. IRC § 3306(c)(1)(B). Research And Experimentation Tax Credit The new law allows taxpayers to elect an alternative incremental research credit regime, treats 75 percent of payments made to certain nonprofit research consortia as qualified research expenses, and states that research credit amounts earned under the new law may not be taken into account in computing estimated tax payments required to be paid for taxable years beginning in 1997. Effective as follows: the extension of the research tax credit is effective for expenditures paid or incurred during the period July 1, 1996, through May 31, 1997 (with a special rule for taxpayers who elect the alternative incremental research credit regime.) The modification to the definition of "start-up firms" is effective for taxable years ending after June 30, 1996. Taxpayers may elect the alternative research credit regime (with lower fixed-base percentages and lower credit rates) for the first taxable year beginning after June 30, 1996, and before July 1, 1997, and the credit is available with respect to all qualified research expenses incurred during the first 11 months of such taxable year. The rule that treats 75 percent of qualified research consortium payments as qualified research expenses is effective for taxable years beginning after June 30, 1996. SBJPA §1204. IRC § section 41(h), §41(b)(3), §41(c)(3)(B)(i)41(b), and §28(b)(1)(D). Orphan Drug Tax Credit. The orphan drug tax credit expired after December 31, 1994. The orphan drug tax credit is extended for 11 months -- i.e., for the period July 1, 1996, through May 31, 1997. Taxpayers are now allowed to carry back unused credits to three years preceding the year the credit is earned and to carry forward unused credits to 15 years following the year the credit is earned. Effective for qualified clinical testing expenses paid or incurred during the period July 1, 1996, through May 31, 1997. The provision allowing for the carry back and carry forward of unused credits is effective for taxable years ending after June 30, 1996. SBJPA §1205 IRC §45C(a) and §38(b)(12). Contributions Of Stock To Private Foundations. 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, subject to some exceptions. For 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 were allowed a deduction equal to the fair market value of "qualified appreciated stock" contributed to a private foundation prior to January 1, 1995. Qualified appreciated stock was defined as publicly traded stock which is capital gain property. The fair- market-value deduction for qualified appreciated stock donations applied 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 was treated as making all contributions that were made by any member of the individual's family. This special rule contained in section 170(e)(5) expired after December 31, 1994. The special rule contained in section 170(e)(5) is extended for 11 months -- i.e., for contributions of qualified appreciated stock made to private foundations during the period July 1, 1996, through May 31, 1997. SBJPA §1206. IRC §170(e)(5)(D). Tax Credit For Producing Fuel From A Nonconventional Source. Certain fuels produced from "nonconventional sources" and sold to unrelated parties are eligible for an income tax credit equal to $3 (generally adjusted for inflation) per barrel or BTU oil barrel equivalent (sec. 29). Qualified fuels must be produced within the United States. Qualified fuels include: (1) oil produced from shale and tar sands; (2) gas produced from geopressured brine, Devonian shale, coal seams, tight formations ("tight sands"), or biomass; and (3) liquid, gaseous, or solid synthetic fuels produced from coal (including lignite). In general, the credit is available only with respect to fuels produced from wells drilled or facilities placed in service after December 31, 1979, and before January 1, 1993. An exception extends the January 1, 1993 expiration date for facilities producing gas from biomass and synthetic fuel from coal if the facility producing the fuel is placed in service before January 1, 1997, pursuant to a binding contract entered into before January 1, 1996. The credit may be claimed for qualified fuels produced and sold before January 1, 2003 (in the case of nonconventional sources subject to the January 1, 1993 expiration date) or January 1, 2008 (in the case of biomass gas and synthetic fuel facilities eligible for the extension period). The new law extends the binding contract date for facilities producing synthetic fuels from coal and gas from biomass through December 31, 1996 and extends the placed in service date for eighteen months, but does not change the present-law sunset on production quaffing for the credit. Thus, synthetic fuels from coal and gas from biomass produced from a facility placed in service before July 1, 1998, pursuant to a binding contract entered into before January 1, 1997, will be eligible for the tax credit if produced before January 1, 2008. Effective as of August 21, 1996. SBJPA §1207. IRC §29(g)(1)(A). Suspend Imposition Of Diesel Fuel Tax On Recreational Motorboats. Diesel fuel used in recreational motorboats is subject to a 24.4 cents-per-gallon excise tax through December 31, 1999. This tax was enacted by the Omnibus Budget Reconciliation Act of 1993 as a revenue offset for repeal of the excise tax on certain luxury boats. Under the new law, tax will not be imposed on diesel fuel used in recreational motorboats during the period from August 27, 1996 through December 31, 1997. IRC §4041(a)(1)(D). PROVISIONS RELATING TO S CORPORATIONS S Corporations Permitted To Have 75 Shareholders. The maximum number of eligible shareholders permitted for an S-corp has been increased from 35 to 75. Effective for taxable years beginning after December 31, 1996. SBJPA §1301. IRC §1361(b)(1)(A). Electing Small Business Trusts. Under present law, trusts other than grantor trusts, voting trusts, certain testamentary trusts and "qualified subchapter S trusts" may not be shareholders in a S corporation. The new law allows stock in an S corporation to be held by certain trusts ("electing small business trusts"). In order to qualify for this treatment, all beneficiaries of the trust must be individuals or estates eligible to be S corporation shareholders, except that charitable organizations may hold contingent remainder interests. No interest in the trust may be acquired by purchase. For this purpose, "purchase" means any acquisition of property with a cost basis determined under sec. 1012. Thus, interests in the trust must be acquired by reason of gift, bequest, etc. A trust must elect to be treated as an electing small business trust. Special rules apply for determining the number of S-Corp shareholders attributable to the trust, the taxation of income and loss from the S-Corp to the trust, and termination of interest in the trust or the S-Corp election. Effective for taxable years beginning after December 31, 1996. SBJPA §1302. IRC §1361(c)(2), §1361(e), §1366(a)(1), and §641(d) 1366(a). Expansion Of Post-Death Qualification For Certain Trusts. Under present law, a grantor trust may remain an S corporation shareholder for 60 days after the death of the grantor. The 60- day period is extended to two years if the entire corpus of the trust is includible in the gross estate of the deemed owner. In addition, a trust may be an S corporation shareholder for 60 days after the transfer of S corporation pursuant to a will. The new law expands the post-death holding period to two years for all testamentary trusts. Effective for taxable years beginning after December 31, 1996. SBJPA §1303. IRC §1361(c)(2)(A). .Financial Institutions Permitted To Hold Safe Harbor Debt. Under existing law, a small business corporation eligible to be an S corporation may not have more than one class of stock. Certain debt ("straight debt") is not treated as a second class of stock so long as such debt is an unconditional promise to pay on demand or on a specified date a sum in money if: (1) the interest rate (and interest payment dates) are not contingent on profits, the borrower's discretion, or similar factors; (2) there is no convertibility (directly or indirectly) into stock, and (3) the creditor is an individual (other than a nonresident alien), an estate, or certain qualified trusts. IRC § Under the new law, the definition of "straight debt" is expanded to include debt held by creditors, other than individuals, that are actively and regularly engaged in the business of lending money. Effective for taxable years beginning after December 31, 1996. SBJPA §1304 IRC § Rules Relating To Inadvertent Terminations And Invalid Elections. Under present law, if the IRS determines that a corporation's Subchapter S election is inadvertently terminated, the IRS can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and shareholders agree to be treated as if the election had been in effect for that period. Such waivers generally are obtained through the issuance of a private letter ruling. Present law does not grant the IRS the ability to waive the effect of an inadvertent invalid Subchapter S election. The new law authorizes the IRS to waive the effect of an invalid election caused by an inadvertent failure to qualify as a small business corporation or to obtain the required shareholder consents (including elections regarding qualified subchapter S trusts), or both. The new law also allows the IRS to treat a late Subchapter S election as timely where the Service determines that there was reasonable cause for the failure to make the election timely. It is intended that the IRS be reasonable in exercising this authority and apply standards that are similar to those applied under present law to inadvertent subchapter S terminations and other late or invalid elections. Effective for taxable years beginning after December 31, 1982. SBJPA §1305. IRC §1361(c)(5)(B)(iii) and §1362(b). Agreement To Terminate Year. Under existing law, each item of S corporation income, deduction and loss is allocated to shareholders on a per-share, per-day basis. However, if any shareholder terminates his or her interest in an S corporation during a taxable year, the S corporation, with the consent of all its shareholders, may elect to allocate S corporation items by closing its books as of the date of such termination rather than apply the per-share, per-day rule. The new law provides that, under regulations to be prescribed by the Secretary of the Treasury, the election to close the books of the S corporation upon the termination of a shareholder's interest is made by all affected shareholders and the corporation rather than by all shareholders. The closing of the books applies only to the affected shareholders. For this purpose, "affected shareholders" means any shareholder whose interest is terminated and all shareholders to whom such shareholder has transferred shares during the year. If a shareholder transferred shares to the corporation, "affected shareholders" includes all persons who were shareholders during the year. Effective for taxable years beginning after December 31, 1996. SBJPA §1306. IRC §1377(a)(2). Expansion Of Post-Termination Transition Period. Distributions made by a former S corporation during its post-termination period are treated in the same manner as if the distributions were made by an S corporation (e.g., treated by shareholders as nontaxable distributions to the extent of the accumulated adjustment account). Distributions made after the post- termination period are generally treated as made by a C corporation (i.e., treated by shareholders as taxable dividends to the extent of earnings and profits). The "post-termination period" is the period beginning on the day after the last day of the last taxable year of the S corporation and ending on the later of: (1) a date that is one year later, or (2) the due date for filing the return for the last taxable year and the 120-day period beginning on the date of a determination that the corporation's S corporation election had terminated for a previous taxable year. The new law expands the definition of post-termination period to include the 120-day period beginning on the date of any determination pursuant to an audit of the taxpayer that follows the termination of the S corporation's election and that adjusts a subchapter S item of income, loss or deduction of the S corporation during the S period. In addition, the definition of "determination" is expanded to include a final disposition of the Secretary of the Treasury of a claim for refund and, under regulations, certain agreements between the Secretary and any person, relating to the tax liability of the person. Effective for taxable years beginning after December 31, 1996. SBJPA §1307 IRC §1377(b). S Corporations No Longer Subject To TEFRA Audit Procedures: The audit procedures adopted by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") with respect to partnerships also applied to S corporations. Thus, the tax treatment of S corporation items was determined at the corporate, rather than individual level. The new law repeals the TEFRA audit provisions applicable to S corporations and provides other rules to require consistency between the returns of the S corporation and its shareholders. Effective for taxable years beginning after December 31, 1996. SBJPA §1307. IRC §6037 and §6633(b). S Corporations Permitted To Hold Subsidiaries. Under existing law, a small business corporation may not be a member of an affiliated group of corporations (other than by reason of ownership in certain inactive corporations). Thus, an S corporation may not own 80 percent or more of the stock of another corporation (whether an S corporation or a C corporation). In addition, a small business corporation may not have as a shareholder another corporation (whether an S corporation or a C corporation). IRC § Under the new law, an S corporation is allowed to own 80 percent or more of the stock of a C corporation. The C corporation subsidiary can elect to join in the filing of a consolidated return with its affiliated C corporations. An S corporation is not allowed to join in such election. Dividends received by an S corporation from a C corporation in which the S corporation has an 80 percent or greater ownership stake are not treated as passive investment income for purposes of sections 1362 and 1375 to the extent the dividends are attributable to the earnings and profits of the C corporation derived from the active conduct of a trade or business. In addition, an S corporation is allowed to own a qualified subchapter S subsidiary. The term "qualified subchapter S subsidiary" means a domestic corporation that is not an ineligible corporation (i.e., a corporation that would be eligible to be an S corporation if the stock of the corporation were held directly by the shareholders of its parent S corporation) if (1) 100 percent of the stock of the subsidiary were held by its S corporation parent and (2) for which the parent elects to treat as a qualified subchapter S subsidiary. Under the election, the qualified subchapter S subsidiary is not treated as a separate corporation and all the assets, liabilities, and items of income, deduction, and credit of the subsidiary are treated as the assets, liabilities, and items of income, deduction, and credit of the parent S corporation. Effective for taxable years beginning after December 31, 1996. SBJPA §1308. IRC §1361(b) and §1362(d)(3). Treatment Of Distributions During Loss Years. Under present law, the amount of loss an S corporation shareholder may take into account for a taxable year cannot exceed the sum of the shareholder's adjusted basis in his or her stock of the corporation and the adjusted basis in any indebtedness of the corporation to the shareholder. Any excess loss is carried forward. Any distribution to a shareholder by an S corporation generally is tax-free to the shareholder to the extent of the shareholder's adjusted basis of his or her stock. The shareholder's adjusted basis is reduced by the tax-free amount of the distribution. Any distribution in excess of the shareholder's adjusted basis is treated as gain from the sale or exchange of property. Under present law, income (whether or not taxable) and expenses (whether or not deductible) serve, respectively, to increase and decrease an S corporation shareholder's basis in the stock of the corporation. These rules require that the adjustments to basis for items of both income and loss for any taxable year apply before the adjustment for distributions applies. These rules limiting losses and allowing tax-free distributions up to the amount of the shareholder's adjusted basis are similar in certain respects to the rules governing the treatment of losses and cash distributions by partnerships. Under the partnership rules (unlike the S corporation rules), for any taxable year, a partner's basis is first increased by items of income, then decreased by distributions, and finally is decreased by losses for that year. In addition, if the S corporation has accumulated earnings and profits, any distribution in excess of the amount in an "accumulated adjustments account" will be treated as a dividend (to the extent of the accumulated earnings and profits). A dividend distribution does not reduce the adjusted basis of the shareholder's stock. The "accumulated adjustments account" generally is the amount of the accumulated undistributed post-1982 gross income less deductions. The new law provides that the adjustments for distributions made by an S corporation during a taxable year are taken into account before applying the loss limitation for the year. Thus, distributions during a year reduce the adjusted basis for purposes of determining the allowable loss for the year, but the loss for a year does not reduce the adjusted basis for purposes of determining the tax status of the distributions made during that year. The new law also provides that in determining the amount in the accumulated adjustment account for purposes of determining the tax treatment of distributions made during a taxable year by an S corporation having accumulated earnings and profits, net negative adjustments (i.e., the excess of losses and deductions over income) for that taxable year are disregarded. Effective for taxable years beginning after December 31, 1996. SBJPA §1309. IRC §1366(d)(1)(A), §1368(d), and §1368(e)(1). Treatment Of S Corporations Under Subchapter C. Present law contains several provisions relating to the treatment of S corporations as corporations generally for purposes of the Internal Revenue Code. First, under present law, the taxable income of an S corporation is computed in the same manner as in the case of an individual (sec. 1363(b)). Under this rule, the provisions of the Code governing the computation of taxable income which are applicable only to corporations, such as the dividends received deduction, do not apply to S corporations. Second, except as otherwise provided by the Internal Revenue Code and except to the extent inconsistent with subchapter S, subchapter C (i.e., the rules relating to corporate distributions and adjustments) applies to an S corporation and its shareholders (sec. 1371(a)(1)). Under this second rule, provisions such as the corporate reorganization provisions apply to S corporations. Thus, a C corporation may merge into an S corporation tax-free. Finally, an S corporation in its capacity as a shareholder of another corporation is treated as an individual for purposes of subchapter C (sec. 1371(a)(2)). In 1988, the Internal Revenue Service took the position that this rule prevents the tax-free liquidation of a C corporation into an S corporation because a C corporation cannot liquidate tax-free when owned by an individual shareholder. PLR 8818049, (Feb. 10, 1988). In 1992, the Internal Revenue Service reversed its position, stating that the prior ruling was incorrect. PLR 9245004, (July 28, 1992). The new law repeals the rule that treats an S corporation in its capacity as a shareholder of another corporation as an individual. Thus, the provision clarifies that the liquidation of a C corporation into an S corporation will be governed by the generally applicable subchapter C rules, including the provisions of sections 332 and 337 allowing the tax-free liquidation of a corporation into its parent corporation. Following a tax-free liquidation, the built-in gains of the liquidating corporation may later be subject to tax under section 1374 upon a subsequent disposition. An S corporation also will be eligible to make a section 338 election (assuming all the requirements are otherwise met), resulting in immediate recognition of all the acquired C corporation's gains and losses (and the resulting imposition of a tax). The repeal of this rule does not change the general rule governing the computation of income of an S corporation. For example, it does not allow an S corporation, or its shareholders, to claim a dividends received deduction with respect to dividends received by the S corporation, or to treat any item of income or deduction in a manner inconsistent with the treatment accorded to individual taxpayers. Effective for taxable years beginning December 31, 1996. SBJPA §1310 IRC §1371(a). Elimination Of Certain Earnings And Profits. Under present law, the accumulated earnings and profits of a corporation are not increased for any year in which an election to be treated as an S corporation is in effect. However, under the subchapter S rules in effect before revision in 1982, a corporation electing subchapter S for a taxable year increased its accumulated earnings and profits if its earnings and profits for the year exceeded both its taxable income for the year and its distributions out of that year's earnings and profits. As a result of this rule, a shareholder may later be required to include in his or her income the accumulated earnings and profits when it is distributed by the corporation. The 1982 revision to subchapter S repealed this rule for earnings attributable to taxable years beginning after 1982 but did not do so for previously accumulated S corporation earnings and profits. The new law provides that if a corporation is an S corporation for its first taxable year beginning after December 31, 1995, the accumulated earnings and profits of the corporation as of the beginning of that year is reduced by the accumulated earnings and profits (if any) accumulated in any taxable year beginning before January 1, 1983, for which the corporation was an electing small business corporation under subchapter S. Thus, such a corporation's accumulated earnings and profits are solely attributable to taxable years for which an S election was not in effect. This rule is generally consistent with the change adopted in 1982 limiting the S shareholder's taxable income attributable to S corporation earnings to his or her share of the taxable income of the S corporation. Effective for taxable years beginning after December 31, 1996. SBJPA §1311. IRC §1362(d)(3). Carryover Of Disallowed Losses And Deductions Under At-Risk Rules Allowed. Under the old law, under section 465, a shareholder of an S corporation may not deduct losses that flow through from the corporation to the extent the shareholder is not "at-risk" with respect to the loss. Any loss not deductible in one taxable year because of the at-risk rules is carried forward to the next taxable year. Under the new law losses of an S corporation that are suspended under the at-risk rules of section 465 are carried forward to the S corporation's post-termination period. Effective for taxable years beginning after December 31, 1996. SBJPA §1312. IRC §1366(d)(3)(D). Adjustment To Basis Of Inherited S Stock To Reflect Certain Items Of Income: Income in respect to a decedent ("IRD") generally consists of items of gross income that accrued during the decedent's lifetime but were not includible in the decedent's income before his or her death under his or her method of accounting. IRD is includible in the income of the person acquiring the right to receive such item. A deduction for the estate tax attributable to an item of IRD is allowed to such person (sec. 691(c)). The cost or basis of property acquired from a decedent is its fair market value at the date of death (or alternate valuation date if that date is elected for estate tax purposes). This basis is often referred to as a "stepped-up basis." Property that constitutes a right to receive IRD does not receive a stepped-up basis. The basis of a partnership interest or corporate stock acquired from a decedent generally is stepped- up at death. Under Treasury regulations, the basis of a partnership interest acquired from a decedent is reduced to the extent that its value is attributable to items constituting IRD (Treas. reg. sec. 1.742-1). This rule insures that the items of IRD held by a partnership are not later offset by a loss arising from a stepped-up basis. Although S corporation income is taxed to its shareholders in a manner similar to the taxation of a partnership and its partners, no comparable regulation requires a reduction in the basis of stock in an S corporation acquired from a decedent where the S corporation holds items of IRD. The new law provides that a person acquiring stock in an S corporation from a decedent will treat as IRD his or her pro rata share of any item of income of the corporation that would have been IRD if that item had been acquired directly from the decedent. Where an item is treated as IRD, a deduction for the estate tax attributable to the item generally will be allowed under the provisions of section 691(c). The stepped-up basis in the stock in an S corporation acquired from a decedent is reduced by the extent to which the value of the stock is attributable to items consisting of IRD. This basis rule is comparable to the present-law partnership rule. Effective for decedents dying after August 21, 1996. SBJPA §1313. IRC §1367(b). S Corporations Eligible For Rules Applicable To Real Property Subdivided For Sale By Noncorporate Taxpayers: Under present-law section 1237, a lot or parcel of land held by a taxpayer other than a corporation generally is not treated as ordinary income property solely by reason of the land being subdivided if: (1) such parcel had not previously been held as ordinary income property and if in the year of sale, the taxpayer did not hold other real property; (2) no substantial improvement has been made on the land by the taxpayer, a related party, a lessee, or a government; and (3) the land has been held by the taxpayer for five years. The new law applies the present-law capital gains presumption to land held by an S corporation. It is expected that rules similar to the attribution rules for partnerships will apply to S corporation (Treas. reg. sec. 1.1237-1(b)(3)). Effective for sales in taxable years beginning after December 31, 1996. SBJPA §1314. IRC §1237(a). Certain Financial Institutions As Eligible Corporations: A small business corporation may elect to be treated as an S corporation. A "small business corporation" is defined as a domestic corporation which is not an ineligible corporation and which meets certain other requirements. An "ineligible corporation" means any corporation which is a member of an affiliated group, certain depository financial institutions (i.e., banks, domestic savings and loan associations, mutual savings banks, and certain cooperative banks), certain insurance companies, a section 936 corporation, or a DISC or former DISC. Under the new law a bank (as defined in sec. 581) is allowed to be an eligible small business corporation unless such institution uses a reserve method of accounting for bad debts. Effective for taxable years beginning after December 31, 1996. SBJPA §1315 IRC '1361(b)(2)(A) Certain Tax-Exempt Entities Allowed To Be Shareholders. Under the old law, a tax-exempt organization described in section 401(a) (relating to qualified retirement plan trusts) or section 501(c)(3) (relating to certain charitable organizations) cannot be a shareholder in an S corporation. Under the new law tax-exempt organizations described in Code sections 401(a) and 501(c)(3) ("qualified tax-exempt shareholders") are allowed to be shareholders in S corporations. For purposes of determining the number of shareholders of an S corporation, a qualified tax-exempt shareholder will count as one shareholder. Items of income or loss of an S corporation will flow- through to qualified tax-exempt shareholders as unrelated business taxable income ("UBTI"), regardless of the source or nature of such income (e.g., passive income of an S corporation will flow through to the qualified tax-exempt shareholders as UBTI.). In addition, gain or loss on the sale or other disposition of stock of an S corporation by a qualified tax- exempt shareholder will be treated as UBTI. In addition, certain special tax rules relating to employee stock ownership plans ("ESOPs") will not apply with respect to S corporation stock held by the ESOP. In addition, the conference agreement provides that if a qualified tax-exempt shareholder acquired, by purchase, stock in an S corporation (whether such stock was acquired when the corporation was a C or an S corporation) and receives a dividend distribution with respect to such S corporation stock (i.e., a distribution of subchapter C earnings and profits), except as provided in regulations, the shareholder must reduce its basis in the stock by the amount of the dividend. Regulations may provide that the basis reduction only would apply to the extent the dividend is deemed to be allocable to subchapter C earnings and profits that accrued on or before the date of acquisition. Effective for taxable years beginning after December 31, 1997. SBJPA §1316. IRC §1361(b)(2)(A), §1361(c), 170(e)(1) ,and §512(e). Reelection Of Subchapter S Status. Under existing law, a small business corporation that terminates its subchapter S election (whether by revocation or otherwise) may not make another election to be an S corporation for five taxable years unless the Secretary of the Treasury consents to such election. Under the new law, for purposes of the five-year rule, any termination of subchapter S status in effect immediately before August 21, 1996 is not be taken into account. Thus, any small business corporation that had terminated its S corporation election within the five-year period before the August 21, 1996 may re-elect subchapter S status without the consent of the Secretary of the Treasury. Effective for terminations occurring in a taxable year beginning before January 1, 1997. SBJPA §1317(b). PENSION SIMPLIFICATION - SIMPLIFIED DISTRIBUTION RULES Repeal Of 5-Year Income Averaging For Lump-Sum Distributions. The new law repeals the 5-year averaging for lump-sum distributions from qualified plans. Effective for taxable years beginning after December 31, 1999. SBJPA §1401. IRC §402(d), 402(e)(4), and taxable year. Repeal Of $5,000 Exclusion For Employer-Provided Death Benefits. The new law repeals the $ 5,000 exclusion for employer- provided death benefits. Effective for decedents dying after August 21, 1996. SBJPA §1402. IRC §101(b). Recovery Of Basis. The new law provides that basis recovery on payments from qualified plans is to be determined under a method similar to the present-law simplified alternative method provided by the IRS. The portion of each annuity payment that represents a return of basis equals to the employee's total basis as of the annuity starting date, divided by the number of anticipated payments under the following table: Age Number of Payments Not more than 55 360 55-60 310 61-65 260 66-70 210 More than 70 160 Effective with respect to annuity starting dates beginning 90 days after the date of enactment (i.e., 90 days after August 21, 1996). SBJPA §1403 IRC §72(d). Required Distributions. The new law modifies the rule that requires all participants in qualified plans to commence distributions by age 70- 1/2 without regard to whether the participant is still employed by the employer and generally replaces it with the rule in effect prior to the Tax Reform Act of 1986. Under the new law, distributions generally are required to begin by April 1 of the calendar year following the later of first, the calendar year in which the employee attains age 70-1/2 or second, the calendar year in which the employee retires. However, in the case of a 5-percent owner of the employer, distributions are required to begin no later than the April 1 of the calendar year following the year in which the 5-percent owner attains age 70-1/2. In addition, in the case of an employee (other than a 5- percent owner) who retires in a calendar year after attaining age 70- 1/2, the new law generally requires the employee's accrued benefit to be actuarially increased to take into account the period after age 70-1/2 in which the employee was not receiving benefits under the plan. Thus, the employee's accrued benefit is required to reflect the value of benefits that the employee would have received if the employee had retired at age 70-1/2 and had begun receiving benefits at that time. The actuarial adjustment rule and the rule requiring 5- percent owners to begin distributions after attainment of age 70-1/2 does not apply to a governmental plan or church plan. The provision is effective for years beginning after December 31, 1996. If a participant is currently receiving distributions, but does not have to under the provision, it is intended that a plan (or annuity contract) could (but would not be required to) permit the participant, with his or her consent, to stop receiving distributions until such distributions are required under the provision. SBJPA §1404. IRC §401(a)(9)(C). PENSION SIMPLIFICATION - INCREASED ACCESS TO RETIREMENT SAVINGS PLANS. IRC Establish SIMPLE Retirement Plans For Employees Of Small Employers. The new law repeals the provisions for salary reduction simplified employee pension ("SARSEP") and replaces them with a simplified retirement plan for small business called the savings incentive match plan for employees ("SIMPLE") retirement plan. SIMPLE plans can be adopted by employers who employ 100 or fewer employees on any day during the year and who do not maintain another employer-sponsored retirement plan. A SIMPLE plan can be either an IRA for each employee or part of a qualified cash or deferred arrangement ("401(k) plan"). If established in IRA form, a SIMPLE plan is not subject to the nondiscrimination rules generally applicable to qualified plans (including the top-heavy rules) and simplified reporting requirements apply. Within limits, contributions to a SIMPLE plan are not taxable until withdrawn. A SIMPLE plan can also be adopted as part of a 401(k) plan. In that case, the plan does not have to satisfy the special nondiscrimination tests applicable to 401(k) plans and is not subject to the top-heavy rules. The other qualified plan rules continue to apply. The provisions relating to SIMPLE plans are effective for years beginning after December 31, 1996. The repeal of SARSEPs applies to years beginning after December 31, 1996, unless the SARSEP was established before January 1, 1997. Consequently, an employer is not permitted to establish a SARSEP after December 31, 1996. SARSEPs established before January 1, 1997, can continue to receive contributions under present-law rules, and new employees of the employer hired after December 31, 1996, can participate in the SARSEP in accordance with such rules. SBJPA §1421 and §1422. IRC §408(p), §219(b), §404(m), §402(k), §408(d)(3), §72(t), §6693, §408(1). Tax-Exempt Organizations Eligible Under Section 401. Under present law, tax-exempt and State and local government organizations are generally prohibited from establishing qualified cash or deferred arrangements (sec. 401(k) plans). Qualified cash or deferred arrangements (1) of rural cooperatives, (2) adopted by State and local governments before May 6, 1986, or (3) adopted by tax-exempt organizations before July 2, 1986, are not subject to this prohibition. The new law allows tax-exempt organizations (including, for this purpose, Indian tribal governments, a subdivision of an Indian tribal government, an agency or instrumentality of an Indian tribal government or subdivision thereof, or a corporation chartered under Federal, State, or tribal law which is owned in whole or in part by any of such entities) to maintain qualified cash or deferred arrangements. The new law retains the present-law prohibition against the maintenance of cash or deferred arrangements by State and local governments, except to the extent it may apply to Indian tribal governments. No inference is intended with respect to whether Indian tribal governments are permitted to maintain qualified cash or deferred arrangements under present law. The provision is effective for plan years beginning after December 31, 1996. SBJPA §1426. IRC §401(k)(4). Spousal IRAs. The new law permits deductible IRA contributions of up to $ 2,000 to be made for each spouse (including, for example, a homemaker who does not work outside the home) if the combined compensation of both spouses is at least equal to the contributed amount. The provision is effective for taxable years beginning after December 31, 1996. SBJPA §1427. IRC §219(c). PENSION SIMPLIFICATION - NON-DISCRIMINATION PROVISIONS Definition Of Highly Compensated Employees And Repeal Of Family Aggregation Rules. Under present law, an employee, including a self-employed individual, is treated as highly compensated if, at any time during the year or the preceding year, the employee (1) was a 5-percent owner of the employer, (2) received more than $100,000 (for 1996) in annual compensation from the employer, (3) received more than $66,000 (for 1996) in annual compensation from the employer and was one of the top-paid 20 percent of employees during the same year, or (4) was an officer of the employer who received compensation in excess of $60,000 (for 1996). Ifs for any year, no officer has compensation in excess of the threshold, then the highest paid officer of the employer is treated as a highly compensated employee. A special rule applies with respect to the treatment of family members of certain highly compensated employees for purposes of the nondiscrimination rules applicable to qualified plans. Under the special rule, if an employee is a family member of either a 5- percent owner or 1 of the top-10 highly compensated employees by compensation, then any compensation paid to such family member and any contribution or benefit under the plan on behalf of such family member is aggregated with the compensation paid and contributions or benefits on behalf of the 5-percent owner or the highly compensated employee in the top-10 employees by compensation. Similar family aggregation rules apply with respect to the $ 150,000 (for 1996) limit on compensation that may be taken into account under a qualified plan (Sec. 401(a)(17)) and for deduction purposes (Sec. 400(1)). Under the new law, an employee is treated as highly compensated if the employee (1) was a 5-percent owner of the employer at any time during the year or the preceding year or (2) had compensation for the proceeding year in excess of $ 80,000 (indexed for inflation) and the employee was in the top 20 percent of employees by compensation for such year, or, (3) at the election of the taxpayer, had compensation for the preceding year in excess of $ 80,000 without regard to whether the employee was in the top 20 percent of employees by compensation. The new law repeals the rule requiring the highest paid officer to be treated as a highly compensated employee. The new law also repeals the family aggregation. The provision is effective for years beginning after December 31, 1996. SBJPA §1431. IRC §414(q). Modification Of Additional Participation Requirements. Under present law, a plan is not a qualified plan unless it benefits no fewer than the lesser of (a) 50 employees of the employer or (b) 40 percent of all employees of the employer (sec. 401(a)(26)). This requirement may not be satisfied by aggregating comparable plans, but may be applied separately to different lines of business of the employer. A line of business of the employer does not qualify as a separate line of business unless it has at least 50 employees. The new law provides that the minimum participation rule applies only to defined benefit pension plans. In addition, the new law provides that a defined benefit pension plan does not satisfy the rule unless it benefits no fewer than the lesser of (1) 50 employees or (2) the greater of (a) 40 percent of all employees of the employer or (b) 2 employees (1 employee if there is only 1 employee). The new law provides that the requirement that a line of business has at least 50 employees does not apply in determining whether a plan satisfies the minimum participation rule on a separate line of business. The provision is effective for years beginning after December 31, 1996. SBJPA §1432. IRC §401(a)(26)(A). Nondiscrimination Rules For Qualified Cash Or Deferred Arrangements And Matching Contributions. The new law modifies the special nondiscrimination tests applicable to elective deferrals and employer matching and after-tax employee contributions to provide that the maximum permitted actual deferral percentage (and actual contribution percentage) for highly compensated employees for the year is determined by reference to the actual deferral percentage (and actual contribution percentage) for nonhighly compensated employees for the preceding, rather than the current, year. A special rule applies for the first plan year. Alternatively, an employer is allowed to elect to use the current year actual deferral percentage (and actual contribution percentage). Such an election can be revoked only as provided by the Secretary. The law also provides a safe harbor for cash or deferred arrangements that satisfies the special nondiscrimination tests if the plan satisfies one of two contribution requirements and satisfies a notice requirement. The new law also provides a safe harbor method of satisfying the special nondiscrimination test applicable to employer matching contributions (the ACP test). The new law also provides that the total amount of excess contributions (and excess aggregate contributions) is determined as under present law, but the distribution of excess contributions (and excess aggregate contributions) are required to be made on the basis of the amount of contribution by, or on behalf of, each highly compensated employee. Thus, excess contributions (and excess aggregate contributions) are deemed attributable first to those highly compensated employees who have the greatest dollar amount of elective deferrals. The provisions relating to use of prior-year data and the distribution of excess contributions and excess aggregate contributions are effective for years beginning after December 31, 1996. The provisions providing for a safe harbor for qualified cash or deferred arrangements and the alternative method of satisfying the special nondiscrimination test for matching contributions are effective for years beginning after December 31, 1998. SBJPA §1433. IRC §401(k)(12). Definition Of Compensation For Purposes Of The Limits On Contributions And Benefits. Present law imposes limits on contributions and benefits under qualified plans based on the type of plan. For purposes of these limits, present law provides that the definition of compensation generally does not include elective employee contributions to certain employee benefit plans. The new law provides that elective deferrals to section 401(k) plans and similar arrangements, elective contributions to nonqualified deferred compensation plans of tax-exempt employers and State and local governments (sec. 457 plans), and salary reduction contributions to a cafeteria plan are considered compensation for purposes of the limits on contributions and benefits. The provision is effective for years beginning after December 31, 1997. SBJPA §1434. IRC §415(c)(3)(D). PENSION SIMPLIFICATION-MISCELLANEOUS PENSION SIMPLIFICATION Plans Covering Self-Employed Individuals. Under present law, certain special aggregation rules apply to plans maintained by owner employees of unincorporated businesses that do not apply to other qualified plans (sec. 401(d)(1) and (2)). The new law eliminates the special aggregation rules that apply to plans maintained by self-employed individuals that do not apply to other qualified plans. The provision is effective for years beginning after December 31, 1996. SBJPA §1441. IRC §401(d). Elimination Of Special Vesting Rule For Multi-Employer Plans. The new law conforms the vesting rules for multi-employer plans to the rules applicable to other qualified plans. The provision is effective for plan years beginning on or after the earlier of (1) the later of January 1, 1997, or the date on which the last of the collective bargaining agreements pursuant to which the plan is maintained terminates, or (2) January 1, 1999, with respect to participants with an hour of service after the effective date. SBJPA §1442 IRC §411(a)(2) Distributions Under Rural Cooperative Plans. A qualified cash or deferred arrangement can permit withdrawals of employee elective deferrals only after the earlier of (1) the participant's separation from service, death, or disability, (2) termination of the arrangement, or (3) in the case of a profit- sharing or stock bonus plan, the attainment of age 59-1/2 or the occurrence of a hardship of the participant. In the case of a money purchase pension plan, including a rural cooperative plan, withdrawals by participants cannot occur upon attainment of age 59- 1/2 or upon hardship. The new law provides that a rural cooperative plan that includes a cash or deferred arrangement may permit distributions to plan participants after the attainment of age 59-1/2 or on account of hardship. In addition, the definition of a rural cooperative is expanded to include certain public utility districts. The provision generally is effective for distributions after the date of enactment. The modifications to the definition of a rural cooperative apply to plan years beginning after December 31, 1996. SBJPA §1443. IRC §401(k)(7)(C). Treatment Of Governmental Plans Under Section 415. The new law makes the following modifications to the limits on contributions and benefits as applied to governmental plans: (1) the 100 percent of compensation limitation on defined benefit pension plan benefits would not apply; and (2) the early retirement reduction and the 10-year phase-in of the defined benefit pension plan dollar limit would not apply to certain disability and survivor benefits. The new law also permits State and local government employers to maintain excess benefit plans without regard to the limits on unfunded deferred compensation arrangements of State and local government employers (sec. 457). The provision is effective for years beginning after December 31, 1994. No inference is intended with respect to whether a governmental plan complies with the requirements of section 415 with respect to years beginning before January 1, 1995. With respect to such years, the Secretary is directed to enforce the requirements of section 415 consistent with the provision. SBJPA §1444. IRC §415(b)(11) Uniform Retirement Age. The new law provides that for purposes of the general nondiscrimination rules (sec. 401(a)(4)) the Social Security retirement age (as defined in sec. 415) is a uniform retirement age and that subsidized early retirement benefits and joint and survivor annuities are not treated as not being available to employees on the same terms merely because they are based on an employee's Social Security retirement age (as defined in sec. 415). The provision is effective for years beginning after December 31, 1996. SBJPA §1445. IRC §401(a)(5)(F). Contributions On Behalf Of Disabled Employees. Under present law, an employer may elect to continue deductible contributions to a defined contribution plan on behalf of an employee who is permanently and totally disabled. For purposes of the limit on annual additions (sec. 415(c)), the compensation of a disabled employee is deemed to be equal to the annualized compensation of the employee prior to the employee's becoming disabled. Contributions are not permitted on behalf of disabled employees who were officers, owners, or highly compensated before they became disabled. The new law provides that the special rule for contributions on behalf of disabled employees is applicable without an employer election and to highly compensated employees if the defined contribution plan provides for the continuation of contributions on behalf of all participants who are permanently and totally disabled. The provision is effective for years beginning after December 31, 1996. SBJPA §1446. IRC §415(c)(3)(C). Treatment Of Deferred Compensation Plans Of State And Local Governments And Tax-Exempt Organizations. The new law makes three changes to the rules governing section 457 plans: (1) permits in- service distributions of accounts that do not exceed $ 3,500 under certain circumstances; (2) increases the number of elections that can be made with respect to the time distributions must begin under the plan; and (3) provides for indexing (in $ 500 increments) of the dollar limit on deferrals. The provision is effective for taxable years beginning after December 31, 1996. SBJPA §1447. IRC §457(e)(9). Trust Requirement For Deferred Compensation Plans Of State And Local Governments. Under the new law all amounts deferred under a section 457 plan maintained by a State and local governmental employer have to be held in trust (or custodial account or annuity contract) for the exclusive benefit of employees. The trust (or custodial account or annuity contract) is provided tax- exempt status. Amounts are not considered made available merely because they are held in a trust, custodial account, or annuity contract. The provision generally is effective with respect to amounts held on or after August 21, 1996. In the case of plans in existence on August 21, 1996, the trust requirement does not have to be satisfied until January 1, 1999. Thus, deferrals prior to and after the date of enactment (and earnings thereon) do not have to be held in trust (or custodial account or annuity contract) until January 1, 1999. SBJPA §1448. IRC §457(g). Correction Of GATT Interest And Morality Rate Provisions In The Retirement Protection Act. The Retirement Protection Act of 1994, enacted as part of the implementing legislation for the General Agreement on Tariffs and Trade ("GATT"), modified the actuarial assumptions that must be used in adjusting benefits and limitations. GATT made similar changes to the interest rate and mortality assumptions used to calculate the value of lump-sum distributions for purposes of the rule permitting involuntary dispositions of certain accrued benefits. The new law conforms the effective date of the new interest rate and mortality assumptions that must be used under section 415 to calculate the limits on benefits and contributions to the effective date of the provision relating to the calculation of lump-sum distributions. This rule applies only in the case of plans that were adopted and in effect before the date of enactment of GATT (December 8, 1994). To the extent plans have already been amended to reflect the new assumptions, plan sponsors are permitted within 1 year of the date of enactment to amend the plan to reverse retroactively such amendment. The new law also repeals the GATT provision which requires that if the benefit is payable before age 62 in a form subject to the requirements of section 417(e)(3) (e.g., lump sum), then the interest rate to be used to reduce the dollar limit on benefits under section 415 cannot be less than the greater of the rate on 30-year Treasury securities or the rate specified in the plan. Consequently, regardless of the form of benefit, the interest rate to be used cannot be less than the greater of 5 percent or the rate specified in the plan. These provision are effective as if included in GATT. SBJPA §1449. §767(d)(3) of the Uruguay Round Agreements Act. Multiple Salary Reduction Agreements Permitted Under Section 403(B). Under existing Treasury regulations, a participant in a tax- sheltered annuity plan (sec. 403(b)) is not permitted to enter into more than one salary reduction agreement in any taxable year. These restrictions do not apply to other elective deferral arrangements such as a qualified cash or deferred arrangement (sec. 401(k)). Under the new law, for participants in a tax-sheltered annuity plan, the frequency that a salary reduction agreement may be entered into, the compensation to which such agreement applies, and the ability to revoke such agreement shall be determined under the rules applicable to qualified cash or deferred arrangements. The provision is effective for taxable years beginning after December 31, 1995. SBJPA §1450. IRC §403(b). Treatment Of Indian Tribal Governments Under Section 403(B). Under present law, certain tax-exempt employers and certain State and local government educational organizations are permitted to maintain tax-sheltered annuity plans (sec. 403(b)). Indian tribal governments are treated as States for this purpose, so certain educational organizations associated with a tribal government are eligible to maintain tax-sheltered annuity plans. The new law provides that any section 403(b) annuity contract purchased in a plan year beginning before January 1, 1995, by an Indian tribal government will be treated as purchased by an entity permitted to maintain a tax-sheltered annuity plan. The new law also provides that such contracts may be rolled over into a section 401(k) plan maintained by the Indian tribal government. The provision is effective on August 21, 1996. SBJPA §1450. IRC §403(b). Application Of Elective Deferral Limit To Section 403(B) Contracts. Under existing law, a tax-sheltered annuity plan must provide that elective deferrals made under the plan on behalf of an employee may not exceed the annual limit on elective deferrals ($ 9,500 for 1996). Plans that do not comply with this requirement may lose their tax-favored status. Under the new law, each tax-sheltered annuity contract, not the tax-sheltered annuity plan, must provide that elective deferrals made under the contract may not exceed the annual limit on elective deferrals. It is intended that the contract terms be given effect in order for this requirement to be satisfied. The provision is effective for years beginning after December 31, 1995, except that an annuity contract is not required to meet any change in any requirement by reason of the provision before the 90th day after August 21, 1996. No inference is intended as to whether the exclusion of elective deferrals from gross income by employees who have not exceeded the annual limit on elective deferrals is affected to the extent other employees exceed the annual limit prior to the prior to the effective date of this provision. SBJPA §1450. IRC §403(b). Waiver Of Minimum Waiting Period For Qualified Plan Distributions For Joint And Survivor Annuity. Under present law, in the case of a qualified joint and survivor annuity ("QJSA"), a written explanation of the form of benefit must generally be provided to participants no less than 30 days and no more than 90 days before the annuity starting date. Temporary Treasury regulations provide that a plan may permit a participant to elect (with any applicable spousal consent) a distribution with an annuity starting date before 30 days have elapsed since the explanation was provided, as long as the distribution commences more than seven days after the explanation was provided. The new law codifies the provision in the temporary Treasury regulations which provides that a plan may permit a participant to elect (with any applicable spousal consent) a distribution with an annuity starting date before 30 days have elapsed since the explanation was provided, as long as the distribution commences more than seven days after the explanation was provided. The new law also provides that a plan is permitted to provide the explanation after the annuity starting date if the distribution commences at least 30 days after such explanation was provided, subject to the same waiver of the 30-day minimum waiting period as described above. This is intended to allow retroactive payments of benefits which are attributable to the period before the explanation was provided. The provision is effective with respect to plan years beginning after December 31, 1996. SBJPA §1451. IRC §417(a)(7). Repeal Of Combined Plan Limit. Present law provides limits on contributions and benefits under qualified retirement plans based on the type of plan (i.e., based on whether the plan is a defined contribution plan or a defined benefit pension plan). In the case of a defined contribution plan, annual contributions are generally limited to the lesser of $ 30,000 (for 1996) and 25 percent of compensation. In the case of a defined benefit pension plan, the annual benefit is generally limited to the lesser of $ 120,000 (for 1996) and 100 percent of the participant's average compensation for the highest 3 years. An overall limit applies if an individual is a participant in both a defined benefit pension plan and a defined contribution plan (called the combined plan limit). Present law imposes a 15-percent excise tax on excess distributions from qualified retirement plans, tax-sheltered annuities, and IRAs. Excess distributions are generally the aggregate amount of retirement distributions from such plans during any calendar year in excess of $ 150,000 (or $ 750,000 in the case of a lump-sum distribution). An additional 15-percent estate tax is also imposed on an individual's excess retirement accumulation. The new law repeals the combined plan limit. Until the repeal of the combined plan limit is effective, the new law suspends the excise tax on excess distributions. The additional estate tax on excess accumulations continues to apply. The provision repealing the combined plan limit is effective with respect to limitation years beginning after December 31, 1999. The provision relating to the excise tax on excess distributions is effective with respect to distributions received in 1997, 1998, and 1999. SBJPA §1452. IRC §415(e), §4980A(g). Tax On Prohibited Transactions. Present law prohibits certain transactions (prohibited transactions) between a qualified plan and a disqualified person in order to prevent persons with a close relationship to the qualified plan from using that relationship to the detriment of plan participants and beneficiaries. A two-tier excise tax is imposed on prohibited transactions. The initial level tax is equal to 5 percent of the amount involved with respect to the transaction. If the transaction is not corrected within a certain period, a tax equal to 100 percent of the amount involved may be imposed. The new law increases the initial-level prohibited transaction tax from 5 percent to 10 percent. The provision is effective with respect to prohibited transactions occurring after August 21, 1996. SBJPA §1453. IRC §4975(a). Treatment Of Leased Employees. Under the new law, the present-law "historically performed" test is replaced with a new test under which an individual is not considered a leased employee unless the individual's services are performed under primary direction or control by the service recipient. As under present law, the determination of whether someone is a leased employee is made after determining whether the individual is a common-law employee of the recipient. Thus, an individual who is not a common-law employee of the service recipient could nevertheless be a leased employee of the service recipient. Similarly, the fact that a person is or is not found to perform services under primary direction or control of the recipient for purposes of the employee leasing rules is not determinative of whether the person is or is not a common-law employee of the recipient. The provision is effective for years beginning after December 31, 1996, except that the new standard does not apply to relationships that have been previously determined by an IRS ruling not to involve leased employees. In applying the leased employee rules to years beginning before the effective date, it is intended that the Secretary use a reasonable interpretation of the statute to apply the leasing rules to prevent abuse. SBJPA §1454. IRC §414(n)(2)(C). Uniform Penalty Provisions To Apply To Certain Pensions Reporting Requirements. Under existing law, any person who fails to file an information report with the IRS on or before the prescribed filing date is subject to penalties for each failure. A different, flat-amount penalty applies for each failure to provide information reports to the IRS or statements to payees relating to pension payments. The new law incorporates into the general penalty structure the penalties for failure to provide information reports relating to pension payments to the IRS and to recipients. The provision is effective with respect to returns and statements the due date for which is after December 31, 1996. SBJPA §1455. IRC §6724(d)(1). Retirement Benefits Of Ministers Not Subject To Tax On Net Earnings From Self-Employment. Under present law, certain benefits provided to ministers after they retire are subject to self-employment tax. The new law provides that retirement benefits received from a church plan after a minister retires, and the rental value or allowance of a parsonage (including utilities) furnished to a minister after retirement, are not subject to self-employment taxes. The provision is effective for years beginning before, on, or after December 31, 1994. SBJPA §1456. IRC §1402(a)(8). Treasury To Provide Sample Language For Spousal Consent And Qualified Domestic Relations Orders. Present law contains a number of rules designed to provide income to the surviving spouse of a deceased employee. Under these spousal protection rules, defined benefit pension plans and money purchase pension plans are required to provide that vested retirement benefits with a present value in excess of $ 3,500 are payable in the form of a qualified joint and survivor annuity ("QJSA") or, in the case of a participant who dies before the annuity starting date, a qualified pre-retirement survivor annuity ("QPSA"). Benefits from a plan subject to the survivor benefit rules may be paid in a form other than a QJSA or QPSA if the participant waives the QJSA or QPSA (or both) and the applicable notice, election, and spousal consent requirements are satisfied. Also, under present law, benefits under a qualified retirement plan are subject to prohibitions against assignment or alienation of benefits. An exception to this rule generally applies in the case of plan benefits paid to a former spouse pursuant to a qualified domestic relations order ("QDRO"). The Secretary is required to develop sample language for inclusion in a spousal consent form no later than January 1, 1997, waiving the QJSA and QPSA forms of benefit. The sample language must be written in a manner calculated to be understood by the average person, and must disclose in plain form whether the waiver is irrevocable and that it may be revoked by a QDRO. The Secretary is required to develop sample language, no later than January 1, 1997, which satisfies the requirements of a QDRO under present law, and the provisions of which focus attention on the need to consider the treatment of any lump sum payment, QJSA, or QPSA. The provisions are effective as of August 21, 1996. SBJPA §1457. Treatment Of Length Of Service Awards For Certain Volunteers Under Section 457. Under existing law, compensation deferred under an eligible deferred compensation plan of a tax-exempt or governmental employer that meets certain requirements (a "sec. 457 plan") is not includible in gross income until paid or made available. One of the requirements for a section 457 plan is that the maximum annual amount that can be deferred is the lesser of $ 7,500 or 33-1/3 percent of the individual's taxable compensation. Amounts deferred under plans of tax-exempt and governmental employers that do not meet the requirements of section 457 (other than amounts deferred under tax-qualified retirement plans, section 403(b) annuities and certain other plans) are includible in gross income in the first year in which there is no substantial risk of forfeiture of such amounts. Under the new law, the requirements of section 457 do not apply to any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of fire fighting and prevention, emergency medical, and ambulance services performed by such volunteers. Under the new law, a length of service award plan will not qualify for this special treatment under section 457 if the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer exceeds $ 3,000. In addition, any amounts exempt from the requirements of section 457 under the new law are not considered wages for purposes of the Federal Insurance Contribution Act ("FICA") taxes. The provision applies to accruals of length of service awards after December 31, 1996. SBJPA §1458. IRC §457(e)(11). Alternative Nondiscrimination Rules For Certain Plans That Provide For Early Participation. Under present law, a special nondiscrimination test applies to qualified cash or deferred arrangements (sec. 401(k) plans). The special nondiscrimination test is satisfied if the actual deferral percentage ("ADP") for eligible highly compensated employees for a plan year is equal to or less than either (1) 125 percent of the ADP of all nonhighly compensated employees eligible to defer under the arrangement or (2) the lesser of 200 percent of the ADP of all eligible nonhighly compensated employees or such ADP plus 2 percentage points. Employer matching contributions and after-tax employee contributions under qualified defined contribution plans are subject to a special nondiscrimination test (the actual contribution percentage ("ACP") test) similar to the special nondiscrimination test applicable to qualified cash or deferred arrangements. Under the new law, for purposes of the ADP test, a section 401(k) plan may elect to disregard employees (other than highly compensated employees) eligible to participate before they have completed 1 year of service and reached age 21, provided the plan separately satisfies the minimum coverage rules (sec. 410(b)) taking into account only those employees who have not completed 1 year of service or are under age 21. Instead of applying two separate ADP tests, such a plan could apply a single ADP test that compares the ADP for all highly compensated employees who are eligible to make elective contributions with the ADP for those nonhighly compensated employees who are eligible to make elective contributions and who have completed one year of service and reached age 21. A similar rule applies for purposes of the ACP test. The provision is effective for plan years beginning after December 31, 1998. SBJPA §1459. IRC §401(k)(3). Clarification Of Application Of ERISA To Insurance Company General Accounts. The Employee Retirement Income Security Act of 1974 ("ERISA") imposes certain fiduciary requirements (including restrictions on certain prohibited transactions) with respect to the assets of an employee benefit plan ("plan assets"). The Internal Revenue Code of 1986 (the "Code") imposes an excise tax in the case of certain prohibited transactions involving plan assets. In 1975, the Department of Labor issued guidance providing that if an insurance company issues a contract or policy of insurance to an employee benefit plan and places the consideration for such contract or policy in its general asset account, the assets in such account are not considered to be plan assets. In 1993, the Supreme Court ruled that certain assets held in an insurance company's general account should be considered plan assets. The new law requires the Secretary of Labor to issue regulations with respect to this issue. SBJPA §1460. §401 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1101). Church Pension Plan Simplification. The new law allows self- employed ministers to participate in a church plan and includes several corresponding rules regarding employed and self-employed ministers. The provision is effective for years beginning after December 31, 1996. SBJPA §1461, §1462, and §1463. IRC §414(e)(5), §414(q)(7), 72(f). Waiver Of Excise Tax On Failure To Pay Liquidity Shortfall. A provision in the Retirement Protection Act of 1994, enacted as part of the implementing legislation for the General Agreement on Tariffs and Trade ("GATT"), generally requires certain underfunded single-employer defined benefit plans to make quarterly contributions sufficient to maintain liquid plan assets, i.e., cash and marketable securities, at an amount approximately equal to three times the total trust disbursements for the preceding 12-month period. This liquidity requirement only applies to underfunded single-employer defined benefit plans (other than small plans) that (1) are required to make quarterly installments of their estimated minimum funding contribution for the plan year, and (2) have a liquidity shortfall for any quarter during the plan year. A plan has a liquidity shortfall if its liquid assets as of the last day of the quarter are less than the base amount for the quarter. If a liquidity shortfall payment is not made, then the plan sponsor is subject to a nondeductible excise tax equal to 10 percent of the amount of the outstanding liquidity shortfall. The new law gives the Secretary authority to waive all or part of the excise tax imposed for a failure to make a liquidity shortfall payment if the plan sponsor establishes to the satisfaction of the Secretary that the liquidity shortfall was due to reasonable cause and not willful neglect and reasonable steps have been taken to remedy such shortfall. The provision is effective as if included in GATT. SBJPA §1464. IRC §4971(f)(4). Date For Adoption Of Plan Amendments. Under the new law any amendments to a plan or annuity contract required by the pension simplification amendments would not be required to be made before the first plan year beginning on or after January 1, 1998. The date for amendments is extended to the first plan year beginning on or after January 1, 2000, in the case of a governmental plan. SBJPA §1465. IRC §4971(f)(4). FOREIGN SIMPLIFICATION PROVISION Repeal of excess passive assets provision. Under the rules of subpart F (Secs. 951-964), certain 10- percent U.S. shareholders of a controlled foreign corporation (CFC) are required to include in income currently for U.S. tax purposes certain earnings of the CFC, whether or not such earnings are actually distributed, currently to the shareholders. The 10-percent U.S. shareholders of a CFC are subject to current U.S. tax on their shares of certain income earned by the CFC (referred to as "subpart F income"). The 10-percent U.S. shareholders are also subject to current U.S. tax on their shares of the CFC's earnings to the extent such earnings are invested by the CFC in certain U.S. property. In addition to these current inclusion rules, the Omnibus Budget Reconciliation Act of 1993 enacted section 956A, which applies another current inclusion rule to U.S. shareholders of a CFC. Section 956A requires the 10-percent U.S. shareholders of a CFC to include in income currently their shares of the CFC's earnings to the extent such earnings are invested by the CFC in excess passive assets. A CFC generally is treated as having excess passive assets if the average of the amounts of its passive assets exceeds 25 percent of the average of the amounts of its total assets; this calculation requires a quarterly determination of the CFC's passive assets and total assets. The new law repeals section 956A. The provision applies to taxable years of foreign corporations beginning after December 31, 1996, and taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end. SBJPA §1501 IRC §951(a)(1) REVENUE OFFSETS IRC § Modifications Of The Puerto Rico And Possession Tax Credit. Certain domestic corporations with business operations in the U.S. possessions (including, for this purpose, Puerto Rico and the U.S. Virgin Islands) may elect the Puerto Rico and possession tax credit which generally eliminates the U.S. tax on income related to their operations in the possessions. In contrast to the foreign tax credit, the Puerto Rico and possession tax credit is a "tax sparing" credit. The new law generally repeals the Puerto Rico and possession tax credit for taxable years beginning after December 31, 1995. However, the Puerto Rico and possession tax credit attributable to QPSII continues to be allowed for QPSII earned before July 1, 1996. The law provides grandfather rules under which a corporation that is an existing credit claimant would be eligible to claim credits for a transition period. A special transition rule applies to the credit attributable to operations in American Samoa, and the Commonwealth of the Northern Mariana Islands. SBJPA §1601. IRC §936. Repeal 50-Percent Interest Income Exclusion For Financial Institution Loans To ESOPs. A bank, insurance company, regulated investment company, or a corporation actively engaged in the business of lending money may generally exclude from gross income 50 percent of interest received on an ESOP loan (sec. 133). The new law repeals the 50-percent interest exclusion with respect to ESOP loans. The provision is effective with respect to loans made after the date of enactment, other than loans made pursuant to a written binding contract in effect before June 10, 1996, and at all times thereafter before such loan is made. The repeal of the 50-percent interest exclusion does not apply to the refinancing of an ESOP loan originally made on or before the date of enactment or pursuant to a binding contract in effect before June 10, 1996, provided: (1) such refinancing loan otherwise meets the requirements of section 133 in effect on the day before the date of enactment; (2) the outstanding principal amount of the loan is not increased; and (3) the term of the refinancing loan does not extend beyond the term of the original ESOP loan. SBJPA §1602. IRC §133. Application Of Look-Through Rule For Purposes Of Characterizing Certain Subpart F Insurance Income As Unrelated Business Taxable Income. The new law applies a look-through rule in characterizing certain subpart F insurance income for unrelated business income tax purposes. The look-through rule applies to amounts that constitute insurance income currently includible in gross income under the subpart F rules and that are not attributable to the insurance of risks of (1) the tax-exempt organization itself, (2) certain tax-exempt affiliates of such organization, or (3) an officer or director of, or an individual who (directly or indirectly) performs services for, the tax-exempt organization (or certain tax-exempt affiliates) provided that the insurance covers primarily risks associated with the individual's performance of services in connection with the exempt organization (or tax-exempt affiliates). The provision applies to amounts includible in gross income in taxable years beginning after December 31, 1995. SBJPA §1603. IRC §512(b)(17). Depreciation Under The Income Forecast Method. The new law makes several changes in the application of the income forecast method of depreciation with respect to the determination of estimated income, the determination and treatment of costs of property, and a look-back method. The new law is effective for property placed in service after September 13, 1995, unless produced or acquired pursuant to a binding written contract in effect on such date and all times thereafter. For this purpose, the binding contract exception may apply to a written contract in effect on the relevant dates if that contract binds a taxpayer to produce, license or deliver property that will be used by the other party to the contract once the property is produced. SBJPA §1604. IRC §167(g). Modify Exclusion Of Damages Received On Account Of Personal Injury Or Sickness. Under present law, gross income does not include any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injury or sickness (sec. 104(a)(2)). The exclusion from gross income of damages received on account of personal injury or sickness specifically does not apply to punitive damages received in connection with a case not involving physical injury or sickness. Courts presently differ as to whether the exclusion applies to punitive damages received in connection with a case involving a physical injury or physical sickness. Certain States provide that, in the case of claims under a wrongful death statute, only punitive damages may be awarded. Courts have interpreted the exclusion from gross income of damages received on account of personal injury or sickness broadly in some cases to cover awards for personal injury that do not relate to a physical injury or sickness. For example, some courts have held that the exclusion applies to damages in cases involving certain forms of employment discrimination and injury to reputation where there is no physical injury or sickness. The damages received in these cases generally consist of back pay and other awards intended to compensate the claimant for lost wages or lost profits. The Supreme Court recently held that damages received based on a claim under the Age Discrimination in Employment Act could not be excluded from income. Schleier v. Commissioner, 115 S. Ct. 2159 (1995). In light of the Supreme Court decision, the Internal Revenue Service has suspended existing guidance on the tax treatment of damages received on account of other forms of employment discrimination. The new law provides that the exclusion from gross income does not apply to any punitive damages received on account of personal injury or sickness whether or not related to a physical injury or physical sickness. Present law continues to apply to punitive damages received in a wrongful death action if the applicable State law (as in effect on September 13, 1995 without regard to subsequent modification) provides, or has been construed to provide by a court decision issued on or before such date, that only punitive damages may be awarded in a wrongful death action. No inference is intended as to the application of the exclusion to punitive damages prior to the effective date of the new law for any case involving a physical injury or physical sickness. The new law provides that the exclusion from gross income only applies to damages received on account of a personal physical injury or physical sickness. If an action has its origin in a physical injury or physical sickness, then all damages (other than punitive damages) that flow therefrom are treated as payments received on account of physical injury or physical sickness whether or not the recipient of the damages is the injured party. For example, damages (other than punitive damages) received by an individual on account of a claim for loss of consortium due to the physical injury or physical sickness of such individual's spouse are excludable from gross income. In addition, damages (other than punitive damages) received on account of a claim of wrongful death continue to be excludable from taxable income as under present law. The new law also specifically provides that emotional distress is not considered a physical injury or physical sickness. It is intended that the term emotional distress includes physical symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress. Thus, the exclusion from gross income does not apply to any damages received (other than for medical expenses as discussed below) based on a claim of employment discrimination or injury to reputation accompanied by a claim of emotional distress. Because all damages received on account of physical injury or physical sickness are excludable from gross income, the exclusion from gross income applies to any damages received based on a claim of emotional distress that is attributable to a physical injury or physical sickness. In addition, the exclusion from gross income specifically applies to the amount of damages received that is not in excess of the amount paid for medical care attributable to emotional distress. The provisions generally are effective with respect to amounts received after date of enactment. The provisions do not apply to amounts received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995. No inference is intended as to the application of the exclusion to damages prior to the effective date of the new law in connection with a case not involving a physical injury or physical sickness. SBJPA §1605. IRC §104(a). Repeal Of Refunds Of Diesel Fuel Tax For Purchasers Of Diesel- Powered Automobiles, Vans, And Light Trucks. Excise taxes are imposed on gasoline (14 cents per gallon) and diesel fuel (20 cents per gallon) to fund the Federal Highway Trust Fund. Before 1985, the gasoline and diesel fuel tax rates were the same. The predominate highway use of diesel fuel is by trucks. In 1984, the diesel excise tax rate was increased above the gasoline tax as the revenue offset for a reduction in the annual heavy truck use tax. Because automobiles, vans, and light trucks did not benefit from the use tax reductions, a provision was enacted allowing first purchasers of model year 1979 and later diesel-powered automobiles and light trucks a tax credit to offset this increased diesel fuel tax. The credit is $ 102 for automobiles, and $ 198 for vans and light trucks. The new law repeals the tax credit for purchasers of diesel-powered automobiles, vans and light trucks. Effective for vehicles purchased after the date of enactment. SBJPA §1606. IRC §6427(g). Extension And Phasedown Of Excise Tax On Luxury Automobiles. Present law imposes an excise tax on the sale of an automobile whose price exceeds a designated threshold, currently $ 34,000. The excise tax is imposed at a rate of 10-percent on the excess of the sales price above the designated threshold. The $ 34,000 threshold is indexed for inflation. The new law extends and phases out the luxury tax on automobiles. The tax rate is reduced by one percentage point per year beginning in 1996. The tax rate for sales (on or after the date of enactment plus seven days) in 1996 is 9 percent. The tax rate for sales in 1997 is 8 percent. The tax rate for sales in 1998 is 7 percent. The tax rate for sales in 1999 is 6 percent. The tax rate for sales in 2000 is 5 percent. The tax rate for sales in 2001 is 4 percent. The tax rate for sales in 2002 is 3 percent. The tax will expire after December 31, 2002. The provision is effective for sales on or after date of enactment plus seven days. SBJPA §1607. IRC §4001(f). Allow Certain Persons Engaged In The Local Furnishing Of Electricity Or Gas To Elect Not To Be Eligible For Future Tax- Exempt Bond Financing. Under existing law, interest on State and local government bonds generally is excluded from income except where the bonds are issued to provide financing for private parties. Present law includes several exceptions, however, that allow tax-exempt bonds to be used to provide financing for certain specifically identified private parties. One such exception allows tax-exempt bonds to be issued to finance facilities for the furnishing of electricity or gas by private parties if the area served by the facilities does not exceed (1) two contiguous counties or (2) a city and a contiguous county (commonly referred to as the "local furnishing" of electricity or gas). Like most other private beneficiaries of tax- exempt bonds, borrowers using tax-exempt bonds to finance these facilities are denied interest deductions on the debt underlying the bonds if the facilities cease to be used in qualified local furnishing activities. Additionally, as with all tax-exempt bonds, if the use of facilities financed with the bonds changes to a use not qualified for tax-exempt financing after the debt is incurred, interest on the bonds becomes taxable unless certain safe harbor standards are satisfied. The new law allows persons that have received tax-exempt financing of facilities that currently qualify as used in the local furnishing of electricity or gas to elect to terminate their qualification for this tax-exempt financing and to expand their service areas without incurring the present-law loss of interest deductions and loss of tax-exemption penalties if they meet several conditions. The new law also further limits the local furnishing exception to bonds for facilities of (1) of persons that qualified as engaged in that activity on the date of the provision's enactment and (2) that serve areas served by those persons on that date, subject to some exceptions and transitional rules. SBJPA §1608. IRC §142(f)(3). Extension Of Airport And Airway Trust Fund Excise Taxes. Before January 1, 1996, the following excise taxes were imposed to fund the Airport and Airway Trust Fund: (1) a 10-percent tax on domestic air passenger tickets; (2) a 6.25-percent tax on domestic air freight waybills; (3) a $ 6-per-person tax on international air departures; (4) a 17.5-cents-per-gallon tax on jet fuel used in noncommercial aviation; and (5) a 15-cents-per- gallon tax on gasoline used in noncommercial aviation (14 cents per gallon of this tax continues, with the revenues being deposited in the Highway Trust Fund). In addition, jet fuel and gasoline used in noncommercial aviation are subject to a tax of 4.3 cents per gallon, the revenues of which are deposited in the General Fund of the Treasury. Prior to January 1, 1996, of the total tax of 19.3 cents per gallon imposed on gasoline used in noncommercial aviation, 18.3 cents per gallon was collected when the gasoline was removed from a pipeline or barge terminal. The remaining 1 cent per gallon was imposed at the retail level. The new law reinstates the five Airport and Airway Trust Fund excise taxes at the pre-1996 rates for the period beginning seven calendar days after the date of enactment and through December 31, 1996. There are exemptions for certain medical air transportation and for helicopters used in exploration or development of hard minerals or oil or gas. The new law consolidates imposition of the aviation gasoline excise tax, with the entire 19.3-cents-per- gallon rate being imposed when the gasoline is removed from a pipeline or barge terminal facility. The new law provides that the determination of which tax, the passenger ticket tax or the fuels tax, applies to flights of aircraft of affiliated groups of corporations will be made on a flight-by-flight basis. The new law applies for transportation or fuel sold beginning seven days after the date of enactment. The air passenger and air freight taxes do not apply to any amount paid before that date, even if for transportation occurring during the reinstatement period. SBJPA §1609. IRC §4091(b)(3)(A). Modify Basis Adjustment Rules Under Section 1033. Under section 1033, gain realized by a taxpayer from certain involuntary conversions of property is deferred to the extent the taxpayer purchases property similar or related in service or use to the converted property within a specified replacement period of time. The replacement property may be acquired directly or by acquiring control of a corporation (generally, 80 percent of the stock of the corporation) that owns replacement property. The taxpayer's basis in the replacement property generally is the same as the taxpayer's basis in the converted property, decreased by the amount of any money or loss recognized on the conversion, and increased by the amount of any gain recognized on the conversion. In cases in which a taxpayer purchases stock as replacement property, the taxpayer generally reduces the basis of the stock, but does not reduce the basis of the underlying assets. Thus, the reduction in the basis of the stock generally does not result in reduced depreciation deductions where the corporation holds depreciable property, and may result in the taxpayer having more aggregate depreciable basis after the acquisition of replacement property than before the involuntary conversion. The new law provides that where the taxpayer satisfies the replacement property requirement of section 1033 by acquiring stock in a corporation, the corporation generally will reduce its adjusted bases in its assets by the amount by which the taxpayer reduces its basis in the stock. The corporation's adjusted bases in its assets will not be reduced, in the aggregate, below the taxpayer's basis in its stock (determined after the appropriate basis adjustment for the stock). In addition, the basis of any individual asset will not be reduced below zero. The basis reduction first is applied to: (1) property that is similar or related in service or use to the converted property, then (2) to other depreciable property, then (3) to other property. The provision applies to involuntary conversions occurring after the date of enactment. SBJPA §1610. IRC §1033(b). Treatment Of Certain Insurance Contracts On Retired Lives. Life insurance companies are allowed a deduction for any net increase in reserves and are required to include in income any net decrease in reserves. The reserve of a life insurance company for any contract is the greater of the net surrender value of the contract or the reserve determined under Federally prescribed rules. In no event, however, may the amount of the reserve for tax purposes for any contract at any time exceed the amount of the reserve for annual statement purposes. Special rules are provided in the case of a variable contract. The new law provides that a variable contract is to include a contract that provides for the funding of group term life or group accident and health insurance on retired lives if: (1) the contract provides for the allocation of all or part of the amounts received under the contract to an account that is segregated from the general asset account of the company; and (2) the amounts paid in, or the amounts paid out, under the contract reflect the investment return and the market value of the segregated asset account underlying the contract. Thus, the reserve for such a contract is to be adjusted by (1) subtracting any amount that has been added to the reserve by reason of appreciation in the value of assets underlying such contract, and (2) adding any amount that has been subtracted from the reserve by reason of depreciation in the value of assets underlying such contract. In addition, the basis of each asset underlying the contract is to be adjusted for appreciation or depreciation to the extent that the reserve is adjusted. The provision applies to taxable years beginning after December 31, 1995. SBJPA §1611. IRC §817(d)(2). Treatment Of Modified Guaranteed Contracts. The new law generally applies a mark-to- market regime to assets held as part of a segregated account under a modified guaranteed contract issued by a life insurance company. Gain or loss with respect to such assets held as of the close of any taxable year are taken into account for that year (even though the assets have not been sold or exchanged), and are treated as ordinary. If gain or loss is taken into account by reason of the mark-to-market requirement, then the amount of gain or loss subsequently realized as a result of sale, exchange, or other disposition of the asset, or as a result of the application of the mark-to-market requirement is appropriately adjusted to reflect such gain or loss. In addition, the reserve for a modified guaranteed contract is determined by taking into account the market value adjustment required on surrender of the contract. The new law also provides the Treasury Department with extensive rule making authority for interpretation and application. The provision applies to taxable years beginning after December 31, 1995. A taxpayer that is required to (1) change its calculation of reserves to take into account market value adjustments and (2) mark to market its segregated assets in order to comply with the requirements of the provision is treated as having initiated changes in method of accounting and as having received the consent of the Treasury Department to make such changes. Except as otherwise provided in special rules, the section 481(a) adjustments required by reason of the changes in method of accounting are to be taken into account as ordinary income for the taxpayer's first taxable year beginning after December 31, 1995. Special rules providing for a seven-year spread apply in the case of certain losses (if any), and in the case of certain reserve increases (if any), in order to limit selective loss recognition or selective minimization of gain recognition. SBJPA §1612 IRC §817A Treatment Of Contributions In Aid Of Construction For Water Utilities. The gross income of a corporation does not include contributions to its capital. A contribution to the capital of a corporation does not include any contribution in aid of construction or any other contribution as a customer or potential customer. Prior to the enactment of the Tax Reform Act of 1986 ("1986 Act"), a regulated public utility that provided electric energy, gas, water, or sewage disposal services was allowed to treat any amount of money or property received from any person as a tax- free contribution to its capital so long as such amount: (1) was a contribution in aid of construction; and (2) was not included in the taxpayer's rate base for rate-making purposes. These rules were repealed by the 1986 Act. Thus, after the 1986 Act, the receipt by a utility of a contribution in aid of construction is includible in the gross income of the utility, and the basis of property received or constructed pursuant to the contribution is not reduced. The new law restores the contributions in aid of construction provisions that were repealed by the 1986 Act for regulated public utilities that provide water or sewerage disposal services. The provision is effective for amounts received after June 12, 1996. SBJPA §1613. IRC §118(c). Require water utility property to be depreciated over 25 years. Property used by a water utility in the gathering, treatment, and commercial distribution of water and municipal sellers are depreciated over a 20-year period for regular tax purposes. The new law provides that water utility property will be depreciated using a 25-year recovery period and the straight line method for regular tax purposes. For this purpose, "water utility property" means (1) property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to the proposal, would have had a recovery period of 20 years and (2) any municipal sewer. The provision is effective for property placed in service after June 12, 1996, other than property placed in service pursuant to a binding contract in effect before June 10, 1996, and at all times thereafter before the property is placed in service. SBJPA §1613. IRC §168(b)(3)(F). Allow Conversion Of Scholarship Funding Corporation To Taxable Corporation. The new law provides that a nonprofit student loan funding corporation may elect to cease its status as a qualified scholarship funding corporation. If the corporation meets the specific requirements , such an election would not cause any bond outstanding as of the date of the issuer's election and any bond issued to refund such a bond to fail to be a qualified student loan bond. Once made, an election could be revoked only with the consent of the Secretary of Treasury. After making the election, the issuer would not be authorized to issue any new bonds. Effective on August 21, 1996. SBJPA §1614. IRC §150(d). Apply Mathematical Or Clerical Error Procedures For Dependency Exemptions And Filing Status When Correct Taxpayer Identification Numbers Are Not Provided. Under the new law, if an individual fails to provide a correct TIN for a dependent, the IRS is authorized to deny the dependency exemption. Such a change also has indirect consequences for other tax benefits currently conditioned on being able to claim a dependency exemption (e.g., head of household filing status and the dependent care credit). In addition, the failure to provide a correct TIN for a dependent will be treated as a mathematical or clerical error and thus any notification that the taxpayer owes additional tax because of that failure will not be treated as a notice of deficiency. The provision is effective for tax returns for which the due date (without regard to extensions) is 30 days or more after the date of enactment. For taxable years beginning in 1995, no requirement to obtain a TIN applies in the case of dependents born after October 31, 1995. For taxable years beginning in 1996, no requirement to obtain a TIN applies in the case of dependents born after November 30, 1996. SBJPA §1615. IRC §151(e). Repeal Of Bad Debt Deductions Of Thrift Institutions. The new law repeals the section 593 reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after 1995. The new law also repeals section 595 effective for property acquired in taxable years beginning after December 31, 1995. The new law also amends section 860E but the amendment does not apply to any residual interest in a REMIC held by the taxpayer on October 31, 1995, and at all times thereafter. The amendment to section 593(e)(1)(B) does not apply to any distributions with respect to preferred stock (including redemptions of such stock) if: (1) such stock was issued and outstanding as of November 1, 1995, and at all times thereafter before the distribution and (2) such distribution is made within the later of (a) one year after the date of enactment of this Act or (b) if the stock is redeemable by the issuer or a related party, 30 days after the date such stock first may be redeemed. For this purpose, the first date a preferred stock may be redeemed is the day upon which the issuer or a related party has the right to call the stock, regardless of the amount of call premium. SBJPA §1616. IRC §593(f) and (g). Repeal Of Business Exclusion For Energy Subsidies Provided By Public Utilities. Internal Revenue Code section 136, as added by the Energy Policy Act of 1992, provides an exclusion from the gross income of a customer of a public utility for the value of any subsidy provided by the utility for the purchase or installation of an energy conservation measure with respect to a dwelling unit (as defined by sec. 280A(f)(1)). In addition, for subsidies received after 1994, section 136 provides a partial exclusion from gross income for the value of any subsidy provided by a utility for the purchase or installation of an energy conservation measure with respect to property that is not a dwelling unit. The amount of the exclusion is 40 percent of the value for subsidies received in 1995, 50 percent of the value for subsidies received in 1996, and 65 percent of the value for subsidies received after 1996. The new law repeals the partial exclusion for any subsidy provided by a utility for the purchase or installation of an energy conservation measure with respect to property that is not a dwelling unit. The provision is effective for subsidies received after December 31, 1996, unless received pursuant to a binding written contract in effect on September 13, 1995, and all times thereafter. SBJPA §1617. IRC §136(c)(1). Treatment Of Financial Asset Securitization Investment Trusts. The new law creates a new type of statutory entity called a "financial asset securitization investment trust" ("FASIT") that facilitates the securitization of debt obligations such as credit card receivables, home equity loans, and auto loans. A FASIT generally will not be taxable; the FASIT's taxable income or net loss will flow through to the owner of the FASIT. A FASIT generally is not subject to tax. Instead, all of the FASIT's assets and liabilities are treated as assets and liabilities of the FASIT's owner and any income, gain, deduction or loss of the FASIT is allocable directly to its owner. Accordingly, income tax rules applicable to a FASIT (e.g., related party rules, sec. 871(h), sec. 165(g)(2)) are to be applied in the same manner as they apply to the FASIT's owner. Any securities held by the FASIT that are treated as held by its owner are treated as held for investment. SBJPA §1621. IRC § 860H et. seq. OTHER PROVISIONS Exempt Alaska From Diesel Dyeing Requirement While Alaska Is Exempt From Similar Clean Air Act Dyeing Requirement. The new law provides that diesel fuel sold in the State of Alaska will be exempt from the diesel dyeing requirement during the period when that State is exempt from the Clean Air Act dyeing requirements. Thus, subject to a certification procedure to be developed by the Treasury Department, undyed diesel fuel which is destined for a nontaxable use may be removed from terminals without payment of tax through September 30, 1996 (urban areas, unless extended by the Environmental Protection Agency) or permanently (remote areas). Effective beginning with the first calendar quarter after the date of enactment. SBJPA §1801. IRC §4082. Application of common paymaster rules to certain agency accounts at state universities. In general, the OASDI portion of FICA taxes are payable with respect to employee remuneration not in excess of a contribution base. If an employee works for more than one employer during a year, these taxes are payable for each employer up to the contribution base. Under the common paymaster rule if an individual works for two or more related corporations, the remuneration may be treated as being from one employer and therefor taxable for one contribution base. Section 125 of Social Security Amendments of 1983 provided a common paymaster rule for certain State universities that employ health care professionals as faculty members at a medical school and at a tax-exempt faculty practice plan. This rule does not explicitly apply to situations where compensation is made through a university agency account and not directly by a medical school faculty practice plan. The new law establishes a common paymaster rule in cases where: (1) a State or State university provides remuneration pursuant to a single contract of employment to certain health care professionals as members of its medical school faculty; and (2) an agency account at such institution also provides remuneration to such health care professionals. The agency account must receive funds for the remuneration from a faculty practice plan described in section 501(c)(3) of the Code. The payments may only be distributed by the agency account to faculty members who render patient care at the medical school. The faculty members receiving payments must comprise at least 30 percent of the membership of the faculty practice plan. Effective for remuneration paid after December 31, 1996. It is intended that, with respect to years before the effective date, the Secretary apply present law in a manner consistent with the proposal. SBJPA §1802. IRC §3121(s). Modifications To Excise Tax On Ozone-Depleting Chemicals. Exempt Imported Recycled Halons From The Excise Tax On Ozone- Depleting Chemicals . The new law extends the exemption from tax for domestically recovered and recycled ozone-depleting chemicals to imported recycled halons. The exemption for imported recycled halons applies only to such chemicals imported from countries that are signatories to the Montreal Protocol on Substances that Deplete the Ozone Layer. The provision is effective for halon- 1301 and halon-2402 imported after December 31, 1996, and for halon- 1211 imported after December 31, 1997. SBJPA §1803 IRC § 4682(d)(1). Exempt Chemicals Used In Metered-Dose Inhalers From The Excise Tax On Ozone-Depleting Chemicals. The new law exempts chemicals used as propellants in metered-dose inhalers from the excise tax on ozone-depleting chemicals. The provision is effective for chemicals sold or used seven days after the date of enactment. SBJPA §1803 IRC §4682(g)(4). Tax-Exempt Bonds For The Sale Of The Alaska Power Administration. Interest on State and local government bonds to provide financing to private parties (private activity bonds) is taxable unless an exception is provided in the Internal Revenue Code. One such exception relates to the financing of facilities for the furnishing of electricity and gas. Persons acquiring existing property financed with most private activity bonds must satisfy a rehabilitation requirement as a condition of the financing. The new law provides an exception from the general rehabilitation requirement for private activity bonds used to acquire existing property for certain bonds to finance the acquisition of the Snettisham hydroelectric project for the Alaska Power Administration pursuant to legislation that has been enacted authorizing that transaction. These bonds are subject to the State of Alaska's private activity bond volume limit. Effective for bonds issued after the date of enactment. SBJPA §1804 IRC §142(f)(3), §147(d). Allow Bank Common Trust Funds To Transfer Assets To Regulated Investment Companies Without Taxation. The common trust fund is not subject to tax and is not treated as a corporation (sec. 584(b)). Each participant in a common trust fund includes his proportional share of common trust fund income, whether or not the income is distributed or distributable (sec. 584(c)). No gain or loss is realized by the fund upon admission or withdrawal of a participant. Participants generally treat their admission to the fund as the purchase of an interest. Withdrawals from the fund generally are treated as the sale of an interest by the participant (sec. 584(e)). A Regulated Investment Company ("RIC") is also treated as a conduit for Federal income tax purposes. Conduit treatment is accorded by allowing the RIC a deduction for dividend distributions to its shareholders. Present law is unclear as to the tax consequences when a common trust fund transfers its assets to one or more RICs. The new law permits a common trust fund to transfer substantially all of its assets to one or more RICs without gain or loss being recognized by the fund or its participants. The fund must transfer its assets to the RICs solely in exchange for shares of the RICs, and the fund must then distribute the RIC shares to the fund's participants in exchange for the participants' interests in the fund. The basis of any asset received by a RIC will be the basis of the asset in the hands of the fund prior to transfer (increased by the amount of gain recognized by reason of the rule regarding the assumption of liabilities). In addition, the basis of any RIC shares that are received by a fund participant will be an allocable portion of the participant's basis in the interests exchanged. If stock in more than one RIC is received in exchange for assets of a common trust fund, the basis of the shares in each RIC shall be determined by allocating the basis of common fund assets used in the exchange among the shares of each RIC received in the exchange on the basis of the respective fair market values of the RICs. The tax-free transfer is not available to a common trust fund with assets that are not diversified under the requirements of section 368(a)(2)(F)(ii), except that the diversification test is modified so that Government securities are not to be included as securities of an issuer and are to be included in determining total assets for purposes of the 25- and 50-percent tests. The provision is effective for transfers after December 31, 1995. SBJPA §1805. IRC §584(g). Treatment Of Qualified State Tuition Programs. The new law provides tax-exempt status to "qualified State tuition programs," meaning programs established and maintained by a State (or agency or instrumentality thereof) under which persons may (1) purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to a waiver or payment of qualified higher education expenses of the beneficiary, or (2) make contributions to an account that is established for the sole purpose of meeting qualified higher education expenses of the designated beneficiary of the account. "Qualified higher education expenses" are defined as tuition, fees, books, and equipment required for the enrollment or attendance at a college or university (or certain vocational schools). The provision is effective for taxable years ending after the date of enactment. The new law also includes a transition rule. SBJPA §1806. IRC §529. Adoption assistance. Present law does not provide a tax credit for adoption expenses. Also, present law does not provide an exclusion from gross income for employer-provided adoption assistance. The new law provides taxpayers with a maximum nonrefundable credit against income tax liability of $ 5,000 per child ($ 6,000 in the case of special needs adoptions) for qualified adoption expenses paid or incurred by the taxpayer. Special needs foreign adoptions are limited to a maximum credit of $ 5,000 (rather than $ 6,000) for qualified adoption expenses until December 31, 2001, at which time the credit for special needs foreign adoptions is and all non-special needs adoptions are repealed. Any unused adoption credit may be carried forward by the taxpayer for up to five years. Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorneys' fees and other expenses that are directly related to the legal adoption of an eligible child. Otherwise qualified adoption expenses paid in one taxable year are not taken into account for purposes of the credit until the next taxable year unless the expenses are incurred in the year the adoption becomes final. No credit is allowed for expenses incurred (1) in violation of State or Federal law, (2) in carrying out any surrogate parenting arrangement, or (3) in connection with the adoption of a child of the taxpayer's spouse. The credit is phased out ratably for taxpayers with modified adjusted gross income (AGI) above $ 75,000, and is fully phased out at $ 115,000 of modified AGI. The law also provides a maximum $ 5,000 exclusion from the gross income of an employee for specified certain adoption expenses paid by the employer. The $ 5,000 limit is a per child limit, not an annual one. The maximum exclusion is increased from $ 5,000 to $ 6,000 in the case of special needs adoptions The exclusion is phased out ratably for taxpayers with modified AGI above $ 75,000 and is fully phased out at $ 115,000 of modified AGI. The exclusion is repealed after December 31, 2001. effective for taxable years beginning after December 31, 1996. SBJPA §1807. IRC § 23. Six-Month Delay In Implementation Of Electronic Fund Transfer System For Collection Of Certain Taxes. The Code requires the development and implementation of an electronic fund transfer system to remit these taxes and convey deposit information directly to the Treasury (Code sec. 6302(h)). The Electronic Federal Tax Payment System ("EFTPS") was developed by Treasury in response to this requirement. Employers must enroll with one of two private contractors hired by the Treasury. After enrollment, employers generally initiate deposits either by telephone or by computer. The new system is phased in over a period of years by increasing each year the percentage of total taxes subject to the new EFTPS system. Treasury has implemented the 1997 percentages by requiring that all employers who deposit more than $ 50,000 in 1995 must begin using EFTPS by January 1, 1997. The new law provides that the increase in the required percentages for fiscal year 1997 (which, pursuant to Treasury regulations, was to take effect on January 1, 1997) shall not take effect until July 1, 1997. SBJPA §1809. IRC §6302(h)(2)(C). MODIFY TREATMENT OF FOREIGN TRUSTS New Information Reporting On Foreign Trusts The new law expands the information reporting requirements and associated penalties with regard to foreign trust. Effective, generally, for reportable events occurring after the date of enactment but annual reporting requirement and penalties applicable to U.S. grantors apply to tax years of U.S. persons beginning after December 31, 1996. SBJPA §1901. IRC §6048, § 6677. Comparable Penalties For Failure To File Return Relating To Transfers To Foreign Entities Under the new law, a failure to file a return with respect to any transfer described in IRC §1491 will impose a liability for the penalties provided in IRC 6677 in the same manner as if such failure to file were a failure to file a notice under IRC 6048(a). Effective for transfers after the date of enactment. SBJPA §1902. IRC §1494. Modifications Of Rules Relating To Foreign Trusts Having One Or More United States Beneficiaries The new law contains several modifications of the outbound foreign grantor trust rules, including rules for application of the fair market value exception, and attribution rules. Effective for property transfers made after February 6, 1995. SBJPA 1903. IRC '679(a)(2). Foreign Persons Not To Be Treated As Owners Under Grantor Trust Rules The new law contains expanded rules for determining whether a U.S. person will be treated as the grantor of a foreign trust to the extent of transfers, directly or indirectly, from the U.S. Person to the foreign trust or it's grantor. Generally effective as of the date of enactment but with several transitional rules. SBJPA §1904. IRC §672(f). Information Reporting Regarding Foreign Gifts The new law imposes requirements upon U.S. persons for reporting the receipt of "foreign gifts" that exceed $10,000 in any one tax year and associated penalties. Effective for amounts received after the date of enactment. SBJPA §1905. IRC §6039F. Modification Of Rules Relating To Foreign Trusts Which Are Not Grantor Trusts Modifies the rules for determination of the amount and interest rate for actual and deemed accumulation distributions of non-grantor foreign trusts. SBJPA §1906 IRC §668(a). Residence Of Trusts, Etc. The new law establishes a two-part objective test for determining for tax purposes whether a trust is foreign or domestic. If both parts of the test are satisfied, the trust is treated as domestic. Under the first part of the proposed test, if a U.S. court (i.e., Federal, State, or local) exercises primary supervision over the administration of the trust, the trust is treated as domestic. Under the second part of the proposed test, in order for a trust to be treated as domestic, one or more U.S. fiduciaries must have the authority to control all substantial decisions of the trust. If a domestic trust changes its situs and becomes a foreign trust, the trust is treated as having made a transfer of its assets to a foreign trust and is subject to the 35-percent excise tax imposed by present-law section 1491 unless one of the exceptions to this excise tax is applicable. The provision to modify the treatment of a trust as a U.S. person applies to taxable years beginning after December 31, 1996. In addition, if the trustee of a trust so elects, the provision would apply to taxable years ending after the date of enactment. The amendment to section 1491 is effective on the date of enactment. SBJPA §1907. IRC §668(a). TECHNICAL CORRECTIONS TO THE REVENUE RECONCILIATION ACT OF 1990. Application of the 2.5-cents-per-gallon tax on fuel used in rail transportation to states and local governments (SBJPA Sec. 1702(b)(2), Sec. 11211(b)(4) of the 1990 Act, and Sec. 4093 of the Code). Deposits of railroad retirement tax Act taxes (SBJPA Sec. 1702(c)(3), Sec. 11334 of the 1990 Act, and Sec. 6302(g) of the Code). Treatment of salvage and subrogation of property and casualty insurance companies (SBJPA Sec. 1702(c)(4) and Sec. 11305 of the 1990 Act). Information with respect to certain foreign-owned or foreign corporations: suspension of the statute of limitations during certain judicial proceedings (SBJPA Sec. 1702(c)(5), Secs. 11314 and 11315 of the 1990 Act, and Secs. 6038a and 6038c of the Code). Rate of interest for large corporate underpayments (SBJPA Secs. 1702(c)(6) and (7), Sec. 11341 of the 1990 Act, and Sec. 6621(c) of the Code). Research credit provision: effective date for repeal of special proration rule (SBJPA Sec. 1702(d)(1) and Sec. 11402 of the 1990 Act). Energy tax provision: alternative minimum tax adjustment based on energy preferences (SBJPA Secs. 1702(e)(1) and (4), Sec. 11531(a) of the 1990 Act, and former Sec. 56(h) of the Code). Estate tax freezes (SBJPA Sec. 1702(f), Sec. 11602 of the 1990 Act, and Secs. 2701-2704 of the Code). Conforming amendments to the repeal of the General Utilities doctrine (SBJPA Secs. 1702(g)(1) and (2), Sec. 11702(e)(2) of the 1990 Act, and Secs. 897(f) and 1248 of the Code). Prohibited transaction rules (SBJPA Sec. 1702(g)(3), Sec. 11701(m) of the 1990 Act, and Sec. 4975 of the Code). Effective date of LIFO adjustment for purposes of computing adjusted current earnings (SBJPA Sec. 1702(g)(4), Sec. 11701 of the 1990 Act, Sec. 7611(b) of the 1989 Act, and Sec. 56(g) of the Code). Low-income housing tax credit (SBJPA Sec. 1702(g)(5), Sec. 11701(a)(11) of the 1990 Act, and Sec. 42 of the Code). Expired or obsolete provisions ("deadwood provisions") (SBJPA Secs. 1702(h)(l)-(18) and Secs. 11801-11816 of the 1990 Act). TECHNICAL CORRECTIONS TO THE REVENUE RECONCILIATION ACT OF 1993. Treatment of full-time students under the low-income housing credit (SBJPA Sec. 1703(b)(1), Sec. 13142 of the 1993 Act and Sec. 42 of the Code). Indexation of threshold applicable to excise tax on luxury automobiles (SBJPA Sec. 1703(c), Sec. 13161 of the 1993 Act, and Sec. 4001(e)(1) of the Code). Indexation of the limitation based on modified adjusted gross income for income from united states savings bonds used to pay higher education tuition and fees (SBJPA Sec. 1703(d), Sec. 13201 of the 1993 Act, and Sec. 135(b)(2)(b) of the Code). Reporting and notification requirements for lobbying and political expenditures of tax-exempt organizations (SBJPA Sec. 1703(g), Sec. 13222 of the 1993 Act and Sec. 6033(e) of the Code). Estimated tax rules for certain tax-exempt organizations (SBJPA Sec. 1703(h), Sec. 13225 of the 1993 Act and Sec. 6655(g)(3) of the Code). Current taxation of certain earnings of controlled foreign corporations-application of foreign tax credit limitation (SBJPA Sec. 1703(i)(1), Sec. 13231(b) of the 1993 Act, and Sec. 904(d) of the Code). Current taxation of certain earnings of controlled foreign corporations -- measurement of accumulated earnings (SBJPA Sec. 1703(i)(2), Sec. 13231(b) of the 1993 Act, and Sec. 956a(b) of the Code). Current taxation of certain earnings of controlled foreign corporations -- aggregation and look-through rules (SBJPA Sec. 1703(i)(3), Sec. 13231(b) of the 1993 Act, and Sec. 956a(f) of the Code). Treatment of certain leased assets for PFIC purposes (SBJPA Sec. 1703(i)(5), Sec. 13231(d)(4) of the 1993 Act, and Sec. 1297(d) of the Code). Amortization of goodwill and certain other intangibles (SBJPA Sec. 1703(k), Sec. 13261(g) of the 1993 Act, and Sec. 197 of the Code). Empowerment zones and eligibility of small farms for tax incentives (SBJPA Sec. 1703(l), Sec. 13301 of the 1993 Act, and Sec. 1397b(d)(5)(b) of the Code). OTHER TAX TECHNICAL CORRECTIONS. Hedge bonds (SBJPA Sec. 1704(b), Sec. 11701 of the 1989 Act, and Sec. 149(g) of the Code). Withholding on distributions from U.S. real property holding companies (SBJPA Sec. 1704(c), Sec. 129 of the deficit reduction Act of 1984, and Sec. 1445 of the Code). Treatment of credits attributable to working interests in oil and gas properties (SBJPA Sec. 1704(d), Sec. 501 of the tax reform Act of 1986, and Sec. 469 of the Code). Clarification of passive loss disposition rule (SBJPA Sec. 1704(e), Sec. 501 of the tax reform Act of 1986, Sec. 1005(a)(2)(a) of the technical and miscellaneous revenue Act of 1988, and Sec. 469(g)(1)(a) of the Code). Estate tax unified credit allowed nonresident aliens under treaty (SBJPA Sec. 1704(f)(1), Sec. 5032(b)(2) of the technical and miscellaneous revenue Act of 1988, and Sec. 2102(c)(3)(a) of the Code). Limitation on deduction for certain interest paid by corporation to related persons (SBJPA Sec. 1704(f)(2)(a), Sec. 7210(a) of the 1989 Act, and Sec. 163(j) of the Code). Interaction between passive Activity loss rules and earnings stripping rules (SBJPA Secs. 1704(f)(2)(b) and (c), Sec. 7210(a) of the 1989 Act, and Sec. 163(j) of the Code). Branch-level interest tax (SBJPA Sec. 1704(f)(3), Sec. 1241 of the 1986 Act, and Sec. 884 of the Code). Determination of source in case of sales of inventory property (SBJPA Sec. 1704(f)(4), Sec. 211 of the 1986 Act, and Sec. 865(b) of the Code). Repeal of obsolete provisions (SBJPA Sec. 1704(f)(5), Sec. 10202 of the revenue Act of 1987, and Secs. 6038(a)(1)(f) and 6038a(b)(4) of the Code). Clarification of a certain stadium bond transition rule in Tax Reform Act of 1986 (SBJPA Sec. 1704(g) and Sec. 1317(3)(a) of the Tax Reform Act of 1986). Health care continuation rules (SBJPA Sec. 1704(h), Sec. 7862(c)(5) of the 1989 Act, Sec. 4980b(f)(2)(b)(i) of the Code, Sec. 602(2)(a) of ERISA, and Sec. 2202(2)(a) of the public health service Act). Taxation of excess inclusions of a residual interest in a REMIC for taxpayers subject to alternative minimum tax with net operating losses (SBJPA Sec. 1704(i) and Sec. 860e(a)(6) of the Code). Application of harbor maintenance tax to Alaska and Hawaii ship passengers (SBJPA Sec. 1704(j) and Sec. 4462(b) of the Code). Modify effective date provision relating to the Energy Policy Act of 1992 (SBJPA Sec. 1704(k) and Secs. 53 and 30 of the Code). Treat qualified football coaches plan as multi-employer pension plan for purposes of the Internal Revenue Code (SBJPA Sec. 1704(l) and Sec. 1022 of ERISA). Determination of unrecovered investment in annuity contract (SBJPA Sec. 1704(m) and Sec. 72(b) and (c) of the Code). Election by parent to claim unearned income of certain children on parent's return (SBJPA Sec. 1704(n) and Secs. 1 and 59(j) of the Code). Treatment of certain veterans' reemployment rights (SBJPA Sec. 1704(o) and new Sec. 414(u) of the Code). Reporting of real estate transactions (SBJPA Sec. 1704(p) and Sec. 6045(e)(3) of the Code). Clarification of denial of deductions for stock redemption expenses (SBJPA Sec. 1704(q) and Sec. 162(k)(2) of the Code). Definition of passive income in determining passive foreign investment company status (SBJPA Sec. 1704(s), Sec. 1235 of the 1986 Act and Sec. 1296(b)(2) of the Code). Exclusion from income for combat zone compensation (SBJPA Sec. 1704(t)(4) and Sec. 112 of the Code). Certain property not treated as section 179 property (SBJPA Sec. 1704(u) and Sec. 179 of the Code).