General explanation of the Tax reform act of 1976

EXPLANATION
GENERAL EXPLANATION
OF THE
OF
THE
REFORM ACT
ACT OF
TAX REFORM
OF 1976
1976
10612, 94TH
(H.R. 10612,
94TH CONGRESS,
CONGRESS, PUBLIC LAW
LAW 94-455)
94^55)
PREPARED BY
PREPARED
BY THE
STAFF OF
STAFF
OF THE
COMMITTEE ON
JOINT COMMITTEE
ON TAXATION
TAXATION
1976
DECEMBER 29,
29, 1976
EXPLANATION
GENERAL EXPLANATION
THE
OF THE
OF
1976
TAX REFORM ACT
ACT OF
OF 1976
TAX
LAW 94-455)
94-455)
(H.K. 10612,
10612, 94TH
(H.R.
94TH CONGRESS,
CONGRESS, PUBLIC
PUBLIC LAW
THE
PREPARED BY
BY TOTE
STAEF OF
THE
STAFF
OF THE
COMMITTEE ON
TAXATION
ON TAXATION
JOINT COMMITTEE
DECEMBER
1976
29, 1976
DECEMBER 29,
U.S. GOVERNMENT
GOVERNMENT PRINTING
OFFICE
U.S.
PRINTING OFFICE
79-667
79-667 O0
WASHINGTON
1976
WASHINGTON : 1976
:
JCS-33-76
Government Printing
PrintingOffice
Office
For sale
the Superintendent
Superintendentof
ofDocuments,
Documents,U.S.
U.S. Government
sale by
by the
20402
Washington, D.C.
D.C. 20402
Washington,
052-070-03860-1
No. 052-070-03850-1
Stock No.
CONGRESS OF
UNITED STATES
CONGRESS
OF THE
THE UNITED
STATES
(94th Cong.,
Cong., 2d
sess.)
(94th
2d sess.)
Joint COMMITTEE
Taxation
Committee ON
on TAXATION
JOINT
Senate
SENATE
House
HOUSE
RUSSELL B.
Louisiana, Chairman
ULLMAN, Oregon,
LONG, Louisiana,
B. LONG,
AL ULLMAN,
Oregon, Vice
Vice Chairman
Chairman
TALMADGE, Georgia
HERMAN E. TALMADGE,
A. BURKE,
JAMES A.
BURKE, Massachusetts
Massachusetts
VANCE HARTKE,
VANCE
HARTKE, Indiana
Indiana
DAN ROSTENKOWSKI,
DAN
ROSTENKOWSKI, Illinois
Illinois
CARL T.
HERMAN T.
CARL
T. CURTIS,
CURTIS, Nebraska
HERMAN
T. SCHNEEBELI,
SCENEEBELI, Pennsylvania
PAUL J.
J. FANNIN, Arizona
B. CONABLE,
BARBER B.
Jr., New York
CONABLE, JR.,
Laurence N.
LAURENCE
N. WOODWORTH,
Woodworth, Chief of
Staff
of Staff
Herbert L. CHABOT,
Chabot, Assistant Chief
HERBERT
Chief of
Staff
of Staff
Bernard M.
Shapiro, Assistant
BERNARD
M. SHAPIRO,
Assistant Chief
Chief of
Staff
of Staff
,
(ID
TRANSMITTAL
OF TRANSMITTAL
LETTER OF
Congress of
States,
CONGRESS
OFthe
THE United
UNITED STATES,
Joint COMMITTEE
Committee ON
Taxation,
on TAXATION,
JOINT
D.C., December
December 29,
1976.
Washington, D.C.,
29, 1976.
Russell B. LONG,
Hon. RUSSELL
Ohmrman,
Long, Chairman,
Hon. AL
Al ULLMAN,
Ullman, Vice
Chairman, Joint
Vice Chairman,
Hon.
Committee on Taxation,
Taxation,
Joint Committee
Congress, Washington,
Washington, D.C.
D.C.
U.S. Congress,
Messrs. CHAIRMEN
Dear MESSRS.
Chairmen : While committee reports
DEAR
posireports explain the posiof the
tion of
the House
House Committee
Committee on
on Ways and
and Means,
Means, or
the position
or the
position of
of
tion
Committee on
Senate Committee
do not in
in all
all cases
the Senate
on Finance,
Finance, they
they do
explain
cases explain
legislation as
finally passed
passed by the Congress.
as finally
This becames
Congress. This
becames parthe tax legislation
particularly important in
in the
case of
major legislation
legislation where
the case
of major
are
where there
there are
ticularly
as passed by the
or as
the House, or
as passed by
many changes between
between the
the bill
bill as
the bill
Senate, and the
which finally
finally becomes
bill which
becomes public
the Senate,
public law.
law. The
The Tax
of1976,
comprehensive scope
Act of
its comprehensive
because of
1976, because of
scope and because
Reform Act
of its
the
were made
the Senthe many changes which were
made in
in this
this legislation,
legislation, both by the
subsequently by
and subsequently
ate and
conferees, is
where the
the
ate
by the
the conferees.
is an
an illustration
illustration of where
differences were especially
especially significant..
significant.
differences
document represents
Joint ComComThis document
represents the
the effort
effort of
of the
the staff
staff of
of the
the Joint
mittee
to provide
provide an explanation
explanation of
Reform Act
mittee on
on Taxation
Taxation to
of the
the Tax Reform
finally enacted
1976 as
is comparable
enacted and
comparable to
similar
of 1976
as finally
and is
to aa number of
of similar
documents prepared
staff on other revenue
revenue acts
acts in
years.
recent years.
documents
prepared by the staff
in recent
where provisions
provisions which
part,where
most part,
conferwhich were
were unchanged in
the most
in conferFor the
ence were
ence
were described
describedinineither
eithertlie
the House
Houseor
or Senate
Senate report,
report, that
that explanaexplanadocument. No
tion is
this document.
is made
is carried over in
made here
in this
tion
No attempt
attempt is
here to
to carry
carry
explanation further
than is
committtee
customary in
the explanation
of committtee
further than
is customary
in the
case of
thecase
the
therefore it
customarit does
not deal
which are
are customarissues which
does not
with issues
deal with
reports and therefore
explained in
ily explained
ily
in regulations
regulations or
or rulings.
rulings.
document contains
of the
part of
the document
contains a
first major part
The first
of and the
the
a summary of
provisions. The second
second part
reasons
reasons previously
previously given
given for
for the
the various provisions.
part
finally enacted and
estimates on
as finally
the revenue estimates
contains the
on the
the legislation
legislation as
provisions appearing in
in
explanation of
the provisions
part is
third part
general explanation
of the
the third
the
is aa general
public law.
law.
which they
they appear in
in the
the public
in which
order in
the order
the
Committee
been prepared by the
has been
the staff
staff of
This material has
of the
the Joint
Joint Committee
of 1976
Act of
1976 was passed.
after the
Tax Reform
the Tax
on Taxation after
passed. It
It has not
Reform Act
reflects the
only reflects
been reviewed
committees and
been
reviewed by
by the
the tax
tax committees
and therefore only
document
this document
staff's
as to'the
to the intent
intent of
of Congress.
Congress. It
It is
is hoped
hoped that
that this
view as
staff's view
••will
will be
be useful
useful in
in gaining
gaining aa better
better understanding
understanding of the
the Tax Reform Act
1976.
of 1976.
Sincerely yours,
yours,
• Sincerely
Laurence N.
Woodworth,
N. WOODWORTH,
LAURENCE
Chief
of Staff.
Chief of
Staff.
:
•
(in)
:
LEGISLATIVE
THE ACT
HISTORY OF THE
ACT
LEGISLATIVE HISTORY
of
years of
over two
result of
two years
1976 was
of over
Act of
was the result
of 1976
Eeform Act
The Tax Reform
Congress, although
the 94th
although
94th Congress,
legislative deliberations
legislative
deliberations largely
largely during the
considered by
some of
some
of the
the provisions
provisions were
were originally
originally considered
by the
the House Ways
and Means Committee
Committee during
during the
the 93rd
93rd Congress.^
Congress.' Consideration
Consideration of
of the
the
schedule
proceeded on
Congress proceeded
Act in
in the 94th
94th Congress
on the
the following schedule:
before the House
PanelDiscussions
1975 Panel
June25,
through June
Discussions before
June 23
23 through
June
25, 1975:
Committee on
on Ways and Means.
1975 Hearings
through July
the House
Commitbefore the
Hearingsbefore
House CommitJuly31,
July
July 88 through
31, 1975:
tee
tee on
on Ways and Means.
House Comreported by
November 12,
the House
Com(H.R. 10612)
by the
10612) reported
November
12, 1975
1975: Bill
Bill (H.R.
mittee on Ways and Means
Means (House Report 94-658)
94-658).
December 33 and
and 4,
4, 1975
1975 : Bill
Bill considered
considered and passed by the
the House of
Representatives.
20 through 22,
17 through
1976; July
22, 1976:
13, 1976;
March 17
through April 13,
July 20
1976: Hearings
ings before
before the
the Senate
Senate Committee on
on Finance.
Finance.
reported by
the Senate
Committee on Finance
Bill reported
Senate Committee
1976 Bill
by the
10, 1976:
June 10,
Supplemental report
report filed
94-938) : Supplemental
Senate Comfiled by
by Senate
Com(Senate Report 94-938)
on July 20,
1976 (Senate
mittee
mittee on
on Finance
Finance on
(Senate Report
Report 94-938,
94-938,Part
Part 2).
2).
20, 1976
1-2, 20-23,
21-25, 28-30,
26-30, and
16-18, 21-25,
20-23, 26-30.
June 16-18,
28-30, July
July 1-2,
and August 3-6,
considered and
Senate.
1976: Bill
1976:
Bill considered
and passed
passed by
by the
the Senate.
Conference submitted
September 13,
1976: Committee
September
Committee on
on Conference
submitted Confer13, 1976:
94-1515; Senate Report 94-1236).
94-1236).
ence Report
ence
Report (House Report 94-1515;
Conference report
(and House
Concurrent
House Concurrent
September 16,
September
16, 1976:
1976: Conference
report (and
Resolution 751)
751) approved by the
the House and Senate.
Senate.
of 1976
94-455)
1976 (Public
Act of
Reform Act
(Public Law
October 4,
Law 94-455)
October
4, 1976:
1976: Tax Reform
signed by
signed
by the
the President.
President.
:
:
:
:
:
:
1 The
reform bill
bill in the
Means Committee
the 93rd
93rd Congress
Congress
The Ways
1
Ways and
and Means
Committeedid
didnot
notreport
report aa tax
tax reform
discussions (February
extensive discussions
hearings (March
(March 5
hold extensive
but
did hold
5
but did
(February 5-28,
5-28, 1973)
1973) and
and hearings
and Means
The Ways
the subject.
Means Committee
subject. The
Ways and
also held
on the
Committee also
through
held legisla1973) on
legislaMay 1,
1, 1973)
through May
tive markup
session (1974),
markup sessions
the 2nd
had only
2nd session
only made
but had
made
(1974), but
tive
sessionson
on tax
tax reform
reform late
late in
in the
decisions prior
Congress. In
tentative decisions
the 93rd
93rd Congress.
end of
In addition,
of the
addition, H.R.
H.R. 17488,
The
17488, The
tentative
prior to
to the end
Energy Tax
Relief Act
Individual Relief
Act of
thatcommittee
reported by
of 1974,
committee on
November
1974, reported
by that
onNovember
Energy
Tax and Individual
1974
Report
provisions
(House
Included
93-1502),
relating
26,
investreal
26, 1974 (House Report 93-1502), included provisions relating to
to real estate
estate investtaxation of
ment trusts and
and the
Income, much
the taxation
offoreign
of which
foreignincome,
which was
much of
was later
later included
in
Included in
ment
Reform Act
1976.
the Tax Reform
Act of
of 1976.
(V)
CONTENTS
CONTENTS
Page
Transmittal Letter
Transmittal
Legislative History
Act
Legislative
History of
of the
the Act
Reasons for
Summary and
and Reasons
for the Act
Act
I. Summary
I.
Revision
A.
A.
Tax Revision
Simplification
B. Tax Simplification
Extension of
of Tax
Tax Reductions
C. Extension
Formation
D. Capital Formation
Provisions
E.
E. Administrative Provisions
Gift Tax
Tax Provisions
Provisions
F. Estate and Gift
Revenue Effects
Effects of
of the Act
Act
II. Revenue
II.
Explanation of
General Explanation
Act
III. General
III.
of the
the Act
shelter provisions
provisions
A. Tax shelter
1. Real
Real Estate
Estate
1.
a.
Capitalization and
Amortization of
Real Property
Property
a.
Capitalization
and Amortization
of Real
Construction Period
Period Interest
Intei estand
andTaxes
Taxes(Sec.
(Sec.201)
201)_
Construction
b.
Recapture of
of Depreciation
Depreciation on
Real Property
Property (Sec.
(Sec.
b. Recapture
on Real
202)
202)____.
Five- Year Amortization
Amortization for
for Low-Income
c.
Low-Income Rental
Rental
c. Five-Year
Housing (Sec.
(Sec. 203)
Housing
203)
2.
Limitation of
of Loss to
At- Risk (Sec.
(Sec. 204)
204)
2.
Limitation
to Amount At-Risk
FarmOperations
3. Farm
Operations
3.
a.
Farming Syndicates
Syndicates (Sec.
(Sec. 207)
a.
Farming
207)
b.
Limitation of
b. Limitation
of Loss
Loss With
With Respect
Respect to
to Farms
Farms to
to the
Amount for
Which the
Risk (Sec.
(Sec.
Amount
for Which
the Taxpayer
Taxpayer Is
Is At Risk
204)
204)
Method of
of Accounting
Accounting for
c.
Corporations Engaged
Engaged in
in
c.
Method
for Corporations
(Sec. 207(c))
207(c))
Farming (Sec.
d.
Termination of
Additions to
Excess Deductions
Deduction?
to Excess
d.
Termination
of Additions
Under Sec.
Sec. 125]
1251 (Sec.
(Sec. 206)
Accounts Under
206)
e.
Scope of
of
Case of
e.
Scope
of Waiver
Waiver of
of Statute
Statute of
of Limitations
Limitations in
in Case
Activities
Engaged in
for Profit
Profit (Sec.
(Sec. 214)
Activities Not Engaged
in for
214)
4.
OilandGas
4. Oil
and Gas
i
a.
Limitationof
ofLoss
toAmount
Risk
Lossto
AmountAtAtRisk
(Sec.
204)
a.
Limitation
(Sec.
204)
____
Gain
b.
Disposition of
in Oil
Oil and Gas
Gas
b.
Gain From
From Disposition
of an
an Interest
Interest in
Propertv
(Sec. 205)
205)
Property (Sec.
5.
Motion
Picture
Films
5.
Picture.
a.
At Risk Rule
Rule and
and Capitalization
Capitalization of
of Production
Production Costs
Costs
a.
(Sees. 204
(Secs.
204 and 210)
210)
b.
Clarification of
b. Clarification
of Definition
Definition of
of Produced
Produced Film
Film Rents
(Sec. 211)
(Sec.
211)
6. Equipment
Equipment Leasing—Limitation
Leasing Limitation on
Loss to
Amount At
At
6.
on Loss
to Amount
(Sec. 204)
Risk (Sec.
204)
7.
Sports Franchises and Player
Player Contracts
Contracts(Sec.
7.
Sports
(Sec. 212)
212)
8. Partnership
PartnershipProvisions
Provisions
8.
a.
Partnership
Depreciation
Additional
FirstYear
a. Partnership Additional First-Year Depreciation
(Sec.
213(a))
(Sec. 213(a))
Fees
b.
Partnership Syndication
Syndication and
and Organization
Organization Fees
b. Partnership
(Sec. 213(b))_
213(b))
(Sec.
or
Partnership Income
Income or
c.
Retroactive Allocations
Allocations of
Retroactive
of Partnership
c.
(Sec. 213(c))
Loss (Sec.
213(c))
Allocations (Sec.
(Sec. 213(d))
Partnership Special
Special Allocations
213(d))
Partnership
d.
d.
Where aa
Liabilities Where
e.
Treatment of
of Partnership
Partnership Liabilities
e. Treatment
2 1 3 (e) )
Liable (Sec.
(Sec 213(e))
Partner
Is Not
NotPersonally
PersonallyLiable
Partner Is
—
.
(VII)
iii
ill
v
11
2
7
7
8
10
10
11
12
15
25
25
25
25
29
32
33
40
40
50
51
51
57
59
62
62
64
67
67
75
77
82
87
87
87
89
91
91
94
96
VIII
VIII
—
General Explanation
III. General
Explanation of
ofthe
theAct—Continued
Act Continued
III.
'^"^^
Page
A.
shelter provisions—Continued
provisions Continued
A. Tax shelter
Interest
9. Interest
9.
97
Prepaid Interest
a.
of Prepaid
Interest (Sec.
(Sec. 208)
208)
a.
Treatment of
97
Limitation on
b.
b. Limitation
on the
the Deduction
Deductionfor
for Investment
Investment Inter(Sec. 209)
209)
est (Sec.
102
Minimum and
Maximum Tax
105
B. Minimum
and Maximum
105
1
Minimum Tax for Individuals
Individuals (Sec.
(Sec. 301)
301)
1.
Minimum
105
2.
Minimum Tax for
for Corporations
Corporations (Sec.
(Sec. 301)
107
2.
301)
Minimum
107
3.
Maxim.um Tax Rate
109
Rate (Sec.
(Sec. 302)
3.
302)
Maximum
109
Income Tax Reductions
Reductions (Secs.
(Sees. 401
401 and
C. Extension
Extension of
of Individual
Individual Income
111
402)
402)
111
Simplification in
115
D. Tax Simplification
in the
the Individual
Individual Income Tax
115
1.
Individuals (Sec.
(Sec. 501)
Revision
115
501)
1.
Revision of
of Tax Tables for Individuals
115
2.
Alimony Payments (Sec.
(Sec. 502)
502)
116
2.
Alimony
116
Income Credit
3.
Credit (Sec.
(Sec. 503)
117
503)
3.
Retirement Income
117
4.
Expenses (Sec.
Child Care
Care Expenses
(Sec. 504)
504)
4.
Credit for Child
123
5.
Sick Pay and
and Certain
Certain Military,
Military, etc.,
etc., Disability
Disability Pensions
Pensions
5.
Sick
(Sec. 505)
127
(Sec.
127
Expenses (Sec.
(Sec. 506)
6.
506)
131
6.
Moving Expenses
131
7.
Simplification Study by Joint
Joint Committee
Committee (Sec.
(Sec. 507)
135
7. Tax Simplification
507)
135
E.
Revisions
136
E. Business-Related
Business-Related Individual Income Tax Revisions
136
Expenses Attributable
1.
Deductions for
Business Use
Use of
of
1.
Deductions
for Expenses
Attributable to Business
(Sec. 601)
136
601)
Home (Sec.
136
2.
Deduction for
of VacaVaca2.
Deduction
for Expenses
Expenses Attributable
Attributable to
to Rental of
Homes (Sec.
(Sec. 601)
tion
601)
141
tion Homes
141
for Attending
AttendingForeign
ForeignConventions
Conventions(Sec.
(Sec.602)
3.
Deductions for
602)__ __
3.
Deductions
146
4.
Qualified Stock
(Sec. 603)
603)
Qualified
Stock Options (Sec.
151
4.
151
Treatment of
of Losses
Losses From
Nonbusiness Guaranties
5.
5.
Treatment
From Certain Nonbusiness
(Sec. 605)
156
(Sec.
156
F.
Accumulation Trusts (Sec.
(Sec. 701)
701)
159
F. Accumulation
159
Formation
G. Capital Formation
165
1. Investment
InvestmentTax
TaxCredit—Extension
Credit Extension of
of 10-Percent
10-Percent Credit
1.
Credit
Property (Secs.
Used Property
(Sees. 801
$100,000 Limitation
801
and $100,000
Limitation For
For Used
and 802)
802)
165
2. First-In-First-Out
First-In-First-Out Treatment
Treatment of
of Investment
Investment Tax
Tax Credits
Credits
2.
(Sec. 802)
166
(Sec.
166
Investment Credit
Provisions(Sec.
ESOP Investment
CreditProvisions
(Sec. 803)
3.
803)
3.
167
167
in
4.
InvestmentCredit
Creditin the
theCase
CaseofofMovies
Movies and
andTelevision
Television
4. Investment
Films (Sec.•804)_
(Sec.-804)
176
TaxCredit
inthe
Certain Ships
5. Investment
InvestmentTax
Creditin
theCase
Caseof
ofCertain
5.
Ships (Sec.
(Sec.
805)
186
186
Net Operating
Operating Losses
Losses
6.
188
6.
188
Net
Operating
Loss
Carryover
Years
a.
and
Carrj'Net
Operating
Loss
Carryover
Years
and
Carrya.
back Election
Election (Sec.
(Sec.806(a)—(d))
806(a)-(d))
188
188
Net Operating
Operating Loss
b.
Limitations on
on Net
Loss Carryovers
Carryovers (Sec.
(Sec.
b.
Limitations
806(e))
190
190
Commercial Fishing
Fishing Vessel
7. Small
SmallCommercial
Vessel Construction
Construction Reserves
Reserves
7.
(Sec. 807)
807)
205
(Sec.
H.
II. Small Business Provisions
206
Extension
1.
Reduc1.
Extension of
of Certain
Certain Corporate
Corporate Income
Income Tax
Tax Rate Reduc(Sec. 901)
901)
206
tions (Sec.
2.
Changes in
Rules
2.
Changes
in Subchapter S Rules
207
a.
Subchapter S
S Corporation
Corporation Shareholder
Shareholder Rules
Rules (Secs.
(Sees.
a.
Subchapter
902 (a) and (c))
(c)
902(a)
207
207
Distributions by Subchapter
Subchapter SS Corporations
Corporations (Sec.
b. Distributions
b.
(Sec. 902
902
(b))
(b))
209
209
Changes to
Rules Concerning
c.
Concerning Termination
Termination of
of Subc.
Changes
to Rules
Subchapter S
Election (Sec.
S Election
(Sec. 902(c))
902(c))
chapter
211
I.
Treatment of
of Foreign
Foreign Income
I.
Tax Treatment
212
1
Earned Abroad
Abroad (Sec.
(Sec. 1011)
1.
1011)
Exclusion for
for Income Earned
212
2.
U.S. Taxpayers Married
Married to
to Nonresident
NonresidentAliens
Aliens(Sec.
(Sec. 1012)_
1012).
2.
U.S.
215
3.
Income of
Transfers to
Foreign Trusts
3.
Income
of Foreign
Foreign Trusts
Trusts and
and Transfers
to Foreign
Trusts
Other Foreign
Foreign Entities
Entities(Secs.
1013-1015)
(Sees. 1013-1015)
and Other
218
4.
Amendments Affecting
Treatment of
of Controlled
Controlled
4.
Amendments
AffectingTax
Tax Treatment
Foreign Corporations
Corporations and
Their Shareholders
Shareholders (Secs.
(Sees.
Foreign
and Their
1021-1024)
227
1021-1024)
227
—
—
)
IX
—
ofthe
theAct—Continued
Act Continued
III. General
Greneral Explanation
Explanation of
III.
Page
Pegs
of Foreign
I.
Foreign Income—Continued
Income Continued
Treatment of
I.
Tax Treatment
theForeign
ForeignTax
TaxCredit
Credit(Secs.
to the
(Sees.1031-1037)
Amendments to
1031-1037)_. _.
5.
Amendments
5.
233
Exclusion From
Gross Estate of
6.
of
Exclusion
From Gross
Gross Income
Income and
and From
From Gross
6.
Portfolio Investments
United States
States of
of NonNonPortfolio
Investmentsinin the
the United
Aliens and
andForeign
ForeignCorporations
Corporations
resident Aliens
(Sec.
1041)
resident
(Sec.
1041)
_ _ __
255
Changes in
Under Section
7.
Requirements Under
7.
Section 367
367 and
and
Changes
in Ruling Requirements
in Amounts
TreatedasasDividends
AmountsTreated
Dividends
(Sec.
Changes in
(Sec.
1042)
_ _____
256
1042)
of Domestic
Branches of
Domestic Insurance
8.
8.
Contiguous Country
Insurance
Contiguous
Country Branches
(Sec. 1043)
267
267
1043)
Companies (Sec.
Bond, Etc.,
Etc., Losses
9.
of Foreign
for Bond,
Rule for
Foreign Banks
Losses of
9.
Transitional Rule
(Sec. 1044)
271
1044)
(Sec.
Tax Treatment
of Corporations
or
Treatment of
10.
Conducting Trade
Trade or
Corporations Conducting
10.
Tax
in Possessions
UnitedStates
of the
States(Sec.
the United
Possessions of
(Sec.
272
Business in
1051)
1051)_ __
Trade Corporations
(Sec. 1052)
11.
278
Corporations (Sec.
11.
Western Hemisphere Trade
1052)
280
Act Corporations
(Sec. 1053)
ChinaTrade
12.
Corporations(Sec.
1053)
12.
China
Trade Act
for Cooperation
Tax Benefits
or
Certain Tax
Benefits for
Denial of
Cooperation With or
13.
13.
Denial
of Certain
1061(Sees. 1061Boycott (Secs.
International Boycott
Participation in
Participation
in an International
282
1067)
1064,1066
and 1067)
1064, 1066and
Tax Benefits
Benefits Attributable
Certain Tax
BribeDenial of
14.
Attributable to Bribe14.
Denial
of Certain
288
288
Income (Sec.
(Sec. 1065)
1065)
Produced Income
290
Sales Corporations (Sec.
(Sec. 1101)
Domestic International
1101)
Domestic
International Sales
J.
J.
301
30]
Provisions
Administrative Provisions
K. Administrative
of Written
Written Determinations
Inspection of
1. Public
Internal
PublicInspection
Determinations by Internal
1.
301
(Sec. 1201)
Service (Sec.
Revenue Service
1201)
Revenue
Tax Return
and Tax
Tax Returns
of Tax
Return Information
Returns and
Information
2. Disclosure
Disclosure of
2.
313
(Sec. 1202)
1202)
(Sec.
345
Return Preparers
(Sec. 1203)
Preparers(Sec.
Income Tax Return
1203)
3.
3.
356
(Sec. 1204)
andTermination
TerminationAssessments
4. Jeopardy
Jeopardyand
Assessments(Sec.
1204)
4.
364
Summons(Sec.
(Sec. 1205)
5. Administrative
AdministrativeSummons
1205)
5.
in Case
of Mathematical
or Clerical
Clerical Errors
Errors
Case of
Mathematical or
6. Assessments
6.
Assessments in
371
(Sec. 1206)
1206)
(Sec.
375
TaxProvisions
Provisions
WithholdingTax
7.
7. Withholding
Taxes
and District
District Income
Income Taxes
a.
Withholding of
a.
Withholding
of State
State and
375
(Sec. 1207(a))
for Military
Military Personnel
Personnel (Sec.
1207(a))
for
From
City Income
Income Taxes
Taxes From
b.
Withholding State
b.
Withholding
State and
and City
National
Members of
the Compensation
the
of Members
of the National
Compensation of
377
Reserve (Sec.
(Sec. 1207(b))
Ready Reserve
Guard or the Ready
1207(b))
Taxes
State Income
Income Taxes
Withholding of
c.
Voluntary Withholding
c.
Voluntary
of State
the Compensation
of Federal
Federal Employees
Employees
From the
Compensation of
From
378
(Sec. 1207(c))
(Sec.
1207(c))
Winnings
on Certain
d.
Certain Gambling
Gambling Winnings
d.
Withholding
Tax on
Withholding Tax
_
379
(Sec. 1207(d))
(Sec.
1207(d))
IndiCertain Indie.
e.
Withholdingofof Federal
Federal Taxes
Taxes on
on Certain
Withholding
380
._.
(Sec. 1207(e))
in Fishing
Fishing (Sec.
viduals Engaged in
1207(e)).383
(Sec. 1208)
Lotteries(Sec.
State-ConductedLotteries
1208)
8.
8. State-Conducted
and
Levy for
Minimum Exemption
from Levy
for Wages,
Exemption from
Salary, and
Wages, Salary,
9.
9. Minimum
__'
384
Income(See.
Other Income
(Sec. 1209)
Other
1209) _
386
JointCommittee
10. Joint
(Sec. 1210)
RefundCases
Cases(Sec.
CommitteeRefund
1210)
10.
11.
387
of Social
Social Security Numbers
11.
Numbers (Sec.
1211)
(Sec. 1211)
Use of
12. Interest
by
Prepared by
Intereston
onMathematical
Errors on
on Returns
Returns Prepared
12.
Mathematical Errors
IRS (Sec.
388
(Sec. 1212)
IRS
1212)
L. Tax-Exempt
390
Tax-ExemptOrganizations
Organizations
L.
1.
Property
Sales of
of Property
Modification of
1.
Modification
of Transitional
Transitional Rule
Rule for
for Sales
390
Private Foundations
Foundations (Sec.
by Private
(Sec. 1301)
1301)
2.
New Private
Private Foundation
391
(Sec. 1302)_
FoundationSet-Asides
2.
New
Set-Asides (Sec.
1302)
3.
Minimum Distribution
Reduction in
Distribution Amount
Amount for
3.
Reduction
in Minimum
for Private
394
(Sec. 1303)
Foundations (Sec.
1303)
4.
4.
To Conform
Time To
Extension of
Conform Charitable
Remainder
Charitable Remainder
Extension
of Time
_ 396
396
for Estate
TaxPurposes
Estate Tax
. _._
Purposes (Sec.
(Sec. 1304)
Trusts for
1304)
5.
Income From
From Fairs,
Fairs, Expositions,
(Sec.
Trade Shows
Shows (Sec.
Expositions, and Trade
5.
Income
398
1305)
398
1305)
6.
6.
as
Declaratory Judgments
Status" as
Tax-Exempt Status
Declaratory
Judgmentsasas to
to Tax-Exempt
400
Organization (Sec.
(Sec. 1306)
etc.. Organization
1306) _ _
Charitable, etc.,
7.
_
7.
407
of Public Charities
Activities of
(Sec. 1307)
Charities (Sec.
Lobbying Activities
1307)
—
'•
'.
'
X
—
—
III. General
General Explanation
Explanation of
of the Act-Continued
Act Continued
III.
L. Tax-Exempt
Tax-Exempt Organizations-Continued
Organizations Continued
L.
Puse
Tax Liens,
Liens, etc.,
8.
Constitute "Acquisition
8.
"Acquisition IndebtedTax
etc., Not
Not to Constitute
Indebted- Page
(Sec. 1308)
1308)
ness" (Sec.
416
9.
Extension of
private foundation
foundation transition
9.
rule for
Extension
of private
transition rule
for sale
sale
(Sec. 1309)
of business holdings (Sec.
1309)
418
Private
10.
foundations imputed
imputed interest
interest (Sec.
(Sec. 1310)
10.
Private foundations
1310)
420
11.
Unrelated
Business Income
Services Provided
11. Unrelated Business
Income from
from Services
Provided by
by a
Tax-exempt Hospital
Other Tax-exempt
Tax-exempt Hospitals
Hospitals
Tax-exempt
Hospital to
to Other
(Sec.
1311)
(Sec. 1311)
421
12.
Clinical Services
12.
Hospitals (Sec.
(Sec.
Clinical
Services Provided
Provided to
to Tax-Exempt Hospitals
1312)
1312) _
422
13.
Exemption of
of Certain
Certain Amateur
Amateur Athletic
Athletic Organizations
13.
Organizations
Exemption
From Tax
Tax (Sec.
(Sec. 1313)
1313)
423
M. Capital
CapitalGains
Gainsand
andLosses
Losses
M.
425
1.
Deduction
of
Capital
Losses
Against
Ordinary
1. Deduction of Capital Losses Against Ordinary Income
Income
(Sec. 1401)
1401)
(Sec.
425
2.
Increase
in
Holding
Period
2.
for
Long-Term
Capital Gains
Gains
Increase in Holding Period for Long-Term Capital
(Sec.
1402)
(Sec. 1402)____
426
3.
Capital Loss
Loss Carryover
Carryover for
for Regulated
Regulated Investment
Investment Com3.
ComCapital
panies
(Sec.
1403)
panies (Sec. 1403)
427
4.
Gain on Sale
Sale of
Elderly (Sec.
4.
(Sec. 1404)
of Residence by Elderly
1404)
428
and
Insurance
Taxation
N. Pension
Pension and Insurance Taxation
430
1.
Individual
1.
Retirement
Account
(IRA)
for Spouse
Spouse (Sec.
Individual Retirement Account (IRA) for
(Sec.
1501)
1501)
430
430
2.
Limitation
on
Contributions
to
10 Plans
2. Limitation on Contributions to Certain
Plans
Certain H.R.
H.R. 10
(Sec.
1502)
(Sec. 1502)
431
3.
Retirement
Deductions for
Members of
3.
of Armed
Armed Forces
Retirement Deductions
for Members
Forces
Reserves,
National Guard
Guard and
and Volunteer
Volunteer Firefighters
Firefighters
Reserves, National
(Sec. 1503)
(Sec.
432
4.
Tax-Exempt
Contracts in
in Closed-End
Closed-End Mutual
4. Tax-Exempt Annuity
Mutual
Annuity Contracts
Funds
(Sec. 1504)
1504)
Funds (Sec.
433
5.
5.
Pension Fund
Investments in
in Segregated
Segregated Asset
Asset Accounts
Pension
Fund Investments
Accounts
of
Life
Insurance
Companies (Sec.
(Sec. 1505)
of Life Insurance Companies
1505)
433
6.
Study of
of Salary Reduction
Pension Plans
Reduction Pension
Plans (Sec.
6.
(Sec. 1506)
1506)
Study
434
^
7.
Consolidated
7. ConsolidatedReturns
Mutual Insurance
Insurance /
Returnsfor
for Life
Life and
and Mutual
Companies(Sec.
(Sec.1507)
1507) _
Companies
435
8.
8.
Guaranteed Renewable
Renewable Life
Life Insurance
Insurance Contracts
Guaranteed
Contracts (Sec.
(Sec.
1508)
1508)
438
9.
Study of Expanded
Expanded Participation in
in Individual Retirement
9.
Accounts (Sec.
(Sec. 1509)
1509)
439
10.
Taxable Status of
10.
of Pension
Pension Benefit
Benefit Guaranty
Guaranty Corporation
Corporation
Taxable
(Sec. 1510)
1510)
(Sec.
440
11.
Level Premium
Premium Plans
Plans Covering
Covering Owner-Employees
11.
Owner-Employees (Sec.
(Sec.
Level
1511)
1511)
440
440
12.
Lump-Sum Distributions
12.
DistributionsFrom
FromPension
PensionPlans
Plans
(Sec.
1512)
441
(Sec.
1512)____
O.
Real
Estate
0. Real Estate Investment
Investment Trusts
443
1.
Deficiency
1.
Procedure (Sec.
(Sec. 1601)
Deficiency Dividend Procedure
445
1601)
2.
Distributions of
Taxable Income
Income After
After Close
of
2. Distributions
Close of
of REIT Taxable
Year (Secs.
(Sees. 1604
1604 and
and 1605)
Taxable Year
449
1606)
3.
Property Held
Heldfor
for Sale
Sale (Sec.
3.
(Sec. 1603)
Property
1603)
451
4.
Meet Income
Income Source
Source Tests
Tests (Sec.
(Sec. 1602)
4.
1602)
Failure to Meet
452
Other
5.
Changes in
5.
in Limitation
Limitation;: and
and Requirements
Requirements (Sec.
(Sec.
Other Changes
1604)
1604)
453
P.
Railroad and
and Airline
P.
Airline Provisions
Provisions
Railroad
460
1.
Treatmentof
Certain Railroad
RailroadTies
Ties (Sec.
(Sec. 1701(a))
1701(a))
1. Treatment
of Certain
460
2.
Limitation on
Use of
Railroad
2.
Credit for
for Railroad
Limitation
on Use
of Investment Tax Credit
Property (Sec.
(Sec. 1701(b))
1701(b))
Property
461
3.
Amortization of
Bores
3.
Grading and
and Tunnel
Tunnel Bores
Amortization
of Railroad
Railroad Grading
(Sec. 1702)
1702) _
(Sec.
463
4.
Limitation on
Use of
of Investment
Investment Tax
Tax Credit
for Airline
Airline
Credit for
4.
Limitation
on Use
Property (Sec.
(Sec. 1703)
465
1703)
Property
International Trade
Q.
Trade Amendments
Amendments
International
468
Q.
1.
United
States International
InternationalTrade
TradeCommission
Commission(Sec.
1.
States
(Sec.1801)
1801) __
468
2.
Trade Act
2.
Act of
1974 Amendments
469
of 1974
Amendments (Sec.
(Sec. 1802)
1802)
R.
R. "Deadwood" Provisions
Provisions
470
470
XI
—
Pajre
Page
Explanation of
Act Continued
III. General
General Explanation
III.
of the
the Act-Continued
Gift Taxes
Taxes
S.
S.
Estate and Gift
525
Schedule for
Unified Rate Schedule
Gift Taxes;
Taxes; Unified
1.
Unified
1.
Unified
for Estate
Estate and Gift
of Specific
in Lieu
(Sec. 2001)
Specific Exemptions
Lieu of
Exemptions (Sec.
Credit in
2001)
525
2.
Increase in
Limitations on
Deductions; Fractional
Fractional
2.
Increase
in Limitations
on Marital Deductions;
of Spouse
Interest of
(Sec. 2002)
Spouse (Sec.
2002)
Interest
532
3.
of Certain
3.
Valuation for Purposes
Purposes of
of the
the Federal
Federal Estate
Estate Tax of
or Closely
Real Property
Property Devoted
Farming or
Devoted to Farming
Held
Closely Held
Real
(Sec. 2003)
2003)
Business Use (Sec.
536
__.
543
4.
(Sec. 2004)
4.
Extension of Time
Time for
for Payment
Payment of
of Estate
Estate Tax (Sec.
2004)__
543
Basis (Sec.
5.
(Sec. 2005)
551
5.
Carryover Basis
2005)
551
Transfers (Sec.
(Sec. 2006)
6.
Generation-Skipping Transfers
6.
Generation-Skipping
2006)
564
(Sec. 2007)
Exclusion (Sec.
7.
2007)
7.
Orphans' Exclusion
583
(Sec. 2008)
Changes (Sec.
8.
8.
Administrative Changes
2008)
584
(Sec. 2009)
9.
Miscellaneous Provisions (Sec.
9.
Miscellaneous
2009)
588
T.
Miscellaneous
T.
Miscellaneous Provisions
Provisions
598
1.
HousingAssociations
CertainHousing
Associations(Sec.
(Sec. 2101)_
2101).
TaxTreatmentof
1.
Tax
Treatment of Certain
598
2.
Crop Disaster
CertainCrop
Payments(Sec.
DisasterPayments
(See.2102)__
Treatmentof
2102)-.
2. Treatment
of Certain
604
1972 Disaster Loans
Certain 1972
Case of
in the
3.
of Certain
Loans
the Case
Treatment in
3.
Tax Treatment
(Sec. 2103)
605
(Sec.
4.
of Certain
Owed by Political
Debts Owed
Certain Debts
Treatment of
Political Parties
4. Tax Treatment
Basis Taxpayers
Taxpayers (Sec.
Accrual Basis
(Sec. 2104)
to
2104)
to Accrual
607
5.
for Student
Bonds for
Loans (Sec.
Student Loans
(Sec. 2105)
5.
2105)
Tax-Exempt Bonds
608
6.
Company
Amendments (Sec.
(Sec. 2106)
6. Personal Holding Company Amendments
2106)
610
7.
Work Incentive
Federal Welfare
(WIN) and
Welfare Recipient
Incentive (WIN)
and Federal
Recipient
7.
Work
Tax
(Sec.
Credits
613
Incentive Tax Credits (Sec. 2107)
2107)
Employment Incentive
8.
614
Trucks (Sec.
ExciseTaxonParts
(Sec. 2108)
2108)
8.
Excise Tax on Partsfor
for Light-Duty
Light-Duty Trucks
9.
for Certain
Exclusion From
Certain
9.
Exclusion
From Manufacturers'
Manufacturers' Excise
Excise Tax
Tax for
615
Articles Resold After
After Modification
(Sec. 2109)
Modification (Sec.
. __
Articles
2109)
10.
Transfers (Sec.
(Sec. 2110)
Franchise Transfers
10.
2110)
616
11.
Tips
Report Tips
Employer's
11.
Employer's Duties
Duties to
to Keep
Keep Records
Records and
and to
to Report
(Sec. 2111)
617
2111)
(Sec.
12.
Treatment of
of Certain
Pollution Control
Facilities (Sec.
Certain Pollution
Control Facilities
(Sec.
12.
Treatment
2112)
619
13.
Certain Fishermen's
Clarification of
of Certain
OrganizaFishermen's Organiza13.
Clarification
of Status
Status of
tions (Sec.
(Sec. 2113)
621
2113)
tions
621
14.
14.
Innocent Spouse
Spouse (Sec.
(Sec. 2114)
Innocent
622
2114)
15.
Rules Relating to
Percentage Depletion
Depletion in
Limitations on
on Percentage
in
to Limitations
15.
Rules
Oil and Gas
Wells (Sec.
of Oil
Gas Wells
(Sec. 2115)
2115)
Case of
624
16.
Federal
(Sec.
Collection of
Taxes (Sec.
Income Taxes
16.
Federal Collection
of State
State Individual Income
2116)
628
17.
(Sec. 2117)
Loans (Sec.
Certain Student
Cancellation of
Student Loans
630
17.
Cancellation
of Certain
2117)
18.
of
Parent and Subsidiary
18.
Simultaneous Liquidation of
(Sec. 2118)__
631
Corporations (Sec.
2118)
631
19.
19.
Expenses (Sec.
633
(Sec. 2119)
2119)
Prepublication Expenses
20.
Utilities in
Public Utilities
20.
Contributions to
of Regulated
Capital of
Regulated Public
Contributions
to Capital
Aid
(Sec. 2120)
Aid of
of Construction (Sec.
635
2120)
21.
21.
Prohibition
Taxes on Production
Production
Prohibition of
of Discriminatory
Discriminatory State
State Taxes
of Electricity
Consumption of
Electricity (Sec.
(Sec. 2121)
2121)
and Consumption
638
22.
of Removing Architectural and
for Cost of
22.
Deduction for
Elderly
Barriers for
Transportation Barriers
and Elderly
Handicapped and
Transportation
for Handicapped
(Sec. 2122)
Persons (Sec.
639
2122)
23.
on High-Income
Reports on
Taxpayers (Sec.
(Sec. 2123)
23.
640
High-Income Taxpayers
2123)
24.
24.
Treatmentof
Structures(Sec.
of Certified
Historic Structures
(Sec. 2124)_
2124).
Certified Historic
Tax Treatment
643
25.
of Certain
25.
Supplemental Security
Victims of
Certain
Supplemental
Security Income
Income for
for Victims
Disasters (Sec.
(Sec. 2125)
Natural Disasters
645
2125)
26.
26.
Operating Loss
Loss Carryovers
Carryovers for
for Cuban
Expropriation
Cuban Expropriation
Net Operating
Losses (Sec.
(Sec. 2126)
Losses
645
2126)
27.
27.
._ _ _
Displays (Sec.
Outdoor Advertising
646
(Sec. 2127)
Advertising Displays
2127). . _
28.
28.
Large Cigars
Cigars (Sec.
Treatment of
of Large
(Sec. 2128)
2128)
Tax Treatment
648
29.
29.
Treatment of
Treatment
Between
Gain from
from Sales
Sales or
or Exchanges
of Gain
Exchanges Between
Parties (Sec.
651
(Sec. 2129)
Related Parties
651
2129)
30.
30.
Application of
Programs
Application
of Section
Section 117
117to
to Certain
Certain Education Programs
for Members
654
Members of
the Uniformed
of the
for
Services (Sec.
(Sec. 2130)____
UniformedServices
2130)
31.
31.
_.
_
656
Exchange Funds (Sec.
(Sec. 2131)
655
2131)
xn
XII
—
III. General
Greneral Explanation
Explanation of
ofthe
theAct—Continued
Act Continued
III.
T.
Miscellaneous Provisions
Continued
T.
Provisions—Continued
32.
Contributions of
Certain Government
Government Publications
Publications (Sec.
(Sec.
32.
Contributions
of Certain
2132)
33.
Study
Tax
of
Incentives
Joint
Committee
33.
by Joint Committee (Sec.
(Sec. 2133)
of Tax Incentives by
2133) __
34.
Prepaid Legal
Legal Services
Services (Sec.
(Sec. 2134)
2134)
34.
35.
Certain
Charitable
Contributions
of
Inventory
35. Certain Charitable Contributions of Inventory (Sec.
(Sec. 2135)_
2135).
36.
Tax Treatment
Treatment of
of Grantor
Grantorof
ofCertain
CertainOptions
36.
Options (Sec.
(Sec. 2136)..
2136).
37.
Exempt-Interest
Dividends
of
Regulated
Investment
37. Exempt-Interest Dividends of Regulated Investment
Companies (Sec.
(Sec. 2137)
2137)
38.
Common Trust
Fund Treatment
Treatment of
of Certain
Certain Custodial
Custodial
38.
Common
Trust Fund
Accounts (Sec.
(Sec. 2138)
2138)
39. Support
Support Test
Test for
for Dependent
Dependent Children
Children of
of Separated
Separated or
39.
or
Divorced Parents
Parents (Sec.
(Sec. 2139)
2139)
Divorced
Deferral of
Gain
on
Involuntary
Conversion
40. Deferral
of
Real
of Gain on Involuntary Conversion of Real
Property
(Sec. 2140)
2140)
Property (Sec.
41.
Livestock
Sold on
of Drought
Drought (Sec.
(Sec. 2141)
41. Livestock Sold
2141)
on Account of
—
rage
Page
667
667
668
672
673
678
679
680
681
681
ACT
SUMMARY AND
I.
AND REASONS
REASONS FOR THE ACT
I. SUMMARY
serve six
purposes. First,
1976 will serve
Act of
of 1976
Reform Act
The Tax Reform
six major
major purposes.
First,
income levels without
system at
all income
the tax
tax system
at all
equity of
of the
improve the
the equity
it
without
will improve
it will
effects imeconomic efficiency
impairing economic.
impairing
efficiencyand
and gi'owth.
growth. Second,
Second, the
the Act effects
certain deducdeductax system
system by modifying certain
simplifications of the tax
portant simplifications
portant
deby increasing the
credits affecting
affecting individuals, by
tions
the standard detions and credits
deductheir deducitemizing their
to switch from itemizing
encourage taxpayers to
duction
duction to
to encourage
complex
redraftingcomplex
by redrafting
deduction, and
and by
the standard
standard deduction,
tions
to using
using the
tions to
used provilittle used
obsolete and little
deleting obsolete
law and
and deleting
provisions of
of the
the tax law
provisions
fiscal stimulus
stimulus provided
the fiscal
Act extends
extends the
sions.
Third, the
provided by
by the
the Tax
the Act
sions. Third,
Revenue Adjustment Act
extended by
1975 and
Reduction Act of
and extended
by the Revenue
of 1975
Reduction
individuals.
foi- individuals.
these tax
of
and makes
makes permanent
permanent part
part of
of these
tax cuts for
of 1975,
1975, and
extending the ininformation by extending
encourages capital
capital formation
the Act
Fourth, the
Act encourages
years, by modifying the application
creased
investment credit
credit for
for four years,
creased investment
investing in
incentive for investing
revising the
the incentive
extending and
and revising
of
credit, by
by extending
of the
the credit,
employee
stock ownership
ownershipplans,
plans, and
and by
by liberalizing
liberalizing the
the net
net operating
operating
employee stock
of the
the tax
tax laws
laws by
improves the administration
administration of
loss
carryover. Fifth,
Fifth, itit improves
loss carryover.
making it
efficientand
andstrengthening
strengtheningtaxpayers'
taxpayers' rights.
rights. Sixth,
Sixth, the
it more efficient
reduces the
taxes. It
It reduces
revision in
Act makes
in the
the estate
estate and
and gift
gift taxes.
makes aa major revision
at the
the same
same
medium-sized estates
estates and at
forsmallsmall- and
andmedium-sized
tax for
estate
estate and gift
gift tax
possibilities.
time
eliminates tax
tax avoidance possibilities.
time eliminates
operation of the
changes in
in the operation
certain changes
In
Act makes
makes certain
the Act
addition, the
In addition,
the withholding
withholding of
of
well as
as the
Commission as
as well
Trade Commission
U.S.
International Trade
U.S. International
or abet
abet internainternafor countries
countries who
who aid
aid or
treatment for
preferential trade
trade treatment
preferential
terrorists.
tional terrorists.
tional
(1)
A. TAX REVISION
While
one contends
contends that
our income
income tax
tax system
system does
does not
not need
need
While no one
that our
it is
is still
still widely
widely acknowledged
acknowledged to
be the
improving, it
to be
the best
best in
in the world.
The difficulty
difficulty faced
improving the
system is
the American
American
The
faced in
in improving
the system
is that the
people
tax system.
system. On the one
one hand,
people want
want different
different things
things from
from their
their tax
they
want every
every individual
individual and
fair share
share of
of
they want
and corporation
corporationto
to pay
pay aa fair
overall income
income tax
burden. In aa system
system that
thatdepends
heavily on
on
depends heavily
the overall
tax burden.
voluntary compliance
compliance with
laws, as ours
ours does,
is
does, tax equity
equity is
voluntary
with the
the tax
tax laws,
especially important.
However, at
same time,
time, Americans
Americans do
do not
especially
important. However,
at the same
the income
income tax
tax system
system to
tointerfere
interferewith
witheconomic
economicefficiency
efficiency and
want the
growth. This implies
implies that
that tax
tax changes
changes to
promote equity
to promote
equity should
should not
growth.
retard
currentrecovery
recovery from
either the
the current
from what
whathas
hasbeen
been the
the worst
worst recesrecesretard either
of the
the economy.
economy. The
sion since
since the
the 1930's
1930'sor
or impede
impedethe
the long-run
long-run growth of
tax
represent aa careful
carefulbalance
balancebetween
between these
these somesometax revisions in the Act represent
objectives.
times conflicting objectives.
many tax
revisions, described
tax revisions,
described in
in more
more detail
below,
deta,il below,
The Act contains many
designed to
abuses and make the tax
system more
tax system
more equiequidesigned
to eliminate
eliminate tax abuses
table.
table.
provisions
Tax shelter provisions
changes were
were needed
needed to end
end the
the excessive
excessive tax
Congress believed
believed that
that changes
tax
deferrals provided
shelters, as
well as
provided by
as well
opportunity they
as the
the opportunity
they
deferrals
by tax
tax shelters,
provide
in effect,
effect, convert
convert ordinary
ordinary income
income into
into capital
gains.
capital gains.
provide to,
to, in
Too
many investments
investments have
have been
been motivated
motivated by
by excessive
excessive conconToo many
cern with the
economic
with them,
them, not
the tax
taxbenefits
benefits associated
associated with
not their
theireconomic
cern
merits. In some
some cases,
cases, the
in which
which the tax
tax shelters
shelters were
were conconmerits.
the manner in
trived
individuals
was questionable
questionable even
law. In others,
others, individuals
trived was
even under
under prior
prior law.
were combining
were
combining provisions
provisions of
of the
the law,
law, or
or leveraging
leveraging them
them through
through nonrecourse
way which
which multiplied
severalfold any
multiplied severalfold
any
recourse borrowings,
borrowings,inin aa way
possible
by Congress.
Congress. Such
Such activities
activities reduce
reduce
possible advantages
advantages intended
intended by
citizens' respect for
for the
the income
income tax
tax and
and represent
representan
aninefficient
inefficient allocaallocacitizens'
tion
resources. The Act contains a
provisions designed to
a number of provisions
tion of resources.
to
worthwhile
these abuses without interfering
interfering with
witheconomically
economically worthwhile
curb these
investments.
investments.
rules to
The Act expands the use of
of the
the so-called
so-called "recapture"
"recapture" rules
to prevent
conversion of
real
case of real
conversion
of ordinary
ordinary income
income into
into capital
capital gains
gains in
in the case
estate,
franchises. For oil
oil and gas
estate, oil
oil and
and gas
gas drilling
drilling and sports franchises.
gas drilldrilling, farm
farm operations,
prooperations, equipment
equipment leasing,
purchases and proleasing, and Min
film purchases
ing,
amount
losses from
duction, losses
from accelerated
accelerated deductions
deductions are
are limited
limited to
to the amount
prevent
which the
designed to
to prevent
the individual
individual is
risk." This
This isis designed
is "at
"at risk."
for which
nonrecourse loans.
tax shelter
shelter benefits
benefits through
through the
the use
use of
of nonrecourse
leveraging of tax
not
in areas
areas not
There is
partnerships in
is also
also an
risk" rule
rule for
for limited
limited partnerships
"at risk"
There
an "at
developdiscourage developspecifically dealt
specifically
dealt with
with by the
the Act,
Act, which
which should
should discourage
farm
case of farm
in the
the case
ment of
of new
new leveraged
shelters. In
addition, in
ment
tax shelters.
In addition,
leveraged tax
producpicture producmotion picture
and motion
syndicates (or passive
passive farm partnerships)
syndicates
partnerships) and
etc.),
records, etc.),
books, records,
tion companies
producing books,
tion
companies (and
(and companies
companies producing
over the
written off
off over
certain costs
be capitalized
capitalized and written
certain
costs are
are required
required to
to be
(2)
(2)
3
related assets,
assets, or the
the writeoff
writeoff is
is delayed
delayed until
productive period of the related
until
involved are
real estate,
items involved
used. For
estate, the
the Act
Act also
the
also requires
requires
the items
are used.
For real
taxes during
during the
the construction
construction period.
period.
capitalization of interest and taxes
The provisions
provisions relating
relating to
to various
various deductions
deductions and
and exclusions
exclusions in
in
The
case of
partnerships are tightened
tightened so
so that the
the deductions
deductions or
or exexthe case
of partnerships
clusions cannot
clusions
cannot be
be allocated
allocated among
amongthe
the various
various partnei*s
partners according to
whomever can
tax benefits
benefits unless
unless such
such allocation
allocation
whomever
can maximize
maximize the
the tax
economic effect.
has substantial economic
effect. Also,
Also,limits
limits are
are placed
placed on
on the
the amount
"bonus" first-year
first-year depreciation
depreciation deductions
partners. The
The
of "bonus"
deductionsof
of the
the partners.
interest to
to be
be deducted
deducted over
over the
the period
period to
which
Act requires prepaid interest
to which
it relates
relates and
and requires
requires use
use of accrual
accrual accounting
accounting by many farm corpocorpoit
rations.
tightens the
the existing
existing limit
limit on
on deductions
of excess
excess
deductions of
rations. Also,
Also, it
it tightens
interest.
investment interest.
Minimum
Minimum and
and maximum
maximum taxes
Congress believed
high-income people
Congress
believedthat
that high-income
people and
and corporations
corporations should
not be
be able
able completely
completely to
Preventescape liability
for income
tax. Preventincome tax.
not
to escape
liability for
this is
is a
major feature
a major
feature of
of the
the Act.
incidence
Act. It
Itgreatly
greatlyreduces
reduces the
the incidence
ing this
tax avoidance
avoidance by
by high-income
high-income people
proviof tax
through two
people through
two related
related provisions a stiffer
income and aa revision
revision
sions—a
stiffer minimum
minimum tax
tax on
on tax-preferred income
in the
the maximum
maximum tax
tax designed
designed to
to discourage
discourage use
of tax preferences.
preferences.
use of
in
Mininiufn
fax
Minimum tax
minimum tax for
for individuals
individuals was
was inadequate.
inadequate. In
it
In 1974
1974 it
The prior minimum
raised only
only $130
$130 million,
from $182
is
$182 million
in 1973,
which is
raised
million, down
down from
million in
1973, which
tax-preferredincome.
income. Also,
Also, the
the minimum
only aa small
small fraction
fraction of total
total tax-preferred
tax for
for individuals
individuals was
was largely
largely aa tax
taxon
onone
one preference—the
preference the excluded
tax
excluded
of capital
capital gains.
gains. The
The Act
Act amends
amends the
the minimum
minimum tax
half of
tax both
both to
to inincrease its
revenue yield
and to
to broaden
broaden the
crease
its revenue
yield and
the tax
taxpreferences
preferences covered
covered
by it.
it.
by
The Act raises the minimum
minimum tax
tax rate
rate from
from10
10 percent,
percent to
to 15
15 percent.
percent.
In place
place of
of the
the existing
existing$30,000
In
exemption and
and the
the deduction
deduction for
for regu$30,000 exemption
regular income
income taxes,
has an
an exemption
lar
taxes, the
the Act has
exemption for
for individuals
individuals equal
equal to
to
one-half of
of regular
regularincome
income taxes
taxesor
or$10,000,
one-half
is greater.
greater. These
$10,000, whichever is
changes reflect
changes
reflect Congress'
Congress'view
viewthat
that the
the effective
effectivetax
tax rate
rate on
on tax
tax prefpreferences should
should be
be higher.
higher.
Two new
new minimum
minimum tax
preferences are
Two
tax preferences
are added.
To reduce
the tax
reduce the
added. To
tax
benefit of
benefit
of shelters
shelters in
in oil
oil and
and gas
gas drilling
drilling and
and to
to ensure
ensure that
that oil
oil drillers
drillers
pay some
some minimum
minimum income
incometax,
tax,the
the Act
Act adds
adds aa preference
preference for
for intangiintangidrilling costs.
costs. To
To impose
impose some
some tax
tax in
in cases
ble drilling
cases where
where there
there is
excessive
is excessive
use of
is a
new preference
use
of itemized
itemized personal deductions, there
there is
preference for
for itema new
itemized deductions
deductions (other than
than medical
medical expenses
ized
expenses and casualty
casualty losses)
losses) in
in
excess of
excess
of 60
60percent
percent of
of adjusted
adjusted gross income.
Congress also
also believed
believed that
that the
the minimum tax
tax on corporations should
should
be strengthened
raise the
be
strengthened in
in order to raise
tax rate
rate on corporate
corporate tax
tax
the effective
effective tax
preferences.
preferences. However,
However, because
because corporate
corporate income
income is
is subject
subject to
to both
both the
the
individual and
and corporate
corporate income
income taxes,
individual
taxes, Congress
Congress felt
felt itit was
wasappropriate
appropriate
to
in full
full the
the deduction
deduction for
for regular
regular taxes
taxes for
for corporations.
to retain in
corporations.
Mammum
Maximum tax
In 1969,
1969, Congress
In
Congress enacted
enacted aa 50-percent
50-percent maximum
maximummarginal
marginal tax
tax rate
rate
income from
services. To reduce the
incentive to
in
on income
from personal services.
the incentive
to invest
invest in
shelters, the law
law provided
provided that
tax shelters,
thatincome
income eligible
eligible for
maximum
for this
this maximum
—
—
4
by tax
tax preferences
rate
preferences (as
(as defined
defined under
reduced by
be reduced
the minimum
under the
minimum
rate be
extends this
Act extends
this 50-percent
of$30,000.
excess of
inexcess
50-percent maximum
maximum
$30,000. The Act
tax) in
(including pensions
compensation (including
pensions and
deferred compensation
rate
to deferred
rate to
and annuities).
annuities).
l)cen as
has not
not been
The "" preference
effective
as effective
The.
preference. offset"
offset" in
in the
the maximum
maximum tax has
shelters as originally planned. The
investment in
in discouraging investment
in
in tax
tax shelters
tax preferences
of minimum
preferences will
will make
minimum tax
make the
expanded list
the preference
preference
expanded
list of
the existing
repeals the
existing$30,000
offset more
floor
offset
more effective.
effective. Also,
Also, the
the Act
Act repeals
$30,000 floor
reduce personal
income eligible
on preferences
service income
preferences that reduce
personal service
on
eligible for
for the
maximum tax.
maximum
tax.
Business
income tax
Business expenses
expenses under
under the
the individual
individual income
tax law
are now
business use
now claiming
for the
claiming deductions
the business
use
deductions for
Many individuals are
their home,
home, for expenses
their vacation
vacation
expenses related
of their
rental of
of their
related to
to the
the rental
homes
year, or for
expenses of
the year.
for expenses
of the
homes for
for aa brief
brief part
part of
of attending
attending foreign
conventions. While
conventions.
While in
in theory
theory there
there isis nothing
nothing wrong
wrong with
with appropriate
appropriate
is often
deductions for
business or
deductions
for business
or investment
investment expenses,
expenses, in
in ])ractice
practice it
it is
expenses
extremely difficult
business expenses
difficult to
allocate between
deductible business
between deductible
extremely
to allocate
many people
people
nondeductible personal
and nondeductible
personal expenses.
expenses.The
The result
result is
is that
that many
been deducting
have
deducting amounts
amounts as
business expenses
as business
have been
expenses which
which in
in part
the
actually represent
this problem,
problem, the
represent personal
expenses. To
personal expenses.
actually
To deal
deal with this
on these deductions.
limitations on
Act places strict
strict limitations
stock
forqualified
qualified stock
tax treatment
The Act
treatment for
Act also
also repeals
the special
repeals the
special tax
The
of
maximum rate
options. With personal
income subject
service income
personal service
options.
subject to
to aa maximum
rate of
taxing
percent. Congress
50
Congressdecided
decidedthat
that there
there isis no
no reason
reason for
for not
not taxing
50 percent,
this form
income.
form of
of compensation
ordinary income.
compensation as ordinary
this
Tax treatment of
of foreign
income
foreign income
of
makes several
The Act makes
several important
important changes
changes in
in the
the tax
tax treatment of
delinecessary to
forei.^rn i"come.
is necessary
i'^come. Congress
Congress believed
forehtn
believedthat
that it
it is
to strike
strike a delinaacross naflow of
free flow
between encouraging
cate bb'hince
'lance between
encouraging the
the free
of capital across
excestional
provide excesnotprovide
lawsdo
thetax
do not
and making
sure that
taxlaws
b-^rders and
making sure
thatthe
tional b-rders
the
siv^e incentives
investment in
sive,
incentivesfor
for foreign
foreign investment
investment instead
instead of
of investment
in the
basic structure
United
States. Congress
Congress decided
United States.
decided to
to retain
retain the
the basic
structure of
of the
income
taxation of
of foreign
for income
credit for
foreign income—namely,
income—namely, aa foreign
taxation
foreign tax
tax credit
abroad and deferral
earned abroad
subsidiaries
foreign subsidiaries
of foreign
on income
of tax
deferral of
income of
tax on
earned
(except in
this
returned to
case of
the case
income) until
haven" income)
(except
in the
of "tax haven"
until returned
to this
country. However.
tax-related
all other
However, the
other tax-related
country.
the Act
Act eliminates
eliminates virtually
virtually all
incentives for
investment abroad.
incentives
for investment
abroad.
An
the perimportant change
perrepeal of
An important
change made
madeby
by the
the Act
Act is
is the
the repeal
of the
country limitation
The per-country
foreign tax
credit. The
limit
tax credit.
per-country limit
country
limitation on
on the
the foreign
enables aa firm
to
another to
enables
firm with
with aa loss
loss in
in one
one country
country and
and aa profit
profit in
in another
deduct the
on the
the
deduct.
the.loss
lossagainst
againstU.S.
U.S.income
incomeand
andstill
still avoid
avoid U.S.
U.S. tax
tax on
profit
this
will eliminate
repeal will
eliminate this
Its repeal
foreign tax
credit. Its
profit through
through the
the foreign
tax credit.
possibility
law. The
possibility and
and will
will also
also greatly
greatly shnplify
simplify this
this part
part of the tax law.
also provides
losses deducted
deducted from U.S.
foreign losses
Act also
provides for
for recapture
recapture of
of foreign
income when
subsequent years.
years.
in subsequent
income
when foreign
foreign profits
profits are
are earned in
Act repeals
which favor
favor investment.
investment
repeals numerous
tax incentives
incentives which
numerous tax
The Act
in
some foreign
in
investment in
over others—those
others— those which
in some
foreign areas over
which favor
favor investment
less-developed
Act corporations
corporations
country corporations,
less-developed country
corporations, China
China Trade
Trade Act
and Western Hemisphere
also substantially rereHemisphere trade
corporations. It
trade corporations.
It also
vises and
possessions. Exprovisions
vises
and improves the
the tax proN
isions relating
relating to
to U.S. possessions.
in the
cept in
the case
no
was no
case of
of U.S.
cept
Congressfelt
felt that
that there was
possessions, Congress
U.S. possessions,
of these
longer
these
one of
investment in
good reason
reason for
longer any
any good
for favoring
in one
favoring investment
foreign areas over another.
another.
income earned
The Act,
earned abroad by
exchision for
for income
an exclusion
retaining an
while retaining
Act, while
individuals,
features of this
this provision enabling those
special features
eliminates special
individuals, eliminates
with
above the
the basic
basic exemption
exemption levels
levelsto
to obtain
obtain additional
additional tax
tax
income above
with income
benefits
from the
the exclusion
the maximum amounts eligible
exclusion and reduces the
benefits from
preference for
for
Congressdid
didnot
not feel
feel that
that the
the tax preference
exclusion. Congress
the exclusion.
for the
income earned
earned abroad
abroad should
should be
beas
aslarge
large as
as itit was
was under
under prior
prior law.
income
deferpermits deferprovision that
Another area
is the
the DISC provision
that permits
of concern
concern is
area of
more
incentive more
ral
this incentive
make this
income. To
To make
ofexport
exportincome.
one-halfof
of tax
tax for
forone-half
ral of
excess of
efficient.
theAct
Act limits
limits DISC
DISC treatment
of a firm's
firm's exports
exports
treatment to
to the
the excess
efficient, the
level.
above
a moving base
period level.
above a
base period
should
corporations should
Congress
did not
multinational corporations
that multinational
believe that
not believe
Congress did
Thus,
misconduct. Thus,
in misconduct.
benefit from
from tax
tax incentives
engage in
incentives when
when they engage
benefit
the
the foreign
foreign tax
tax credit,
credit, tax
tax deferral,
deferral, and
and DISC
DISC treatthe Act
Act denies
denies the
ment,
for income
incomeearned
earnedin
in connection
connectionwith
with participation
participation in
in internament for
protional
such as
as the
the Arab
Arab boycott
boycott o,f
of Israel.
Israel. Similarly,
Similarly, it
it protional boycotts,
boycotts, such
will be taxed
subsidiaries will
vides that
that amounts paid as
as bribes
bribes by foreign subsidiaries
vides
to
the U.S.
U.S. parent
parent corporation.
corporation.
to the
To eliminate
oil companies
companies which operate abroad
eliminate the
possibility that
that oil
the possibility
payments
gain
their payments
from the
characterization of
gain undue
undue advantage
advantage from
the characterization
of their
limits the
to foreign
as creditable
creditable taxes,
taxes. the
the Act
Act further
further limits
to
foreign governments
governments as
be used
used
extent
oil extraction
extraction can
can be
which foreign
foreign tax
credits from
from oil
extent to
to which
tax credits
reduce the
while
continuing the
the requirement
that these
requirement that
taxes may
may not
not reduce
while continuing
these taxes
tax on other
other foreign
foreign oil
oil income.
income.
The Act
Act also
also makes
technical corrections
corrections that
that were
were considconsidmakes several
several technical
ered necessary
resulting from
from the
the changes
changes in
in the
the taxation
taxation of
foreign
ered
necessary resulting
of foreign
income
made by
by the
the Tax Reduction Act
Act of
income made
of 1975.
1975.
Capital gains
gains and losses
losses
Capital
of
The
in the
treatment of
The Act makes
makes three
three important
important changes
changes in
the tax treatment
capital
m capital
capital
long-term
capital gains
gains and
losses. The holding period
period defining
defining long-ter
and losses.
gains,
which receive
receivepreferential
preferential tax
tax treatment,
treatment, is
raised (over
gains, which
(over a
is raised
a period
of two
two years)
years) from
from six
six months
encourage
months to
to one
one year.
year. This
Thisshould
should encourage
longer term investments as
as contrasted
contrasted to
speculative investinvestto short-term speculative
ments.
Also, the
the Act
Act (over aa period of two years)
ments. Also,
years) increases
increases the
the amount
ordinary income
of ordinary
income against
which capital
against which
capital losses
losses can
can be
be deducted from
$1,000
to$3,000.
$3,000.This
Thischange
changeisisdesigned
designedto
toprovide
provide relief
relief to
to those who
$1,000 to
have capital
losses in
capital losses
in excess
excessof
of capital
capital gains,
gains, which
which is
is not
not only
only fair
fair but
also should
should encourage
encourage individuals
individuals to
to make
make equity
equity investments.
investments. Finally,
Finally,
the
increases the exemption
the Act increases
level for
for capital
capital gains
exemption level
gains on
the sale
sale of
a
on the
of a
principal
principal residence
residence by a
a taxpayer
taxpayer age
age 65
65 or over.
over.
revisions
tax revisions
Other tax
makes a large
large number
The Act makes
number of
other relatively
of other
relatively minor
revisions
minor revisions
the tax
tax law.
law. These
These deal
deal with
in the
with inequities
inequities or
or technical
technical problems
that
problems that.
have come
conic to
to the
the attention
attention of the
the Congress.
Congress.
are several
several provisions
provisions relating
There are
relating to
to tax-exempt
tax-exempt organizations.
organizations.
Among these
Among
these is
is one
one which
whichsets
setsthe
thepayout
payoutrequirement
requirement (if
(if larger
larger than
actual earnings)
earnings) for
for foundations
foundations at
at 55 percent
percent of
(instead
actual
of asset
asset value
value (instead
of a
a minimum
minimum of
percent) and
of
of 6
that this
6 percent)
and provides
provides that
limit is
not to
to be
be
this limit
is not
varied as interest rates
rates generally
generally change.
change. A
varied
provision sets
A second
second provision
sets up
a court
court review
review procedure
procedure where
a
where the
the IRS holds
an organization
organization
holds that an
does not qualify for
for exempt
exempt status.
status. A
does
A third
thirdchange
changemakes
makesmore
more specific
specific
the rules
rules for
for lobbying
lobbying by charitable
the
charitable and educational organizations.
organizations.
234-120 O
77 -- 2
2
231-t20
0 -- 77
6
to pensions.
pensions. Probincludes a
The Act includes
a number of
of provisions
provisions relating
relating to
existing
expands the existing
one which
which expands
important of
of these
these is
is one
the most
most, important
ably
ably the
permit aa workworkto permit
provision for
for individual
individual retirement accounts
accounts (IRAs) to
change
This change
foraanonworking
nonworkingspouse.
spouse. This
IRA for
an IRA
spouse to
ing spouse
to set
set up an
nonworking
family made
made by
by nonworking
recognizes the
recognizes
the contributions
contributionsto
to the
the family
contribution
bothspouses,
spouses,aa$1,750
upfor
forboth
IRA isisset
setup
$1,750 contribution
spouses. If
spouses.
If an IRA
Contributions can
applies. Contributions
limit applies.
limit
can be
be made,
made, subject
subjectto
tothat
that limit,
limit, to
to a
separatesubaccount.s
subaccounts or
IRA with
with separate
single IRA
single
or two
two separate
separate IRAs. Another
each
amount of
to$750
to be
be set
set aside
aside each
permits an
an amount
ofup
upto
$750 to
pension
pension provision
provision permits
whereincome
income is
is $15,000
H.R. 10-type
10-type plan
planwhere
in an
an H.R.
$15,000 or
year in
or under
under without
individual's
limited to 25
25 percent
percent of an
an individual's
amount set
set aside
aside being
being limited
the amount
earnings.
of
changes relating
relating to the
the taxation
taxation of
also are
number of
of changes
There also
There
are a number
period of
of five
five
companies. Among
insurance companies.
Among these
these is
is one
one which,
which, after
after aa period
file consolidated
consolidated
casualty insurance
insurance companies
companies to
to file
years, will
will permit
permit casualty
years,
manner which
which does
does
returns
life insurance
insurance companies
companies but
returns with life
but in aa manner
remove more
losses of
companies to
to remove
not
the losses
not permit the
of the casualty companies
more than
than a
income .from
life insurance income
limited amount of the life
from taxation.
taxation.
of real
real estate investThere are technical changes in
in the
the tax
tax treatment
treatment of
condominiums, certain
ment trusts,
cooperatives and condominiums,
trusts, housing cooperatives
certain franchise
franchise
publishers, creditors
creditors of political
political parties,
parties, subauthors and
and publishers,
subtransfers, authors
taxcredit,,
credit, personal
personal
chapter S
corporations, the
the work incentive
incentive (WIN)
(WIN) tax
S corporations,
losses from disasters,
disasters, simulholding companies, oil
oil and gas producers, losses
taneous liquidation
and subsidiary
subsidiary corporations,
corporations, gain from
from
taneous
liquidation of
of parent and
sales or
exchanges between
removfor removsales
or exchanges
between related
related parties,
parties, and deductions for
ing
architectural and
and transportation
transportation barriers
barriers for
for handicapped
handicapped and
and
ing architectural
people.
elderly people.
The Act makes
revisions in
in depreciation
depreciation rules
makes revisions
rules designed
designed to encourage
rehabilitation
historic structures.
structures.
rehabilitation of historic
Several tax provisions
provisions that
have recently
recently expired
expired are
are extended
extended in
in
Several
that have
amortization provisions
provisions for
for pollution
pollution conconthe Act. These include
include rapid
rapid amortization
trol facilities
facilities and
and rehabilitated
rehabilitatedlow-income
low-income housing.
housing. Pollution control
trol
control
facilities are
also given
given half of
of the
the normal
normal investment
investment credit,
credit, which
which
facilities
are also
differs from
provision under which
which 5-year amortization was
differs
from the
the prior
prior provision
alternative to
to the
theinvestment
investment credit.
credit. Congress
Congress believed
believed that
that since
since
an alternative
re^ilations require
require installation
installation of
of pollution
pollution control
contix>l equipment,
Federal regulations
it is
is equitable to
it
to reduce the
the cost
cost of
of capital
capital for
for sii.l. equipment. Also, the
the
exclusion from
student loans
loans is
is extended
extended
exclusion
from income
income for
for certain
certain forgiven student
through 1978.
1978. Further,
extends for aa limited
limited period
period the
excluFurther, the Act extends
the exclusion for certain
certain health-related
health -related scholarships
scholarships for members
members of
unision
of the uniservices for
in 1976.
1976.
formed services
for those
those participating
participating in
exemption is
is provided for
for contributions
contributions by
Tax exemption
by employers to
to qualiqualified group
fied
group legal
legal services
services plans,
plans, designed
designed to
to encourage
encourage use
useof
ofthis
this fringe
fringe
benefit.
benefit.
for State
State and
and local
local government
To broaden the market for
government bonds,
bonds, mutual
funds are allowed
allowed to
tax-exempt interest
to pass through tax-exempt
interest on
on such
such bonds
bonds
to
to shareholders.
redefines income
Also, the
the Act redefines
income or
or loss
loss from
from writing
writing options
shortoptions as
as shortterm capital
capital gain
gain or loss
loss in
to limit
limit the tax shelters
term
in order to
shelters that
that have
have
stock option
developed in
in recent
recent years
years in
in stock
option hedges.
hedges.
In addition.
addition, the
the Act
Act makes
makes certain
certain small
small changes
changes in
in the
In
the excise
excise tax
tax
treatment
of truck
truck modifications
modifications and truck
truck parts
partsand
treatment of
andaccessories,
accessories, and
simplifies and
simplifies
and revises
revises the
the excise
excisetax
tax treatment
treatment of
of cigars.
cigars.
7
SIMPLIFICATION
TAX SIMPLIFICATION
B. TAX
B.
second major
simplification is
the Act.
SimplifiAct. SimplifiTax simplification
is the
the second
major goal
goal of the
cation
process, and
and the
the individual
individual provisions
provisions of
of the
the
cation must be an ongoing process,
periodically to
how they contribute
reexamined periodically
contribute
must be
to see
law must
see how
be reexamined
tax law
occurs, the
complexity of
to
the complexity
of the
the tax
tax law. Unless this
this reexamination occurs,
the
to the
provisions are
gradually more
complicated as
grow gradually
more complicated
new provisions
law will
as new
will grow
tax law
achieve new
to achieve
added to
new goals
goals of
of society.
society. The
The,Act
Act repeals
repeals or
or restructures
restructures
Congressional
lav,', and
several provisions
that aaCongressional
directs that
tax law,
and directs
several
provisions of
of the
the tax
simplification of
further simplification
system.
tax system.
of the tax
study be made
made regarding further
income tax
tables. The
such provision
One such
One
provision concerns
concerns the
the use
use of
of the
the income
tax tables.
based on
income,
adjusted gross
tables based
gross income,
on adjusted
Act eliminates the
the existing tax tables
which have
substitutes a
a
which
have been
been aa major
major source
sourceof
of taxpayer
taxpayer error,
error, and substitutes
based on
taxable income.
income. lt
tables based
on taxable
of tables
to$20,000
raisesto
Italso
set of
simpler set
alsoraises
$20,000
level where these
income level
these tax
tables may
the taxable
be used.
taxable income
may be
the
tax tables
used.
second simplification
A second
simplification concerns
concerns the
the retirement
retirement income
income credit.
credit. This
This
designed to
social security
give those
those who
was originally
to give
originally designed
who retire
retire without social
security
accorded social
security benefits.
benefits. As
social security
similar to
benefit similar
thataccorded
tax benefit
to that
a tax
a
As a
computation were
designed to
to
were designed
eligibility for
result, eligibility
for the.
its computation
the credit
result,
credit and its
follow as
closely as
of, social
as closely
social
follow
as possible
possible eligibility
eligibility for,
for, and computation of,
whole
filled a
benefits. This
complex form
security benefits.
a whole
security
This required
required aa complex
form that
that filled
eligible
people eligible
fraction of
estimated that
page, and
ofthe
large fraction
that aa large
it is
thepeople
page,
and it
is estimated
computing it.
the credit
did not
claim it
in computing
either did
errors in
credit either
made errors
not claim
for the
it.
it or
or made
credit to
elimiresponse to
to elimiIn response
In
to this
this problem, Congress
Congress restructured
restructured the
the credit
this means
even though
virtually all
breaking
means breaking
complexity, even
all the
nate virtually
though this
nate
thecomplexity,
income credit
social security
close link
the close
link between
between the
the retirement
retirement income
credit and social
security
eligibility. This
eligibility.
This new
new credit
credit for
for the
the elderly
elderly also
also will
will be
be fairer
fairer than
than the
the
also be applicable
prior law
retirement
will also
income credit
law since
it will
retirement income
credit under prior
applicable
since it
taxpayers age
over.
age 65
to earned income for
to
for taxpayers
65 or over.
exclusion. In
sick pay exclusion.
complicated provision
Another complicated
provision has
has been
been the
the sick
that the exclusion should
be allowed
should be.
case. Congress concluded that.
this
allowed only
this case,
totally disabled,
for
who are
are permanently
permanently and
for other
disabled, since
since for
for persons
and totally
persons who
people there
there is
is no
no reason
reason why
why sick
sickpay
pay should
should be
betreated
treated more
more favorably
favorably
of
income, particularly
deductibility of
wage income,
view of
than
particularly in
in view
than wage
the deductibility
of the
the sick
expenses. For
sick pay
medical and
pay
medical
and drug
drug expenses.
For those
those still
still eligible
eligible for
for the
simplified and coordiconsiderably simplified
been considerably
coordiexclusion, the
exclusion,
the provision
provision has been
credit for
new credit.
the new
nated with the
for the
the elderly.
elderly.
nated
makes major
child and dependof child
The Act makes
major changes
changes in
in the
the treatment
treatment of
were allowed as
expenses. Formerly, these
care expenses.
these were
itemized deducas an itemized
ent care
complicated limitations.
some complicated
converts the
tion, subject
to some
limitations. The
The Act
Act converts
subject to
tion,
the
20-percent credit,
will be
deduction into
available to
to those
be available,
so that
deduction
into a 20-percent
credit, so
that itit will
who use
it
who
use the
the standard
standard deduction
deduction as
as well
well as
as to
to itemizers
itemizers and
and so
so that
that it
will provide the
in low
will
the same
same tax
tax relief
relief to
to taxpayers
taxpayers in
to those
low brackets as
as to
worth,
in high
brackets. The
deduction in
high brackets.
care deduction
law was
child care
The child
was worth.
in
in prior law
70 cents
for examp'e,
expenses for
exampV, 70
care expenses
child care
for
cents for
for each
dollar of
for aa taxtaxeach dollar
of child
payer in
only 14
70-percent bracket, but
in the
the 70-percent
cents to
but only
14 cents
to aa low-bracket
low-bracket taxtaxpayer who
who used
nothing to
deductions and nothing
used the
who itemized deductions
someone who
to someone
worth 20
will be
cents for
each dolstandard deduction.
new credit
deduction. The
for each
dolThenew
credit will
standard
be worth
20 cents
expenses for
the
qualified child
lar of
addition, the
of qualified
lar
for all
all taxpayers.
taxpayers. In
In addition.
care expenses
child care
significantly simplifies
simplifies the
provision and broadens
elicare provision
Act significantly
broadens eliAct
the child
child care
gibility for
for it.
gibility
it.
law or
makes several
The Act makes
several other
other changes
changesthat
that will
will simplify
simplify the
the law
make
it more
equitable, including
including aa revision
revision of
of the
the rules
rules relating
relating to
make it
more equitable,
to
8
accumulation trusts
and the
the moving
moving expense
expense deduction.
deduction. The alimony
alimony
accumulation
trusts and
deduction is
is moved
deduction
moved from
from an
an itemized
itemized deduction
deduction to
to aa deduction
deduction in
in deterdetermining adjusted gross
gross income,
income, so
it can
can be
be used
used by
by people
people who
who
mining
so that
that it
take the standard
deduction.
standard deduction.
are some
some cases
where it
cases where
possible to
is possible
to achieve
achieve tax
tax simplificasimplificaThere are
it is
tion without
without changing
changing the
the substance
substance of
the law.
law. The
The Act
the
of the
Act includes
includes the
tion
which deletes obsolete
obsolete and
so-called "deadwood provisions"
provisions" which
and rarely
rarely used
parts
from the
the Internal
InternalRevenue
Revenue Code
Code and
and makes
makes many other
other changes
changes
parts from
to
simplify the
the language
language of
of the
the Code.
Code.
to shorten and simplify
These provisions
provisions are
are only
only the
the beginning of what must be aa continual
process
simplification. Congress
Congress plans
further tax
taxsimplicat.ion
simplication
process of
of tax
tax simplification.
plans further
measures and
Joint Committee
Committee on
Taxation to
conduct
on Taxation
to conduct
measures
and has
has directed
directed the
the Joint
comprehensive study
lea comprehensive
study of
of ways
ways to
to simplify
simplify the
the tax
tax system
system (with aa report to
to the
the House
House Ways
"Ways and
and Means
Means and
and Senate
Senate Finance
Finance Committees
Committees
due by June
June 30,
30, 1977).
1977).
'
EXTENSION OF
TAX REDUCTIONS
C. EXTENSION
OF TAX
REDUCTIONS
C.
Economic
Economic conditions
third major
A third
major purpose
purpose of
the Tax
to exexof the
Tax Reform
Reform Act
Act of
1976 is
is to
of 1976
tend the fiscal
fiscal stimulus
stimulus provided
provided by the
the Tax
Tax Reduction
Reduction Act
Act of
of 1975
1975
subsequently extended
first half
half of
1976 by
the Revenue
Revenue
of1976
by the
and subsequently
extended for
for the
the first
Adjustment Act of
of 1975.
1975. The Tax Reduction
Reduction Act
Act of
of 1975
1975 provided a
tax cut,
cut, a tax
tax rebate
rebate and
and increased
increased expenditures
expenditures totaling
totaling $23
billion in
$23 billion
1975.1
1975.1
1975 tax
included a temporary
temporaiy increase
increase in
standard
The 1975
tax cut included
in the standard
deduction and
a $30
deduction
and a.
$30nonrefundable
nonrefundabletax
tax credit
credit for
for each
each taxpayer
taxpayer and
liabilityby
by$8
billion'and
reflected
and was
was reflected
dependent, which reduced tax liability
$8 billion
in lower
lower withheld and
and estimated
estimated tax
tax payments
paymentsover
over the
the last,
last 8
8 months
in
1975. There
also an earned income
income credit
involving $1.4
of 1975.
There was also
credit involving
billion
$1.4 billion
and aa home
home purchase credit
credit amounting
amounting to
to about
billion. Finally,
Finally,
about $0.6
$0.6 billion.
were business
business tax
reductions— an increase
there were
tax reductions—an
increase in
in the
the investment
investment tax
and aa corporate
corporate rate
ratecut
forsmall
cutfor
smallbusinesses—amounting
businesses amounting to
to $5
credit and
$5
billion.
billion.
1975 increase
deduction and
and the
the $30
The 1975
increase in
in the
the standard
standard deduction
credit, which
$30 credit,
reduced tax
liability by
by $8
billion, were
were reflected
reflected in lower
lower withheld
withheld
reduced
tax liability
$8 'billion,
estimated tax
payments over
last 8
8 months
the
months of 1975
1975 at
and estimated
tax payments
over the
the last
at the
rate
of $1
month, or
or $12
billion per year.
$1 billion per month,
In the
the Revenue
Revenue
rate of
$12 billion
year. In
Adjustment Act
Act of
of1975,
Congress decided to
1975, Congress
Adjustment
withto extend these
these same withthe first
first half
half of
of 1976
1976 and to
holding rates for the
tax liato provide a
cut in
in tax
liaa cut
bility for
for 1976
1976 approximately
equal to
to this
this $6
bility
approximately equal
billion reduction
reduction in
in withwith$6 billion
holding. Also,
Act extended
extended the,
the small
holding.
Also, that
that Act
small business
business tax
tax cuts
cuts and
and the
the
earned income
earned
incomecredit
creditfor
for the
the'first
of 1976.
1976. (The
(The increase
increase in
in the
first half of
investment credit
been put into
into effect
effect for
for 1975
1975 and 1976
the
investment
credit had been
in the
1976 in
Tax Reduction Act.)
Congress analyzed
economic conditions
in 1976
believed
Congress
analyzed economic
conditions again
again in
1976 and believed
it
was inappropriate
inappropriate to
to withdraw
withdrawthe
theeconomic
it was
economic stimulus
stimulus provided
provided by
the 1975
1975 tax
1975-76 tax
the 1975-76
the
tax reductions.
reductions. Due in
in no small
small part
part to
tax reducto the
reduc-
—
1 This included
included a rebate
rebate on
on 1974
1974 Individual
individual income
Income taxes of
1
billion plus
of $8.1
$8.1 billion
plus aa $50
one$50 onetime ,payment
.payment to
social security
security recipients
recipients and
andincreased
increasedunemployment
unemployment compensation
compensation
time
to social
billion.
amounting to $2
$2 billion.
9
1974-75
tions,
economic recovery
recovery from
from the
been an
an overall
overalleconomic
the 1974-75
has been
there has
tions, there
recession
in the
the past
past 18
18 months.
months. Output
Output has
has grown
grown at
at aa rate
rate of
more
of more
recession in
income and producthan
we have
have exceeded
exceeded the
the level
level of
of income
percent, and
and we
than 66 percent,
tion
prior to
therecession.
theend
endof
to the
recession. Since
Since then,
then,
that existed
existed at
at the
of1973,
tion that
1973, prior
however,
the capacity
capacity of
of the
has grown
grown and will
the economy
economy has
will continue
continue to
to
however, the
grow,
forecasts examined
examined by
Congress indicated
indicated
economic forecasts
by Congress
grow, and
and the
the economic
that
for at
least
likely to
excess capacity
capacity in
in the
the economy
economy for
at least
there is
is likely
to be
be excess
that there
the
rate had fallen
the unemployment rate
fallen from
from 99 percent
percent
next year.
year. While the
the next
to
percent (at
Act), the
the Tax
Reform Act),
the
(at the
the time
time of
of passage
passage of
of the
Tax R-eform
to 7.8
7.8 percent
existing
rate was
still considered
considered to
to be
be unacceptably
unacceptably
existing unemployment
unemployment rate
was still
high.
agreed to
to extend
the existing
extend the
existing tax
high. For
these reasons,
reasons. Congress
Congress agreed
For these
cuts
and to
to make
make part
part of
tax cuts
cuts permanent.
at least
least through
through 1977
of the
the tax
cuts at
1977 and
Congress
did not
not believe
believethat
that aa permanent extension
of the
the entire
extension of
entire
Congress did
$20
million in
in tax
effect was
was appropriate.
appropriate. There
There
reductions then
then in
in effect
tax reductions
$20 million
was imcertainty
uncertainty about
capacity there
there was
was (or
(or was
about just
how much
much excess
excess capacity
just how
would
likely to
how serious
inflation problem
problem would
likely
in the
theeconomy,
economy, how
serious the
the inflation
to be)
be) in
requirements would
would be
be
be
in the
the years
years ahead,
ahead, as
as well
well as
as what
what budgetary
budgetary requirements
be in
necessary for
for the
necessary
the rest
rest of
of the
the decade.
decade.
In
of the
the uncertain
uncertain economic
and budgetary
budgetary situation,
situation, Congress
In view
view of
economic and
permanant but
agreed
to make
reduction permanent
agreed to
make part
part of
of the
the $20
billion tax
tax reduction
$20 billion
and
to
only temporarily.
temporarily. This
will afford
afford Congress
Congress and
to extend
extend the
the rest
rest only
This will
economic
the Administration
revieweconomic
the
Administration an
opportunity in
1977 totoreview
an opportunity
in 1977
conditions
and the
the fiscal
requirementstoto see
seewhat,
what,ifif any,
any, further
conditions and
fiscal requirements
be made.
made.
extensions
or enlargements
enlargements of
of these
these tax
tax cuts
should be
extensions or
cuts should
Individual tax reductions
reductions
The Act makes
permanent $4
$4 billion
billion of
of individual
reductions.
makes permanent
individual tax
tax reductions.
Act
These
result from
in the
These result
the standard
standard deduction.
deduction. The Act
from the
the increases
increases in
the Revenue
Revenue
extends
through 1977
the general
general tax
tax credit
extends through
in the
1977 the
credit adopted
adopted in
involve
Adjustment Act
together involve
Act and
and the
the earned
earned income
income credit,
credit, which
which together
a tax
tax cut
billion for
a
cut of
of $11
for 1977.
1977.
$11 billion
deduction
Act permanently
permanently increases
standard deduction
The Act
increases the
the minimum
minimum standard
(or
allowance) from $1,300
to $1,700
$1,700for
for single
single returns
returns
(or low-income
low-income allowance)
$1,300 to
and to
for joint
joint returns.
to $2,100
percentage standard
returns. It
increases the
the percentage
It increases
$2,100 for
maxideduction from 15
increases the maxideduction
15 percent to
to 16
percent. Also,
Also, it
it increases
16 percent.
mum standard
mum
standard deduction
to $2,400
$2,400for
for single
single returns
returns and
deduction from
from $2,000
$2,000 to
annual
to $2,800
to
for joint
joint returns.
returns. This
This will
will reduce
reduce tax
tax liability
liability at
at an annual
$2,800 for
fiscal
rate
receipts in
in fiscal
rate of
of $4.2
billion for
will lower
lower budget
budget receipts
for 1977,
and will
$4.2 billion
1977, and
repyear 1977
by $4.1
$4.1billion.
billion.This
This increase
increasein
in the
the standard
standard deduction rep1977 by
since it
it
resents a
major simplification
income tax,
tax, since
resents
a major
of the
simplification of
the individual
individual income
switch to
to switch
will make
make it
for filers
filers of
9 million
will
it worthwhile for
million tax
tax returns to
of 9
equity,
the
greater tax equity,
Also, this
this change
change creates
creates greater
the standard
standard deduction.
deduction. Also,
while
inflation, while
since
itemized deductions
deductions have
have been
been free
free to
to rise
rise with inflation,
since itemized
unless
constant unless
maximum standard
the minimum and maximum
standard deductions
deductions stay constant
the
specific legislative
there is
legislative action.
action.
is specific
credit through
through 1977.
1977.
There is
is also
also an extension
extension of the
the earned
earned income
income credit
of
thefirst
first$4,000
This is
is a
refundable credit
credit equal
equal to
to 10
10 percent
percent of
of the
a refundable
$4,000 of
earnings,
with aaphaseout
risesbetween
between$4,000
and$8,000.
$8,000.
phaseoutas
incomerises
earnings, with
asincome
$4,000 and
involves a
a
It is
is available
available only
only to
children. It
It involves
It
to people
people with
with dependent
dependent children.
in
in tax
liability in
billion, and a
cut
cut in
tax liability
in 1977
1977 at
a reduction in
at aa rate
rate of
of $1.3
$1.3 billion,
income
fiscal year
earned income
1977 budget
receipts of
billion. The
The earned
fiscal
year 1977
budget receipts
of $0.7
$0.7 billion.
credit provides a work incentive
incentive for
for those
those with
with jobs
jobs that
that pay relatively
relatively
10
10
It provides desperately needed
needed tax
low wages. It
tax relief to a hard-pressed
and energy
who are faced with high food
food and
energy prices
prices and are
are subsubgroup, who
ject
ject to
to the
the payroll
payroll tax.
tax.
1977 the
The Act extends through 1977
the general
general tax
tax credit
credit for
for individuals
Revenue Adjustment Act,
which reduces
the Revenue
Act, which
in the
reduces tax
adopted in
tax liability
liability in
The extension
of$10.1
rate of
billion. The.
will
annual rate
$10.1 billion.
1977 at
1977
at an annual
extension of
of this
this credit
credit will
fiscal year 1977
1977 receipts
reduce fiscal
equals the
reduce
receipts by
by $9.5
$9.5 billion.
billion. This
This credit
credit equals
the
2 percent
dependent or 2
taxpayer and
and dependent
each taxpayer
percent of the
$35 for each
greater of $35
first $9,000
$9,000 of
first
of taxable
taxable income.
Together, the
liability in
in
Together,
the, individual
individual tax
tax cuts
cuts amount
amount to
to aa cut
cut in
in tax liability
rate of
of $15.6
1977 at
$15.6 billion.
1977
at an
an annual
annual rate
billion. They
They will
will reduce
reduce budget
budget receipts
receipts
year 1977
fiscal year
in fiscal
1977 by $14.4
$14.4 billion.
in
billion.
Business
Business tax reductions
order to
providesufficient
toprovide
sufficient economic
economic stimulus
stimulus and to
encourage
to encourage
In order
businesses to
businesses
to invest,
invest, the
the.Act
Act extends
extends the
the business
business tax
tax cuts
cuts provided by
of1975.
Actof
in 1977
Tax Reduction
1975. These reduce tax liability
liability in
Reduction Act
1977 at
the Tax
at an
will reduce
reduce tax
receipts in
rate of
billion and
fiscal year
tax receipts
in fiscal
and will
of $5.4
$5.4 billion
annual rate
1977 by $3.0
1977
$3.0 billion.
billion.
Capital Foilriation,
later under
As discussed
Fcnvnation, the
under Capital
discussed later
Act extends
extends
As
the Act
through 1980
1980 the current
current 10-percent
10-percent investment
investment credit (applicable
(applicable
through
previously through
represents an
the
increase from
from the
previously
through 1976).
1976). This
This represents
an increase
previous 7-percent
for most
most businesses
from the
businesses and
4-percent
the 4-percent
previous
7-percent rate
rate for
and from
for public
public utilities.
utilities. These
These changes
changes will
reduce tax liability
liability by
will reduce
by $3.3
rate for
$3.3
billion in
in 1977,
lower budget
will lower
budget receipts
billion in
receipts by
fiscal
1977, and will
in fiscal
by $1.3
billion
$1.3 billion
year 1977.
1977.
year
The investment
investment credit
credit has proven
proven an
ineffective way
an effective
stimulate inway to
to stimulate
vestment
1962 and
reenactment in
in
enactment in 1962
its reenactment
vestment in
in equipment.
equipment. Its
Its enactment
and its
investment booms,
1971 were
suspension in
in 1966
1966
1971
were followed
followed by
by investment,
booms, and
and its
its suspension
repeal in
in 1969
followed by sharp
sharp declines
were followed
declines in
investment.
in investment.
1969 were
and repeal
improve our
our
Increased
investment in
economy is
is needed
to improve
the U.S.
needed to
Increased investment
in the
U.S. economy
living and
other
toachieve
of living
and other
and to
achieve energy,
energy, environmental
environmental and
standard of
goals and
underthese
and under
circumstances. Congress
believed an
extension
these circumstances,
an extension
Congress believed
goals;
the 10-percent
10-percent investment
of the
investment credit
credit was
was appropriate.
appropriate. The
The credit
credit for
utilities is
is increased
increased to
because
the same rate
to the
forother
businesses because
that for
as that
otherbusinesses
utilities
rate as
Congress believed
on the
Congress
believedthey
they should
should be
be able
able to
to compete
compete for
for capital
capital on
same basis
basis as
as other
other industries.
industries.
Act also
1977 the
The Act,
also extends
extends through
through 1977
the small
small business
business tax
tax cuts
cuts enacted
1975. These
from $25,000
exemption from
$25,000 to
in 1975.
These increase
increasethe
the corporate
corporate surtax
surtax exemption
to
corporate
of corporate
rate on
initial$25,000
the initial
$25,000 of
on the
$50,000 and
$50,000
and reduce
reducethe
the tax
tax rate
is
income from
income
from 22
22 percent
percent to
to 20
20percent.
percent.The
Thereduction
reduction in
in tax
tax liability
liability is
is $1.7
in 1977,
in budget,
$1.7 billion
budget receipts is
$2.1
billion in
and the
the reduction in
1977, and
$2.1 billion
position
fiscal year 1977.
in fiscal
This change
change will
will improve
improve the competitive position
1977. This
of small business.
business,
of
;
FORMATION
D. CAPITAL FORMATION
Act isisthe
fourth major
encouragement of capital
the Act
A fourth
theencouragement
major aspect
aspect of
of the
certain ininmodification of
formation through
and modification
through the continuation
continuation and
formation
of certain
incentives. Congress
Congress was
vestment-related tax incentives.
was concerned
concerned that
that the
the U.S.
early 1974,
1974,
In 1973
and early
capital. In
1973 and
economy faced
economy
faced aa severe
severe shortage
shortage of
of capital.
investbecause investindustries because
in many major
majoi- industries
shortages in
there were capacity
capacity shortages
there
previousfive.
theprevious
five years. Also, the
in the
in them
been inadequate
had been
inadequate in
them had
ment in
11
11
productivity has
growth rate
hasslowed,
labor productivity
rate of
slowed, again
of labor
again partly
of
partlybecause
because of
investment. We
inadequate
inadequate capital
capital investment.
in stimhave had the
We have
success in
stimthe most
most success
investment in
recent years
years by
in recent
capital investment
ulating
ulating capital
the use
the investment
use of
by the
of the
appearsto
beaaclose
There appears
closecorrelation
tobe
correlationsince
tax credit.
between
credit. There
since1962
1962 between
investment credit
purchases of
presence of
the presence
of the
the investment
credit and purchases
the
equipment. As
of equipment.
10-percent investment
aa result,
extends the
result, the
investment credit
Act extends
four
the 10-percent
the Act
credit for
for foie•
years
(or through
through 1980).
years (or
1980).
provision enacted
extends and expands
expands aa provision
enacted in
The Act extends
allowing
in 1975
1975 allowing
an additional
credit if
if an equivalent
additional one-percent
investment credit
equivalent amount
one- percent investment,
amount
in an
an employee
placed in
is
stock ownership
ownership plan.
plan. These changes
employee stock
is placed
changes should
should
provision is
significantly increase
significantly
increasethe
the extent
extent to
to which
which the
the provision
is used
used by
by
business.
Under the
the new
new law,
law, aa credit
credit of
of an additional
additional one-half
perone-half perbusiness. Under
with employee
matched with
centage point
employee contribucontribuallowed if
centage
point is
if it
also allowed
it is
is also
is matched
desirable in
broaden emtions.
in order to
option is
considered desirable
to broaden
emThis option
is considered
tions. This
in
ployees ownership
ownership in
in business
businessand
and thereby
thereby increase
increase their
their interest
interest in
ployees
serve the
will also
improving productivity. It
also serve
the twin goals of increasing
It will
distribution of
of
capital
and creating
creating aa more
equal distribution
accumulation and
capital accumulation
more equal
profitable busibusiavailable to
wealth. To make the
less profitable
wealth.
the investment credit
to less
credit available
available on
nesses, the
first-out basis.
first-in, first-out
nesses,
the Act
Act makes
makes itit available
basis.
on a
a first-in,
will be
provision to
accumulation, which
Another provision
capital accumulation,
promote capital
which will
be
to promote
especially important
extends the
especially
important for
for new
new business,
business,isis one
one that
that extends
the net
net
carryforward period
flexiperiod to
more flexiallowing more
operating loss
years. By
loss carryforward
to77 years.
By allowing
bility
in averaging
encourage risktaking.
averaging profits
risktaking.
profits and
bility in
this will
losses, this
will encourage
and losses,
will also
also encourage
It will
It
encourage investment
investment in
in new
new businesses.
businesses.The
The Act
Act tightens
tightens
the
the existing
"trafficking" in
in losses
in order
order to
to reduce
prevent "trafficking"
rules to
reduce
existing rules
losses in
to prevent.
incentives toward
capital
any tax incentives
toward business
business mergers.
mergers.In
In addition,
addition, the
the capital
to
loss carryover
years to
is extended
extended from
loss
carryover period
period for
for mutual
mutual funds
funds is
from 5
5 years
years.
8 years.
8
genertrouble generhave had trouble
railroads and
industries which
which have
airlines, industries
For railroads
and airlines,
recession, the
ating
the Act
Act provides
provides (for
(for
the recession,
result of
internal funds
ating internal
as aa result
of the
funds as
the
in the
changes in
reduction through
through changes
tax reduction
period of
a
of time)
time) aa tax
limited period
a limited
at
reasons, at
similar reasons,
investment credit
credit and
and in
amortization rules.
investment
rules. For similar
in amortization
investment credit.
credit is
domestic merchant
half investment
least
available to
to the
is made available
the domestic
least half
construcwithdrawn from
marine
tax-deferred ship
marine for
for funds
ship constructheir tax-deferred
from their
funds withdrawn
purchase ships.
tion fund to
ships.
tion
to purchase
makes
the Act,
encourage domestic
production, makes
domestic production,
order to
Act, in
toencourage
in order
Finally, the
investment credit
propicture prothe
motion picture
for motion
the investment
credit available
availablein
in the
the future
future for
films.
ductions only
only where
where they
they are
are predominantly
predominantly American-produced films.
Service and
For the
compromise between
past, aa compromise
Revenue Service
For
between the
the Internal
Internal Revenue
the past,
credit
investment credit
industry is
worked out
appropriate investment
the
is worked
out as
the industry
as to
the appropriate
to the
intended
law.
relatively uncertain
intended under
under the
the relatively
uncertain provisions
provisions of
of prior
prior law.
ADMINISTRATIVE PROVISIONS
PROVISIONS
E. ADMINISTRATIVE
E.
A fifth
fifth major goal of
of the
the Act
Act is
is to
to improve
improve the
the administration
administration of
of the
the
efficiency of
laws. It
improve efficiency
tax laws.
provisions to
to improve
several provisions
contains several
It contains
tax
of tax
withholding provisions
provisions and
in withholding
changes in
administration through changes
and better
better
regulation of
significant adminadminpreparers. It
return preparers.
alsomakes
makes significant
Italso
regulation
of tax
tax return
changes designed
istrative changes
istrative
designed to
to strengthen
strengthen taxpayers'
taxpayers' rights.
rights.
The Act provides
of
definitive rules
provides definitive
confidentiality of
to the
rules relating
relating to
the confidentiality
tax returns,
returns, an
area where
where there
an area
tax
there has
has been
been abuse
abuseinin the
the past.
past. It
It
strictly limits
ability
disclosure of
limits disclosure
strictly
of information
information from
from tax
tax returns.
returns. The
The ability
12
InternalRevenue
Revenue Service
Service to
to use jeopardy and termination
termination assessassessof the
the Internal
ments and to
to issue
issue administrative
administrative summons also
also is
is limited
limited by
by providing
providing
review in
in these
these cases.
cases.
better court
court review
better
time, rules
At the
the same
same time,
provided for
publication of
prithe publication
rules are
are provided
for the
of priletter rulings
rulings so
so everyone
everyone will
know
vate letter
will have
have an
an equal
equal opportunity
opportunity to know
view of
on the
of the
the tax
tax law.
law. New
New
the view
of the
the IRS
IRS on
the proper interpretation of
also added
way in
in which
which
Service in
in reviewing
reviewing the
rules are
are also
added to
to aid the Service
the way
preparers carry
carry out
out their
their duties.
duties.
tax return preparers
case of withholding tax provisions,
the case
provisions, a number
number of changes
changes are
In the
on
of 20
percent on
made,
20 percent
made, including
including provision
provisionto
to withhold
withhold at
at the
the rate of
most wagering
amount won
won is
is $1,000
income from
$1,000 or over.
income
from most,
wagering wliere
where the amount
Further, in
inthe
thecase
case of
fishing vessels
vessels where the
is shared, sternof fishing
Further,
the catch is
classified as
The
men are classified
independent contractors
purposes. The
men
as independent
contractors for
for tax purposes.
also provides
provides mandatory withholding
withholding of State
income
Act also
State and
and local
local income
taxes
members of
taxes for members
of the
the Armed Forces.
ESTATE AND
AND GIFT
GIFT TAX
TAX PROVISIONS
PROVISIONS
F. ESTATE
gift tax
taxprovisions
provisionsprovide
provideaacomprehensive
comprehensive revision
revision
The estate and gift
these taxes.
taxes. In this
this area,
area, the
the Act
Act provides
provides substantial
substantial relief
relief for
for
of these
moderate-sized estates,
closely-held businesses,
and other
otherclosely-held
businesses, alleviallevimoderate-sized
estates, farms and
liquidity problem
problem for
for estates
estates comprised
comprised largely
ates the liquidity
largely of
of farms and
other closely-held
closely-held business,
same time
removes tax
time it,
it removes
other
business, while
while at
at the same
avoidance devices
system. This is
accomplished with
is accomplished
avoidance
devices from
from the present system.
balanced set
provisions which
will at
least mainmainat least
a balanced
set of
of provisions
which in
in the
the long
long run
run will
tain
the present
present level
level of revenues.
revenues.
tain the
substantially reduces
reduces estate
estate taxes
taxes for
for medium-sized
medium-sized estates.
estates.
The Act substantially
The existing
existing $60,000
$60,000 estate
exemption was
enacted in
in 1942
estate. tax
tax exemption
was enacted
1942 and
since that
time the
thepercentage
percentageof
ofdecedents
decedentswhose
whose estates
been
estates have
since
that time
have been
subjected to
estate tax has
has increased
increased from 1
1 percent to
to 8
8
subjected
to the
the Federal estate
percent.
increase has
resulted from
inflation and
greater
percent. This
This increase
has resulted
from inflation
and the
the greater
ability of
of people
people to
to accumulate
accumulate wealth
wealth because
because of
of the
the unprecedented
unprecedented
ability
economic prosperity
post-war era.
from
The Act
Act increases
increases from
economic
prosperityinin the
the post-war
era. The
$60,000 to
of estates
estates begins.
begins.
$60,000
to $175,000
$175,000the
thelevel
levelatatwhich
whichthe
the taxation
taxation of
It also
to confer the
It,
also changes
changes the
the exemption
exemptioninto
into aa tax
tax credit
credit in
in order to
maximum possible
relief on
estates.
on the
the small
small and
medium-sized estates.
and medium-sized
maximum
possible tax
tax relief
addition, the
the prior
priorestate
estatetax
taximposed
imposedacute
problems when
when the
acute problems
In addition,
principal asset
asset of
of the
the estate
estate was
was equity
equity in
in a
farm or
orsmall
business.
a farm
small business.
principal
Because assets
estate
Because.
assetsare
arevalued
valuedat
at.their
their "highest
"highest and
and best
best use"
use" for estate
tax purposes,
purposes, rather
rather than
thanon
which the
the
on the
thebasis
basisof
ofthe
thespecific
specific use
use to
to which
tax
assets were
(and also
assets are
illiquid),
also because
because these
assets
were being
being put
put (and
are illiquid).
these assets
family members
members have
been forced
sell farms and
small busibusiand small
family
have often
often been
forced to
to sell
nesses
the estate
problems the
estate tax.
tax. To
Todeal
withthese,
these problems
dealwith
nesses in
in order
order to
to pay the
Act allows
allows farms
(to the
the
(and other
other family
family businesses)
businesses) to
farms (and
to be
be valued
valued (to
small
purposes (or other small
$500,000) at
extent of $500,000)
at the
the value
value for
for farming purposes
business use)
fifteen
in the
the family for
period of
of ten
to fifteen
for aa period
ten to
business
use), if
if they remain in
after the
the death
valued at
death of
of the
the decedent.,
decedent, rather
being valued
years after
rather than being
at the
"highest and
and best
the Act
exbest use"
use" market
market value.
value. Also,
cases, the
Act exAlso, in
in these
these cases,
tends the
time for payment
provides for
payment of estate
estate tax
tax liability
liability and
and provides
tends
the time
low 4-percent
4-percent interest
million of
aa low
interest,rate
rate on
on the
the tax
tax on
on up
up to
of farm
to $1
$1 million
small business
business value.
value. These
preserve the
These changes
intended to
or small
changes are
are intended
to preserve
farm and
and other
other family
family businesses—two
businesses two very
family farm
very important
important AmeriAmeneconomically and
can institutions,
institutions, both economically
and culturally.
culturally.
,
—
13
13
The estate
estate and
and gift
gift tax
the Federal
Federal
important part,
of the
part of
structure is
is an
an important
tax structure
equitable as
nearly equitable
tax system
possible in
needs to
in
as possible
tax
to be
system and as
such needs
as nearly
as such
be as
method used
the method
its
depend on
to
used to
not depend
should not
liability should
on the
its application.
application. Tax liability
transfer the
this,
Because of this,
generation to
fromone
next. Because
to the
the next.
the property
propertyfrom
transfer
one generation
aa number of
were taken
taken to
to reform
reform the
the estate
estate and
and gift
gift tax
tax proviof steps
steps Avere
prosions.
This reform
reform provides
assurance that
that in
in the
provides assurance
these prothe long run these
sions. This
visions will
visions
revenue.
will not
not lose
lose revenue.
considerable variations
Two features
features of
variations
give rise
law which
rise to
which give
to considerable
prior law
of prior
in
gift tax
transfer the
the same
same amount
who transfer
estate and gift
for people
people who
in estate
burdens for
tax burdens
exemption provision
were the
of
the separate
provision for
for
rate schedule
separate rate
schedule and exemption
of wealth were
lifetime Gifts.
estates
gifts.
estates and gifts.
tolifetime.
advantagesto
tax advantages
were several
gifts. There
several tax
There were
The gift
of estate
estate tax
tax rates;
unlike the
the
percent of
and, unlike
gift tax
rates and,
tax rates
rates were
were 75
75 percent
in the
the tax
estate
tax, the
of the
the gift
gift tax
tax
the amount of
included in
estate tax,
was not
tax itself
not included
itself was
between gifts
base. Also,
base.
Also, someone
someonewho
whosplit
splithis
his total
total transfers
transfers between
gifts and
first
bequests
bequests achieved
achievedthe
theadvantage
advantageof
of "rate
"rate splitting,"
splitting," since
the first
since the
dollar
the bottom
bottom estate
estate tax
tax rate
even
rate even
taxable bequests
dollar of
taxed at.
of taxable
at the
was taxed
bequests was
opportunities
where
there had been
where there
lifetime gifts.
substantial lifetime
These opportunities
gifts. These
been substantial
inequitable,
for
were inequitable,
reducting the
giving were
lifetime giving
burden by
for redacting
the overall
overall burden
by lifetime
especially since
especially
since many
many people
people are
are not
not wealthy enough to
lifetime
to make lifetime
gifts.
exemptions
the exemptions
The Act
estate and
gifts. The
unifies the
taxes both the
the estate
Act unifies
gift taxes—both
and(rift.
(which have been
converted into
into aa credit.)
deal with
rates to deal
the rates—to
credit) and the
been converted
these inequities.
these
inequities.
the same
Another
of unequal
of taxpayers
sa,me
taxpayers with the
cause of
Another cause
treatment of
unequal treatment,
amount of
"generation
wealth transfers
the ability
amount
of wealth
ability to
transfers has
been the
to use
use "generation
has been
his
trusts. When
skipping" trusts.
bequeathedfrom
fromthe
the parent
parent to
to his
weath isisbequeathed
Wlien IN-Path
child,
then from
from the
the child
child to
to aa grandchild
grandchild and finally
from the
the grandfinally from
child, then
times.
three times.
child to
imposed three
great-grandchild, the
child
tax is
estate tax
the estate
is imposed
to aa great-grandchild,
However,
child
which the
wealth in
the child
However, if
if the
theparent.
the wealth
in a
places the
in which
trust in
parent places
a trust
trust,
and then the
and
the trust,
the grandchild
from the
income from
right to
has the
to the
grandchild has
the income
the right
will
with the
parent will
with
great-grandchild, the
principal going
the parent
the principal
going to
the great-grandchild,
to the
generations
achieve virtually
skip two
two generations
effect, skip
and, in
achieve
virtually the
in effect,
result and,
the same
same result
100
for 100
of estate
tax could
avoided for
these cases,
could be
estate tax
tax. In
cases, the
be avoided
of
In these
estate tax.
the estate
years or
arrangements have
have
trust arrangements
years
or more
prior law.
more under prior
such trust
Since such
law. Since
been used
generationtax generationbeen
used largely
largely by
by wealthier
wealthier people,
people, this
this failure
failure to
to tax
and
progressivity of
skipping trusts
the estate
estate and
skipping
trusts has
of the.
has undermined
the progressivity
undermined the
gift taxes.
taxes. The
gift
significantly limits
avoidance through
tax avoidance
limits estate
The Act
estate tax
Act significantly
generation-skipping trusts
generation-skipping
trustsbybyimposing
imposing
taxatat the
the time
of the
the
time of
a atax
death of
theexample
cited above,
of
example cited
above, of
grandchild, in
or grandchild,
the child
in the
death
child or
of the
substantially the.
property
the same
substantially
same size
size as
as would
would be
be imposed
imposed had
had the
the property
greatpassed directly
passed
directly from
from the
the child
child to
to the
the grandchild
and to
the greatgrandchild and
to the
grandchild, although the
payable by the
case is
grandchild,
the
the additional
tax in
additional tax
is payable
in this
this case
trust. However,
trust..
However, an exception
exception to
to this
this rule
provided for
to$250,000
rule is
forup
upto
$250,000
is provided
passing from a child
child to
to one
one or
or more
moregrandchildren.
grandchildren.
Still another
another inequity
inequity in
resulted from
prior law resulted
Still
in the
the prior
from the
the fact
fact that
when appreciated
the
when
appreciated property
property was
was transferred
transferred at
basis of
death, the
of the
the basis
at death,
property
for the.
the heirs
property for
heirs (on
is computed)
gain or
or loss
capital gain
loss is
which any capital
(on which
was the
rather than
basis of
market value at
than the
was
the fair
fair market
at the
the basis
the time of
of death rather
the decedent.
decedent. This
donee
the donee
gifts, where
the
This contrasted
contrasted with
with the
the rule
where the
rule for
for gifts,
must carry over the
must
the basis
basis of
of the
the donor.
donor. One
One unfortunate
unfortunate result
result of
of the
prior law
law has
has been that
people were
were reluctant
prior
that people
reluctant to
to sell
sell appreciated
appreciated proppropin 'anticipation
anticipation of
erty in
of the
the step-up
basis at
at death.
death. Another result
result has
in basis
step-up in
been that
income bore
ordinary income
assets accumulated out
been
that assets
out of savings from ordinary
;
—
—
14
heavier total tax burden
burden than
than, those
from appreciation
appreciation in
those resulting
resulting from
a heavier
value
where the gain
gain had
hadnot
notbeen
beenrealized.
theinefficiency
inefficiency
realized.To
Toreduce.
reducethe
value where
and inequity
inequity of the prior
prior system,
system, the Act
generally provides
provides for
Act generally
and
for a
carryover
but provides,
provides, however, that
there will
will continue
carryover basis at
at death but
that there
to
step-up in
be a step-up
in basis
basis for
for appreciation
appreciation which
througli
which has
has occurred
occurred through
to be
calendar year
year 1976.
1976.
the end of the calendar
G. INTERNATIONAL.
INTERNATIONAL TRADE
AMENDMENTS
G.
TRADE AMENDMENTS
Another
the Act
Act involves
involves changes
changes in
operation of
Another area
area of the
in the operation
of the
International Trade
U.S. International
Trade.Commission
Commission and
amendments to
U.S.
and amendments
to the
the Trade
Act
1974 regarding
countries aiding or
Act of
of 1974
regarding tariff
tariff treatment of countries
or abetting
terrorists.
international terrorists.
Congress concluded
the voting
The Congress
concluded that,
that ,the
voting procedures
procedures of
of the
the InternaInternational
Trade Commission,
facilitate the
Commission, needed
tional Trade
neededreyising
revisingininorder
order to
to facilitate
functioning of
of the
cases where a
the Congressionql
override mechanism
Congressiorial override
mechanism in
in cases
functioning
threecommissioners
agreemeiiit on
commissioners reached
reached ,agreement
plurality oofthree
on aa particular
remedy but,
because aa majoi'ity
not
of the
the commissioners
commissioners voting
remedy
but, because
majority of
voting did not
agree on aa remedy,
remedy, there
there was
no "recommendation"
"recommendation"' by
the CommisCommiswas no
by the
agree
sion which
which Congress
provisions
Congress could
override provisions
sion
could implement
implement under
under the override
1974). Thus,
(contained in
in the
the Trade Act of 1974).
Thus, the
the Act
Act provides
provides that
that if
if a
the Commissioners
Commissioners voting on an
an escape
of the
escape clause
clause or market
majority of
case cannot
remedy finding,
disruption case.
cannot agree
agree on
on aa remedy
finding, the
the remedy finding
agreed upon by a plurality
plurality of
of not
notless
less than
thanthree
threeCommissioners
Commissioners is
is to
agreed
be treated
the remedy
remedy finding
finding of
purposes
as the
of the
the Commission
Commission for the purposes
be
treated as
the Congressional
Congressional override
override mechanism.
mechanism. The Act
Act also
also modifies
modifies the
of the
rule
office for a
the term
term of
ofoffice
a member
member of the
the Commission
Commission so
rule for the
so that
that a
Commissioner may
Commissioner
maycontinue
continuetotoserve
serveafter
after the
the expiration
expiration of
of the
the term
office until
successor is
qualified.
of office
until the
the successor
is appointed
appointed and qualified.
a new
new
addition, the
the Act
Act amends
amends the
the Trade
Trade Act
Act of
of 1974
1974 to
to add a
In addition,
treatment to
"benecategory of
tariff treatment
to "benereasons for
category
of reasons
for denying
denying preferential
preferential tariff
ficiary developing
ficiary
developing countries.''
countries." The
The new
new provision
provision would
would prohibit
prohibit prefprefindiabet any
any indierential tariff
countries that
to such
such countries
erential
tariff treatment to
that aid or abet
vidual or
or group which has
has committed
committed an
an act
act of
of international
international terrorism.
terrorism.
he may
however, could
may for
The President, however,
could waive
waive this
this prohibition
prohibition (as
(as he
if
categories for
certain of
of the
the other categories
for denial
denial of
of preferential
preferential treatment)
treatment) if
waiver is
national economic
economic interest
is determined
determined to
to be
be in
in the
the national
aa waiver
interest of
of the
ITnited
States.
United States.
,
,
608
or
in the
the ordinary
ordinary course
of their
their trade
the
services in
course of
or services
trade or
or business.
business. Thus,
Thus, the
receipts giving
giving rise
receipts
rise to
the debt
debt must
must have
to the
have been
been taken
taken into
into income
income in
in
order
obtained.
order for
for the
the deduction
deduction to
to be
be obtained.
The Act limits
limits this
this exception
exception to
to those
those cases
cases in
in which
which 30
30 percent
percent of
of
all
accruedinin the
the ordinary
ordinary course
courseof
of all
all of
all of
receivables accrued
of the
the receivables
of the
the
trades or
of the
the taxpayer
trades
or businesses
businesses of
taxpayer are
are clue
due from
from political
political parties.
parties.
Thus, the
to politipolitiThus,
the exception
exception is
is limited
limited to
to those
those taxpayers
taxpayers whose
whose sales
sales to
cal
cal parties
parties (including
political campaigns
(inchiding political
campaigns and
and candidates)
candidates) constitute
constitute
a
a major
major portion
portion of
of their
their trades
tradesor
orbusinesses.
businesses. In
In determining
determining the
the
amount.
requiredtoto meet
meetthe
the 30
30 percent
percent rule,
rule, all
all of
of the
amount required
the taxpayer's
taxpayer's
trades and
are to
considered. Thus,
Thus, in
in the
the case
of an
an inditrades
businesses are
to be
be considered.
and businesses
case of
individual, every
every trade
trade or
the taxpayer
is to
vidual,
or business
business which
which the
taxpayer controls
controls is
to be
be
aggregated
aggregated for
for purposes
purposes of
of this
this test.
test. In
In the
thecase.
which
case of
of a
taxpayer which
a taxpayer
is a.
corporation, every
every trade
trade and business
of all
is
a corporation,
business of
all corporations
corporations under
under
common
ownershipwith
with the
the taxpayer
taxpayer is
common ov/nership
is to
to be
be aggregated.
aggregated.
The
deduction is
is to
to he
be allowed
allowed only
only if
if the
the taxpayer
The bad debt.
debt deduction
has
taxpayer has
made substantial
substantial continuing
the debt.
Tints, aa taxtaxmade
continuing efforts
efforts to
to collect
collect on
on the
debt. Thus,
payer must make good faith
the
payer
faith efforts
efforts over
over a
period of
time to
a period
of time
to collect
collect the
debt and
it is
is not
debt
must be
be able
and must
able to
to document
document those
those efforts.
efforts. However,
However, it
not
intended
that aa taxpayer
intended that
taxpayer is
is required
required in
in any
any case
case to
to file
file a
lawsuit
a lawsuit
against
against the
the debtor
debtor in
in order
order to
to be
be determined
to have
determined to
have made substantial
substantial
continuing
continuing efforts.
efforts.
The Congress
affirmedthat
that the
the provision
provision of
of prior
prior law was
Congress affirmed
was not
innot intended to
to apply
tended
to taxpayers
whose primary
primary business
apply to
business is
is to
provide
taxi:)ayers whose
to provide
goods
or services
to political
by the
goods or
services to
political parties.
parties. The changes
changes made
made by
the Act
thus reflect
Congress' original
original intent
intent in
in enacting
prior law.
thus
reflect Congress'
enacting prior
law.
Effective
date
Effective (late
This provision
provision is
is to
to apply
apply to
to taxable
taxable years
years beginning
beginning after
after DecemDecember 31,
ber
1975.
31, 1975.
Revenue effect
effect
It
It is
is anticipated
produce aa negligible
anticipated that
that this
this provision
provision will
will prodn-e
negligible loss
loss of
of
revenues.
revenues.
5.
of the
the Act and
Bonds for
5. Tax-Exempt Bonds
for Student
StudentLoans
Loans(Sec.
(Sec.2105
2105 of
sec.
of the
the Code)
103 of
sec. 103
Prior
Prior law
law
section 103(a)
Under section
103(a) of the
the Code,
Code, interest
interest paid on
governon certain
certain governmental obligations is
is exempt from Federal
Federal income
income tax.
obligatax. These
These obligations are
are those
tions
those of
of the States
States and
and their
their political
political subdivisions,
subdivisions, and
and of
of
certain corporations
corporations organized
certain
organized under
under an
an Act of
of Congress
Congress as
instruas instrumentalities of
mentalities
of the
the United
United States.
States. However,
However, interest
interest on
on such
governsuch governmental obligations
obligations (with a
mental
a minor
minor exception)
exception) is
is not
not exempt from taxtaxif aa major
major portion
portionof
ation if
to
ofthe
theproceeds
proceeds can
can be
be reasonably
reasonably expected
expected to
be
used, directly
directly or indirectly,
be used,
indirectly, to
to purchase
purchase nonexempt
nonexempt securities
or
securities or
that can
can reasonably
reasonably be.
obligations that
expected to
to produce
produce aa higher
higher yield
be expected
yield
over the
the issue
issue than the
over
the term of the
the yield
yield on
on the
the governmental
governmental obligaobligations.
These governmental
governmental obligations,
tions. These
obligations, which
which are
are subject
subject to
to Federal
taxation,
are called
called "arbitrage
taxation, are
"arbitrage bonds."
bonds." In
addition,governmental
governmental
Inaddition,
obligations whose
whose proceeds
obligations
proceeds are
are expected
expected to
to be
be used
used to
to replace
replace such
such
nonexempt
nonexempt go.ernmental
go, ernmental obligations
obligations are
are themselves
subject to
to tax.
tax.
themselves subject
609
However, governmental
However,
governmentalobligations
obligationsare
arenot
not treated
treated as
as arbitrage
arbitrage
bonds
proceeds are
invested in
in obbonds merely
merely because
because their
their proceeds
are temporarily invested
obhigher yield
yield until
until those
those proceeds
proceeds can
can be
ligations paying a higher
be put
put to
to their
their
intended purpose.
purpose. In addition,
addition, obligations
obligations are
are not,
not arbitrage
intended
arbitrage bonds
bonds
simply because
because their
proceeds are
invested in
obligations paying
simply
their proceeds
are invested
in obligations
paying a
a
higher yield
yield that
are aa part
partof
ofa areasonably
reasonably required
required reserve
reserve or rerehigher
that are
placement
placement fund.
Reasons
change
Reasons for
for change
Congress is
least one
Congress
is a^vare
awarethat
that groups
groups in
in at
at least
one State
State are
are attempting
develop a student
loan program
student loan
program for
for students
students desiring
dei?iring aa college
to develop
college
education. Since
education.
Since political
political subdivisions
subdivisionsin
in the
the State
State apparently do not
have the governmental
governmental authority to
to issue
issue bonds
bonds to
to finance
finance their
their own
have
own
student loan
loan programs,
programs, not-for-profit
not-for-profit corporations
student
corporations in
in that
that. State
State are
being organized
organized to finance
finance the needed
needed student.
student loan programs. These
being
These
corporations, however,
however, faced considerable obstacles because
corporations,
the interest
interest
because tlie
bonds tliey
wished to issue
issue to finance
finance student loans
loans may
may have
have been
been
on bonds
they wished
taxable under
prioi- law.
law. The
The corporations
corporations are
are not
not political
taxable
under prior
political subdisubdivisions of
regvisions
of the
the State
State and
and could
could not
not be
be treated
treated under
under the
the Treasury regulatio)is as
acting "on
"on behalf
behalf of"
of" the.
the State
State or
or its
its political
political subdiulations
as acting
subdivisions. Even
they were
were described
described in section
section 103(a),
103(a), these
obligavisions.
Even if
if they
these obligations might
might not
not have
have been
been exempt
exempt because
because they
they might,
might have
tions
have been
been
arbitrage bonds
bonds under
undersection
section 10:3(e).
103 (c)
arbitrage
the Emergency
Emergency Tnsured
Insured Student
Student Loan
LoanAct
Actof
of1969,
1969, the
the ComUnder the
Commissioner of
Education (of
the(Department.
Department of
(of the
Education,
missioner
of Education
of Health, Education,
"Welfare) is
is authorized to provide
provide incentive
incentive payments
payments to
instituand 'Welfare)
to institustudent loans.
tions providing student,
loans. Although
Although the
the maximinn
maximum rate
rate of interest
interest
by students
students on
on their
their loans
loans is
is now
now set
set at
at seven
seven percent, this
to be paid by
this
yield, together with
with the
the incentive
incentive payments received
received by
yield,
by the
the institution
institution
the loan
Commissioner of Education, would
would consticonstimaking the.
loan from the Commissioner
tute a.
a yield
could be
tute
yield that
that could
be higher
higher than the maximum yield
yield the corporations believe
believe they
tions
they vv'ould
would be
beable
ableto
to pay
pay on
on their
their bonds
bonds if
if they
they are to
cover administrative
solvent loan
cover
administrative expenses
expenses and
and maintain
maintain a solvent
loan program.
Consequently, tlieir
law, would
would be
be considered
considered
Consequently,
their bonds,
bonds, under
under prior law,
arbitrage bonds
bonds and not entitled
entitled to tax exemption.
arbitrage
Congress believes
obligations of these
these
Congress
believesitit.isisappropriate
appropriate to
to treat
treat the obligations
corporations providing
corporations
providing student
student.loans
loansininthe
the same
same manner
manner as
as if
if the
State had
had issued
issued the bonds directly.
State
directly.
ExpluTiation
provision
Explanation of
of provision.
proAdsion adds
adds to
to the.
the list
list of
obligations described
described in
of exempt
exempt obligations
This provision
section 103(a)
103(a) those.
those obligations
obligations of
not-for-profit corporations
corporations ororof not-for-profit.
section
ganized by,
political subdivision
subdivision
requested to
act by,
by, aa State.
State or aa political
ganized
by, or requested
to act
acquire
possession of
solely to acquire
State (or
(or of
of a.
a possession
States), solely
of aa State.
of the
the United
United States),
HigherEducation
of1965.
1965,
loan notes
notes incurred
incurred under
under the
the Higher
EducationAct.
Act of
student loan
expenses
payment of
of expenses
entire income
(after payment,
The entire.
income of
of these
these corporations
corporations (after
provision for debt
debt service
service requirements)
and provision
requirements) must
must accrue
accrue to
to the
the State
political subdivision.
subdivision, or
be recmired
purchase addiaddior political
or be
to be
be used
used to
to purchase
reauired to
lled "Qualified
e ca
tional student loan
notes. The
"Qualified
loan notes.
The obligations
obligations are
lie
called
tional
are to h
Scholarshi]) Fundi
Scholarship
Funding
nir Bonds."
result of
of this
this provision,
provision, organizations
organizations which
which wish
v.-ish to
to maintain
As a
a result
student loan
programs will
issue taxtaxloan iirograms
statutory authority
autliority to issue
student
will have
have statutory
exempt bonds to
to finance
finance their
their operations.
operations.
.
610
610
In
to make
it clear
clear that
that the
In addition,
addition, a
provision is
is added
added to
make it
a provision
the student
student
loan
loan incentive
incentive payments
payments made
made by
by the
the Commissioner
Commissioner of
of Education
Education
under the
the Emergency
Emergency Insured
Insured Student
Student Loan
Loan Act
Actof
of1969
1969 are
are not
be
not to
to be
taken
in determining
whether the
the yield
yield on
taken into
determining whether
into account
account in
on the
the student
student
loan
notes is
is higher
higher than
the
loan notes
than the
the yield
yield on
on the
the bonds
bonds issued
issued to
to finance
finance the
student
student loan
loan program.
program. As
student loan
result, bonds
As aa result,
bonds issued
issued to
finance student
to finance
loan
programs
would be
be expected
expected to
to be
be able
programs would
able to
to avoid
avoid arbitrage
arbitrage bond
bond
classification.
classification.
Effective date
date
E-ffective
These
provisions would
would apply
apply to
to obligations
issued on
on or
or after
These provisions
obligations issued
after
the
on or
or after
after
the date
date of
of enactment.
enactment. Thus,
Thus, the
the interest
interest on
on bonds
bonds issued
issued on
the
the date
date of
of enactment
enactment in
in order
order to
to finance
finance student
student loan
loan programs
to
programs to
enable
students to
to attend
of higher
enable students
attend institutions
institutions of
higher learning
learning may
be
may be
exempt
from Federal
exempt from
Federal taxation
taxation if
if the
the requirements
requirements of
of the
the amendment
amendment
are.
are met.
met.
Revenue effect
Revenue
ejfect
It
It is
is estimated
estimated that
thatthese
theseprovisions
provisionswill
willreduce
reduce the
the revenues
revenues by
less
by less
than
million annually.
annually.
than $5
$5 million
6.
of the
the Act
Personal Holding
Holding Company
6. Personal
Company Amendments
Amendments (Sec.
2106 of
(Sec. 2106
Act
and
of the
the Code)
Code)
and Sec.
Sec. 543
543 of
Prior law
Prior
la/w
A corporation which
is taxed
taxed on
its
which is
is a
a personal
personal holding company
company is
on its
undistributed personal
at, aa rate
rate of
undistributed
personal holding
holding company
company income
income at
perof 70
70 percent (sec.
cent
(sec. 541).
corporation is
541). A corporation
is aa personal
personal holding
holding company
where
company where
five
five or
or fewer
own more
more than
than 50
50 percent
percent in
in value
value of
of its
fewer individuals
individuals own
its
outstanding stock
of the
the corporation's
corporation's adjusted
adjusted
stock and at
least 60
at least
60 percent.
percent of
ordinary gross
from certain
gross income
income comes
comes from
certain types
types of
of income.
income.
Royalties
Royalties (other
(other than mineral,
mineial, oil
oil or
or gas
gas royalties
royalties and
copyright
and copyright
royalties)
by aa corporation
royalties) received
received by
corporation are
are personal
personal holding
holding company
company
income, regardless
income,
regardless of
of how
how much
much income
income of
of other
other types
types the
the corporation
corporation
may have (sec.
(sec. 543(a)
"Royalties'' include
include amounts
543(a) (1)).
amounts received
received for
for
(1)). "Royalties"
aa license
to use
trade brands,
franchises and
and similar
license to
use trade
brands, secret
secret processes,
processes, franchises
similar
intangible
property.
intangible property.
general, rental
In general,
from persons
other than
than major
rental income
income received
received from
persons other
shareholders
is treated
shareholders is
treated as
as personal
personal holding
holdingcompany
company income
income unless
unless
such rent
such
50 percent
percent or
or more
more of
of the
rent comprises
comprises 50
corporation's adjusted
the corporation's
adjusted
ordinary gross
gross income
income and,
and, if
if the
companj^ has
substantial amount.
amount
the company
has aa substantial
of other types
it distributes
of personal
types of
personal holding
holding company
company income,
income, it
distributes such
such
income
543(a) (2)).
(2) ).
income (sec.
(sec. 543(a)
separate rule
rule of
of prior
Under aa separate
prior law
law (sec.
(sec. 543(a)
rentsreceived
received
543(a) (6)),
(6) ), rents
25 -percent or
leasing corporate "property"
by aa corporation from leasing
"property" to
to aa 25-percent
shareholder were
greater shareholder
were personal
pei-sonal holding
holding company
income, but.
only
company income,
but only
if
over 10 percent of
the company's total
if over10
came from
from otlier
other types
types
of the
total income
income came
of personal holding
holding company
1971-2 Cum.
of
company income.
income. In
In Rev.
Rev. Rul.
Rul. 71-596,
71-596, 1971-2
Bull. 242,
ruled that
Bull.
the IRS ruled
that aacompany's
company's income
income from
from licensing
licensing a
a
242, the
secret process
governed
major shareholder
to make
major
shareholder to
make and
and sell
sell aa secret
process was
was governed
by the
the "royalty" rule
rule rather
rather than
than by
"sliareholder rent."
rent" rule.
by
rule. In
by the.
the "shareholder
1975
tl►e I7.S.
Court of
of Claims
also held
held in
in illon.tgovnery
Montgomery Coca-Cola
1975 the
U.S. Court
Claims also
Bottlmg
Co. v.
United States,
States, 75-1
para. 9291,
Bottling Ca.
v. United
75-1 USTC para.
35 AFTR 2d
2d
9291, 35