Legislative Update

Legislative Update

News story posted in Legislative on 19 July 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

As a follow-up to this morning's Planned Giving Online article, Senate Finance Committee Chairman William V. Roth, Jr. (R- Delaware), on behalf of the Joint Committee on Taxation, unveiled the "Taxpayer Refund Act of 1999" which is a ten year $792 billion tax cut plan. This Bill includes, among other things, a provision allowing charitable IRA rollovers, which was not present in the proposed Financial Freedom Act of 1999 (H.R. 2488) released in the House of Representatives last week. In addition, the Senate Finance Committee Democrats have released a summary of a $295 billion tax cut alternative to Chairman Roth's mark.

PGDC SUMMARY:

Senate Finance Committee Chairman William V. Roth, Jr. (R-Delaware), on behalf of the Joint Committee on Taxation, unveiled the "Taxpayer Refund Act of 1999" which is a ten year $792 billion tax cut plan. Some of the provisions that would impact charitable planning include (i) a charitable IRA rollover, (ii) an above the line charitable contribution deduction for non-itemizers limited to $50 (individuals) and $100 (joint), (iii) an increase in the adjusted gross income percentage limitation applicable for charitable contributions by individuals gradually from the current 50-percent and 30-percent limitations to 60-percent and 40-percent, respectively, in 2006 and an increase to 70-percent and 50-percent, respectively, in 2007, (iv) a gradual increase in the percentage limitation applicable to charitable contributions by corporations from 10-percent to 20-percent in 2006, (v) a reduction in estate, gift and generation-skipping transfer tax rates to a maximum of 50-percent in 2001, (vi) an increase in the unified credit to a $1.5 million unified exemption in 2007, (vii) an expansion of the estate tax rules on conservation easements, (viii) an increase in the annual gift tax exclusion to $15,000 per donee from 2001 to 2003 and to $20,000 per donee in 2004, and (ix) various modifications of the generation-skipping transfer tax provisions.

The Senate Finance Committee Democrats have released a summary of a $295 billion tax cut alternative to Chairman Roth's mark. This proposal would, in part, (i) increase the standard deduction, and (ii) accelerate the increase of the unified credit exemption amount to $1 million.

POINTS TO PONDER:

It is our understanding that the Financial Freedom Act of 1999 (H.R. 2488) released last week is scheduled for consideration on the House floor on July 21st.

PARTIAL TEXT:

Scheduled for Markup

by the

SENATE COMMITTEE ON FINANCE

on July 20, 1999

Prepared by the Staff of the

JOINT COMMITTEE ON TAXATION

JCX-46-99



VII. ESTATE AND GIFT TAX RELIEF

A. REDUCE ESTATE, GIFT, AND

GENERATION-SKIPPING TRANSFER TAXES



Present Law

A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at death. The gift tax and the estate tax are unified so that a single graduated rate schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. The unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million. In addition, a 5-percent surtax is imposed on cumulative taxable transfers between $10 million and the amount necessary to phase out the benefits of the graduated rates.

A unified credit is available with respect to taxable transfers by gift and at death. The unified credit amount effectively exempts from tax a total of $650,000 in 1999, $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1 million in 2006 and thereafter.

A generation-skipping transfer ("GST") tax generally is imposed on transfers, either directly or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more than one generation below that of the transferor). Transfers subject to the GST tax include direct skips, taxable terminations, and taxable distributions. The GST tax is imposed at the top estate and gift tax rate (which, under present law is 55 percent) on cumulative generation-skipping transfers in excess of $1 million.

The basis of property acquired or passing from a decedent is its fair market value on the date of the decedent's death (or, if the alternative valuation date is elected, the earlier of six months or the date the property is sold or distributed by the estate). This step up (or step down) in basis eliminates the recognition of any income on the appreciation of the property that occurred prior to the decedent's death, and it also has the effect of eliminating any tax benefit from any unrealized loss.

Description of Proposal

Beginning in 2001, the 5-percent surtax, which phases out the graduated rates, and the rates in excess of 50 percent would be repealed. Beginning in 2004, the unified credit would be replaced with a unified exemption. Beginning in 2007, the unified exemption amount would be increased from $1 million to $1.5 million.

Effective Date



The 5-percent surtax and the rates in excess of 50 percent would be repealed for estates of decedents dying and gifts and generation-skipping transfers made after December 31, 2000. The unified credit would be replaced with a unified exemption for estates of decedents dying and gifts made after December 31, 2003. The unified exemption amount would be increased to $1.5 million for estates of decedents dying and gifts made after December 31, 2006.

B. EXPAND ESTATE TAX RULE FOR CONSERVATION EASEMENTS
Present Law

An executor may elect to exclude from the taxable estate 40 percent of the value of any land subject to a qualified conservation easement, up to a maximum exclusion of $100,000 in 1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and $500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion percentage is reduced by 2 percentage points for each percentage point (or fraction thereof) by which the value of the qualified conservation easement is less than 30 percent of the value of the land (determined without regard to the value of such easement and reduced by the value of any retained development right).

A qualified conservation easement is one that meets the following requirements: (1) the land is located within 25 miles of a metropolitan area (as defined by the Office of Management and Budget) or a national park or wilderness area, or within 10 miles of an Urban National Forest (as designated by the Forest Service of the U.S. Department of Agriculture); (2) the land has been owned by the decedent or a member of the decedent's family at all times during the three-year period ending on the date of the decedent's death; and (3) a qualified conservation contribution (within the meaning of sec. 170(h)) of a qualified real property interest (as generally defined in sec. 170(h)(2)(C)) was granted by the decedent or a member of his or her family. For purposes of the provision, preservation of a historically important land area or a certified historic structure does not qualify as a conservation purpose.

In order to qualify for the exclusion, a qualifying easement must have been granted by the decedent, a member of the decedent's family, the executor of the decedent's estate, or the trustee of a trust holding the land, no later than the date of the election. To the extent that the value of such land is excluded from the taxable estate, the basis of such land acquired at death is a carryover basis (i.e., the basis is not stepped-up to its fair market value at death). Property financed with acquisition indebtedness is eligible for this provision only to the extent of the net equity in the property. The exclusion from estate taxes does not extend to the value of any development rights retained by the decedent or donor.

Description of Proposal

The proposal would expand the rule for conservation easements by increasing to 50 miles the distance within which the land must be situated from a metropolitan area, national park, or wilderness area in order to be a qualified conservation easement. The proposal also would clarify that the date for determining easement compliance is the date on which the donation was made.

Effective Date

The proposal to clarify the date for determining easement compliance would be effective for estates of decedents dying after December 31, 1997. The proposal to expand the distance rule would be effective for estates of decedents dying after December 31, 1999.

C. INCREASE ANNUAL GIFT EXCLUSION
Present Law



An annual exclusion of $10,000 of transfers of present interests in property is provided for each donee. If the non-donor spouse consents to split the gift with the donor spouse, the annual exclusion is $20,000 for each donee. Unlimited transfers between spouses are permitted without imposition of a gift tax. In the case of gifts made after 1998, the $10,000 amount is increased by a cost- of-living adjustment.

Description of Proposal



Beginning in 2001 and through 2003, the annual gift tax exclusion would be increased to $15,000 for each donee. Beginning in 2004 and thereafter, the annual gift tax exclusion would be increased to $20,000 for each donee.

Effective Date

The annual gift tax exclusion would be increased to $15,000, for each donee, for gifts made after December 31, 2000, and before January 1, 2004. The annual gift tax exclusion would then be increased to $20,000, for each donee, for gifts made after December 31, 2003.

D. SIMPLIFICATION OF GENERATION-SKIPPING TRANSFER ("GST") TAX

1. RETROACTIVE ALLOCATION OF THE GST TAX EXEMPTION

Present Law

A GST tax generally is imposed on transfers, either directly or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more than one generation below that of the transferor). Transfers subject to the GST tax include direct skips, taxable terminations, and taxable distributions. An exemption of $1 million (indexed beginning in 1999) is provided for each person making generation-skipping transfers. The exemption may be allocated by a transferor (or his or her executor) to transferred property.

A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip person. A skip person may be a natural person or certain trusts. All persons assigned to the second or more remote generation below the transferor are skip persons (e.g., grandchildren and great-grandchildren). Trusts are skip persons if (1) all interests in the trust are held by skip persons, or (2) no person holds an interest in the trust and at no time after the transfer may a distribution (including distributions and terminations) be made to a non-skip person. A taxable termination is a termination (by death, lapse of time, release of power, or otherwise) of an interest in property held in trust unless, immediately after such termination, a non-skip person has an interest in the property, or unless at no time after the termination may a distribution (including a distribution upon termination) be made from the trust to a skip person. A taxable distribution is a distribution from a trust to a skip person (other than a taxable termination or direct skip). If a transferor allocates GST tax exemption to a trust prior to the taxable termination or taxable distribution, GST tax may be avoided.

A transferor will likely not allocate GST tax exemption to a trust that the transferor expects will benefit only non-skip persons. However, if a taxable termination occurs because, for example, the transferor's child unexpectedly dies such that the trust terminates in favor of the transferor's grandchild, and GST tax exemption had not been allocated to the trust, then GST tax would be due even if the transferor had unused GST tax exemption.

Description of Proposal



The proposal would allow the retroactive allocation of GST exemption when there is an unnatural order of death. Under the provision, if a lineal descendant of the transferor predeceases the transferor, then the transferor may allocate any unused GST exemption to any previous transfer or transfers to the trust on a chronological basis. The proposal would permit a transferor to retroactively allocate GST exemption to a trust where a beneficiary (a) is a non- skip person, (b) is a lineal descendant of the transferor's grandparent or a grandparent of the transferor's spouse, (c) is a generation younger than the generation of the transferor, and (d) dies before the transferor. Exemption would be allocated under this rule retroactively, and the applicable fraction and inclusion ratio would be determined based on the value of the property on the date the property was transferred to a trust.

Effective Date



The proposal would apply to deaths of non-skip persons occurring after the date of enactment.

2. SEVERING OF TRUSTS HOLDING PROPERTY HAVING AN INCLUSION RATIO OF GREATER THAN ZERO

Present Law

A generation-skipping transfer tax ("GST tax") generally is imposed on transfers, either directly or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more than one generation below that of the transferor). Transfers subject to the GST tax include direct skips, taxable terminations, and taxable distributions. An exemption of $1 million is provided for each person making generation-skipping transfers. The exemption may be allocated by a transferor (or his or her executor) to transferred property. If the value of transferred property exceeds the amount of the GST exemption allocated to that property, then the GST tax generally is determined by multiplying a flat tax rate equal to the highest estate tax rate (which is currently 55 percent) by the "inclusion ratio" and the value of the taxable property at the time of the taxable event. The "inclusion ratio" is the number one minus the "applicable fraction." The applicable fraction is a fraction calculated by dividing the amount of the GST exemption allocated to the property by the value of the property.

Under Treas. Reg. 26.2654-1(b), a trust may be severed into two or more trusts (e.g., one with an inclusion ratio of zero and one with an inclusion ration of one) only if (1) the trust is severed according to a direction in the governing instrument or (2) the trust is severed pursuant to the trustee's discretionary powers, but only if certain other conditions are satisfied (e.g., the severance occurs or a reformation proceeding begins before the estate tax return is due). Under current Treasury regulations, however, a trustee cannot sever a trust that is subject to the GST tax after the trust has been created.

Description of Proposal

The proposal would allow a trust to be severed in a "qualified severance." A qualified severance is defined as the division of a single trust and the creation of two or more trusts if (1) the single trust was divided on a fractional basis, and (2) the terms of the new trusts, in the aggregate, provide for the same succession of interests of beneficiaries as are provided in the original trust. If a trust has an inclusion ratio of greater than zero and less than one, a severance is a qualified severance only if the single trust is divided into two trusts, one of which receives a fractional share of the total value of all trust assets equal to the applicable fraction of the single trust immediately before the severance. In such case, the trust receiving such fractional share shall have an inclusion ratio of zero and the other trust shall have an inclusion ratio of one. Under the proposal, a trustee could elect to sever a trust in a qualified severance at any time.

Effective Date

The proposal would be effective for severances of trusts occurring after the date of enactment.

3. MODIFICATION OF CERTAIN VALUATION RULES

Present Law

Under present law, the inclusion ratio is determined using gift tax values for allocations of GST tax exemption made on timely filed gift tax returns. The inclusion ratio generally is determined using estate tax values for allocations of GST tax exemption made to transfers at death. Treas. Reg. 26.2642-5(b) provides that, with respect to taxable terminations and taxable distributions, the inclusion ratio becomes final on the later of the period of assessment with respect to the first transfer using the inclusion ratio or the period for assessing the estate tax with respect to the transferor's estate.

Description of Proposal

The proposal would provide that, in connection with timely and automatic allocations of GST transfer tax, the value of the property for purposes of determining the inclusion ratio shall be its finally determined gift tax value or estate tax value depending on the circumstances of the transfer. In the case of an allocation deemed to be made at the conclusion of an estate tax inclusion period, the value for purposes of determining the inclusion ratio shall be its value at that time.

Effective Date

The provision would be effective as though included in the amendments made by section 1431 of the Tax Reform Act of 1986.

4. RELIEF FROM LATE ELECTIONS

Present Law

A GST tax generally is imposed on transfers, either directly or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more than one generation below that of the transferor). Transfers subject to the GST tax include direct skips, taxable terminations, and taxable distributions. An exemption of $1 million is provided for each person making generation-skipping transfers. The exemption may be allocated by a transferor (or his or her executor) to transferred property.

A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip person. A skip person may be a natural person or certain trusts. All persons assigned to the second or more remote generation below the transferor are skip persons (e.g., grandchildren and great-grandchildren). Trusts are skip persons if (1) all interests in the trust are held by skip persons, or (2) no person holds an interest in the trust and at no time after the transfer may a distribution (including distributions and terminations) be made to a non-skip person.

A taxable termination is a termination (by death, lapse of time, release of power, or otherwise) of an interest in property held in trust unless, immediately after such termination, a non-skip person has an interest in the property, or unless at no time after the termination may a distribution (including a distribution upon termination) be made from the trust to a skip person. A taxable distribution is a distribution from a trust to a skip person (other than a taxable termination or direct skip).

The tax rate on generation-skipping transfers is a flat rate of tax equal to the maximum estate and gift tax rate in effect at the time of the transfer (55 percent under present law) multiplied by the "inclusion ratio." The inclusion ratio with respect to any property transferred in a generation-skipping transfer indicates the amount of "GST exemption" allocated to a trust. The allocation of GST exemption reduces the 55-percent tax rate on a generation-skipping transfer.

If an individual makes a direct skip during his or her lifetime, any unused GST exemption is automatically allocated to a direct skip to the extent necessary to make the inclusion ratio for such property equal to zero. An individual may elect out of the automatic allocation for lifetime direct skips.

Under present law, an election to allocate GST tax exemption to a specific transfer may be made at any time up to the time for filing the transferor's estate tax return. If an allocation is made on a gift tax return filed timely with respect to the transfer to trust that is not a direct skip, then the value on the date of transfer to trust is used for determining GST tax exemption allocation. However, if the allocation relating to a such transfer is not made on a timely-filed gift tax return, then the value on the date of allocation must be used. There is no statutory provision allowing relief for an inadvertent failure to make an election on a timely-filed gift tax return to allocate GST tax exemption. Current Treasury regulations may permit relief from failure to make an election only if relief is requested, under certain circumstances, within 6 months of the date of the failure.

Description of Proposal

The proposal would authorize and direct the Treasury Secretary to grant extensions of time to make the election to allocate GST tax exemption and to grant exceptions to the time requirement. When such relief is granted, the value on the date of transfer to a trust is used for determining GST tax exemption allocation. In determining whether to grant relief for late elections, the Treasury Secretary is directed to consider all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Treasury Secretary deems relevant. For purposes of determining whether to grant relief, the time for making the allocation (or election) would be treated as if not expressly prescribed by statute.

Effective Date

The proposal to provide relief from late elections would apply to requests pending on, or filed after, the date of enactment. /58/

5. SUBSTANTIAL COMPLIANCE

Present Law

Under present law, there is no statutory rule which provides that substantial compliance with the statutory and regulatory requirements for allocating GST tax exemption will suffice to establish that GST tax exemption was allocated to a particular transfer or trust.

Description of Proposal

The proposal would provide that substantial compliance with the statutory and regulatory requirements for allocating GST tax exemption would suffice to establish that GST tax exemption was allocated to a particular transfer or a particular trust. If a taxpayer demonstrates an intent to have an inclusion ratio of zero with respect to a particular transfer or trust, then so much of the transferor's unused GST tax exemption will be allocated to the extent it produces, when possible, a zero inclusion ratio. In determining whether there has been substantial compliance, all relevant circumstances would be considered, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Treasury Secretary deems appropriate.

Effective Date

The substantial compliance provisions would take effect on the date of enactment and would apply to allocations made prior to such date for purposes of determining the tax consequences of generation-skipping transfers with respect to which the period of time for filing claims for refund has not expired. /59/

VIII. TAX-EXEMPT ORGANIZATION PROVISIONS

A. PROVIDE TAX EXEMPTION FOR ORGANIZATIONS CREATED BY A STATE TO

PROVIDE PROPERTY AND CASUALTY INSURANCE COVERAGE FOR PROPERTY FOR

WHICH SUCH COVERAGE IS OTHERWISE UNAVAILABLE
Present Law

A life insurance company is subject to tax on its life insurance company taxable income, which is its life insurance income reduced by life insurance deductions (sec. 801). Similarly, a property and casualty insurance company is subject to tax on its taxable income, which is determined as the sum of its underwriting income and investment income (as well as gains and other income items) (sec. 831). Present law provides that the term "corporation" includes an insurance company (sec. 7701(a)(3)).

In general, the Internal Revenue Service ("IRS") takes the position that organizations that provide insurance for their members or other individuals are not considered to be engaged in a tax-exempt activity. The IRS maintains that such insurance activity is either (1) a regular business of a kind ordinarily carried on for profit, or (2) an economy or convenience in the conduct of members' businesses because it relieves the members from obtaining insurance on an individual basis.

Certain insurance risk pools have qualified for tax exemption under Code section 501(c)(6). In general, these organizations (1) assign any insurance policies and administrative functions to their member organizations (although they may reimburse their members for amounts paid and expenses); (2) serve an important common business interest of their members; and (3) must be membership organizations financed, at least in part, by membership dues.

State insurance risk pools may also qualify for tax exempt status under section 501(c)(4) as a social welfare organization or under section 115 as serving an essential governmental function of a State. In seeking qualification under section 501(c)(4), insurance organizations generally are constrained by the restrictions on the provision of "commercial-type insurance" contained in section 501(m). Section 115 generally provides that gross income does not include income derived from the exercise of any essential governmental function and accruing to a State or any political subdivision thereof.

Certain specific provisions provide tax-exempt status to organizations meeting statutory requirements.

Health coverage for high-risk individuals

Section 501(c)(26) provides tax-exempt status to any membership organization that is established by a State exclusively to provide coverage for medical care on a nonprofit basis to certain high-risk individuals, provided certain criteria are satisfied. The organization may provide coverage for medical care either by issuing insurance itself or by entering into an arrangement with a health maintenance organization ("HMO").

High-risk individuals eligible to receive medical care coverage from the organization must be residents of the State who, due to a pre-existing medical condition, are unable to obtain health coverage for such condition through insurance or an HMO, or are able to acquire such coverage only at a rate that is substantially higher than the rate charged for such coverage by the organization. The State must determine the composition of membership in the organization. For example, a State could mandate that all organizations that are subject to insurance regulation by the State must be members of the organization. The provision further requires the State or members of the organization to fund the liabilities of the organization to the extent that premiums charged to eligible individuals are insufficient to cover such liabilities. Finally, no part of the net earnings of the organization can inure to the benefit of any private shareholder or individual.

Workers' compensation reinsurance organizations

Section 501(c)(27)(A) provides tax-exempt status to any membership organization that is established by a State before June 1, 1996, exclusively to reimburse its members for workers' compensation insurance losses, and that satisfies certain other conditions. A State must require that the membership of the organization consist of all persons who issue insurance covering workers' compensation losses in such State, and all persons and governmental entities who self- insure against such losses. In addition, the organization must operate as a nonprofit organization by returning surplus income to members or to workers' compensation policyholders on a periodic basis and by reducing initial premiums in anticipation of investment income.

State workmen's compensation act companies

Section 501(c)(27)(B) provides tax-exempt status for any organization that is created by State law, and organized and operated exclusively to provide workmen's compensation insurance and related coverage that is incidental to workmen's compensation insurance, and that meets certain additional requirements. The workmen's compensation insurance must be required by State law, or be insurance with respect to which State law provides significant disincentives if it is not purchased by an employer (such as loss of exclusive remedy or forfeiture of affirmative defenses such as contributory negligence). The organization must provide workmen's compensation to any employer in the State (for employees in the State or temporarily assigned out-of-State) seeking such insurance and meeting other reasonable requirements. The State must either extend its full faith and credit to the initial debt of the organization or provide the initial operating capital of such organization. For this purpose, the initial operating capital can be provided by providing the proceeds of bonds issued by a State authority; the bonds may be repaid through exercise of the State's taxing authority, for example. For periods after the date of enactment, either the assets of the organization must revert to the State upon dissolution, or State law must not permit the dissolution of the organization absent an act of the State legislature. Should dissolution of the organization become permissible under applicable State law, then the requirement that the assets of the organization revert to the State upon dissolution applies. Finally, the majority of the board of directors (or comparable oversight body) of the organization must be appointed by an official of the executive branch of the State or by the State legislature, or by both.

Description of Proposal

The proposal would provide tax-exempt status for any association created before January 1, 1999, by State law and organized and operated exclusively to provide property and casualty insurance coverage for property located within the State for which the State has determined that coverage in the authorized insurance market is limited or unavailable at reasonable rates, provided certain requirements are met.

Under the proposal, no part of the net earnings of the association may inure to the benefit of any private shareholder or individual. Except as provided in the case of dissolution, no part of the assets of the association may be used for, or diverted to, any purpose other than: (1) to satisfy, in whole or in part, the liability of the association for, or with respect to, claims made on policies written by the association; (2) to invest in investments authorized by applicable law; (3) to pay reasonable and necessary administration expenses in connection with the establishment and operation of the association and the processing of claims against the association; or (4) to make remittances pursuant to State law to be used by the State to provide for the payment of claims on policies written by the association, purchase reinsurance covering losses under such policies, or to support governmental programs to prepare for or mitigate the effects of natural catastrophic events. Under the proposal, it would be required that the State law governing the association permit the association to levy assessments on insurance companies authorized to sell property and casualty insurance in the State, or on property and casualty insurance policyholders with insurable interests in property located in the State to fund deficits of the association, including the creation of reserves. Under the proposal, it would be required that the plan of operation of the association be subject to approval by the chief executive officer or other official of the State, by the State legislature, or both. In addition, it would be required that the assets of the association revert upon dissolution to the State, the State's designee, or an entity designated by the State law governing the association, or that State law not permit the dissolution of the association.

The proposal would provide a special rule in the case of any entity or fund created before January 1, 1999, pursuant to State law and organized and operated exclusively to receive, hold, and invest remittances from an association exempt from tax under the proposal, to make disbursements to pay claims on insurance contracts issued by the association, and to make disbursements to support governmental programs to prepare for or mitigate the effects of natural catastrophic events. The special rule would provide that the entity or fund may elect to be disregarded as a separate entity and be treated as part of the association exempt from tax under the proposal, from which it receives such remittances. The election would be required to be made no later than 30 days following the date on which the association is determined to be exempt from tax under the proposal, and would be effective as of the effective date of that determination.

An organization described in the proposal would be treated as having unrelated business taxable income ("UBIT") in the amount of its taxable income (computed as if the organization were not exempt from tax under the proposal), if at the end of the immediately preceding taxable year, the organization's net equity exceeded 15 percent of the total coverage in force under insurance contracts issued by the organization and outstanding at the end of that preceding year.

Under the proposal, no income or gain would be recognized solely as a result of the change in status to that of an association exempt from tax under the proposal.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1999.

B. MODIFY SECTION 512(b)(13)
Present Law

In general, interest, rents, royalties and annuities are excluded from the unrelated business income ("UBI") of tax-exempt organizations. However, section 512(b)(13) treats otherwise excluded rent, royalty, annuity, and interest income as UBI if such income is received from a taxable or tax-exempt subsidiary that is 50 percent controlled by the parent tax-exempt organization. In the case of a stock subsidiary, "control" means ownership by vote or value of more than 50 percent of the stock. In the case of a partnership or other entity, control means ownership of more than 50 percent of the profits, capital or beneficial interests. In addition, present law applies the constructive ownership rules of section 318 for purposes of section 512(b)(13). Thus, a parent exempt organization is deemed to control any subsidiary in which it holds more than 50 percent of the voting power or value, directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary).

Under present law, interest, rent, annuity, or royalty payments made by a controlled entity to a tax-exempt organization are includable in the latter organization's UBI and are subject to the unrelated business income tax to the extent the payment reduces the net unrelated income (or increases any net unrelated loss) of the controlled entity.

The Taxpayer Relief Act of 1997 (the "1997 Act") made several modifications, as described above, to the control requirement of section 512(b)(13). In order to provide transitional relief, the changes made by the 1997 Act do not apply to any payment received or accrued during the first two taxable years beginning on or after the date of enactment of the 1997 Act (August 5, 1997) if such payment is received or accrued pursuant to a binding written contract in effect on June 8, 1997, and at all times thereafter before such payment (but not pursuant to any contract provision that permits optional accelerated payments).

Description of Proposal

The proposal would provide that the general rule of section 512(b)(13), which includes interest, rent, annuity, or royalty payments made by a controlled entity to a tax-exempt organization in the latter organization's UBI, applies only to the portion of payments received in a taxable year that exceed the amount of the specified payment which would have been paid if such payment had been determined under the principles of section 482. Thus, if a payment of rent by a controlled subsidiary to its tax-exempt parent organization exceeds fair market value, the excess amount of such payment over fair market value (as determined in accordance with section 482) would be included in the parent organizations's UBI. In addition, the proposal would impose a 20 percent penalty on the excess amount of any such payment.

The proposal would provide relief for payments under contracts which, on the date of enactment of the proposal, are subject to the binding contract transition rule of the 1997 Act, but for which the transition rule would expire prior to the effective date of the proposal, by extending the transition rule until December 31, 1999.

Effective Date

The proposal providing an exception from the general rule of section 512(b)(13) for interest, rent, annuity, or royalty payments from controlled subsidiaries that do not exceed fair market value generally would apply to payments received or accrued in taxable years beginning after December 31, 1999.

C. TAX-FREE WITHDRAWALS FROM IRAS FOR CHARITABLE PURPOSES
Present Law

Under present law, individuals may make deductible contributions to a traditional individual retirement arrangement ("IRA"). Amounts in an IRA are includible in income when withdrawn (except to the extent the withdrawal represents a return of after-tax contributions). Includible amounts withdrawn before attainment of age 59-1/2 are subject to an additional 10-percent early withdrawal tax, unless an exception applies.

Generally, a taxpayer who itemizes deductions may deduct cash contributions to charity, as well as the fair market value of contributions of property. The amount of the deduction otherwise allowable for the taxable year with respect to a charitable contribution may be reduced, depending on the type of property contributed, the type of charitable organization to which the property is contributed, and the income of the taxpayer. For donations of cash by individuals, total deductible contributions to public charities may not exceed 50 percent of a taxpayer's adjusted gross income ("AGI") for a taxable year. To the extent a taxpayer has not exceeded the 50-percent limitation, contributions of cash to private foundations and certain other nonprofit organizations and contributions of capital gain property to public charities generally may be deducted up to 30 percent of the taxpayer's AGI. If a taxpayer makes a contribution in one year which exceeds the applicable 50-percent or 30-percent limitation, the excess amount of the contribution may be carried over and deducted during the next five taxable years.

In addition to the percentage limitations imposed specifically on charitable contributions, present law imposes a reduction on most itemized deductions, including charitable contribution deductions, for taxpayers with adjusted gross income in excess of a threshold amount, which is indexed annually for inflation.

The threshold amount for 1999 is $126,600 ($63,300 for married individuals filing separate returns). For those deductions that are subject to the limit, the total amount of itemized deductions is reduced by 3 percent of AGI over the threshold amount, but not by more than 80 percent of itemized deductions subject to the limit. The effect of this reduction may be to limit a taxpayer's ability to deduct some of his or her charitable contributions.

Description of Proposal

The proposal would provide an exclusion from gross income for qualified charitable distributions from an IRA: (1) to a charitable organization to which deductible contributions can be made; (2) to a charitable remainder annuity trust or charitable remainder unitrust; (3) to a pooled income fund (as defined in sec. 642(c)(5)); or (4) for the issuance of a charitable gift annuity. The exclusion would apply with respect to distributions described in (2), (3), or (4) only if no person holds an income interest in the trust, fund, or annuity attributable to such distributions other than the IRA owner, his or her spouse, or a charitable organization.

In determining the amount includible in gross income by reason of a payment from a charitable remainder annuity trust or charitable remainder unitrust to which a qualified charitable distribution from an IRA was made, the taxpayer would be required to treat as ordinary income (as described in sec. 664(b)(1)) the portion of the distribution from the IRA to the trust which would have been includible in income but for the proposal. Similarly, in determining the amount includible in gross income by reason of a payment from a charitable gift annuity purchased with a qualified charitable distribution from an IRA, the taxpayer would not be permitted to treat the portion of the distribution from the IRA used to purchase the annuity as an investment in the annuity contract.

A qualified charitable distribution would be treated as any distribution from an IRA which is made after age 70-1/2, and which is made directly to the charitable organization or to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity (as described above). The amount otherwise allowable as a deduction to the individual for the year as charitable contributions would be reduced by the amount of qualified charitable distributions.

Effective Date

The proposal would be effective with respect to distributions after December 31, 2000.

D. PROVIDE EXCLUSION FOR MILEAGE REIMBURSEMENTS

BY CHARITABLE ORGANIZATIONS


Present Law

In computing taxable income, individuals who do not elect the standard deduction may claim itemized deductions, including a deduction (subject to certain limitations) for charitable contributions or gifts made during the taxable year to a qualified charitable organization or governmental entity (sec. 170). Individuals who elect the standard deduction may not claim a deduction for charitable contributions made during the taxable year.

No charitable contribution deduction is allowed for a contribution of services. However, unreimbursed expenditures made incident to providing donated services to a qualified charitable organization--such as out-of-pocket transportation expenses necessarily incurred in performing donated services--may constitute a deductible contribution (Treas. Reg. sec. 1.170A-1(g)). /60/ However, no charitable contribution deduction is allowed for traveling expenses (including expenses for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel (sec. 170(j)). Moreover, a taxpayer may not deduct as a charitable contribution out-of-pocket expenditures incurred on behalf of a charity if such expenditures are made for the purposes of influencing legislation (sec. 170(f)(6)).

For purposes of computing the charitable contribution deduction for the use of a passenger automobile (including vans, pickups, and panel trucks) in connection with providing donated services to a qualified charitable organization, the standard mileage rate is 14 cents per mile (sec. 170(i)). Volunteer drivers who are reimbursed for mileage expenses have taxable income to the extent the reimbursement exceeds 14 cents per mile.

Description of Proposal

Under the proposal, reimbursement by an entity or organization described in section 170(c) (including public charities and private foundations) for the costs of using an automobile in connection with providing donated services would be excludable from the gross income of the volunteer, provided that (1) reimbursement does not exceed the rate prescribed for business use, and (2) applicable recordkeeping requirements are satisfied. The proposal would not permit a volunteer to exclude a reimbursement from income if the volunteer claims a deduction or credit with respect to his or her automobile transportation expenses incurred in connection with providing donated services.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1999.

E. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN EXPENSES

INCURRED IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE WHALING
Present Law

In computing taxable income, individuals who do not elect the standard deduction may claim itemized deductions, including a deduction (subject to certain limitations) for charitable contributions or gifts made during the taxable year to a qualified charitable organization or governmental entity (sec. 170). Individuals who elect the standard deduction may not claim a deduction for charitable contributions made during the taxable year.

No charitable contribution deduction is allowed for a contribution of services. However, unreimbursed expenditures made incident to the rendition of services to an organization, contributions to which are deductible, may constitute a deductible contribution (Treas. Reg. sec. 1.170A-1(g)). Specifically, section 170(j) provides that no charitable contribution deduction is allowed for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.

Description of Proposal

The proposal would allow individuals to claim a deduction under section 170 not exceeding $7,500 per taxable year for certain expenses incurred in carrying out sanctioned whaling activities. The deduction would be available only to an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities. The proposal would allow a deduction for reasonable and necessary expenses paid by the taxpayer during the taxable year for (1) the acquisition and maintenance of whaling boats, weapons, and gear used in sanctioned whaling activities, (2) the supplying of food for the crew and other provisions for carrying out such activities, and (3) storage and distribution of the catch from such activities. For purposes of the proposal, the term "sanctioned whaling activities" means subsistence bowhead whale hunting activities conducted pursuant to the management plan of the Alaska Eskimo Whaling Commission.

Effective Date

The proposal would be effective for taxable years ending after December 31, 1999.

F. SIMPLIFY LOBBYING EXPENDITURE LIMITATIONS

Present Law

An organizations does not qualify for tax-exempt status as a charitable organization under section 501(c)(3) unless no substantial part of its activities constitutes carrying on propaganda or otherwise attempting to influence legislation (commonly referred to as "lobbying"). For purposes of determining whether legislative activities are a substantial part of a public charity's overall functions, a public charity may elect either the "substantial part" test or the "expenditure" test.

The substantial part test uses a facts and circumstances approach to measure the permissible level of legislative activities. Because there is no statutory or regulatory guidance, it is not clear whether the determination is based on the organization's activities, or its expenditures, or both. /61/ As an alternative to the substantial part test, the expenditure test permits public charities to elect to be governed by specific expenditure limitations on their lobbying activities under section 501(h). The expenditure test establishes two expenditure limits: one restricts the total amount of lobbying expenditures the public charity can make, the other restricts grass roots lobbying expenditures as a subset of total lobbying expenditures. A public charity's total lobbying expenditures for a year are the sum of its expenditures for direct lobbying and its expenditures for grass roots lobbying.

Direct lobbying is defined as an attempt to influence legislation through communication with a member or staff of a legislative body or with any other government official or employee who may participate in the formulation of legislation. The communication will constitute direct lobbying only if such communication "refers to specific legislation" and reflects a view on such legislation (Treas. Reg. sec. 56.4911-2(b)(1)(ii)). Grass roots lobbying is defined as an attempt to influence legislation through a communication with members of the public that seeks to affect their opinions about the legislation (Treas. Reg. sec. 56.4911- 2(b)(2)(i)). The communication must refer to specific legislation, reflect a view on the legislation, and encourage the recipient of the communication to take action with respect to the legislation.

Under the expenditure test, a public charity will be denied exemption under section 501(c)(3) because of lobbying activities only if it "normally" either (1) makes total lobbying expenditures in excess of the "lobbying ceiling amount" or (2) makes grass roots expenditures in excess of the "grass roots ceiling amount" (sec. 501(h)(1)). The lobbying ceiling amount is 150 percent of the organization's "lobbying nontaxable amount" and the grass roots ceiling amount is 150 percent of the "grass roots nontaxable amount." The lobbying nontaxable amount is the lesser of $1 million or an amount determined as a percentage of an organization's exempt purpose expenditures. The grass roots nontaxable amount is 25 percent of the organization's lobbying nontaxable amount for that taxable year. A public charity that has elected the expenditure test and that exceeds either or both of these limitations is subject to a 25 percent tax on the greater of the two excess lobbying expenditures.

Description of Proposal

The proposal would remove the separate percentage limitation on grass roots lobbying expenditures. Consequently, public charities would be subject to an expenditure limitation only on their total lobbying expenditures.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1999.

G. CHARITABLE GIVING PROPOSALS

Generally, a taxpayer who itemizes deductions may deduct cash contributions to charity made within a taxable year (generally, January 1-December 31 for calendar-year taxpayers), as well as the fair market value of contributions of property. The amount of the deduction otherwise allowable for the taxable year with respect to a charitable contribution may be reduced, depending on the type of property contributed, the type of charitable organization to which the property is contributed, and the income of the taxpayer. Taxpayers who do not itemize their deductions are not permitted to claim charitable contribution deductions. /62/

For donations of cash by individuals, total deductible contributions to public charities, private operating foundations, and certain types of private non-operating foundations may not exceed 50 percent of a taxpayer's "contribution base," which is typically the taxpayer's adjusted gross income ("AGI"), for a taxable year (sec. 170(b)(1)). To the extent a taxpayer has not exceeded the 50-percent limitation, contributions of cash to private foundations and certain other charitable organizations and contributions of capital gain property to public charities generally may be deducted up to 30 percent of the taxpayer's contribution base. If a taxpayer makes a contribution in one year which exceeds the applicable 50-percent or 30-percent limitation, the excess amount of the contribution may be carried over and deducted during the next five taxable years. The maximum charitable contribution deduction that may be claimed by a corporation for any one taxable year is limited to 10 percent of the corporation's taxable income for that year. (sec. 170(b)(2)).

Description of Proposal

Deadline for contributions to low-income schools extended until return filing date

The proposal would allow taxpayers to claim a charitable contribution deduction for donations to public, private, and parochial low-income elementary and secondary schools made after the end of the taxable year and on or before the date for filing the taxpayer's Federal income tax return. For example, under the proposal, a calendar-year taxpayer could make a contribution to a qualifying school on March 23, 2001, and claim a charitable contribution deduction for that gift on his or her Federal income tax return for the year 2000 filed on April 15, 2001. /63/ For purposes of the proposal, a low-income school would be defined as one where more than 50 percent of the students qualify for free or reduced price lunches.

Charitable contribution deduction for non-itemizers

For 2000 and 2001, the proposal would allow taxpayers who do not itemize their deductions to claim an above-the-line deduction for charitable contributions. The deduction would be limited to $50 for individual taxpayers and $100 for taxpayers filing joint returns.

Increase AGI percentage limits for individuals

The proposal would phase up the percentage limitations applicable to charitable contributions by individuals. Beginning in 2002, the proposal would increase the 50-percent and 30-percent limitations by 2 percent per year until the limitations are equal to 60 percent and 40 percent, respectively, in 2006. In 2007, the limitations would be increased to 70 percent and 50 percent, respectively.

Increase AGI percentage limits for corporations

The proposal would phase up the percentage limitation applicable to charitable contributions by corporations. Beginning in 2002, the proposal would increase the 10-percent limitation by 2 percent per year until the limitation is equal to 20 percent in 2006.

Effective Date

The proposal extending the deadline for contributions to certain low-income schools would be effective for taxable years beginning after December 31, 1999. The proposal permitting non- itemizers to claim a charitable contribution deduction would be effective for taxable years 2000 and 2001. The proposals increasing the percentage limitations for individual and corporate taxpayers would be effective for taxable years beginning after December 31, 2001.

FULL TEXT:

SUMMARY OF SENATE FINANCE DEMOCRATIC
$295 BILLION TAX CUT ALTERNATIVE

Senator Daniel Patrick Moynihan (D-NY) and other Democratic members of the Senate Finance Committee propose a fiscally appropriate tax cut package as an alternative to Chairman Roth's mark. The $295 billion Democratic alternative has, at its core, a broad based increase in the standard deduction.

BROAD BASED: ($169 BILLION)

Increases the standard deduction by $4,350 for joint filers, $2,150 for heads of household, and $1,300 for single filers; and increases the phase-out levels for married EIC recipients.

o Simplifies filing for over 12 million taxpayers -- it REMOVES MORE THAN 3 MILLION TAXPAYERS FROM THE TAX ROLLS and allows an estimated 9 million more to claim the standard deduction.

o Increases the standard deduction by more than 60% for married couples, more than 34% for single parents, and more than 30% for individuals.

o Reduces the tax burden for more than 73% of taxpayers.

o Delivers marriage penalty relief for taxpayers who take the standard deduction.

o Provides additional marriage penalty relief to EIC recipients.

o Benefits hourly wage families.

MARRIAGE PENALTY: ($26 BILLION)

Allows an itemized deduction equal to the lesser of $4,350 or 20% of the lower earning spouse's earned income for taxpayers with incomes less than $95,000.

o Provides middle-income taxpayers with marriage penalty relief.

o Ensures that millions of couples receive marriage penalty relief.

HEALTH CARE: ($27 BILLION)

Allows 100% deductibility of health insurance costs for self-employed individuals; permits a 30% tax credit for individuals without employer-sponsored plans; and provides tax breaks for long- term care costs.

o Makes meaningful health insurance more affordable and accessible.

o Reduces the burden of long-term care costs for families.

o Provides tax-equity for individuals and the self-employed.

ALTERNATIVE MINIMUM TAX: ($11 BILLION)

Extends the provision allowing taxpayers to claim their personal tax credits without regard to the AMT; coordinates income averaging for farmers.

o Ensures that families and middle-income taxpayers receive the full benefit of their child, Hope, adoption, dependent care, and other personal nonrefundable tax credits.

o Ensures that farmers receive the full benefit of income averaging.

ESTATE TAX: ($10 BILLION)

Accelerates the increase of the unified credit exemption amount to $1 million and increases the exemption for family-owned farms and businesses by $450,000 (up to $1.75 million).

o Enables family-owned farms and businesses to pass an estate on to future generations.
TECHNOLOGY AND ECONOMIC DEVELOPMENT: ($31 BILLION)

Increases the low income housing tax credit from $1.25 to $1.50 per capita; establishes a "New Markets" tax credit to encourage $3.75 billion of private investment in low income communities; and permanently extends the research credit.

o Stimulates the development of high quality rental housing for families of limited means.

o Creates "patient capital" for economically underdeveloped areas.

o Promotes long-term research and development initiatives.

EDUCATION: ($17 BILLION)

Provides $24 billion in public school modernization bonds; eliminates tax on savings for college; and permanently extends employer-provided tuition assistance for higher education.

o Tax credits for school bonds will help build new schools and renovate existing ones.

o Helps families prepare students for college through savings in state-sponsored college savings plans, operational in 44 states.

o Allows companies to compete by ensuring an educated workforce.

SAVINGS AND PENSIONS: ($9 BILLION)

Offers small businesses a tax credit to start pension plans; permits portability of savings from one job to another; and increases protection of assets.

o Expands plan availability and pension security.

o Prevents "leakage" of assets upon job change.

o Provides participants with more information about their benefits.

ENVIRONMENT: ($5 BILLION)

Creates a capital gains incentive for conservation; gives tax incentives for alternative fuels and alternative fuel vehicles; increases public transportation benefits; and promotes land and endangered species conservation, urban revitalization, and waste utilization.

o Encourages landowners, investors, and philanthropists to preserve open space and protect fish, wildlife, and endangered species.

o promotes a cleaner environment by using public transportation to reduce auto emissions and road congestion, and by encouraging technological innovation.

AGRICULTURE: ($5 BILLION)

Establishes tax-deferred risk management accounts; increases the volume cap for agriculture bonds; and gives farmers the full advantage of the $500,000 capital gains tax break by extending it to farmland.

o Provides equitable and ratable income treatment for farmers.

o Attracts new farmers by reducing the cost of credit and stimulating investment in agriculture.

SMALL BUSINESS AND OTHER: ($11 BILLION)

Accelerates the increase in small business expensing to $25,000; allows 100% deductibility for self-employed health insurance; and gives small business pension incentives.

o Encourages entrepreneurism by increasing capital investment.

o Enhances small business job opportunities through improved benefits.

$include:RR_NAL-talink$

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