IRS Restructuring and Reform Act of
1998
Senate
Report page7
 
2.
Clarification of the small business exemption (sec.
6006(a) of the bill, sec. 401 of the 1997 Act, and
sec. 55 of the Code)
Present
Law
The corporate alternative minimum tax is repealed
for small corporations for taxable years beginning
after December 31, 1997. A small corporation is one
that had average gross receipts of $5 million or
less for a prior three-year period. A corporation
that meets the $5 million gross receipts test will
continue to be treated as a small corporation exempt
from the alternative minimum tax so long as its
average gross receipts do not exceed $7.5 million.
Explanation
of Provision
The provision clarifies the application of the $5
million and $7.5 million gross receipts tests that a
corporation must meet to be a small corporation
exempt from the AMT. Under the provision, in order
for a corporation to qualify as a small corporation
exempt from the AMT for a taxable year, the
corporation's average gross receipts for all
3-taxable-year periods beginning after December 31,
1993 and ending before such taxable year must be
$7.5 million or less. The $7.5 million amount is
reduced to $5 million for the corporation's first
3-taxable-year period (or portion thereof) beginning
after December 31, 1993, and ending before the
taxable year for which the exemption is claimed.
If a corporation's first taxable year beginning
after December 31, 1997 (the first year the
exemption is available) is its first taxable year
(and the corporation does not lose its status as a
small corporation because it is aggregated with one
or more corporations under section 448(c)(2) or
treated as having a predecessor corporation under
section 448(c)(3)(D)), the corporation will be
treated as an exempt small corporation for such year
regardless of its gross receipts for such year.
The operation of the gross receipts tests for the
small corporation AMT exemption is demonstrated by
the following examples.
Example 1. --Assume a calendar-year
corporation was in existence on January 1, 1994. In
order to qualify as a small corporation for 1998
(the first year the exemption is available), (1) the
corporation's average gross receipts for the
3-taxable-year period 1994 through 1996 must be $5
million or less and (2) the corporation's average
gross receipts for the 1995 through 1997 period must
be $7.5 million or less. If the corporation
qualifies for 1998, the corporation will qualify for
1999 if its average gross receipts for the
3-taxable-year period 1996 through 1998 also is $7.5
million or less. If the corporation does not qualify
for 1998, the corporation cannot qualify for 1999 or
any subsequent year.
Example 2. --Assume a calendar-year
corporation is first incorporated in 1999 and is
neither aggregated with a related, existing
corporation under section 448(c)(2) nor treated as
having a predecessor corporation under section
448(c)(3)(D). The corporation will qualify as a
small corporation for 1999 regardless of its gross
receipts for such year. In order to qualify as a
small corporation for 2000, the corporation's gross
receipts for 1999 must be $5 million or less.69
If the corporation qualifies for 2000, the
corporation also will qualify for 2001 if its
average gross receipts for the 2-taxable-year period
1999 through 2000 is $7.5 million or less. If the
corporation does not qualify for 2000, the
corporation cannot qualify for 2001 or any
subsequent year. If the corporation qualifies for
2001, the corporation will qualify for 2002 if its
average gross receipts for the 3-taxable-year period
1999 through 2001 is $7.5 million or less.
Effective
Date
The provision is effective for taxable years
beginning after December 31, 1997.
F.
Amendments to Title V of the 1997 Act Relating to
Estate and Gift Taxes 1. Clarification of phaseout
range for 5-percent surtax to phase out the benefits
of the unified credit and graduated rates (sec.
6007(a)(1) of the bill, sec. 501 of the 1997 Act,
and sec. 2001(c)(2) of the Code)
Present
Law
Prior to the 1997 Act, a 5-percent surtax was
imposed upon cumulative taxable transfers between
$10 million and $21,040,000 to phase out the
benefits of the graduated rates and the unified
credit. The 1997 Act increased the unified credit
beginning in 1998, from an effective exemption of
$600,000 to an effective exemption of $1,000,000 in
2006. A conforming amendment was made to the
5-percent surtax provision in section 2001(c)(2)
that was intended to reflect the increased unified
credit. However, the conforming amendment was
drafted in a manner that had the effect of phasing
out the benefits of the graduated rates but not the
unified credit.
Explanation
of Provision
The provision clarifies section 2001(c)(2) to
properly phase out the benefits of both the
graduated rates and the unified credit.
Effective
Date
The provision is effective for decedents dying, and
gifts made, after December 31, 1997.
2.
Clarification of effective date for indexing of
generation-skipping exemption (sec. 6007(a)(2) of
the bill, secs. 501(d) and (f) of the 1997 Act, and
sec. 2631(c) of the Code)
Present
Law
The 1997 Act provided for the indexation of the $1
million exemption from generation-skipping transfers
effective for decedents dying after December 31,
1998.
Explanation
of Provision
The provision clarifies that the indexing of the
exemption from generation-skipping transfers is
effective with respect to all generation-skipping
transfers (i.e., direct skips, taxable terminations,
and taxable distributions) made after 1998.
With respect to existing trusts, transferors are
permitted to make a late allocation of any
additional GST exemption amount attributable to
indexing adjustments in accordance with the
present-law rules applicable to late allocations as
set forth in sections 2632 and 2642, and the
regulations promulgated thereunder. For example,
assume an individual transferred $2 million to a
trust in 1995, and allocated his entire $1 million
GST exemption to the trust at that time (resulting
in an inclusion ratio of .50). Assume further that
in 2001, the GST exemption has increased to
$1,100,000 as the result of indexing, and that the
value of the trust assets is now $3 million. If the
individual is still alive in 2001, he is permitted
to make a late allocation of $100,000 of GST
exemption to the trust, resulting in a new inclusion
ratio of 1-(($1,500,000§100,000)/$3,000,000), or
.467.
Effective
Date
The provision is effective for generation-skipping
transfers (i.e., direct skips, taxable terminations,
and taxable distributions) made after December 31,
1998.
3.
Conversion of qualified family-owned business
exclusion into a deduction (sec. 6007(b)(1)(A) of
the bill, sec. 502 of the 1997 Act, and redesignated
sec. 2057 of the Code)
Present
Law
The qualified family-owned business provision in the
1997 Act provides an exclusion from estate taxes for
certain qualified family-owned business interests.
It is unclear whether the provision provides an
exclusion of value or an exclusion of property from
the estate, and thus it is unclear how the new
provision interacts with other provisions in the
Internal Revenue Code (e.g., secs. 1014, 2032A,
2056, 2612, and 6166).
Explanation
of Provision
The provision converts the qualified family-owned
business exclusion into a deduction, and
redesignates section 2033A as section 2057. Except
as provided below, the requirements of the qualified
family-owned business provision otherwise remain
unchanged. The qualified family-owned business
deduction is not available for generation-skipping
transfer tax purposes.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
4.
Coordination between unified credit and family-owned
business provision (sec. 6007(b)(1)(B) and
6007(b)(4) of the bill, sec. 502 of the 1997 Act,
and redesignated sec. 2057(a) of the Code)
Present
Law
The 1997 Act effectively increased the amount of
lifetime gifts and transfers at death that are
exempt from unified estate and gift tax from
$600,000 to $1,000,000 over the period 1997 to 2006,
through increases in an individual's unified credit.
In addition, the 1997 Act provided a limited
exclusion for certain family-owned business
interests. The exclusion for family-owned business
interests may be taken only to the extent that the
exclusion for family-owned business interests, plus
the amount effectively exempted by the unified
credit, does not exceed $1.3 million. As a result,
for years after 1998, the maximum amount of
exclusion for family-owned business interests is
reduced by increases in the dollar amount of
transfers effectively exempted through the unified
credit.
Because the structure of the 1997 Act increases the
unified credit over time (until 2006) while
decreasing over the same period the benefit of the
closely-held business exclusion, the estate tax on
estates with family-owned businesses increases over
time until 2006. This increase in estate tax results
from the fact that increases in the unified credit
provide a benefit at the decedent's lowest estate
tax brackets, while the exclusion for family-owned
businesses provides a benefit at the decedent's
highest estate tax brackets.
Explanation
of Provision
Under the provision, if an executor elects to
utilize the qualified family-owned business
deduction, the estate tax liability is calculated as
if the estate were allowed a maximum qualified
family-owned business deduction of $675,000 and an
applicable exclusion amount under section 2010
(i.e., the amount exempted by the unified credit) of
$625,000, regardless of the year in which the
decedent dies. If the estate includes less than
$675,000 of qualified family-owned business
interests, the applicable exclusion amount is
increased on a dollar-for-dollar basis, but only up
to the applicable exclusion amount generally
available for the year of death.
For example, assume the decedent dies in 2005, when
the applicable exclusion amount under section 2010
is $800,000. If the estate includes qualified
family-owned business interests valued at $675,000
or more, the estate tax liability is calculated as
if the estate were allowed a qualified family-owned
business deduction of $675,000, and the applicable
exclusion amount under section 2010 is limited to
$625,000. If the estate includes qualified
family-owned business interests of $500,000 or less,
all of the qualified family-owned business interests
could be deducted from the estate, and the
applicable exclusion amount under section 2010 is
$800,000. If the estate includes qualified
family-owned business interests valued between
$500,000 and $675,000, all of the qualified
family-owned business interests could be deducted
from the estate, and the applicable exclusion amount
under section 2010 is calculated as the excess of
$1.3 million over the amount of qualified
family-owned business interests. (For example, if
the qualified family-owned business interests were
valued at $600,000, the applicable exclusion amount
under section 2010 is $700,000.)
If a recapture event occurs with respect to any
qualified family-owned business interest, the total
amount of estate taxes potentially subject to
recapture is calculated as the difference between
the actual amount of estate tax liability for the
estate, and the amount of estate taxes that would
have been owed had the qualified family-owned
business election not been made.
Effective
Date
The provision is effective for decedents dying after
December 31, 1997.
5.
Clarification of businesses eligible for
family-owned business provision (sec. 6007(b)(2) of
the bill, sec. 502 of the 1997 Act, and redesignated
sec. 2057(b)(3) of the Code)
Present
Law
In order to be eligible to exclude from the gross
estate a portion of the value of a family-owned
business, the sum of (1) the adjusted value of
family-owned business interests includible in the
decedent's estate, and (2) the amount of gifts of
family-owned business interests to family members of
the decedent that are not included in the decedent's
gross estate, must exceed 50 percent of the
decedent's adjusted gross estate.
Explanation
of Provision
The provision clarifies the formula for determining
the amount of gifts of family-owned business
interests made to members of the decedent's family
that are not otherwise includible in the decedent's
gross estate.
Effective
Date
The provision is effective with respect to decedents
dying after December 31, 1997.
6.
Clarification of "trade or business"
requirement for family-owned business provision
(sec.
6007(b)(5)
of the bill, sec. 502 of the Act, and redesignated
secs. 2057(e)(1) and 2057(f) of the Code)
Present
Law
A qualified family-owned business interest is
defined as any interest in a trade or business that
meets certain requirements --e.g., the decedent and
members of his family must own certain percentages
of the trade or business, the decedent or members of
his family must have materially participated in the
trade or business for five of the eight years
preceding the decedent's death, and the qualified
heir or members of his family must materially
participate in the trade or business for at least
five years of any eight-year period within 10 years
following the decedent's death.
Explanation
of Provision
The provision clarifies that an individual's
interest in property used in a trade or business may
qualify for the qualified family-owned business
provision as long as such property is used in a
trade or business by the individual or a member of
the individual's family. Thus, for example, if a
brother and sister inherit farmland upon their
father's death, and the sister cash-leases her
portion to her brother, who is engaged in the trade
or business of farming, the "trade or
business" requirement is satisfied with respect
to both the brother and the sister. Similarly, if a
father cash-leases farmland to his son, and the son
materially participates in the trade or business of
farming the land for at least five of the eight
years preceding his father's death, the pre-death
material participation and "trade or
business" requirements are satisfied with
respect to the father's interest in the farm.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
7.
Clarification that interests eligible for
family-owned business provision must be passed to a
qualified heir (secs. 6007(b)(1)(B) of the bill,
sec. 502 of the Act, and redesignated sec.
2057(a)(1) of the Code)
Present
Law
The 1997 Act provided a new exclusion for qualified
family-owned business interests. One of the
requirements for the exclusion is that such
interests must pass to a "qualified heir,"
which includes members of the decedent's family and
any individual who has been actively employed by the
trade or business for at least 10 years prior to the
date of the decedent's death.
Explanation
of Provision
The provision clarifies that qualified family-owned
business interests must pass to a qualified heir in
order to qualify for the deduction. For this
purpose, if all beneficiaries of a trust are
qualified heirs (and in such other circumstances as
the Secretary of the Treasury may provide), property
passing to the trust may be treated as having passed
to a qualified heir.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
8.
Other modifications to the qualified family-owned
business provision (secs. 6007(b)(3), 6007(b)(6),
and 6007(b)(7) of the bill, sec. 502 of the 1997
Act, and redesignated sec. 2057 of the Code)
Present
Law
The qualified family-owned business provision
incorporates by cross-reference several other
provisions of the Code, including a number of
provisions in section 2032A and the personal holding
company rules of section 543(a).
Explanation
of Provision
The provision modifies section 2033A(g) (relating to
the security requirements for noncitizen qualified
heirs) by deleting the cross-reference to section
2033A(i)(3)(M), which does not appear to be
appropriate. The provision also makes rules similar
to those set forth in section 2032A(h) and (i)
(relating to conversions and exchanges of property
under sections 1031 and 1033) applicable for
purposes of section 2033A. Finally, the provision
clarifies that, in identifying assets that produce
(or are held for the production of) income of a type
described in section 543(a), section 543(a) is
applied without regard to section 543(a)(2)(B) (the
dividend requirement for corporate entities).
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
9.
Clarification of interest on installment payment of
estate tax on holding companies (sec. 6007(c) of the
bill, sec. 503 of the 1997 Act, and secs.
6166(b)(7)(A) and 6166(b)(8)(A) of the Code)
Present
Law
If certain conditions are met, a decedent's estate
may elect to pay the estate tax attributable to
certain closely-held businesses over a 14-year
period. The 1997 Act provided for a 2-percent
interest rate on the estate tax on first $1 million
in value of interests in qualified closely-held
businesses, and a rate equal to 45 percent of the
regular deficiency rate on the amount in excess of
the portion eligible for the 2-percent rate, but
also provided that none of interest on the deferred
payment of estate taxes is deductible for income or
estate tax purposes. Interests in holding companies
and non-readily-tradeable business interests are not
eligible for the 2-percent rate.
Explanation
of Provision
The provision clarifies that deferred payments of
estate tax on holding companies and
non-readily-tradable business interests do not
qualify for the 2-percent interest rate, but instead
are subject to a rate of 45 percent of the regular
deficiency rate. Such interest payments are not
deductible for income or estate tax purposes.
Effective
Date
The provision generally is effective for decedents
dying after December 31, 1997.
10.
Clarification on declaratory judgment jurisdiction
of U.S. Tax Court regarding installment payment of
estate tax (sec. 6007(d) of the bill, sec. 505 of
the 1997 Act, and sec. 7479(a) of the Code)
Present
Law
If certain conditions are met, a decedent's estate
may elect to pay estate tax attributable to certain
closely-held business over a 14-year period. The
1997 Act provided that the U.S. Tax Court would have
jurisdiction to determine whether the estate of a
decedent qualifies for the 14-year installment
payment of estate tax.
Explanation
of Provision
The provision clarifies that the jurisdiction of the
U.S. Tax Court to determine whether an estate
qualifies for installment payment of estate tax on
closely-held businesses extends to determining which
businesses in an estate are eligible for the
deferral.
Effective
Date
The provision is effective for decedents dying after
the date of enactment of the 1997 Act.
11.
Clarification of rules governing revaluation of
gifts (sec. 6007(e) of the bill, sec. 506 of the
1997 Act, and sec. 2504(c) of the Code)
Present
Law
The valuation of a gift becomes final for gift tax
purposes after the statute of limitations on any
gift tax assessed or paid has expired. The 1997 Act
extended that rule to apply for estate tax purposes,
provided for a lengthened statute of limitations for
gift tax purposes if certain information is not
disclosed with the gift tax return, and provided
jurisdiction to the U.S. Tax Court to determine the
value of any gift.
Explanation
of Provision
The provision clarifies that in determining the
amount of taxable gifts made in preceding calendar
periods, the value of prior gifts is the value of
such gifts as finally determined, even if no gift
tax was assessed or paid on that gift. For this
purpose, final determinations include, e.g., the
value reported on the gift tax return (if not
challenged by the IRS prior to the expiration of the
statute of limitations), the value determined by the
IRS (if not challenged in court by the taxpayer),
the value determined by the courts, or the value
agreed to by the IRS and the taxpayer in a
settlement agreement.
Effective
Date
The provision is effective with respect to gifts
made after the date of enactment of the 1997 Act.
12.
Clarification with respect to post-mortem
conservation easements (sec. 6007(g) of the bill,
sec. 506 of the 1997 Act, and sec. 2031(c) of the
Code)
Present
Law
A deduction is allowed for estate tax purposes for a
contribution of a qualified real property interest
to a charity (or other qualified organization)
exclusively for conservation purposes (sec.
2055(f)). The 1997 Act also provided an election to
exclude from the taxable estate 40 percent of the
value of any land subject to a qualified
conservation easement that meets certain
requirements. The 1997 Act provided that the
executor of the decedent's estate, or the trustee of
a trust holding the land, could grant a qualifying
easement after the decedent's death, as long as the
easement is granted prior to the date of the
election (generally, within nine months after the
date of the decedent's death).
Explanation
of Provision
The provision clarifies that, in the case of a
qualified conservation contribution made after the
date of the decedent's death, an estate tax
deduction is allowed under section 2055(f). However,
no income tax deduction is allowed to the estate or
the qualified heirs with respect to such post-mortem
conservation easements.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
G.
Amendments to Title VII of the 1997 Act Relating to
Incentives for the District of Columbia (sec. 6008
of the bill, sec. 701 of the 1997 Act, and secs.
1400, 1400B and 1400C of the Code)
Present
Law
Designation of D.C. Enterprise Zone
Certain economically depressed census tracts within
the District of Columbia are designated as the
"D.C. Enterprise Zone," within which
businesses and individual residents are eligible for
special tax incentives. The census tracts that
compose the D.C. Enterprise Zone for purposes of the
wage credit, expensing, and tax-exempt financing
incentives include all census tracts that presently
are part of the D.C. enterprise community and census
tracts within the District of Columbia where the
poverty rate is not less than 20 percent. The D.C.
Enterprise Zone designation generally will remain in
effect for five years for the period from January 1,
1998, through December 31, 2002.
Empowerment
zone wage credit, expensing, and tax-exempt
financing
The following tax incentives generally are available
in the D.C. Enterprise Zone: (1) a 20-percent wage
credit for the first $15,000 of wages paid to D.C.
residents who work in the D.C. Enterprise Zone; (2)
an additional $20,000 of expensing under Code
section 179 for qualified zone property placed in
service by a "qualified D.C. Zone
business"; and (3) special tax-exempt financing
for certain zone facilities.
Qualified
D.C. Zone business
For purposes of the increased expensing under
section 179, as well as for purposes of the zero
percent capital gains rate (described below), a
corporation or partnership is a qualified D.C. Zone
business if: (1) the sole trade or business of the
corporation or partnership is the active conduct of
a "qualified business" (defined below)
within the D.C. Zone; (2) at least 50 percent (80
percent for purposes of the zero percent capital
gains rate) of the total gross income of such entity
is derived from the active conduct of a qualified
business within the D.C. Zone; (3) a substantial
portion of the use of the entity's tangible property
(whether owned or leased) is within the D.C. Zone;
(4) a substantial portion of the entity's intangible
property is used in the active conduct of such
business; (5) a substantial portion of the services
performed for such entity by its employees are
performed within the D.C. Zone; and (6) less than 5
percent of the average of the aggregate unadjusted
bases of the property of such entity is attributable
to (a) certain financial property, or (b)
collectibles not held primarily for sale to
customers in the ordinary course of an active trade
or business. Similar rules apply to a qualified
business carried on by an individual as a
proprietorship.
In general, a "qualified business" means
any trade or business. However, a "qualified
business" does not include any trade or
business that consists predominantly of the
development or holding of intangibles for sale or
license. In addition, a qualified business does not
include any private or commercial golf course,
country club, massage parlor, hot tub facility,
suntan facility, racetrack or other facility used
for gambling, liquor store, or certain large farms
(so-called "excluded businesses"). The
rental of residential real estate is not a qualified
business. The rental of commercial real estate is a
qualified business only if at least 50 percent of
the gross rental income from the real property is
from qualified D.C. Zone businesses. The rental of
tangible personal property to others also is not a
qualified business unless at least 50 percent of the
rental of such property is by qualified D.C. Zone
businesses or by residents of the D.C. Zone.
For purposes of the tax-exempt financing provisions,
the term "D.C. Zone business" generally is
defined as for purposes of the increased expensing
under section 179. However, a qualified D.C. Zone
business for purposes of the tax-exempt financing
provisions includes a business located in the D.C.
Zone that would qualify as a D.C. Zone business if
it were separately incorporated. In addition, under
a special rule applicable only for purposes of the
tax-exempt financing rules, a business is not
required to satisfy the requirements applicable to a
D.C. Zone business until the end of a startup period
if, at the beginning of the startup period, there is
a reasonable expectation that the business will be a
qualified D.C. Zone business at the end of the
startup period and the business makes bona fide
efforts to be such a business. With respect to each
property financed by a bond issue, the startup
period ends at the beginning of the first taxable
year beginning more than two years after the later
of (1) the date of the bond issue financing such
property, or (2) the date the property was placed in
service (but in no event more than three years after
the date of bond issuance). In addition, if a
business satisfies certain requirements applicable
to a qualified D.C. Zone business for a three-year
testing period following the end of the start-up
period and thereafter continues to satisfy certain
business requirements, then it will be treated as a
qualified D.C. Zone business for all years after the
testing period irrespective of whether it satisfies
all of the requirements of a qualified D.C. Zone
business.
Zero-percent
capital gains rate
A zero-percent capital gains rate applies to capital
gains from the sale of certain qualified D.C. Zone
assets held for more than five years. For purposes
of the zero-percent capital gains rate, the D.C.
Enterprise Zone is defined to include all census
tracts within the
District of Columbia
where the poverty rate is not less than 10 percent.
Only capital gain that is attributable to the
10-year period beginning January 1, 1998, and ending
December 31, 2007, is eligible for the zero-percent
rate.
In general, qualified "D.C. Zone assets"
mean stock or partnership interests held in, or
tangible property held by, a D.C. Zone business.
Such assets must generally be acquired after
December 31, 1997, and before January 1, 2003.
However, under a special rule, qualified D.C. Zone
assets include property that was a qualified D.C.
Zone asset in the hands of a prior owner, provided
that at the time of acquisition, and during
substantially all of the subsequent purchaser's
holding period, either (1) substantially all of the
use of the property is in a qualified D.C. Zone
business, or (2) the property is an ownership
interest in a qualified D.C. Zone business.
First-time
homebuyer tax credit
First-time homebuyers of a principal residence in
the District are eligible for a tax credit of up to
$5,000 of the amount of the purchase price, except
that the credit phases out for individual taxpayers
with adjusted gross income ("AGI") between
$70,000 and $90,000 ($110,000-$130,000 for joint
filers). The credit is available with respect to
property purchased after the date of enactment and
before January 1, 2001. Any excess credit may be
carried forward indefinitely to succeeding taxable
years.
Explanation
of Provisions
Eligible
census tracts
The bill clarifies that the determination of whether
a census tract in the District of Columbia satisfies
the applicable poverty criteria for inclusion in the
D.C. Enterprise Zone for purposes of the wage
credit, expensing, and special tax-exempt financing
incentives (poverty rate of not less than 20
percent) or for purposes of the zero-percent capital
gains rate (poverty rate of not less than 10
percent) is based on 1990 decennial census data.
Thus, data from the 2000 decennial census would not
result in the expansion or other reconfiguration of
the D.C. Enterprise Zone.
Qualified
D.C. Zone business
The bill modifies section 1400B(c) to clarify that a
proprietorship can constitute a D.C. Zone business
for purposes of the zero-percent capital gains rate.
The bill also clarifies that qualified D.C. Zone
businesses that take advantage of the special
tax-exempt financing incentives do not become
subject to a 35-percent zone resident requirement
after the close of the testing period.
Zero-percent
capital gains rate
The bill clarifies that there is no requirement that
D.C. Zone business property be acquired by a
subsequent purchaser prior to January 1, 2003, to be
eligible for the special rule applicable to
subsequent purchasers.
In addition, the bill clarifies that the termination
of the D.C. Enterprise Zone designation at the end
of 2002 will not, by itself, result in property
failing to be treated as a qualified D.C. Zone asset
for purposes of the zero-percent capital gains rate,
provided that the property otherwise continues to
qualify were the D.C. Zone designation in effect.
First-time
homebuyer credit
The bill clarifies that, for purposes of the
first-time homebuyer credit, a "first-time
homebuyer" means any individual if such
individual (and, if married, such individual's
spouse) did not have a present ownership interest in
a principal residence in the District of Columbia
during the one-year period ending on the date of the
purchase of the principal residence to which the
credit applies.
The bill also clarifies that the phaseout of the
credit for individual taxpayers with adjusted gross
income between $70,000 and $90,000
($110,000-$130,000 for joint filers) applies only in
the year the credit is generated, and does not apply
in subsequent years to which the credit may be
carried over.
In addition, the bill clarifies that the term
"purchase price" means the adjusted basis
of the principal residence on the date the residence
is purchased. Newly constructed residences are
treated as purchased by the taxpayer on the date the
taxpayer first occupies such residence.
The bill clarifies that the first-time homebuyer
credit is a nonrefundable personal credit and would
provide that the first-time homebuyer credit is
claimed after the credits described in Code sections
25 (credit for interest on certain home mortgages)
and 23 (adoption credit).
Finally, the bill clarifies that the first-time
homebuyer credit would be available only for
property purchased after August 4, 1997, and before
January 1, 2001. Thus, the credit is available to
first-time home purchasers who acquire title to a
qualifying principal residence on or after August 5,
1997, and on or before December 31, 2000,
irrespective of the date the purchase contract was
entered into.
Effective
Date
The provision s are effective as of August 5, 1997,
the date of enactment of the 1997 Act.
H.
Amendments to Title IX of the 1997 Act Relating to
Miscellaneous Provisions 1. Clarification of effect
of certain transfers to Highway Trust Fund (sec.
6009(a) of the bill, sec. 901 of the 1997 Act, and
sec. 9503 of the Code)70
Present
Law
The 1997 Act provided for the transfer of an
additional 4.3 cents per gallon of the highway motor
fuels tax revenues from the General Fund to the
Highway Trust Fund, and provided that revenues
transferred to the Trust Fund under this provision
could not be used in a manner resulting in changes
in direct spending. The 1997 Act further changed the
dates by which certain taxes would be required to be
deposited with the Treasury in fiscal year 1998.
Explanation
of Provision
The bill clarifies that the tax deposit delays
included in the provisions affecting transfers to
the Highway Trust Fund, like the revenue transfers
themselves, do not affect direct spending from the
Trust Fund.
Effective
Date
The provision is effective as if included in the
1997 Act. 2. Clarification of Mass Transit Account
portions of highway motor fuels taxes (sec. 6009(b)
of the bill, sec. 907 of the 1997 Act, and sec. 9503
of the Code)71
Present
Law
The 1997 Act provided for the transfer to the
Highway Trust Fund of revenues attributable to a
General Fund fuels tax rate of 4.3 cents per gallon.
That Act further enacted reduced rates, based on
energy content, for propane, liquefied natural tax,
compressed natural gas, and methanol produced from
natural gas. When deposited in the Highway Trust
Fund, revenues from the taxes on each of these
products are divided between the Trust Fund's
Highway Account and the Mass Transit Account.
Explanation
of Provision
The bill clarifies that the Mass Transit Account
portion of the highway motor fuels taxes generally
is 2.86 cents per gallon and that taxes on the four
fuels eligible for reduced rates are divided between
the Highway Account and the Mass Transit Account in
the same proportion as is the tax on gasoline.
Effective
Date
The provision is effective as if included in the
1997 Act.
3.
Clarification of qualification for reduced rate of
excise tax on certain hard ciders (sec. 6009(c) of
the bill, sec. 908 of the 1997 Act, and sec. 5041 of
the Code)
Present
Law
Distilled spirits are taxed at a rate of $13.50 per
proof gallon; beer is taxed at a rate of $18 per
barrel (approximately 58 cents per gallon); and
still wines of 14 percent alcohol or less are taxed
at a rate of 1.07 per wine gallon. The Code defines
still wines as wines containing not more than 0.392
gram of carbon dioxide per hundred milliliters of
wine. Higher rates of tax are applied to wines with
greater alcohol content, to sparkling wines (e.g.,
champagne), and to artificially carbonated wines.
Certain small wineries may claim a credit against
the excise tax on wine of 90 cents per wine gallon
on the first 100,000 gallons of still wine produced
annually (i.e., net tax rate of 17 cents per wine
gallon on wines with an alcohol content of 14
percent or less). No credit is allowed on sparkling
wines. Certain small breweries pay a reduced tax of
$7.00 per barrel (approximately 22.6 cents per
gallon) on the first 50,000 barrels of beer produced
annually.
Hard cider is a wine fermented solely from apples or
apple concentrate and water, containing no other
fruit product and containing at least one-half of
one percent and less than 7 percent alcohol by
volume. Once fermented, eligible hard cider may not
be altered by the addition of other fruit juices,
flavor, or other ingredients that alter the flavor
that results from the fermentation process. The 1997
Act provided a lower excise tax rate of 22.6 cents
per gallon on hard cider. Qualifying small producers
that produce 250,000 gallons or less of hard cider
and other wines in a calendar year may claim a
credit of 5.6 cents per wine gallon on the first
100,000 gallons of hard cider produced. This credit
produces an effective tax rate of 17 cents per
gallon, the same effective rate as that applied to
small producers of still wines having an alcohol
content of 14 percent or less. This credit is phased
out for production in excess of 100,000 gallons but
less than 250,000 gallons annually.
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