Revenue Reconciliation Act
page8
 
Clarification
of limitation on maximum number of shareholders
(sec. 1051 of the bill and secs. 856(k), 857(a), and
857(f) of the Code)
The bill replaces the rule that disqualifies a REIT
for any year in which the REIT failed to comply with
Treasury regulations to ascertain its ownership,
with an intermediate penalty for failing to do so.
The penalty would be $25,000 ($50,000 for
intentional violations) for any year in which the
REIT did not comply with the ownership regulations.
The REIT also is required, when requested by the
IRS, to send curative demand letters.
In addition, a REIT that complied with the Treasury
regulations for ascertaining its ownership, and
which did not know, or have reason to know, that it
was so closely held as to be classified as a
personal holding company, is treated as meeting the
requirement that it not be a personal holding
company.
De
minimis rule for tenant service income (sec. 1052 of
the bill and sec. 856(d) of the Code)
The bill permits a REIT to render a de minimis
amount of impermissible services to tenants, or in
connection with the management of property, and
still treat amounts received with respect to that
property as rent. The value of the impermissible
services may not exceed one percent of the gross
income from the property. For these purposes, the
services may not be valued at less than 150 percent
of the REIT's direct cost of the services.
Attribution
rules applicable to tenant ownership (sec. 1053 of
the bill and sec, 856(d)(5) of the Code)
The bill modifies the application of section
318(a)(3)(A) (attribution to partnerships) for
purposes of defining rent in section 856(d)(2), so
that attribution occurs only when a partner owns a
25 percent or greater interest in the partnership.
Credit
for tax paid by REIT on retained capital gains (sec.
1054 of the bill and sec. 857(b)(3) of the Code)
The bill permits a REIT to elect to retain and pay
income tax on net long-term capital gains it
received during the tax year, just as a RIC is
permitted under present law. Thus, if a REIT made
this election, the REIT shareholders would include
in their income as long-term capital gains their
proportionate share of the undistributed long-term
capital gains as designated by the REIT. The
shareholder would be deemed to have paid the
shareholder's share of the tax, which would be
credited or refunded to the shareholder. Also, the
basis of the shareholder's shares would be increased
by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by
the REIT) included in the shareholder's long-term
capital gains.
Repeal
of 30-percent gross income requirement (sec. 1055 of
the bill and sec. 856(c) of the Code
The bill repeals the rule that requires less than 30
percent of a REIT's gross income be derived from
gain from the sale or other disposition of stock or
securities held for less than one year, certain real
property held less than four years, and property
that is sold or disposed of in a prohibited
transaction.
Modification
of earnings and profits for determining whether REIT
has earnings and profits from non-REIT year (sec.
1056 of the bill and sec. 857(d) of the Code
The bill changes the ordering rule for purposes of
the requirement that newly-electing REITs distribute
earnings and profits that were accumulated in non-REIT
years. Under the bill, distributions of accumulated
earnings and profits generally are treated as made
from the entity's earliest accumulated earnings and
profits, rather than the most recently accumulated
earnings and profits. These distributions are not
treated as distributions for purposes of calculating
the dividends paid deduction. Treatment of
foreclosure property (sec. 1057 of the bill and sec.
856(e) of the Code
The bill lengthens the original grace period for
foreclosure property until the last day of the third
full taxable year following the election. The grace
period also could be extended for an additional
three years by filing a request to the IRS. Under
the bill, a REIT could revoke an election to treat
property as foreclosure property for any taxable
year by filing a revocation on or before its due
date for filing its tax return.
In addition, the bill conforms the definition of
independent contractor for purposes of the
foreclosure property rule (sec. 856(e)(4)(C)) to the
definition of independent contractor for purposes of
the general rules (sec. 856(d)(2)(C)).
Payments
under hedging instruments (sec. 1058 of the bill and
sec. 856(c)(5)(G) of the Code
The bill treats income from all hedges that reduce
the interest rate risk of REIT liabilities, not just
from interest rate swaps and caps, as qualifying
income under the 95-percent test. Thus, payments to
a REIT under an interest rate swap, cap agreement,
option, futures contract, forward rate agreement or
any similar financial instrument entered into by the
REIT to hedge its indebtedness incurred or to be
incurred (and any gain from the sale or other
disposition of these instruments) are treated as
qualifying income for purposes of the 95-percent
test.
Excess
noncash income (sec. 1059 of the bill and sec.
857(e)(2) of the Code
The bill (1) expands the class of excess noncash
items that are not subject to the distribution
requirement to include income from the cancellation
of indebtedness and (2) extends the treatment of
original issue discount and coupon interest as
excess noncash items to REITs that use an accrual
method of taxation.
Prohibited
transaction safe harbor (sec. 1060 of the bill and
sec. 856(b)(6)(C) of the Code)
The bill excludes from the prohibited sales rules
property that was involuntarily converted.
Shared
appreciation mortgages (sec. 10-61 of the bill and
sec. 856(j) of the Code)
The bill provides that interest received on a shared
appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject
to the mortgage is sold within 4 years of the REIT's
acquisition of the mortgage pursuant to a bankruptcy
plan of the mortgagor unless the REIT acquired the
mortgage knew or had reason to know that the
property subject to the mortgage would be sold in a
bankruptcy proceeding.
Wholly-owned
REIT subsidiaries (sec. 1062 of the bill and sec.
856(i)(2)of the Code)
The bill permits any corporation wholly-owned by a
REIT to be treated as a qualified subsidiary,
regardless of whether the corporation had always
been owned by the REIT. Where the REIT acquired an
existing corporation, the bill treats any such
corporation as being liquidated as of the time of
acquisition by the REIT and then reincorporated
(thus, any of the subsidiary's pre-REIT built-in
gain would be subject to tax under the normal rules
of section 337). In addition, any pre-REIT earnings
and profits of the subsidiary must be distributed
before the end of the REIT's taxable year.
Effective
Date
The bill is effective for taxable years beginning
after the date of enactment.
E.
Repeal of the 30-percent ("Short-short")
Test for Regulated Investment Companies (sec. 1071
of the Bill and sec. 851(b)(3) of the Code)
Present
Law
To qualify as a Regulated Investment Company (RIC),
a company must derive less than 30 percent of its
gross income from the sale or other disposition of
stock or securities held for less than 3 months (the
"30-percent test" or "short-short
rule").
Reasons
for Change
The short-short rule restricts the investment
flexibility of RICs. The rule can, for example,
limit a RIC's ability to "hedge" its
investments (e.g., to use options to protect against
adverse market moves).
The rule also burdens a RIC with significant
recordkeeping, compliance, and administration costs.
The RIC must keep track of the holding periods of
assets and the relative percentages of short-term
gain that it realizes throughout the year. The
committee believes that the short-short test places
unnecessary limitations upon a RIC's activities.
Explanation
of Provision
The 30-percent test (or short-short rule) is
repealed.
Effective
Date
The provision is effective for taxable years
beginning after the December 31, 1997.
F.
Taxpayer Protections
1.
Provide reasonable cause exception for additional
penalties (sec. 1081 of the bill and secs. 6652,
6683, 7519 of the Code)
Present
Law
Many penalties in the Code may be waived if the
taxpayer establishes reasonable cause. For example,
the accuracy-related penalty (sec. 6662) may be
waived with respect to any item if the taxpayer
establishes reasonable cause for his treatment of
the item and that he acted in good faith (sec.
6664(c)).
Reasons
for Change
The Committee believes that it is appropriate to
provide a reasonable cause exception for several
additional penalties where one does not currently
exist.
Explanation
of Provision
The bill provides that the following penalties may
be waived if the failure is shown to be due to
reasonable cause and not willful neglect:
(1) the penalty for failure to make a report in
connection with deductible employee contributions to
a retirement savings plan (sec. 6652(g));
(2) the penalty for failure to make a report as to
certain small business stock (sec. 6652(k));
(3) the penalty for failure of a foreign corporation
to file a return of personal holding company tax
(sec. 6683); and
(4) the penalty for failure to make required
payments for entities electing not to have the
required taxable year (sec. 7519).
Effective
Date
The provision is effective for taxable years
beginning after the date of enactment.
2.
Clarification of period for filing claims for
refunds (sec. 1082 of the bill and sec. 6512 of the
Code)
Present
Law
The Code contains a series of limitations on tax
refunds. Section 6511 of the Code provides both a
limitation on the time period in which a claim for
refund can be made (section 6511(a)) and a
limitation on the amount that can be allowed as a
refund (section 6511(b)). Section 6511(a) provides
the general rule that a claim for refund must be
filed within 3 years of the date of the return or 2
years of the date of payment of the taxes at issue,
whichever is later. Section 6511(b) limits the
refund amount that can be covered: if a return was
filed, a taxpayer can recover amounts paid within 2
years before the claim. Section 6512(b)(3)
incorporates these rules where taxpayers who
challenge deficiency notices in Tax Court are found
to be entitled to refunds.
In Commissioner v. Lundy, 116 S. Ct. 647
(1996), the taxpayer had not filed a return, but
received a notice of deficiency within 3 years after
the date the return was due and challenged the
proposed deficiency in Tax Court. The Supreme Court
held that the taxpayer could not recover
overpayments attributable to withholding during the
tax year, because no return was filed and the 2-year
"look back" rule applied. Since
overwithheld amounts are deemed paid as of the date
the taxpayer's return was first due (i.e.,
more than 2 years before the notice of deficiency
was issued), such overpayments could not be
recovered. By contrast, if the same taxpayer had
filed a return on the date the notice of deficiency
was issued, and then claimed a refund, the 3-year
"look back" rule would apply, and the
taxpayer could have obtained a refund of the
overwithheld amounts.
Reasons
for Change
The Committee believes that it is appropriate to
eliminate this disparate treatment.
Explanation
of Provision
The bill permits taxpayers who initially fail to
file a return, but who receive a notice of
deficiency and file suit to contest it in Tax Court
during the third year after the return due date, to
obtain a refund of excessive amounts paid within the
3-year period prior to the date of the deficiency
notice.
Effective
Date
The provision applies to claims for refund with
respect to tax years ending after the date of
enactment.
3.
Repeal of authority to disclose whether a
prospective juror has been audited (sec. 1083 of the
bill and sec. 6103 of the Code)
Present
Law
In connection with a civil or criminal tax
proceeding to which the United States is a party,
the Secretary must disclose, upon the written
request of either party to the lawsuit, whether an
individual who is a prospective juror has or has not
been the subject of an audit or other tax
investigation by the Internal Revenue Service (sec.
6103(h)(5)).
Reasons
for Change
This disclosure requirement, as it has been
interpreted by several recent court decisions, has
created significant difficulties in the civil and
criminal tax litigation process. First, the
litigation process can be substantially slowed. It
can take the Secretary a considerable period of time
to compile the information necessary for a response
(some courts have required searches going back as
far as 25 years). Second, providing early release of
the list of potential jurors to defendants (which
several recent court decisions have required, to
permit defendants to obtain disclosure of the
information from the Secretary) can provide an
opportunity for harassment and intimidation of
potential jurors in organized crime, drug, and some
tax protester cases. Third, significant judicial
resources have been expended in interpreting this
procedural requirement that might better be spent
resolving substantive disputes. Fourth, differing
judicial interpretations of this provision have
caused confusion. In some instances, defendants
convicted of criminal tax offenses have obtained
reversals of those convictions because of failures
to comply fully with this provision.
Explanation
of Provision
The bill repeals the requirement that the Secretary
disclose, upon the written request of either party
to the lawsuit, whether an individual who is a
prospective juror has or has not been the subject of
an audit or other tax investigation by the Internal
Revenue Service.
Effective
Date
The provision is effective for judicial proceedings
commenced after the date of enactment.
4.
Clarify statute of limitations for items from
pass-through entities (sec. 1084 of the bill and
sec. 6501 of the Code)
Present
Law
Pass through entities (such as S corporations,
partnerships, and certain trusts) generally are not
subject to income tax on their taxable income.
Instead, these entities file information returns and
the entities' shareholders (or beneficial owners)
report their pro rata share of the gross income and
are liable for any taxes due.
Some believe that, prior to 1993, it may have been
unclear as to whether the statute of limitations for
adjustments that arise from distributions from
passthrough entities should be applied at the entity
or individual level (i.e., whether the 3-year
statute of limitations for assessments runs from the
time that the entity files its information return or
from the time that a shareholder timely files his or
her income tax return). In 1993, the Supreme Court
held that the limitations period for assessing the
income tax liability of an S corporation shareholder
runs from the date the shareholder's return is filed
(Bufferd v. Comm., 113 S. Ct. 927 (1993)).
Reasons
for Change
Uncertainty regarding the correct statute of
limitations hinders the resolution of factual and
legal issues and creates needless litigation over
collateral matters.
Explanation
of Provision
The bill clarifies that the return that starts the
running of the statute of limitations for a taxpayer
is the return of the taxpayer and not the return of
another person from whom the taxpayer has received
an item of income, gain, loss, deduction, or credit.
Effective
Date
The provision is effective for taxable years
beginning after the date of enactment.
5.
Prohibition on browsing (secs. 1084 and 1085 of the
bill and secs. 7213A and 7431 of the Code)
Present
Law
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized willful
disclosure is a felony punishable by a fine not
exceeding $5,000 or imprisonment of not more than
five years, or both (sec. 7213). An action for civil
damages also may be brought for unauthorized
disclosure (sec. 7431).
There is no explicit criminal penalty in the
Internal Revenue Code for unauthorized inspection
(absent subsequent disclosure) of tax returns and
return information. Such inspection is, however,
explicitly prohibited by the Internal Revenue
Service ("IRS").140
In a recent case, an individual was convicted of
violating the Federal wire fraud statute (18 U.S.C.
1343 and 1346) and a Federal computer fraud statute
(18 U.S.C. 1030) for unauthorized inspection.
However, the
U.S.
First Circuit Court of Appeals overturned this
conviction.141
Unauthorized inspection of information of any
department or agency of the United States (including
the IRS) via computer was made a crime under 18
U.S.C. 1030 by the Economic Espionage Act of 1996.142
This provision does not apply to unauthorized
inspection of paper documents.
Reasons
for Change
The Committee believes that it is important to have
a criminal penalty in the Internal Revenue Code to
punish this type of behavior. The Committee also
believes that it is appropriate to provide for civil
damages for unauthorized inspection parallel to
civil damages for unauthorized disclosure.
Explanation
of Provisions
Criminal
penalties
The bill creates a new criminal penalty in the
Internal Revenue Code. The penalty is imposed for
willful inspection (except as authorized by the
Code) of any tax return or return information by any
Federal employee or IRS contractor. The penalty also
applies to willful inspection (except as authorized)
by any State employee or other person who acquired
the tax return or return information under specific
provisions of section 6103. Upon conviction, the
penalty is a fine in any amount not exceeding
$1,000,143
or imprisonment of not more than 1 year, or both,
together with the costs of prosecution. In addition,
upon conviction, an officer or employee of the
United States
would be dismissed from office or discharged from
employment.
The Congress views any unauthorized inspection of
tax returns or return information as a very serious
offense; this new criminal penalty reflects that
view. The Congress also believes that unauthorized
inspection warrants very serious personnel sanctions
against IRS employees who engage in unauthorized
inspection, and that it is appropriate to fire
employees who do this.
Civil
damages
The bill amends the provision providing for civil
damages for unauthorized disclosure by also
providing for civil damages for unauthorized
inspection. Damages are available for unauthorized
inspection that occurs either knowingly or by reason
of negligence. Accidental or inadvertent inspection
that may occur (such as, for example, by making an
error in typing in a TIN) would not be subject to
damages because it would not meet this standard. The
bill also provides that no damages are available to
a taxpayer if that taxpayer requested the inspection
or disclosure.
The bill also requires that, if any person is
criminally charged by indictment or information with
inspection or disclosure of a taxpayer's return or
return information in violation of section 7213(a)
or (b), section 7213A (as added by the bill), or 18
USC section 1030(a)(2)(B), the Secretary notify that
taxpayer as soon as practicable of the inspection or
disclosure.
Effective
Date
The bill is effective for violations occurring on or
after the date of enactment.
TITLE
XI. ESTATE, GIFT, AND TRUST TAX SIMPLIFICATION
1.
Eliminate gift tax filing requirements for gifts to
charities (sec. 1101 of the bill and sec. 6019 of
the Code)
Present
Law
A gift tax generally is imposed on lifetime
transfers of property by gift (sec. 2501). In
computing the amount of taxable gifts made during a
calendar year, a taxpayer generally may deduct the
amount of any gifts made to a charity (sec. 2522).
Generally, this charitable gift deduction is
available for outright gifts to charity, as well as
gifts of certain partial interests in property (such
as a remainder interest). A gift of a partial
interest in property must be in a prescribed form in
order to qualify for the deduction.
Individuals who make gifts in excess of $10,000 to
any one donee during the calendar year generally are
required to file a gift tax return (sec. 6019). This
filing requirement applies to all gifts, whether
charitable or noncharitable, and whether or not the
gift qualifies for a gift tax charitable deduction.
Thus, under current law, a gift tax return is
required to be filed for gifts to charity in excess
of $10,000, even though no gift tax is payable on
the transfer.
Reasons
for Change
Because a charitable gift does not give rise to a
gift tax liability, many donors are unaware of the
requirement to file a gift tax return for charitable
gifts in excess of $10,000. Failure to file a gift
tax return under these circumstances could expose
the donor to penalties. The bill eliminates this
potential trap for the unwary.
Explanation
of Provision
The bill provides that gifts to charity are not
subject to the gift tax filing requirements of
section 6019, as long as the entire value of the
transferred property qualifies for the gift tax
charitable deduction under section 2522. The filing
requirements for gifts of partial interests in
property remain unchanged.
Effective
Date
The provision is effective for gifts made after the
date of enactment.
2.
Clarification of waiver of certain rights of
recovery (sec. 1102 of the bill and secs. 2207A and
2207B of the Code)
Present
Law
For estate and gift tax purposes, a marital
deduction is allowed for qualified terminable
interest property (QTIP). Such property generally is
included in the surviving spouse's gross estate upon
his or her death. The surviving spouse's estate is
entitled to recover the portion of the estate tax
attributable to inclusion of QTIP from the person
receiving the property, unless the spouse directs
otherwise by will (sec. 2207A). For this purpose, a
will provision specifying that all taxes shall be
paid by the estate is sufficient to waive the right
of recovery.
A decedent's gross estate includes the value of
previously transferred property in which the
decedent retains enjoyment or the right to income
(sec. 2036). The estate is entitled to recover from
the person receiving the property a portion of the
estate tax attributable to the inclusion (sec.
2207B). This right may be waived only by a provision
in the will (or revocable trust) specifically
referring to section 2207B.
Reasons
for Change
It is understood that persons utilizing standard
testamentary language often inadvertently waive the
right of recovery with respect to QTIP. Similarly,
persons waiving a right to contribution are unlikely
to refer to the code section granting the right.
Accordingly, allowing the right of recovery (or
right of contribution) to be waived only by specific
reference should simplify the drafting of wills by
better conforming with the testator's likely intent.
Explanation
of Provision
The bill provides that the right of recovery with
respect to QTIP is waived only to the extent that
language in the decedent's will or revocable trust
specifically so indicates (e.g., by a specific
reference to QTIP, the QTIP trust, section 2044, or
section 2207A). Thus, a general provision specifying
that all taxes be paid by the estate is no longer
sufficient to waive the right of recovery.
The bill also provides that the right of
contribution for property over which the decedent
retained enjoyment or the right to income is waived
by a specific indication in the decedent's will or
revocable trust, but specific reference to section
2207B is no longer required.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
3.
Transitional rule under section 2056A (sec. 1103 of
the bill and sec. 2056A of the Code)
Present
Law
A "marital deduction" generally is allowed
for estate and gift tax purposes for the value of
property passing to a spouse. The Technical and
Miscellaneous Revenue Act of 1988 ("TAMRA")
denied the marital deduction for property passing to
an alien spouse outside a qualified domestic trust
("QDT"). An estate tax generally is
imposed on corpus distributions from a QDT.
TAMRA defined a QDT as a trust that, among other
things, required all trustees be
U.S.
citizens or domestic corporations. This provision
was modified in the Omnibus Budget Reconciliation
Acts of 1989 and 1990 to require that at least one
trustee be a U.S. citizen or domestic corporation
and that no corpus distribution be made unless such
trustee has the right to withhold any estate tax
imposed on the distribution (the "withholding
requirement").
Reasons
for Change
Wills drafted under the TAMRA rules must be revised
to conform with the withholding requirement, even
though both the TAMRA rule and its successor ensure
that a
U.S.
trustee is personally liable for the estate tax on a
QDT. Reinstatement of the TAMRA rule for wills
drafted in reliance upon it reduces the number of
will revisions necessary to comply with statutory
changes, thereby simplifying estate planning.
Explanation
of Provision
Certain trusts created before the enactment of the
Omnibus Budget Reconciliation Act of 1990 are
treated as satisfying the withholding requirement if
the governing instruments require that all trustees
be
U.S.
citizens or domestic corporations.
Effective
Date
The provision applies as if included in the Omnibus
Budget Reconciliation Act of 1990.
4.
Treatment for estate tax purposes of short-term
obligations held by nonresident aliens (sec. 1104 of
the bill and sec. 2105 of the Code)
Present
Law
The
United States
imposes estate tax on assets of noncitizen
nondomiciliaries that were situated in the
United States
at the time of the individual's death. Debt
obligations of a
U.S.
person, the
United States
, a political subdivision of a State, or the
District of Columbia
are considered property located within the
United States
if held by a nonresident not a citizen of the
United States
(sec. 2014(c)).
Special rules apply to treat certain bank deposits
and debt instruments the income from which qualifies
for the bank deposit interest exemption and the
portfolio interest exemption as property from
without the United States despite the fact that such
items are obligations of a U.S. person, the United
States, a political subdivision of a State, or the
District of Columbia (sec. 2105(b)). Income from
such items is exempt from
U.S.
income tax in the hands of the nonresident recipient
(secs. 871(h) and 871(i)(2)(A)). The effect of these
special rules is to exclude these items from the
U.S.
gross estate of a nonresident not a citizen of the
United States
. However, because of an amendment to section 871(h)
made by the Tax Reform Act of 1986, these special
rules no longer cover obligations that generate
short-term OID income despite the fact that such
income is exempt from U.S. income tax in the hands
of the nonresident recipient (sec. 871(g)(1)(B)(i)).
Reasons
for Change
The Committee believes that the income and estate
tax treatments of short-term OID obligations held by
nonresident aliens should conform. A purpose of
exempting short-term OID income derived by
nonresident aliens from
U.S.
income tax is to enhance the ability of
U.S.
borrowers to raise funds from foreign lenders, and
such purpose is hindered by the lack of a
corresponding exemption for
U.S.
estate tax. Moreover, to the extent the interest
from such an obligation is exempt from
U.S.
income tax, the inclusion of the instrument in the
nonresident noncitizen's
U.S.
estate would be a trap for the unwary.
Explanation
of Provision
The bill provides that any debt obligation, the
income from which would be eligible for the
exemption for short-term OID under section
871(g)(1)(B)(i) if such income were received by the
decedent on the date of his death, is treated as
property located outside of the United States in
determining the U.S. estate tax liability of a
nonresident not a U.S. citizen. No inference is
intended with respect to the estate tax treatment of
such obligations under present law.
Effective
Date
The provision is effective for estates of decedents
dying after the date of enactment.
5.
Distributions during first 65 days of taxable year
of estate (sec. 1105 of the bill and sec. 663(b) of
the Code)
Present
Law
In general, trusts and estates are treated as
conduits for Federal income tax purposes; income
received by a trust or estate that is distributed to
a beneficiary in the trust or estate's taxable year
"ending with or within" the taxable year
of the beneficiary is taxable to the beneficiary in
that year; income that is retained by the trust or
estate is initially taxable to the trust or estate.
In the case of distributions of previously
accumulated income by trusts (but not estates),
there may be additional tax under the so-called
"throwback" rules if the beneficiary to
whom the distributions were made has marginal rates
higher than those of the trust. Under the
"65-day rule," a trust may elect to treat
distributions paid within 65 days after the close of
its taxable year as paid on the last day of its
taxable year. The 65-day rule is not applicable to
estates.
Reasons
for Change
In order to minimize the tax differences between
estates and revocable trusts, the Committee believes
that the 65-day rule should be allowed to estates as
well as to trusts.
Explanation
of Provision
The bill extends application of the 65-day rule to
distributions by estates. Thus, an executor can
elect to treat distributions paid within 65 days
after the close of the estate's taxable year as
having been paid on the last day of such taxable
year.
Effective
Date
The provision applies to taxable years beginning
after the date of enactment.
6.
Separate share rules available to estates (sec. 1106
of the bill and sec. 663(c) of the Code)
Present
Law
Trusts with more than one beneficiary must use the
"separate share" rule in order to provide
different tax treatment of distributions to
different beneficiaries to reflect the income earned
by different shares of the trust's corpus.144
Treasury regulations provide that "[t]he
application of the separate share rule . . . will
generally depend upon whether distributions of the
trust are to be made in substantially the same
manner as if separate trusts had been created....
Separate share treatment will not be applied to a
trust or portion of a trust subject to a power to
distribute, apportion, or accumulate income or
distribute corpus to or for the use of one or more
beneficiaries within a group or class of
beneficiaries, unless the payment of income,
accumulated income, or corpus of a share of one
beneficiary cannot affect the proportionate share of
income, accumulated income, or corpus of any shares
of the other beneficiaries, or unless substantially
proper adjustment must thereafter be made under the
governing instrument so that substantially separate
and independent shares exist." (Treas. Reg.
sec. 1.663(c)-3). The separate share rule presently
does not apply to estates.
Reasons
for Change
The Committee understands that estates typically do
not have separate shares. Nonetheless, where
separate shares do exist in an estate, the
inapplicability of the separate share rule to
estates may result in one beneficiary or class of
beneficiaries being taxed on income payable to, or
accruing to, a separate beneficiary or class of
beneficiaries. Accordingly, the Committee believes
that a more equitable taxation of an estate and its
beneficiaries would be achieved with the application
of the separate share rule to an estate where, under
the provisions of the decedent's will or applicable
local law, there are separate shares in the estate.
Explanation
of Provision
The bill extends the application of the separate
share rule to estates. There are separate shares in
an estate when the governing instrument of the
estate (e.g., the will and applicable local law)
creates separate economic interests in one
beneficiary or class of beneficiaries such that the
economic interests of those beneficiaries (e.g.,
rights to income or gains from specified items of
property) are not affected by economic interests
accruing to another separate beneficiary or class of
beneficiaries. For example, a separate share in an
estate would exist where the decedent's will
provides that all of the shares of a closely-held
corporation are devised to one beneficiary and that
any dividends paid to the estate by that corporation
should be paid only to that beneficiary and any such
dividends would not affect any other amounts which
that beneficiary would receive under the will. As in
the case of trusts, the application of the separate
share rule is mandatory where separate shares exist.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
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