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 any of the new provisions in the Act add complexity to the
tax code. The simplification provisions in Chapter 10 attempt to make the tax system
easier to use. This chapter also describes various changes to administrative tax
provisions and technical corrections to pre-existing tax laws.  Simplifications
Modifications of rules for real estate investment trusts (REITs): The Act
provides numerous modifications to requirements for qualification as, and the taxation of,
a real estate investment trust (REIT). The modifications relate to the general
requirements for qualification as a REIT, the taxation of a REIT, the income requirements
for qualification as a REIT, and certain other provisions. The modifications are
summarized below.
- Clarification of limitation on maximum number of shareholders.
- De minimis rule for tenant service income.
- Attribution rules applicable to stock ownership.
- Credit for tax paid by REIT on retained capital gains.
- Repeal of 30% gross income requirement.
- Modification of earnings and profits rules for determining whether REIT has earnings and
profits from non-REIT year.
- Treatment of foreclosure property.
- Payments under hedging instruments.
- Excess noncash income.
- Prohibited transaction safe harbor.
- Shared appreciation mortgages.
- Wholly owned REIT subsidiaries.
Effective date: These provisions generally are effective for
taxable years beginning after the date of enactment.
Partnership Simplification Provisions
- Simplified reporting for electing large partnerships: The Act allows a large
partnership (partnerships that had 100 or more partners in the preceding year) to elect
special simplified tax reporting rules in determining the treatment of a large number of
distributive items from the partnership level. The election generally is not available for
service partnerships and partners who perform substantial services for their partnership.
Effective date: The provision generally applies to partnership
taxable years beginning after Dec. 31, 1997.
- Simplified audit procedures for electing large partnerships: As under prior law,
large partnerships and their partners are subject to unified audit rules. Under the Act,
partnership adjustments for electing large partnerships resulting from an audit generally
will take effect and flow through to the partners for the year in which the adjustment
takes place rather than going back to any prior year. The partnership, in lieu of flowing
through the adjustment to the partners, may elect to pay an imputed underpayment on the
net adjustment at the highest tax rate for the taxable years under audit. If such an
election is made by the partnership, a partner may not claim a credit or refund for the
partner's share of the payment. The partnership is responsible for interest and penalties
that result from a partnership adjustment, and any payment made by the partnership is
nondeductible.
Partners may not report an item inconsistently with the partnership, or participate in
settlement conferences or request a refund. The IRS only is required to notify the
partnership, and not the partners, of any final adjustment.
Effective date: The provision applies to partnership taxable years
beginning after Dec. 31, 1997.
- Due date for furnishing information to partners of electing large partnerships: The
Act requires an "electing large partnership" to furnish Forms K-1 to its
partners the first March 15 following the close of the partnership's taxable year.
- Closing of partnership taxable year with respect to deceased partner: The Act
provides that a partnership's taxable year will close with respect to a partner whose
entire interest in the partnership terminates by death.
Effective date: This provision is effective for partnership taxable
years beginning after Dec. 31, 1997.
- Provisions related to TEFRA proceedings: The Act contains a number of changes
dealing with the treatment of partnership items in deficiency proceedings and for
partnerships under audit, including provisions relating to the statute of limitations.
Qualified Bond Provisions
The Act has made a variety of modifications to the provisions of the Internal Revenue
Code governing "qualified bonds."
- The Act increases the limit of outstanding bonds from which a 501(c)(3) organization may
benefit by repealing the $150 million limit for financing capital expenditures.
- Tax-exempt bond proceeds that are invested for purposes unrelated to the exempt purpose
of the borrowing must be rebated to the government. This requirement was previously met
provided all proceeds other than the lesser of 5% or $100,000 are utilized within certain
time limits. The Act repeals the $100,000 exception.
- The Act provides that an additional $5 million of "small-issuer" government
bonds may be issued and exempt from the rebate provisions if that additional $5 million is
used to finance public school capital expenditures.
- The Act modifies the advance refunding rules for tax-exempt bonds issued by the Virgin
Islands.
- If the spending requirements exceptions for construction bond proceeds are met, the Act
exempts earnings on bond proceeds invested in bona fide debt service funds from the
arbitrage rebate and penalty requirements.
- The Act repeals the 150% of debt service yield restriction.
- Temporary period exceptions to the arbitrage rebate and pooled financing temporary
period rules for certain qualified student loan bonds are repealed.
Miscellaneous Fuel-Related Provisions
The Act also includes the following oil and fuel-related provisions:
- The Act treats gasoline retailers with ten or more retail outlets as wholesale
distributors under gasoline tax refund rules.
- The diesel fuel-excise tax rules are extended to kerosene.
- The Act repeals the application of the diesel fuel tax to fuel used in recreational
motorboats.
- The new law permits refund of tax previously paid on aviation fuel to registered
producers of fuel.
- Tax rates on liquefied petroleum, liquefied natural gas, and methanol from natural gas
have been revised to 13.6, 11.9, and 9.15 cents per gallon, respectively.
Excise Tax Simplifications and Modifications
The Act simplifies and changes many other excise taxes.
Apply 3% telephone excise tax to certain prepaid phone cards: The Act applies
the 3% telephone excise tax to the face amount of prepaid telephone cards. The face amount
is deemed paid when the telephone card is transferred from a telecommunications carrier.
The secretary may provide regulations for determining the face amount when not specified
in dollar amounts, e.g., stated in minutes. Examples of such taxable amounts
include prepaid telephone cards offered through service stations, convenience stores, and
other businesses to their customers and others (e.g., employees).
Effective date: The provision is effective for amounts paid in
calendar months beginning more than 60 days after the date of enactment.
Other excise tax changes
- The Act replaces the present-law vaccine excise tax rates, that differ by vaccine, with
a single rate tax of $0.75 per dose on any listed vaccine component. The provision adds
three new taxable vaccines to the present-law taxable vaccines.
- The heavy truck and luxury automobile excise tax on subsequent installation of parts and
accessories does not apply to parts and accessories with an aggregate price that does not
exceed $1,000.
- The IRS is authorized to waive excise tax registration requirements for purchasers and
second purchasers in all cases, and not just cases of sale or resale for export.
- The Act eliminates out-of-date provisions relating to tax on piggyback trailers, tax on
removal of hard minerals from the deep seabed, and special excise tax rates on sale or use
of certain ozone-depleting chemicals.
- The current excise tax on arrows is replaced with a manufacturer's excise tax on the
four component parts of the arrow. The tax rate is increased to 12.4% of the value of each
component.
- The Act clarifies that the 75% of value threshold (used to determine whether a
modification to an existing vehicle constitutes a taxable remanufacture or a nontaxable
repair) applies in determining whether repairs to a wrecked vehicle constitute
remanufacture.
- The legislation allows a credit for the amount of manufacturers' excise tax paid on
tires against the 12% retail excise tax imposed on certain heavy highway trucks, trailers,
and tractors while repealing the current exclusion based on the value of tires installed.
- The Act repeals the present-law exemption from excise tax on imported recycled
Halon-1211.
Distilled spirits, wine, and beer: The new law includes a series of
simplifications and changes to excise taxes on distilled spirits, wine, and beer,
including the following:
- Treasury is directed to study options for changing the point at which the distilled
spirits excise tax is collected.
- The legislation adjusts the tax rate on apple cider having an alcohol content of less
than 7% to 22.6 cents per wine gallon.
- The Act also contains a number of changes to reporting and record-keeping requirements
that affect distilled spirits, wine, and beer.
Administrative Provisions
Tax Filing and Information Reporting Provisions
- Permit payment of taxes by any commercially acceptable means: The Act allows the
IRS to accept payment by any commercially acceptable means that the secretary deems
appropriate, to the extent and under the conditions provided in Treasury regulations. This
will include, for example, electronic funds transfers, including those arising from credit
cards, debit cards, and charge cards.
Effective date: The provision is effective nine months after the date
of enactment.
Administrative changes: The new legislation also includes a number of
administrative changes to current law, including the following:
- The new law provides that a calendar-year private foundation's first-quarter estimated
tax payment is due on May 15th.
- For purposes of determining the period to which the large corporate underpayment rate
applies, any letter or notice is disregarded if the amount of the deficiency set forth in
the letter or notice is not greater than $100,000.
- The Act clarifies that an order to refund an overpayment is appealable by the Service in
the same manner as a decision of the Tax Court. Also, it clarifies that the Tax Court does
not have jurisdiction over the validity or merits of the credits or offsets that reduce or
eliminate the refund to which the taxpayer was otherwise entitled.
- The Act provides that within one year after a Tax Court decision becomes final, the
taxpayer may file a "motion" (rather than a "petition") to seek a
redetermination of interest.
- The Act provides that the net worth limitations currently applicable to individuals also
apply to estates and trusts. Also, it provides that individuals who file a joint tax
return shall be treated as separate individuals for purposes of computing the net worth
limitations.
- If there is a controversy involving a determination by the IRS regarding employment
status, taxpayers are allowed the option of going to Tax Court to resolve these disputes.
- Trades or businesses making payments to an attorney or a law firm (even if organized as
a corporation) are required to report the gross proceeds on a Form 1099-B. Attorneys are
required to supply their taxpayer identification numbers or be subject to backup
withholding.
- The Act reduces the threshold, from $25,000 or more to $600 or more, for reporting
payments made by an executive agency to any person (including a corporation) for services.
- The Act permanently extends the authorization for the IRS and Social Security
Administration to disclose certain tax return information to the Department of Veterans
Affairs for the administration of its needs-based pension, health care, and other
programs.
Taxpayer Protections
- The reasonable cause exception is expanded to abate the following penalties: for failure
to make a report in connection with deductible employee contributions to a retirement
plan; for failure to make a report as to certain small business stock; for failure of a
foreign corporation to file a return of personal holding company tax; and for failure to
make required payments for entities electing not to have the required taxable year.
- 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,
obtain a refund of excessive amounts paid within the three-year period prior to the date
of the deficiency notice.
- The Act repeals the requirement that the IRS disclose whether a prospective juror had
ever been audited or the subject of another tax investigation by the IRS.
- The Act clarifies that the return which starts the statute of limitations running is the
return of the taxpayer rather than that of the pass through entity.
- Any person seeking to recover attorney fees because they substantially prevailed over
the United States in a tax case must apply for such costs within 90 days from the
determination that they were a prevailing party. Furthermore, in order to seek judicial
review, persons who are denied these costs must petition the Tax Court within 90 days from
the date the IRS mails the denial notice.
Earned income credit compliance provisions: The new law includes additional
compliance measures for taxpayers applying for the earned income tax credit, including the
following:
- A taxpayer who fraudulently claims the earned income credit (EIC) is ineligible to claim
the EIC for a subsequent period of 10 years. In addition, a taxpayer who erroneously
claims the EIC due to reckless or intentional disregard of rules or regulations is
ineligible to claim the EIC for a subsequent period of two years.
- A taxpayer who has been denied the EIC as a result of deficiency procedures is
ineligible to claim the EIC in subsequent years unless evidence of eligibility for the
credit is provided by the taxpayer.
- Tax return preparers are required to fulfill certain due diligence requirements with
respect to returns they prepare claiming the EIC. The penalty for failure to meet these
requirements is $100 per return. This penalty is in addition to any other penalty imposed
under present law.
Effective date: The provisions are effective for taxable years after
1996.
Technical corrections
The Act contains technical corrections to prior tax legislation. This booklet describes
only some of those technical corrections, including the following:
Reporting requirements of intermediate sanctions and other excise tax penalties: The
Act corrects the Taxpayer Bill of Rights 2 by requiring that public charities report any
excise taxes assessed on excess lobbying expenditures, disqualified lobbying expenditures,
and political expenditures in addition to the excise tax imposed by engaging in an excess
benefit transaction.
Charitable remainder trusts not eligible to be electing small business trusts: The
provision clarifies that charitable remainder annuity trusts and charitable remainder
unitrusts may not be electing small business trusts.
Treatment of qualified subchapter S subsidiaries: The Act provides that the
secretary of the Treasury may provide, by regulations, instances where the separate
corporate existence of a qualified subchapter S subsidiary may be taken into account for
purposes of the Code. It also provides that regulations may provide exceptions to the
general rule that the qualified subchapter S subsidiary election is treated as a deemed
section 332 liquidation of the subsidiary in appropriate cases.
Technical corrections to COLI Provision from 1996 Act: The Health Insurance
Portability and Accountability Act of 1996 enacted strict limitations on the deductibility
of policy loan interest on company-owned life insurance. The Act makes several technical
changes and clarifications to the 1996 legislation including clarification that
transitional relief for lapsed policies is available when a lapse occurs as a result of no
additional premiums being paid on the contract after October 13, 1995.
Blue Cross Blue Shield special deduction: The Act clarifies that the 25% special
deduction is to be computed taking into account claims incurred under cost-plus contracts.
Phaseout and expiration of excise tax on luxury automobiles: The legislation
clarifies that the phased-in reduction in luxury excise tax rates and the expiration date
of Dec. 31, 2002, enacted as part of the Small Business Job Protection Act, apply both for
the tax imposed on the purchase of new automobiles and for the tax imposed for the
separate purchase of vehicles and parts and accessories.
Clarification of "Indian Reservation" eligible for accelerated
depreciation: The Act clarifies that only former Oklahoma Indian reservations that are
within the jurisdictional area of an Oklahoma Indian tribe as determined by the Interior
Department are entitled to special depreciation and employment credits put into place as
part of the Omnibus Budget Reconciliation Act of 1993.
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