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Senate Approves Tax Bill

Friday, June 27, 1997

Deloitte & Touche OnLine

The Senate June 27 approved 80 to 18 the fiscal 1998 tax bill (S.949), which provides capital gains and estate tax relief, a new child tax credit, expanded individual retirement accounts, and education tax benefits.

Senate Finance Committee Chairman William Roth, R-Del., applauded the bipartisan way the bill was passed.

Like the House, the Senate used the budget agreement with President Clinton as a guide. Whether the agreement has been adhered to is open to interpretation, and the final details will be worked out in July when a House-Senate conference, with input from the administration, will work to agree on a final version of the bill.

The White House expressed a preference for the Senate version, but the final product will not be known until after the conference.

The last amendment the Senate considered before voting on final passage would have indexed the basis in capital assets for inflation in a manner similar to the House bill. The Senate defeated the proposal, 57 to 41, listening to threats from members who warned that President Clinton would consider such a provision a violation of the budget agreement.

401(k) changes

The Senate approved by voice vote an amendment offered by Sen. Barbara Boxer, D-Calif., which would restrict the ability of 401(k) plans to require an employee’s contributions to be invested in the employer’s stock, unless the plan provides the employee an election about how the employee’s account is invested.

Another amendment, approved 98-0, would make health insurance premiums for the self-employed fully deductible by 2007. The amendment, offered by Sen. Don Nickles, R-Okla., would expand and speed up the phase-in of the provision in last year’s health bill that will increase the deductibility of health insurance premiums to 80%.

The revenue loss from the provision would be offset by shortening from 31 months to 24 months -- from December 31, 1999, to May 31, 1999, the extension of the research and development credit and the deduction for contributions of appreciated stock to private foundations, thus bringing the Senate position closer to the House’s position. The orphan drug credit and the exclusion for education expenses would be extended permanently.

Another amendment approved 58 to 42 would allow penalty-free withdrawals from education individual retirement accounts to be used for expenses for kindergarten through grade 12, including private and religious schools. To offset the revenue loss, the Secretary of the Treasury would reduce alternative minimum tax relief for individuals by amount sufficient to pay for the amendment. The amendment was offered by Sen. Paul Coverdell, R-Ga.

An amendment offered by Sen. Robert Torricelli, D-N.J., would exclude from gross income severance payments and offsets the revenue loss by limiting business credit carrybacks to one year and business credit carryforwards to 15 years.

Other amendments approved by voice vote:

• Altering the tax treatment of cancellation of certain student loans, offered by Sen. Christopher Dodd, D-Conn.
• Allowing distributions from individual retirement accounts without penalty to replace or repair property damaged in a presidentially declared disaster area, offered by Sen. Byron Dorgan, D-N.D.
• Allowing interest abatement for taxpayers located in a presidentially declared disaster area, offered by Sen. Byron Dorgan, D-N.D.
• Excluding from income survivor benefits for public safety officers killed in the line of duty, offered by Sen. Joseph Biden, D-Del.
• Clarifying the tax treatment of certain disability benefits received by former police officers, offered by Sens. Alfonse D’Amato, R-N.Y., and Christopher Dodd, D-Conn.
• Expressing the sense of the Senate that the Senate Finance Committee will hold hearings on the tax treatment of stock options, offered by Sen. John McCain, R-Ariz.
• Excluding from unrelated business taxable income for certain charitable gambling, offered by Sen. Rod Grams, R-Minn.
• Providing funds from the District of Columbia tax incentives to repair schools, offered by Sen. Jim Jeffords, R-Vt.
• Creating a tax incentive for employers who provide child-care for dependents, which is paid for by creating an anti-fraud program to ensure that tax benefits for children are attributed properly, offered by Sen. Herb Kohl, D-Wis.

Other amendments were also approved and details will be provided when further information is available.

The Senate bill does the following:

• Cuts the capital gains tax to 10% for individuals in the 15% bracket, and to 20% for individuals in higher brackets.
• Temporarily extends the research and development tax credit, the work opportunity tax credit, and the tax deduction for contributions of stock to private foundations. The research and development credit and deduction for contributed stock are extended through the end of 1999, a full year longer than the Ways and Means Committee bill.
• Permanently extends the orphan drug credit and the section 127 education exclusion for graduate students and undergraduates.
• Excludes up to $1 million of qualified family farms and business assets for decedents dying after 1997, in addition to general estate tax relief.
• Revises the President’s education tax proposals;
• Phases in a $500 per child tax credit;
• Modifies and expands by about $4 billion over five years the Ways and Means Committee’s version of the ticket tax extension;
• Eliminates capital gains avoidance techniques, such as short-against-the-box.
• Modifies rules relating to corporate spin-offs;
• Requires registration of corporate tax shelters.
• Modifies corporate net operating loss carrybacks and carryforwards.
• Limits tax benefits from corporate-owned life insurance.