11/ The House-passed bill is discussed in Institute Memorandum
to Tax Members No. 12-92, Closed-End Fund Members No. 10-92, Unit
Investment Trust Members No. 14-92, Accounting/Treasurers Members
No. 8-92, Operations Members No. 8-92, International Committee
No. 4-92, and Transfer Agent Advisory Committee No. 11-92, dated
March 2, 1992.
22/ A separate memorandum to Pension Members describes the
Senate bill provisions (1) expanding eligibility for deductible
Individual Retirement Account ("IRA") contributions and creating
a new IRA to which nondeductible contributions could be made
(essentially last fall's Bentsen-Roth IRA), (2) permitting
March 16, 1992
TO: TAX MEMBERS NO. 14-92
CLOSED-END FUND MEMBERS NO. 12-92
UNIT INVESTMENT TRUST MEMBERS NO. 17-92
ACCOUNTING/TREASURERS MEMBERS NO. 10-92
OPERATIONS MEMBERS NO. 10-92
INTERNATIONAL COMMITTEE NO. 6-92
INSTITUTIONAL FUNDS COMMITTEE NO. 2-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 12-92
RE: SENATE APPROVES TAX BILL
__________________________________________________________
The United States Senate has approved, by a vote of 50-47,
its version of the "Family Tax Fairness, Economic Growth and
Health Care Awareness Act of 1992." Because this bill is not
identical to the tax bill that recently passed the House 1/1, the
differences must be resolved by a House-Senate Conference. Any
bill emerging from the Conference that is subsequently approved
by both the House and the Senate would be sent to the President
for signature or veto.
The Senate bill provisions of interest to regulated
investment companies ("RICs") that are discussed in this
memorandum relate to (1) modified taxation of capital gains, (2)
foreign tax simplification, (3) repeal of investment restrictions
applicable to nuclear decommissioning funds, (4) the amended
Taxpayer Bill of Rights and (5) certain administrative changes. 2/2
certain penalty-free withdrawals from IRAs and (3) providing
pension simplification.
33/ Unlike the House bill, the Senate bill does not provide for
indexing the cost basis of capital assets for inflation.
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Similarities and differences between the House and
Senate bills are discussed. Relevant portions of the Senate bill
and its Technical Explanation may be obtained by calling the
undersigned at (202) 955-3585.
I. Modified Taxation of Capital Gains
The Senate bill contains two provisions that modify the
taxation of capital gains. First, like the House bill, the
Senate bill excludes from tax 50 percent of the capital gains
realized upon the disposition of qualified small business stock
acquired by the taxpayer at its original issuance and held for
more than five years. As in the House bill, RIC shareholders
would be eligible to claim the 50 percent exclusion for gains on
the sale of qualified small business stock originally issued to
the RIC only if (1) the RIC held the stock for more than five
years and (2) the RIC shareholder held the RIC stock on which the
capital gain dividend was paid from the date the RIC acquired the
qualified small business stock through the date the qualified
small business stock was sold.
Second, the Senate bill provides progressive capital gains
tax rates for individuals.3/3 The marginal rate on qualified
capital gain would be 5 percent on gains otherwise taxed in the
15 percent bracket, 19 percent on gains otherwise taxed in the 28
percent bracket, 23 percent on gains otherwise taxed in the 31
percent bracket and 28 percent on gains otherwise taxed in the
new 36 percent bracket. As under current law, capital gains
realized upon the disposition of a RIC's portfolio securities
would retain their character for purposes of reduced capital
gains tax rates when distributed to the RIC's individual
shareholders as capital gain dividends.
In addition to changing tax rates, the bill would change
the treatment of capital gains in two other ways. First, the
entire amount of qualified capital gain would be included in
alternative minimum taxable income. Second, the holding period
for long-term capital gain treatment would be increased under the
Senate bill from more than one year to more than two years.
The new capital gains rates would apply to taxable years
ending after January 31, 1992. For a taxable year beginning on
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or before that date, the new rates would apply to the lesser of
(i) the net capital gain for the taxable year or (ii) the net
capital gain determined by taking into account only gain or loss
attributable to the portion of the year after January 31, 1992.
With respect to distributions of net capital gain to RIC
shareholders, the new rates would apply only to gains realized by
the RIC after January 31, 1992.
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II. Foreign Investment Provisions
The Senate bill provides new rules for (1) taxing
investments in passive foreign corporations ("PFCs") and (2)
claiming the foreign tax credit when the amount of an
individual's creditable foreign taxes is no more than $200.
These Senate provisions are in all relevant respects comparable
to the provisions in the House bill.
As discussed in greater detail in the memorandum on the
House bill that we recently sent to you, the mark-to-market
system applicable to investments by RICs in PFCs will generally
eliminate the RIC-level tax that applies under existing law.
Also like the House bill, the Senate bill contains a transition
rule that would require RICs to (1) mark to market all PFIC stock
in their portfolios on the first day of the RIC's first taxable
year beginning after December 31, 1992, (2) pay a nondeductible
interest charge on the tax that would have been collected had the
PFC shares been marked to market in the prior years and (3)
distribute the mark-to-market gains to their shareholders.
III. Repeal of Investment Restrictions Applicable to Nuclear
Decommissioning Funds
As you know, the Institute has supported proposed Treasury
regulations that would permit nuclear decommissioning funds to
invest in RICs which meet certain conditions regarding assets and
conduct. (See Institute Memoranda to Tax Committee No. 27-90 and
SEC Rules Committee No. 47-90, dated September 4, 1990; and to
Tax Committee No. 38-90 and Institutional Funds Committee No. 6-
90, dated December 20, 1990.) The Senate bill would expand the
investment options of nuclear decommissioning funds far beyond
the scope of the proposed Treasury regulations by completely
eliminating the present-law investment restrictions that apply to
nuclear decommissioning funds, effective for taxable years
beginning after December 31, 1991.
IV. Taxpayer Bill of Rights
The Senate bill would expand the Taxpayer Bill of Rights
provision relating to tax information returns, that is also
contained in the House bill, by requiring that IRS Forms 1099
(and acceptable substitutes) contain the name, address and phone
number of the payor's "information contact." Under the House
bill, a payor would be required to include on the information
return only its telephone number. This provision would apply to
statements required to be furnished after December 31, 1992.
In addition, the Senate bill would provide relief from
retroactive application of Treasury regulations by providing that
the effective date for temporary and proposed regulations would
generally be no earlier than the date of the publication in the
Federal Register. Final regulations may take effect from the
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date of publication of the temporary or proposed regulations to
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which they relate. An earlier effective date for Treasury
regulations could be provided only by (1) a special legislative
grant authorizing Treasury to prescribe the effective date with
respect to a statutory provision and (2) Treasury permitting
taxpayers to elect to apply temporary or proposed regulations
retroactively. This provision would apply with respect to any
temporary or proposed regulation published on or after February
20, 1992 and to any temporary or proposed regulation published
before February 20, 1992 which is published as a final regulation
after that date.
V. Administrative Provisions
The Senate bill also contains two administrative changes
that were included in the House bill. First, the bill would
replace the tax deposit system used to deposit amounts withheld
pursuant to the backup withholding rules of Code section 3406.
Three basis deposit timetables would be provided under the bill.
First, the eighth-monthly system would be replaced by a
requirement to make deposits twice a week, on Tuesdays and
Fridays. Second, the bill would retain present law rules
requiring large depositors to make deposits the next day when
they accumulate to $100,000 or more. Finally, deposits must be
made only once a month, on or before the fifteenth day of the
following month, if the amount required to be deposited was
$12,000 or less per quarter for the previous one-year base
period. These deposit rules would apply to payments made after
December 31, 1992.
The second administrative provision would redefine the term
"reproduction" for purposes of the Code section 6103(p)
recordkeeping requirements for returns and return information.
Under the bill, the term would include a reproduction from a
digital image. This provision would be effective on the date of
enactment.
VI. Provisions From House Bill Not Included In Senate Bill
Simplification provisions included in the House bill that
are not included in the Senate bill include those relating to
mutual fund tax simplification and the amortization of
intangibles. Any provision in either bill is eligible for
inclusion in the final bill.
* * *
We will keep you informed of developments regarding this
legislation.
Keith D. Lawson
Associate Counsel - Tax
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