Revenue effect This provision has no effect on Federal revenues, but involves an expenditure of Federal funds of up to $1 million. 8. Interest on Certain Governmental Obligations for Hospital Construction (sec. 2308 of the bill and sec. 103 of the Code) Present law In general, industrial development bonds are not eligible for exemption from the Federal income tax on interest income. The term industrial development bond includes obligations from which all or a major portion of the proceeds are used in a trade or business by a person other than an exempt person. An "exempt person" is defined as a governmental unit or an organization described in section 501 (c) (3) and exempt from tax under section 501 (a), except for unrelated trade or business activity. Exceptions have been made for such issues to finance certain facilities which possess elements of a public character and the development costs of industrial parks. In addition, an exemption also is provided for certain small issues which do not exceed $5 million. The exempt activities of a public character include providing residential real property for families, sports facilities, convention or trade show facilities, certain freight and passenger transportation facilities, pollution control or waste disposal facilities, and certain local public utility facilities. Public hospitals operated by governmental units may be financed with tax-exempt bonds, but private hospitals are not eligible for financing with industrial development bonds except under the small issues exemption. Reasons for change The costs of constructing and equipping hospitals have escalated so rapidly in the past several years that it is not possible to construct a moderate-sized private hospital within the $5 million limitation. This is a matter of importance in many rural areas where public hospitals have not been built. The committee decided that it would be appropriate to increase the small issues limitation as it applies to private hospitals, so long as the appropriate State government health agency certifies that construction of the hospital is necessary. This would assure that taxexempt bonds are issued only where other local hospital facilities are inadequate or lacking. Explanation of provision The amendment adds a special exception from the $5 million limit for small issues which will permit issues up to $20 million for a private hospital which is certified as necessary by the appropriate State health agency. There is no corresponding provision in the House bill. Effective date The amendment is effective for obligations issued in taxable years beginning after December 31, 1976. Revenue effect It is estimated that this provision will decrease budget receipts by $1 million in fiscal year 1977, $3 million in fiscal year 1978, and $14 million in fiscal year 1981. 9. Group Legal Services Plans (sec. 2309 of the bill and secs. 120 and 501(c) (20) of the Code) Present law Prepaid group legal services plans are a recent, innovative means of providing legal services. Because of the relative novelty of these fringe benefit plans and the variety of their design, the tax treatment of the employer contributions on behalf of the employee and of the benefits received by the employee under such plans has not yet been clearly established. However, depending on the structure of the plan, it appears that the employee will be required to include in his income either (1) his share of the amounts contributed by his employer to the group legal services plan or (2) the value of legal services or reimbursement of expenses for legal services received under the employer-funded plan, or both. (If plans are funded with contributions which are partially taxable and partially tax-free to the employee, the employee may be required to include any benefits in income to the extent the contributions for the plan constitute amounts not previously included in the employee's income.) Amounts contributed by the employer for an employee to a group legal services plan or the value of services or reimbursements if provided directly by the employer to the employee under a plan are deductible by the employer as ordinary and necessary business expenses, if they meet the usual standards for trade or business deductions. Reasons for change The committee believes that it is appropriate to provide a tax incentive to promote prepaid legal services plans. Within the last 3 years, the American Bar Association and many State bar associations have endorsed the creation of this type of arrangement as a means of making legal services more generally available. Several unions have alalready established prepaid group legal services plans which are supported entirely or in part by employer contributions. The committee believes that excluding such employer contributions from the employees' income will promote interest in such plans and increase the access to legal services for many taxpayers by encouraging employers to offer and employees to seek such plans as a fringe benefit. The committee believes a tax incentive, which would increase the availability of legal services, is especially helpful to middle-income taxpayers who at present may be the most under-represented economic group in terms of legal services. Lower-income persons have access to publicly-supported legal aid services, while taxpayers with higher incomes can generally afford their own legal expenses. The committee believes that providing favorable tax treatment for group prepaid legal services plans (which has some similarity to the tax treatment provided for accident and health plans) will grant tax payers some relief from the high cost of legal fees and will promote the adoption and implementation of such plans by many employers and employees. In order to insure that the tax law encourages only those plans which may be considered nondiscriminatory employee fringe benefits, the committee believes it necessary to adopt rules which will prohibit discrimination and minimize the possibility of abuse of the tax incentive by those taxpayers who might create such plans to channel otherwise taxable compensation through a plan providing a tax-free fringe benefit. Explanation of provision The committee amendment excludes from an employee's income amounts contributed by an employer to a qualified group legal services plan for employees (or their spouses or dependents) as well as any services received by an employee or any amounts paid to an employee under such a plan as reimbursement for legal services for the employee, his spouse, or his dependents. The exclusion does not apply to direct reimbursements made by the employer to the employee. There is no corresponding provision in the House bill. In order to be a qualified plan under which employees are entitled to the tax-free benefits provided by the amendment, a group legal services plan must fulfill several requirements with regard to its provisions, the employer, and the covered employees. These requirements are designed to insure that the tax-free fringe benefits are provided on a nondiscriminatory basis and that the possibility of tax abuse through the misuse of such plans is minimized. A qualified group legal services plan must be a separate written plan of an employer for the exclusive benefit of his employees or their spouses or dependents. The plan must supply the employees, their spouses, and dependents with specified benefits consisting of personal (i.e., nonbusiness) legal services through prepayment of, or provision in advance for, all or part of an employee's, his spouse's, or his dependents' legal fees. Benefits must be set forth so that the employees understand what legal services are covered by the plan. The amendment also provides that amounts contributed by employers under a plan may be paid only (1) to insurance companies, (2) to trusts (exempt under new sec. 501 (c) (20), described below), (3) as prepayments to providers of legal services under the plan, or (4) to a combination of the three permissible types of payment arrangements. In order to be a qualified plan, a group legal services plan must also meet requirements with respect to nondiscrimination in contributions or benefits and in eligibility for enrollment. The committee amendment requires that the contributions paid by an employer and the benefits provided under a plan may not discriminate in favor of employees who are officers, shareholders, self-employed individuals, or highly-compensated. The plan must benefit employees who qualify under a classification which the employer sets up and which the Service determines does not discriminate in favor of employees who are officers, shareholders, self-employed individuals, or highly-compensated. However, in determining whether the classification is discriminatory the employer may exclude from the calculations those employees who are members of a collective bargaining unit if there is evidence that group legal services plan benefits were the subject of good faith bargaining between representatives of that group and the employer. A limit is placed on the proportion of the amounts contributed under the plan which can be for employees who own more than 5 percent of the stock or of the capital or profits interest in the employer corporation or unincorporated trade or business. The aggregate of the contributions for those employees and their spouses and dependents must not be more than 25 percent of the total contributions. Under the amendment, in order to be treated as a qualified group legal services plan, the plan must notify the Internal Revenue Service that it is applying for recognition of this qualified status. If the plan fails to notify the Service by the time prescribed in Treasury regulations, then the plan cannot be regarded as a qualified plan for any period before it in fact gave notice. For example, if the Treasury regulations provide that a plan is required to notify the Service before the end of the first plan year in order to be treated as a qualified plan from the beginning of the first plan year, and the organization does not file its notice until half-way through the second plan year, then (1) the organization is not qualified for its first plan year, and (2) the organization is not qualified for that part of the second plan year preceding the date on which the notice finally was filed. However, if the notice was filed on the last day of the first plan year, then the organization would be qualified from the first day of that first plan year.1 Furthermore, several additional special rules and definitions are to apply to qualified group legal services plans. An individual who is an employee within the meaning of section 401(c)(1) of the Code is, for purposes of these group legal services provisions, an "employee" and also is a "self-employed individual". This means that, in general, the term "self-employed individual” means, and the term "employee" includes, individuals who have earned income for a taxable year, as well as individuals who would have earned income except that their trades or businesses did not have net profits for a taxable year. An individual who owns the entire interest in an unincorporated trade or business is treated as his own employer. A partnership is considered the employer of each partner who is an employee of the partnership. Under a special rule for the allocation of contributions, the Treasury Department's regulations must provide that allocations of amounts contributed under the plan shall take into account the expected relative utilization of benefits to be provided under the plan from those contributions or plan assets and the manner in which any premium charge (or retainer or other price) for the plan was developed. The term "dependent" has the meaning given to it under section 152. Therefore, the plan may cover an individual whose relationship to the employee is listed in section 152, if the employee provides over 1 Recognizing that existing plans are to be covered by this provision and that there may be a delay in the final publication of these notification regulations, theamendment also provides that this initial notice is to be considered timely if it s given at any time through the 90th day after the publication of the first final Treasury Regulations on this half of the support for that individual for the calendar year in which the employee's taxable year begins. Since the plan must be for the exclusive benefit of employees and their spouses and dependents, the plan is not to cover any other persons. For determining stock ownership in corporations, the amendment adopts the attribution rules provided under subsections (d) and (e) of section 1563 (without regard to sec. 1563 (e) (3) (C)). The Treasury Department is to issue regulations for determining ownership interests in unincorporated trades or businesses, such as partnerships or proprietorships, following the principles governing the attribution of stock ownership. The amendment also provides that a trust created or organized in the United States, whose exclusive function is to form part of a qualified group legal services plan under section 120, is to be exempt from income tax (new sec. 501(c) (20)). Such a trust shall be subject to the rules governing organizations exempt under section 501(c), including the taxation of any unrelated business income. Effective date This provision applies to taxable years beginning after December 31, 1973. The time within which a plan must apply to the Service for recognition of its status as a qualified group legal services plan under the notice requirement of this amendment is not to expire before the 90th day after the Treasury Department's regulations on this point first become final. A written group legal services plan that was in existence on January 1, 1976, is to be treated as meeting the requirements for a qualified plan for the retroactive period under this amendment and also up to the 180th day after the bill's enactment. If, on January 1, 1976, the plan was maintained under a collective bargaining agreement, then the plan is to continue to be treated as qualifying under this amendment past the 180th day after enactment, until the termination of the last collective bargaining agreement under which the plan is maintained, but in no event past December 31, 1981. After the termination of the agreement (or on the 180th day after enactment, or on January 1, 1982, whichever applies in the particular case) the plan must comply with the antidiscrimination, etc., requirements set forth in this provision (new sec. 120) in order for the tax benefits provided by this amendment to apply. Revenue estimate It is estimated that this provision will decrease budget receipts by $5 million for fiscal year 1977, $8 million for fiscal year 1978, and $33 million for fiscal year 1981 (and this revenue loss will continue to increase significantly thereafter). 10. Exchange Funds (sec. 2310 of the bill and sections 368, 721, 584 and 683 of the Code) Present law An exchange fund is an investment entity through which large numbers of investors pool stocks or debt securities which usually are highly appreciated in exchange for shares of the fund. These arrange |