D. TITLE XXV-MISCELLANEOUS AMENDMENTS 1. Sick Pay and Military, etc., Pension Exclusion-Injuries Resulting From Acts of Terrorism (sec. 2501 of the bill and secs. 104 and 105 of the Code) The committee bill excluded from gross income military disability payments attributable to combat-related injuries. The committee believes that many civilian government employees expose themselves to considerable danger in their work abroad for the government. For example, U.S. Foreign Service officers have been injured and held hostage during political crises at their foreign posts. Representatives at international conferences have been the victims of guerrilla-type terrorist attacks. The committee believes that all government employees who expose themselves to such risks and thereby suffer injuries in the course of their employment should receive tax benefits similar to those which the committee provided to members of the Armed Forces who receive disability payments for combat-related injuries. This amendment permits employees of the United States Government or any of its branches or agencies, who suffer injuries as a direct result of a violent attack, which the Secretary of State determines to be a terrorist attack, while outside the United States in the course of their employment, to exclude from their gross income any amounts received as disability benefits attributable to such injuries. It is estimated that this provision will result in a decrease in budget receipts of less than $5 million annually. 2. Changes in Treatment of Foreign Income a. Ordering of foreign tax credit carryover (sec. 2502 of the bill and sec. 904 of the Code) Under present law, taxpayers generally are required to use any foreign tax credits and investment tax credits arising in the current year to reduce their tax liability before they are allowed to use any credits carried over or back to that year. However, in the case of investment tax credits arising in years before 1971 (i.e., before the investment tax credit was reenacted in 1971), which were carried over to 1971 and later years, these pre-1971 carryovers are to be used before any credits arising in the current year. In its consideration of the Tax Reform bill the committee agreed to allow foreign and investment tax credit carryovers which otherwise would expire in 1976 to be extended for two additional years in order for the Congress to have time to study further various proposals relating to the treatment of these carryovers. In the case of investment tax credits this means that pre-1971 credits still being carried forward could be used in 1977 or 1978 before any credits arising in the current taxable year. The committee agreed to a further amendment in order to equate the treatment of foreign tax credit carryovers otherwise expiring in 1976 with the treatment that investment tax credit carryovers from pre-1971 years receive. Thus, under the amendment, any foreign tax credit carryovers which otherwise would expire in 1976 but which have been extended through 1978 are to be used first in 1977 and 1978 against any foreign income received in those years. This should encourage the repatriation of foreign earnings. If this change is not made, companies with foreign tax credit carryovers will be reluctant to bring high-taxed earnings home if foreign tax credits which otherwise would be available for a carry forward are used first before credits that would otherwise expire. The amendment is to be effective for taxable years ending after December 31, 1975, and before January 1, 1978. It is estimated that this provision will result in a decrease in budget receipts by $2 million in fiscal year 1977, $3 million in fiscal year 1978, and $1 million in fiscal year 1981. b. Exclusion for income earned abroad (sec. 2503(a) of the bill and sec. 911 of the Code) The committee amendment, while retaining the exclusion of up to $20,000 (or in some cases $25,000) for income earned abroad by U.S. citizens living or residing abroad, significantly tightens that provision in three respects. First, the committee amendment provides that no foreign tax credit is allowable with respect to foreign taxes paid on the excluded income. Second, the committee amendment provides that amounts included in income are to be subject to the tax rate brackets which would be applicable if no exclusion had been allowed. Third, the exclusion is not allowed in certain tax avoidance situations. The impact of the committee amendment may in a few cases result in individuals being better off (if they have paid substantial amounts of foreign income taxes) if there was no exclusion available to them. Accordingly, this amendment provides an election to an individual not to have the earned income exclusion apply. To prevent shifting from an exclusion to a credit system from year to year, the amendment provides that once an election is made not to have the exclusion apply, it is binding for all subsequent years and may be revoked only with the consent of the Internal Revenue Service. It is estimated that this provision will result in a decrease in budget receipts of less than $5 million annually. c. Recapture of foreign losses (sec. 2503(b) of the bill and sec. 904(f) of the Code) The committee amendment provides that an overall foreign loss sustained in a taxable year beginning after December 31, 1975, is subject to recapture if in a later year foreign source income is derived. The effective date of the committee amendment is December 31, 1975, but an exception is provided where an investment is substantially worthless prior to the effective date but where the loss is not sustained for tax purposes until 1976. In that case the loss is not subject to recapture if the taxpayer terminates its investment in the loss corporation or corporations by either selling out, or otherwise disposing of, its investment or by liquidating its investment by the end of 1976. In some cases, a corporation may want to continue an investment beyond 1976 in an attempt to try to make the investment profitable, although it may ultimately fail in that endeavor. This amendment provides that if a loss would qualify for the exception to recapture but for the fact that the investment is not terminated in 1976, if the investment is terminated before January 1, 1979, there is to be no recapture of the loss to the extent there was on December 31, 1975, a deficit in earnings and profits. It is estimated that this provision will result in a decrease in budget receipts of less than $5 million annually. d. Tax treatment of corporations conducting trade or business in Puerto Rico or possessions of the United States (sec. 2519 of the bill and secs. 33, 931, and 936 of the Code) The committee amendment permits corporations which qualify for possessions corporation treatment to repatriate their earnings on a current basis and have the dividend eligible for the dividends-received deduction. However, the committee amendment further provides that investment income earned outside of the possession where the profits generating the funds for the investment were derived is to be subject to T.S. tax on a current basis. These provisions apply to taxable years beginning after December 31, 1975. Possessions corporations wishing to take advantage of the dividendsreceived deduction provision need to wait until the enactment of this legislation so that they can be assured of the tax treatment which a dividend will receive. In the meantime, these amounts which will be repatriated are invested in income-producing investments. These investments should not be penalized by reason of the delay in enactment of the legislation. Accordingly, this amendment provides that this income is not to be subject to tax even if derived from outside of Puerto Rico or a possession of the United States where the funds were derived if the taxpayer can satisfy the Internal Revenue Service that the income was earned before October 1, 1976. It is estimated that this provision will result in a decrease in budget receipts of $6 million in fiscal year 1977 from the House provision. For fiscal years subsequent to 1977, it is estimated that this provision will not have any effect on budget receipts. 3. Treatment of Certain Individuals Employed in Fishing as SelfEmployed (sec. 2504 of the bill, new sec. 3121(b)(20) and secs. 1402(c) and 3401(a) of the Code, and new sec. 210(a) (20) of the Social Security Act) A provision in the committee bill treats certain boat crewmen as self-employed individuals for purposes of income tax withholding from wages, the self-employment tax, the Federal Insurance Contributions Act taxes, and the social security laws, when they are engaged in taking aquatic animal life under specified working arrangements. To qualify under the new classification of self-employed individuals, the crewmen, under the committee bill, have to (1) receive only a share of the catch as remuneration, and (2) perform their duties on a boat with an operating crew of less than six.1 It appears that many of the fishing operations this provision was designed to help would not be benefitted under the provision as first agreed to by the committee. The committee is informed that many fishing operations, such as a number of those operating in the Gulf Stream, are pursued on an informal employment basis, with frequent turnover of employees working as crewmen. These fishing operations may satisfy the basic criterion of the committee provision, which is that the crewman, to be treated as self-employed, must receive only a share of the catch as remuneration. However, because the boats used in these operations normally use an operating crew of more than five individuals, the crewmen serving on these boats would not be treated as self-employed under the original committee provision. In addition, the committee provision treats a crewman as meeting the qualifications for treatment as self-employed only if his remuneration is a share of the catch of the boat upon which he serves. In practice, many fishing operations (or other operations in which aquatic animal life, such as shrimp or lobsters, are taken) permit crewmen of one boat to share the catch of several boats. This procedure, of course, is primarily designed to spread whatever catch is made by a group of boats to each crewman, regardless of the relative success of the crewman's particular vessel. The committee believes this provision should be extended in application to crewmen who receive a share of the catch of the entire group of boats, in the case of an operation involving more than one boat. This amendment modifies the provision in the committee bill to provide that all crewmen on fishing boats (or boats engaged in taking other forms of aquatic animal life) are to be treated as self-employed individuals if the operating crew of the boat upon which they serve normally consists of fewer than ten individuals, and also if the sole remuneration of these crewmen consists of a share of the catch of the boat, or, in the case of an operation involving more than one boat, consists of a share of the catch of the entire group of boats. It is estimated that this provision will decrease budget receipts by $65 million over the next five fiscal years. 4. Energy Related Provisions a. Special credit for wind-related residential energy equipment (sec. 2505(a) of the bill and sec. 44B of the Code) Present law Under present law, no special tax credit or deduction is allowed for wind-related energy equipment (such as a traditional windmill) installed with respect to a residence. 1 The committee report (S. Rept. No. 94-938, p. 385) inadvertently indicated that another qualification required that if a crewman was to be taxed as a self-employed individual, his service on the boat must be on a "substantially intermittent basis." The committee, however, had decided to omit this requirement from its bill. Reasons for change The committee believes a tax credit is needed for wind-related energy equipment for much the same reasons tax credits are needed (and provided in the committee's reported bill) for solar and geothermal energy equipment. It is not possible at this time to foresee which of these new industries will be most successful at replacing fossil fuels in providing residential energy sources. The committee believes it appropriate, therefore, to grant wind-related energy equipment the same tax treatment as is provided for solar and geothermal equipment. Explanation of provision The committee amendment provides a refundable income tax credit for wind-related energy equipment installed on or adjacent to a residence. Like the solar and geothermal equipment credits, the credit for wind-related energy equipment is 40 percent of the first $1,000 of qualified expenditures, plus 25 percent of the next $6,400 (a maximum credit of $2,000). To qualify, both the equipment and its installation must be paid for by the individual (or individuals) using the edifice as a residence. Thus, the owner or a tenant may qualify, but a builder or developer adding the wind-related equipment to a house he does not intend to use as his residence would not qualify for this credit (although he might qualify for the investment credit given under this amendment for wind-related energy equipment installed for commercial or industrial purposes). For purposes of the dollar limitations on the amount of expenditures that may be taken into account in determining the credit, expenditures for solar, heat pump, and geothermal equipment and installation must be aggregated with expenditures for wind-related equipment and installation. For example, a taxpayer who has already made purchases of $7,400 for solar equipment allowed during the credit period could not make use of the tax credit for expenditures on wind-related equipment for the same residence. This tax credit is to be allowed only for installations and expenditures made, or, in the case of an accrual basis taxpayer, incurred, through 1980. Before that time, the committee will review the credit to see whether it should be continued after 1980. Also, both the installation and the expenditure must occur after June 30, 1976. The credit is for both the expenditures for wind-related equipment itself and also for expenditures for its installation. Unlike the case of the credit for installation of insulation on an existing residence, wind-related energy equipment expenditures for installations on both existing and newly-constructed residences 1 qualify for the credit. The credit may be allowed only for qualified payments made during the year or other tax period for which the tax return is filed. To the extent that (during the period for which the credit is in effect) the taxpayer during any prior year paid for installations of energy equipment for which a special credit provided by this bill was allowed, the dollar limitations on the solar, geothermal, heat pump or wind-related 1 Condominium and cooperative units may be treated as separate residences. |