energy expenditures for which the credit is given must be reduced by the amount of the earlier qualified payments.2. If an individual who has already been allowed the maximum credit under the dollar limitations for solar, geothermal, heat pump, or windrelated energy equipment installed on one residence (or who has partially used his limitations) thereafter changes his residence, the limitations begin again to run from zero, and he may claim 40 percent of the first $1,000 paid, and 25 percent of the subsequent qualifying expenditures (or half those amounts, in the case of qualified heat pump expenditures) for equipment installed on his new residence. The wind-related energy equipment for which the credit may be claimed is that which uses wind-related energy to generate electricity to heat or cool a residence (or residences) or to provide hot water for use inside it, and (1) which meets such standards or criteria for performance as the Secretary of Housing and Urban Development may prescribe, (2) the original use of which commences with the taxpayer, and (3) which has a useful life of at least three years. At least some of the wind-related equipment for which this credit is provided is expected to be used as an additional source of energy for a residence which also contains a conventional energy source, such as an oil or gas furnace. In this case, the credit, of course, only is available for the additional equipment necessary to permit the wind-related energy to function. If joint owners install qualified wind-related energy equipment on a common residence, the credit is to be apportioned among those who paid for the equipment and its installation in accordance with the ratio which each owner's payment bears to the total payment during the calendar year. Similarly, if one piece of wind-related equipment provides energy for more than one residence, the residents who benefit from the wind-related energy source are to share the credit according to the ratios of the payment which they bore. In the case of qualifying expenditures by a cooperative housing corporation, each of the corporation's shareholders who is entitled to occupy a dwelling unit owned by the corporation, and who in fact occupies the dwelling unit as his residence, is treated as the resident in that unit and as having paid for the portion of the corporation's qualifying expenditures that is the same as his proportionate share of the corporation's total outstanding stock. Similarly, in the case of duplex, triplex, etc., houses, the expenditure for wind-related energy may shared among the respective residents. be Expenditures made by a resident that qualify for the credit would normally constitute capital expenditures that increase the tax basis of the residence. In order to avoid a double tax benefit (allowance of a credit and also a reduced gain on sale), the committee amendment requires that any increase in basis on account of a qualified wind-related energy expenditure be reduced by the amount of the expenditure that is allowed as a credit. For example, assume that the taxpayer makes 2 Note that expenditures before July 1, 1976, and installations before that date are not to qualify for the credit. Consequently, such pre-July 1, 1976, expenditures and installations are to be ignored in determining whether and to what extent the expenditure limit is reached under this provision. $2.500 of qualified expenditures of the sort which would normally increase his basis in his home. The maximum credit allowable in this case is $775 (40 percent of the first $1.000, plus 25 percent of the remaining $1.500). Consequently, the taxpayer's basis in his home would be increased by $1.725 (the $2.500 of expenditures minus the $775 of tax credit). The wind-related energy equipment credit is a refundable credit. As a result, a taxpayer whose tax liability is less than the amount of the credit would receive a refund of the difference, while the amount of his credit that equals the amount of his tax liability would be available to eliminate that liability. The House bill contains no comparable provision. Effective date The committee amendment makes the credit available in cases in which both the expenditure and the installation of the qualifying equipment occurred on or after July 1, 1976, and before January 1, 1981. Before the credit period expires after December 31, 1980, the committee intends to reexamine the usefulness of this credit approach and the availability of other approaches to secure the necessary energy savings. Revenue effect It is estimated that this provision will result in a decrease in budget receipts of less than $5 million annually. b. Special investment credit for wind-related energy equipment used in the production of electricity (sec. 2505(b) of the bill and sec. 46A of the Code) Present law Under present law, a 10-percent investment credit is permitted for the capital costs of several types of business machinery, equipment, and facilities used in a trade or business or held for the production of income. As a facility used as an integral part of the production of electrical energy, wind-related energy equipment used to generate electricity may be entitled to the investment credit of present law (sec. 48(a) (1) (B) (i)), unless it is a structural component of a building. Reasons for change The committee believes it is important to encourage the development of new methods of generating electricity that do not involve the consumption of fossil fuels. Through the use of a special investment credit for this purpose, the committee hopes to help preserve an adequate supply of electrical energy for our industrial and business needs, while simultaneously conserving fossil fuel and mitigating fossil fuel energy shortages. Since the use of windmills in the generation of electricity is in a new stage of development, in which new and more efficient ways of producing electricity through the use of windmills are being discovered, the committee believes a tax credit is needed to encourage this new development to continue at a more rapid pace than could otherwise be expected. Explanation of provision The committee amendment extends the investment credit (at an increased rate for a limited period of time) to wind-related energy equipment (such as windmills) installed for use in the trade or business of producing electricity or to generate electricity for use in a trade or business. The amount of the credit is to be 20 percent of the qualified wind-related energy equipment installation investment after May 25, 1976, and before January 1, 1982. After that time, the credit is reduced to 10 percent for this type of investment through 1986. Both the 20-percent and the 10-percent credits apply to the costs of the wind-related energy equipment itself, as well as the costs of its installation. The credit is to be applicable whether or not the wind-related energy equipment would otherwise fail to qualify for the general investment credit because it is a structural component of a building. In the case of wind-related energy property under construction on May 25, 1976, this special investment credit is to apply only to that portion of the basis of the property which is attributable (in accordance with Treasury regulations) to construction, reconstruction, or erection after that date. This credit is not to apply to any equipment acquired by the taxpayer with amounts paid him as a grant by the Federal Government, or by any of its agencies or instrumentalities, unless the grant was made in the form of a loan or a loan guarantee. In addition to the 20- and 10-percent special investment credits, an additional 2-percent investment credit is to be available for taxpayers who establish or maintain an appropriate employee stock ownership plan to which the employer contributes stock equal to 2 percent of the qualified investment in the wind-related energy property. The House bill contains no comparable provision. Effective date 2 To qualify for the 20-percent credit, the wind-related energy equipment must be acquired, constructed, reconstructed, or erected by the taxpayer after May 25, 1976, and placed in service before January 1, 1982. Similarly, to qualify for the 10-percent credit allowance applicable after 1981, the equipment must be placed in service after December 31, 1981, and before January 1, 1987. In the case of both pre-1982 and pre-1987 wind-related energy property, however, installations of equipment after those periods may qualify for the investment credit of 20 percent and 10 percent, respectively, in certain cases of binding contracts entered into before those years, under circumstances described in section 49. Revenue effect It is estimated that this provision will result in a decrease in budget receipts of less than $5 million annually. 1 The applicable investment credit for wind-related energy property after 1981, and before 1987, is to be 10 percent regardless of whether the general investment credit rate at that time is 10 percent. See section 301 (d) of the Tax Reduction Act of 1975 (P.L. 94-12, 89 Stat. 26).. 5. Sliding-Scale Inclusion Ratio for Capital Gains (sec. 2506 of the bill and sec. 1202 of the Code) Present law Individuals (and estates and trusts) may deduct from gross income one-half of the excess of their long-term capital gains over their shortterm capital losses. Reasons for change The committee believes that the tax on capital gains should be reduced for assets that have been held for long periods of time. This reduction is desirable because of the need to encourage additional savings by individuals, particularly in equity securities, and to improve the mobility of capital in the economy. In 1975, Americans saved only 8.3 percent of their disposable personal income. This rate is lower than that achieved by virtually every other major industrialized country. Meanwhile, the nation has vast unmet investment needs. The nation needs capital for expansion in industries where there have been shortages, such as the steel, paper, and chemical industries; for additional housing; for pollution control; and for greater self-sufficiency in energy. Unless the Federal Government can run budget surpluses, which is unlikely in view of the fact that there have been budget deficits in ten of the past eleven years, these investment needs can be met only by increased private savings. This, in turn, requires more favorable tax treatment of the income from capital. The committee believes that lower capital gains taxes will have several beneficial effects on the economy. It will encourage individuals to save by purchasing assets on which they expect to receive capital gains, including common stocks. Additional equity investment is needed in the United States to finance new businesses, which traditionally rely on equity financing, and to enable existing corporations to reduce their debt-to-equity ratios, which have become dangerously high in recent years. The lower capital gains rates will also improve the mobility of capital in the economy. Because capital gains on an asset are subject to taxation when the asset is sold, individuals are discouraged from selling assets in order to postpone their capital gains tax. This socalled "lock-in effect" means that some corporations, on whose securities there are substantial accrued capital gains, can raise capital more cheaply than other corporations, which causes inefficient allocation of capital between companies. The sliding scale should reduce this lock-in effect. Explanation of provision The bill provides a capital gains deduction (in addition to the existing 50-percent deduction) equal to one percent of an individual's capital gain on an asset multiplied by the number of years in excess of five years that the asset was held. The additional deduction on each asset is to be limited to 20 percent of the capital gain on that asset (for holding periods exceeding 25 years). Also, a taxpayer's total for both deductions is to be no more than 75 percent of his net capital gain (the excess of his net long-term capital gains over net shortterm capital losses). The additional capital gains deduction is to be available only for certain assets. These include securities, real property, partnership interests, and business goodwill of proprietorships. In the case of goodwill, the amount of the sales price that the seller may allocate to goodwill cannot exceed the amount that the purchaser allocates to goodwill. This limitation is designed to prevent taxpayers from allocating a disproportionate share of their capital gain to goodwill. Qualifying assets include those held by pass-through entities where gains realized by the entity are includible in gross income of the taxpayer. The amendment repeals the alternative tax rate of 25 percent on the initial $50,000 of net long-term capital gains of individuals. The rules for determining holding periods will generally be those currently used to distinguish short-term and long-term capital gains. In the case of real property, however, the rules will generally be those used to determine the phaseout of the depreciation recapture provision in section 1250, except for certain involuntary conversions and likekind exchanges where the property-owner will be able to tack the holding period of the old property onto that of the new property. There are also rules defining substantial additions to basis. These will require the taxpayer to consider the addition as a separate asset with its own holding period. The House bill does not contain a comparable provision. Effective date The additional exclusion will apply to all gains on assets sold during taxable years beginning after December 31, 1977. Revenue effect It is estimated that this provision will decrease budget receipts by $719 million in fiscal year 1979, $791 million in fiscal year 1980, and $870 million in fiscal year 1981. 6. Pensions, ESOP's and Related Items a. Taxable status of Pension Benefit Guaranty Corporation (sec. 2507 of the bill and sec. 4002(g) of the Employee Retirement Income Security Act of 1974) Present law Under present law (sec. 501 (c) (1)), a corporation organized under an Act of Congress is, in general, not exempt from Federal income taxation unless that Act (either in its original or in an amended and supplemented form) specifies that the corporation is to be exempt. The Pension Benefit Guaranty Corporation (PBGC) was established by title IV of the Employee Retirement Income Security Act of 1974 (ERISA), primarily to administer a pension plan termination insurance program. The PBGC guarantees certain vested retirement benefits (within limitations) that would otherwise be lost to workers because of failure of their retirement plans. ERISA exempts |