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Joint Committee on Taxation 
May 12, 1986 
JCX-5-86 
SUMMARY OF TAX REFORM PROVISIONS 
IN H.R. 
3838 
AS ORDERED REPORTED BY THE SENATE COMMITTEE ON FINANCE 
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CONTENTS 
Page 
INCFOGUCLION. -cec eevee 
reve everesreeesevevecees 
1 
OVErVIEW. cece cere rere tener eres eer eseresrereses 
2 
Summary Of Major ProviSiONS....ceecceceerevenee 
4 
I. 
Individual 
Income Tax Provisions 
...... 
4 
II. 
Accelerated Cost Recovery System and 
Investment Tax Credit 
...cecsevescves 
7 
III. 
Accounting ProviSiONS,...cccereeveveres 
8 
IV. 
Capital GainS woe 
escec rrr eccnee 
9 
Vv. 
Compliance and Tax Administration 
..... 
10 
VI. 
Corporate Tax ProviSionS....o.eeeseeee 
ol 
VII. 
Agriculture, Energy, 
and Natural 
RESOUFCES 
wocccncccvveeervcreseresres 
12 
VIII. 
Employment and Excise Tax Provisions... 
14 
IX, 
Financial ee OU Clonee tie. feceaeeanan: 
14 
X. 
Foreign Tax BROW hi eNSoRc Alec micwenet 
15 
XI. 
Insurance Products and Companies....... 
19 
XII. 
Interest ExXpenSe€...cceeeeerescennsenses 
20 
XIII. 
Minimum Tax... ccecccccccercaseessecoes 
20 
XIV. 
Pensions and Employee Benefits; ESOPs.. 
21 
XV. 
Research and Development Provisions.... 
25 
XVI. 
Tax Shelters and Real Estate........... 
25 
XVII. 
Tax-Exempt Bonds.....cceceeevccesess onus 
27 
XVIII. 
Taxation of Trusts, Estates, 
and Minor 
Children; Estate, Gift and 
Generation-Skipping Taxes.........006 
30 
XIX. 
Miscellaneous ProviSionS.......cesceees 
31 
XX. 
Technical Corrections. ....cccevnceccece 
31 
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INTRODUCTION 
i 
1 
f the 
principal 
ocument 
rovides 
@ brief summary 0 
p 
ip 
tax Peta cfovie ions in H.R. 
3838 as ordered reported, 
with 
an amendment 
in the nature of a substitute, 
by the Senate 
Committee on Finance on May 6, 1986. 
The order and grouping 
of provisions 
in this document generally follow the 
Committee's tax reform markup spreadsheet. 
This document 
is intended 
to provide a convenient 
listing, 
in summary form, 
of the principal tax reform 
provisions approved by the Finance Committee, 
for use 
of 
| 
Members of Congress and the public. The official 
legislative 
documents on the bill as reported will be the reported bill 
and the committee report on the bill. 
1 
his document may be cited as follows: 
Joint Committee on 
Taxation, 
Summary of Tax Reform Provisions 
in H.R. 3838 as 
Ordered Reported by the Senate Committee on Finance 
TICX-5-86), May 12, 1986. 
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OVERVIEW 
The bill approved by the Senate Committee on Finance 
represents a major restructuring of the Federal 
income tax 
system. 
The bill nearly halves the top individual 
tax rate 
to 27 percent and reduces the top corporate tax rate by 
nearly one-third to 33 percent. 
The bill 
is estimated 
to be 
revenue neutral; 
over the next 
five years, 
the tax burden of 
individuals would be reduced by approximately $100 billion, 
while corporate taxes would increase by a Similar amount. 
The reduction 
in tax rates 
is achieved by broadening 
the 
base of the corporate and individual 
income taxes through the 
elimination of various tax benefits and preferences allowed 
under present 
law. 
Many of the new provisions increase 
the 
tax base of upper-income 
individuals and allow a reduction 
in 
the top tax rate without altering the distribution of the tax 
burden. These provisions, 
such as strict 
new limitations 
on 
the use of investment losses to shelter other income and an 
expanded minimum tax, seek to ensure that high-income 
taxpayers cannot reduce their effective tax rates 
to 
disproportionately 
low levels. 
The bill 
is intended 
to simplify the tax system for 
nearly all Americans. 
The bill replaces the 15 tax brackets 
for individuals under present 
law with two rates--15 percent 
and 27 percent. 
Over 80 percent of all] taxpayers will have 
a 
top rate no higher than 
15 percent. 
Large increases 
in the 
standard deduction 
(the zero bracket amount, 
under present 
law) 
and a near Goubling of the personal exemption will 
eliminate the tax liability of approximately six million 
low-income 
individuals. 
Taxpayers will receive 
an average 
tax cut of over 
six percent 
in 1988, with low- and 
middle-income taxpayers experiencing 
the largest percentage 
declines 
in tax liability. 
The following table shows 
the 
estimated average percentage reduction 
in tax liability by 
income group. 
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Income class 
Percentage change 
(thousands of 
in income tax 
1986 dollars) 
liability 1988 
Less than $10 
-62.3 
$10 - 
20 
-18.1 
20 - 
30 
-8.0 
30 - 
40 
-5.0 
40 - 
50. 
-6.6 
50 - 
75 
-3,9 
75 - 
100 
-3.3 
100 
- 
200 
-3.8 
$200 and above 
-4.7 
Total 
-6.3 
Preliminary--May 
12, 1986 
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Other features of the bill 
for individuals include the 
retention of the most widely used itemized deductions. 
Home 
mortgage interest, 
State and local 
income taxes, 
State and 
local real and personal property taxes, 
charitable 
contributions, 
medical expenses 
(above 
a higher floor), 
and 
casualty losses all remain deductible. 
A $600 additional 
standard deduction 
is provided for elderly or blind 
individuals 
to replace the extra personal exemption they 
currently receive. 
The earned income 
tax credit 
for lower 
income taxpayers 
is increased, 
and the child care credit 
is 
retained. 
The capital gains exclusion 
for individuals 
is 
eliminated. 
The top corporate 
income tax rate would be reduced from 
46 percent 
to 33 percent. 
The investment 
tax credit 
is 
repealed, but the present-law Accelerated Cost Recovery 
System generally 
is enhanced for equipment 
to provide more 
generous depreciation benefits. 
One objective of these 
changes 
is to improve the allocation of investment within the 
corporate sector by more nearly equalizing the effective 
rates of taxation of a wide range of assets. 
A new 
alternative minimum tax for corporations would be provided, 
designed to prevent profitable corporations from avoiding any 
significant current 
tax liability. 
Summaries of the principal provisions of the bill as 
ordered reported by the Committee on Finance are provided in 
the following sections. 
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SUMMARY OF MAJOR PROVISIONS 
1. 
INDIVIDUAL INCOME TAX PROVISIONS 
A. 
Rate structure 
1. 
There would be two taxable income brackets and tax 
rates--15 percent and 27 percent. 
The 27-percent 
rate would 
begin at taxable income levels 
(i.e., adjusted gross income 
less personal exemptions and less the standard deduction or 
itemized deductions) 
of $29,300 
for married individuals 
filing jointly, $23,500 for heads of household, 
and $17,600 
for single individuals. 
2. 
The standard deduction 
(replacing the zero bracket 
amount) would be increased to $5,000 for married individuals 
filing jointly (and for surviving spouses), 
$4,400 
for heads 
of household, 
and $3,000 
for single individuals. 
3. 
An additional standard deduction of $600 would be 
allowed 
for an elderly or blind individual. 
The present-law 
credit 
for elderly individuals and for individuals who are 
permanently and totally disabled would be retained. 
4. 
The personal exemption would be increased 
to $2,000 
($1,900 
in 1987) 
for an individual, 
the individual's spouse, 
and each dependent. 
5. 
The rate and phase-out 
levels of the earned 
income 
credit would be increased, 
and adjustments would be made to 
reflect 
inflation 
The child care credit would be retained. 
6. 
The benefit of the 15-percent bracket would be 
phased out 
for high-income taxpayers. 
The phase-out would 
occur between $75,000 and $145,320 
for married individuals 
filing jointly, between $55,000 and $111,400 
for heads of 
household, 
and between $45,000 and $87,240 
for single 
individuals. 
7. 
The personal exemption would be phased out between 
$145,320 and $185,320 for married individuals filing jointly, 
$111,400 and $151,400 for heads of household, 
and $87,240 and 
$127,240 
for single individuals. 
8. 
Inflation adjustments ("indexing") 
to the rate 
brackets, 
standard deduction, 
and personal exemption would be 
continued, 
but rounded down to the next lowest multiple of 
$50. 
9. 
The personal exemption would not be allowed 
to an 
individual who is eligible to be claimed as a dependent 
on 
another taxpayer's return. 
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10. The second-earner deduction and income averaging 
would be repealed. 
B. 
Personal deductions and exclusions 
1. 
Itemized deductions would be retained for State and 
local income taxes, 
real estate taxes, 
and personal property 
taxes, 
but disallowed 
for State and local sales taxes. 
2. 
Itemized deductions would be retained for charitable 
contributions, 
casualty losses, medical expenses, 
and 
adoption of children with special needs. 
The floor under the 
medical expense deduction would be increased from five to ten 
percent of the taxpayer's adjusted gross income. 
3. 
All allowable itemized deductions would be fully 
deductible by individuals 
in both tax brackets; 
i.e., 
no 
itemized deductions would be limited to the lowest bracket. 
4. 
The charitable deduction 
for nonitemizers would 
terminate after 1986, 
as scheduled under present 
law. 
5. 
The exclusion for scholarships and fellowships would 
be retained 
as under present 
law. 
6. 
The partial exclusion for unemployment compensation 
benefits would be repealed. 
7. 
The present-law exclusion 
for certain prizes and 
awards 
for charitable, 
artistic, scientific, 
and like 
achievements would apply only where the recipient designates 
that the prize.or award be paid to a tax-exempt charitable 
organization. 
C. 
Business 
and investment expenses 
1. 
80 percent of business meal expenses and business 
entertainment expenses would be deductible. 
(Business meals 
provided as an integral part of certain convention programs 
would be fully deductible 
in 1987 and 1988.) 
Requirements 
for deducting business meal expenses would be tightened. 
2. 
No deductions would be allowed for costs of 
attending investment conventions or seminars or for 
"educational" 
travel expenses. 
Deductions 
for luxury water 
travel would be limited. 
3. 
The miscellaneous 
itemized deductions would be 
repealed. 
Deductions 
for certain unreimbursed employee 
business expenses that under present 
law may be taken 
"above-the-line”" would be limited to itemizers and would be 
subject 
to a floor of one percent of adjusted gross income. 
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Deductions for home office expenses and hobby losses 
would be limited. 
D. 
Other items 
1. 
The political contributions 
tax credit would be 
repealed. 
2. 
The $1/$2 Presidential campaign checkoff would be 
retained. 
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II, 
ACCELERATED COST RECOVERY SYSTEM AND 
INVESTMENT TAX CREDIT 
A. 
Depreciation 
The Accelerated Cost Recovery System ("ACRS") would be 
retained with the following changes: 
automobiles, 
light 
trucks, 
and semiconductor manufacturing equipment would be 
depreciated using the straight-line method over 
3 years; 
research and experimentation property would be placed 
in the 
5-year class until December 31, 1989, and in the 3-year class 
(using 150-percent declining balance) 
thereafter; 
truck 
tractors would be moved to the 5-year class; property with an 
ADR midpoint 
life of 16 years or greater would be moved to 
the 10-year class; utility property with an ADR midpoint 
life 
of 20 years or greater and steam and electric generators 
or 
distribution systems would be included 
in the 15-year class 
(using 150-percent declining balance); 
residential 
real 
property would be depreciated using the straight-line method 
over 27-1/2 years; 
and other real property would be 
depreciated using the straight-line method over 31-1/2 years. 
The method of depreciation 
in the 5-year class and the 
10-year class would be increased to 200-percent declining . 
balance, 
switching 
to straight-line. 
B. Expensing 
Taxpayers would be permitted 
to expense up to $10,000 of 
the cost of tangible personal property used 
in a business, 
subject 
to a phaseout where the taxpayer's total 
investment 
in such property exceeds $200,000 
for the year. 
C. 
Investment 
tax credit 
1. 
The investment 
tax credit would be repealed, 
effective January 
1, 1986. 
Transition 
rules would be 
provided for certain property placed 
in service after 
this 
date. 
2. 
ITC carryforwards and ITC earned on transition 
property would be reduced by 30 percent. 
D. 
Finance leases 
The finance lease rules would be repealed, 
effective 
January 1, 1987 
(for property that qualifies for finance 
lease transition rules under prior tax acts, January 1, 
1988). 
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111. 
ACCOUNTING PROVISIONS 
A. 
Use of the cash method of accounting would be denied 
for financial 
institutions. 
B. 
Use of the installment method would be denied 
for 
(1) sales under a revolving credit plan, 
(2) a portion of 
sales by dealers 
in personal or real property (other than 
those using revolving credit plans), based on the ratio of 
the taxpayer's outstanding debt to its adjusted asset basis, 
and (3) sales of publicly traded property. 
A limited 
exception would be provided for certain dealer installment 
sales where resale or rental of the property by the buyer 
affects the term of the obligation. 
For installment 
sales of certain timeshares 
and 
residential 
lots, 
the installment method would be allowed 
in 
full and excepted from the minimum tax provisions, 
if the 
seller elects 
to pay interest 
on the deferral of tax 
attributable 
to the installment method. 
C. 
Taxpayers would be required to capitalize both 
direct and indirect 
inventory, 
construction, 
and development 
costs, 
including 
interest, 
under comprehensive uniform 
capitalization rules. 
An exception would be provided for 
wholesalers and retailers with gross receipts of $5 million 
or less. 
In -addition, 
under 
a transitional 
rule, present-law 
rules would apply to excess depreciation on plant and 
equipment used to produce inventory or self-constructed 
assets, provided such plant or equipment was placed 
in 
service prior to March 
1, 1986. 
Taxpayers providing property to customers under 
long-term contracts would be required to capitalize general 
and administrative costs attributable 
to cost-plus contracts 
and certain Federal contracts, 
in addition 
to those costs 
capitalized under the uniform capitalization rules. 
A 
special rule would apply for contractors having average 
annual gross receipts of no more than $10 million with 
respect 
to real property construction contracts 
to be 
completed within two years. 
D. 
Use of the reserve method of computing deductions 
for bad debts would no longer be permitted, 
except 
for 
financial 
institutions, 
certain farm credit 
institutions, 
and 
certain finance companies. 
E. 
The election to deduct the cost of redeeming 
"qualified discount coupons" 
received after the close of the 
taxable year would be repealed. 
F. 
Solvent taxpayers would be required to recognize 
currently income 
from cancellation of indebtedness. 
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G. 
The taxable years of all partnerships, 
§S 
corporations, 
and personal service corporations would have to 
be conformed more closely to the taxable years of their 
owners. 
H. 
Utilities using the accrual method of accounting 
would be required to include 
in gross income earned but 
unbilled income. 
I. 
Depreciation recapture 
income realized on 
installment sales of farm irrigation equipment would be 
taxable under the rules applicable prior to the Deficit 
Reduction Act of 1984. 
Thus, recapture 
income would be 
recognized as payments are made, 
rather than 
in the year of 
sale. 
IV. 
CAPITAL GAINS 
A. 
The exclusion 
for long-term capital gains of 
individuals would be repealed. 
B. 
The present-law rules for nonrecognition of gain on 
sale of a principal residence where reinvested 
in a new 
residence, 
and for 
a one-time exclusion 
of up to $125,000 
of 
gain on sale of a principal residence by a taxpayer age 55 or 
older, would be retained. 
C. 
The corporate 
tax rate on long-term capital gains 
would be 28 percent. 
D. 
The incentive stock option provisions would be 
liberalized. 
E. 
Under the loss deferral 
rule 
in the straddle 
provisions, 
the qualified covered call exception would be 
Genied to a taxpayer who fails to hold an option for 30 days 
after the related stock 
is disposed of at a loss, where gain 
on sale of the option is included 
in the subsequent year. 
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V. 
COMPLIANCE AND TAX ADMINISTRATION 
A. 
The penalties for failure to pay taxes, 
for 
negligence and fraud, 
for failure to file information 
returns, 
and for substantially understating tax liability 
would be increased. 
B. 
A one-percent differential between interest 
rates on 
refunds and deficiencies would be provided. 
C. 
Information reporting on real estate transactions, 
Federal contracts, 
and royalty payments would be required. 
The requirement 
that certain 
information reports be furnished 
in a separate mailing would be modified. 
Present 
law would 
be retained with respect 
to information reporting by State 
and local governments. 
D. 
A user's 
fee and increased penalties would be 
imposed on tax shelters. 
E. 
Individuals whose wage withholding does not cover 
their income tax liability would have to make estimated 
tax 
payments equal to 90 percent 
(rather than 80 percent) 
of 
their current-year 
tax liability. 
F, 
Trusts and estates would be required to make 
estimated 
income tax payments, 
and the four quarterly-payment 
provision 
for estates would be repealed. 
The period of tax 
deferral 
for trusts by use of different taxable years would 
be decreased. 
G. 
Significant 
increases 
in the IRS budget 
for agents, 
audits, 
and modernization of compliance systems would be 
provided. 
The IRS would be required to institute 
a program 
waiving criminal penalties 
if certain taxpayers voluntarily 
Gisclose their tax 
law violations. 
A number of areas of tax 
administration at both the IRS and the Tax Court would be 
improved. 
H. 
The payment of attorney's 
fees 
in tax cases would be 
modified and extended. 
I, 
The procedures 
for sharing of tax compliance 
information between the 
IRS and State tax authorities would 
be extended on a trial basis 
to tax authorities of cities 
with a population exceeding two million that impose an income 
tax. 
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VI. 
CORPORATE TAX PROVISIONS 
A. 
The top corporate rate would be reduced to 33 
percent. 
B. 
The 85-percent dividends received deduction for 
corporations would be reduced to 80 percent. 
C. 
The $100/$200 dividends exclusion 
for individuals 
would be repealed. 
D. 
Amounts paid in connection with a redemption of 
stock 
(for example, 
so-called "“greenmail" payments) would not 
be deductible. 
E. 
The rules limiting use of net operating losses after 
a change of ownership would be modified. 
F. 
The rules requiring the basis of stock held by a 
corporation 
to be reduced by the untaxed portion of 
extraordinary dividends would be expanded. 
G. 
Basis allocation rules 
in asset acquisitions would 
be conformed 
to rules 
for stock acquisitions where basis 
is 
stepped-up (section 338 rules). 
Rules for consistent 
treatment of buyers and sellers would be included. 
H. 
The five-year amortization period for trademarks 
and 
tradenames would be repealed. 
The five-year amortization 
period for pollution control facilities and the 50-year 
amortization period for qualified railroad grading and tunnel 
bores would be retained. 
I. 
The 85-percent limitation on the amount 
of income 
tax liability that can be offset by business 
tax credits 
would be reduced 
to 75 percent. 
J. 
Regulated investment companies would be taxed on a 
calendar-year basis, 
and the ability of regulated investment 
companies to pay "Spillover dividends" without penalty would 
be eliminated. 
K. 
Owners of certain bus operating authorities would be 
allowed an ordinary deduction ratably over 
five years for 
loss 
in value of such authorities. 
L. 
Present 
law would be retained with respect 
to (1) 
the treatment 
of corporate liquidating sales and 
distributions 
(i.e., 
the "General Utilities” 
rule would not 
be repealed); 
(2) the regular tax treatment 
of merchant 
Marine capital construction funds; 
and 
(3) contributions 
in 
aid of certain utility construction. 
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VII. 
AGRICULTURE, 
ENERGY, 
AND NATURAL RESOURCES 
Agriculture 
A. 
The present-law rule allowing current deductions 
for 
soil and water conservation expenditures would be limited 
to 
expenditures consistent with USDA or comparable State 
conservation plans. 
B. 
The present-law provision allowing current 
deductions 
for certain fertilizer expenditures would be 
retained. 
The provision allowing current. deductions 
for land 
clearing expenditures would be -epealed. 
C. 
Present-law rules governing capitalization of 
preproductive period expenditures by farmers would be 
retained. 
D. 
New restrictions would be imposed on tax benefits 
available with respect 
to highly erodible land and wetlands 
that are converted to crop production. 
E. 
Farmers prepaying more than 50 percent of the costs 
of feed, 
seed, and other supplies 
in any year could not 
deduct the excess over 
50 percent until the year 
in which the 
Supplies were used or consumed. 
F, 
The rules governing expensing of costs of replanting 
groves, 
orchards, 
or vineyards destroyed by freezing 
or other 
natural disasters would be extended 
to replanting on land 
other than the land on which the plants were destroyed and to 
businesses having new owners who materially participate 
in 
the business 
so long as the new owners hold less than 
a 
50-percent 
interest. 
G. 
Discharge of indebtedness 
income realized by certain 
marginally solvent 
farmers would receive the same 
tax 
treatment 
as 
if such income were realized by insolvent 
taxpayers. 
Energy and natural resources 
A. 
Business energy tax credits would be extended 
for 
solar, geothermal, 
and ocean thermal energy through 1988, 
and 
for wind energy and biomass through 1987, 
at reduced rates. 
The residential energy credits would expire (after 1985) 
as 
under present 
law. 
B. 
Alcohol 
fuels and mixtures would be eligible 
for the 
gasoline excise tax exemption at the present-law rate 
for 
alcohol 
fuels mixtures 
(6 cents per gallon). 
The income tax 
credit 
for alcohol 
fuels would be repealed. 
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C. 
Duty-free treatment would be denied to ethyl alcohol 
imported from a Caribbean Basin Initiative (CBI) country, 
unless produced from source material 
that 
is the product of a 
CBI country or the United States. 
D. 
Foreign mining exploration and development costs and 
intangible drilling costs incurred outside the U.S. would be 
recovered over 
a lO-year, straight-line amortization schedule 
(or electively as part of the basis for cost depletion). 
E. 
Gift and estate tax deductions would be permitted 
for certain irrevocable charitable donations 
in perpetuity of 
real property easements to public charities or governmental 
entities. 
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VIII. 
EMPLOYMENT AND EXCISE TAX PROVISIONS 
A. 
The quarterly payroll threshold at which certain 
agricultural wages are covered under FUTA would be increased 
from $20,000 to $40,000. 
B. 
The threshold 
for accelerated payroll tax deposits 
would be increased from $3,000 to $5,000. 
C. 
Present 
law would be retained with respect 
to excise 
tax rates and deductibility of excise taxes incurred by 
businesses. 
IX. 
FINANCIAL INSTITUTIONS 
A. 
The maximum percentage of taxable 
income that 
a 
thrift 
institution could deduct 
as an addition to reserves 
for bad debts would be reduced from 40 percent 
to 25 percent. 
B. 
Net operating losses of thrift institutions 
incurred 
in years ending after 1981 and before 1986 would be eligible 
to be carried forward eight years. 
C. 
Individuals could elect 
to deduct 
losses on deposits 
in qualified bankrupt 
or insolvent financial 
institutions 
as 
a casualty loss at the time the loss can be reasonably 
estimated. 
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X. 
FOREIGN TAX PROVISIONS 
A. 
Passive income would be subject to a separate 
foreign tax credit limitation; 
income from insurance, 
shipping, 
and bona fide active banking generally would not be 
considered passive or subjected to a separate limitation. 
B. 
Interest that incurs a foreign withholding tax of 
five percent or more would be subject 
to a separate foreign 
tax credit limitation, 
with a permanent grandfather 
for 
certain preexisting loans 
(and rollovers thereof through 
1990) 
to “Baker 15" country residents, 
and a 10-year 
grandfather 
for certain other preexisting 
loans. 
C. 
Present-law rules determining 
the source 
of income 
from sales of inventory property generally would be retained. 
D. 
For transportation 
income 
(including bareboat 
charter 
income), 
a 50-50 source 
rule and residence-based 
reciprocal exemption would be adopted. 
A four-percent gross 
withholding 
tax would be imposed on U.S. 
source 
transportation 
income of foreign persons resident 
in 
countries 
that impose gross tax on transportation income of 
U.S. persons. 
U.S. source transportation 
income of other 
foreign persons also would be subject 
to the four-percent 
tax 
unless effectively connected with a U.S. business or treated 
as such pursuant 
to an election made available to these 
foreign persons. 
The four-percent 
tax would be collected by 
return. 
Income earned offshore and 
in space 
(other than 
telecommunications 
income) generally would be sourced 
in the 
recipient's country of residence. 
Telecommunications 
income 
earned offshore or 
in space would be sourced 50-percent U.S. 
and 50-percent foreign. 
E. 
The source of amounts paid by 80/20 companies 
to 
U.S. 
and foreign persons would be determined under 
a 
look-through rule. 
F. 
In general, 
the Chairman's proposal 
on the 
allocation of interest and other expenses would be adopted, 
with the following modifications. 
Interest of a corporation 
generally would be allocated only among 
its assets (including 
assets of any subsidiaries). 
However, 
if an upper-tier 
corporation 
(e.g., the parent) guarantees 
the corporation's 
associated borrowings or otherwise 
lends 
its credit, 
the 
corporation's borrowings would be treated as made by the 
upper-tier corporation when necessary 
to prevent 
overallocation 
of interest expense 
to U.S. 
source 
income. 
Additional 
rules would be provided to equalize the group's 
borrowings 
in the event 
the upper-tier corporation has 
borrowings 
in addition 
to a subsidiary's borrowings, 
and to 
allocate 
a corporation's 
interest 
if the corporation makes 
its borrowed 
funds available 
to related corporations. 
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G. 
Certain additional 
items of passive income earned by 
controlled foreign corporations would be taxed currently 
under subpart F. 
Deferral would be retained 
for controlled 
foreign corporations that are engaged 
in shipping, 
insurance, 
or bona fide active banking. 
The de minimis threshold 
for 
exempting foreign base company income from the subpart F 
current taxation rules would be reduced 
to five percent of 
gross income. 
H. 
For section 936 companies, 
the passive income 
limitation would be reduced from 35 to 25 percent, 
and the 
required cost sharing payment would be increased 
to 110 
percent of the present-law cost sharing payment. 
Income 
from 
investments 
in financial institutions that are used for 
certain investments 
in active business assets 
in a qualified 
Caribbean Basin Initiative country or development project 
in 
a qualified CBI country would be eligible 
for U.S. 
tax 
exemption. 
Compliance rules would be provided. 
In addition, 
the requirement 
that funds be received 
in a possession to 
qualify for the section 936 credit would not apply to funds 
received 
from unrelated parties. 
I. 
The President's proposal 
for U.S. possessions 
taxation generally would be adopted; 
repeal of the Virgin 
Islands inhabitant 
rule would apply to all open years. 
The 
Virgin Islands would be aple to waive or reduce 
its tax on 
non-U.S. 
source 
income of a V.I. corporation, 
whether or not 
that 
income 
is V.I.-source 
income, 
except 
to the extent 
a 
U.S. person owns 
an interest 
(direct or indirect) 
in that 
corporation. 
J. 
U.S. 
investors 
in passive foreign investment 
companies would be required to pay an interest charge on 
repatriation of their deferred income or could elect current 
taxation 
of their share of the company's 
income. 
Such U.S. 
investors would be entitled 
to flow-through treatment 
of 
capital gains whether they elect current taxation on their 
share of income or defer tax. 
K. 
A branch-level 
tax on profits would be adopted. 
The 
present-law withholding tax on U.S. 
source 
interest paid by 
foreign corporations would be modified; 
the U.S. business 
income threshold 
for imposition of the tax would be reduced 
to 10 percent and the amount of interest subject 
to 
withholding would be based on interest expense deducted 
against U.S. 
income. 
The U.S. business 
income threshold for 
imposition of the withholding tax on dividends paid by 
foreign corporations also would be reduced to 10 percent. 
Treaty-shopping would not be respected. 
L. 
Present-law rules governing the excise tax on 
insurance and reinsurance premiums paid to foreign insurers 
would be retained. 
The Treasury Department would be directed 
to study the competitive impact on the U.S. 
reinsurance 
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industry of U.S. 
tax treaty provisions governing the taxation 
of foreign reinsurers, 
and to renegotiate U.S. 
tax treaties 
to the extent that the U.S. 
reinsurance industry 
is at a 
Significant competitive disadvantage. 
M. 
The Foreign Investment 
in Real Property Tax Act of 
1980 (FIRPTA) would be repealed prospectively. 
N. 
Foreign governments would be taxed on business 
activity, defined to include ownership of controlling 
interests 
in U.S. businesses, 
O. 
Importers would be required to take consistent 
positions on valuation 
for customs purposes and income tax 
purposes. 
P. 
Dual resident compenies that use deductions here and 
abroad would not be allowed 
to consolidate with other U.S. 
corporations 
if the dual resident companies consolidate 
abroad with companies whose earnings are not ever subject 
to 
U.S. 
tax. 
Q. 
The deduction for interest paid to related, 
tax-exempt parties generally would be denied to the extent 
that interest exceeds 50 percent of taxable 
income before 
this deduction. 
R. 
The President's proposal concerning foreign currency 
gains and losses generally would be adopted. 
S. 
.The present-law deduction 
for dividends received 
from a foreign corporation would be modified 
as follows. 
The 
deduction would be allowed 
(subject 
to the regular percentage 
limitations) 
to 10-percent U.S. 
corporate shareholders of 
foreign corporations on @ pro rata basis to the extent 
that 
the foreign corporation 
(directly or in certain cases through 
another foreign corporation) derives income that 
is 
effectively connected with a U.S. 
trade or business, 
or 
receives dividends from an 80-percent owned U.S. corporation. 
Any dividend received by a 10-percent U.S. corporate 
shareholder of a foreign corporation would be treated 
as U.S. 
source 
to the extent 
that the dividend 
is attributable 
to 
U.S. Source 
income or effectively connected 
income. 
T. 
The foreign earned income exclusion would be reduced 
to $70,000. 
The exclusion would not be available 
to U.S. 
citizens who reside and work in a foreign country 
in 
contravention of an executive order. 
U. 
Permanent U.S. 
resident aliens applying for green 
card renewal would be required to show tnat they filed U.S. 
income 
tax returns, 
or were exempt 
from filing, 
for the years 
Since their 
last renewal applications. 
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V. 
Civilian U.S. Defense Department employees and 
Panama Canal Commission employees 
in Panama would be 
permitted to exclude allowances equivalent to those that may 
be excluded by State Department employees 
in Panama. 
U.S. 
taxation of U.S. persons would not be prevented by a treaty 
with Panama. 
W. 
Present 
law governing Foreign Sales Corporations 
(FSCs) would be retained. 
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XI. 
INSURANCE PRODUCTS AND COMPANIES 
A. 
Life insurance products and companies 
1. 
Present-law treatment of inside buildup and 
policyholder 
loans with respect to life insurance contracts 
would be retained. 
2. 
A Structured settlement company would be taxed on 
the investment 
income on contracts purchased 
to fund 
a 
Structured settlement agreement. 
3. 
The special 20-percent 
life insurance company 
Geduction would be repeaied. 
4. 
The small 
life insurance company deduction would be 
retained. 
B. 
Property and casualty insurance companies 
1. 
Twenty percent of the annual 
increase 
in unearned 
premiums would be included in income, 
as would 20 percent of 
the outstanding balance of the unearned premium reserve 
ratably over 
7-1/2 years. 
In the case of bond insurance, 
10 
percent 
(rather than 20 percent) 
of the annual 
increase 
in 
unearned premiums and the outstanding balance of the unearned 
premium reserve would be included 
in income. 
2. 
<A pretax discounting rule for loss reserves, 
applicable to each line of business 
(including unpaid loss 
reserves attributable 
to accident 
and health insurance 
lines 
of business of any insurers that 
are not subject 
to life 
insurance discounting rules) would be adopted at a discount 
rate initially set 
at five percent and phased 
in to a rolling 
average of 75 percent of the applicable Federal 
rate. 
For 
title insurers, 
the discounting 
rule, 
rather 
than the 
unearned premium reserve 
rule, would apply to loss reserves. 
3. 
The protection against 
loss account would be 
repealed. 
4. 
A single small company provision would be adopted. 
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XII. 
INTEREST EXPENSE 
A. 
No deduction would be allowed 
for consumer 
interest 
(such as interest on car loans or credit card balances), 
or 
for investment 
interest expense 
in excess of investment 
income. 
The definitions of investment 
interest 
and 
investment 
income would be modified. 
The effect of this rule would be phased 
in, so that 
35 
percent of such interest would be disallowed 
in 1987, 
60 
percent 
in 1988, 
80 percent 
in 1989, 
and 90 percent 
in 1990; 
100 percent disallowance would begin 
in 1991. 
Interest 
on 
the 
principal residence and a second residence of the 
taxpayer would remain fully deductible. 
B. 
Interest 
on loans 
to fund an 
IRA would not be 
deductible. 
XIII. 
MINIMUM TAX 
A. 
An alternative minimum tax would be imposed on 
individuals and corporations 
at a 20-percent rate. 
B. 
The following 
items would be treated as preferences: 
accelerated depreciation on real and personal property, 
intangible drilling costs 
(in excess of net oil and gas 
income), 
rapid amortization 
for pollution control 
facilities, 
circulation expenditures of individuals and personal holding 
companies, 
research and experimentation expenditures of 
individuals, percentage depletion, 
incentive stock options, 
the completed contract and other methods of accounting 
for 
long-term contracts, 
the installment method of accounting 
when used by dealers, 
net 
losses on passive farming 
activities, 
excess bad debt 
reserves 
of financial 
institutions, 
mining exploration and development costs of 
individuals 
and personal holding companies, 
and capital 
construction 
funds of shipping companies. 
In addition, 
one-half of reported profits of a corporation not otherwise 
included 
in the minimum tax base would be a preference. 
C. 
Limitations on nonparticipatory business losses, 
similar 
to those under the regular tax, would apply in 
calculating alternative minimum taxable 
income of 
individuals, personal holding companies, 
and personal service 
corporations, 
and would be fully effective 
in 1987. 
D. 
Credits other than the foreign tax credit would not 
be allowed against the minimum tax. 
The foreign tax credit 
could not offset more than 90 percent of minimum tax 
liability. 
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XIV. 
PENSIONS AND EMPLOYEE BENEFITS; 
ESOPs 
Pensions 
A. 
The deduction for IRA contributions would be limited 
to individuals not covered by a tax-favored retirement plan. 
Other individuals could make nondeductible contributions 
to 
an IRA within present-law limitations 
($2,000/$2,250 
annually). 
Earnings on amounts allowed 
to be contributed 
to 
an 
IRA, whether or not the contribution 
is deductible, 
would 
be tax-exempt 
(until withdrawn), 
B. 
Annual elective deferrals of an employee under all 
cash or deferred arrangements 
(sec. 
401(k) plans) would be 
limited 
to $7,000. 
An additional 
$2,500 of elective 
deferrals would be permitted under 
a section 401(k) plan 
if 
the $2,500 
is invested 
in an ESOP. 
C. 
The special nondiscrimination tests applicable 
to 
section 401(k) plans would be modified by redefining the 
group of highly compensated employees. 
The modified test 
also would be applied to all employer matching and after-tax 
employee contributions. 
D. 
Tax-exempt employers would be permitted to maintain 
section 401(k) plans. 
State and local governments would not 
be permitted to establish section 401(k) plans, but section 
401(k) plans adopted by State and local governments before 
March 
1, 1986 would be grandfathered. 
E. 
Simplified employee plans (SEPs) maintained by small 
employers could, 
under certain circumstances, 
include 
a cash 
or deferred arrangement. 
F. 
Coverage tests, 
the rules governing the integration 
of qualified plan benefits with social security, 
and the 
vesting requirements applicable 
to qualified plans would be 
modified and strengthened. 
In general, 
a participant would 
be required to be fully vested 
in employer-funded benefits 
after 
five years of service. 
G. 
A 15-percent additional 
income tax would be imposed 
on withdrawals from a qualified plan or an IRA before death, 
Gisability, 
or attainment of age 59-1/2, 
unless the payments 
are made 
in the form of a life annuity or substantially 
level 
distributions over 
the individual's 
life. 
Exceptions would 
be provided 
in the case of certain unforeseen hardships, 
early retirement 
on or after age 55, and distributions 
to 
participants from ESOPs. 
The tax would be lowered to 10 
percent 
in the case of withdrawals of employer matching 
contributions and earnings attributable 
to after-tax 
contributions, 
and to five percent 
in the case of withdrawals 
under nonqualified deferred annuities, 
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H. 
Ten-year forward income averaging generally would be 
replaced with five-year averaging available under limited 
circumstances. 
Ten-year averaging 
(at present-law tax rates) 
would remain available 
to certain individuals. 
1. 
For purposes of the dollar limit on benefits under 
defined benefit plans and for purposes of determining 
an 
employer's deduction 
for plan contributions, 
normal 
retirement age would be the social security retirement 
age 
(scheduled to increase 
from 65 to 67 between the years 2000 
and 2022). 
An actuarial reduction of the limit would be made 
for benefits commencing before the social security retirement 
age. 
The $75,000 safe harbor 
for benefits commencing on or 
after age 55 would be eliminated. 
J. 
The dollar limits on contributions 
to and benefits 
from defined contribution and defined benefit plans, 
respectively, 
would be indexed by reference 
to percentage 
increases 
in the social security wage base. 
Indexing of the 
dollar 
limit on annual additions 
to a defined contribution 
plan would be delayed until 
the present-law dollar 
limit 
($30,000) 
is no more than 25 percent of the dollar 
limit 
for 
defined benefit plans. 
K. 
A 10-percent nondeductible excise tax would be 
imposed on reversions of surplus assets from terminated 
plans, 
with an exception for surplus assets transferred 
from 
a terminated plan to an ESOP. 
L. 
The three-year basis recovery rule would be phased 
out beginning after 1987, 
For individuals whose annuity 
starting date 
is after January 
1, 1988, 
50 percent 
of basis 
would be recovered under 
the three-year basis recovery 
rule 
and the remainder would be recovered ratably over 
the period 
of the annuity. 
For individuals whose annuity starting date 
is after January 
1], 1989, 
the three-year basis recovery 
rule 
would be repealed, 
and 100 percent 
of basis would be 
recovered ratably over 
the period of the annuity. 
M. 
Present 
law generally would be retained with respect 
to section 403(b) annuities. 
Employee benefits 
A. 
The statutory exclusions for employer-provided 
educational assistance and group legal services would be 
reinstated on a permanent basis, with a cap on the 
educational assistance exclusion. 
The statutory exclusions 
for employer-provided health insurance, 
$50,000 of group term 
life insurance, 
$5,000 of death benefits, 
and 
employer-provided dependent care assistance would be 
retained. 
An exclusion would be provided for qualified 
campus lodging furnished by educational 
institutions 
to 
employees. 
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B. 
All employee awards 
(e.g., for productivity) would 
be includible 
in income, except that awards of tangible 
personal property for length of service or safety achievement 
would be excludable, subject to certain limitations, 
for up 
to $400 ($1,600 
if made under 
a qualified plan where the 
average award does not exceed $400). 
C. 
Self-employed individuals would be allowed to deduct 
(for income tax purposes) 
50 percent of the health insurance 
coverage under a nondiscriminatory employer-provided health 
plan. 
D. 
Nondiscrimination rules applicable to employer- 
provided employee benefits would be modified by (1) applying 
nondiscrimination rules to insured health plans; 
(2) revising 
the rules for self-insured medical reimbursement plans and 
group-term life insurance; 
(3) establishing 
a uniform 
definition of highly compensated employees and excludable 
employees; 
(4) providing 
an alternative test 
for flexible 
benefit plans (including cafeteria plans); and (5) requiring 
reasonable notice of benefit plan eligibility to employees. 
E. 
The treatment 
of accrued vacation pay and the 
funding restrictions applicable to retiree medical benefits 
would be modified. ° 
ESOPs 
A. 
The payroll-based tax credit for ESOPs would be 
repealed, effective 
for compensation paid after 1986. 
B. 
The deduction 
for dividends paid on ESOP stock would 
be extended to apply to dividends used to repay ESOP loans. 
C. 
An exclusion from the gross estate of a decedent 
would be provided for 50 percent of the proceeds realized on 
the sale (by the executor) 
of stock 
in the estate 
to an ESOP. 
D. 
The 50-percent 
interest exclusion 
for ESOP loans 
would be extended 
(1) to loans made by mutual 
funds, 
and 
(2) 
in the case of a loan to an employer that 
is matched by 
contributions of stock to an ESOP. 
E. 
The ESOP put option requirements would be applied to 
all stock bonus plans. 
F. 
The definition of highly compensated employees 
for 
purposes of the special limit on contributions applicable 
to 
ESOPs would be conformed to the new definition of highly 
compensated employees applicable to qualified plans. 
G. 
Distributions 
to plan participants would be 
permitted on account 
of the termination of an ESOP without 
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regard to the period that employer securities have been held 
by the plan. 
H. 
The period after which distributions may be made 
under an ESOP would be shortened and the put option 
requirements would be modified. 
I. 
The provision permitting the rollover of gain in the 
case of stock sold to an ESOP would apply if the ESOP holds 
at least 
30 percent of the total number of shares of each 
class of stock of the employer. 
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XV. 
RESEARCH AND DEVELOPMENT PROVISIONS 
A. 
The R&D credit would be extended for four years 
(through 1989) 
at the present 25-percent 
rate, with 
modifications to the credit definition of research and with 
increased incentives 
for university basic research, 
B. 
A two-year 
rule would be adopted allowing the 
allocation of 75 percent of U.S.-incurred research 
expenditures against U.S. 
income. 
C. 
An exception from the personal holding company rules 
would be provided for certain companies actively engaged 
in 
the business of developing computer software. 
XVI. 
TAX SHELTERS AND REAL ESTATE 
Rule limiting use of certain losses 
Losses and credits from a business activity 
in which the 
taxpayer does not materially participate 
(e.g., 
a limited 
partner's interest 
in a limited partnership) would not be 
allowed against other income, 
including salary, active 
business 
income, 
and portfolio income 
(such as dividends, 
interest, 
royalties, 
and nonbusiness capital gains, 
and 
including portfolio income passed through to the taxpayer 
from a nonparticipatory activity). 
Losses and credits from 
nonparticipatory business activities that are not allowed 
could be carried forward indefinitely and would be allowed 
in 
subsequent years against income from nonparticipatory 
activities. 
Disallowed 
losses from 
a nonparticipatory 
activity would be allowed 
in full when the taxpayer 
recognizes gain or loss upon 
a disposition of his or her 
entire interest 
in the activity. 
The effect of the rule would be phased 
in, so that 
35 
percent of excess nonparticipatory losses and credits would 
be disallowed 
in 1987, 
60 percent 
in 1988, 
80 percent 
in 
1989, and 90 percent 
in 1990; 
100 percent disallowance would 
begin in 1991. 
Under the nonparticipatory 
loss limitation rule, working 
interests 
in oil and gas properties with respect 
to which the 
-taxpayer's liability is not limited 
(that 
is, working 
interests other than those owned, 
e.g., 
through limited 
partnership interests) would be treated as active business 
interests even 
if the taxpayer does not materially 
participate 
in the activity. 
Rental activities would be 
treated as nonparticipatory business activities even 
if the 
taxpayer does materially participate. 
Taxpayers who 
materially participate 
in rental 
real estate activities would 
be permitted to use losses and credits 
from such activities 
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against up to $25,000 of other income. 
Low-income housing 
credits could be so used whether or not the taxpayer 
materially participated. 
The $25,000 amount would be phased 
out between $100,000 and $150,000 of income. 
Real estate 
A. 
At-risk rules would be extended 
to real estate, 
with 
an exception 
for third-party nonrecourse debt and for certain 
loans made by equity participants. 
B. 
A 20-percent rehabilitation credit would apply for 
certified historic structures; 
a 10-percent credit would be 
available 
for other qualified rehabilitation expenditures 
for 
buildings placed 
in service hefore 
1936. 
C. 
For low-income rental housing, 
a new tax credit 
would be provided as an elective alternative 
to tax-exempt 
bonds and Federal subsidies. 
At least 
20 percent of the 
housing units 
in projects qualifying 
for the credit would 
have to be occupied by tenants having incomes of 50 percent 
or less of the area median income. 
An annual eight-percent 
credit, 
available 
for 10 years, would be provided for 
low-income units occupied by tenants with incomes of 50 
percent or less of the area median 
income. 
In addition, 
for 
a limited number of units occupied by individuals with 
incomes between 
50 percent and 70 percent of median income, 
an annual four-percent credit would be provided for 10 years. 
Preferential depreciation and amortization provisions would 
be repealed. 
; 
D. 
The rules relating to taxation of real estate 
investment 
trusts would be modified. 
E. 
Rules would be provided 
for the treatment 
of certain 
mortgage-backed securities. 
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XVII. 
TAX-EXEMPT BONDS 
A. 
Tax-exempt bonds would be continued 
for direct 
funding of government operations and for certain other 
activities under rules similar to present 
law. 
B. 
Tax-exempt financing would be continued 
for 
activities of section 501(c)(3) organizations that are 
directly related to their exempt purpose. 
C. 
Tax-exempt 
IDB financing would be allowed for-- 
(1) 
Multifamily rental housing, 
(2) 
Airports and docks and wharves, 
(3) 
Sewage, 
solid waste disposal, 
and water 
facilities, 
(4) 
Electric and gas local furnishing systems, 
(5) 
Local district heating and cooling systems, 
(6) 
Hazardous waste disposal facilities, 
and 
(7} 
Small-issue IDBs (subject to present-law 
sunset dates) 
and qualified redevelopment 
IDBs. 
D. 
Bonds would be IDBs 
if-- 
(1) 
25 percent 
or more of bond proceeds were used 
in a trade or business and direct 
or indirect payments 
with respect 
to the financed property were made’ to the 
issuer by @ private party. 
(2) 
Liberalized management contract 
rules would be 
provided for determining when bond proceeds are used 
in 
a private trade or business. 
E. 
Tax-exemption would be continued 
for qualified 
student 
loan bonds and extended to student 
loan bonds issued 
under State programs not benefiting 
from Federal guarantees. 
F. 
Mortgage revenue bonds would 
be continued under 
present-law rules, along with the MCC alternative 
(with an 
increased trade-in rate); 
the present-law sunset date for 
qualified mortgage bonds would be retained. 
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G. 
Present-law volume caps would be retained, 
including 
the scheduled reduction to $100 per capita 
in the volume cap 
for student 
loan bonds and most 
IDBs. 
The following bonds 
would not be subject to volume caps-- 
(1) 
Section 501(c)(3) organization bonds, 
(2) 
IDBs for certain governmentally owned 
airports, docks and wharves, 
and sewage, 
solid waste 
disposal, 
and water facilities, 
and 
(3) 
Multifamily rental housing IDBs.. 
H. 
The arbitrage rules 
for all tax-exempt bonds would 
be modified 
in several respects, 
including-- 
(1) 
Rebate rules like the present-law IDB rules 
would be extended to arbitrage earned on tax-exempt 
bonds other than-- 
(a) 
Arbitrage profits on all mortgage revenue 
bonds, which would be subject 
to rebate requirements 
that currently apply to qualified mortgage bonds, 
and 
(b) 
Certain arbitrage profits on student 
loan 
bonds issued 
in conjunction with the Federal GSL and 
PLUS programs. 
(2) 
Advance refundings would be limited to 
governmental bonds and section 501(c)(3) organization 
bonds, 
and would be subject 
to new restrictions. 
(3) 
For all tax-exempt bonds, yield would be 
computed using the original 
issue discount rules of the 
Code (i.e., 
the State of Washington case would be 
reversed). 
(4) 
Tax-exemption would be denied for pension 
arbitrage bonds. 
(S) 
Certain other arbitrage rules currently 
applicable to IDBs would be extended to all tax-exempt 
bonds. 
I. 
All tax-exempt bond-financed property would be 
depreciated using the straight-line method. 
Generally, 
such 
property would be depreciated over the ADR midpoint 
life or 
40 years for real property. 
Multifamily housing would be 
depreciated over 27-1/2 years and solid waste disposal 
facilities and hazardous waste facilities would be 
depreciated over eight years. 
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J. 
Miscellaneous other amendments would be made, 
including-- 
(1) 
The rules on small-issue 
IDBs for first-time 
farmers would be liberalized 
and these bonds would be 
treated as small-issue 
IDBs for manufacturing 
facilities. 
(2) 
The aggregate amount of depreciable farm 
property permitted to be financed 
for any principal user 
would be $250,000. 
(3) 
Limited equity cooperatives would be permitted 
to elect 
to satisfy the targeting rules for multifamily 
rental housing 
in lieu of the qualified mortgage bond 
targeting rules, but bonds 
for electing cooperatives 
would be subject 
to the qualified mortgage bond volume 
cap and tenant/shareholders 
in such cooperatives would 
be treated 
as renters 
for purposes of individual 
itemized deductions. 
(4) 
Information reporting requirements 
for issuers 
would be extended 
to all tax-exempt bonds. 
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XVIII. 
TAXATION OF TRUSTS, ESTATES, 
AND MINOR CHILDREN; 
ESTATE, GIFT, AND GENERATION-SKIPPING TAXES 
A. 
The unearned income of a child under 14 would be 
taxed to the child at the top marginal rate of the parents to 
the extent attributable 
to property received from the 
parents. 
Unearned 
income that 
is derived from assets 
received from other sources 
(or by reason of a parent's 
death) 
and that 
is placed in a qualified segregated account 
would be taxed at the child's marginal rate, 
as would earned 
income of the child. 
B. 
The income of a trust generally would be taxed to 
its grantor 
if the trust corpus will revert 
to the grantor or 
the grantor'’s spouse. 
C. 
The rate schedule applicable 
to the retained 
income 
of trusts and estates would be compressed 
as compared with 
the rates applicable 
to individuals. 
D. 
The generation-skipping transfer 
tax would be 
retained without change from present 
law. 
E. 
The period during which heirs 
(of individuals dying 
before 
1982 leaving property for which estate tax special 
use 
valuation was elected) must continue 
to own and use such 
property without 
incurring 
a special recapture tax would be 
reduced 
from 15 years to 10 years. 
F. 
Where an executor of a decedent's estate 
has elected 
special use valuation on a timely filed estate tax return by 
providing substantially all the information elicited by the 
return 
form, 
the executor would have an additional 
90 days, 
after being notified by the IRS, 
to supply any missing 
information. 
G. 
Certain disclaimers executed before February 22, 
1982, with respect 
to property interests created before 
November 
15, 1958, 
would be treated 
as qualified disclaimers 
for gift tax purposes. 
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XIX. 
MISCELLANEOUS PROVISIONS 
A. 
The targeted jobs credit would be extended 
for three 
years, with modifications. 
The present rate would apply for 
first-year employment. 
No credit would be available 
for 
second-year employment or for individuals who work for the 
employer 
for less than a specified period. 
B. 
Expired provisions for (1) expensing costs of 
removing barriers to the handicapped and 
(2) spouses of 
Vietnam MIA's would be extended. 
C. 
An exemption from the unrelated business 
income 
tax 
would apply for income of certain tax-exempt organizations 
from exchanges and rentals of membership lists. 
D. 
The requirements 
for tax exemption as 
a 
title-holding company would be modified. 
E. 
Private foundations could retain “grandfathered” 
business holdings acquired prior to May 27, 1969, 
if certain 
requirements are met. 
F. 
Tenant-stockholders 
in cooperative housing 
corporations would not be limited to individuals 
for purposes 
of certain deduction rules. 
XX. 
TECHNICAL CORRECTIONS 
Technical corrections would be made 
to provisions of the 
Deficit Reduction Act of 1984, 
the Retirement Equity Act of 
1984, 
and other recently enacted 
tax legislation. 
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