Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
54979657
label
Coverdell/ESAs [Education Savings Accounts] [2]
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
54979657
sourceUrl
contentType
document
title
Coverdell/ESAs [Education Savings Accounts] [2]
citationUrl
collections
Records of the Office of Legislative Affairs (Clinton Administration)
Joanna Slaney's Files
largeImageUrl
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
54979657
levelOfDescription
fileUnit
otherTitles
42-t-4490744-20140226F-001-043-2016
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
2ce4a394efeed687
ocrText
FOIA Number: 2014-0226-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
Legislative Affairs
Series/Staff Member:
Joanna Slaney
Subseries:
OA/ID Number:
21932
FolderID:
Folder Title:
Coverdell / ESAs [Education Savings Accounts] [2]
Stack:
Row:
Section:
Shelf:
Position:
S
26
1
2
1
Congressional Budget Office Cost Estimate
S. 1134--The Affordable Education Act of 1999
Summary: The Affordable Education Act of 1999 would amend the
Internal Revenue Code to provide various tax incentives for education.
The Joint Committee on Taxation (JCT) and the Congressional Budget
Office (CBO) have estimated that this bill would increase revenues by
$274 million in fiscal year 2000 and by $70 million over the 2000 2004
period. CBO estimates that the bill would increase direct spending by $3
million over the 2000 2004 period. Because the legislation would affect
revenues and direct spending, pay-as-you-go procedures would apply.
The bill contains one intergovernmental mandate as defined in the
Unfunded Mandates Reform Act (UMRA). JCT estimates the cost of the new
intergovernmental mandate would be less than $50 million in each fiscal
year through the 2000 2004 period. The bill would impose eight new
private-sector mandates. The costs of the new mandates would exceed the
threshold ($100 million in 1996, adjusted annually for inflation)
specified in UMRA in fiscal years 2000 2004.
Description of major provisions: The Affordable Education Act of 1999
would modify education individual retirement accounts (IRAs) through
provisions that would:
Expand the definition of qualified education expenses to include
elementary and secondary schools through December 31, 2003;
Increase the annual contribution limit to $2,000 through December
31, 2003;
Allow contributions for special needs beneficiaries above the age of
18;
Allow corporations and tax-exempt entities to make contributions;
Allow contributions until the time prescribed by law for filing a
return for such a taxable year;
Allow taxpayers to claim a HOPE or Lifetime Learning credit and to
exclude amounts distributed from gross income through December 31, 2003;
and
Repeal the excise tax on contributions made during any taxable year
in which contributions are also made to a qualified state tuition
program on behalf of the same beneficiary.
The bill would modify qualified tuition programs to:
Expand the definition of qualified tuition program" to allow
private institutions to provide prepaid tuition plans;
Exclude from gross income distributions made after December 31,
1999, from qualified state tuition programs and after December 31, 2003,
distributions made by any qualified tuition program; and
Allow distributions from qualified tuition programs to be made on
behalf of a student if a HOPE or Lifetime Learning Credit is claimed for
that student.
The bill also contains other education tax incentives that would:
Extend the tax exclusion of employer-provided assistance for
undergraduate courses through June 30, 2004, and allow the exclusion for
graduate courses beginning on January 1, 2000, through June 30, 2004;
Eliminate the limit on the number of months for which interest paid
on qualified education loans is deductible effective December 31, 1999;
Eliminate the tax on awards under the National Health Corps
Scholarship program and the F. Edward Herbert Armed Forces Health
Professions Scholarship program;
Increase the arbitrage rebate exemption from $10 million to $15
million on government bonds used to finance qualified school
construction;
Allow the issuance of tax-exempt private activity bonds for public
school facilities; and
Allow the Federal Housing Board to guarantee up to $500 million
annually in school construction bonds through the Federal Home Loan
Banks.
The bill contains revenue offsets that would:
Reduce the carryback period for foreign tax credits to one year and
extend the foreign tax credit carryforward to 7 years;
Limit the use of the non-accrual experience method of accounting;
Expand the reporting of cancellation of indebtedness income to
non-bank financial institutions;
Extnd IRS user fees through September 30, 2009;
Clarify the definition of `subject to" liabilities under section
357(c) of the Internal Revenue Code;
Deny charitable contribution deductions for transfers associated
with split-dollar insurance arrangements;
Allow employers to transfer excess defined benefit plan assets to a
special account for the health benefits of retirees through September
30, 2009;
Impose a limitation on prefunding of certain employee benefits;
Repeal the installment method for most accrual basis taxpayers; and
Include the streptococcus pneumonia vaccine in the list of taxable
vaccines.
Estimated cost to the Federal Government: The estimated budgetary
impact of the Affordable Education Act of 1999 is shown in the following
table. The exclusion of employer-provided tuition assistance would
affect social security taxes, which are off-budget.
By fiscal year, in millions of dollars
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
CHANGES IN REVENUES
Educational provisions:
0
-237
-590
-772
-923
-881
-656
-630
-670
-705
-723
Subtotal
0
-332
-780
-995
-1,161
-1,051
-702
-630
-670
-705
-723
Revenue offset provisions
0
606
955
791
1,124
915
792
771
747
617
599
All revenue provisions:
0
369
365
19
201
35
136
141
77
-88
-124
Total
0
274
175
-204
-37
-136
-90
141
77
-88
-124
CHANGES IN DIRECT SPENDING
IRS user fees
0
0
0
0
0
3
3
3
3
3
3
CHANGES IN SURPLUS
On-budget
0
369
365
19
201
32
133
138
74
-91
-127
Off-budget
0
-95
-190
-223
-238
-170
-46
0
O
O
O
Total
0
274
175
-204
-37
-139
87
138
74
-
91
-127
Sources: Joint Committee on Taxation and Congressional Budget Office.
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
DESCRIPTION OF CHAIRMAN'S MARK
OF PROPOSALS RELATING TO EDUCATION INCENTIVES
Scheduled for Markup
By the
SENATE COMMITTEE ON FINANCE
on May 19, 1999
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
May 17, 1999
JCX-20-99
CONTENTS
INTRODUCTION
I. EDUCATION TAX INCENTIVES
A. Modifications to Education Individual Retirement Accounts
B. Private Pre-Paid Tuition Programs; Exclusion from Gross Income of
Education Distributions from Qualified Tuition Programs
C. Exclusion for Employer-Provided Educational Assistance
D. Eliminate 60-Month Limit on Student Loan Interest Deduction
E. Eliminate Tax on Awards Under National Health Corps Scholarship
Program and F. Edward Herbert Armed Forces Health Professions
Scholarship and Financial Assistance Program
F. Liberalize Tax-Exempt Financing Rules For Public School Construction
II. REVENUE OFFSETS
1 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
A. Modify Foreign Tax Credit Carryover Rules
B. Limit Use of Non-Accrual Experience Method of Accounting to
Amounts to be Received for the Performance of Qualified Personal
Services
C. Expand Reporting of Cancellation of Indebtedness Income
D. Extension of IRS User Fees
E. Clarify Definition of "Subject to" Liabilities Under Code
Section 357(c)
F. Denial of Charitable Contribution Deduction for Transfers Associated with
Split-Dollar Insurance Arrangements
G. Treatment of Excess Pension Assets Used for Retiree Health Benefits
H. Impose Limitation on Prefunding of Certain Employee Benefits
I. Modify Installment Method and Prohibit its Use by Accrual Method
Taxpayers
J. Add Certain Vaccines Against Streptococcus Pneumonia to the List of
Taxable Vaccines
INTRODUCTION
The Senate Committee on Finance has scheduled a markup on May 19, 1999, on various education tax
incentives.
This document, (1) prepared by the staff of the Joint Committee on Taxation, provides a description of
the education tax incentives (Part I) and revenue offsets (Part II) contained in the Chairman's Mark.
I. EDUCATION TAX INCENTIVES
A. Modifications to Education Individual Retirement Accounts
Present Law
In general
Section 530 provides tax-exempt status to education individual retirement accounts "education IRAs,"
meaning certain trusts (or custodial accounts) which are created or organized in the United States
exclusively for the purpose of paying the qualified higher education expenses of a named beneficiary (2)
Contributions to education IRAs may be made only in cash. Annual contributions to education IRAs
may not exceed $500 per designated beneficiary (except in cases involving certain tax-free rollovers, as
described below), and may not be made after the designated beneficiary reaches age 18.(3) Moreover, an
excise tax is imposed if a contribution is made by any person to an education IRA established on behalf
of a beneficiary during any taxable year in which any contributions are made by anyone to a qualified
State tuition program (defined under sec. 529) on behalf of the same beneficiary.
2 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
Phase-out of contribution limit
The $500 annual contribution limit for education IRAs is phased out ratably for contributors with
modified adjusted gross income ("AGI") between $95,000 and $110,000 ($150,000 and $160,000 for
joint returns). Individuals with modified AGI above the phase-out range are not allowed to make
contributions to an education IRA established on behalf of any other individual.
Treatment of distributions
Amounts distributed from an education IRA are excludable from gross income to the extent that the
amounts distributed do not exceed qualified higher education expenses of the designated beneficiary
incurred during the year the distribution is made (provided that a HOPE credit or Lifetime Learning
credit is not claimed with respect to the beneficiary for the same taxable year). Distributions from an
education IRA are generally deemed to consist of distributions of principal (which, under all
circumstances, are excludable from gross income) and earnings (which may be excludable from gross
income) by applying the ratio that the aggregate amount of contributions to the account for the
beneficiary bears to the total balance of the account. If the qualified higher education expenses of the
student for the year are at least equal to the total amount of the distribution (i.e., principal and earnings
combined) from an education IRA, then the earnings in their entirety are excludable from gross income.
If, on the other hand, the qualified higher education expenses of the student for the year are less than the
total amount of the distribution (i.e., principal and earnings combined) from an education IRA, then the
qualified higher education expenses are deemed to be paid from a pro-rata share of both the principal
and earnings components of the distribution. Thus, in such a case, only a portion of the earnings are
excludable (i.e., a portion of the earnings based on the ratio that the qualified higher education expenses
bear to the total amount of the distribution) and the remaining portion of the earnings is includible in the
distributee's gross income. To the extent that a distribution exceeds qualified higher education expenses
of the designated beneficiary, an additional 10-percent tax is imposed on the earnings portion of such
excess distribution, unless such distribution is made on account of the death or disability of, or
scholarship received by, the designated beneficiary.
Present law allows tax-free transfers or rollovers of account balances from one education IRA
benefitting one beneficiary to another education IRA benefitting another beneficiary (as well as
redesignations of the named beneficiary), provided that the new beneficiary is a member of the family of
the old beneficiary. For this purpose, a "member of the family" means persons described in paragraphs
(1) through (8) of section 152(a) -- e.g., sons, daughters, brothers, sisters, nephews and nieces, certain
in-laws -- and any spouse of such persons or of the original beneficiary.
Any balance remaining in an education IRA will be deemed to be distributed within 30 days after the
date that the named beneficiary reaches age 30 (or, if earlier, within 30 days of the date that the
beneficiary dies).
Qualified higher education expenses
The term "qualified higher education expenses" includes tuition, fees, books, supplies, and equipment
required for the enrollment or attendance of the designated beneficiary at an eligible education
institution, regardless of whether the beneficiary is enrolled at an eligible educational institution on a
full-time, half-time, or less than half-time basis. Moreover, the term "qualified higher education
expenses" includes room and board expenses (meaning the minimum room and board allowance
applicable to the student as determined by the institution in calculating costs of attendance for Federal
financial aid programs under sec. 472 of the Higher Education Act of 1965) for any period during which
the beneficiary is at least a half-time student. Qualified higher education expenses include expenses with
respect to undergraduate or graduate-level courses. In addition, qualified higher education expenses
include amounts paid or incurred to purchase tuition credits (or to make contributions to an account)
under a qualified State tuition program, as defined in section 529, for the benefit of the beneficiary of the
education IRA.
3 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
Qualified higher education expenses generally include only out-of-pocket expenses. Such qualified
higher education expenses do not include expenses covered by educational assistance for the benefit of
the beneficiary that is excludable from gross income. Thus, total qualified higher education expenses are
reduced by scholarship or fellowship grants excludable from gross income under present-law section
117, as well as any other tax-free educational benefits, such as employer-provided educational assistance
that is excludable from the employee's gross income under section 127. In addition, qualified higher
education expenses do not include expenses paid with interest on education savings bonds that is
excludable under section 135. No reduction of qualified higher education expenses is required, however,
for a gift, bequest, devise, or inheritance.
Eligible educational institution
Eligible educational institutions are defined by reference to section 481 of the Higher Education Act of
1965. Such institutions generally are accredited post-secondary educational institutions offering credit
toward a bachelor's degree, an associate's degree, a graduate-level or professional degree, or another
recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution must be eligible to participate in Department of
Education student aid programs.
Description of Proposal
Annual contribution limit
For the period 2000 through 2003, the proposal would increase to $2,000 the annual education IRA
contribution limit. Thus, under the proposal, aggregate contributions that could be made by all
contributors to one (or more) education IRAs established on behalf of any particular beneficiary would
be limited to $2,000 for each year during the period 2000 through 2003. For 2004 and later years, the
annual contribution limit for education IRAs would be $500.
Qualified expenses
With respect to contributions made during the period 2000 through 2003 (and earnings attributable to
such contributions), the proposal would expand the definition of qualified education expenses that may
be paid with tax-free distributions from an education IRA. Specifically, the definition of qualified
education expenses would be expanded to include "qualified elementary and secondary education
expenses" meaning (1) tuition, fees, academic tutoring, special needs services, books, supplies, and
equipment (including computers and related software and services) incurred in connection with the
enrollment or attendance of the designated beneficiary as an elementary or secondary student at a public,
private, or religious school providing elementary or secondary education (kindergarten through grade
12), and (2) room and board, uniforms, transportation, and supplementary items and services (including
extended-day programs) required or provided by such a school in connection with such enrollment or
attendance of the designated beneficiary. "Qualified elementary and secondary education expenses" also
would include certain homeschooling education expenses if the requirements of any applicable State or
local law are met with respect to such homeschooling. For contributions made in 2004 or later years (and
for earnings attributable to such contributions), the definition of qualified education expenses would be
limited to post-secondary education expenses.
Special needs beneficiaries
The proposal also would provide that, although contributions to an education IRA generally may not be
made after the designated beneficiary reaches age 18, contributions may continue to be made to an
education IRA in the case of a special needs beneficiary (as defined by Treasury Department
regulations). In addition, under the proposal, in the case of a special needs beneficiary, a deemed
distribution of any balance in an education IRA would not occur when the beneficiary reaches age 30.
Contributions by persons other than individuals
4 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
The proposal would clarify that corporations and other entities (e.g., tax-exempt entities) are permitted
to make contributions to education IRAs, regardless of the income of the corporation or entity during the
year of the contribution. As under present law, the eligibility of high-income individuals to make
contributions to education IRAs would be phased out ratably for individuals with modified AGI between
$95,000 and $110,000 ($150,000 and $160,000 for joint returns).
Contributions permitted until April 15
Under the proposal, individual contributors to education IRAs would be deemed to have made a
contribution on the last day of the preceding taxable year if the contribution is made on account of such
taxable year and is made not later than the time prescribed by law for filing the return for such taxable
year (not including extensions), generally April 15 in the case of individual taxpayers.
Coordination with HOPE and Lifetime Learning credits
The proposal would allow a taxpayer to claim a HOPE credit or Lifetime Learning credit for a taxable
year and receive an exclusion from gross income for amounts distributed (both the principal and the
earnings portions) from an education IRA on behalf of the same student as long as the distribution is not
used for the same expenses for which a credit was claimed.
Coordination with qualified tuition plans
The proposal would repeal the excise tax on contributions made by any person to an education IRA on
behalf of a beneficiary during any taxable year in which any contributions are made by anyone to a
qualified State tuition program on behalf of the same beneficiary (sec. 4973(e)(1)(B)).
Effective Date
The proposals modifying education IRAs would generally be effective for taxable years beginning after
December 31, 1999. The provision that increases the annual contribution limit for education IRAs to
$2,000 per year applies during the period January 1, 2000, through December 31, 2003, and the
provision that expands the definition of qualified education expenses to include qualified elementary and
secondary expenses applies to contributions (and earnings thereon) made during the period January 1,
2000, through December 31, 2003.
B. Private Pre-Paid Tuition Programs; Exclusion from Gross Income
of Education Distributions from Qualified Tuition Programs
Present Law
Section 529 provides tax-exempt status to "qualified State tuition programs," meaning certain programs
established and maintained by a State (or agency or instrumentality thereof) under which persons may
(1) purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the
beneficiary to a waiver or payment of qualified higher education expenses of the beneficiary, or (2)
make contributions to an account that is established for the purpose of meeting qualified higher
education expenses of the designated beneficiary of the account. The term "qualified higher education
expenses" has the same meaning as does the term for purposes of education IRAs (as described above)
and, thus, includes expenses for tuition, fees, books, supplies, and equipment required for the enrollment
or attendance at an eligible educational institution(4), as well as room and board expenses (meaning the
minimum room and board allowance applicable to the student as determined by the institution in
calculating costs of attendance for Federal financial aid programs under sec. 472 of the Higher
Education Act of 1965) for any period during which the student is at least a half-time student.
No amount is included in the gross income of a contributor to, or beneficiary of, a qualified State tuition
program with respect to any distribution from, or earnings under, such program, except that (1) amounts
5 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
distributed or educational benefits provided to a beneficiary (e.g., when the beneficiary attends college)
are included in the beneficiary's gross income (unless excludable under another Code section) to the
extent such amounts or the value of the educational benefits exceed contributions made on behalf of the
beneficiary, and (2) amounts distributed to a contributor or another distributee (e.g., when a parent
receives a refund) are included in the contributor's/distributee's gross income to the extent such amounts
exceed contributions made on behalf of the beneficiary.(5)
A qualified State tuition program is required to provide that purchases or contributions only be made in
cash (6) Contributors and beneficiaries are not allowed to directly or indirectly direct the investment of
contributions to the program (or earnings thereon). The program is required to maintain a separate
accounting for each designated beneficiary. A specified individual must be designated as the beneficiary
at the commencement of participation in a qualified State tuition program (i.e., when contributions are
first made to purchase an interest in such a program), unless interests in such a program are purchased by
a State or local government or a tax-exempt charity described in section 501(c)(3) as part of a
scholarship program operated by such government or charity under which beneficiaries to be named in
the future will receive such interests as scholarships. A transfer of credits (or other amounts) from one
account benefitting one designated beneficiary to another account benefitting a different beneficiary is
considered a distribution (as is a change in the designated beneficiary of an interest in a qualified State
tuition program), unless the beneficiaries are members of the same family. For this purpose, the term
"member of the family" means persons described in paragraphs (1) through (8) of section 152(a) -- e.g.,
sons, daughters, brothers, sisters, nephews and nieces, certain in-laws -- and any spouse of such persons
or of the original beneficiary. Earnings on an account may be refunded to a contributor or beneficiary,
but the State or instrumentality must impose a more than de minimis monetary penalty unless the refund
is (1) used for qualified higher education expenses of the beneficiary, (2) made on account of the death
or disability of the beneficiary, or (3) made on account of a scholarship received by the designated
beneficiary to the extent the amount refunded does not exceed the amount of the scholarship used for
higher education expenses.
No amount is includible in the gross income of a contributor to, or beneficiary of, a qualified State
tuition program with respect to any contribution to or earnings on such a program until a distribution is
made from the program, at which time the earnings portion of the distribution (whether made in cash or
in-kind) is includible in the gross income of the distributee. To the extent that a distribution from a
qualified State tuition program is used to pay for qualified tuition and related expenses (as defined in
sec. 25A(f)(1)), the distributee (or another taxpayer claiming the distributee as a dependent) may claim
the HOPE credit or Lifetime Learning credit under section 25A with respect to such tuition and related
expenses (assuming that the other requirements for claiming the HOPE credit or Lifetime Learning
credit are satisfied and the modified AGI phaseout for those credits does not apply).
Description of Proposal
Eligible educational institutions
The proposal would expand the definition of "qualified tuition program" to include certain prepaid
tuition programs established and maintained by one or more eligible educational institutions (which may
be private institutions) that satisfy the requirements under section 529 (other than the present-law State
sponsorship rule). In the case of a qualified tuition program maintained by one or more private
educational institutions, persons would be able to purchase tuition credits or certificates on behalf of a
designated beneficiary as set forth in section 529(b)(1)(A)(i), but would not be able to make
contributions to an account as described in section 529(b)(1)(A)(ii) (so-called "savings account plans").
Exclusion from gross income
Under the proposal, an exclusion from gross income would be provided for distributions made in taxable
years beginning after December 31, 1999, from qualified State tuition programs to the extent that the
distribution is used to pay for qualified higher education expenses. This exclusion from gross income
would be extended to distributions from qualified tuition programs established and maintained by an
entity other than a State or agency or instrumentality thereof, for distributions made in taxable years
6 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.hm
after December 31, 2003. If a HOPE credit or Lifetime Learning credit is claimed with respect to a
student for a taxable year, then a distribution from any qualified tuition program may (at the option of
the taxpayer) be made on behalf of that student during that taxable year, but an exclusion from gross
income would not be available for the earnings portion of such distribution.
Rollovers for benefit of same beneficiary
The proposal would modify section 529(c)(3) to clarify that a transfer of credits (or other amounts) from
one account benefitting a designated beneficiary to another account benefitting the same beneficiary will
not be considered a distribution for a maximum of three such transfers.
Member of family
The proposal would modify section 529(e)(2) to clarify that, for purposes of tax-free rollovers and
changes of designated beneficiaries, a "member of the family" includes first cousins of the original
beneficiary.
Effective Date
The proposal that would provide for the establishment of qualified tuition programs maintained by one
or more private educational institutions would be effective for taxable years beginning after December
31, 1999. The proposal that would allow an exclusion from gross income for certain distributions from
qualified State tuition programs under section 529 (and the modification to the definition of qualified
higher education expenses under that section) is effective for distributions made in taxable years
beginning after December 31, 1999. In the case of a qualified tuition program established and
maintained by an entity other than a State or agency or instrumentality thereof, the proposal would be
effective for distributions made in taxable years after December 31, 2003.
C. Exclusion for Employer-Provided Educational Assistance
Present Law
Educational expenses paid by an employer for its employees are generally deductible to the employer.
Employer-paid educational expenses are excludable from the gross income and wages of an employee if
provided under a section 127 educational assistance plan or if the expenses qualify as a working
condition fringe benefit under section 132. Section 127 provides an exclusion of $5,250 annually for
employer-provided educational assistance. The exclusion does not apply to graduate courses. The
exclusion for employer-provided educational assistance expires with respect to courses beginning on or
after June 1, 2000.
In order for the exclusion to apply, certain requirements must be satisfied. The educational assistance
must be provided pursuant to a separate written plan of the employer. The educational assistance
program must not discriminate in favor of highly compensated employees. In addition, not more than 5
percent of the amounts paid or incurred by the employer during the year for educational assistance under
a qualified educational assistance plan can be provided for the class of individuals consisting of more
than 5-percent owners of the employer (and their spouses and dependents).
Educational expenses that do not qualify for the section 127 exclusion may be excludable from income
as a working condition fringe benefit (7) In general, education qualifies as a working condition fringe
benefit if the employee could have deducted the education expenses under section 162 if the employee
paid for the education. In general, education expenses are deductible by an individual under section 162
if the education (1) maintains or improves a skill required in a trade or business currently engaged in by
the taxpayer, or (2) meets the express requirements of the taxpayer's employer, applicable law or
regulations imposed as a condition of continued employment. However, education expenses are
7 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
generally not deductible if they relate to certain minimum educational requirements or to education or
training that enables a taxpayer to begin working in a new trade or business (8)
Description of Proposal
The proposal would extend the present-law exclusion for employer-provided educational assistance to
undergraduate courses beginning before January 1, 2004. The proposal would also extend the exclusion
to graduate education, effective for courses beginning after January 1, 2000, and before January 1, 2004.
Effective Date
The proposal to extend the exclusion for undergraduate courses would be effective for courses beginning
before January 1, 2004. The exclusion with respect to graduate-level courses would be effective for
courses beginning after January 1, 2000, and before June 1, 2004.
D. Eliminate 60-Month Limit on Student Loan Interest Deduction
Present Law
Certain individuals who have paid interest on qualified education loans may claim an above-the-line
deduction for such interest expenses, subject to a maximum annual deduction limit (sec. 221). The
deduction is allowed only with respect to interest paid on a qualified education loan during the first 60
months in which interest payments are required. Required payments of interest generally do not include
nonmandatory payments, such as interest payments made during a period of loan forbearance. Months
during which interest payments are not required because the qualified education loan is in deferral or
forbearance do not count against the 60-month period. No deduction is allowed to an individual if that
individual is claimed as a dependent on another taxpayer's return for the taxable year.
A qualified education loan generally is defined as any indebtedness incurred solely to pay for the costs
of attendance (including room and board) of the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred in attending on at least a half-time basis (1)
post-secondary educational institutions and certain vocational schools defined by reference to section
481 of the Higher Education Act of 1965, or (2) institutions conducting internship or residency programs
leading to a degree or certificate from an institution of higher education, a hospital, or a health care
facility conducting postgraduate training.
The maximum allowable deduction per taxpayer return is $1,500 in 1999, $2,000 in 2000, and $2,500 in
2001 and thereafter. (9) The deduction is phased out ratably for individual taxpayers with modified
adjusted gross income of $40,000-$55,000 and $60,000-$75,000 for joint returns. The income ranges
will be indexed for inflation after 2002.
Description of Proposal
The proposal would eliminate the limit on the number of months during which interest paid on a
qualified education loan is deductible.
Effective Date
The proposal would be effective for interest paid on qualified education loans after December 31, 1999.
E. Eliminate Tax on Awards Under National Health Corps Scholarship Program
and F. Edward Hebert Armed Forces Health Professions Scholarship
and Financial Assistance Program
8 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
Present Law
Section 117 excludes from gross income amounts received as a qualified scholarship by an individual
who is a candidate for a degree and used for tuition and fees required for the enrollment or attendance
(or for fees, books, supplies, and equipment required for courses of instruction) at a primary, secondary,
or post-secondary educational institution. The tax-free treatment provided by section 117 does not
extend to scholarship amounts covering regular living expenses, such as room and board. In addition to
the exclusion for qualified scholarships, section 117 provides an exclusion from gross income for
qualified tuition reductions for certain education provided to employees (and their spouses and
dependents) of certain educational organizations.
Section 117(c) specifically provides that the exclusion for qualified scholarships and qualified tuition
reductions does not apply to any amount received by a student that represents payment for teaching,
research, or other services by the student required as a condition for receiving the scholarship or tuition
reduction.
Section 134 provides that any "qualified military benefit," which includes any allowance, is excluded
from gross income if received by a member or former member of the uniformed services if such benefit
was excludable from gross income on September 9, 1986.
The National Health Service Corps Scholarship Program (the "NHSC Scholarship Program") and the F.
Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program (the
"Armed Forces Scholarship Program") provide education awards to participants on condition that the
participants provide certain services. In the case of the NHSC Program, the recipient of the scholarship
is obligated to provide medical services in a geographic area (or to an underserved population group or
designated facility) identified by the Public Health Service as having a shortage of health-care
professionals. In the case of the Armed Forces Scholarship Program, the recipient of the scholarship is
obligated to serve a certain number of years in the military at an armed forces medical facility. These
education awards generally involve the payment of higher education expenses (under the NHSC
Program, the awards may be also used for the repayment or cancellation of existing or future student
loans). Because the recipients are required to perform services in exchange for the education awards, the
awards used to pay higher education expenses are taxable income to the recipient.
Description of Proposal
The proposal would provide that amounts received by an individual under the NHSC Scholarship
Program or the Armed Forces Scholarship Program are eligible for tax-free treatment as qualified
scholarships under section 117, without regard to any service obligation by the recipient.
Effective Date
The proposal would be effective for education awards received after December 31, 1993.
F. Liberalize Tax-Exempt Financing Rules For Public School Construction
Present Law
1. Tax-exempt bonds
In general
Interest on debt incurred by States or local governments is excluded from income if the proceeds of the
borrowing are used to carry out governmental functions of those entities or the debt is repaid with
governmental funds (sec. 103). Like other activities carried out and paid for by States and local
9 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.hm
governments, the construction, renovation, and operation of public schools is an activity eligible for
financing with the proceeds of tax-exempt bonds.
Interest on bonds that nominally are issued by States or local governments, but the proceeds of which are
used (directly or indirectly) by a private person and payment of which is derived from funds of such a
private person is taxable unless the purpose of the borrowing is approved specifically in the Code or in a
non-Code provision of a revenue Act. These bonds are called "private activity bonds." The term "private
person" includes the Federal Government and all other individuals and entities other than States or local
governments.
Private activities eligible for financing with tax-exempt private activity bonds
The Code includes several exceptions permitting States or local governments to act as conduits
providing tax-exempt financing for private activities. Both capital expenditures and limited working
capital expenditures of charitable organizations described in section 501(c)(3) of the Code -- including
elementary, secondary, and post-secondary schools -- may be financed with tax-exempt private activity
bonds ("qualified 501(c)(3) bonds").
States or local governments may issue tax-exempt "exempt-facility bonds" to finance property for
certain private businesses. Businesses eligible for this financing include transportation (airports, ports,
local mass commuting, and high speed intercity rail facilities); privately owned and/or privately operated
public works facilities (sewage, solid waste disposal, local district heating or cooling, and hazardous
waste disposal facilities); privately-owned and/or operated low-income rental housing; and certain
private facilities for the local furnishing of electricity or gas. A further provision allows tax-exempt
financing for "environmental enhancements of hydro-electric generating facilities." Tax-exempt
financing is authorized for capital expenditures for small manufacturing facilities and land and
equipment for first-time farmers ("qualified small-issue bonds"), local redevelopment activities
("qualified redevelopment bonds"), and eligible empowerment zone and enterprise community
businesses.
Finally, tax-exempt private activity bonds may be issued to finance limited non-business purposes:
student loans and mortgage loans for owner-occupied housing ("qualified mortgage bonds" and
"qualified veterans' mortgage bonds").
In most cases, the volume of tax-exempt private activity bonds is restricted by aggregate annual limits
imposed on bonds issued by issuers within each State. These annual volume limits equal $50 per
resident of the State, or $150 million if greater. The annual State private activity bond volume limits are
scheduled to increase to the greater of $75 per resident of the State or $225 million in calendar year
2007. The increase will be phased in ratably beginning in calendar year 2003. This increase was enacted
by the Tax and Trade Relief Extension Act of 1998. Qualified 501(c)(3) bonds are among the
tax-exempt private activity bonds that are not subject to these volume limits.
Private activity tax-exempt bonds may not be used to finance schools owned or operated by private,
for-profit businesses.
Arbitrage restrictions on tax-exempt bonds
The Federal income tax does not apply to income of States and local governments that is derived from
the exercise of an essential governmental function. To prevent these tax-exempt entities from issuing
more Federally subsidized tax-exempt bonds than is necessary for the activity being financed or from
issuing such bonds earlier than necessary, the Code includes arbitrage restrictions limiting the ability to
profit from investment of tax-exempt bond proceeds. In general, arbitrage profits may be earned only
during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of
the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement
funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such
investments must be rebated to the Federal Government.
10 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
The Code includes three exceptions applicable to education-related bonds. First, issuers of all types of
tax-exempt bonds are not required to rebate arbitrage profits if all of the proceeds of the bonds are spent
for the purpose of the borrowing within six months after issuance. In the case of governmental bonds
(including bonds to finance public schools) the six-month expenditure exception is treated as satisfied if
at least 95 percent of the proceeds is spent within six months and the remaining five percent is spent
within 12 months after the bonds are issued.
Second, in the case of bonds to finance certain construction activities, including school construction and
renovation, the six-month period is extended to 24 months for construction proceeds. Arbitrage profits
earned on construction proceeds are not required to be rebated if all such proceeds (other than certain
retainage amounts) are spent by the end of the 24-month period and prescribed intermediate spending
percentages are satisfied.
Third, governmental bonds issued by "small" governments are not subject to the rebate requirement.
Small governments are defined as general purpose governmental units that issue no more than $5 million
of tax-exempt governmental bonds in a calendar year. The $5 million limit is increased to $10 million if
at least $5 million of the bonds are used to finance public schools.
Restriction on Federal guarantees of tax-exempt bonds
Unlike interest on State or local government bonds, interest on Federal debt (e.g., Treasury bills) is
taxable. Generally, interest on State and local government bonds that are Federally guaranteed does not
qualify for tax-exemption. This restriction was enacted in 1984. The 1984 legislation included
exceptions for housing bonds and for certain Federal insurance programs that were in existence when the
restriction was enacted.
2. Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, certain States and local governments are given the
authority to issue "qualified zone academy bonds." Under present law, a total of $400 million of
qualified zone academy bonds may be issued in each of 1998 and 1999. The $400 million aggregate
bond authority is allocated each year to the States according to their respective populations of
individuals below the poverty line. Each State, in turn, allocates the credit to qualified zone academies
within such State. A State may carry over any unused allocation into subsequent years.
Certain financial institutions (i.e., banks, insurance companies, and corporations actively engaged in the
business of lending money) that hold qualified zone academy bonds are entitled to a nonrefundable tax
credit in an amount equal to a credit rate (set monthly by Treasury Department regulation at 110 percent
of the applicable Federal rate for the month in which the bond is issued) multiplied by the face amount
of the bond (sec. 1397E). The credit rate applies to all such bonds issued in each month. A taxpayer
holding a qualified zone academy bond on the credit allowance date (i.e., each one-year anniversary of
the issuance of the bond) is entitled to a credit. The credit amount is includible in gross income (as if it
were a taxable interest payment on the bond), and credit may be claimed against regular income tax and
alternative minimum tax liability.
"Qualified zone academy bonds" are defined as bonds issued by a State or local government, provided
that: (1) at least 95 percent of the proceeds is used for the purpose of renovating, providing equipment
to, developing course materials for use at, or training teachers and other school personnel in a "qualified
zone academy;" and (2) private entities have promised to contribute to the qualified zone academy
certain equipment, technical assistance or training, employee services, or other property or services with
a value equal to at least 10 percent of the bond proceeds.
A school is a "qualified zone academy" if (1) the school is a public school that provides education and
training below the college level, (2) the school operates a special academic program in cooperation with
businesses to enhance the academic curriculum and increase graduation and employment rates, and (3)
either (a) the school is located in an empowerment zone or a designated enterprise community, or (b) it
is reasonably expected that at least 35 percent of the students at the school will be eligible for free or
11 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
reduced-cost lunches under the school lunch program established under the National School Lunch Act.
Description of Proposals
1. Increase amount of governmental bonds that may be issued by governments qualifying for the
"small governmental unit" arbitrage rebate exception
The additional amount of governmental bonds for public schools that small governmental units may
issue without being subject to the arbitrage rebate requirement would be increased from $5 million to
$10 million. Thus, these governmental units could issue up to $15 million of governmental bonds in a
calendar year provided that at least $10 million of the bonds were used for public schools.
2. Allow issuance of tax-exempt private activity bonds for public school facilities
The private activities for which tax-exempt bonds may be issued would be expanded to include
elementary and secondary public school facilities which are owned by private, for-profit corporations
pursuant to public-private partnership agreements with a State or local educational agency. The school
facilities for which these bonds were issued would be required to be operated by a public educational
agency as part of a system of public schools. Issuance of these bonds would be subject to an annual
per-State volume limit equal to the greater of $10 per resident ($5 million, if greater) in lieu of the
present-law State private activity bond volume limits.
3. Permit limited Federal guarantees of school construction bonds by the Federal Housing Finance
Board
The Federal Housing Finance Board would be permitted to guarantee (through the 12 regional Federal
Home Loan Banks in its system) up to $500 million per year of governmental bonds 95 percent or more
of the proceeds of which are used for public school construction.
Effective Dates
The proposals would be effective for bonds issued after December 31, 1999.
II. REVENUE OFFSETS
A. Modify Foreign Tax Credit Carryover Rules
Present Law
U.S. persons may credit foreign taxes against U.S. tax on foreign-source income. The amount of foreign
tax credits that can be claimed in a year is subject to a limitation that prevents taxpayers from using
foreign tax credits to offset U.S. tax on U.S.-source income. Separate foreign tax credit limitations are
applied to specific categories of income.
The amount of creditable taxes paid or accrued (or deemed paid) in any taxable year which exceeds the
foreign tax credit limitation is permitted to be carried back two years and forward five years. The
amount carried over may be used as a credit in a carryover year to the extent the taxpayer otherwise has
excess foreign tax credit limitation for such year. The separate foreign tax credit limitations apply for
purposes of the carryover rules.
Description of Proposal
The proposal would reduce the carryback period for excess foreign tax credits from two years to one
year. The proposal also would extend the excess foreign tax credit carryforward period from five years
to seven years.
12 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.hm
Effective Date
The proposal would apply to foreign tax credits arising in taxable years beginning after December 31,
2001.
B. Limit Use of Non-Accrual Experience Method of Accounting to Amounts
to be Received for the Performance of Qualified Personal Services
Present Law
An accrual method taxpayer generally must recognize income when all the events have occurred that fix
the right to receive the income and the amount of the income can be determined with reasonable
accuracy. An accrual method taxpayer may deduct the amount of any receivable that was previously
included in income that becomes worthless during the year.
Accrual method taxpayers are not required to include in income amounts to be received for the
performance of services which, on the basis of experience, will not be collected (the "non-accrual
experience method"). The availability of this method is conditioned on the taxpayer not charging interest
or a penalty for failure to timely pay the amount charged.
A cash method taxpayer is not required to include an amount in income until it is received. A taxpayer
may not use the cash method if purchase, production, or sale of merchandise is a material income
producing factor. Such taxpayers are generally required to keep inventories and use the accrual method
of accounting. In addition, corporations (and partnerships with corporate partners) generally may not use
the cash method of accounting if their average annual gross receipts exceed $5 million. An exception to
this $5 million rule is provided for qualified personal service corporations, corporations (1) substantially
all of whose activities involve the performance of services in the fields of health, law, engineering,
architecture, accounting, actuarial science, performing arts or consulting and (2) substantially all of the
stock of which is owned by current or former employees performing such services, their estates or heirs.
Qualified personal service corporations are allowed to use the cash method without regard to whether
their average annual gross receipts exceed $5 million.
Description of Proposal
The proposal would limit the use of the non-accrual experience method to amounts that are to be
received for the performance of qualified personal services. Amounts to be received for the performance
of all other services would be subject to the general rule regarding inclusion in income. Qualified
personal services are personal services in the fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts or consulting. As under present law, the availability of the non-accrual
experience method would be conditioned on the taxpayer not charging interest or a penalty for failure to
timely pay the amount.
Effective Date
The proposal would be effective for taxable years ending after the date of enactment. Any change in the
taxpayer's method of accounting necessitated as a result of the proposal would be treated as a voluntary
change initiated by the taxpayer with the consent of the Secretary of the Treasury. Any required section
481(a) adjustment would be taken into account over a period not to exceed four years under principles
consistent with those in Rev. Proc. 98-60.(10)
C. Expand Reporting of Cancellation of Indebtedness Income
13 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
Present Law
Under section 61(a)(12), a taxpayer's gross income includes income from the discharge of indebtedness.
Section 6050P requires "applicable entities" to file information returns with the IRS regarding any
discharge of indebtedness of $600 or more.
The information return must set forth the name, address, and taxpayer identification number of the
person whose debt was discharged, the amount of debt discharged, the date on which the debt was
discharged, and any other information that the IRS requires to be provided. The information return must
be filed in the manner and at the time specified by the IRS. The same information also must be provided
to the person whose debt is discharged by January 31 of the year following the discharge.
"Applicable entities" include: (1) the FDIC, the RTC, the National Credit Union Administration, and any
successor or subunit of any of them; (2) any financial institution (as described in sec. 581 (relating to
banks) or sec. 59 (a) (relating to savings institutions)); (3) any credit union; (4) any corporation that is a
direct or indirect subsidiary of an entity described in (2) or (3) which, by virtue of being affiliated with
such entity, is subject to supervision and examination by a Federal or State agency regulating such
entities; and (5) an executive, judicial, or legislative agency (as defined in 31 U.S.C. sec. 3701(a)(4)).
The penalties for failure to file correct information reports with the IRS and to furnish statements to
taxpayers are similar to those imposed with respect to a failure to provide other information returns. For
example, the penalty for failure to furnish statements to taxpayers is generally $50 per failure, subject to
a maximum of $100,000 for any calendar year. These penalties are not applicable if the failure is due to
reasonable cause and not to willful neglect.
Description of Proposal
The proposal would require that information reporting on discharges of indebtedness also be done by
any organization a significant trade or business of which is the lending of money (such as finance
companies and credit card companies whether or not affiliated with financial institutions).
Effective Date
The proposal would be effective with respect to discharges of indebtedness after December 31, 1999.
D. Extension of IRS User Fees
Present Law
The IRS provides written responses to questions of individuals, corporations, and organizations relating
to their tax status or the effects of particular transactions for tax purposes. The IRS generally charges a
fee for requests for a letter ruling, determination letter, opinion letter, or other similar ruling or
determination. Public Law 104-117(11) extended the statutory authorization for these user fees(12)
through September 30, 2003.
Description of Proposal
The proposal would extend the statutory authorization for these user fees through September 30, 2009.
Effective Date
The proposal would be effective on the date of enactment.
14 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
E. Clarify Definition of "Subject to" Liabilities Under Code Section 357(c)
Present Law
Present law provides that the transferor of property recognizes no gain or loss if the property is
exchanged solely for qualified stock in a controlled corporation (sec. 351). The assumption by the
controlled corporation of a liability of the transferor (or the acquisition of property "subject to" a
liability) generally will not cause the transferor to recognize gain. However, under section 357(c), the
transferor does recognize gain to the extent that the sum of the assumed liabilities, together with the
liabilities to which the transferred property is subject, exceeds the transferor's basis in the transferred
property. If the transferred property is "subject to" a liability, Treasury regulations indicate that the
amount of the liability is included in the calculation regardless of whether the underlying liability is
assumed by the controlled corporation. Treas. Reg. sec. 1.357-2(a). Similar rules apply to
reorganizations described in section 368(a)(1)(D).
The gain recognition rule of section 357(c) is applied separately to each transferor in a section 351
exchange.
The basis of the property in the hands of the controlled corporation equals the transferor's basis in such
property, increased by the amount of gain recognized by the transferor, including section 357(c) gain.
Description of Proposal
Under the proposal, the distinction between the assumption of a liability and the acquisition of an asset
subject to a liability is generally eliminated. First, except as provided in regulations, a recourse liability
or any portion thereof is treated as having been assumed if, as determined on the basis of all facts and
circumstances, the transferee has agreed to, and is expected to, satisfy the liability or portion thereof
(whether or not the transferor has been relieved of the liability). Thus, where more than one person
agrees to satisfy a liability or portion thereof, only one would be expected to satisfy such liability or
portion thereof. Second, except as provided in regulations, a nonrecourse liability is treated as having
been assumed by the transferee of any asset subject to such liability; except that the amount treated as
assumed shall be reduced by the amount of such liability which an owner of other assets not transferred
to the transferee and also subject to such liability has agreed with the transferee to, and is expected to
satisfy, up to the fair market value of such other assets (determined without regard to section 7701(g)).
In determining whether any person has agreed to and is expected to satisfy a liability, all facts and
circumstances are to be considered. In any case where the transferee does agree to satisfy a liability, the
transferee will also be expected to satisfy the liability in the absence of facts indicating the contrary.
In determining any increase to the basis of property transferred to the transferee as a result of gain
recognized because of the assumption of liabilities under section 357, such increase shall not cause the
basis to exceed the fair market value of the property (determined without regard to sec. 7701(g)). In
addition, if gain is recognized to the transferor as the result of an assumption by a corporation of a
nonrecourse liability that is also secured by any assets not transferred to the corporation, and if no person
is subject to tax under the Internal Revenue Code on such gain, then for purposes of determining the
basis of assets transferred, the amount of gain treated as recognized as the result of such assumption of
liability shall be determined as if the liability assumed by the transferee equaled such transferee's ratable
portion of the liability, based on the relative fair market values (determined without regard to sec.
7701(g)) of all assets subject to such nonrecourse liability.
The Treasury Department has authority to prescribe such regulations as may be necessary to carry out
the purposes of the provision. Where appropriate, the Treasury Department may also prescribe
regulations which provide that the manner in which a liability is treated as assumed under the provision
is applied elsewhere in the Code.
The Miscellaneous Trade and Technical Corrections Act of 1999 (S. 262), as reported by the Senate
Finance Committee on January 22, 1999, contains a substantially identical provision.
15 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
Effective Date
The proposal would be effective for transfers on or after October 19, 1998. No inference regarding the
tax treatment under present law is intended.
F. Denial of Charitable Contribution Deduction for Transfers
Associated with Split-Dollar Insurance Arrangements
Present Law
Under present law, a deduction is allowed for a charitable contribution paid during the taxable year. A
charitable contribution is defined to mean a contribution or gift to or for the use of specified types of
organizations or governmental entities (sec. 170(c)).
Some taxpayers may be taking the position that a charitable contribution deduction is permitted under an
arrangement whereby taxpayers transfer money to a charity, which the charity then uses to pay
premiums for life insurance on the transferor or another person. Under these arrangements, the
beneficiaries under the life insurance contract typically include members of the transferor's family (either
directly or through a family trust or family partnership). The charitable organization does not have
unfettered use of the transferred funds.
Description of Proposal
Deduction denial
The proposal(13) restates present law to provide that no charitable contribution deduction is allowed for
purposes of Federal tax, for a transfer to or for the use of an organization described in section 170(c) of
the Internal Revenue Code, if in connection with the transfer (1) the organization directly or indirectly
pays, or has previously paid, any premium on any "personal benefit contract" with respect to the
transferor, or (2) there is an understanding or expectation that any person will directly or indirectly pay
any premium on any "personal benefit contract" with respect to the transferor. It is intended that an
organization be considered as indirectly paying premiums if, for example, another person pays
premiums on its behalf.
A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment
contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the
transferor's family, or any other person (other than a section 170(c) organization) designated by the
transferor. For example, such a beneficiary would include a trust having a direct or indirect beneficiary
who is the transferor or any member of the transferor's family, and would include an entity that is
controlled by the transferor or any member of the transferor's family. It is intended that a beneficiary
under the contract include any beneficiary under any side agreement relating to the contract. If a
transferor contributes a life insurance contract to a section 170(c) organization and designates one or
more section 170(c) organizations as the sole beneficiaries under the contract, generally, it is not
intended that the deduction denial rule under the proposal apply. If, however, there is an outstanding
loan under the contract upon the transfer of the contract, then the transferor is considered as a
beneficiary. The fact that a contract also has other direct or indirect beneficiaries (persons who are not
the transferor or a family member, or designated by the transferor) does not prevent it from being a
personal benefit contract. The proposal is not intended to affect situations in which an organization pays
premiums under a legitimate fringe benefit plan for employees.
It is intended that a person be considered as an indirect beneficiary under a contract if, for example, the
person receives or will receive any economic benefit as a result of amounts paid under or with respect to
the contract. For this purpose, an indirect beneficiary is not intended to include a person that benefits
exclusively under a bona fide charitable gift annuity (within the meaning of sec. 501(m)).
16 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
In the case of a charitable gift annuity, if the charitable organization purchases an annuity contract issued
by an insurance company to fund the payment of the charitable gift annuity, a person receiving payments
under the charitable gift annuity from the charitable organization that are funded by the contract is not
treated as an indirect beneficiary, provided certain requirements are met. The requirements are that (1)
the charitable organization possess all of the incidents of ownership under the contract; (2) the charitable
organization be entitled to all the payments under the contract; and (3) the timing and amount of
payments under the contract be substantially the same as the timing and amount of payments to each
person under the organization's obligation under the charitable gift annuity (as in effect at the time of the
transfer to the charitable organization). Only in the case in which the charitable organization purchases
an annuity contract issued by an insurance company to fund the payment of the charitable gift annuity
and the contract is purchased pursuant to the laws of a State that requires each annuitant under the
charitable gift annuity to be an annuitant under the contract (in order for the State insurance laws not to
apply to the charitable gift annuity), then the foregoing requirements (1) and (2) are treated as if they are
met, provided that the State law requirement was in effect on February 8, 1999, each annuitant under the
charitable gift annuity is a bona fide resident of the State, the only persons entitled to payments under
the contract are persons entitled to payments under the charitable gift annuity, and the timing and
amount of payments under the contract to each person are substantially the same as the timing and
amount of payments to the person under the charitable organization's obligation under the charitable gift
annuity (as in effect at the time of the transfer to the charitable organization).
In the case of a charitable remainder annuity trust or charitable remainder unitrust (as defined in section
664(d)) that purchases a contract issued by an insurance company, a person who is a recipient of an
annuity or unitrust amount paid by the trust is not treated as an indirect beneficiary under the contract
purchased by the trust, provided the foregoing requirements (1) and (2) (applied with respect to the trust)
are met.
Nothing in the proposal is intended to suggest that a life insurance, endowment, or annuity contract
would be a personal benefit contract, solely because an individual who is a recipient of an annuity or
unitrust amount paid by a charitable remainder annuity trust or charitable remainder unitrust uses such a
payment to purchase a life insurance, endowment or annuity contract, and a beneficiary under the
contract is the recipient, a member of his or her family, or another person he or she designates.
Excise tax
The proposal imposes on any organization described in section 170(c) of the Code an excise tax, in the
amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract,
if the payment of premiums on the contract is in connection with a transfer for which a deduction is not
allowable under the deduction denial rule of the proposal. The excise tax does not apply if all of the
direct and indirect beneficiaries under the contract (including any related side agreement) are
organizations described in section 170(c). Under the proposal, payments are treated as made by the
organization, if they are made by any other person pursuant to an understanding or expectation of
payment. The excise tax is to be applied taking into account rules ordinarily applicable to excise taxes in
chapter 41 or 42 of the Code (e.g., statute of limitation rules).
Reporting
The proposal requires that the organization annually report the amount of premiums that is paid during
the year and that is subject to the excise tax imposed under the provision, and the name and taxpayer
identification number of each beneficiary under the contract to which the premiums relate, as well as
other information required by the Secretary of the Treasury. For this purpose, it is intended that a
beneficiary include the beneficiary under any side agreement to which the section 170(c) organization is
a party (or of which it is otherwise aware). Penalties applicable to returns required under Code section
6033 apply to returns under this reporting requirement. Returns required under this provision are to be
furnished at such time and in such manner as the Secretary shall by forms or regulations require.
Regulations
17 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
The proposal provides for the promulgation of regulations necessary to carry out the purposes of the
provisions.
Effective Date
The deduction denial provision of the proposal applies to transfers after February 8, 1999 (as provided in
H.R. 630). The excise tax provision of the proposal applies to premiums paid after the date of enactment.
The reporting provision applies to premiums (that would be subject to the excise tax were it then
effective) paid after February 8, 1999.
No inference is intended that a charitable contribution deduction is allowed under present law in the
circumstances to which this proposal applies. The proposal does not change the rules with respect to
fraud or criminal or civil penalties under present law; thus, actions constituting fraud or that are subject
to penalties under present law would still constitute fraud or be subject to the penalties after enactment
of the proposal.
G. Treatment of Excess Pension Assets Used for Retiree Health Benefits
Present Law
Defined benefit pension plan assets generally may not revert to an employer prior to the termination of
the plan and the satisfaction of all plan liabilities. A reversion prior to plan termination may constitute a
prohibited transaction and may result in disqualification of the plan. Certain limitations and procedural
requirements apply to a reversion upon plan termination. Any assets that revert to the employer upon
plan termination are includible in the gross income of the employer and subject to an excise tax. The
excise tax rate, which may be as high as 50 percent of the reversion, varies depending upon whether or
not the employer maintains a replacement plan or makes certain benefit increases. Upon plan
termination, the accrued benefits of all plan participants are required to be 100-percent vested.
A pension plan may provide medical benefits to retired employees through a section account that
is a part of such plan. A qualified transfer of excess assets of a defined benefit pension plan (other than a
multiemployer plan) into a section 401(h) account that is a part of such plan does not result in plan
disqualification and is not treated as a reversion to the employer or a prohibited transaction. Therefore,
the transferred assets are not includible in the gross income of the employer and are not subject to the
excise tax on reversions.
Qualified transfers are subject to amount and frequency limitations, use requirements, deduction
limitations, vesting requirements and minimum benefit requirements. Excess assets transferred in a
qualified transfer may not exceed the amount reasonably estimated to be the amount that the employer
will pay out of such account during the taxable year of the transfer for qualified current retiree health
liabilities. No more than one qualified transfer with respect to any plan may occur in any taxable year.
The transferred assets (and any income thereon) must be used to pay qualified current retiree health
liabilities (either directly or through reimbursement) for the taxable year of the transfer. Transferred
amounts generally must benefit all pension plan participants, other than key employees, who are entitled
upon retirement to receive retiree medical benefits through the section 401(h) account. Retiree health
benefits of key employees may not be paid (directly or indirectly) out of transferred assets. Amounts not
used to pay qualified current retiree health liabilities for the taxable year of the transfer are to be returned
at the end of the taxable year to the general assets of the plan. These amounts are not includible in the
gross income of the employer, but are treated as an employer reversion and are subject to a 20-percent
excise tax.
No deduction is allowed for (1) a qualified transfer of excess pension assets into a section 401(h)
account, (2) the payment of qualified current retiree health liabilities out of transferred assets (and any
18 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.hm
income thereon) or (3) a return of amounts not used to pay qualified current retiree health liabilities to
the general assets of the pension plan.
In order for the transfer to be qualified, accrued retirement benefits under the pension plan generally
must be 100-percent vested as if the plan terminated immediately before the transfer.
The minimum benefit requirement requires each group health plan under which applicable heath benefits
are provided to provide substantially the same level of applicable health benefits for the taxable year of
the transfer and the following 4 taxable years. The level of benefits that must be maintained is based on
benefits provided in the year immediately preceding the taxable year of the transfer. Applicable health
benefits are health benefits or coverage that are provided to (1) retirees who, immediately before the
transfer, are entitled to receive such benefits upon retirement and who are entitled to pension benefits
under the plan and (2) the spouses and dependents of such retirees.
The provision permitting a qualified transfer of excess pension assets to pay qualified current retiree
health liabilities expires for taxable years beginning after December 31, 2000.
Description of Proposal
The present-law provision permitting qualified transfers of excess defined benefit pension plan assets to
provide retiree health benefits under a section 401(h) account would be extended through September 30,
2009. (14) In addition, the present-law minimum benefit requirement would be replaced by the minimum
cost requirement that applied to qualified transfers before December 9, 1994, to section 401(h) accounts.
Therefore, each group health plan or arrangement under which applicable health benefits are provided
would be required to provide a minimum dollar level of retiree health expenditures for the taxable year
of the transfer and the following 4 taxable years. The minimum dollar level would be the higher of the
applicable employer costs for each of the 2 taxable years immediately preceding the taxable year of the
transfer. The applicable employer cost for a taxable year would be determined by dividing the
employer's qualified current retiree health liabilities by the number of individuals to whom coverage for
applicable health benefits was provided during the taxable year.
Effective Date
The proposal would be effective with respect to qualified transfers of excess defined benefit pension
plan assets to section 401(h) accounts after December 31, 2000, and before October 1, 2009.
H. Impose Limitation on Prefunding of Certain Employee Benefits
Present Law
Under present law, contributions to a welfare benefit fund generally are deductible when paid, but only
to the extent permitted under the rules of Code sections 419 and 419A. The amount of an employer's
deduction in any year for contributions to a welfare benefit fund cannot exceed the fund's qualified cost
for the year. The term qualified cost means the sum of (1) the amount that would be deductible for
benefits provided during the year if the employer paid them directly and was on the cash method of
accounting, and (2) within limits, the amount of any addition to a qualified asset account for the year. A
qualified asset account includes any account consisting of assets set aside for the payment of disability
benefits, medical benefits, supplemental unemployment compensation or severance pay benefits, or life
insurance benefits. The account limit for a qualified asset account for a taxable year is generally the
amount reasonably and actuarially necessary to fund claims incurred but unpaid (as of the close of the
taxable year) for benefits with respect to which the account is maintained and the administrative costs
incurred with respect to those claims. Specific additional reserves are allowed for future provision of
post-retirement medical and life insurance benefits.
The present-law deduction limits for contributions to welfare benefit funds do not apply in the case of
19 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
certain 10-or-more employer plans. A plan is a 10-or-more employer plan if (1) more than one employer
contributes to it, (2) no employer is normally required to contribute more than 10 percent of the total
contributions under the plan by all employers, and (3) the plan does not maintain experience-rating
arrangements with respect to individual employers.
Description of Proposal
Under the proposal, the present-law exception to the deduction limit for 10-or-more employer plans
would be limited to plans that provide only medical, disability, and group-term life insurance benefits.
This exception would no longer be available with respect to plans that provide supplemental
unemployment compensation, severance pay and life insurance (other than group-term life) benefits.
Thus, the generally applicable deduction limits (sections 419 and 419A) would apply to plans providing
these benefits.
In addition, rules would be included to prevent amounts that are deductible pursuant to the 10-or-more
employer exception (and earnings thereon) from being used to provide benefits other than medical,
disability, and group-term life insurance.
Under the proposal, no inference would be intended with respect to the validity of any 10-or-more
employer arrangement under the provisions of present law.
Effective Date
The proposal would be effective with respect to contributions paid after the date of enactment.
I. Modify Installment Method and Prohibit its Use by Accrual Method Taxpayers
Present Law
An accrual method taxpayer is generally required to recognize income when all events have occurred
that fix the right to the receipt of the income and the amount of the income can be determined with
reasonable accuracy. The installment method of accounting provides an exception to this general
principle if income recognition by allowing a taxpayer to defer the recognition of income from the
disposition of certain property until payment is received. Sales to customers in the ordinary course of
business are not eligible for the installment method, except for sales of property that is used or produced
in the trade or business of farming and sales of timeshares and residential lots if an election to pay
interest under section 453(1)(2)(b)) is made.
A pledge rule provides that if an installment obligation is pledged as security for any indebtedness, the
net proceeds of such indebtedness are treated as a payment on the obligation, triggering the
recognition of income. Actual payments received on the installment obligation subsequent to the receipt
of the loan proceeds are not taken into account until such subsequent payments exceed the loan proceeds
that were treated as payments. The pledge rule does not apply to sales of property used or produced in
the trade or business of farming, to sales of timeshares and residential lots where the taxpayer elects to
pay interest under section 453(1)(2)(b), or to dispositions where the sales price does not exceed
$150,000.
An additional rules require the payment of interest on the deferred tax that is attributable to most large
installment sales.
Description of Proposal
Prohibit use of installment method for accrual method dispositions
The proposal generally would prohibit the use of the installment method of accounting for dispositions
20 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm.
of property that would otherwise be reported for Federal income tax purposes using an accrual method
of accounting.
The proposal does not change present law regarding the availability of the installment method for
dispositions of property used or produced in the trade or business of farming. The proposal also does not
change present law regarding the availability of the installment method for dispositions of timeshares
and residential taxpayers if the taxpayer elects to pay interest under section 453(1)(3).
The proposal does not change the ability of a cash method taxpayer to use the installment method. For
example, a cash method individual owns all of the stock of a closely held accrual method corporation.
This individual sells his stock for cash, a ten year note, and a percentage of the gross revenues of the
company for next ten years. The proposal would not change the ability of this individual to use the
installment method in reporting the gain on the sale of the stock.
Modify pledge rule
The proposal would also modify the pledge rule to provide that entering into any arrangement that gives
the taxpayer the right to satisfy an obligation with an installment note will be treated in the same manner
as the direct pledge of the installment note. For example, a taxpayer disposes of property for an
installment note. The disposition is properly reported using the installment method. The taxpayer only
recognizes gain as it receives the deferred payment. However, were the taxpayer to pledge the
installment note as security for a loan, it would be required to treat the proceeds of such loan as a
payment on the installment note, and recognize the appropriate amount of gain. Under the proposal, the
taxpayer would also be required to treat the proceeds of a loan as payment on the installment note to the
extent the taxpayer had the right to repay the loan by transferring the installment note to the taxpayer's
creditor. Other arrangements that have a similar effect would be treated in the same manner.
The proposed modification of the pledge rule would only apply to installment sales where the pledge
rule of present law applies. Accordingly, the proposal would not apply to installment method sales made
by a dealer in timeshares and residential lots where the taxpayer elects to pay interest under section
453(1)(2)(b), to sales of property used or produced in the trade or business of farming, or to dispositions
where the sales price does not exceed $150,000, since such sales are not subject to the pledge rule under
present law.
Effective Date
The proposal would be effective for installment sales entered into on or after the date of enactment.
J. Add Certain Vaccines Against Streptococcus Pneumonia
to the List of Taxable Vaccines
Present Law
A manufacturer's excise tax is imposed at the rate of 75 cents per dose (sec. 4131) on the following
vaccines routinely recommended for administration to children: diphtheria, pertussis, tetanus, measles,
mumps, rubella, polio, HIB (haemophilus influenza type B), hepatitis B, varicella (chicken pox), and
rotavirus gastroenteritis. The tax applies to any vaccine that is a combination of vaccine components
equals 75 cents times the number of components in the combined vaccine.
Amounts equal to net revenues from this excise tax are deposited in the Vaccine Injury Compensation
Trust Fund to finance compensation awards under the Federal Vaccine Injury Compensation Program
for individuals who suffer certain injuries following administration of the taxable vaccines. This
program provides a substitute Federal, "no fault" insurance system for the State-law tort and private
liability insurance systems otherwise applicable to vaccine manufacturers. All persons immunized after
September 30, 1988, with covered vaccines must pursue compensation under this Federal program
21 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
before bringing civil tort actions under State law.
Description of Proposal
The proposal would add conjugated streptococcus pneumonia vaccines to the list of taxable vaccines.
Effective Date
The proposal would be effective for vaccine purchases beginning on the day after the date on which the
Centers for Disease Control make final recommendation for routine administration of conjugated
streptococcus pneumonia vaccines to children. No floor stocks tax would be collected for amounts held
for sale on that date.
FOOTNOTES
1. This document may be cited as follows: Joint Committee on Taxation, Description of Chairman's
Mark of Proposals Relating to Education Incentives (JCX-20-99) May 17, 1999.
2. Education IRAs generally are not subject to Federal income tax, but are subject to the unrelated
business income tax ("UBIT") imposed by section 511.
3. An excise tax may be imposed under present law to the extent that excess contributions above the
$500 annual limit are made to an education IRA.
4. "Eligible educational institutions" are defined the same for purposes of education IRAs (described in
Part A, above) and qualified State tuition programs.
5. Distributions from qualified State tuition programs are treated as representing a pro-rata share of the
principal (i.e., contributions) and accumulated earnings in the account.
6. Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) provide special estate and gift tax rules for
contributions made to, and distributions made from, qualified State tuition programs and education
IRAs.
7. These rules also apply in the event that section 127 expires and is not reinstated.
8. In the case of an employee, education expenses (if not reimbursed by the employer) may be claimed
as an itemized deduction only if such expenses, along with other miscellaneous deductions, exceed 2
percent of the taxpayer's AGI. The 2-percent floor limitation is disregarded in determining whether an
item is excludable as a working condition fringe benefit.
9. The maximum allowable deduction for 1998 was $1,000.
10. 1998-51 I.R.B. 16.
11. An Act to provide that members of the Armed Forces performing services for the peacekeeping
efforts in Bosnia and Herzegovina, Croatia, and Macedonia shall be entitled to tax benefits in the same
manner as if such services were performed in a combat zone, and for other purposes (March 20, 1996).
12. These user fees were originally enacted in section 10511 of the Revenue Act of 1987 (Public Law
100-203, December 22, 1987).
13. The proposal is similar to H.R. 630, introduced by Mr. Archer for himself and for Mr. Rangel (106th
Cong., 1st Sess.).
22 of 23
2/22/2000 8:39 PM
JCX-20-99 SFC CHAIRMAN'S MARK RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-20-99.htm
14. In addition to amendments to the Internal Revenue Code, the proposal would make conforming
amendments to applicable sections of the Employee Retirement Income Security Act ("ERISA").
15. The net proceeds equal the gross loan proceeds less the direct expenses of obtaining the loan.
23 of 23
2/22/2000 8:39 PM
JCX-22-99 MODIFICATIONS OF SFC CHA K RELATING TO EDUCATION INCENTIVES
http://www.house.gov/jct/x-22-99.htm
Joint Committee on Taxation
May 19, 1999
JCX-22-99
DESCRIPTION OF MODIFICATION TO CHAIRMAN'S MARK
OF PROPOSALS RELATING TO EDUCATION INCENTIVES
The Senate Committee on Finance has scheduled a markup on May 19, 1999, on various education tax
incentives in an original bill, entitled the "Affordable Education Act of 1999." A description of the
Chairman's Mark is contained in Description of Chairman's Mark of Proposals Relating to Education
Incentives (JCX-20-99), May 17, 1999.
Under the modification, a taxpayer would be permitted to claim a HOPE or Lifetime Learning credit for
a taxable year and receive an exclusion from gross income for amounts distributed (both the principal
and earnings portions) from an education individual retirement account and/or from a qualified tuition
program on behalf of the same student in the same year as long as the distributions are not used for the
same expenses for which a credit was claimed. This modification would be effective for distributions
made during the period January 1, 2000, through December 31, 2003.
Under the modification, the exclusion for employer-provided education assistance, as applied to both
graduate and undergraduate education, would be extended through courses beginning on or before June
30, 2004. (1)
FOOTNOTE
1. The Description of Chairman's Mark of Proposals Relating to Education Incentives (JCX-20-99),
May 17, 1999, at p. 11 under the heading "Effective Date," incorrectly states that the Chairman's Mark
would extend the exclusion for graduate-level courses to courses beginning after January 1, 2000, and
before June 1, 2004. The effective date is correctly stated, at p. 11 under the "Description of Proposal,"
as graduate-level courses beginning after January 1, 2000, and before January 1, 2004.
1 of 1
2/22/2000 8:41 PM
May 18, 1999
Honorable William V. Roth, Jr.
Chairman, Committee on Finance
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
We write to express our strong opposition to proposals for education tax incentives (Joint
Committee on Taxation, "Description of Chairman's Mark of Proposals Relating to Education
Incentives" (JCX-020-99), May 17, 1999), which we understand your committee will consider
this week In the summer of 1997, as Congress was in the final stages of consideration of the
Taxpayer Relief Act of 1997, the President stated that be would veto the legislation if it
contained a proposal relating to Education Savings Accounts that is similar to the education
savings account proposal contained in the Chairman's mark. In 1998, we wrote to inform you
that we would recommend to the President that he veto similar legislation, which, after
consideration and approval by Congress, he did. If this proposal were to pass the Congress this
year, we again would recommend to the President that he veto the bill.
Every American child deserves a high-quality elementary and secondary education. We believe
that targeting our limited Federal resources to build stronger public schools will help ensure that
all our children receive the education they need to be productive citizens. Public schools serve
approximately 90 percent of students in grades K-12 and currently face record-breaking
enrollments. By focusing resources on public schools, we can leverage community investment
to help parents, teachers, and administrators meet the important educational challenges they face
in serving the vast majority of our children: meeting high standards for learning and discipline;
fixing school buildings; and providing a safe, drug-free environment for children. [For this
reason, the President's FY 2000 budget proposals include a school modernization bond initiative
that would leverage $25 billion to renovate and build up to 6,000 public schools. In contrast, the
Chairman's mark falls far short of adequately addressing the overwhelming problems that States
and local communities face in building and modernizing their schools.]
The current bill disproportionately benefits the most affluent families and provides little benefit
to lower- and middle-income families. Additionally, given the expansion of tax-preferred
savings vehicles in the Taxpayer Relief Act of 1997, which the Administration supported, we do
not believe that further increasing the contribution limits for Education IRAs will generate much
additional savings. Instead, the Chairman's mark would reward families, particularly those with
significant means, for what they may do in any case.
We are also concerned that the bill would create significant compliance problems. The
legislation allows tax-free withdrawals from Education IRAs for, among other things, tuition,
fees, academic tutoring, special needs services, books, supplies and equipment expenses incurred
in connection with the child's enrollment or attendance at a public or private elementary or
secondary school. Withdrawals would also be tax-free if used for room and board, uniforms,
transportation or supplementary items or services required or provided by the school
FEB-22-00 20:38 FROM:
Page 2 - Honorable William V. Roth, Jr.
Distinguishing between an appropriately tax-free withdrawal and one that should be subject to
tax would lead to significant additional record-keeping burdens for families and schools, as well
as disputes when discretionary purchases are made.
in addition to the points outlined above, we have other concerns with proposals in the bill that
are not described in this letter.
We understand that Senators Robb and Conrad intend to offer a substitute that would replace the
education IRA proposals in this bill with school modernization/construction bond proposals
similar to those in the President's budget for fiscal year 2000. We strongly prefer that proposal
and other alternatives that devote Federal revenue to improving the public schools so that a high-
quality education is available to every American child regardless of his or her family income.
Therefore, we strongly support the Robb-Conrad substitute.
Thank you for letting us bring our concerns to your attention, and we look forward to working
with you on these important budget and tax issues in the days ahead.
Sincerely,
Robert E. Rubin Rily
Richard W. Riley
Secretary of the Treasury
Secretary of Education
TOTAL P.04
TOTAL P.03
Karen Robb
02/22/2000 09:41:09 PM
Record Type:
Record
To:
Charles M. Brain/WHO/EOP@EOP
CC:
Rebecca Hunter/WHO/EOP@EOP, Rebecca Hunter/WHO/EOP@EOP, Joanna E.
Slaney/WHO/EOP@EOP
Subject: S. 1134, the Affordable Education Act of 1999
Lott may seek U.C. on this bill tomorrow. Because the prospects of getting u.c. are slim to none the Senate
is not likely to debate this until next week at the earliest. This bill is $8 billion package of education tax
initiatives. ( While this bill contains revenue offsets that cover the costs of the bill, $2.5 billion were already
used last year in the tax extender bill). This bill is similar to one passed by the Congress and vetoed by the
President in 1998. Below is a list of key provisions, the most controversial is the Education Savings
accounts (IRAs). According to Moynihan's staff the remainder of the provisions have bipartisan support.
Education Savings Accounts--this authorizes an increase in educ. svgs accts from $500-$2,000 and
authorizes tax free distributions for K-12 education and homeschooling--currently only higher education
expenses qualify. In 1997, the Pres. threatened to veto this in the Taxpayer Relief Act. These IRAs are not
only objectionable because they favor the wealthy but they are also seen as tantamount to a school
voucher for private schools.
Prepaid Tuition Plans.--this authorizes the expansion of tax benefits of qualified state tuition plans to allow
tax-free withdrawals for qualifed education expenses. This would also authorize the formation of private
prepaid tuition plans with tax-free withdrawals begining in 2003.
Section 127--this authorizes an income exclusion for employer provided eduation assistance for graduate
studies. This provision expired in 1996 and the undergraduate income exclusion will expire in Dec. of
2000. This bill extends to June 2004 the exclusion for undergraduate and graduate course work.
Student Loan Interest-- this provision would permit the deductibility of interest for the life of the loan.
Currently, the interest is deductible for 60 months after the repayment of the loan begins.
E
-
02/22/00
21:46
MEMORANDUM FOR DEMOCRATIC TAX LAs
From:
Russ Sullivan
Senate Finance Committee
Subject:
Overview of Finance Committee Education Tax Bill
Date:
Tuesday, February 22, 2000
The Senate leadership may move on Wednesday, February 23, 2000 to bring S.1134, the
Affordable Education Act of 1999, to the Senate floor. This $8 billion package of education tax
initiatives was marked up in the Finance Committee on May 19, 1999. It was reported out on a
vote of 12-8 with all Republicans except Sens. Chafee and Jeffords supporting the bill and all
Democrats except Sens. Breaux, Graham and Kerrey opposing the bill. The package is similar to
the one passed by the Congress and vetoed by President Clinton in 1998. The bill is fully paid
for with tax raisers, principally from the President's budget. Some of the provisions were
enacted into law in the tax extenders package passed in November 1999. The bill contains the
following provisions:
Education Savings Accounts (Education IRAs). The bill incorporates the so-called
"Coverdell bill" through an increase in the annual contribution to education savings accounts
from $500 to $2000 and by authorizing tax-free distributions for K-12 education and
homeschooling expenses (currently, only higher education expenses qualify). The expansion
would only be effective from 2000 to 2003; after that time annual contributions would be limited
to $500, and K-12 withdrawals could only be made from contributions made during the period
from 2000 and 2003 (and the earnings on such contributions). This K-12 withdrawal feature is
by far the most controversial component in the bill. In 1997, President Clinton threatened to veto
the Taxpayer Relief Act of 1997 if this provision had been included.
The bill would also allow post-age 18 contributions for special needs children, and permit
businesses to establish education savings accounts (though no non-discrimination rules would be
imposed). In addition, the bill would provide coordination rules between education savings
accounts and the HOPE credit, allowing taxpayers to both exclude distributions from their
education savings account from income and claim the HOPE credit, provided they are not used
for the same expenses. These coordination rules expire in 2003. Senator Torricelli is the lead
mgrands.
Democratic sponsor of this provision.
Prepaid Tuition Plans. The bill expands the tax benefits of qualified state tuition plans
to allow tax-free withdrawals for qualified education expenses. The bill also would allow for the
formation of private prepaid tuition plans with tax-free withdrawals beginning in 2003. The bill
also contains coordination rules between the prepaid tuition plans and the HOPE credit.
However, these coordination rules sunset in 2003. Senators Graham, McConnell and Sessions
have championed these provisions.
E
02/22/00
21:46
Section 127. The income exclusion for employer-provided education assistance for
graduate studies expired June 30, 1996. The provision will expire for undergraduate studies
December 31, 2000. The bill would extend the provision through June 30, 2004 for both
undergraduate and graduate course (effective for graduate courses on January 1, 2000).
Senators Moynihan, Roth and others have championed this provision, which is included in the
President's FY2001 budget.
School Construction. The package contains three school construction items. First, the
bill would exempt up to $15 million in tax-exempt school construction bonds issued by small
school districts from the anti-arbitrage rebate rule, thus allowing districts to earn a limited
amount of arbitrage profits on their school construction bonds. Second, the bill includes a
proposal to permit public private partnerships for school construction using private activity
bonds (which are tax-exempt). Each state would receive bond authority of $10 per resident
under a separate cap. Senators Graham and Grassley sponsored these provisions. Third, the bill
n
would permit the Federal Housing Finance Board to guarantee school construction bonds.
Senator Roth sponsored this provision.
Student Loan Interest. The bill includes a provision to eliminate the 60-month limit on
deductibility of student loan interest. Under current law, a taxpayer may only deduct interest on
his or her student loans for 60 months after the repayment obligation begins. The proposal
would allow deductibility for the life of the loan. This proposal was included in President
Clinton's FY2001 budget. Senators Baucus and Grassley have introduced legislation to
accomplish this.
Revenue Offsets. A package of 10 revenue offsets, principally from the tax accounting
and employee benefits areas pays for the bill. About half of these proposals were tax raisers
included in the President's FY2000 budget. Four of the ten, raising $2.5 billion, were partially or
wholly included in the Ticket to Work and Work Incentives Improvement Act of 1999..
House Bill. The House Ways & Means Committee has not yet taken up this or similar
legislation this Congress.
Likely Changes By Proponents. If the bill were brought up, it is likely that the
proponents would seek to modify the bill to not sunset provisions in 2003 and would seek to
drop many or all of the revenue offsets. At the time the bill was marked up in the Finance
Committee, most Members insisted on it being fully paid for. Since then, budget surplus
estimates have emerged and Democrats and the Administration agreed to enact the tax extenders
bill without fully paying for it.
VII. MINORITY VIEWS
The undersigned Members of the Committee on Finance opposed the
Affordable Education Act of 1999, as reported by the Finance Committee
on May 19, 1999. We opposed the bill because, as explained below, we
believe its central feature--the proposal to expand education IRAs--is
seriously flawed. We were also troubled by the Committee's failure to
comprehensively address in this bill the pressing need for improved
school infrastructure in the states.
EMPLOYER PROVIDED EDUCATIONAL ASSISTANCE
The bill includes an extension of the Internal Revenue Code Section
127, employer provided educational assistance, which we strongly
support. Section 127 is one of the most successful Federal education
policies in place today. Approximately one million persons per year
participate in employer educational assistance programs; about a quarter
of those are enrolled in graduate-level courses. Employers benefit
substantially from the ability to send employees to school to acquire
additional skills. In a world of continuing education, where science and
technology change constantly, Section 127 permits employers to provide
education benefits to employees, who then bring new skills back into the
workplace and earn more income. The Federal Treasury in turn receives
more tax revenue. This is a program that works, and it administers
itself.
The Finance Committee and Senate versions of the Taxpayer Relief Act
of 1997 made Section 127 permanent for both undergraduate and graduate
study. However, the Senate language was dropped in conference, leaving
only undergraduate study eligible under the Code. We believe that the
Committee has acted appropriately in once again seeking to extend the
benefit of this provision to graduate students, and in extending the
entire provision until June 30, 2004. We hope this position is sustained
in the Senate bill, and in conference with the House.
QUALIFIED TUITION PLANS
We are also pleased that the bill reported by the Committee includes
a provision to expand the tax benefits accorded to qualified State
tuition plans. These programs have been adopted by, or are being
considered in, each of the States, to provide a vehicle whereby parents
and students can save for the costs of college. The Congress recognized
the importance of these programs in the Small Business Job Protection
Act of 1996 by enacting rules designed to clarify that the programs are
tax-exempt and that the beneficiaries of the plans should not be taxed
until funds are withdrawn from the plans. The prepaid tuition plan rules
were further modified in the Taxpayer Relief Act of 1997.
The proposal in the Committee bill to exclude certain distributions
from qualified tuition plans from gross income would contribute to tax
simplification. Parents and students would be able to participate in the
programs and withdraw funds for college expenses without having to
determine which portion of the withdrawal represents earnings versus a
return of contributions.
STUDENT LOANS
We also applaud the Committee for including a proposal to repeal the
limit on the number of months during which interest paid on a student
loan is deductible. Enactment of this proposal will eliminate
significant complexity and administrative burden on the part of
financial institutions, borrowers and the Internal Revenue Service.
EDUCATION IRAS
We appreciate the good intentions of the proponents of expanding the
availability of education IRAs. However, the proposed changes to current
law included in the Committee bill are fraught with serious policy and
technical defects. The Secretary of the Treasury and the Secretary of
Education expressed strong opposition to the education IRA provisions in
this bill, and indicated that they will recommend that the President
veto a bill that contains such provisions. In a letter to members of the
Finance Committee dated May 18, 1999, Secretaries Rubin and Riley argued
that the provisions would disproportionately benefit the most affluent
families and provide little or no benefit to lower and middle-income
families. In addition, they indicated that the provisions "would create
significant compliance problems."
Previous Treasury analyses conclude that seventy percent of the tax
benefits from this provision would go to the top twenty percent of all
taxpayers. The staff of the Joint Committee on Taxation estimates that
the average tax benefit to families with students attending public
elementary and secondary schools would be $5.00 per year.
We therefore believe that the bill will not result in greater
opportunity for middle and lower income families to send their children
to private schools, as supporters contend. Instead, it will merely
provide new tax breaks to families already able to afford private
schools for their children. Nor do we believe that expansion of the
contribution limit and tax-free withdrawal opportunities for education
IRAs will lead to increased savings. In our view, these changes will
provide further incentives for taxpayers to shift money to tax-favored
accounts, and to spend funds that would otherwise be used for
retirement.
Further, we are concerned about the additional complexity these
changes would add to the Internal Revenue Code. At a time when calls for
simplifying, and even abolishing, the income tax grow ever louder,
enactment of the proposed changes to the education IRA provisions would
add a maze of new rules and unanswered questions with which taxpayers
0
Nanda Chitre
01/18/2000 08:23:42 PM
Record Type:
Record
To:
See the distribution list at the bottom of this message
CC:
VII. MINORITY VIEWS
The undersigned Members of the Committee on Finance opposed the
Affordable Education Act of 1999, as reported by the Finance Committee
on May 19, 1999. We opposed the bill because, as explained below, we
believe its central feature--the proposal to expand education IRAs--is
seriously flawed. We were also troubled by the Committee's failure to
comprehensively address in this bill the pressing need for improved
school infrastructure in the states.
EMPLOYER PROVIDED EDUCATIONAL ASSISTANCE
The bill includes an extension of the Internal Revenue Code Section
127, employer provided educational assistance, which we strongly
support. Section 127 is one of the most successful Federal education
policies in place today. Approximately one million persons per year
participate in employer educational assistance programs; about a quarter
of those are enrolled in graduate-level courses. Employers benefit
substantially from the ability to send employees to school to acquire
additional skills. In a world of continuing education, where science and
technology change constantly, Section 127 permits employers to provide
education benefits to employees, who then bring new skills back into the
workplace and earn more income. The Federal Treasury in turn receives
more tax revenue. This is a program that works, and it administers
itself.
The Finance Committee and Senate versions of the Taxpayer Relief Act
of 1997 made Section 127 permanent for both undergraduate and graduate
study. However, the Senate language was dropped in conference, leaving
only undergraduate study eligible under the Code. We believe that the
Committee has acted appropriately in once again seeking to extend the
benefit of this provision to graduate students, and in extending the
entire provision until June 30, 2004. We hope this position is sustained
in the Senate bill, and in conference with the House.
QUALIFIED TUITION PLANS
We are also pleased that the bill reported by the Committee includes
a provision to expand the tax benefits accorded to qualified State
tuition plans. These programs have been adopted by, or are being
considered in, each of the States, to provide a vehicle whereby parents
and students can save for the costs of college. The Congress recognized
the importance of these programs in the Small Business Job Protection
Act of 1996 by enacting rules designed to clarify that the programs are
tax-exempt and that the beneficiaries of the plans should not be taxed
until funds are withdrawn from the plans. The prepaid tuition plan rules
were further modified in the Taxpayer Relief Act of 1997.
The proposal in the Committee bill to exclude certain distributions
from qualified tuition plans from gross income would contribute to tax
simplification. Parents and students would be able to participate in the
programs and withdraw funds for college expenses without having to
determine which portion of the withdrawal represents earnings versus a
return of contributions.
STUDENT LOANS
We also applaud the Committee for including a proposal to repeal the
limit on the number of months during which interest paid on a student
loan is deductible. Enactment of this proposal will eliminate
significant complexity and administrative burden on the part of
financial institutions, borrowers and the Internal Revenue Service.
EDUCATION IRAS
We appreciate the good intentions of the proponents of expanding the
availability of education IRAs. However, the proposed changes to current
law included in the Committee bill are fraught with serious policy and
technical defects. The Secretary of the Treasury and the Secretary of
Education expressed strong opposition to the education IRA provisions in
this bill, and indicated that they will recommend that the President
veto a bill that contains such provisions. In a letter to members of the
Finance Committee dated May 18, 1999, Secretaries Rubin and Riley argued
that the provisions would disproportionately benefit the most affluent
families and provide little or no benefit to lower and middle-income
families. In addition, they indicated that the provisions would create
significant compliance problems."
Previous Treasury analyses conclude that seventy percent of the tax
benefits from this provision would go to the top twenty percent of all
taxpayers. The staff of the Joint Committee on Taxation estimates that
the average tax benefit to families with students attending public
elementary and secondary schools would be $5.00 per year.
We therefore believe that the bill will not result in greater
opportunity for middle and lower income families to send their children
to private schools, as supporters contend. Instead, it will merely
provide new tax breaks to families already able to afford private
schools for their children. Nor do we believe that expansion of the
contribution limit and tax-free withdrawal opportunities for education
IRAs will lead to increased savings. In our view, these changes will
provide further incentives for taxpayers to shift money to tax-favored
accounts, and to spend funds that would otherwise be used for
retirement.
Further, we are concerned about the additional complexity these
changes would add to the Internal Revenue Code. At a time when calls for
simplifying, and even abolishing, the income tax grow ever louder,
enactment of the proposed changes to the education IRA provisions would
add a maze of new rules and unanswered questions with which taxpayers
and the IRS would be forced to contend.
Taxpayers and the IRS will have difficulty interpreting the
definition of a 'qualified education expense." For example, such
expenses are defined in the bill to include computers and related
software and services in connection with the enrollment or attendance of
the beneficiary of an education IRA at a school providing elementary or
secondary education. Yet the bill provides no guidance for the IRS to
determine whether a computer (or use of the Internet) is used by a child
for educational purposes or for entertainment, or by the child's parents
for unrelated purposes.
The proposal would also add significant complexity by requiring
taxpayers to make sophisticated financial calculations each time a
withdrawal from the education IRA is made. For instance, after 2003,
withdrawals for elementary and secondary education expenses can be
made--but only from contributions made during the period from 2000 to
2003 (and from earnings on such contributions). The law already includes
complicated rules for taxpayers to determine the portion of a withdrawal
that represents earnings, and the portion that represents a return of
contributions. This bill would create different tax consequences
depending on whether a withdrawal relates to contributions from three
time periods (1999, 2000 2003, and post-2003), and from earnings on such
contributions.
SCHOOL INFRASTRUCTURE
The bill includes a $5 million increase in the small government
issuer exception to the arbitrage rebate requirement, provided the
proceeds are used for school construction. In addition, the bill
promotes public-private partnerships in school construction by allowing
tax-exempt private activity bonds to be issued for public school
facilities. While we applaud the inclusion of these provisions, they
alone will not provide the financing tools to facilitate the school
construction and modernization needs of our nation's school districts.
We believe that the amendment offered by Senator Robb and Senator
Conrad in the Committee, to establish school modernization bonds, would
provide substantial resources to address the pressing needs of school
construction and repair. The proposal would authorize up to $25 billion
in qualified school modernization bonds, holders of which would receive
tax credits in lieu of an interest payment from the issuer of the bond.
This proposal targets aid to the public schools with the greatest needs:
those that are over-crowded and those that are in drastic need of
repair. A portion of the bonds would benefit school districts with the
highest percentage of low-income students. States would allocate the
remaining bonds in a manner to efficiently leverage the tax incentive
and maximize the number of districts able to build and repair schools.
Ninety percent of the students of this country attend public schools.
The benefits of the K 12 education IRA proposal included in the bill
would accrue principally to wealthier families whose children attend
private schools. The Committee should have focused our limited resources
on the public school system. The needs for school construction and
modernization, including helping schools provide students with access to
computers, are too great to ignore. We remain committed to identifying
and pursuing solutions to this critical problem.
Daniel P. Moynihan.
Max Baucus.
John D. Rockefeller.
Kent Conrad.
Richard Bryan.
Charles Robb.
03/01/00 WED 16:30 FAX
002
03/01/00
17:23
202 224 3267
CAPITOL S-229
1
002
S.L.C.
O:\BAI\BAI00.241
Key Bailey Jutchism Jutchison
#2860
AMENDMENT NO.
Calendar No.
Purpose: To establish the Careers to Classrooms Program.
IN THE SENATE OF THE UNITED STATES-106th Cong., 2d Sess.
S.1134
To amend the Internal Revenue Code of 1986 to allow tax-
free expenditures from education individual retirement
accounts for elementary and secondary school expenses,
to increase the maximum annual amount of contribu-
tions to such accounts, and for other purposes.
Referred to the Committee on
and ordered to be printed
Ordered to lie on the table and to be printed
AMENDMENT
intended
to
be
proposed
by
Viz:
1
At the appropriate place, insert the following:
2 SEC.
- CAREERS TO CLASSROOMS.
3
(a) DEFINITIONS.-In this section:
4
(1) IN GENERAL-The terms "elementary
5
school", "local educational agency", "secondary
6
school", and "Secretary" have the meanings given
7
the terms in section 14101 of the Elementary and
8
Secondary Education Act of 1965 (20 U.S.C. SS01).
February 29, 2000
1:45 p.m.
S.1134 Amendments Filed
Senator Abraham
2825 Deduction for Computer Donations To Schools (with Wyden). Current law provides
taxpayers with a deduction in an amount greater than the fair market value of a computer
donated to K-12 schools if the computer is less than two years old. The proposal would
extent the enhanced deduction to donations of computers up to three years old. Current
law does not provide a credit for the donation of computers to schools or senior centers.
Taxpayers may claim a charitable deduction if the recipient is a qualified organization.
The amendment would provide a credit of up to 30% of qualified computer contributions
to schools and senior centers. The credit would be increased to 50% if the recipient is
located in an empowerment zone, enterprise community or Indian reservation.
Senator Collins
2954 Deduction for Teacher Professional Development Expenses and Credit for
Unreimbursed Expenses for Classroom Materials. Under current law, a teacher (or
any other taxpayer) may only deduct unreimbursed business expenses to the extent that,
in the aggregate, they exceed 2% of adjusted gross income. The amendment would allow
an itemized deduction (not subject to the 2% floor) or a credit for unreimbursed
professional development expenditures a teacher incurs. In addition, the amendment
would provide a credit of up to $100 for unreimbursed costs associated with providing
classroom materials.
Senator Coverdell
2839 Provide Teachers Protection Against Certain Lawsuits. [Judiciary Committee
explanation pending]
2840 Eliminate the Sunset of the ESA Contribution Limit Increase. Due to revenue
constraints, the Finance Committee bill provided for an increase to $2000 in allowable
contributions to an ESA only through December 31, 2003. The amendment would make
that increase permanent.
1
Senator Dodd
2850 Eliminate the provision to allow EDAs for K-12 tuition and fees. The amendment
would disallow spending ESA withdrawals for K-12 tuition and fees. It would allow the
tax-free withdrawals to be used for other purposes (e.g., computers, uniforms) at public
and private schools.
2857 $1.2 billion in funding for IDEA. The amendment strikes the ESA provisions in the bill
and appropriates the $1.2 billion in savings to carry out part B of the Individuals with
Disabilities Education Act.
Senator Feinstein
2845 Require States Receiving Federal Funds under ESEA to Implement Achievement
Standards and Assess Student Performance in Meeting the Standards. The
amendment would require that State and local education agencies (1) implement State
achievement standards in the core curriculum at key transition points, to be determined by
the State, for all K-12 students and (2) assess student performance in meeting the State
achievement standards in order to receive federal funds under ESEA.
2846 Facilitate the Adoption of State Policies with Respect to Prohibiting the Practice of
Social Promotion. The amendment would preclude states from making ESEA funds
available to a local educational agency unless the State demonstrates to the Secretary of
Education that the State has adopted a policy prohibiting the practice of social promotion.
Senator Graham
2843 Provide Offsets for the Entire Bill. The bill reported out by the Finance Committee in
May 1999 contained 10 revenue provisions raising $8 billion over 10 years. The Ticket
To Work legislation enacted by Congress in November 1999 contained parts or all of five
of these 10 revenue offsets. The remaining five offsets would raise approximately $5.5
billion over 10 years. The amendment would provide up to approximately $25 billion in
additional revenues to cover the $2.5 billion shortfall currently in the bill and increased
costs that might be added through amendments. The raisers include reinstating the
superfund excise taxes, eliminating the lower-of-cost-or-market method of accounting for
inventories and provisions to reduce tax benefits associated with corporate tax shelters.
2
2844 Eliminate the Sunset on the Coordination Rules Between Qualified Tuition
Programs and the Hope and Lifetime Learning Credits. Under the bill, distributions
from qualified state tuition plans would be tax free. The bill provides that taxpayers
could only claim both tax-free treatment of qualified state tuition plan distributions and
the Hope credit/Lifetime Learning credit if they are for different qualified expenses. Due
to revenue constraints, this coordination provision sunsets December 31, 2003. The
amendment makes the coordination rules permanent.
2847 Provide Funds to Assist High-Poverty School Districts Meet their Teaching Needs.
The amendment would build on the Troops To Teachers initiative to provide a $5,000
grant to individuals willing to change to a teaching career and commit to teaching at least
three years in low-income schools as defined under Title I of ESEA. The grants can be
used toward the cost of courses and training necessary to become qualified teachers.
2848 Expanded Opportunities for School Construction Financing. Current law requires
school districts issuing bonds to spend the proceeds of those bonds within three years or
pay to the IRS the excess of interest earned on bond proceeds over the interest payments
to holders of the bonds. The amendment would extend that spend-down period to four
years. Under current law, financial institutions are limited in their ability to be holders of
school construction bonds. The amendment would allow financial institutions to
purchase school construction bonds issued by districts issuing no more than $25,000,000
in bonds.
Senator Gramm
2828 Disallow Federal Home Loan Bank System Guarantee of School Construction
Bonds. Under current law, bonds cannot be tax exempt (meaning the interest is not
taxable income to the bondholder) if the bonds are guaranteed by a federal government
agency. The theory is that bonds should not receive two separate federal subsidies.
Exceptions are made for certain bonds guaranteed by certain governmental entities under
programs in existence when the rule was enacted. The Finance Committee bill contained
a provision permitting the Federal Home Loan Bank System to guarantee up to $500
million per year in school construction bonds. The amendment would delete this
provision from the bill.
Senator Hatch
2823 Deduction for teacher expenses. Under current law, a teacher (or any other taxpayer)
may only deduct unreimbursed business expenses to the extent that, in the aggregate, they
exceed 2% of adjusted gross income. The amendment would allow an above-the-line
3
deduction for teacher professional development and incidental costs. The teacher could
claim a deduction for every dollar of qualified expenses.
2824 Marriage Penalty in Student Loan Interest Deduction (with Mack). Under current
law, the deduction for interest on qualified student loans is phased out for single filers
beginning at $40,000 and is not available for those with income above $55,000. For
married filers, the phase-out range is $60,000-$75,000. The proposal would increase the
phase-out trigger for married couples to $80,000 and extend the phase-out range to
$110,000. The result would be phase-outs for joint filers that is twice that of single filers.
Senator Kennedy
2849 Eliminate the Provisions to Allow ESAs for K-12 School Expenses at Private or
Religious Schools. The amendment would preclude taxpayers from receiving tax-free
distributions from an ESA and using those funds for K-12 school expenses at private or
religious schools. Expenditures for public school K-12 expenses would be permitted
under the amendment.
2851 Eliminate the provision to allow ESAs for K-12 expenses. The amendment would
eliminate the use of ESAs for any K-12 expenditure. Under the amendment, ESAs could
only be used for higher education expenses.
Senator Kerry
NYF Exclusion of National Service Educational Awards from Income. Under current law,
scholarship and grants generally are excludable from income. Because Americorps
education awards are considered to represent payment for services rendered, they are
currently includable in taxable income. The amendment would provide that Americorps
education awards are scholarships for federal income tax purposes and may be excluded
from income..
Senator Kyl
2841 Allow an Above-the-Line Deduction or Credit for K-12 Teachers Who Provide
Classroom Materials. Under current law, a teacher (or any other taxpayer) may only
deduct unreimbursed business expenses to the extent that, in the aggregate, they exceed
2% of adjusted gross income. The amendment would allow either an above-the-line
deduction or a credit for unreimbursed expenditures a teacher incurs to provide classroom
materials. The credit would be limited to $100 per year. The deduction would not be
limited.
4
2842 Permit a $100 Credit for K-12 Teachers who Provide Classroom Materials. Under
current law, a teacher (or any other taxpayer) may only deduct unreimbursed business
expenses to the extent that, in the aggregate, they exceed 2% of adjusted gross income.
The amendment would allow a credit for unreimbursed expenditures a teacher incurs to
provide classroom materials. The credit would be limited to $100 per year.
Senator Mack
2827 Marriage Penalty in the Reduction of Permitted ESA Contributions (with Hatch).
Under current law, the $500 annual contribution (raised to $2,000 in the bill) limit for
ESAs is phased out ratably for single filers with modified adjusted gross income between
$95,000 and $110,000. The phase out range for joint filers is $150,000 and $160,000 for
joint returns. The amendment would increase the phase-out range for joint filers to
$190,000 to $220,000, double the amount applicable to single filers.
Senator Robb
2829 Eliminate the Use of ESAs for K-12 School Expenses at Private or Religious Schools.
Under the bill, individuals could withdraw funds tax-free from an ESA for qualified
expenses at a public, private or home school. The amendment would deny the tax-free
withdrawal for expenses at private, religious or home schools. Under the amendment,
tax-free withdrawals would be available only for qualified expenses at public schools.
2830 Tax Credit Bonds for School Modernization. The amendment would establish a new
program under which holders of qualified school modernization bonds would be allowed
a tax credit generally equal to the market interest rate. The federal government would
allocate $25 billion in qualified school modernization bonds to the states and designated
school districts. The amendment would be paid for in part by eliminating the provision to
allow tax-free ESA distributions for K-12 expenses.
Senator Roth
2831 Substitute.
2832 Advance Effective Dates of Title I (Education Savings Incentives) By One Year. The
Finance Committee bill was reported out in May 1999 and made the changes to the ESAs
and qualified state tuition plans effective for years after December 31, 1999. The
amendment moves the effective date to taxable years beginning after December 31, 2000.
5
2833 Modify Section 127 Provision to Reflect Intervening Action. In May 1999, the
Finance Committee reported a bill extending the provision allowing employer-provided
education assistance to be excluded from employee's income from June 1, 2000 to June
30, 2004. In November 1999, Congress passed Ticket To Work legislation that included
extension of certain tax provisions. The section 127 employer-provided education
assistance exclusion was extended from June 1, 2000 to December 31, 2001. The
technical amendment reflects that change in law. The provision would still be effective
through June 30, 2004.
2834 Advance Effective Dates of Title III (School Construction) By One Year. The
Finance Committee bill was reported out in May 1999 and made the provisions regarding
school construction effective for bonds issued after December 31, 1999. The amendment
moves the effective date to bonds issued after December 31, 2000.
2835 Delete All The Revenue Raising Provisions. The bill reported out by the Finance
Committee in May 1999 contained 10 revenue provisions raising $8 billion over 10 years.
In the Ticket To Work legislation enacted by Congress in November 1999 contained parts
or all of five of these 10 revenue offsets. The remaining five offsets would raise
approximately $5.5 billion over 10 years. The amendment would strike all of the revenue
raisers from the legislation.
2836 Advance the Effective Date of the Provision Eliminating the 60-Month Limit on the
Deductibility of Student Loans. The Finance Committee bill was reported out in May
1999 and made the provision eliminating the 60-month limit on the deductibility of
interest on qualified student loans effective for interest paid after December 31, 1999.
The amendment moves the effective date to interest paid on qualified education loans
after December 31, 2000.
Senator Torricelli
2826 $5000 Per Year Certified Teacher Credit. Current law does not provide a credit or
other tax subsidy for certified teachers. The amendment would permit certain certified
teachers to claim a tax credit of up to $5000 each year. under the amendment, certified
teachers would be individuals who have successfully completed the requirements for
advanced certification provided by the National Board for Professional Teaching
Standards. The credit would be limited to teachers serving in certain urban and rural
areas. The credit would be refundable, meaning that if the teacher's tax liability without
the credit were $4,000, then the teacher would have a tax liability of $0 and would also
receive a refund of $1,000 from the IRS.
T:\Educate\2000\amenddes.wpd
6
Senate Finance Committee Democratic Staff
98 VOTE 59-36
Toricelle JCT tax # 70% benefit bottem 70%
5115
Marte / IT 73% + 93.8 FEI
D's LOST '98
R gain
Biden
2/ Vounovich (GLENN)
Breaux
Byrd
R lost
Cleland
Bunning (FORD)
Feinstein
Fitzgerald (Moseley-Braurin)
Kohl
Lieberman
Toricelli
/8
R Nays
Chafee Leaning Dem
Jeffords
D pick-up
Specter
Schumer /1
Likely D lost
Graham
VOTE
Y
Z
D unknown
59
36
Lincoln (Bumpers)
w/NV
JDR, Akaka
+1
+3 C Buucus
Leannigy EDWARDS (FAIRCLOTH)
60
39
leaning Y BAYH ( COATS)
-1
+1
Schumer
+1
-1
Graham
60
39
-1
-
+1
Volnouich
59
40
+2
-2 BUNNING+
FITZGERA
60-40 60 40
Q: SPECTER
61
38
+1
LINCOLN
VC3-37
CHAFEE
- 1
JEFFORDS
60
39
BAYH (A)
EDWARDS (A)
03/02/00 10:40 FAX 202 224 2151
DEMOCRATIC POLICY
002
12
S.L.C.
O:\MAT\MAT00.098
PENDINS
Camie Mack
AMENDMENT NO.
Calendar No.
Purpose: To eliminate the marriage penalty in the reduction
in permitted contributions to education individual retire-
ment accounts.
IN THE
Sess.
AMENDMENT
2827
By Coverdell for Mack (Hatch)
To:
S. 1134
To ame
tax-
fre
ment
ac
nses,
2
to
ribu-
Page(s)
tic
GPO: 1996 52-517 (mac)
Referred to the Committee on
and ordered to be printed
Ordered to lie on the table and to be printed
and Mr. HATCH
AMENDMENT intended to be proposed by Mr. MACK
Viz:
1
In subsection (a) of section 101, add at the end the
2 following:
3
(4) ELIMINATION OF THE MARRIAGE PENALTY
4
IN THE REDUCTION IN PERMITTED CONTRIBU-
5
TIONS.-Section 530(c)(1) (relating to reduction in
6
permitted contributions based on adjusted gross in-
7
come) is amended-
8
(A) by striking "$150,000" in subpara-
9
graph (A)(ii) and inserting "$190,000", and
03/02/00 10:40 FAX 202 224 2151
DEMOCRATIC POLICY
003
O:\MAT\MAT00.098
S.L.C.
2
1
(B) by striking "$10,000" in subpara-
2
graph (B) and inserting "$30,000".
February 29, 2000
1:45 p.m.
S.1134 Amendments Filed
Senator Abraham
2825 Deduction for Computer Donations To Schools (with Wyden). Current law provides
taxpayers with a deduction in an amount greater than the fair market value of a computer
donated to K-12 schools if the computer is less than two years old. The proposal would
extent the enhanced deduction to donations of computers up to three years old. Current
law does not provide a credit for the donation of computers to schools or senior centers.
Taxpayers may claim a charitable deduction if the recipient is a qualified organization.
The amendment would provide a credit of up to 30% of qualified computer contributions
to schools and senior centers. The credit would be increased to 50% if the recipient is
located in an empowerment zone, enterprise community or Indian reservation.
Senator Collins
2954 Deduction for Teacher Professional Development Expenses and Credit for
Unreimbursed Expenses for Classroom Materials. Under current law, a teacher (or
any other taxpayer) may only deduct unreimbursed business expenses to the extent that,
in the aggregate, they exceed 2% of adjusted gross income. The amendment would allow
an itemized deduction (not subject to the 2% floor) or a credit for unreimbursed
professional development expenditures a teacher incurs. In addition, the amendment
would provide a credit of up to $100 for unreimbursed costs associated with providing
classroom materials.
Senator Coverdell
2839 Provide Teachers Protection Against Certain Lawsuits. [Judiciary Committee
explanation pending]
2840 Eliminate the Sunset of the ESA Contribution Limit Increase. Due to revenue
constraints, the Finance Committee bill provided for an increase to $2000 in allowable
contributions to an ESA only through December 31, 2003. The amendment would make
that increase permanent.
1
Senator Dodd
2850 Eliminate the provision to allow EDAs for K-12 tuition and fees. The amendment
would disallow spending ESA withdrawals for K-12 tuition and fees. It would allow the
tax-free withdrawals to be used for other purposes (e.g., computers, uniforms) at public
and private schools.
2857 $1.2 billion in funding for IDEA. The amendment strikes the ESA provisions in the bill
and appropriates the $1.2 billion in savings to carry out part B of the Individuals with
Disabilities Education Act.
Senator Feinstein
2845 Require States Receiving Federal Funds under ESEA to Implement Achievement
Standards and Assess Student Performance in Meeting the Standards. The
amendment would require that State and local education agencies (1) implement State
achievement standards in the core curriculum at key transition points, to be determined by
the State, for all K-12 students and (2) assess student performance in meeting the State
achievement standards in order to receive federal funds under ESEA.
2846 Facilitate the Adoption of State Policies with Respect to Prohibiting the Practice of
Social Promotion. The amendment would preclude states from making ESEA funds
available to a local educational agency unless the State demonstrates to the Secretary of
Education that the State has adopted a policy prohibiting the practice of social promotion.
Senator Graham
2843 Provide Offsets for the Entire Bill. The bill reported out by the Finance Committee in
May 1999 contained 10 revenue provisions raising $8 billion over 10 years. The Ticket
To Work legislation enacted by Congress in November 1999 contained parts or all of five
of these 10 revenue offsets. The remaining five offsets would raise approximately $5.5
billion over 10 years. The amendment would provide up to approximately $25 billion in
additional revenues to cover the $2.5 billion shortfall currently in the bill and increased
costs that might be added through amendments. The raisers include reinstating the
superfund excise taxes, eliminating the lower-of-cost-or-market method of accounting for
inventories and provisions to reduce tax benefits associated with corporate tax shelters.
2
2844 Eliminate the Sunset on the Coordination Rules Between Qualified Tuition
Programs and the Hope and Lifetime Learning Credits. Under the bill, distributions
from qualified state tuition plans would be tax free. The bill provides that taxpayers
could only claim both tax-free treatment of qualified state tuition plan distributions and
the Hope credit/Lifetime Learning credit if they are for different qualified expenses. Due
to revenue constraints, this coordination provision sunsets December 31, 2003. The
amendment makes the coordination rules permanent.
2847 Provide Funds to Assist High-Poverty School Districts Meet their Teaching Needs.
The amendment would build on the Troops To Teachers initiative to provide a $5,000
grant to individuals willing to change to a teaching career and commit to teaching at least
three years in low-income schools as defined under Title I of ESEA. The grants can be
used toward the cost of courses and training necessary to become qualified teachers.
2848 Expanded Opportunities for School Construction Financing. Current law requires
school districts issuing bonds to spend the proceeds of those bonds within three years or
pay to the IRS the excess of interest earned on bond proceeds over the interest payments
to holders of the bonds. The amendment would extend that spend-down period to four
years. Under current law, financial institutions are limited in their ability to be holders of
school construction bonds. The amendment would allow financial institutions to
purchase school construction bonds issued by districts issuing no more than $25,000,000
in bonds.
Senator Gramm
2828 Disallow Federal Home Loan Bank System Guarantee of School Construction
Bonds. Under current law, bonds cannot be tax exempt (meaning the interest is not
taxable income to the bondholder) if the bonds are guaranteed by a federal government
agency. The theory is that bonds should not receive two separate federal subsidies.
Exceptions are made for certain bonds guaranteed by certain governmental entities under
programs in existence when the rule was enacted. The Finance Committee bill contained
a provision permitting the Federal Home Loan Bank System to guarantee up to $500
million per year in school construction bonds. The amendment would delete this
provision from the bill.
Senator Hatch
2823 Deduction for teacher expenses. Under current law, a teacher (or any other taxpayer)
may only deduct unreimbursed business expenses to the extent that, in the aggregate, they
exceed 2% of adjusted gross income. The amendment would allow an above-the-line
3
deduction for teacher professional development and incidental costs. The teacher could
claim a deduction for every dollar of qualified expenses.
2824 Marriage Penalty in Student Loan Interest Deduction (with Mack). Under current
law, the deduction for interest on qualified student loans is phased out for single filers
beginning at $40,000 and is not available for those with income above $55,000. For
married filers, the phase-out range is $60,000-$75,000. The proposal would increase the
phase-out trigger for married couples to $80,000 and extend the phase-out range to
$110,000. The result would be phase-outs for joint filers that is twice that of single filers.
Senator Kennedy
2849 Eliminate the Provisions to Allow ESAs for K-12 School Expenses at Private or
Religious Schools. The amendment would preclude taxpayers from receiving tax-free
distributions from an ESA and using those funds for K-12 school expenses at private or
religious schools. Expenditures for public school K-12 expenses would be permitted
under the amendment.
2851 Eliminate the provision to allow ESAs for K-12 expenses. The amendment would
eliminate the use of ESAs for any K-12 expenditure. Under the amendment, ESAs could
only be used for higher education expenses.
Senator Kerry
NYF Exclusion of National Service Educational Awards from Income. Under current law,
scholarship and grants generally are excludable from income. Because Americorps
education awards are considered to represent payment for services rendered, they are
currently includable in taxable income. The amendment would provide that Americorps
education awards are scholarships for federal income tax purposes and may be excluded
from income..
Senator Kyl
2841 Allow an Above-the-Line Deduction or Credit for K-12 Teachers Who Provide
Classroom Materials. Under current law, a teacher (or any other taxpayer) may only
deduct unreimbursed business expenses to the extent that, in the aggregate, they exceed
2% of adjusted gross income. The amendment would allow either an above-the-line
deduction or a credit for unreimbursed expenditures a teacher incurs to provide classroom
materials. The credit would be limited to $100 per year. The deduction would not be
limited.
4
2842 Permit a $100 Credit for K-12 Teachers who Provide Classroom Materials. Under
current law, a teacher (or any other taxpayer) may only deduct unreimbursed business
expenses to the extent that, in the aggregate, they exceed 2% of adjusted gross income.
The amendment would allow a credit for unreimbursed expenditures a teacher incurs to
provide classroom materials. The credit would be limited to $100 per year.
Senator Mack
2827 Marriage Penalty in the Reduction of Permitted ESA Contributions (with Hatch).
Under current law, the $500 annual contribution (raised to $2,000 in the bill) limit for
ESAs is phased out ratably for single filers with modified adjusted gross income between
$95,000 and $110,000. The phase out range for joint filers is $150,000 and $160,000 for
joint returns. The amendment would increase the phase-out range for joint filers to
$190,000 to $220,000, double the amount applicable to single filers.
Senator Robb
2829 Eliminate the Use of ESAs for K-12 School Expenses at Private or Religious Schools.
Under the bill, individuals could withdraw funds tax-free from an ESA for qualified
expenses at a public, private or home school. The amendment would deny the tax-free
withdrawal for expenses at private, religious or home schools. Under the amendment,
tax-free withdrawals would be available only for qualified expenses at public schools.
2830 Tax Credit Bonds for School Modernization. The amendment would establish a new
program under which holders of qualified school, modernization bonds would be allowed
a tax credit generally equal to the market interest rate. The federal government would
allocate $25 billion in qualified school modernization bonds to the states and designated
school districts. The amendment would be paid for in part by eliminating the provision to
allow tax-free ESA distributions for K-12 expenses.
Senator Roth
2831 Substitute.
2832 Advance Effective Dates of Title I (Education Savings Incentives) By One Year. The
Finance Committee bill was reported out in May 1999 and made the changes to the ESAs
and qualified state tuition plans effective for years after December 31, 1999. The
amendment moves the effective date to taxable years beginning after December 31, 2000.
5
2833 Modify Section 127 Provision to Reflect Intervening Action. In May 1999, the
Finance Committee reported a bill extending the provision allowing employer-provided
education assistance to be excluded from employee's income from June 1, 2000 to June
30, 2004. In November 1999, Congress passed Ticket To Work legislation that included
extension of certain tax provisions. The section 127 employer-provided education
assistance exclusion was extended from June 1, 2000 to December 31, 2001. The
technical amendment reflects that change in law. The provision would still be effective
through June 30, 2004.
2834 Advance Effective Dates of Title III (School Construction) By One Year. The
Finance Committee bill was reported out in May 1999 and made the provisions regarding
school construction effective for bonds issued after December 31, 1999. The amendment
moves the effective date to bonds issued after December 31, 2000.
2835 Delete All The Revenue Raising Provisions. The bill reported out by the Finance
Committee in May 1999 contained 10 revenue provisions raising $8 billion over 10 years.
In the Ticket To Work legislation enacted by Congress in November 1999 contained parts
or all of five of these 10 revenue offsets. The remaining five offsets would raise
approximately $5.5 billion over 10 years. The amendment would strike all of the revenue
raisers from the legislation.
2836 Advance the Effective Date of the Provision Eliminating the 60-Month Limit on the
Deductibility of Student Loans. The Finance Committee bill was reported out in May
1999 and made the provision eliminating the 60-month limit on the deductibility of
interest on qualified student loans effective for interest paid after December 31, 1999.
The amendment moves the effective date to interest paid on qualified education loans
after December 31, 2000.
Senator Torricelli
2826 $5000 Per Year Certified Teacher Credit. Current law does not provide a credit or
other tax subsidy for certified teachers. The amendment would permit certain certified
teachers to claim a tax credit of up to $5000 each year. under the amendment, certified
teachers would be individuals who have successfully completed the requirements for
advanced certification provided by the National Board for Professional Teaching
Standards. The credit would be limited to teachers serving in certain urban and rural
areas. The credit would be refundable, meaning that if the teacher's tax liability without
the credit were $4,000, then the teacher would have a tax liability of $0 and would also
receive a refund of $1,000 from the IRS.
T:\Educate\2000\amenddes.wpd
6
Senate Finance Committee Democratic Staff