Description: TO PASS H.R. 10612.
Bill summary: Tax Reform Act -
Title I: Limitation on Artificial Losses
- Restricts the extent to which losses arising from accelerated deductions under the Internal Revenue Code on real property can be used currently to offset income unrelated to real estate. Places accelerated deductions, to the extent that the deductions exceed the taxpayer's net related income from real property, in a deferred deduction account for use in a later year. Defines "net related income" as gross income from real property
less the ordinary deductions attributable to real property (deductions other than the accelerated deductions). Stipulates that the limitation does not apply to true economic losses which continue to be deductible currently.
States that the accelerated deductions which are subject to this limitation are the deductions for interest and taxes during the construction period, and accelerated depreciation in excess of straight line depreciation.
Applies the limitation on artificial losses (LAL) to commercial and residential property where the construction begins after December 31, 1975. Delays the application of LAL to residential property if specified conditions are met.
Applies LAL to farm operations to restrict the extent to which losses arising from accelerated deductions from farm operations can be used currently to offset nonfarm income. States that the accelerated deductions which would be limited include: (1) prepaid seed, seed, fertilizer and similar farm supply expenses; (2) preproductive period expenses attributable to specified crops, animals, and livestock; and (3) accelerated depreciation of livestock.
Allows losses attributable to accelerated deductions from farm operations to be used to offset $20,000 of nonfarm income. Eliminates such allowance for taxpayers who have nonfarm income of $40,000 or more.
Applies LAL to intangible drilling and development costs on developmental oil and gas wells on a property-by-property basis. Stipulates that such deductions cannot be taken in any year to the extent they exceed the net related income derived in that year from the operation of the same property. Provides that the amount of the related income (against which the intangible drilling costs can be deducted) shall be reduced by the amount of any percentage depletion and dry hole deductions taken with respect to that income.
Extends the limitation on artificial losses to motion picture films, equipment leasing, and sports franchises. Stipulates that with respect to sports franchises LAL shall only apply to those established or transfered after November 4, 1975.
Extends from December 31, 1975, until December 31, 1977, the termination date of the five-year amortization of expenditures incurred to rehabilitate low-income rental housing.
Title II: Other Amendments Related to Tax Shelters
- Provides, under the Internal Revenue Code, that in the case of residential real estate, all depreciation in excess of straight line depreciation shall be completely recaptured to the extent of any gain realized at the time of the sale of such property.
Provides that any gain on the disposition of an interest in oil or gas properties (or an interest in an oil and gas venture) shall be treated as ordinary income to the extent of the excess of the intangible drilling deductions taken with respect to those properties over the deductions that would have been allowed had the expenses been capitalized.
Requires corporations engaged in farm operations, other than Subchapter S corporations and family corporations, to use accrual and inventory accounting methods for tax purposes.
Permits taxpayers using the cash method of accounting to deduct prepayment of interest only in the period to which it relates under an accrual method of accounting. Requires points to be deducted ratably over the term of a loan, except in the case of a mortgage secured by the taxpayer's principal residence.
Imposes a limit of $12,000 a year on the amount of nonbusiness interest that an individual can claim as a deduction. Provides that in the case of a loan for investment purposes, interest on the loan shall be deductible to the extent of the investment income in addition to such $12,000 limitation.
Limits the deduction of a loss to the amount for which the taxpayer is at risk in the cases of motion picture films, livestock, and specified crops, including wheat and cotton. Limits the deduction for intangible drilling and development costs attributable to a property to the extent of the taxpayer's equity investment in a partnership. Stipulates that a taxpayer cannot deduct such expenses paid out of borrowed funds, unless he has personal liability with respect to those borrowings.
Specifically limits the extent to which a partnership may allocate income and loss generally and also specified items of income, gain, loss, deduction, or credit among the partners.
Provides that with respect to hobby loss elections, the waiver of the statute of limitations shall be limited so that the waiver does not apply to unrelated items on the taxpayer's return.
Title III: Minimum Tax for Individuals
- Makes changes in the present minimum tax on individuals, estates, trusts, and Subchapters S corporations. Reduces the present $30,000 exemption on the minimum tax for individuals to $20,000. Eliminates the exemption completely when preference income exceeds $40,000. Increases the minimum tax from 10 to 14 percent. Reduces the deduction under the minimum tax for regular income taxes from 100 percent of the regular taxes to 50 percent.
Title IV: Extensions of Individual Income Tax Reductions
- Makes permanent the individual income tax reductions directed by the Tax Reduction Act. Provides a tax credit for 1976 equal to the greater of: (1) two percent of so much of a taxpayer's taxable income as does not exceed $12,000, or (2) $30 per taxpayer's, spouse and dependent.
Directs that the earned income credit provided in the Tax Reduction Act not be taken into account as income or receipts for purposes of determining eligibility of the taxpayer or any other individual for benefits or assistance or for purposes of determining the amount of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.
Title V: Tax Simplification in the Individual Income Tax
- Replaces the 12 existing optional tax tables with 4 tables based upon taxable income rather than adjusted gross income. Applies these four new tables to taxable incomes up to $20,000 and makes them available to those who itemize and to those who take the standard deduction.
Changes the alimony deduction from an itemized deduction to a deduction from gross income in arriving at adjusted gross income (making the alimony deduction available to those who take the standard deduction).
Converts the present retirement income credit to a tax credit for the elderly, available to all taxpayers age 65 or older regardless of whether they have retirement income or earned income. Increases the maximum amount on which the credit is computed. Revises the present procedure for reduction of the credit by substituting an income phaseout based upon adjusted gross income above $7500.
Replaces the itemized deduction for household and dependent care expenses with a nonrefundable tax credit. Extends the credit to married couples in which the husband or wife, or both, work part time (presently, both are required to work full time).
Revises the sick pay exclusion to provide a maximum annual exclusion of $5200 for taxpayers under age 65 who are permanently and totally disabled. Reduces the exclusion on a dollar-for- dollar basis by the taxpayer's income in excess of $15,000. Provides that members of the armed services who enlist after September 24, 1975 will be allowed to exclude military disability payments from their gross income only if the payments are directly related to "combat injuries". Defines "combat injuries" for purposes of such exclusion.
Revises the deduction for the expenses of moving to a new residence in connection with beginning work at a new location. Increases the maximum deduction for premove househunting and temporary living expenses at the new job location from $1,000 to $1,500. Removes the present requirement that members of the armed forces report as income any moving expenses, for which they are provided in-kind services by the Department of Defense or the Department of Transportation, for required moves incident to a permanent change of station.
Title VI: Business Related Individual Income Tax Provisions
- Prohibits a taxpayer from deducting any expenses attributable to the use of his home for business purposes except with respect to such portion of the home that is used exclusively on a regular basis as (1) the taxpayer's principal place of business, or (2) a place of business which is used for patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of business. Stipulates that such deduction may not exceed the income generated by the business activity of the taxpayer in his home.
Imposes new limitations on deductions allowable for the expenses of taxpayers attending conventions, or similar meetings outside the United States.
Modifies the present tax treatment of qualified stock options, so that they are subject to the rules of the Internal Revenue Code, and in general are treated as ordinary income.
Provides that where a taxpayer has a loss arising from the guaranty of a loan, he will receive the same treatment as where he has a loss from a loan which he makes directly (presently, nonbusiness guarantees are treated as business loans).
Revises the treatment of the deduction for trade or business expenses away from home afforded State legislators and members of Congress. Eliminates the present $3,000 limitation and substitutes an amount to be determined by the Internal Revenue Service in accordance with specified factors.
Title VII: Accumulation Trusts
- Substitutes a single method for the two alternative methods used in computing the throwback rule for accumulation distributions. Provides that income accumulated by a trust prior to a beneficiary's attaining the age of 21, and the years a beneficiary was not in existence, shall not be subject to the throwback rule. Repeals the capital gains throwback rule.
Title VIII: Investment Credit Changes
- Extends for four years, until 1980, the increase in the investment tax credit and the increase in the limitation on used property effected by the Tax Reduction Act. Revises the investment credit with respect to movie and television films.
Title IX: Continuation for Two Years of 1975 Change in Corporate Tax Rates and Increase in Surtax Exemption
- Continues until December 31, 1977, the increase in the corporate surtax exemption and the decrease in the corporate tax rates effected by the Tax Reduction Act.
Title X: Changes in the Treatment of Foreign Income
- Phases out over a four-year period the present exclusions allowed U.S. citizens living abroad for income earned abroad. Continues the exclusion for employees of charitable organizations and employees on construction projects.
Applies the present grantor trust rules to U.S. grantors of foreign trusts with U.S. beneficiaries.
Provides that the definition of "investments in U.S. property" by controlled foreign corporations (which are treated as dividends) will be limited to investments in stock or obligations of a related U.S. person and to tangible property leased to, or used by, such related U.S. person.
Repeals that provision of the Internal Revenue Code which excepts U.S. shareholders of less- developed country corporations from ordinary income tax on gain from the sale of stock of those corporations (to the extent of their accumulated profits).
Repeals the "per country" limitation on the foreign tax credit. Requires foreign losses to be offset against U.S. income when, and to the extent, foreign income is earned in future years. Provides new treatment for foreign sources capital gains and losses.
Repeals the present 30 percent withholding tax on dividend and interest income received from the United States by foreign persons.
Modifies the tax treatment of "possessions" corporations by providing a new tax credit for such corporations in lieu of the income exclusion provided under present law.
Title XI: Amendments Affecting Domestic International Sales Corporations
- Eliminates Domestic International Sales Corporations taxable income treatment for products sold for use as military equipment and for agricultural products not in surplus in the United States. Revises the method of computing DISC benefits.
Title XII: Administrative Provision
- Establishes a series of rules dealing with income tax return preparers, including: (1) each prepared return, statement or other document must contain the identification number of the return preparer and other data sufficient to identify the preparer; (2) each preparer must furnish to a taxpayer a copy of the return of claim for refund prepared by the tax return preparer at the time the return is given to the taxpayer for his signature; and (3) each return preparer or person employing a tax return preparer to prepare the returns of others must file an annual report with the IRS.
Provides a $100 penalty for negligent or intentional disregard of Internal Revenue Service rules or regulations by a tax return preparer. Provides a $500 penalty for a willful attempt to evade, defeat or understate any tax by a tax return preparer.
Provides a procedure to permit an organization to ask the U.S. Tax Court or a Federal district court for a declaratory judgment as to its tax-exempt status and classification under the Internal Revenue Code or its charitable donee status.
Specifies the situations in which the IRS can make summary assessments in case of mathematical error.
Authorizes the paying officers of the House of Representatives to enter into agreements with requesting States or the District of Columbia to withold State or District income tax from any Members or employees of the House who request such withholding. Authorizes the withholding of State and local income taxes from the pay of members of the National Guard and Ready Reserve when such members participate in drills or training.
Replaces the present information reporting requirement on specified gambling winnings of more than $1000 with a 20 percent withholding requirement on such winnings.
Exempts state-conducted lotteries from the two percent wagering tax.
Provides expedited Tax Court review of jeopardy and termination assessments. Exempts a limited amount of a taxpayer's wages, salary, and other income from levy under jeopardy and termination assessments.
Title XIII: Technical Income Tax Provisions
- Provides that in the case of homeowner associations, condominium housing associations, and cooperative housing corporations, only the investment income and income derived from a trade or business shall be taxable.
Allows cash basis farmers who receive payments under the Agriculture and Consumer Protection Act of 1973 for losses to crops caused by natural disasters, to elect to report the disaster proceeds as income in the year in which the income normally received from the crops would have been reproted.
Permits a deduction for a bad debt owed by a political party or campaign committee to an accrual basis taxpayer if specified conditions are satisfied.
Title XIV: Treatment of Certain Capital Losses; Holding Period for Capital Gains and Losses
- Increases the amount of ordinary income against which a capital loss may be deducted from $1,000 to $4,000 effective in 1978 with lesser increases in the intervening years. Allows an individual with capital losses of $30,000 or more in any taxable year an option of electing a three-year carryback of capital losses against capital gains (but not against ordinary income).
Increases over a three-year period the holding period for long-term capital gains and losses from six months to a year.
Title XV: Individual Retirement Account Amendments
- Makes tax-free rollover treatment available to an employee who receives a payment on account of a termination of his employer's retirement plan or on account of a complete discontinuance of contributions under such plan.
Title XVI: Real Estate Investment Trusts
- Establishes a deficiency dividend procedure that allows a real estate investment trust (REIT) which fails to meet the income distribution requirements upon and audit by the Internal Revenue Service to make a late distribution to its shareholders to avoid disqualificaiton.
Permits a REIT to have a limited amount of income (up to one percent of its gross income) from property held for sale to customers. Subjects such income to corporate tax.
Title XVII: Amortization of Certain Railroad Grading and Tunnel Bores; Tax Treatment of Certain Railroad Ties
- Allows amortization over a 50-year period of railroad grading and tunnel bores that were placed in service before 1969. Allows railroads which use the retirement -replacement method of accounting for depreciation of their railroad track to expense currently (rather than capitalize) expenditures for acquiring and installing replacement ties which are not made of wood.
Title XVIII: Tax Credit for Home Garden Tool Expenses
- Provides a seven percent tax credit to individuals for the purchase of home garden tools used in the production of home vegetable gardens. Limits the credit to a maximum of $100 annually.
Title XIX: Repeal and Revision of Approximately Obsolete, Rarely Used, Etc., Provisions
- Removes or amends approximately 1,000 sections of the Internal Reveue Code which are no longer used in computing current taxes or are little used and of minor importance.
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Bill titles: A bill to reform the tax laws of the United States.
Original source documents: Digest of the Congressional Record vol. 121-178, p. H11858;
Links for more info on the vote: congress.gov