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total tax attributable to the taxpayer's share of income from the trade, business, or entity.

Special rules governing the computation and allocation of the credit are included in the bill for controlled groups of corporations and trades or businesses under common control. The bill would also authorize the Treasury to adopt regulations governing passthrough of the credit, in the case of S corporations (under rules similar to those of Code secs. 52(d) and 52(e)), and allocation of the credit, in the case of partnerships.

Effective Date

The provisions of section 2 of the bill would be effective for taxable years beginning after 1982.

4. S. 1464-Senators Armstrong and Hart

Exemption from Divestiture Requirements of Excess Business Holdings Provision for the El Pomar Foundation

Present Law

The Tax Reform Act of 1969 imposed an excise tax on the excess business holdings of a private foundation (Code sec. 4943). Generally, under the excess business holdings provision, the combined ownership of a business by a private foundation and all disqualified persons cannot exceed 20 percent of the voting stock of the business (35 percent if other persons have effective control of the business).

The 1969 Act provided that if a private foundation and disqualified persons together had holdings on May 26, 1969 in excess of the permitted amounts under the general rules, then those holdings could be retained for an initial transitional period. Following that period, the combined holdings must be reduced to 50 percent. Ultimately, the combined holdings must be reduced to 35 percent if the disqualified persons hold, in the aggregate, no more than two percent of the business after the initial transition period. If the disqualified persons hold more than two percent, then the combined holdings may continue to be as much as 50 percent, but the foundation itself may hold no more than 25 percent of the voting stock.

Explanation of the Bill

The bill would provide that the divestiture requirements of the excess business holding provisions (sec. 4943) would not apply to a private foundation which meets the following conditions: (1) the foundation owned (directly or through a holding company), on May 26, 1969, 100 percent of the voting stock in an incorporated business enterprise substantially all of the operating assets of which are used in operating a hotel business enterprise; (2) the stock in the business enterprise was acquired by gift, devise, or bequest before December 31, 1966; (3) neither the donor nor any of the members of the donor's family was a foundation manager on or after December 31, 1956; (4) on May 26, 1969, and at all times thereafter, the hotel business enterprise is substantially the same character as the enterprise which was conducted by the corporation on the date of the last gift, devise, or bequest by any donor of any stock in the business enterprise; (5) on May 26, 1969, and at all times thereafter, substantially all of the operating assets are used in operating the hotel business enterprise; and (6) the foundation does not acquire on or after May 26, 1969, any interest in a business enterprise that would constitute excess business holdings.

It is understood that the intended beneficiary of the bill is the El Pomar Foundation of Colorado Springs, Colorado. However, any


private foundation that meets the requirements of the bill would qualify for exemption from the divestiture rules.

Effective Date

The provisions of the bill would be effective on the date of enactment.

Prior Congressional Action

In 1982, the Senate passed a similar provision as part of H.R. 4961, the Tax Equity and Fiscal Responsibility Act of 1982. That provision was deleted in conference. Also, a similar provision was added by the Committee on Finance to H.R. 4577, as reported by the Committee on November 15, 1982. No further action was taken on that bill in the 97th Congress.

5. S. 1549-Senators Armstrong, Long, Durenberger, Wallop, Grassley, Symms, Bentsen, Baucus, Boren, and Pryor Exemption from Unrelated Business Income Tax for Income from Certain Oil and Gas Property

In general

Present Law

Under present law, most organizations which generally are exempt from Federal income taxation under Code section 501(a), including any trust that is part of a tax-qualified pension, profit-sharing, or stock bonus plan described in section 401(a), are subject to tax on any unrelated business taxable income (secs. 511-514). In addition, a tax is imposed on the unrelated trade or business income of an individual retirement account or annuity (an IRA).15 The term unrelated trade or business generally means any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of the activities for which the organization was granted tax exemption.

Under present law, a tax-exempt organization is treated as being engaged in the same activities as any partnership (whether limited or general) in which the organization invests. Accordingly, if a taxexempt organization becomes a limited partner in a partnership that owns a working interest in oil and gas properties and the working interest is not substantially related to the organization's exempt function, the income derived from the working interest is subject to the unrelated trade or business tax.

Debt-financed property

Present law also provides that the income of an exempt trust or organization, or an IRA, from debt-financed property which is unrelated to its exempt function is subject to the unrelated business income tax in the proportion in which the property is financed by the debt (sec. 514). Debt-financed property means all property (e.g., rental real estate, tangible personal property, and corporate stock) that is held to produce income and with respect to which indebtedness was incurred to acquire or improve the property or an indebtedness would not have been incurred but for the acquisition or improvement of the property.

A special rule applies under present law to real property acquired by a tax-exempt trust forming part of a tax-qualified pension, etc., plan. Under this rule, debt-financed real property ac

15 Sec. 408(e)(1).


quired by an exempt trust is not treated as debt-financed property unless one of the following applies:

(1) the acquisition price is not a fixed amount determined as of the date of acquisition;

(2) the amount of any indebtedness or any other amount payable with respect to such indebtedness, or the time for making any payment with respect to the indebtedness, is partially or wholly dependent upon any revenue, income, or profits derived from the real property;

(3) the real property is at any time after acquisition leased by the trust to the seller or to any person related to the seller (within the meaning of sec. 267(b));

(4) the real property is acquired from or, at any time after acquisition, is leased to any person that bears a certain relationship to the trust; or

(5) the seller or any person related to the seller or the trust (as described in (3) or (4)) provides the trust with nonrecourse financing in connection with the acquisition and the debt is subordinate to any other indebtedness on the property or bears interest at a rate that is significantly lower than the prevailing market interest rate.

In general

Explanation of the Bill

Under the bill, certain exempt organizations would be permitted to invest in working interests in domestic oil and gas properties without incurring tax for unrelated business income. The organizations that would be eligible under this provision include exempt trusts forming a part of tax-qualified pension, etc., plans, IRAs, and tax-exempt educational organizations described in Code sections 170(b)(1)(A)(ii) or 170(b)(1)(A)(iv).

In order to qualify under the special rule, the trust or organization must receive income from the working interest in oil and gas property as a limited partner from a limited partnership. In addition, the limited partnership could not, at any time during the partnership taxable year for which an income allocation is made (i) allocate to the limited partners a share of any item of deduction, loss, or credit that is less than the limited partners' share of income or gain;

(ii) allocate among the limited partners any item of deduction, loss, or credit that differs from the ratio in which they share income or gain;

(iii) allocate cash distributions to partners (limited or general) in a manner that differs from the allocation of income or gain.

However, these restrictions would not apply if the allocations of depreciation, depletion, gain, or loss take account of the variation between the basis of property to the limited partnership and its fair market value at the time of its contribution to the partnership and if the allocations are permissible under Treasury regulations. 16

16 Sec. 704(c)(2).

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