Explanation of provision This provision was sponsored by Senator Bentsen. The provision permits an investment in stock of a closed-end investment company to qualify for treatment as a tax-sheltered annuity by depleting the provision in present law that limits qualifying investments in regulated investment companies o investments in those which only issue redeemable stock. This provision would apply to taxable years beginning after December 31, 1975. This provision will be of general benefit to closed-end mutual funds. 41. Pension Fund Investments in Segregated Assets Accounts of Life Insurance Companies (sec. 1506 of the bill) Present law Under present law, a life insurance company may base its reserve for certain annuity contracts (e.g., variable annuity contracts) on a segregated asset account. Accordingly the amounts paid in or paid out under the contract vary with the performance of the assets held under the account. Under the Code, the income, expenses, gains, and losses with respect to assets held under a segregated asset account under a contract for a qualified pension plan are generally not considered income, etc. of the life insurance company. Under present law, a segregated asset account may not be used by a life insurance company except as the basis for a contract which provides for the payment of annuities. The Internal Revenue Service has taken the position that a segregated asset account can be used as the basis for a reserve for a contract by a particular life insurance company only if that life insurance company provides annuities under the contract. Therefore, an employer who wishes to have its qualified pension fund invested in a segregated asset account held by a particular life insurance company but wishes to purchase annuities from another life insurance company (or to provide annuity benefits directly from an employee trust) is unable to do so without incurring the cost of compensating the holder of the account for annuity purchase rate guarantees that will not be utilized. Issue The issue is whether the law should be changed to permit segregated asset accounts to be used as reserves for contracts which do not provide for annuities. Explanation of provision This provision was included at the suggestion of Senator Bentsen. The provision clarifies present law by providing that a segregated asset account can be used as an investment medium for assets of a qualified pension, profit-sharing, or anuity plan even though the account is held as a reserve under a contract which does not require the holder of the account to provide for the payment of annuities. The provision also permits assets of a qualified plan to be held in a segregated account instead of a trust. The provision does not in any way modify the requirements of title I of the Employee Retirement Income Security Act which requires certain pension plan assets to be held in a trust. The provision applies for taxable years beginning after December 31, 1975. This provision will be of benefit to life insurance companies having annuity contracts (for example, variable annuities) handled on a segregated asset account basis. 42. Extension of Study of Salary Reduction and Cash or Deferred Profit-Sharing Plans (sec. 1507 of the bill) Present law Under present law, in general, an employee's contributions to a tax qualified retirement plan maintained by his employer are not tax deductible. In the case of a salary reduction plan, or a cash and deferred profit-sharing plan, however, the Internal Revenue Service has permitted employees to exclude from income certain amounts contributed by their employers to the plan, even where the source of these amounts is the employee's agreement to take salary or bonus reductions, or forego salary increases. On December 6, 1972, the Service issued proposed regulations which would have changed this result in the case of salary reduction plans, and which called into question the continued viability of the treatment of cash and deferred profit-sharing plans. In order to allow time for congressional study of these areas, section 2006 of the Employee Retirement Income Security Act of 1974 (ERISA) provided for a temporary freeze of the status quo. Under ERISA, contributions to plans in existence on June 27, 1974, are governed under the law as it was applied prior to January 1, 1972, and this treatment is to continue at least through December 31, 1976, or (if later) until regulations are issued in final form in this area, which would change the pre-1972 administration of the law. Section 2006 of ERISA provides that these regulations, if issued, are not to be retroactive for purposes of the social security taxes or the Federal withholding taxes, and are not to be retroactive prior to January 1, 1977, for Federal income tax purposes. In the case of plans not in existence on June 27, 1974, contributions made on a salary reduction basis, or made, at the employee's option, to a cash and deferred profit-sharing plan, are treated as employee contributions (until January 1, 1977, or until new regulations are prescribed in this area). This was intended to prevent a situation where a new plan might begin in reliance on pre-1972 law while Congress has not yet determined what the law should be in the future. Also to be covered under these principles are so-called "cafeteria plans," under which the employees may have a choice between certain fringe benefits, some of which would constitute taxable income to the employee, whereas other forms of benefit might not. Thus, cafeteria plans in existence on June 27, 1974, also are governed under the pre1972 law until at least January 1, 1977. However, in the case of new plans, the value of any benefits selected under a cafeteria plan are to be includable in income until at least January 1, 1977 (or, if later, until new regulations in this area have been promulgated). In general, the same rules to be applied in determining whether or not a salary reduction plan was in existence on June 27, 1974, are also to be applied to cafeteria plans. Of course, minor plan amendments (such as changing the plan to allow cash payments to cover cases of breakage, i.e.. where two alternative benefits available under the cafeteria plan do not have exactly the same value) would not cause an existing plan to be classified as a new plan for purposes of these rules. Issue The issue is whether the temporary freeze of the status quo provided for in section 2006 of ERISA should be extended beyond January 1, 1977, to allow additional time for Congress to study the questions involved in order to enact permanent legislation regarding salary reduction and cash and deferred profit-sharing plans. Explanation of provision This provision was suggested by Senator Brock. In order to allow additional time for congressional study of these areas, the provision extends the temporary freeze from January 1, 1977, until January 1, 1979. This provision will be of benefit to Eastman Kodak Company. Irving Trust Bank, Xerox, TRW, and others. 43. Consolidated Returns for Life and Mutual Insurance Companies (sec. 1508 of the bill) Present law Under present law, life insurance companies, both stock and mutual, (taxed under section 802 of the code and hereafter referred to as life companies) are barred from filing consolidated income tax returns with corporations that are not life companies. A similar restriction applies to mutual insurance companies other than life companies (taxed under section 821 of the code and hereafter referred to as "other mutual insurance companies). On the other hand, stock property-liability insurance companies (and certain other companies) taxed under section 831 of the code are generally permitted to file consolidated returns with other types of corporations. Issue The issue is whether stock and mutual life companies and other mutual insurors should be allowed to file consolidated returns with other corporations. Explanation of provision This provision was suggested by Senator Ribicoff. It permits consolidated returns to be filed by stock or mutual life insurance companies (or other mutual insurors) and nonlife companies, subject to the restrictions that (1) the life company's taxable income cannot be reduced by more than one-half as a result of the consolidation, and (2) no more than one-half of a nonlife company's losses can be applied against a life company's income in any year. Any nonlife company losses not absorbed in this manner will still be available as carryovers of the nonlife companies to subsequent years. The filing of a consolidated return by an affiliated group which includes a life company and a property-liability company will permit the tax savings from the property-liability company's losses to be taken into account sooner in computing its statutory surplus. This larger surplus should increase the capacity of these companies to write insurance. The provision is effective for taxable years beginning after December 31, 1977. However, a transitional rule is provided to limit the use of carryovers of losses and credits for pre-1978 years. These carryovers are to be treated as if the committee amendment had not been made. This means that the ability to absorb these losses or credits is not to be changed as a result of the new election to include life or other mutual insurance companies in a consolidated return with other companies. The same principles also apply with respect to losses and credits which may be carried back to pre-1978 years. This provision will be of benefit to life insurance companies which own casualty companies that incur losses. Revenue effect It is estimated that this provision will result in a decrease in revenues of $25 million in the fiscal year 1978, $55 million in the fiscal year 1979, $49 million in the fiscal year 1980, and $40 million in the fiscal year 1981. 44. Modifications in Investment Credit for Railroads (sec. 1701 of the bill) a. Percentage Limitation on Credit Present law The amount of investment tax credit which can be taken in any one year may not exceed the first $25,000 of tax liability plus 50 percent of the liability greater than $25,000. In the Tax Reduction Act of 1975, the 50-percent limit was increased temporarily for public utility property to 100 percent for 1975 and 1976, 90 percent for 1977, 80 percent for 1978, 70 percent for 1979, 60 percent for 1980 and back to 50 percent for 1981 and later years. Issue The generally low profit rates of railroads in recent years mean that the 50-percent limit of tax liability cannot accommodate investment credits earned under substantially expanded investment programs initiated by railroads since 1973. Without an adjustment of the kind made available to public utility property, railroads would accumulate substantial carry forwards which might be lost in the future when the carry forward period for the credit terminates. The issue is whether railroads are similar enough to public utilities to receive the same treatment with respect to the 50-percent limit. Explanation of provision This provision was sponsored by Senator Hartke. Under this provision, railroads would be allowed to apply investment credits against 100 percent of tax liability in 1977 and 1978, 90 percent in 1979, 80 percent in 1980, 70 percent in 1981, 60 percent in 1982, and 50 percent in 1983 and later years. The provision applies for taxable years ending after December 31, 1976. The provision would benefit all railroads which would be operating at a low (or zero) profit margin for the next few years. The Association of American Railroads expressed an interest in this provision. Revenue effect Budget receipts would be reduced by this provision by $29 million in fiscal year 1977, $66 million in 1978 and $41 million in 1981. b. First-in-First Out Treatment of Investment Credit Present law Investment tax credits earned currently are applied to the current year's tax liability before any carry forwards may be used. Unused credits expire at the end of the carry forward period. Issue Railroad companies would lose between $50 million and $80 million from 1978 through 1982 in carry forwards of expiring unused investment credits that have been carry forwards from earlier taxable years. The 50-percent limit and low taxable income did not permit full use of the credits currently. The issues are whether the sequence prescribed for using investment credits should be changed and whether the change should apply to only the railroads. Explanation of provision This provision was suggested by Senator Curtis. The provision would permit railroads to apply carry forwards of the investment credit earned in prior years to the current year's tax liability before applying investment credits earned in the current year. The provision applies to computations in taxable years ending after December 31, 1976. This provision would benefit railroads generally which have unused carry forwards in the years after 1976 and who make additional investments in those years. The Association of American Railroads expressed an interest in this provision. Revenue effect The revenue loss from this provision is estimated as negligible during fiscal years 1977, 1978 and 1981 because the investment credits are fully utilized. 45. Amortization of Railroad Assets (secs. 1701 and 1702 of the bill) a. Amortization of grading and tunnel bores Present law Railroads may elect to amortize, on a straight-line basis over a 5-year period, railroad grading and tunnel bores placed in service after 1968. Issue Before 1969, tax law followed ICC practice of not permitting depreciation of tangible railroad property that has an indeterminate useful life. In 1969, Congress enacted the present law provision for such property placed in service prospectively. In recent years, several railroads have entered into litigation to establish useful lives for depreciation purposes. Fifty-year amortization has been established since 1969 as a means to permit the taxpayer to recoup the costs of these investments in relatively small annual changes. The issue is whether 50-year, straight-line amortization should be extended to grading and tunnel bores placed in service before 1969. Explanation of provision This provision was included in the House-passed bill. Under the provision, a railroad would be allowed to elect to amortize railroad grading and tunnel bores that were placed in service before 1969 on a straightline basis over a 50-year period. Property valuations for acquisitions or construction since 1913 have been established by the ICC or a State regulatory commission, and where valuation disputes have not been resolved, the basis for determination of capital gain or loss for Federal tax purposes may be used as the basis for amortization. |