The committee believes that the level of political contributions will not be adversely affected to any significant degree by repeal of the itemized deduction. The availability of the credit for political contributions which can be used both by itemizers and nonitemizersshould continue to encourage citizens to participate actively in the elective process. Explanation of provision The bill repeals the itemized deduction for political or newsletter fund contributions. The income tax credit for such contributions, however, will remain available to taxpayers as under present law. Effective date The repeal of the deduction is effective for taxable years beginning after December 31, 1978. Revenue effect It is estimated that this provision will reduce calendar year liabilities by $6 million in 1979, $7 million in 1980 and $11 million in 1983. Budget receipts will be reduced by $2 million in fiscal year 1979, $6 million in 1980, and $10 million in fiscal year 1983. C. Treatment of Unemployment Compensation (Sec. 114 of the Bill and new sec. 85 of the Code) Present law Present law does not expressly exclude from gross income amounts received under unemployment compensation programs. However, unemployment compensation paid under most government programs is exempt from taxation under a series of Internal Revenue Service rulings beginning in the 1930's. These rulings reflect a long-standing policy on the part of the Internal Revenue Service to exempt from taxation payments made under legislatively provided social benefit programs for promotion of the general welfare. (Railroad unemployment insurance benefits specifically are exempted from taxation under the Railroad Unemployment Insurance Act itself.) In addition to these programs, the Internal Revenue Service has held that in certain circumstances benefits received as a substitute for unemployment compensation pursuant to State unemployment disability plans are excluded from gross income as unemployment compensation.2 In contrast to its rulings on unemployment compensation benefits paid under government programs, however, the Internal Revenue Service consistently has held that unemployment compensation benefits paid under private plans are taxable to the extent that they exceed the recipient's prior contributions.3 Reasons for change The committee believes that a portion of unemployment compensation benefits paid under government programs should be includible in gross income because such benefits are, in substance, a substitute for taxable wages and are equivalent to unemployment benefits paid pursuant to private plans, which are includible in gross income to the extent that they exceed the recipient's prior contributions. The com 1 The relevant rulings are I.T. 3230, 1938-2 C.B. 136 (payments by a State agency out of funds received from the Federal Unemployment Trust Fund); Rev. Rul. 55-652, 1955-2 C.B. 21 (unemployment compensation payments to Federal employees by State or Federal agencies); Rev. Rul. 70-280, 1970-1 C.B. 13 (payments by a State agency out of funds received from the Federal Unemployment Trust Fund); Rev. Rul. 73-154, 1973-1 C.B. 40 (unemployment compensation payments made under the Emergency Unemployment Compensation Act of 1971); Rev. Rul. 76-63, 1976-1 C.B. 14 (unemployment compensation payments made under the Emergency Jobs and Unemployment Assistance Act of 1974 and the Emergency Unemployment Compensation Act of 1974); Rev. Rul. 76-144, 1976-1 C.B. 17 (payments made under the Disaster Relief Act of 1974); and Rev. Rul. 76-229, 1976-1 C.B. 19 (trade readjustment allowance paid under the Trade Act of 1974). 2 Rev. Rul. 75-499, 1975-2 C.B. 43 and Rev. Rul. 75-479, 1975-2 C.B. 44. Such plans presently are in effect in New York, New Jersey, Hawaii, California, Rhode Island, and Puerto Rico. 3 I.T. 1918, III-1 C.B. 121 (1924); Rev. Rul. 56-249, 1956-1 C.B. 488; Rev. Rul. 57-383, 1957-2 C.B. 44; Rev. Rul. 58-128, 1958-1 C.B. 89; Rev. Rul. 59-5, 1959-1 C.B. 12; and Rev. Rul. 71-70; 1971-1 C.B. 27. (47) mittee also believes that the present total exclusion of unemployment compensation benefits paid under government programs tends to create a work disincentive in that it increases the incentive to remain unemployed, the length of unemployment and the consequent cost of maintaining uneployment coverage. Thus, for taxpayers with substantial other income during the year, the bill subjects to income tax a portion of unemployment benefits. Explanation of provision In general, a portion of benefits in the nature of unemployment compensation paid pursuant to government programs will be included in the recipient's adjusted gross income. The amount of unemployment compensation included in income will be limited to one-half of the excess of (1) the sum of the taxpayer's adjusted gross income, all unemployment compensation paid pursuant to government programs and all disability income of the type eligible for exclusion from income (under sec. 105 (d)) over (2) the taxpayer's "base amount." The base amount is $25,000 in the case of a married individual filing a joint return; zero in the case of a married individual filing a separate return, unless he or she lived apart from his or her spouse for the entire taxable year; and $20,000 in the case of all other individuals.* The base amount is zero for married individuals filing separate returns because the committee believes that the family should be treated as an economic unit in determining the amount which is includible under this provision. If a married taxpayer files a separate return which includes only his or her own income and not his or her spouse's, the taxpayer should not be entitled to a higher base amount. In determining the amount of disability income which may be excluded from adjusted gross income under section 105 (d), the portion of unemployment compensation which is included in adjusted gross income under this provision is taken into account as part of the taxpayer's adjusted gross income for purposes of the phaseout of the exclusion of disability income when adjusted gross income exceeds $15,000. For purposes of this provision, "unemployment compensation" means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation. Unemployment compensation programs are those designed to provide cash benefits on a regular basis to normally employed workers during limited periods of unemployment. Currently, there are seven major unemployment insurance programs which would be included in this definition: (1) Federal-State Regular Unemployment Insurance Program (2) Federal-State Extended Unemployment Insurance Pro *The operation of these rules may be illustrated by the following example. H and W are married taxpayers. H is disabled and receives $4,500 of disability income of a type eligible for exclusion under section 105(d). W works for part of the year and earns $20,000, but is laid off and receives $5,000 in unemployment compensation under a government program during the remainder of the year. H and W file a joint return. Their income including disability income and unemployment compensation is $29,500 (the sum of $4,500 disability income, $20,000 salary, and $5,000 unemployment compensation). The excess of $29,500 over their base amount, $25,000, is $4,500, and one-half of the excess is $2,250. Accordingly, $2,250 of W's $5,000 of unemployment compensation is included in adjusted gross income and the remaining $2,750 is excluded. gram, (3) Unemployment Compensation Program for Federal Civilian Employees, (4) Unemployment Compensation Program for ExServicemen; (5) Railroad Unemployment Insurance Program, (6) Trade Readjustment Assistance pursuant to the Trade Act of 1974, and (7) Unemployment Compensation under the Disaster Relief Act of 1974. The definition of unemployment compensation covered by this provision also includes disability benefits paid under Federal or State law as a substitute for unemployment benefits to individuals who are ineligible for unemployment benefits because they are disabled. However, workmen's compensation or benefits in the nature of workmen's compensation are not unemployment compensation and will continue to be totally excludible from income under section 104 (a)(1) of the Code. Benefits paid under private supplemental unemployment benefit plans will continue to be includible in gross income to the extent that they exceed the employee's prior contributions. Under some government unemployment compensation programs, employees are required to make contributions based on their wages. If the taxpayer is not allowed a deduction for a contribution, then the benefits of such programs are not to be considered in the calculations made under this provision until an amount equal to the total nondeductible contributions has been received by the taxpayer. Effective date The provision applies to unemployment compensation paid after December 31, 1978, in taxable years ending after that date. Revenue effect It is estimated that this provision will reduce calendar year liabilities by $251 million in 1979, $261 million in 1980 and $268 million in 1983. Budget receipts will not be affected in fiscal year 1979, and will be reduced by $251 million in 1980, and $263 million in fiscal year 1983. 5 See note 2, supra. D. Deferred Compensation Plans 1. State and local government deferred compensation plans (sec. 121 of the bill and sec. 457 of the Code) Present law Under present law, a taxpayer using the cash receipts and disbursements method (cash method) of accounting is generally not required to include compensation in gross income until it is actually or constructively received (sec. 451). However, under the constructive receipt doctrine, a taxpayer may not deliberately turn his back on income. and thus select the taxable year for which the income will be reported. A taxpayer ordinarily will be deemed to have received income if he or she has a right to receive that income and the exercise of that right is not subject to substantial restrictions (Treas. Regs. § 1.451-2(a)). In addition, under certain conditions, a taxpayer is required to treat the receipt of noncash benefits as income. Under the cash method, a taxpayer is required to report any item of income that is received in cash or in the form of a "cash equivalent." (Treas. Regs. §§ 1.61-2 (d), 1.446-1(a)(3) and 1.446–1(c) (1) (i).) However, if the property transferred as compensation is subject to a substantial risk of forfeiture or is nontransferable, special rules are provided which defer income inclusion until the property first becomes transferable or not subject to a substantial risk or forfeiture (sec. 83). The same general rules which apply to the transfer of property in connection with the performance of services generally apply to funded, nonqualified deferred compensation arrangements (see 402(b)). In applying the constructive receipt and cash equivalent doctrines to deferred compensation, an unsecured promise to make a future payment, not represented by a note, is not an item of gross income under the cash receipts and disbursements method.1 Further, some courts have held that neither the constructive receipt doctrine nor the cash equivalent doctrine would be applied to a taxpayer merely because the taxpayer agreed with the payor in advance to receive compensation on a deferred basis rather than currently, as long as the agreement was made before the taxpayer had obtained an unqualified and unconditional right to the income.2 In 1960, the Internal Revenue Service published Revenue Ruling 60-313 which set forth a broad policy statement regarding the applica 1 1 See Jackson v. Smietanka, 272 F. 970 (7th Cir. 1921); E. F. Cremin, 5 B.T.A. 1164 (1927), acq. VI-I C.B. 2 (1927); C. Florian Zittel, 12 B.T.A. 675, 677 (1928). * See James F. Oates, 18 T.C. 570 (1952); aff'd, 207 F. 2d 711 (7th Cir. 1953), acq, (and prior nonacq. withdrawn) 1960-1 C.B. 5; Howard Veit, 8 T.C. 809 (1947), acq. 1947-2 C.B. 4; cf. Kay Kimbell, 41 B.T.A. 940 (1940), acq. and nonacq. 1940-2 C.B. 5, 12; J. D. Amend, 13 T.C. 178 (1949), acq. 1950-1 C.B. 1; James Gould Cozzens, 19 T.C. 663 (1953); Howard Veit, 8 CCH Tax Ct. Mem. 919 (1949). 3 1960-1 C.B. 174. (50) |