The Senate amendment, effective with respect to estates of decedents who die after December 31, 1976, permits the subordination of the special lien for additional estate tax attributable to the special valuation of a farm or other qualified real property where the Secretary of the Treasury is satisfied that the interests of the U.S. are protected adequately after the subordination. Conference agreement.-The conference agreement adopts the Senate amendment. 106. 10-year carryback of product liability net operating losses House bill.-No provision. Senate amendment.-Under present law, net operating losses incurred in a taxable year generally may be "carried back" and offset against taxable income of the 3 years first preceding the year of loss and, if not fully absorbed, "carried forward" and offset against taxable income of the 7 years next succeeding the year of loss. Losses offset against taxable income in carryback years generally result in tax refunds, and losses offset against taxable income in future years generally result in decreases in tax liabilities for those years. Under the Senate amendment, the amount of a net operating loss that is attributable to a product liability loss could be carried back an additional 7 years. Thus, in total, the product liability loss could be carried back to the 10 years first preceding the loss year and carried forward to the 7 years next succeeding the loss year. A taxpayer could elect not to apply this special carryback rule and, instead to carry the entire net operating loss back 3 years and forward 7 years as under present law. The amount of a net operating loss that is attributable to a product liability loss is the lesser of (1) the sum of the product liability losses deductible for the taxable year, or (2) the net operating loss (reduced by any portion thereof that is attributable to a foreign expropriation loss) for the taxable year.' Product liability losses include not only the liability for damages under product liability claims, but also the expenses incurred in the investigation or settlement of, or opposition to, product liability claims. Indirect corporate expense, or overhead, is not to be allocated to product liability claims so as to become a product liability loss. Only expenses directly incurred in connection with the product liability claim are to be included in determining the amount of the product liability losses for the year. The definition of product liability under the Senate amendment is intended to include the kinds of damages that are recoverable under prevalent theories of product liability. The laws of the several states regarding product liability are not uniform, but it is believed that the 1 The operation of this rule is illustrated as follows: Assume a taxpayer incurs a net operating loss for the taxable year of $80,000, of which $60,000 is attributable to a product liability loss. Assume further that taxable income for each of the 10 years immediately preceding the loss year is $5,000. The product liability loss of $60,000 may first be carried back to the 10th through the 4th preceding years, thus absorbing $35,000 of the loss. The remaining $25,000 of product liability loss is added to the "regular" net operating loss of $20,000 (for a total of $45,000) and is carried to the 3rd through 1st preceding years, which utilizes $15,000 of the loss. The remaining loss ($30,000) is carried forward to future years under present law rules, without regard to the source of the loss. Of course, in computing the amount of loss that may be carried from one preceding year to another, the normal adjustments under section 172 (such as the adjustment for the capital gain exclusion or excess of nonbusiness deductions over nonbusiness income) would continue to be applicable even in the extended carryback years. definition of product liability provided in the amendment is sufficiently broad to encompass the kinds of damages that may be recovered under product liability theories in most states. If a type of injury or damage included within the definition of the amendment (such as emotional harm without physical injury) it is to be considered a product liability loss (assuming it otherwise qualifies) even though it may not be recoverable under State law. Thus, if a taxpayer settles out of court on such a claim, the payment may be classified as a product liability loss even though the law of the State would not then have allowed recovery. The definition of product liability in the amendment does not include liabilities arising under warranty, which essentially are contract liabilities. Nor does the definition include liabilities based on services performed by the taxpayer. For example, medical or legal malpractice is not a product liability under the definition. Where both product and services are an integral part of the transaction, such as in the sale and installation of a boiler by the taxpayer, no product liability arises under the definition until all operations have been completed (or terminated) and the taxpayer has relinquished possession of the product. If the loss occurs prior to that point in time, it is not a product liability loss under the definition. The Senate amendment also makes it clear that self-insurance of product liability risks is a business need for which earnings and profits may be accumulated to a reasonable extent without imposition of the tax on unreasonable accumulation of earnings. This amendment is consistent with, and merely clarifies, present law. Under the amendment, the Secretary of the Treasury will prescribe regulations regarding the determination of the amount that may reasonably be accumulated to meet product liability self-insurance needs. It is expected that the regulations will provide that in determining what is a reasonable accumulation, it is appropriate to take into account the taxpayer's product liability experience, the extent of its commercial coverage for product liability, and the tax consequences of the taxpayer's ability to deduct product liability losses and related expenses for income tax purposes. Estimates of product liability claims that may be made against the taxpayer in the future must be reasonable both as to probability of occurrence and amount. The Senate amendment would be effective for product liability losses deductible in taxable years beginning after September 30, 1979. Conference agreement.-The conference agreement follows the Senate amendment. 107. Certain cost sharing payments House bill.-No provision. Senate amendment.-Under the Senate amendment, an exclusion from gross income would be provided for certain payments received under a number of Federal and State cost-sharing conservation programs. The exclusion would apply to the extent that the Secretary of Agriculture determines that the payment is made primarily for conservation, etc., purposes and only to the extent the Secretary of the Treasury determines that the payment does not increase substantially the annual income of the recipient. Neither a current deduction, depreciation, amortization, depletion, nor the investment credit may be claimed with respect to amounts excluded under this provision. The basis of any property acquired or improved with such payments would not reflect the amount of such payments. Ordinary income recapture is provided (to the extent of the lesser of the income recognized or the excluded payments) where the property or improvements purchased with such payments are disposed of before the expiration of 20 years. The amount recaptured is reduced 10 percent per year after the first ten years. Conference agreement. The conference agreement generally follows the Senate amendment with certain technical changes. The most significant of these changes provides that a payment (or a portion of a payment) will be excluded from income if the Secretary of the Treasury determines that the payment will not increase substantially the annual income from the property with respect to which the payment is made.1 108. Claim of right carryback House bill.-No provision. Senate amendment.-If a taxpayer includes in income for a prior year an amount received or accrued under a "claim of right," and it subsequently is determined that no such "claim of right" existed then a deduction is allowed for the amount restored to another. This situation may arise, for example, when a utility bills customers based on a temporary rate schedule, and after the rates are finalized by a utility commission in a subsequent year must make rebates to its customers. The tax benefit (i.e., reduction in current year taxes) that is attributable to this deduction is the greater of the tax reduction that would be realized by treating the item as a deduction in (1) the year it originally was included in income, or (2) the subsequent year in which it was discovered that the claim of right did not exist. If the greater tax benefit is realized by treating the item as a deduction in the prior year, it may result in a tax benefit greater than the entire tax liability otherwise due in the current year. In this case, the excess benefit is treated as an overpayment of tax in the current year and is refundable. Under present law, however, this refund may not be received for several years, since it is treated as an overpayment of tax for the current year and payment may be postponed until the return for the year is audited. The Senate amendment provides that a taxpayer may apply for a tentative refund of the amount of an overpayment for a taxable year that is attributable to a claim of right adjustment. The application for tentative refund may not be filed before the taxpayer has filed its income tax return for the taxable year, and must be filed within 12 months after the close of the taxable year. The amendment specifies certain information that must be provided in connection with the application. Within 90 days after the application is filed (or, if later, within 90 days after the last day of the month in which the tax return for the year in which the overpayment occurs must be filed, including extensions) the Secretary of the Treasury must review the application, determine the amount of the overpayment and apply credit or refund the overpayment to the taxpayer. 1 The comparable restriction in the Senate amendment indicated that a payment would be excludible only if the Secretary of the Treasury determines that the payment would not increase substantially the annual income of the recipient. This application for tentative refund will be administered in a manner similar to the manner prescribed under present law for tentative refunds due to carryback of net operating losses, investment_tax credit, etc. Thus, special rules may need to be prescribed by the Secretary of the Treasury to take into account special problems involving consolidated returns. The amendment applies to tentative refund claims filed on and after the date of enactment. Conference agreement.-The conference agreement follows the Senate amendment. 109. Revision of disability income exclusion for married taxpayers House bill.-No provision. Senate amendment. Under present law, a disability income exclusion generally is available to taxpayers who have not attained age 65 before the close of the taxable year and who have retired because of permanent and total disability. This exclusion is limited to $100 per week (a maximum of $5,200 a year). The amount of the exclusion is phased out on a dollar-for-dollar basis for taxpayers with adjusted gross incomes greater than $15,000. Thus, a taxpayer with $20,200 or more of adjusted gross income is not entitled to an exclusion. In order to claim the disability income exclusion, a taxpayer who is married at the close of a taxable year must file a joint return with his or her spouse, unless they have lived apart at all times during that year. The Senate amendment eliminates the requirement under present law that married taxpayers claiming the disability income exclusion must file a joint return. Thus, under the Senate amendment, if a married taxpayer filed a separate return, the phase-out of the exclusion for adjusted gross income over $15,000 would be computed without regard to any income of the other spouse. Conference agreement.-The conference agreement does not contain this provision. 110. Conditional tax reductions based on limited Federal spending House bill.-No provision Senate amendment.-Under present law, individual income tax rate reductions are not linked directly to Federal spending. The Senate amendment provides individual income tax reductions for 1980-1983 if: (1) total Federal outlays, as agreed to in the appropriate fiscal year budget resolution, do not exceed the following percentages of the projected gross national product: (2) the increase in Federal outlays specified in the budget resolution for a fiscal year does not exceed the previous year's outlays by more than the percentage increase in prices plus one percent; (3) for fiscal year 1982 only total Federal outlays do not exceed total revenues, as specified in the Second Concurrent Budget Resolution Conference agreement. The conference agreement provides that as a matter of national policy the rate of growth in Federal outlays, adjusted for inflation, should not exceed one percent per year between fiscal year 1979 and fiscal year 1983; Federal outlays as a percentage of gross national product should decline to below 21 percent in fiscal year 1980, 20.5 percent in fiscal year 1981, 20 percent in fiscal year 1982 and 19.5 percent in fiscal year 1983; and the Federal budget should be balanced in fiscal years 1982 and 1983. If these conditions are met, it is the intention that the tax-writing committees of Congress will report legislation providing significant tax reductions for individuals to the extent that these tax reductions are justified in the light of prevailing and expected economic conditions. 111. Sense of the Senate regarding revenue loss for fiscal years after 1979 House bill.-No provision Senate amendment.-The Senate amendment expresses the sense of the Senate that the conferees on the part of the Senate shall limit, to an extent that is practical and reasonable, the revenue loss for the fiscal years following 1979. Conference agreement.-The conferees agreed to the principles contained in the sense of the Senate regarding limiting the revenue loss for the fiscal years following 1979. 112. Study by the Treasury on ways to simplify Federal individual income tax return forms and instructions House bill.-No provision. Senate amendment.-The Senate amendment provides for the establishment of a Treasury Department task force to study the simplification of individual income tax returns and related instructions. Graphic and communication experts would be used in this study Interim reports would be made to the Secretary, and a final report, with recommendations, would be made to the Congress not later than 2 years after date of enactment. Conference agreement.-The conference agreement follows the Senate amendment 113. Involuntary conversion of livestock House bill.-No provision. Senate amendment.-Under present law, taxpayers may elect not to recognize gain realized on the involuntary conversion of certain property if property similar or related in service or use to the property converted is acquired by the taxpayer within the replacement period. In such a situation, gain is recognized only to the extent that the amount realized exceeds the cost of the replacement property. The basis of the replacement property is that of the converted property, decreased by any gain not recognized. In the case of involuntarily converted livestock, the replacement property satisfies the "similar or related in service or use" requirements for nonrecognition only if the new livestock is functionally the same as that converted. The Senate amendment provides that gain realized on the involuntary conversion of livestock will qualify for nonrecognition if property, |