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tax rules apply to generation-skipping transfers occurring as a result of death, and gift tax rules apply in other cases.

In addition to any adjustment to basis received under the gift or estate tax basis provisions, the basis of property subject to the amended generation-skipping transfer tax generally is increased by the amount of that tax attributable to the excess of the property's value over the transferor's basis. In the case of taxable terminations occurring as a result of death, a step-up in basis like that provided under the estate tax (sec. 1014) is provided.

Property transferred in a direct skip occurring as a result of death has the same value for purposes of the generation-skipping transfer tax as the property has for estate tax purposes. Thus, if the transferor's estate elects the alternate valuation date or the current use valuation provision, the value under those provisions is used in determining the generation-skipping transfer tax. In addition, even if an estate does not elect the alternate valuation date, an election may be made to value any property transferred in a taxable distribution or a taxable termination on the alternate valuation date if the distribution or termination occurs as a result of death and the requirements of that provision are satisfied.

The special rules under which estate tax attributable to interests in certain closely held businesses may be paid in installments also apply to direct skips occurring as a result of death.

The provision permitting tax-free redemptions of stock to pay estate tax is amended to permit those redemptions to pay generation-skipping transfer tax in the case of such transfers occurring as a result of death.

Effective Dates

The amended generation-skipping transfer tax applies to transfers after the date of enactment (October 22, 1986), subject to the following exceptions:

(1) Inter vivos transfers occurring after September 25, 1985, are subject to the amended tax;

(2) Transfers from trusts that were irrevocable before September 26, 1985, are exempt to the extent that the transfers are not attributable to additions to the trust corpus occurring after that date;12

(3) Transfers pursuant to wills 13 in existence before the date of enactment of the Act (October 22, 1986) are not subject to tax if the decedent died before January 1, 1987; and

(4) Transfers under a trust to the extent that such trust consists of property included in the gross estate of the decedent or which are direct skips which occur by reason of the death of any decedent

12 The new generation-skipping transfer tax does not apply to the exercise of a limited power of appointment under an otherwise grandfathered trust or to trusts to which the trust property is appointed provided such exercise cannot postpone vesting of any estate or interest in the trust property for a period ascertainable without regard to the date of the creation of the trust. See, 132 Cong. Rec. H8362 (September 25, 1986) (colloquy between Mr. Rostenkowski and Mr. Andrews) and 132 Cong. Rec. S13952 (September 26, 1986) (colloquy between Senator Packwood and Senator Bentsen).

13 Congress intended that the generation-skipping transfer tax not apply to transfers made pursuant to revocable trusts created before the date of enactment (October 22, 1986) if the grantor of the trust died before January 1, 1987. A technical amendment may be necessary for the statute to reflect this intent. Such an amendment was included in the H. Cong. Res. 395, as passed by the House of Representatives and Senate in the 99th Congress.

if the decedent was incompetent on the date of enactment of this Act (October 22, 1986) and at all times thereafter until death.

The Act provides that an election may be made to treat inter vivos and testamentary contingent transfers in trust for the benefit of a grandchild as direct skips if (1) the transfers occur before date of enactment of the Act (October 22, 1986), and (2) the transfers would be direct skips except for the fact that the trust instrument provides that, if the grandchild dies before vesting of the interest transferred, the interest is transferred to the grandchild's heirs (rather than the grandchild's estate). Transfers treated as direct skips as a result of this election are subject to Federal gift and estate tax on the grandchild's death in the same manner as if the contingent gift over had been to the grandchild's estate.

The existing generation-skipping transfer tax is repealed, retroactive to June 11, 1976.

The Congress adopted these delays in effective dates to permit a reasonable period for individuals to re-execute their wills to conform to the extension of generation-skipping transfer tax to direct skips. No comparable period was provided for generation-sharing transfers because those transfers were subject to generation-skipping transfer tax under present law.

Revenue Effect

These provisions are estimated to decrease fiscal year budget receipts by $3 million in 1987, $7 million in 1988, $7 million in 1989, $8 million in 1990, and $8 million in 1991.

TITLE XV-COMPLIANCE AND TAX ADMINISTRATION

A. Penalties

1. Penalties for failure to file information returns or statements (sec. 1501 of the Act and secs. 6652, 6676, and 6678, and new secs. 6721, 6722, 6723, and 6724 of the Code)1

Prior Law

Under prior and present law, the Code requires that information returns be filed with the IRS, and a copy be given to the taxpayer, detailing all wages, most other types of income, and some deductions. These requirements apply to a variety of specific payments, and are described in a number of Code provisions.

The Code also provides civil penalties for failure either to file an information return with the IRS (sec. 6652) or to provide a copy to the taxpayer (sec. 6678). The general penalty for failure to supply an information return to the IRS is separate from the penalty for failure to give a copy to the taxpayer. Generally, these penalties are $50 for each failure; under prior law, the maximum penalty under each provision was $50,000 per calendar year.

The Code also provides a penalty of either $5 or $50 (depending on the nature of the failure) for failure to furnish a correct taxpayer identification number (for individuals, the social security number) (sec. 6676). Under prior law, the Code did not provide a penalty for including other incorrect information on an information return.

Reasons for Change

Congress believed that simplifying these penalties, consolidating them, and making them more comprehensible would have a beneficial impact on tax compliance. Taxpayers will be able to understand more easily the consequences of noncompliance, and the administration of these penalties by the IRS should be facilitated by this simplification and consolidation.

Congress also believed that persons required to file these information returns (and provide copies to payees) who include incorrect information on them should be subject to a penalty.

Congress was concerned that the current maximum of $50,000 per calendar year for each of these penalties might diminish the efficacy of these penalties in instances where there has been a massive failure to file these information returns. Congress was also concerned, however, that total elimination of these maximum

1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1301; H.Rep. 99-426, pp. 829-831; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 501; S.Rep. 99-313, pp. 175-177; and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 777-778 (Conference Report).

amounts could subject taxpayers to enormous potential liability that would be disproportionate both to the taxpayer's culpability and to the penalties for many other Federal offenses. Consequently, Congress preserved a maximum amount for each of these penalties, but also raised the dollar amounts of those maximums.

Explanation of Provision

The Act consolidates the penalty for failure to file an information return with the IRS with the penalty for failure to supply a copy of that information return to the payee in the same subchapter of the Code. The general level of each of these penalties remains at $50 for each failure. The maximum penalty is raised from $50,000 to $100,000 per calendar year for each category of failure.2 Thus, a maximum penalty of $100,000 applies to failures to file information returns with the IRS, and another maximum penalty of $100,000 applies to failures to supply copies of information returns to payees.

As under prior law, the Act imposes these penalties without limits where the failure to file information returns with the IRS is due to intentional disregard of the filing requirement. The Act also provides, as did prior law, generally higher penalties for each failure to file where the failure to file is due to intentional disregard. The Act modifies the levels of these higher penalties for certain specified failures. Thus, the penalty for failure to report cash transactions that exceed $10,0003 is increased to 10 percent of the amount that should have been reported. Also, the penalty for failure to report exchanges of certain partnership interests or failure to report certain dispositions of donated property is 5 percent of the amount that should have been reported.

These provisions have generally been redrafted to improve their comprehensibility and administrability. In light of this redrafting, the Act repeals the prior-law penalty for failure to furnish an information return to the IRS (sec. 6652(a)) and the prior-law penalty for failure to supply a copy of the information return to the payee (sec. 6678).

The Act also adds to the Code a new penalty for failure to include correct information either on an information return filed with the IRS or on the copy of that information return supplied to the payee. This new penalty applies to both an omission of information or an inclusion of incorrect information. The amount of the penalty is $5 for each information return or copy for the payee, up to a maximum of $20,000 in any calendar year. This maximum does not apply in cases of intentional disregard of the requirement to file accurate information returns.

This new penalty does not apply to an information_return if a penalty for failure to supply a correct taxpayer identification number has been imposed with respect to that information return. Thus, if the person filing an information return is subject to a pen

2 The Act also raises from $50,000 to $100,000 per calendar year the maximum penalty for failure to supply taxpayer identification numbers (sec. 6676).

3 See Code sec. 60501. 4 See Code sec. 6050K. $ See Code sec. 6050L.

alty under section 6676 for including an incorrect social security number on the information return, this new penalty is not imposed with respect to that information return.

This new penalty is intended to provide to persons filing information returns an incentive both to file accurate and complete information returns initially and to correct as rapidly as possible any incorrect information returns that may have been filed. If a person files what purports to be an information return, but which contains so many inaccuracies or omissions that the utility of the document is minimized or eliminated, the IRS may under circumstances such as these (as it did under prior law) impose the penalty for failure to file an information return, rather than this new penalty for filing an information return that includes inaccurate or incomplete information. If the IRS imposes a penalty for failure to file an information return, it may not in addition impose a penalty for filing an incorrect information return with respect to the same information.

As under prior law, there is an exception from all of these penalties if the failure to file an information return with the IRS, to provide a copy to the payee, or to include correct information on either of those returns is due to reasonable cause and not to willful neglect. Thus, under this standard, if a person required to file fails to do so because of negligence or without reasonable cause, that person would be subject to these penalties. The Act retains the higher standards and special rules of prior law that apply to failures with respect to interest or dividend returns or statements.

The Act also clarifies a number of the substantive information reporting provisions of the Code relating to furnishing a written statement to the payee. Under prior law, a number of these provisions arguably might have been technically effective only if the person required to supply the copy to the payee had actually filed the information return with the IRS. These provisions were redrafted so that it is clear that the requirement to supply a copy of the information return to the payee is triggered when there is an obligation to file (instead of the actual filing of) an information return with the IRS.

Effective Date

The provision is effective for information returns the due date of which (determined without regard to extensions) is after December 31, 1986, except that certain modifications of the information return provisions for interest, dividends, and patronage dividends are effective on the date of enactment (see Modification of separate mailing requirement for certain information reports, C.6., below). 2. Increase in penalty for failure to pay tax (sec. 1502 of the Act and sec. 6651 of the Code)6

Prior Law

Under prior and present law, the Code provides that a taxpayer who fails to pay taxes when due must pay a penalty (sec. 6651(a)(2)

For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1302; H.Rep. 99-426, pp. 831-833; H.R. 3838,

Continued

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