with respect to employer securities allocated to the accounts of ESOP participants and beneficiaries. If the employer maintaining an ESOP has a registration-type class of securities, the ESOP must provide that each participant and beneficiary is entitled to direct the plan trustee how to vote the shares allocated to the participant's or beneficiary's account. If the employer does not have a registration-type class of securities, then each participant and beneficiary is entitled to direct the trustee how to vote shares allocated to his or her account only with respect to certain enumerated issues. In general, the bill would provide that (1) a plan will not be qualified as an ESOP unless the establishment of the plan is approved by a majority of the employees of the employer establishing the plan, and (2) the Treasury Department may provide that the voting requirements with respect to ESOPs are not satisfied if the voting rights of any participant or beneficiary are not substantially similar to the voting rights of other persons who hold the same class of securities or substantially similar securities.

The majority vote requirement would be effective with respect to plans established after the date of enactment of the bill. The voting rights requirement would be effective with respect to securities acquired after the date of enactment.

4. S. 2409-Senator Bumpers

Designation of Overpayments and Contributions on Tax Return for the Organ Transplant Trust Fund

Under present law, individual taxpayers may elect on their income tax return to allocate $1 ($2 on a joint return) of their tax liability to a fund established to provide financing to Presidential election campaigns. Federal tax law does not permit taxpayers to make contributions for charitable or other purposes through their Federal income tax returns.

The bill would provide that taxpayers could designate on their tax returns all or a portion of their tax refunds (or could make contributions with their returns) to a new trust fund that would defray the cost of necessary organ transplants. The designation of contributions to the trust fund would be effective for returns filed for taxable years ending after the date of enactment.

5. S. 2484-Senators Danforth, Baucus, Wallop, Kerry, Heinz, Durenberger, Chafee, Mitchell, Boren, McCain, Riegle, Bond, Cranston, Wilson, Symms, Bingaman, Rudman, Sanford, DeConcini, Weicker, Grassley, Heflin, and Lautenberg

Extension and Modification of Research Credit

A 20-percent income tax credit is allowed for the amount of qualified research expenditures paid or incurred by a taxpayer during the taxable year that exceeds the average amount of the taxpayer's qualified research expenditures in the preceding three taxable years (the "base period"). The credit also applies to certain payments to universities for basic research. Under present law, the credit is scheduled to expire after December 31, 1988.

The incremental credit is available only for research expenditures paid or incurred by the taxpayer in carrying on an existing trade or business. Thus, under present law no credit is available to a start-up company for research the results of which are intended to be used in its future business activities, or to an existing business for research expenditures incurred for purposes of developing a new line of business.

The bill would make permanent the incremental research credit and the university basic research credit.

Under the bill, a taxpayer could elect either of two methods for computing the incremental research credit. Under either method, a specified credit rate would apply to the amount of the taxpayer's qualified research expenditures in the current year that exceeds a fixed base period amount (subject to an annual adjustment to reflect increases in the GNP growth rate), rather than a moving base period amount as under present law. The credit would be 20 percent of the excess of current-year expenditures over the base, or seven percent of the excess of current-year expenditures over 75 percent of the base.

Also, the bill would modify the present-law trade or business test to extend eligibility for credit to qualified research expenditures where the research results are intended to be used in the active conduct of a future trade or business of the taxpayer.

The bill would be effective for taxable years beginning after December 31, 1988.

6. S. 2611-Senator Cranston

Disclosure of Certain Tax Return Information to Veterans'

Administration

The Internal Revenue Code prohibits disclosure of tax returns and return information of taxpayers, with exceptions for authorized disclosure in certain enumerated instances. Any unauthorized disclosure is subject to criminal penalties and civil damages.

The bill2 would allow disclosure of certain tax return information to the Veterans' Administration for the purpose of determining eligibility for (and the amount of) veterans' pension and other benefits. The bill would be effective on the date of enactment.

7. H.R. 1961

Portability of Pension Plan Benefits

There is no precise definition of portability of pension benefits, and the term is often used to refer to a broad variety of concepts. In general, the term portability refers to an individual's ability to maintain his or her pension benefits after changing employment. Under present law, the social security system provides the greatest degree of portability of retirement benefits. The social security system covers virtually all workers, and benefits are based on all covered employment.

2S. 2611 was favorably reported by the Senate Committee on Veterans' Affairs on July 6, 1988 (S. Rpt. 100-412), and was placed on the Senate Calendar.

In the private pension system, present law includes several provisions intended to facilitate portability by permitting individuals who receive a distribution of benefits to keep the benefit in a taxfavored retirement arrangement (this concept is often referred to as portability of assets). The most significant of these provisions is the ability to roll over pension distributions to an individual retirement account (IRA). In addition, the withdrawal restrictions applicable to tax-qualified retirement plans and the rules regarding taxation of benefits facilitate the ability to keep retirement funds in a tax-favored arrangement until retirement, inasmuch as these provisions generally are designed to provide incentives for individuals to retain pension savings until retirement.

The bill3 modifies the rules relating to distributions from qualified plans, qualified annuity plans, tax-sheltered annuity contracts, and IRAS. The bill provides that (1) in certain circumstances direct transfers to IRAs are required in lieu of distribution; (2) the Treasury Department may permit the distribution of employee contributions to be rolled over; (3) distributions from IRAs must be made with the consent of the IRA owner; (4) certain spousal rights to survivor benefits are required for IRAs and tax-sheltered annuity contracts; (5) certain nontax provisions are made applicable to pension plans consisting of one or more IRAs; and (6) the rules relating to salary reduction SEPs are modified. The bill is effective for years beginning after 1991.

8. H.R. 2792

Tax Treatment of Indian Fishing Rights

Various treaties, Federal statutes, and executive orders reserve to Indian tribes (mostly in the West and Great Lakes regions) rights to fish for subsistence and commercial purposes both on and off reservations. Because the treaties, statutes, and executive orders were adopted before passage of the Federal income tax, they do not specifically address whether income derived by Indians from protected fishing activities is exempt from taxation.

The bill would provide that income derived by certain Indians and Indian-owned entities from the exercise of fishing rights protected by treaties, Federal statutes, or executive orders is exempt from Federal and State tax, including income, social security, and unemployment compensation insurance taxes. The bill would apply to all taxable years beginning before or after the date of enactment as to which the period of assessment has not expired.

* H.R. 1961 was reported, with amendments, by the House Committee on Education and Labor on June 7, 1988 (H. Rpt. 100-676, Part 1).

H.R. 2792 was passed by the House of Representatives on June 20, 1988. (See also H.Rpt. 100-312, Part 2.)

1. S. 1239-Senators Armstrong and Daschle

Tax Treatment of Short-Term Loans of Small Banks

Present Law

Required accrual of interest on short-term loans

Under present law, certain taxpayers must accrue as interest (computed on a daily basis) any acquisition discount and stated interest on short-term obligations, i.e., obligations with a fixed maturity date of not more than one year from the date of issue (Code sec. 1281). This accrual requirement applies to accrual-basis taxpayers, banks, regulated investment companies (mutual funds), common trust funds, dealers in short-term obligations, taxpayers that designate the short-term obligations as part of a hedge, and certain taxpayers that stripped an obligation.

The requirement under section 1281(a)(1) for accrual of interest attributable to acquisition discount generally is effective for obligations acquired after July 18, 1984. Taxpayers, however, could elect to apply the provision to all short-term obligations owned by the taxpayer for its first taxable year ending after July 18, 1984; an electing taxpayer was permitted a five-year spread of the income attributable to the change in accounting method for short-term obligations. The accrual of stated interest on short-term obligations under section 1281(a)(2) is effective for obligations acquired after September 27, 1985.

Deferral of interest deduction allocable to short-term obligations

For taxpayers that are not required to accrue acquisition discount and stated interest on short-term obligations, present law defers the deduction of net direct interest expense with respect to any short-term obligations until the interest income on such shortterm obligations is recognized (sec. 1282). Net direct interest expense means the excess, if any, of the amount of interest paid or accrued during the taxable year on indebtedness incurred or con-tinued to purchase or carry a short-term obligation, over the aggregate amount of interest includible in gross income for the taxable year with respect to such obligation.

Explanation of the Bill

The bill would exempt loans made by a small bank in the ordinary course of the bank's trade or business from the rules applica

The Technical Corrections Act of 1988 (8. 2288), sec. 118(cX1), would make this provision offective for obligations acquired after December 81, 1985.

ble to short-term obligations requiring accrual of any acquisition discount, accrual of stated interest, and the deferral of interest expense. A bank would be considered a small bank for this purpose if, in general, its average annual gross receipts do not exceed $5 million. This provision would be effective for obligations acquired after July 18, 1984.

For entities not affected by the provision above, the bill would change the effective date of the provision which requires the accrual of stated interest on short-term obligations under section 1281(a)(2). Under the bill, such accrual would be required for obligations acquired after October 22, 1986.