Revenue Effect The provisions of the bill are estimated to reduce fiscal year budget receipts by $7 million in 1985, $6 million in 1986, $3 million in 1987, $1 million in 1988, and a negligible amount in 1989. 8. H.R. 3388-Messrs. Matsui, Thomas, and Fazio Application of Section 252 of Economic Recovery Tax Act of 1981 to Certain Transfers in 1973 Present Law In general Under the present law rules relating to transfers of property in connection with the performance of services (sec. 83), an employee generally includes in income the fair market value of transferred property, less any amount paid for the property, when the property first becomes either transferable or not subject to a substantial risk of forfeiture. Thus, if an employee receives property that is both subject to a substantial risk of forfeiture and is not transferable, the employee generally is not taxed until the property becomes either transferable or not subject to a substantial risk of forfeiture. The amount the employee includes in income is equal to the fair market value of the transferred property (as of the time of taxation), less any amount the employee paid for the property. However, an employee may elect (under sec. 83(b)) to be taxed when the property is received. In that case, the employee includes an amount in income equal to the fair market value of the property when received less any amount paid for the property. Effect of restrictions Generally, under section 83, restrictions on property are not taken into account in determining the fair market value of the property. Also, property is considered transferable for purposes of section 83 when the property would not be subject to a substantial risk of forfeiture in the hands of a subsequent transferee. Prior to enactment of section 252 of the Economic Recovery Tax Act of 1981 (ERTA), the U.S. Tax Court had ruled 5 that stock subject to the "insider trading" rules of section 16(b) of the Securities Exchange Act of 1934 6 was transferable within the meaning of section 83. Thus, although the taxpayer's profit on a sale of the stock within six months of receipt could be recovered by the corporation, the taxpayer was taxable on the fair market value of the stock when received. As amended by section 252 of ERTA, section 83 provides that stock subject to the restrictions of section 16(b) of the Securities Exchange Act of 1934 is treated as being subject to a substantial risk of forfeiture and nontransferable for the six-month period following receipt of the stock during which that section applies. Thus, unless * An employer generally is allowed a business expense deduction, when the employee is taxed, equal to the amount includible in the employee's income (sec. 83(h)). 5 Horwith v. Comm'r, 71 T.C. 932 (1979). 615 U.S.C. sec. 78p(b). the taxpayer elects (under sec. 83(b)) to be taxed when the stock is received, the taxpayer must include in income (and the employer may deduct), at the expiration of the period during which section 16(b) is applicable, the value of the stock at such time, less any amount the taxpayer paid for the stock. A similar rule is provided for stock subject to restrictions on transfer by reason of complying with the "pooling-of-interests" accounting rules of Accounting Series Releases Numbered 130 (10/5/72) 37 FR 20937; 17 CFR 211.130)) and 135 ((1/18/73) 38 FR 1734; CFR 211.135)). The amendments made to section 83 by section 252 of ERTA apply to taxable years (of the transferee) ending after December 31, 1981. Explanation of the Bill Under the bill, the rules of section 252 of ERTA would apply if (1) stock was acquired in November or December of 1973 pursuant to options granted in November or December of 1971, (2) the corporation granting the options was acquired in a reorganization during December 1973, and (3) the fair market value of the stock in the acquiring corporation as of July 1, 1974, received in exchange for the stock acquired on exercise of the option, was less than 50 percent of its value on December 4, 1973. This relief under the bill would be allowed only at the election of a shareholder who during 1975 or 1976 sold substantially all the stock so received. The bill would not apply with respect to a transfer to any employee to the extent that its application would result in a reduction in tax liability (exclusive of interest) of such employee in excess of $100,000 for all taxable years. Also, the bill provides that a refund or credit of any overpayment of tax, or an assessment of any deficiency, which is attributable to provisions of the bill, and which otherwise would be barred within six months after the date of enactment, could be made or allowed to the extent attributable to application of provisions of the bill, provided that, in the case of a credit or refund, a claim therefor is filed within such six-month period. The provisions of the bill could affect the tax liability of an electing person for the year in which stock was sold, as well as the amount of compensation and the year of its inclusion in income. The bill could also affect the amount and timing of any deduction allowable to the employer corporation. The statute of limitations would be kept open for the purpose of making such adjustments. The intended beneficiaries of the bill are John G. Franzia, Jr., Joseph S. Franzia, and Fred T. Franzia. Effective Date The bill would have only retroactive effect, and only to the limited extent provided in the bill and described in the explanation of the provisions of the bill. Revenue Effect The provisions of the bill are estimated to have a negligible effect on budget receipts. Prior Congressional Action An identical bill in the 97th Congress (H.R. 4577) passed the House and was favorably reported by the Senate Finance Committee, but was not enacted. 9. H.R. 3528-Mrs. Kennelly Deduction for Loss in Value of Freight Forwarder Operating Authorities Background Freight forwarders are required to obtain an operating authority before providing services. Historically, only a limited number of freight forwarder operating authorities were issued. Thus, the value of an operating authority constituted a substantial part of a freight forwarder's assets. Since 1980, however, the Interstate Commerce Commission (the "ICC") has granted operating authorities to freight forwarders without regard to the prior scheme of economic regulation. Nor have freight forwarders been subjected to any significant regulatory entry restrictions. As a result of the relative ease of entry into the freight forwarding business, the value of freight forwarder operating authorities has diminished significantly. Although the Congress has not acted to deregulate the freight forwarding industry, the owners of freight forwarder operating authorities state that their situation is similar to that faced by owners of motor carrier operating authorities after enactment of the Motor Carrier Act of 1980. That statute deregulated the trucking industry; as a result, motor carrier operating authorities lost significant value. The Economic Recovery Tax Act of 1981 contained a provision that allows trucking companies an ordinary deduction ratably over five years for loss in value of motor carrier operating authorities (sec. 266 of the 1981 Act). Present Law A deduction is allowed for any loss incurred in a trade or business during the taxable year, if the loss is not compensated for by insurance or otherwise (Code sec. 165(a)). In general, the amount of the deduction equals the adjusted basis of the property giving rise to the loss (sec. 165(b)). Treasury regulations provide that, to be deductible, a loss must be evidenced by a closed and completed transaction (i.e., must be "realized"), and must be fixed by an identifiable event (Reg. sec. 1.165-1(b)). As a general rule, no deduction is allowed for a decline in value of property absent a sale, abandonment, or other disposition. Thus, for a loss to be allowed as a deduction, generally the business must be discontinued or the property must be abandoned (Reg. sec. 1.1652)). Further, if the property is a capital asset and is sold or exchanged at a loss, the deduction of the resulting capital loss is subject to limitations (secs. 1212, 1211, and 165(f)). The courts have denied a loss deduction where the value of an operating permit or license decreased as the result of legislation expanding the number of licenses or permits that could be issued. In the view of several courts,7 the diminution in the value of a license or permit does not constitute an event giving rise to a deductible loss if the license or permit continues to have value as a right to carry on a business. Explanation of the Bill The bill would expand the scope of section 266 of the 1981 Act to allow an ordinary deduction ratably over a 60-month period for taxpayers who held one or more freight forwarder operating authorities on July 1, 1980 (the date of enactment of the Motor Carrier Act of 1980). The amount of the deduction would be the aggregate adjusted bases of all freight forwarder operating authorities that were held by the taxpayer on July 1, 1980, or acquired after that date under a contract that was binding on that date. The 60-month period would begin with the later of July 1, 1980, the month in which acquired, or at the taxpayer's election, the first month of the taxpayer's first taxable year beginning after that date. The bill would require that adjustments be made to the bases of authorities to reflect amounts allowable as deductions under the bill. Under regulations to be prescribed by the Treasury, a corporate taxpayer holding an eligible operating authority would be able to elect to allocate to the authority a portion of the cost to the taxpayer of stock in an acquired corporation (see Treas. Reg. sec. 1.9200-1 for rules relating to motor carrier operating authorities). The election would be available if the operating authority was held (directly or indirectly) by the taxpayer at the time its stock was acquired. In such a case, a portion of the stock basis would be allocated to the authority only if the corporate taxpayer would have been able to make such an allocation had the authority been distributed in a liquidation to which prior-law section 334(b)(2) applied. The election would be available only if the stock was acquired on or before July 1, 1980 (or pursuant to a binding contract in effect on such date). Effective Date The provisions of the bill would be effective retroactively for taxable years ending after June 30, 1980. Revenue Effect The provisions of the bill are estimated to decrease fiscal year budget receipts by $20 million in 1985 and $13 million in 1986. 7 See e.g., Consolidated Freight Lines, Inc. v. Comm'r, 37 B.T.A. 576 (1938), aff'd, 101 F.2d 813 (9th Cir.), cert. denied, 308 U.S. 562 (1939) (denial of loss deduction attributable to loss of monopoly due to State deregulation of the intrastate motor carrier industry); Monroe W. Beatty, 46 T.C. 835 (1966) (no deduction allowed for diminution in value of liquor license resulting from change in State law limiting grant of such licenses). 10. H.R. 4167-Messrs. Jenkins, Fowler, and Gephardt, Mrs. Kennelly, Messrs. Matsui, Flippo, Anthony, Philip Crane, Archer, Moore, Duncan, Pickle, Hance, Vander Jagt, Dorgan, Campbell, Heftel and others Exemption from Unrelated Business Income Tax for Income from Certain Oil and Gas Property In general Present Law Under present law, most organizations that generally are exempt from Federal income taxation under Code section 501(a), including any trust that is part of a tax-qualified pension, profit-sharing, or stock bonus plan described in section 401(a), are subject to tax on any unrelated business taxable income (secs. 511-514). In addition, a tax is imposed (sec. 408(e)(1)) on the unrelated trade or business income of an individual retirement account or annuity (an IRA). The term unrelated trade or business generally means any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of the activities for which the organization is granted tax exemption. Present law provides that a tax-exempt organization is treated as being engaged in the same activities as any partnership (whether limited or general) in which the organization invests. Accordingly, if a tax-exempt organization becomes a limited partner in a partnership that owns a working interest in oil and gas properties and the working interest is not substantially related to the organization's exempt function, the income derived from the working interest is subject to the unrelated trade or business tax. Debt-financed property Present law also provides that the income of an exempt trust or organization, or an IRA, from debt-financed property that is unrelated to its exempt function is subject to the unrelated business income tax in the proportion in which the property is financed by the debt (sec. 514). Debt-financed property means all property (e.g., rental real estate, tangible personal property, and corporate stock) that is held to produce income and with respect to which indebtedness was incurred to acquire or improve the property or an indebtedness would not have been incurred but for the acquisition or improvement of the property. A special rule applies under present law to real property acquired by an educational organization described in section 170 or a tax-exempt trust forming part of a tax-qualified pension, etc., plan. Under this rule, debt-financed real property acquired by such an educational organization or exempt trust is not treated as debt-financed property unless all of the following applies: (1) the acquisition is a fixed amount determined as of the date of acquisition; (2) the amount of any indebtedness or any other amount payable with respect to such indebtedness, or the time for making |