taxanalystr DOCUMENT S RVICE

taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) 7 COMMITTEE ON \ WAYS AND MEANS CHAIRMAN DAVE CAM P Tax Reform Act of 2014 Discussion Draft Section-by-Section Summary Table of Contents Section I. Short Title; Etc 1 Title I — Tax Reform for Individuals 1 Subtitle A — Individual Income Tax Rate Reform I Secs. 1001-1003. Simplification of individual income tax rates; Deduction for adjusted net capital gain; Conforming amendments related to simplification of individual income tax rates 1 Subtitle B - Simplification of Tax Benefits for Families 3 Sec. 1101. Standard deduction 4 Sec. 1102. Increase and expansion of child tax credit. 5 Sec. 1103. Modification of earned income tax credit. 6 Sec. 1104. Repeal of deduction for personal exemptions. 7 Subtitle C — Simplification of Education Incentives 8 Sec. 1201. American opportunity tax credit. 8 Sec. 1202. Expansion of Pell Grant exclusion from gross income. 9 Sec. 1203. Repeal of exclusion of income from United States savings bonds used to pay higher education tuition and fees 10 Sec. 1204. Repeal of deduction for interest on education loans. 10 Sec. 1205. Repeal of deduction for qualified tuition and related expenses. 10 Sec. 1206. No new contributions to Coverdell education savings accounts 11 Sec. 1207. Repeal of exclusion for discharge of student loan indebtedness 11 Sec. 1208. Repeal of exclusion for qualified tuition reductions. 12 Sec. 1209. Repeal of exclusion for education assistance programs 12 Sec. 1210. Repeal of exception to 10-percent penalty for higher education expenses. 12 Subtitle D — Repeal of Certain Credits for Individuals 13 Sec. 1301. Repeal of dependent care credit. 13 Sec. 1302. Repeal of credit for adoption expenses 13 Sec. 1303. Repeal of credit for nonbusiness energy property 14 Sec. 1304. Repeal of credit for residential energy efficient property. 14 Sec. 1305. Repeal of credit for qualified electric vehicles 14 Sec. 1306. Repeal of alternative motor vehicle credit. 1 Sec. 1307. Repeal of alternative fuel vehicle refueling property credit 15 Sec. 1308. Repeal of credit for new qualified plug-in electric drive motor vehicles 15 Prepared by Ways and Means Committee Majority Tax Staff EFTA01078150 tannalyStS . DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 1309. Repeal of credit for health insurance costs of eligible individuals. 16 Sec. 1310. Repeal of first-time homebuyer credit. 16 Subtitle E — Deductions, Exclusions, and Certain Other Provisions 17 Sec. 1401. Exclusion of gain from sale of a principal residence. 17 Sec. 1402. Mortgage interest. 18 Sec. 1403. Charitable contributions. 19 Sec. 1404. Denial of deduction for expenses attributable to the trade or business of being an employee. 22 Sec. 1405. Repeal of deduction for taxes not paid or accrued in a trade or business. 23 Sec. 1406. Repeal of deduction for personal casualty losses 23 Sec. 1407. Limitation on wagering losses. 24 Sec. 1408. Repeal of deduction for tax preparation expenses. 24 Sec. 1409. Repeal of deduction for medical expenses 24 Sec. 1410. Repeal of disqualification of expenses for over-the-counter drugs under certain accounts and arrangements. 25 Sec. 1411. Repeal of deduction for alimony payments and corresponding inclusion in gross income. 25 Sec. 1412. Repeal of deduction for moving expenses. 26 Sec. 1413. Termination of deduction and exclusions for contributions to medical savings accounts. 26 Sec. 1414. Repeal of 2-percent floor on miscellaneous itemized deductions 27 Sec. 1415. Repeal of overall limitation on itemized deductions 27 Sec. 1416. Deduction for amortizable bond premium allowed in determining adjusted gross income. 28 Sec. 1417. Repeal of exclusion, etc., for employee achievement awards 28 Sec. 1418. Clarification of special rule for certain governmental plans. 29 Sec. 1419. Limitation on exclusion for employer -provided housing 29 Sec. 1420. Fringe benefits 30 Sec. 1421. Repeal of exclusion of net unrealized appreciation in employer securities. 30 Sec. 1422. Consistent basis reporting between estate and person acquiring property from decedent. 31 Subtitle F — Employment Tax Modifications 31 Sec. 1501. Modifications of deduction for Social Security taxes in computing net earnings from self-employment 31 Sec. 1502. Determination of net earnings from self-employment. 32 Sec. 1503. Repeal of exemption from FICA taxes for certain foreign workers. 33 Sec. 1504. Repeal of exemption from FICA taxes for certain students 34 Sec. 1505. Override of Treasury guidance providing that certain employer -provided supplemental unemployment benefits are not subject to employment taxes 34 Sec. 1506. Certified professional employer organizations. 35 Subtitle G — Pensions and Retirement 36 Part I — Individual Retirement Plans 36 Secs. 1601-1603. Elimination of income limits on contributions to Roth IRAs; No new contributions to traditional IRAs; Inflation adjustment for Roth IRA contributions. 36 Prepared by Ways and Means Committee Majority Tax Staff ii EFTA01078151 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 1604. Repeal of special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions 37 Sec. 1605. Repeal of exception to 10-percent penalty for first home purchases. 37 Part 2 — Employer -Provided Plans 38 Secs. 1611-1612. Termination for new SEPs; Termination for new SIMPLE 401(k)s 38 Sec. 1613. Rules related to designated Roth contributions 39 Sec. 1614. Modifications of required distribution rules for pension plans. 40 Sec. 1615. Reduction in minimum age for allowable in-service distributions. 41 Sec. 1616. Modification of rules governing hardship distributions 42 Sec. 1617. Extended rollover period for the rollover of plan loan offset amounts in certain cases. 42 Sec. 1618. Coordination of contribution limitations for 403(b) plans and governmental 457(b) plans. 43 Sec. 1619. Application of 10-percent early distribution tax to governmental 457 plans 44 Secs. 1620-1624. Inflation adjustments for qualified plan benefit and contribution limitations; Inflation adjustments for qualified plan elective deferral limitations; Inflation adjustments for SIMPLE retirement accounts; Inflation adjustments for catch-up contributions for certain employer plans; Inflation adjustments for governmental and tax-exempt organization plans. 44 Subtitle H — Certain Provisions Related to Members of Indian Tribes 45 Secs. 1701-1703. Indian general welfare benefits; Tribal Advisory Committee; Other relief for Indian tribes 45 Title II — Alternative Minimum Tax Repeal 47 Sec. 2001. Repeal of alternative minimum tax. 47 Title III - Business Tax Reform 49 Subtitle A — Tax Rates 49 Sec. 3001. 25-percent corporate tax rate 49 Subtitle B — Reform of Business-related Exclusions and Deductions 50 Sec. 3101. Revision of treatment of contributions to capital. 50 Sec. 3102. Repeal of deduction for local lobbying expenses. 51 Sec. 3103. Expenditures for repairs in connection with casualty losses 51 Sec. 3104. Reform of accelerated cost recovery system 51 Sec. 3105. Repeal of amortization of pollution control facilities 53 Sec. 3106. Net operating loss deduction. 53 Sec. 3107. Circulation expenditures. 54 Sec. 3108. Amortization of research and experimental expenditures 54 Sec. 3109. Repeal of deductions for soil and water conservation expenditures and endangered species recovery expenditures 55 Sec. 3110. Amortization of certain advertising expenses. 56 Sec. 3111. Expensing certain depreciable business assets for small business 57 Sec. 3112. Repeal of election to expense certain refineries 58 Sec. 3113. Repeal of deduction for energy efficient commercial buildings. 58 Sec. 3114. Repeal of election to expense advanced mine safety equipment. 58 Prepared by Ways and Means Committee Majority Tax Staff iii EFTA01078152 DOCUMENlT SIMI Doc 20144426 (193 pgs) illiala • Sec. 3115. Repeal of deduction for expenditures by farmers for fertilizer, etc. 59 Sec. 3116. Repeal of special treatment of certain qualified film and television productions 59 Sec. 3117. Repeal of special rules for recoveries of damages of antitrust violations, etc 59 Sec. 3118. Treatment of reforestation expenditures. 60 Sec. 3119. 20-year amortization of goodwill and certain other intangibles 60 Sec. 3120. Treatment of environmental remediation costs 61 Sec. 3121. Repeal of expensing of qualified disaster expenses. 61 Sec. 3122. Phaseout and repeal of deduction for income attributable to domestic production activities 62 Sec. 3123. Unification of deduction for organizational expenditures 62 Sec. 3124. Prevention of arbitrage of deductible interest expense and tax-exempt interest income 63 Sec. 3125. Prevention of transfer of certain losses from tax indifferent parties. 63 Sec. 3126. Entertainment, etc. expenses. 64 Sec. 3127. Repeal of limitation on corporate acquisition indebtedness 65 Sec. 3128. Denial of deductions and credits for expenditures in illegal businesses. 65 Sec. 3129. Limitation on deduction for FDIC premiums. 66 Sec. 3130. Repeal of percentage depletion. 66 Sec. 3131. Repeal of passive activity exception for working interests in oil and gas property 67 Sec. 3132. Repeal of special rules for gain or loss on timber, coal, or domestic iron ore 67 Sec. 3133. Repeal of like-kind exchanges. 68 Sec. 3134. Restriction on trade or business property treated as similar or related in service to involuntarily converted property in disaster areas. 69 Sec. 3135. Repeal of rollover of publicly traded securities gain into specialized small business investment companies. 69 Sec. 3136. Termination of special rules for gain from certain small business stock. 70 Sec. 3137. Certain self-created property not treated as a capital asset. 70 Sec. 3138. Repeal of special rule for sale or exchange of patents. 71 Sec. 3139. Depreciation recapture on gain from disposition of certain depreciable realty. 71 Sec. 3140. Common deduction conforming amendments. 72 Subtitle C — Reform of Business Credits 72 Sec. 3201. Repeal of credit for alcohol, etc., used as fuel. 72 Sec. 3202. Repeal of credit for biodiesel and renewable diesel used as fuel 72 Sec. 3203. Research credit modified and made permanent. 73 Sec. 3204. Low-income housing tax credit 75 Sec. 3205. Repeal of enhanced oil recovery credit. 77 Sec. 3206. Phaseout and repeal of credit for electricity produced from certain renewable resources. 78 Sec. 3207. Repeal of Indian employment credit. 78 Sec. 3208. Repeal of credit for portion of employer Social Security taxes paid with respect to employee cash tips 79 Sec. 3209. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions. 79 Sec. 3210. Repeal of credit for small employer pension plan startup costs 79 Prepared by Ways and Means Committee Majority Tax Staff ry EFTA01078153 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 3211. Repeal of employer -provided child care credit. 80 Sec. 3212. Repeal of railroad track maintenance credit 80 Sec. 3213. Repeal of credit for production of low sulfur diesel fuel. 80 Sec. 3214. Repeal of credit for producing oil and gas from marginal wells 81 Sec. 3215. Repeal of credit for production from advanced nuclear power facilities. 81 Sec. 3216. Repeal of credit for producing fuel from a nonconventional source 81 Sec. 3217. Repeal of new energy efficient home credit. 81 Sec. 3218. Repeal of energy efficient appliance credit 82 Sec. 3219. Repeal of mine rescue team training credit 82 Sec. 3220. Repeal of agricultural chemicals security credit. 82 Sec. 3221. Repeal of credit for carbon dioxide sequestration 83 Sec. 3222. Repeal of credit for employee health insurance expenses of small employers 83 Sec. 3223. Repeal of rehabilitation credit. 84 Sec. 3224. Repeal of energy credit. 84 Sec. 3225. Repeal of qualifying advanced coal project credit. 85 Sec. 3226. Repeal of qualifying gasification project credit. 85 Sec. 3227. Repeal of qualifying advanced energy project credit 85 Sec. 3228. Repeal of qualifying therapeutic discovery project credit. 86 Sec. 3229. Repeal of work opportunity tax credit. 86 Sec. 3230. Repeal of deduction for certain unused business credits 86 Subtitle D — Accounting Methods 87 Sec. 3301. Limitation on use of cash method of accounting. 87 Sec. 3302. Rules for determining whether taxpayer has adopted a method of accounting 88 Sec. 3303. Certain special rules for taxable year of inclusion. 88 Sec. 3304. Installment sales. 89 Secs. 3305-3306. Repeal of special rule for prepaid subscription income; Repeal of special rule for prepaid dues income of certain membership organizations 90 Sec. 3307. Repeal of special rule for magazines, paperbacks, and records returned after close of the taxable year. 90 Sec. 3308. Modification of rules for long-term contracts 90 Sec. 3309. Nuclear decommissioning reserve funds. 91 Sec. 3310. Repeal of last-in, first-out method of inventory 92 Sec. 3311. Repeal of lower of cost or market method of inventory. 93 Sec. 3312. Modification of rules for capitalization and inclusion in inventory costs of certain expenses. 94 Sec. 3313. Modification of income forecast method. 94 Sec. 3314. Repeal of averaging for farm income 95 Sec. 3315. Treatment of patent or trademark infringement awards 95 Sec. 3316. Repeal of redundant rules with respect to carrying charges 96 Sec. 3317. Repeal of recurring item exception for spudding of oil or gas wells 96 Subtitle E — Financial Instruments 97 Part I — Derivatives and Hedges 97 Sec. 3401. Treatment of certain derivatives 97 Sec. 3402. Modification of certain rules related to hedges 98 Prepared by Ways and Means Committee Majority Tax Staff V EFTA01078154 DOCUMENT SIMI Doc 20144426 (193 pgs) =Ma • Part 2 — Treatment of Debt Instruments 98 Sec. 3411. Current inclusion in income of market discount. 98 Sec. 3412. Treatment of certain exchanges of debt instruments 99 Sec. 3413. Coordination with rules for inclusion not later than for financial accounting purposes. 100 Sec. 3414. Rules regarding certain government debt 100 Part 3 — Certain Rules for Determining Gain and Loss 101 Sec. 3421. Cost basis of specified securities determined without regard to identification. 101 Sec. 3422. Wash sales by related parties. 101 Sec. 3423. Nonrecognition for derivative transactions by a corporation with respect to its stock. 102 Part 4 — Tax Favored Bonds 102 Secs. 3431-3432. Termination of private activity bonds; Termination of credit for interest on certain home mortgages. 102 Sec. 3433. Repeal of advance refunding bonds. 103 Sec. 3434. Repeal of tax credit bond rules 104 Subtitle F — Insurance Reforms 104 Sec. 3501. Exception to pro rata interest expense disallowance for corporate -owned life insurance restricted to 20-percent owners. 104 Sec. 3502. Net operating losses of life insurance companies 105 Sec. 3503. Repeal of small life insurance company deduction 105 Sec. 3504. Computation of life insurance tax reserves. 106 Sec. 3505. Adjustment for change in computing reserves. 106 Sec. 3506. Modification of rules for life insurance proration for purposes of determining the dividends received deduction. 107 Sec. 3507. Repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account 107 Sec. 3508. Modification of proration rules for property and casualty insurance companies. 108 Sec. 3509. Repeal of special treatment of Blue Cross and Blue Shield organizations, etc. 108 Sec. 3510. Modification of discounting rules for property and casualty insurance companies. 109 Sec. 3511. Repeal of special estimated tax payments 110 Sec. 3512. Capitalization of certain policy acquisition expenses. 110 Secs. 3513-3514. Tax reporting for life settlement transactions; Clarification of tax basis of life insurance contracts. 111 Sec. 3515. Exception to transfer for valuable consideration rules 112 Subtitle G — Pass-Thru and Certain Other Entities 112 Part 1 — S Corporations 112 Sec. 3601. Reduced recognition period for built-in gains made permanent. 113 Sec. 3602. Modifications to S corporation passive investment income rules 113 Sec. 3603. Expansion of qualifying beneficiaries of an electing small business trust 113 Prepared by Ways and Means Committee Majority Tax Staff vi EFTA01078155 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 3604. Charitable contribution deduction for electing small business trusts 114 Sec. 3605. Permanent rule regarding basis adjustment to stock of S corporations making charitable contributions of property 114 Sec. 3606. Extension of time for making S corporation elections 115 Sec. 3607. Relocation of C corporation definition. 115 Part 2 — Partnerships 116 Sec. 3611. Repeal of rules relating to guaranteed payments and liquidating distributions. 116 Sec. 3612-3614. Mandatory adjustments to basis of partnership property in case of transfer of partnership interests; Mandatory adjustments to basis of undistributed partnership property; Corresponding adjustments to basis of properties held by partnership where partnership basis adjusted. 117 Sec. 3615. Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner's share of loss 117 Sec. 3616. Revisions related to unrealized receivables and inventory items 118 Sec. 3617. Repeal of time limitation on taxing precontribution gain. 118 Sec. 3618. Partnership interests created by gift. 119 Sec. 3619. Repeal of technical termination 119 Sec. 3620. Publicly traded partnership exception restricted to mining and natural resources partnerships 119 Sec. 3621. Ordinary income treatment in the case of partnership interests held in connection with performance of services. 120 Sec. 3622. Partnership audits and adjustments. 122 Part 3 — REITs and RICs 123 Sec. 3631. Prevention of tax-free spinoffs involving REITs. 123 Sec. 3632. Extension of period for prevention of REIT election following revocation or termination 124 Sec. 3633. Certain short-life property not treated as real property for purposes of REIT provisions 124 Sec. 3634. Repeal of special rules for timber held by REITs. 124 Sec. 3635. Limitation on fixed percentage rent and interest exceptions for REIT income tests 125 Secs. 3636-3637. Repeal of preferential dividend rule for publicly offered REITs; Authority for alternative remedies to address certain REIT distribution failures. 126 Sec. 3638. Limitations on designation of dividends by REITs 126 Sec. 3639. Non-REIT earnings and profits required to be distributed by REIT in cash 127 Sec. 3640. Debt instruments of publicly offered REITs and mortgages treated as real estate assets. 127 Sec. 3641. Asset and income test clarification regarding ancillary personal property. 127 Sec. 3642. Hedging provisions. 128 Sec. 3643. Modification of REIT earnings and profits calculation to avoid duplicate taxation 128 Sec. 3644. Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries. 129 Sec. 3645. Treatment of certain services provided by taxable REIT subsidiaries 129 Prepared by Ways and Means Committee Majority Tax Staff vn EFTA01078156 taxanalysts° DOCUMENT StRVICE Doc 20144426 (193 pgs) Sec. 3646. Study relating to taxable REIT subsidiaries 130 Sec. 3647. C corporation election to become, or transfer assets to, a RIC or REIT. 130 Sec. 3648. Interests in RICs and REITs not excluded from definition of United States real property interests 130 Sec. 3649. Dividends derived from RICs and REITs ineligible for deduction for United States source portion of dividends from certain foreign corporations. 131 Part 4 — Personal Holding Companies 132 Sec. 3661. Exclusion of dividends from controlled foreign corporations from the definition of personal holding company income for purposes of the personal holding company rules 132 Subtitle H — Taxation of Foreign Persons 132 Sec. 3701. Prevention of avoidance of tax through reinsurance with non-taxed affiliates. 132 Sec. 3702. Taxation of passenger cruise gross income of foreign corporations and nonresident alien individuals. 133 Sec. 3703. Restriction on insurance business exception to passive foreign investment company rules. 134 Sec. 3704. Modification of limitation on earnings stripping. 134 Sec. 3705. Limitation on treaty benefits for certain deductible payments 135 Subtitle I — Provisions Related to Compensation 135 Part I — Executive Compensation 135 Sec. 3801. Nonqualified deferred compensation. 135 Sec. 3802. Modification of limitation on excessive employee remuneration. 136 Sec. 3803. Excise tax on excess tax-exempt organization executive compensation. 137 Sec. 3804. Denial of deduction as research expenditure for stock transferred pursuant to an incentive stock option. 138 Part 2 — Worker Classification 138 Sec. 3811. Determination of worker classification 138 Subtitle J — Zones and Short-Term Regional Benefits 139 Sec. 3821. Repeal of provisions relating to Empowerment Zones and Enterprise Communities 139 Sec. 3822. Repeal of DC Zone provisions. 140 Sec. 3823. Repeal of provisions relating to renewal communities 140 Sec. 3824. Repeal of various short-term regional benefits. 141 Title IV — Participation Exemption System for the Taxation of Foreign Income 142 Subtitle A — Establishment of Exemption System 142 Sec. 4001. Deduction for dividends received by domestic corporations from certain foreign corporations 142 Sec. 4002. Limitation on losses with respect to specified 10-percent owned foreign corporations. 142 Sec. 4003. Treatment of deferred foreign income upon transition to participation exemption system of taxation. 143 Sec. 4004. Look-thru rule for related controlled foreign corporations made permanent 144 Prepared by Ways and Means Committee Majority Tax Staff viii EFTA01078157 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Subtitle B — Modifications Related to Foreign Tax Credit System 145 Sec. 4101. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year basis 145 Sec. 4102. Foreign tax credit limitation applied by allocating only directly allocable deductions to foreign source income. 145 Sec. 4103. Passive category income expanded to include other mobile income. 146 Sec. 4104. Source of income from sales of inventory determined solely on basis of production activities 146 Subtitle C — Rules Related to Passive and Mobile Income 147 Part I — Modification of Subpart F Provisions 147 Sec. 4201. Subpart F income to only include low-taxed foreign income. 147 Sec. 4202. Foreign base company sales income. 147 Sec. 4203. Inflation adjustment of de minimis exception for foreign base company income 148 Sec. 4204. Active finance exception extended with limitation for low-taxed foreign income 148 Sec. 4205. Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment. 149 Part 2 — Prevention of Base Erosion 149 Sec. 4211. Foreign intangible income subject to taxation at reduced rate; intangible income treated as subpart F income 149 Sec. 4212. Denial of deduction for interest expense of United States shareholders which are members of worldwide affiliated groups with excess domestic indebtedness 151 Title V — Tax Exempt Entities 152 Subtitle A — Unrelated Business Income Tax 152 Sec. 5001. Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under section 501(a) 152 Sec. 5002. Name and logo royalties treated as unrelated business taxable income 153 Sec. 5003. Unrelated business taxable income separately computed for each trade or business activity 153 Sec. 5004. Exclusion of research income limited to publicly available research. 154 Sec. 5005. Parity of charitable contribution limitation between trusts and corporations 154 Sec. 5006. Increased specific deduction. 154 Sec. 5007. Repeal of exclusion of gain or loss from disposition of distressed property 155 Sec. 5008. Qualified sponsorship payments. 155 Subtitle B — Penalties 156 Sec. 5101. Increase in information return penalties 156 Sec. 5102. Manager-level accuracy-related penalty on underpayment of unrelated business income tax. 157 Subtitle C — Excise Taxes 158 Sec. 5201. Modification of intermediate sanctions 158 Sec. 5202. Modification of taxes on self-dealing. 159 Prepared by Ways and Means Committee Majority Tax Staff rx EFTA01078158 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 5203. Excise tax on failure to distribute within 5 years contribution to donor advised fund Sec. 5204. Simplification of excise tax on private foundation investment income Sec. 5205. Repeal of exception for private operating foundation failure to distribute income 161 Sec. 5206. Excise tax based on investment income of private colleges and universities 162 Subtitle D — Sec. 5301 Sec. 5302 Sec. 5303 Sec. 5304 Title VI—Tax Subtitle A — Sec. 6001 Sec. 6002 Sec. 6003 Sec. 6004 Sec. 6005 Sec. 6006 Sec. 6007 Sec. 6008 Sec. 6009 Sec. 6010 Sec. 6011 Subtitle B — Sec. 6101 Sec. 6102 Sec. 6103 Sec. 6104 Sec. 6105 Subtitle C — Secs. 620 Subtitle D — Sec. 6301 160 161 Requirements for Organizations Exempt from Tax 162 . Repeal of tax-exempt status for professional sports leagues 162 . Repeal of exemption from tax for certain insurance companies and co-op health insurance issuers. 163 . In-State requirement for workmen's compensation insurance organizations 163 . Repeal of Type II and Type III supporting organizations. 164 Administration and Compliance 165 IRS Investigation -Related Reforms 165 . Organizations required to notify Secretary of intent to operate as 501(c)(4) 165 . Declaratory judgments for 501(c)(4) organizations. 166 . Restriction on donation reporting for certain 501(c)(4) organizations. 167 . Mandatory electronic filing for annual returns of exempt organizations 167 . Duty to ensure that IRS employees are familiar with and act in accord with certain taxpayer rights 168 . Termination of employment of IRS employees for taking official actions for political purposes. 168 . Release of information regarding the status of certain investigations. 169 . Review of IRS examination selection procedures 169 . IRS employees prohibited from using personal email accounts for official business 170 . Moratorium on IRS conferences. 170 . Applicable standard for determinations of whether an organization is operated exclusively for the promotion of social welfare 170 Taxpayer Protection and Service Reforms 171 . Extension of IRS authority to require truncated Social Security numbers on Form W-2 171 . Free electronic filing. 172 . Pre-populated returns prohibited 172 . Form 1040SR for seniors 173 . Increased refund and credit threshold for Joint Committee on Taxation review of C corporation return 174 Tax Return Due Date Simplification 174 1-6203. Due dates for returns of partnerships, S corporations, and C corporations; Modification of due dates by regulation; Corporations permitted statutory automatic 6-month extension of income tax returns. 174 Compliance Reforms 175 . Penalty for failure to file. 175 Prepared by Ways and Means Committee Majority Tax Staff EFTA01078159 DOCUMENT SIMI Doc 20144426 (193 pgs) =Ma • Sec. 6302. Penalty for failure to file correct information returns and provide payee statements 175 Sec. 6303. Clarification of 6-year statute of limitations in case of overstatement of basis. 176 Sec. 6304. Reform of rules related to qualified tax collection contracts. 176 Sec. 6305. 100 percent continuous levy on payments to Medicare providers and suppliers 177 Sec. 6306. Treatment of refundable credits for purposes of certain penalties. 178 Title VII — Excise Taxes 179 Sec. 7001. Repeal of medical device excise tax. 179 Sec. 7002. Modifications relating to oil spill liability trust fund. 179 Sec. 7003. Modification relating to inland waterways trust fund financing rate. 179 Sec. 7004. Excise tax on systemically important financial institutions. 180 Sec. 7005. Clarification of orphan drug exception to annual fee on branded prescription pharmaceutical manufacturers and importers 181 Title VIII — Deadwood and Technical Provisions 182 Subtitle A — Repeal of Deadwood 182 Secs. 8001-8084. Repeal of Deadwood. 182 Subtitle B — Conforming Amendments Related to Multiple Sections 182 Sec. 8101. Conforming amendments related to multiple sections 182 Prepared by Ways and Means Committee Majority Tax Staff Xi EFTA01078160 tannalyStS . DOCUMENT S RVICE Doc 20144426 (193 pgs) Tax Reform Act of 2014 Discussion Draft Section-by-Section Summary Section 1. Short Title; Etc. This section provides: (1) a short title for the discussion draft, the "Tax Reform Act of 2014"; (2) that when the discussion draft amends or repeals a particular section or other provision, such amendment or repeal generally should be considered as referring to sections or provisions of the Internal Revenue Code of 1986; and (3) a table of contents. Title I — Tax Reform for Individuals Subtitle A — Individual Income Tax Rate Reform Secs. 1001-1003. Simplification of individual income tax rates; Deduction for adjusted net capital gain; Conforming amendments related to simplification of individual income tax rates. Current law: Under current law, a taxpayer generally determines his regular tax liability by applying the tax rate schedules (or the tax tables) to his regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer's income increases. Separate rate schedules apply based on an individual's filing status. For 2014, there are seven regular individual income tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. In addition, there are five categories of filing status: single, head of household, married filing jointly (and surviving spouses), married filing separately, and estates and trusts. For married individuals filing jointly, the upper bounds of the 10- and 15-percent brackets are exactly double the upper bounds that apply to single individuals, to prevent a marriage penalty from applying at these income levels. The income levels for each bracket threshold are indexed annually based on increases in the Consumer Price Index (CPI). A separate rate schedule applies to adjusted net capital gain and qualified dividends, with rates of 0 percent, 15 percent, and 20 percent. Additional rates of 25 percent and 28 percent apply to unrecaptured section 1250 gain and 28-percent rate gain (collectibles gain and section 1202 gain), respectively. Special rules (i.e., the so-called "kiddie tax") apply to certain unearned income of children, taxing a portion of such income at the parents' tax bracket. Provision: Under the provision, the current seven tax brackets would be consolidated and simplified into three brackets: 10 percent, 25 percent, and 35 percent. Generally, the new 10- percent bracket would replace the current 10- and 15-percent brackets; the new 25-percent bracket would replace the current 25-, 28-, 33-, and 35-percent brackets; and the new 35-percent bracket would replace the current 39.6-percent bracket. While the current 25-percent bracket Prepared by Ways and Means Committee Majority Tax Staff EFTA01078161 DOCUMENT Sin Doc 20144426 (193 pgs) =Ma • begins at $72,500 (2013 dollars) for joint filers (half that amount for single filers), the new 25- percent bracket would begin at $71,200 (2013 dollars) for joint filers (half that amount for single filers). The new 35-percent bracket would begin at the same income levels as the current 39.6- percent bracket (e.g., $400,000 for single filers and $450,000 for joint filers in 2013). Beginning in tax year 2015, these income levels would be indexed for chained CPI instead of CPI, a slightly different measure of inflation. The 35-percent bracket would not apply to qualified domestic manufacturing income (QDMI), meaning that such income would be subject to a maximum statutory rate of 25 percent. QDMI generally would be net income attributable to domestic manufacturing gross receipts. Domestic manufacturing gross receipts would include gross receipts derived from (1) any lease, rental, license, sale, exchange, or other disposition of tangible personal property that is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States, or (2) construction of real property in the United States as part of the active conduct of a construction trade or business. Income that either is net earnings from self-employment or results from an adjustment under Code section 481 (for changes in accounting methods) would not qualify as QDMI. Puerto Rico would be considered "domestic" for these purposes, and other rules similar to those under current-law Code section 199 would apply. Finally, the exemption of QDMI from the 35-percent bracket would be phased in over three years, with only one-third of QDMI being excluded from the top bracket in tax year 2015, and two-thirds being excluded in 2016. In addition, certain tax preferences could only be taken against the 25-percent bracket, but not the 35-percent bracket. These tax preferences would include: the standard deduction; all itemized deductions except the deduction for charitable contributions; the foreign earned income exclusion (including the exclusions for income from Puerto Rico and U.S. possessions); tax- exempt interest; employer contributions to health, accident, and defined contribution retirement plans to the extent excluded from gross income; the deduction for health premiums of the self- employed; the deduction for contributions to Health Savings Accounts; and the portion of Social Security benefits excluded from gross income. The 25-percent cap that would apply to both the maximum rate imposed on QDMI and the rate against which certain tax preferences may be taken would be administered by imposing the difference between the 25-percent bracket and the 35-percent bracket (i.e., 10 percentage points) on modified adjusted gross income (MAGI) rather than taxable income. MAGI would equal adjusted gross income, plus the above-the-line deductions and exclusions listed above, minus QDMI and charitable contributions. For high-income taxpayers, the provision would phase out the tax benefit of the 10-percent bracket, measured as the difference between what the taxpayer pays and what the taxpayer would have paid had the first dollar of taxable income been subject to the 25-percent bracket. This tax benefit is phased out at a rate of $5 of tax savings for every $100 of modified adjusted gross income in excess of $250,000 (single filers) or $300,000 (joint filers). These thresholds are adjusted for chained CPI in tax years after 2013. Prepared by Ways and Means Committee Majority Tax Staff 2 EFTA01078162 taxanarlyst DOCUMENT S RVICE Doc 20144426 (193 pgs) The special rate structure for net capital gain would be repealed. Instead, non-corporate taxpayers could claim an above-the-line deduction equal to 40 percent of adjusted net capital gain. Adjusted net capital gain would equal the sum of net capital gain and qualified dividends, reduced by net collectibles gain. The provision would be effective for tax years beginning after 2014. Considerations: • Overall, the changes to the individual rate structure would create a simpler, fairer, and flatter Federal income tax. • Most economists consider chained CPI to represent a more accurate measure of inflation than CPL • Qualifying for head of household filing status requires a taxpayer to comply with a complicated set of rules, and comparable relief for single individuals with dependents could be provided through simpler changes to certain deductions and credits. • The modified tax preference for long-term capital gains and dividends would result in such income being taxed at 60 percent of the taxpayer's marginal rate. Thus, for example, taxpayers in the 35-percent bracket would pay an effective rate of 21 percent on adjusted net capital gain. Combining this with the additional 3.8 percent tax imposed on such income by Code section 1411 yields a top effective rate of 24.8 percent, slightly lower than the top effective rate under current law, which is 25 percent. • The 40-percent deduction for adjusted net capital gain would greatly simplify the calculation of the tax preference for such income relative to current law, and is similar to how the tax preference was structured prior to enactment of the Tax Reform Act of 1986. • Excluding qualified domestic manufacturing income from the 35-percent bracket would ensure that small businesses and pass-through entities (such as S corporations and partnerships) engaged in such activity are taxed at a rate no higher than 25 percent, achieving parity with C corporations under the discussion draft. JCT estimate: According to JCT, the provisions, along with sections 3132 and 3139 of the discussion draft, would reduce revenues by $498.7 billion over 2014-2023, and increase outlays by $0.4 billion over 2014-2023. Subtitle B - Simplification of Tax Benefits for Families Considerations for Subtitle B: • The Code currently includes six basic family tax benefits, each with its own rules, eligibility criteria, and calculations. • Three — the basic standard deduction, additional standard deduction, and personal exemption for taxpayer and spouse — are intended to shield a minimum level of income from Federal income taxation, with the level depending on whether the taxpayer is single or married. • The other three — personal exemptions for children and dependents, the child tax credit, and head of household filing status — are intended to deliver additional tax benefits to households with children and dependents. Prepared by Ways and Means Committee Majority Tax Staff 3 EFTA01078163 DOCUMENT SIMI Doc 20144426 (193 pgs) =Ma • • Consolidating these six benefits into three simpler benefits — a larger standard deduction, an additional deduction for single parents, and an enhanced child and dependent tax credit — would achieve the same policy and distributional goals as current law while making the Code much simpler for low- and middle-income families. Sec. 1101. Standard deduction. Current law: Under current law, an individual reduces adjusted gross income (AGI) by any personal exemption deductions and either (1) the applicable standard deduction or (2) his itemized deductions to determine taxable income. The basic standard deduction varies depending upon a taxpayer's filing status. For 2013, the amount of the standard deduction was $6,100 for single individuals and married individuals filing separate returns, $8,950 for heads of households, and $12,200 for married individuals filing a joint return (and surviving spouses). An additional standard deduction is allowed with respect to any individual who is elderly or blind. The amounts of the basic and additional standard deductions are indexed annually for inflation (CPI). In lieu of taking the applicable standard deductions, an individual may elect to itemize deductions. Provision: Under the provision, the basic and additional standard deductions would be consolidated into a single standard deduction of $22,000 for joint filers (and surviving spouses) and $11,000 for other individual filers. Single filers with at least one qualifying child could claim an additional deduction of $5,500, regardless of whether or not they itemize deductions. These amounts would be adjusted annually from tax year 2013 based on changes in the chained CPI. The standard deduction — or in the case of itemizers, an equivalent amount of itemized deductions — would phase out by $20 for every $100 by which modified adjusted gross income (MAGI) exceeds $517,500 for joint filers and $358,750 for single filers. The additional deduction for single filers with a qualifying child would phase out by one dollar for every dollar by which AGI exceeds $30,000. The phase-out threshold amounts also are adjusted for inflation based on 2013 dollars. The provision would be effective for tax years beginning after 2014. Considerations: • The increase in the standard deduction would achieve substantial simplification by reducing the number of taxpayers who choose to itemize their deductions — from roughly one-third under current law to only 5 percent under the discussion draft (in 2015). • While the provision eliminates the additional standard deduction for the elderly and blind, the increase in the standard deduction more than compensates these taxpayers for this simplification. JCT estimate: According to JCT, the provision would reduce revenues by $578.3 billion over 2014-2023, and increase outlays by $87.9 billion over 2014-2023. Prepared by Ways and Means Committee Majority Tax Staff 4 EFTA01078164 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 1102. Increase and expansion of child tax credit. Current law: Under current law, an individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000. The aggregate amount of child credits that may be claimed is phased out by $50 for each $1,000 of MAGI over $75,000 for single filers and $110,000 for joint filers. Neither the $1,000 credit amount nor the MAGI thresholds are indexed for inflation. The taxpayer must submit a valid taxpayer identification number (TIN) for each child for whom the credit is claimed. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit, or ACTC) equal to 15 percent of earned income in excess of $3,000 for tax years beginning before 2018, or $10,000 thereafter, indexed for changes in the CPI since calendar year 2000. The taxpayer is not required to have a Social Security number (SSN) to claim the refundable portion of the credit, and (unlike with the EITC) taxpayers claiming the foreign earned income exclusion may qualify for the refundable portion of the credit. Provision: Under the provision, the child credit would be increased to $1,500 and would be allowed for qualifying children under the age of 18. A reduced credit of $500 would be allowed for non-child dependents. Both the $1,500 and $500 credit amounts would be indexed annually for changes in the chained CPI. The credit would be refundable to the extent of 25 percent of the taxpayer's earned income (earned income in excess of $3,000 before 2018). The credit would not begin to phase out until MAGI exceeds $413,750 for single filers and $627,500 for joint filers (indexed for inflation, using 2013 dollars). To reduce waste, fraud, and abuse, a taxpayer would be required to provide his SSN, but not an SSN for the child or dependent, to claim the refundable portion of the credit. The IRS would be granted math error authority to adjust the returns of taxpayers failing to satisfy the identification requirements. The refundable portion of the credit would be disallowed for taxpayers claiming the foreign earned income exclusion. The provision would be effective for tax years beginning after 2014. Considerations: • The cost of raising children increases every year, but the current law child tax credit fails to recognize this because it is not indexed for inflation. • Consolidating the personal exemption for children and dependents and the child tax credit into a single tax credit achieves simplification while better targeting relief to low- and middle-income families. • Increasing the phase-out level dramatically would reward more families with children and would simplify the Code for middle class families currently forced to perform a phase-out computation. JCT estimate: According to JCT, the provision would reduce revenues by $277.9 billion over 2014-2023, and increase outlays by $276.1 billion over 2014-2023. Prepared by Ways and Means Committee Majority Tax Staff 5 EFTA01078165 taxanalystr DOCUMENT S RVICE Doc 20144426 (193 pgs) Sec. 1103. Modification of earned income tax credit. Current law: Under current law, a refundable earned income tax credit (EITC) is available to low-income workers who satisfy certain requirements. The amount of the EITC varies depending upon the taxpayer's earned income and whether the taxpayer has zero, one, two, or more than two qualifying children. In 2013, the maximum ETC (regardless of filing status) was $6,044 for taxpayers with more than two qualifying children, $5,372 for taxpayers with two qualifying children, $3,250 for taxpayers with one qualifying child, and $487 for taxpayers with no qualifying children. For tax year 2013, the credit amount begins to phase out at an income level of $17,530 ($7,970 for taxpayers with no qualifying children). The phase-out percentages are 15.98 percent for taxpayers with one qualifying child, 17.68 percent for two or more qualifying children, and 7.65 percent for no qualifying children. Provision: Under the provision, the ETC would be modified so that it would refund employment -related taxes (i.e., payroll taxes and self-employment taxes) paid by or with respect to the individual. The employee's share of payroll taxes would be offset by a credit against such taxes, while the employer's share would be rebated through a refundable income tax credit. Only taxpayers with at least one qualifying child could qualify for the credit against the employer's share of payroll taxes. For taxpayers without a qualifying child, the maximum credit amount would be $200 for joint filers ($100 for other filers). For taxpayers with one qualifying child, the maximum credit would be $2,400. For taxpayers with more than one qualifying child, the maximum credit would be $4,000 in the case of a joint return and $3,000 in other cases. These credit amounts would be indexed for chained CPI based on 2013 dollars. A special rule would apply to tax years 2015, 2016, and 2017 that would make the credit equal to 200 percent of the taxpayer's payroll taxes (both employee and employer shares). In addition, taxpayers with one qualifying child could claim a maximum credit of $3,000 (rather than $2,400), and taxpayers with two or more qualifying children could claim a maximum credit of $4,000, regardless of filing status. The credit would phase out as AGI exceeds certain levels. For taxpayers with qualifying children, the credit would begin phasing out at $20,000 for single filers and $27,000 for joint filers. For taxpayers without qualifying children, the credit would begin phasing out at $8,000 for single filers and $13,000 for joint filers. These thresholds would be indexed to chained CPI, based on 2013 dollars. The phase-out percentages would be 19 percent for filers with one or more qualifying children and 7.65 percent for no qualifying children. Finally, the provision would require the Treasury Department to report to Congress, within 180 days of the date of enactment, recommendations for providing advance payments of the EITC (1) as promptly as feasible, and (2) with minimal administrative burden imposed on employers and the IRS. The provision would be effective for tax years beginning after 2014. Prepared by Ways and Means Committee Majority Tax Staff 6 EFTA01078166 tannalyStS . DOCUMENT S RVICE Doc 20144426 (193 pgs) Considerations: • Exempting a portion of wages from payroll tax would represent a tax cut, whereas the current EITC constitutes government spending. • The Treasury Inspector General for Tax Administration (TIGTA) recently estimated that up to 25 percent of EITC payments are improper (including fraudulent claims), costing the Federal government up to $132 billion over the last 10 years. • The EITC calculation is highly complex, and TIGTA has estimated that as many as 22 percent of eligible taxpayers fail to claim it. • Simply allowing low-income taxpayers a rebate of their payroll taxes is both much simpler and more transparent than current law, with the potential for fraud reduced by the direct link to payroll taxes withheld on a taxpayer's Form W-2. • Allowing a larger maximum credit for joint filers than for other filers helps to reduce the marriage penalty embedded in the current EITC. JCT estimate: According to JCT, the provision would reduce revenues by $160.8 billion over 2014-2023, and reduce outlays by $378.0 billion over 2014-2023. Sec. 1104. Repeal of deduction for personal exemptions. Current law: Under current law, a taxpayer generally may claim personal exemptions for the taxpayer, the taxpayer's spouse, and any dependents. For 2013, taxpayers may deduct $3,900 for each personal exemption. This amount is indexed annually for inflation (CPI). Additionally, the personal exemption phase-out (PEP) reduces a taxpayer's personal exemptions by 2 percent for each $2,500 ($1,250 for married filing separately) by which the taxpayer's AGI exceeds $250,000 (single), $275,000 (head-of-household), $300,000 (married filing jointly), and $150,000 (married filing separately). These threshold amounts apply