<DOC>
[DOCID: f:52240.wais]


                        [JOINT COMMITTEE PRINT]

 
                         GENERAL EXPLANATION OF
                    TAX LEGISLATION ENACTED IN 1998

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                           NOVEMBER 24, 1998


                                 _____


                      U.S. GOVERNMENT PRINTING OFFICE
 52-240                      WASHINGTON : 1998                 JCS-6-98
_______________________________________________________________________
           For sale by the U.S. Government Printing Office, 
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402



                      JOINT COMMITTEE ON TAXATION

                      105th Congress, 2nd Session
                                 ------                                
               SENATE                               HOUSE
WILLIAM V. ROTH, Jr., Delaware,      BILL ARCHER, Texas,
  Chairman                             Vice Chairman
JOHN H. CHAFEE, Rhode Island         PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa               WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York    CHARLES B. RANGEL, New York
MAX BAUCUS, Montana                  FORTNEY PETE STARK, California
                     Lindy L. Paull, Chief of Staff
              Mary M. Schmitt, Deputy Chief of Staff (Law)
      Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)


                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Surface Transportation Revenue Act of 1998 (Title IX of 
  H.R. 2400).....................................................     2

Part Two: Internal Revenue Service Restructuring and Reform Act 
  of 1998 (H.R. 2676)............................................    16

Part Three: Tax and Trade Relief Extension Act of 1998 (Division 
  J of H.R. 4328, The Omnibus Consolidated and Emergency 
  Supplemental Appropriations Act, 1999).........................   235

Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec. 
  103(h) of H.R. 1023)...........................................   303

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  1998...........................................................   305


                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Surface Transportation Revenue Act of 1998 (Title IX of 
  H.R. 2400).....................................................     2

    A. Extension of Highway Trust Fund, Aquatic Resources Trust 
      Fund, and National Recreational Trails Trust Fund Excise 
      Taxes and Expenditure Authority (secs. 9002-9005, 9008, 
      9009, and 9011)............................................     2

    B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel 
      (sec. 9006)................................................    11

    C. Purposes for Which Amtrak NOL Monies May Be Used In Non-
      Amtrak States (sec. 9007)..................................    12

    D. Exclusion from Income for Employer-Provided Transportation 
      Benefits (sec. 9010).......................................    13

    E. Identification of Limited Tax Benefits (sec. 9012)........    15

Part Two: Internal Revenue Service Restructuring and Reform Act 
  of 1998 (H.R. 2676)............................................    16

Title I. Reorganization of Structure and Management of the IRS...    16

    A. IRS Restructuring and Creation of IRS Oversight Board.....    16

        1. IRS mission and restructuring (secs. 1001 and 1002)...    16

        2. Establishment and duties of IRS Oversight Board (sec. 
          1101)..................................................    18

    B. Appointment and Duties of IRS Commissioner and Chief 
      Counsel and Other Personnel................................    26

        1. IRS Commissioner and other personnel (secs. 1102(a) 
          and 1104)..............................................    26

        2. IRS Chief Counsel (sec. 1102(b))......................    27

    C. Structure and Funding of the Employee Plans and Exempt 
      Organizations Division (``EP/EO'') (sec. 1101).............    29

    D. Taxpayer Advocate (sec. 1102(a), (c), and (d))............    31

    E. Treasury Office of Inspector General; IRS Office of the 
      Chief Inspector (secs. 1102 and 1103)......................    35

    F. Prohibition on Executive Branch Influence Over Taxpayer 
      Audits (sec. 1105).........................................    44

    G. IRS Personnel Flexibilities (secs. 1201-1205).............    45

Title II. Electronic Filing......................................    51

    A. Electronic Filing of Tax and Information Returns (sec. 
      2001)......................................................    51

    B. Due Date for Certain Information Returns (sec. 2002)......    52

    C. Paperless Electronic Filing (sec. 2003)...................    53

    D. Return-Free Tax System (sec. 2004)........................    54

    E. Access to Account Information (sec. 2005).................    55

Title III. Taxpayer Protection and Rights........................    56

    A. Burden of Proof (sec. 3001)...............................    56

    B. Proceedings by Taxpayers..................................    59
        1. Expansion of authority to award costs and certain fees 
          (sec. 3101)............................................    59
        2. Civil damages for collection actions (sec. 3102)......    61
        3. Increase in size of cases permitted on small case 
          calendar (sec. 3103)...................................    62
        4. Actions for refund with respect to certain estates 
          which have elected the installment method of payment 
          (sec. 3104)............................................    63
        5. Administrative appeal of adverse IRS determination of 
          a bond issue's tax-exempt status (sec. 3105)...........    64
        6. Civil action for release of erroneous lien (sec. 3106)    65

    C. Relief for Innocent Spouses and for Taxpayers Unable to 
      Manage Their Financial Affairs Due to Disabilities.........    66
        1. Relief for innocent spouses (sec. 3201)...............    66
        2. Suspension of statute of limitations on filing refund 
          claims during periods of disability (sec. 3202)........    72

    D. Provisions Relating to Interest and Penalties.............    73
        1. Elimination of interest differential on overlapping 
          periods of interest on income tax overpayments and 
          underpayments (sec. 3301)..............................    73
        2. Increase in overpayment rate payable to taxpayers 
          other than corporations (sec. 3302)....................    75
        3. Mitigation of penalty for individual's failure to pay 
          during period of installment agreement (sec. 3303).....    75
        4. Mitigation of failure to deposit penalty (sec. 3304)..    76
        5. Suspension of interest and certain penalties if 
          Secretary fails to contact individual taxpayer (sec. 
          3305)..................................................    77
        6. Procedural requirements for imposition of penalties 
          and additions to tax (sec. 3306).......................    78
        7. Personal delivery of notice of penalty under section 
          6672 (sec. 3307).......................................    79
        8. Notice of interest charges (sec. 3308)................    79
        9. Abatement of interest on underpayments by taxpayers in 
          Presidentially declared disaster areas (sec. 3309).....    80

    E. Protections for Taxpayers Subject to Audit or Collection 
      Activities.................................................    81

        1. Due process in IRS collection actions (sec. 3401).....    81

        2. Examination activities................................    86
            a. Uniform application of confidentiality privilege 
              to taxpayer communications with federally 
              authorized practitioners (sec. 3411)...............    86
            b. Limitation on financial status audit techniques 
              (sec. 3412)........................................    88
            c. Software trade secrets protection (sec. 3413).....    89
            d. Threat of audit prohibited to coerce tip reporting 
              alternative commitment agreements (sec. 3414)......    92
            e. Taxpayers allowed motion to quash all third-party 
              summonses (sec. 3415)..............................    93
            f. Service of summonses to third-party recordkeepers 
              permitted by mail (sec. 3416)......................    94
            g. Notice of IRS contact of third parties (sec. 3417)    95
        3. Collection activities.................................    96
            a. Approval process for liens, levies, and seizures 
              (sec. 3421)........................................    96
            b. Modifications to certain levy exemption amounts 
              (sec. 3431)........................................    96
            c. Release of levy upon agreement that amount is 
              uncollectible (sec. 3432)..........................    97
            d. Levy prohibited during pendency of refund 
              proceedings (sec. 3433)............................    98
            e. Approval required for jeopardy and termination 
              assessments and jeopardy levies (sec. 3434)........    99
            f. Increase in amount of certain property on which 
              lien not valid (sec. 3435).........................    99
            g. Waiver of early withdrawal tax for IRS levies on 
              employer-sponsored retirement plans or IRAs (sec. 
              3436)..............................................   100
            h. Prohibition of sales of seized property at less 
              than minimum bid (sec. 3441).......................   102
            i. Accounting of sales of seized property (sec. 3442)   102
            j. Uniform asset disposal mechanism (sec. 3443)......   103
            k. Codification of IRS administrative procedures for 
              seizure of taxpayer's property (sec. 3444).........   104
            l. Procedures for seizure of residences and 
              businesses (sec. 3445).............................   104
        4. Provisions relating to examination and collection 
          activities.............................................   105
            a. Procedures relating to extensions of statute of 
              limitations by agreement (sec. 3461)...............   105
            b. Offers-in-compromise (sec. 3462)..................   107
            c. Notice of deficiency to specify deadlines for 
              filing Tax Court petition (sec. 3463)..............   109
            d. Refund or credit of overpayments before final 
              determination (sec. 3464)..........................   110
            e. IRS procedures relating to appeal of examinations 
              and collections (sec. 3465)........................   110
            f. Application of certain fair debt collection 
              practices (sec. 3466)..............................   112
            g. Guaranteed availability of installment agreements 
              (sec. 3467)........................................   113
            h. Prohibition on requests to taxpayers to waive 
              rights to bring actions (sec. 3468)................   114

    F. Disclosures to Taxpayers..................................   114

        1. Explanation of joint and several liability (sec. 3501)   114
        2. Explanation of taxpayers' rights in interviews with 
          the IRS (sec. 3502)....................................   115
        3. Disclosure of criteria for examination selection (sec. 
          3503)..................................................   116
        4. Explanation of the appeals and collection process 
          (sec. 3504)............................................   116
        5. Explanation of reason for refund disallowance (sec. 
          3505)..................................................   117
        6. Statements to taxpayers with installment agreements 
          (sec. 3506)............................................   118
        7. Notification of change in tax matters partner (sec. 
          3507)..................................................   118
        8. Conditions under which taxpayers' returns may be 
          disclosed (sec. 3508)..................................   119
        9. Disclosure of Chief Counsel advice (sec. 3509)........   120

    G. Low-Income Taxpayer Clinics (sec. 3601)...................   124

    H. Other Provisions..........................................   125

         1. Cataloging complaints (sec. 3701)....................   125
         2. Archive of records of Internal Revenue Service (sec. 
          3702)..................................................   126
         3. Payment of taxes (sec. 3703).........................   127
         4. Clarification of authority of Secretary relating to 
          the making of elections (sec. 3704)....................   127
         5. IRS employee contacts (sec. 3705)....................   128
         6. Use of pseudonyms by IRS employees (sec. 3706).......   129
         7. Illegal tax protestor designations (sec. 3707).......   129
         8. Provision of confidential information to Congress by 
          whistleblowers (sec. 3708).............................   130
         9. Listing of local IRS telephone numbers and addresses 
          (sec. 3709)............................................   131
        10. Identification of return preparers (sec. 3710).......   131
        11. Offset of past-due, legally enforceable State income 
          tax obligations against overpayments (sec. 3711).......   132
        12. Reporting requirements relating to education tax 
          credits (sec. 3712)....................................   133

    I. Studies...................................................   136

        1. Administration of penalties and interest (sec. 3801)..   136
        2. Confidentiality of tax return information (sec. 3802).   136
        3. Noncompliance with revenue laws by taxpayers (sec. 
          3803)..................................................   137
        4. Payments for detection of underpayments and fraud 
          (sec. 3804)............................................   138

Title IV. Congressional Accountability for the IRS...............   139

    A. Review of Requests for GAO Investigations of the IRS (sec. 
      4001)......................................................   139

    B. Joint Congressional Reviews and Coordinated Oversight 
      Reports (secs. 4001 and 4002)..............................   140

    C. Funding for Century Date Change (sec. 4011)...............   141

    D. Tax Law Complexity Analysis (secs. 4021 and 4022).........   142

Title V. Additional Provisions...................................   144

    A. Elimination of 18-Month Holding Period for Capital Gains 
      (sec. 5001)................................................   144

    B. Deductibility of Meals Provided for the Convenience of the 
      Employer (sec. 5002).......................................   145

Title VI. Tax Technical Corrections..............................   147

    technical corrections to the taxpayer relief act of 1997        147

    A. Amendments to Title I of the 1997 Act Relating to the 
      Child Credit...............................................   147

        1. Stacking rules for the child credit under the 
          limitations based on tax liability (sec. 6003(a))......   148
        2. Treatment of a portion of the child credit as a 
          supplemental child credit (sec. 6003(b))...............   148

    B. Amendments to Title II of the 1997 Act Relating to 
      Education Incentives.......................................   149

        1. Clarifications to HOPE and Lifetime Learning tax 
          credits (sec. 6004(a)).................................   149
        2. Deduction for student loan interest (sec. 6004(b))....   150

        3. Qualified State tuition programs (sec. 6004(c)).......   151

        4. Education IRAs (sec. 6004(d)).........................   152
        5. Enhanced deduction for corporate contributions of 
          computer technology and equipment (sec. 6004(e)).......   155
        6. Treatment of cancellation of certain student loans 
          (sec. 6004(f)).........................................   156
        7. Qualified zone academy bonds (sec. 6004(g))...........   156

    C. Amendments to Title III of the 1997 Act Relating to 
      Savings Incentives.........................................   157

        1. Conversions of IRAs into Roth IRAs (sec. 6005(b)).....   157
        2. Penalty-free distributions from IRAs for education 
          expenses and purchase of first homes (sec. 6005(c))....   160
        3. Limits based on modified adjusted gross income (sec. 
          6005(b))...............................................   161
        4. Contribution limit to Roth IRAs (sec. 6005(b))........   162
        5. Contribution limitations for active participants in an 
          IRA (sec. 6005(a)).....................................   162

    D. Amendments to Title III of the 1997 Act Relating to 
      Capital Gains..............................................   163

        1. Individual capital gains rate reductions (sec. 
          6005(d))...............................................   163
        2. Exclusion of gain on the sale of a principal residence 
          owned and used less than two years (sec. 6005(e) (1) 
          and (2)................................................   165
        3. Effective date of the exclusion of gain on the sale of 
          a principal residence (sec. 6005(e)(3))................   166
        4. Rollover of gain from sale of qualified stock (sec. 
          6005(f))...............................................   167

    E. Amendments to Title IV of the 1997 Act Relating to 
      Alternative Minimum Tax....................................   167

        1. Clarification of small business exemption (sec. 
          6006(a))...............................................   167
        2. Election to use AMT depreciation for regular tax 
          purposes (sec. 6006(b))................................   168

    F. Amendments to Title V of the 1997 Act Relating to Estate 
      and Gift Taxes.............................................   169

         1. Clarification of effective date for indexing of 
          generation-skipping exemption (sec. 6007(a))...........   169
         2. Conversion of qualified family-owned business 
          exclusion into a deduction (sec. 6007(b)(1)(A))........   170
         3. Coordination between unified credit and family-owned 
          business provision (secs. 6007(b)(1)(B) and 6007(b)(4))   170
         4. Clarification of businesses eligible for family-owned 
          business provision (sec. 6007(b)(2))...................   172
         5. Clarification of ``trade or business'' requirement 
          for family-owned business provision (sec. 6007(b)(5))..   172
         6. Clarification that interests eligible for family-
          owned business provision must be passed to a qualified 
          heir (sec. 6007(b)(1)(B))..............................   173
         7. Other modifications to the qualified family-owned 
          business provision (secs. 6007(b)(3), 6007(b)(6), and 
          6007(b)(7))............................................   173
         8. Clarification of interest on installment payment of 
          estate tax on holding companies (sec. 6007(c)).........   174
         9. Clarification on declaratory judgment jurisdiction of 
          U.S. Tax Court regarding installment payment of estate 
          (sec. 6007(d)).........................................   175

        10. Clarification of rules governing revaluation of gifts 
          (sec. 6007(e)).........................................   175
        11. Clarification with respect to post-mortem 
          conservation easements (sec. 6007(g))..................   176

    G. Amendments to Title VII of the 1997 Act Relating to 
      Incentives for the District of Columbia (sec. 6008)........   176

    H. Amendments to Title IX of the 1997 Act Relating to 
      Miscellaneous Provisions...................................   180

        1. Clarification of qualification for reduced rate of 
          excise tax on certain hard ciders (sec. 6009(a)).......   180
        2. Election for 1987 partnerships to continue exception 
          from treatment of publicly traded partnerships as 
          corporations (sec. 6009(b))............................   181
        3. Depreciation limitations for electric vehicles (sec. 
          6009(c))...............................................   182
        4. Combined employment tax reporting demonstration 
          project (sec. 6009(d)).................................   182
        5. Modification of operation of elective carryback of 
          existing net operating losses of the National Railroad 
          Passenger Corporation (``Amtrak'') (sec. 6009(e))......   183

    I. Amendments to Title X of the 1997 Act Relating to Revenue-
      Raising Provisions.........................................   184

         1. Exception from constructive sales rules for certain 
          debt positions (sec. 6010(a)(1)).......................   184
         2. Definition of forward contract under constructive 
          sales rules (sec. 6010(a)(2))..........................   184
         3. Treatment of mark-to-market gains of electing traders 
          (sec. 6010(a)(3))......................................   185
         4. Special effective date for constructive sale rules 
          (sec. 6010(a)(4))......................................   186
         5. Gain recognition for certain extraordinary dividends 
          (sec. 6010(b)).........................................   186
         6. Treatment of certain corporate distributions (sec. 
          6010(c))...............................................   187
         7. Application of section 304 to certain international 
          transactions (sec. 6010(d))............................   191
         8. Certain preferred stock treated as ``boot''--
          treatment of transferor (sec. 6010(e)(1))..............   193
         9. Certain preferred stock treated as ``boot''--statute 
          of limitations (sec. 6010(e)(2)).......................   193
        10. Establish IRS continuous levy and improve debt 
          collection (sec. 6010(f))..............................   194
        11. Clarification regarding aviation gasoline excise tax 
          (sec. 6010(g)).........................................   194
        12. Clarification of requirement that registered fuel 
          terminals offer dyed fuel (sec. 6010(h))...............   195
        13. Clarification of treatment of prepaid telephone cards 
          (sec. 6010(i)).........................................   195
        14. Modify UBIT rules applicable to second-tier 
          subsidiaries (sec. 6010(j))............................   196
        15. Application of foreign tax credit holding period rule 
          to RICs and clarification of exception from such rule 
          for securities dealers (sec. 6010(k))..................   197
        16. Clarification of provision expanding the limitations 
          on deductibility of premiums and interest with respect 
          to life insurance, endowment, and annuity contracts 
          (sec. 6010(o)).........................................   198
        17. Clarification of allocation of basis of properties 
          distributed by a partnership (sec. 6010(m))............   200
        18. Clarification to the definition of modified adjusted 
          gross income for purposes of the earned income credit 
          phaseout (sec. 6010(p))................................   201

    J. Amendments to Title XI of the 1997 Act Relating to Foreign 
      Provisions.................................................   202

        1. Application of attribution rules under PFIC provisions 
          (sec. 6011(b)(2))......................................   202
        2. Treatment of PFIC option holders (sec. 6011(b)(1))....   203
        3. Application of PFIC mark-to-market rules to RICs (sec. 
          6011(c)(3))............................................   205
        4. Interaction between the PFIC provisions and other 
          mark-to-market rules (sec. 6011(c)(2)).................   206
        5. Information reporting with respect to certain foreign 
          corporations and partnerships (sec. 6011(f))...........   207

    K. Amendments to Title XII of the 1997 Act Relating to 
      Simplification Provisions..................................   207

        1. Travel expenses of Federal employees participating in 
          a Federal criminal investigation (sec. 6012(a))........   207
        2. Magnetic media returns for partnerships having more 
          than 100 partners (sec. 6012(d)).......................   208
        3. Effective date for provisions relating to electing 
          large partnerships, partnership returns required on 
          magnetic media, and treatment of partnership items of 
          individual retirement arrangements (sec. 6012(e))......   208
        4. Modification of distribution rule for REITS (sec. 
          6012(g))...............................................   209

    L. Amendments to Title XIII of the 1997 Act Relating to 
      Estate, Gift and Trust Simplification......................   209

        1. Clarification of treatment of revocable trusts for 
          purposes of the generation-skipping transfer tax (sec. 
          6013(a))...............................................   209
        2. Provision of regulatory authority for simplified 
          reporting of funeral trusts terminated during taxable 
          year (sec. 6013(b))....................................   210
    M. Amendment to Title XIV of the 1997 Act Relating to Excise 
      Tax Simplification.........................................   211

        1. Transfers of bulk imports of wine to wineries or beer 
          to breweries (secs. 6014(a)(1) and (b)(1)).............   211
        2. Refunds when wine returned to wineries or beer 
          returned to breweries (secs. 6014(a)(2) and (b)(2))....   211
        3. Clarification of the provision allowing wine imported 
          in bulk to be transferred to a U.S. winery without 
          payment of tax (sec. 6014(b)(3)).......................   212

    N. Amendments to Title XV of the 1997 Act Relating to 
      Pensions and Employee Benefits.............................   212

        1. Treatment of certain disability payments to public 
          safety employees (sec. 6015(c))........................   212

    O.  Amendments to Title XVI of the 1997 Act Relating to 
      Technical Corrections......................................   213

        1. Application of requirements for SIMPLE IRAs in the 
          case of mergers and acquisitions (sec. 6016(a)(1)).....   213
        2. Treatment of Indian tribal governments under section 
          403(b) (sec. 6016(a)(2))...............................   214

    technical corrections to other tax legislation...............   214

    A. Amendment Related to the Transportation Equity Act for the 
      21st Century...............................................   214

        1. Simplified refund provisions for tax on gasoline, 
          diesel fuel and kerosene (sec. 6017)...................   214
        2. Conforming changes to the Highway Trust Fund 
          expenditure authority (sec. 9015)......................   215

    B. Amendment to the Small Business Job Protection Act of 1996   215

        1. Treatment of adoption tax credit carryovers (sec. 
          6018)..................................................   215

    C. Amendments Related to Taxpayer Bill of Rights 2...........   216

        1. Disclosure requirements for apostolic organizations 
          (sec. 6019(a) and (b)).................................   216
        2. Disclosure of returns and return information (sec. 
          6019(c))...............................................   217

    D. Amendment Related to the Omnibus Budget Reconciliation Act 
      of 1993....................................................   217

        1. Allow deduction for unused employer social security 
          credit (sec. 6020).....................................   217

    E. Amendment Related to the Revenue Reconciliation Act of 
      1990.......................................................   218

        1. Earned income credit qualification rules (sec. 6021)..   218

Title VII. Revenue Offsets.......................................   220

    A. Employer Deductions for Vacation and Severance Pay (sec. 
      7001)......................................................   220

    B. Freeze Grandfather Status of Stapled REITs (sec. 7002)....   222

    C. Make Certain Trade Receivables Ineligible for Mark-to-
      Market Treatment (sec. 7003)...............................   231

    D. Exclusion of Minimum Required Distributions from AGI for 
      Roth IRA Conversions (sec. 7004)...........................   233

Title VIII. Identification of Limited Tax Benefits Under the Line 
  Item Veto Act (sec. 8001)......................................   234

Part Three: Tax and Trade Relief Extension Act of 1998 (Division 
  J of H.R. 4328, the Omnibus Consolidated and Emergency 
  Supplemental Appropriations Act, 1999).........................   235

Title I. Extension of Expiring Provisions........................   235

    A. Extension of Research Tax Credit (sec. 1001)..............   235

    B. Extension of the Work Opportunity Tax Credit (sec. 1002)..   237
    C. Extension of the Welfare-to-Work Tax Credit (sec. 1003)...   238

    D. Make Permanent the Deduction Provided for Contributions of 
      Appreciated Stock to Private Foundations; Public Inspection 
      of Private Foundation Annual Returns.......................   239

        1. Make permanent the deduction provided for 
          contributions of appreciated stock to private 
          foundations (sec. 1004(a)).............................   239
        2. Public inspection of private foundation public returns 
          (sec. 1004(b)).........................................   240

    E. Exceptions under Subpart F for Certain Active Financing 
      Income (sec. 1005).........................................   243

    F. Disclosure of Return Information to Department of 
      Education in Connection With Income Contingent Loans (sec. 
      1006)......................................................   264

Title II. Other Provisions.......................................   266

    Subtitle A.--Provisions Relating to Individuals..............   266

    A. Personal Credits Fully Allowed Against Regular Tax 
      Liability During 1998 (sec. 2001)..........................   266

    B. Increase Deduction for Health Insurance Expenses of Self-
      Employed Individuals (sec. 2002)...........................   271

    C. Modification of Individual Estimated Tax Safe Harbors 
      (sec. 2003)................................................   272

    Subtitle B.--Provisions Relating to Farmers..................   273

    A. Permanent Extension of Income Averaging for Farmers (sec. 
      2011)......................................................   273

    B. Farm Production Flexibility Payments (sec. 2012)..........   274

    C. Extend the Net Operating Loss Carryback Period for Farmers 
      (sec. 2013)................................................   276


    Subtitle C.-Miscellaneous Provisions.........................   277

    A. Increase State Volume Limits on Private Activity Tax-
      Exempt Bonds (sec. 2021)...................................   277

    B. Comprehensive Study of Recovery Periods and Depreciation 
      Methods Under Section 168 (sec. 2022)......................   278

    C. State Election to Exempt Student Employees From Social 
      Security (sec. 2023).......................................   279

Title III. Revenue Offset Provisions.............................   281

    A. Treatment of Certain Deductible Liquidating Distributions 
      of Regulated Investment Companies and Real Estate 
      Investment Trusts (sec. 3001)..............................   281

    B. Add Vaccines Against Rotavirus Gastroenteritis to the List 
      of Taxable Vaccines (sec. 3002)............................   282

    C. Clarify and Expand Mathematical Error Procedures (sec. 
      3003)......................................................   284

    D. Restrict 10-Year Net Operating Loss Carryback Rules for 
      Specified Liability Losses (sec. 3004).....................   285

    E. Tax Treatment of Prizes and Awards (sec. 5301)............   286

Title IV. Technical Corrections..................................   289

    A. Technical Corrections to the 1998 IRS Restructuring Act...   289

        1. Burden of proof (sec. 4002(b))........................   289
        2. Relief for innocent spouses (sec. 4002(c))............   289
        3. Interest netting (sec. 4002(d)).......................   290
        4. Effective date for elimination of 18-month holding 
          period for capital gains (sec. 4002(i))................   291

    B. Technical Corrections to the 1997 Act.....................   292

         1. Treatment of interest on qualified education loans 
          (sec. 4003(a)).........................................   292
         2. Capital gains distributions of charitable remainder 
          trusts (secs. 4002(i)(3) and 4003(b))..................   293
         3. Gifts may not be revalued for estate tax purposes 
          after expiration of limitations (sec. 4003(c)).........   294
         4. Coordinate Vaccine Injury Compensation Trust Fund 
          expenditure purposes with list of taxable vaccines 
          (sec. 4003(d)).........................................   295
         5. Abatement of interest by reason of Presidentially 
          declared disasters (sec. 4003(e))......................   296
         6. Treatment of certain corporate distributions (sec. 
          4003(f))...............................................   296
         7. Treatment of affiliated group including formerly tax-
          exempt organization (sec. 4003(g)).....................   297
         8. Treatment of net operating losses arising from 
          certain eligible losses (sec. 4003(h)).................   298
         9. Determination of unborrowed cash value under COLI pro 
          rata interest disallowance rules (sec. 4003(i))........   299
        10. Payment of taxes by commercially acceptable means 
          (sec. 4003(k)).........................................   300

    C. Technical Corrections to the 1984 Act.....................   300

        1. Casualty loss deduction (sec. 4004)...................   300

    D. Perfecting Amendments Related to Withholding From Social 
      Security Benefits and Other Federal Payments (sec. 4005)...   301
    E. Disclosure of Tax Return Information to Department of 
      Agriculture (sec. 4006(a)).................................   301
    F. Technical Corrections to the Transportation Equity Act for 
      the 21st Century (sec. 4006(b))............................   302

Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec. 
  103(h) of H.R. 1023)...........................................   303

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  1998...........................................................   305



                              INTRODUCTION

    This pamphlet,<SUP>1</SUP> prepared by the staff of the 
Joint Committee on Taxation in consultation with the staffs of 
the House Committee on Ways and Means and Senate Committee on 
Finance, provides an explanation of tax legislation enacted in 
1998.
---------------------------------------------------------------------------
    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in 1998 (JCS-
6-98), November 24, 1998.
---------------------------------------------------------------------------
    A committee report on legislation issued by a Congressional 
committee sets forth the committee's explanation of the bill as 
it was reported by that committee. In some instances, a 
committee report does not serve as an explanation of the final 
provisions of the legislation as enacted. This is because the 
version of the bill adopted by the conference committee may 
differ significantly from the versions of the bill reported by 
committee or passed by the House and the Senate. The material 
contained in this pamphlet is prepared so that Members of 
Congress, tax practitioners, and other interested parties can 
have a detailed explanation of the final tax legislation 
enacted in 1998 in one publication.
    Part One of the pamphlet is an explanation of the 
provisions of the Surface Transportation Revenue Act of 1998 
(Title IX of H.R. 2400, P.L. 105-178) relating to the extension 
and revision of the Highway Trust Fund excise taxes. Part Two 
is an explanation of the Internal Revenue Service Restructuring 
and Reform Act of 1998 (H.R. 2676, P.L. 105-206). Part Three is 
an explanation of the revenue provisions of the Tax and Trade 
Relief Act of 1998 (Division J of the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act, 1999, H.R. 4328, 
P.L. 105-277). Part Four is an explanation of the revenue 
provision in the Ricky Ray Hemophilia Relief Fund Act of 1998 
(sec. 103(h) of H.R. 1023, P.L. 105-369). The Appendix provides 
estimates of the budget effects of revenue legislation enacted 
in 1998 for the fiscal year period, 1999-2007.
    The first footnote in each part gives the legislative 
history of each of the 1998 Acts.



PART ONE: SURFACE TRANSPORTATION REVENUE ACT OF 1998 (TITLE IX OF H.R. 
                           2400) <SUP>2</SUP>
---------------------------------------------------------------------------

    \2\ Title IX of H.R. 2400 (``Surface Transportation Revenue Act of 
1998''); P.L. 105-178. The revenue provisions (Title IX) of H.R. 2400 
were reported by the House Committee on Ways and Means on March 27, 
1998 (H. Rept. 105-467, Part II). H.R. 2400 was passed by the House on 
April 1, 1998.
    The Senate passed H.R. 2400, as amended with the provisions of S. 
1173, on April 2, 1998. The conference report was filed on the bill on 
May 22, 1998 (H. Rept. 105-550), and was passed by the House and the 
Senate on May 22, 1998. H.R. 2400 was signed by the President on June 
9, 1998.
---------------------------------------------------------------------------

 A. Extension of Highway Trust Fund, Aquatic Resources Trust Fund, and 
 National Recreational Trails Trust Fund Excise Taxes and Expenditure 
 Authority (secs. 9002-9005, 9008, 9009, and 9011 of the Act and secs. 
  4041-4042, 4051-4053, 4071-4073, 4081-4084, 4101, 4481-4484, 9503, 
                      9504, and 9511 of the Code)

                         Present and Prior Law

Highway and related transportation excise taxes
            Overview
    The present and prior law highway transportation excise 
taxes consist of:
    (1) taxes on gasoline, diesel fuel, kerosene, and special 
motor fuels;
    (2) a retail sales tax imposed on tractors, trucks, and 
trailers having gross vehicle weights in excess of prescribed 
thresholds;
    (3) a tax on manufacturers of tires designed for use on 
heavy highway vehicles; and
    (4) an annual use tax imposed on trucks and tractors having 
taxable gross weights in excess of prescribed thresholds.
    Special motor fuels include liquefied natural gas 
(``LNG''), benzol, naphtha, liquefied petroleum gas (e.g., 
propane), natural gasoline, and any other liquid (e.g., ethanol 
and methanol) other than gasoline or diesel fuel. Compressed 
natural gas (``CNG'') also is subject to tax as a special motor 
fuel, but at a lower rate than other special motor fuels.
    With the exception of 4.3 cents per gallon of the motor 
fuels excise tax rates, these taxes were scheduled to expire 
after September 30, 1999.
            Highway motor fuels taxes
    Tax rates.--The present and prior law highway motor fules 
excise tax rates are shown in Table 1.

    Table 1. --Federal Highway Trust Fund Motor Fuels Excise Tax Rates,
                      as of    October 1, 1998 \1\
                    [Rates shown in cents per gallon]
------------------------------------------------------------------------
                                                               Tax rate
                        Highway fuel                             \2\
------------------------------------------------------------------------
Gasoline \3\...............................................         18.3
Diesel Fuel \4\............................................         24.3
Special Motor Fuels Generally..............................     \5\ 18.3
CNG........................................................     \6\ 4.3
------------------------------------------------------------------------
\1\ The rates shown include the 4.3-cents-per-gallon tax rate which was
  transferred to the Highway Trust Fund beginning on October 1, 1997,
  pursuant to the Taxpayer Relief Act of 1997.
\2\ Excludes an additional 0.1-cent-per-gallon rate imposed on these
  motor fuels to finance the Leaking Underground Storage Tank Trust
  Fund.
\3\ Gasoline used in motorboats and in certain off-highway recreational
  vehicles and small engines is subject to tax in the same manner and at
  the same rates as gasoline used in highway vehicles. 6.8 cents per
  gallon of the revenues from the tax on gasoline used in these uses was
  retained in the General Fund under prior law; the remaining 11.5 cents
  per gallon was deposited in the Aquatic Resources Trust Fund
  (motorboat and small engine gasoline), the Land and Water Conservation
  Fund ($1 million of motorboat gasoline tax revenues), and the National
  Recreational Trails Trust Fund (off-highway recreational vehicles).
\4\ Kerosene is taxed at the same rate as diesel fuel.
\5\ The rate is 13.6 cents per gallon for propane, 11.9 cents per gallon
  for liquefied natural gas, and 11.3 cents per gallon for methanol fuel
  from natural gas. In each case the tax rate is based on the relative
  energy equivalence of the fuel to gasoline.
\6\ The statutory rate is 48.54 cents per thousand cubic feet (``MCF'').

     Administration of highway motor fuels excise taxes.--The 
gasoline, diesel fuel, and kerosene excise taxes are imposed on 
removal of the fuel from a refinery or on importation, unless 
the fuel is transferred by pipeline or barge to a registered 
terminal facility. In such a case, tax is imposed on removal of 
the fuel from the terminal facility (i.e., at the ``terminal 
rack'').<SUP>3</SUP> A large majority of these taxes is imposed 
at the terminal rack. The special motor fuels tax, which 
accounts for a relatively small portion of motor fuels tax 
revenues, is imposed at the retail level. Present law imposes 
tax on all gasoline, diesel fuel, and kerosene that is removed 
from a terminal facility, except diesel fuel and kerosene that 
is destined for nontaxable use (including a partially taxable 
use in an intercity bus or a train) and that is indelibly dyed 
in accordance with Treasury Department regulations.<SUP>4</SUP> 
Effective after June 30, 1998, prior law provided that as a 
condition of holding untaxed fuel, terminals that sold diesel 
fuel were required to offer both dyed and undyed fuel to their 
customers and terminals that sold kerosene were required to 
offer both dyed and undyed kerosene. The person holding an 
inventory position in the terminal at the time the fuel is 
removed from that facility (the ``position holder'') is liable 
for payment of the tax.
---------------------------------------------------------------------------
    \3\ Gasoline, diesel fuel, and kerosene may be removed from a 
refinery without payment of tax only if the party removing the fuel and 
all subsequent parties before its removal from a terminal facility are 
registered with the Internal Revenue Service. If fuel is sold to an 
unregistered party before leaving the terminal facility, tax 
immediately is imposed. This tax does not preclude imposition of a 
second tax at the terminal rack; however, the second tax may be 
refunded upon request. This dual tax regime was enacted in 1990 in 
response to reports that gasoline was being removed without payment of 
tax from terminals upon a claim that tax had already been paid, when in 
fact it had not been paid.
    \4\ Undyed kerosene also may be removed from terminals without 
payment of tax if the fuel is destined for use as aviation fuel or for 
certain nonfuel industrial purposes.
---------------------------------------------------------------------------
    Under prior law, gasoline, diesel fuel, and kerosene excise 
tax refunds were administered separately, subject to separate 
quarterly minimum filing thresholds. For gasoline, the minimum 
refund claim was $1,000 in the calendar quarter to which the 
claim relates. Certain diesel fuel claims were subject to this 
same standard; certain other diesel and aviation fuel claims 
could be filed in any of the first three calendar quarters in 
which the aggregate year-to-date refund equals $750. Fourth 
quarter refunds were required to be claimed as income tax 
credits regardless of amount.
    Highway fuels tax exemptions.--Prior law and present law 
include numerous exemptions (including partial exemptions for 
specified uses of taxable fuels or for specified fuels), 
typically for governments or for uses not involving use of (and 
thereby damage to) the highway system. Because the gasoline, 
diesel fuel, and kerosene taxes generally are imposed before 
the end use of the fuel is known, many of these exemptions are 
realized through refunds to end users of tax paid by a party 
that processed the fuel earlier in the distribution chain. 
These exempt uses and fuels include:
          (1) use in State and local government and nonprofit 
        educational organization vehicles;
          (2) use in buses engaged in transporting students and 
        employees of schools;
          (3) use in private local mass transit buses having a 
        seating capacity of at least 20 adults (not including 
        the driver) when the buses operate under contract with 
        (or are subsidized by) a State or local governmental 
        unit;
          (4) use in private intercity buses serving the 
        general public along scheduled routes (totally exempt 
        from the gasoline tax and exempt from 17 cents per 
        gallon of the diesel tax); and
          (5) use in off-highway uses such as farming.
    LNG, propane, CNG, and methanol derived from natural gas 
are subject to reduced tax rates based on the energy 
equivalence of these fuels to gasoline.
    Ethanol and methanol derived from renewable sources (e.g., 
biomass) are eligible for income tax benefits (the ``alcohol 
fuels credit'') equal, under prior law, to 54 cents per gallon 
(ethanol) and 60 cents per gallon (methanol).<SUP>5</SUP> In 
addition, small ethanol producers are eligible for a separate 
10-cents-per-gallon production credit.<SUP>6</SUP> The 54-
cents-per-gallon ethanol and 60-cents-per-gallon renewable 
source methanol tax credits may be claimed through reduced 
excise taxes paid on gasoline and special motor fuels as well 
as through credits against income tax.<SUP>7</SUP>
---------------------------------------------------------------------------
    \5\ Under prior law, the alcohol fuels credit was scheduled to 
expire after December 31, 2000, or earlier, if the Highway Fund excise 
taxes actually expired before that date.
    \6\ The small ethanol producer credit is available on up to 15 
million gallons of ethanol produced by persons whose annual production 
capacity does not exceed 30 million gallons.
    \7\ Authority to claim the ethanol and renewable source methanol 
tax benefits through excise tax reductions was scheduled to expire 
after September 30, 2000 (or earlier, if the underlying excise taxes 
actually expire before September 30, 2000) under prior law.
---------------------------------------------------------------------------
            Non-fuel Highway Trust Fund excise taxes
    In addition to the highway motor fuels excise tax revenues, 
the Highway Trust Fund receives revenues produced by three 
excise taxes imposed exclusively on heavy highway vehicles or 
tires. Under prior law and present law, these taxes are:
    (1) A 12-percent excise tax imposed on the first retail 
sale of highway vehicles, tractors, and trailers (generally, 
trucks having a gross vehicle weight in excess of 33,000 pounds 
and trailers having such a weight in excess of 26,000 pounds);
    (2) An excise tax imposed at graduated rates on highway 
tires weighing more than 40 pounds; and
    (3) An annual use tax imposed on highway vehicles having a 
taxable gross weight of 55,000 pounds or more. (The maximum 
rate for this tax is $550 per year, imposed on vehicles having 
a taxable gross weight over 75,000 pounds.)

Aquatic Resources Trust Fund and National Recreational Trails Trust 
        Fund taxes

     Gasoline and special motor fuels used in motorboats and in 
certain off-highway recreational vehicles and in small engines 
are subject to tax in the same manner and the same rates as 
gasoline and special motor fuels used in highway vehicles. Of 
the tax revenues from these uses, 6.8 cents per gallon was 
retained in the General Fund under prior law; the remaining 
11.5 cents per gallon was deposited in the Aquatic Resources 
Trust Fund (``Aquatic Fund'') (motorboat gasoline and special 
motor fuels and small-engine gasoline), the Land and Water 
Conservation Fund (``Land and Water Fund'') (limited to $1 
million of motorboat fuels tax revenues), and the National 
Recreational Trails Trust Fund (the ``Trails Fund'') (fuels 
used in off-highway recreational vehicles). Transfers to these 
Funds were scheduled to terminate after September 30, 1998 
under prior law. Transfers to the Trails Fund were contingent 
on appropriations from that Fund; no appropriations from the 
Trails Fund were enacted under prior law.

Highway Trust Fund expenditure authority provisions

            In general
     Dedication of excise tax revenues to the Highway Trust 
Fund and expenditures from the Highway Trust Fund are governed 
by provisions of the Code (sec. 9503).<SUP>8</SUP> Under prior 
law, revenues from the highway excise taxes, as imposed through 
September 30, 1999, were dedicated to the Highway Trust Fund. 
Also, the Highway Trust Fund earned interest on its cash 
balances each year from investments in Treasury securities 
under prior law (sec. 9602). Further, the Code authorized 
expenditures (subject to appropriations) from the Highway Trust 
Fund through September 30, 1998, for the purposes provided in 
authorizing legislation, as in effect on the date of enactment 
of Public Law 105-130.
---------------------------------------------------------------------------
    \8\ The Highway Trust Fund statutory provisions were placed in the 
Internal Revenue Code in 1982.
---------------------------------------------------------------------------
     Highway Trust Fund provisions also governed transfer of 
11.5 cents per gallon of the revenues from the tax imposed on 
gasoline used in motorboats, small engines, and off-highway 
recreational vehicles. Those revenues were transferred from the 
Highway Trust Fund to the Aquatic Fund, the Land and Water 
Fund, and the Trails Fund, respectively, through September 30, 
1998.
            Prior-law Highway Trust Fund expenditure purposes
     The Highway Trust Fund is divided into two accounts: a 
Highway Account and a Mass Transit Account, each of which is 
the funding source for specific programs.
     Highway and Mass Transit Account expenditure purposes have 
been revised with passage of each authorization Act enacted 
since establishment of the Highway Trust Fund in 1956. In 
general, expenditures authorized under those Acts (as the Acts 
were in effect on the date of enactment of the most recent of 
such authorizing Acts) are approved Highway Trust Fund 
expenditure purposes.<SUP>9</SUP> Authority to make 
expenditures from the Highway Trust Fund was scheduled to 
expire after September 30, 1998. Thus, no Highway Trust Fund 
monies could be spent for a purpose not already approved by the 
tax-writing committees of Congress. Further, no Highway Trust 
Fund expenditures could occur after September 30, 1998, without 
such approval.
---------------------------------------------------------------------------
    \9\ The authorizing Acts which were referenced in the Highway Trust 
Fund (for the Highway Account) under prior law were the Highway Revenue 
Act of 1956, Titles I and II of the Surface Transportation Assistance 
Act of 1982, the Surface Transportation and Uniform Relocation Act of 
1987, the Intermodal Surface Transportation Efficiency Act of 1991, and 
Public Law 105-130.
---------------------------------------------------------------------------
     Under prior law and present law, Highway Trust Fund 
spending further is limited by two anti-deficit provisions 
which are internal to the Highway Fund. The first of these 
provisions limits the unfunded Highway Account authorizations 
at the end of any fiscal year to amounts not exceeding the 
unobligated balance plus revenues projected to be collected for 
that Account by the dedicated excise taxes during the two 
following fiscal years. Under prior law, the second anti-
deficit provision similarly limited unfunded Mass Transit 
Account authorizations to the dedicated excise taxes expected 
to be collected during the next fiscal year. Because of these 
two provisions, the highway transportation excise taxes 
typically have been scheduled to expire at least two years 
after current authorizing Acts. If either of these provisions 
is violated, spending for specified programs funded by the 
relevant Trust Fund Account is reduced proportionately, in much 
the same manner as would occur under a general Budget Act 
sequester.
     Highway Account.--The Highway Trust Fund's Highway Account 
receives revenues from all non-fuel highway transportation 
excise taxes and under prior law, revenues from all but 2.85 
cents per gallon (2.0 cents before October 1, 1997) of the 
highway motor fuels excise taxes. Programs financed from the 
Highway Account included expenditures for the following general 
purposes:
          (1) Federal-aid highways, including the Interstate 
        System, National Highway System, forest and public 
        lands highways, scenic highways, and certain overseas 
        highways (includes construction and planning and 
        traffic control projects);
          (2) Interstate highway resurfacing and repair;
          (3) Bridge replacement and repair;
          (4) Surface transportation programs;
          (5) Congestion mitigation and air quality 
        improvement;
          (6) Highway safety programs and research and 
        development, including a share of the cost of National 
        Highway Traffic Safety Administration (``NHTSA'') 
        programs and university research centers;
          (7) Transportation research, technology, and 
        training;
          (8) Intermodal urban projects and mass transit 
        (including carpool and vanpool) grants;
          (9) Intelligent transportation systems;
          (10) Transportation enhancements (including 
        transportation-related historic restoration, scenic 
        beautification, removal of billboards);
          (11) Construction of ferry boats and ferry terminal 
        facilities;
          (12) Certain administrative costs of the Federal 
        Highway Administration and NHTSA;
          (13) Grants to the Internal Revenue Service for motor 
        fuels tax and highway use tax enforcement activities; 
        and
          (14) Certain other highway and transit-related 
        programs (including bicycle pathways and pedestrian 
        walkways).
    Mass Transit Account.--Under prior law, the Highway Fund's 
Mass Transit Account received revenues equivalent to 2.85 cents 
per gallon (2.0 cents before October 1, 1997) of the highway 
motor fuels excise taxes. Mass Transit Account monies were 
available through September 30, 1998, for capital and capital-
related expenditures under sections 5338(a)(1) and (b)(1) of 
Title 49, United States Code, or the Intermodal Surface 
Transportation Efficiency Act of 1991.
    The capital and capital-related mass transit programs 
included new rail or busway facilities, rail rolling stock, 
buses, improvement and maintenance of existing rail and other 
fixed guideway systems, and upgrading of bus systems.

Aquatic Fund and Land and Water Fund provisions

    Under prior law, transfers of recreational motorboat 
gasoline and special fuels tax revenues from the Highway Trust 
Fund to the Boat Safety Account of the Aquatic Fund were 
limited to a maximum of $70 million per fiscal year. Any excess 
motorboat fuels tax revenues were transferred to the Land and 
Water Fund (limited to $1 million per year) and to the Sport 
Fish Restoration Account of the Aquatic Fund.<SUP>10</SUP> The 
authority to transfer revenues to the Aquatic Fund was 
scheduled to expire after September 30, 1998.
---------------------------------------------------------------------------
    \10\ Under prior law, the maximum balance that could accumulate in 
the Boat Safety Account was $70 million.
---------------------------------------------------------------------------
    Expenditures from the Boat Safety Account and Land and 
Water Fund were subject to appropriation Acts. The Sport Fish 
Restoration Account has a permanent appropriation, and all 
moneys transferred to that Account are automatically 
appropriated in the fiscal year following the fiscal year of 
receipt.
    Under prior law, expenditures were authorized from the Boat 
Safety Account, as follows:
          (1) One-half of the amount allocated to the Account 
        for State boating safety programs; and
          (2) One-half of the amount allocated to the Account 
        for operating expenses of the Coast Guard to defray the 
        cost of services provided for recreational boating 
        safety.

Recreational Trails Trust Fund provisions

    The Trails Fund was established in the Intermodal Surface 
Transportation Act of 1991 (``1991 Act''). Amounts are 
authorized to be transferred from the Highway Trust Fund into 
the Trails Fund equivalent to revenues received from 
``nonhighway recreational fuel taxes'' (not to exceed $30 
million per year under an obligational ceiling set in the 1991 
Act), subject to amounts actually being appropriated from the 
Trails Fund. No monies were ever transferred because no amounts 
were appropriated from the Trails Fund. The authority to 
transfer revenues to the Trails Fund was scheduled to expire 
after September 30, 1998 under prior law.
    Nonhighway recreational fuels taxes included the taxes 
imposed on (1) fuel used in vehicles and equipment on 
recreational trails or back country terrain, or (2) fuel used 
in camp stoves and other outdoor recreational equipment. Such 
revenues did not include small-engine gasoline tax revenues 
which are transferred to the Aquatic Fund.
    Expenditures were authorized from the Trails Fund, subject 
to appropriations, for allocations to States for use on trails 
and trail-related projects as set forth in the 1991 Act. 
Authorized uses included (1) acquisition of new trails and 
access areas, (2) maintenance and restoration of existing 
trails, (3) State environmental protection education programs, 
and (4) program administrative costs.

                           Reasons for Change

    The Transportation Equity Act for the 21st Century (the 
``Act'') authorized expenditures (through contract authority 
and discretionary spending subject to appropriations) for 
Highway Trust Fund and Aquatic Fund programs during fiscal 
years 1998 through 2003. The Act further provided that Highway 
Trust Fund spending and revenues would not be considered for 
certain budget calculations. The excise taxes which constitute 
a dedicated revenue source for these programs under prior law 
were scheduled to expire after September 30, 1999. Thus, absent 
an extension of these taxes, contemplated highway, mass 
transit, and boat safety programs would not have been funded. 
The Congress concluded that a separate Trails Fund was not 
necessary, because no revenues had been deposited in the Trust 
Fund since its inception and because similar expenditure 
programs are financed from the Highway Trust Fund under the 
Act.

                       Explanation of Provisions

Highway tax and trust fund provisions

            Extension of existing Highway Trust Fund excise taxes
     The scheduled expiration date of the Highway Trust Fund 
excise taxes on motor fuels and on heavy highway vehicles and 
tires was extended, from September 30, 1999 through September 
30, 2005.
            Extension and modification of renewable source alcohol tax 
                    provisions
     The prior-law tax benefits for ethanol and renewable 
source methanol were extended for seven years from their 
previously scheduled expiration dates; the ethanol benefits 
were modified to reduce the benefit levels during the extension 
period. The modified ethanol benefit levels are as follows: 
2001 and 2002, 53 cents per gallon; 2003 and 2004, 52 cents per 
gallon; and, 2005 through 2007, 51 cents per gallon. The 
extension and the modifications apply to both the alcohol fuels 
credit and to the associated excise tax provisions.
             Motor fuels tax refund procedure
    The Act combined the quarterly excise tax refund procedures 
for all taxable motor fuels, allowing aggregation of quarterly 
amounts and filing of refund claims once a single $750 minimum 
amount is reached (determined on a year-to-date basis rather 
than an individual quarter basis). Fourth quarter refund claims 
are allowed under the same rules as applicable to the first 
three quarters.
            Requirement that motor fuels terminals offer dyed fuel
    As described under prior law, diesel fuel and kerosene 
(after June 30, 1998) are taxed on removal from a registered 
terminal facility unless the fuel is destined for a nontaxable 
use and is indelibly dyed. After June 30, 1998, prior law 
required terminals to offer dyed fuel as a condition of being 
allowed to store untaxed fuel. The Act delayed the effective 
date of the requirement that terminals offer dyed fuel for two 
years, to July 1, 2000.
            Extension and modification of Highway Trust Fund provisions
     The prior-law September 30, 1998 expiration date of 
authority to spend monies from the Highway Trust Fund was 
extended, from September 30, 1998 through September 30, 2003.
     The Code provisions governing purposes for which monies in 
the Highway Trust Fund may be spent were updated to include the 
purposes provided in the Act, as of the date of enactment.
     The anti-deficit provisions of the Mass Transit Account 
were conformed to those of the Highway Account so that 
permitted obligations will be determined by reference to two 
years of projected revenues.
    Provisions were incorporated into the Highway Trust Fund 
clarifying that expenditures from the Highway Trust Fund may 
occur only as provided in the Code. Clarification was further 
provided that the expiration date for expenditures allowed from 
the Highway Trust Fund does not preclude disbursements to 
liquidate contracts which were validly entered into before the 
last date permitted under those provisions. Expenditures for 
contracts entered into or for amounts otherwise obligated after 
that date (or for other non-contract authority purposes 
permitted by non-Code provisions) are not permitted, 
notwithstanding the provisions of any subsequently enacted 
authorization or appropriations legislation. If any such 
subsequent non-tax legislation provided for expenditures not 
provided for in the Code, or if any executive agency authorized 
such expenditures in contravention of the Code restrictions, 
excise tax revenues otherwise to be deposited in the Highway 
Fund would be retained in the General Fund beginning on the 
date of any unauthorized expenditure (including an obligation 
of funds under contract authority) pursuant to such legislation 
or the date of such an action by an executive 
agency.<SUP>11</SUP>
---------------------------------------------------------------------------
    \11\ The Congress did not intend that tax deposits terminate as a 
result of inadvertent administrative errors provided those errors are 
corrected within a reasonable period and do not evidence a pattern of 
disregard of this provision.
---------------------------------------------------------------------------
     A technical amendment to the Taxpayer Relief Act of 1997 
was included clarifying that excise tax revenues attributable 
to LNG, CNG, propane, and methanol from natural gas (all of 
which are subject to reduced, energy equivalent rates, as 
indicated in Table 1) are divided between the Highway and Mass 
Transit Accounts of the Highway Trust Fund in the same 
proportions as gasoline tax revenues are divided between those 
two accounts.
    A technical correction to the Taxpayer Relief Act of 1997 
was included providing that the amount of gasoline and diesel 
fuel tax revenues deposited into the Mass Transit Account is 
2.86 cents per gallon (rather than 2.85 cents per gallon as 
provided in that 1997 Act).
    The Act provided that the Highway Trust Fund (including the 
Mass Transit Account) will no longer earn interest on unspent 
balances, effective after September 30, 1998. Further, the 
balance in excess of $8 billion in the Highway Account of the 
Highway Trust Fund was canceled on October 1, 1998.

Aquatic Fund provisions

    The Act extends transfers of motorboat fuels tax revenues 
to the Boat Safety Account and Wetlands sub-Account of the 
Aquatic Fund through September 30, 2003. The Act further 
provided that an additional 1.5 cents per gallon of taxes 
imposed during fiscal years 2002 and 2003 (for a total of 13 
cents), and an additional 2 cents per gallon thereafter (for a 
total of 13.5), will be transferred to the Aquatic Fund.
    The Act extends the expenditure authority for the Boat 
Safety Account through September 30, 2003. The expenditure 
purposes of the Aquatic Fund (including those of the Sport Fish 
Restoration Account) are conformed to those purposes in effect 
in the authorizing provisions of the Act as of the date of 
enactment.
    The Act further incorporated provisions into the Aquatic 
Fund clarifying that expenditures from the Fund may occur only 
as provided in the Code Trust Fund provisions.

Repeal of Trails Fund

     The Act repealed the Trails Fund and the transfers of 
nonhighway recreational fuels taxes to that Trust Fund, 
effective on the date of the Act's enactment. (Under 
authorizing provisions of the Act, Highway Trust Fund 
expenditures are authorized for purposes similar to those of 
the prior-law Trails Fund.)

                             Revenue Effect

     The highway tax and trust fund provisions (other than the 
provisions relating to dyed fuel and refund procedures) are 
estimated to increase Federal fiscal year budget receipts by $9 
million in 2001, $12 million in 2002, $23 million in 2003, $27 
million in 2004, $39 million in 2005, $44 million in 2006, and 
$44 million in 2007 above amounts already included in the 
baseline. (Excise taxes dedicated to trust funds are assumed to 
be imposed permanently notwithstanding statutory expiration 
dates.) The provision delaying the requirement that registered 
terminals offerdyed fuel is estimated to have a negligible 
effect on Federal fiscal year budget receipts. The provision modifying 
the refund procedures for fuels excise taxes is estimated to decrease 
Federal fiscal year budget receipts by $5 million in 1999 and by less 
than $500,000 in each of the years 2000-2007. The provisions 
transferring additional revenues to the Aquatic Resources Trust Fund 
and repealing the National Recreational Trails Trust Fund are estimated 
to have no revenue effect.

  B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel (sec. 9006)

                               Prior Law

    Under prior law, diesel fuel used in trains was subject to 
a 5.65-cents-per-gallon excise tax. (Of this amount, 0.1 cent 
per gallon is dedicated to the Leaking Underground Storage Tank 
Trust Fund; this rate is scheduled to expire after March 31, 
2005.) The remaining 5.55 cents per gallon was a General Fund 
tax, with 4.3 cents per gallon being permanently imposed and 
1.25 cents per gallon being scheduled to expire after September 
30, 1999.

                           Reasons for Change

    The 1.25-cents-per-gallon rail fuel tax rate was repealed 
because the Congress believed it is inappropriate for railroads 
to pay a fuel tax for deficit reduction when most other 
transportation modes pay taxes only to support trust fund 
programs that benefit those industries.

                        Explanation of Provision

    The Act repeals the 1.25-cents-per-gallon rate on rail 
diesel fuel that was scheduled to expire after September 30, 
1999, effective on November 1, 1998.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $24 million in 1999 and less than $500,000 
in 2000.

   C. Purposes for Which Amtrak NOL Monies May be Used in Non-Amtrak 
   States (sec. 9007 of the Act, modifying sec. 977(e)(1)(B) of the 
                      Taxpayer Relief Act of 1997)

                         Present and Prior Law

    The Taxpayer Relief Act of 1997 provided elective 
procedures that allow Amtrak to consider the tax attributes of 
its predecessors in the use of its net operating losses. The 
election was conditioned on Amtrak agreeing to make payments 
equal to one percent of the amount it receives as a result of 
the election to the States that do not receive Amtrak service. 
The non-Amtrak States are required to spend these monies for 
qualified purposes. Qualified purposes were limited to the 
capital costs connected with the provision of intercity 
passenger rail and bus service, or the purchase of intercity 
rail service from Amtrak. Any amounts not spent by the non-
Amtrak States for qualified purposes by 2010 must be returned 
to the Treasury.

                           Reasons for Change

    The Congress believed that all States, whether or not 
served by Amtrak, should share in the Federal income tax 
benefits provided Amtrak in the Taxpayer Relief Act of 1997. 
The Congress believed that each non-Amtrak State's share should 
be available for appropriate transportation projects within 
that State. Since enactment of the Taxpayer Relief Act of 1997, 
the Congress has become aware of additional appropriate 
transportation projects within the non-Amtrak States.

                        Explanation of Provision

    The provision expands the list of qualified purposes to 
include (a) capital expenditures related to State owned rail 
operations, (b) projects eligible to receive funding under 
section 5309, 5310, or 5311 of Title 49, (c) projects that are 
eligible to receive funding under section 130 or 152 of Title 
23, (d) upgrading and maintenance of intercity primary and 
rural air service facilities, including the purchase of air 
service between primary and rural airports and regional hubs, 
(e) the provision of passenger ferryboat service and (f) 
certain harbor and highway improvements that are eligible to 
receive funding under section 103, 133, 144, and 149 of Title 
23.

                             Effective Date

    The provision is effective on August 5, 1997, as if it had 
been included in the Taxpayer Relief Act of 1997.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

D. Exclusion from Income for Employer-Provided Transportation Benefits 
            (sec. 9010 of the Act and sec. 132 of the Code)

                         Present and Prior Law

    Qualified transportation fringe benefits provided by an 
employer are excluded from an employee's gross income. 
Qualified transportation fringe benefits include parking, 
transit passes, and vanpool benefits. In addition, in the case 
of employer-provided parking, no amount is includible in income 
of an employee merely because the employer offers the employee 
a choice between cash and employer-provided parking. Under 
prior law, transit passes and vanpool benefits were only 
excludable if provided in addition to, and not in lieu of, any 
compensation otherwise payable to an employee. Up to $175 per 
month of employer-provided parking is excludable from income. 
Under prior law, up to $65 per month of employer-provided 
transit and vanpool benefits were excludable from gross income. 
Under prior law, these dollar amounts were indexed annually for 
inflation, rounded to the nearest multiple of $5.
    Under present and prior law, qualified transportation 
fringe benefits include a cash reimbursement by an employer to 
an employee. However, in the case of transit passes, a cash 
reimbursement is considered a qualified transportation fringe 
benefit only if a voucher or similar item which may be 
exchanged only for a transit pass is not readily available for 
direct distribution by the employer to the employee. The 
position of the Treasury Department is that a voucher or 
similar item is ``readily available'' if an employer can obtain 
it on terms no less favorable than those available to an 
individual employee and without incurring a significant 
administrative cost.<SUP>12</SUP>
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    \12\ I.R.S. Notice 94-3, 1994 C.B. 327.
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    Present and prior law impose limits on the amount of annual 
additions that can be made to a tax-qualified pension plan. In 
the case of defined contribution plans, the limit is the lesser 
of $30,000 or 25 percent of compensation. For this purpose, 
under section 415(c)(3), compensation is generally taxable 
compensation, plus salary reduction contributions under a 
qualified cash or deferred arrangement (a ``section 401(k) 
plan''), a tax-sheltered annuity (a ``section 403(b) 
annuity''), a SIMPLE plan, certain plans of deferred 
compensation for State and local government employees and 
employees of tax-exempt organizations (a ``sec. 457 plan''), 
and a cafeteria plan. Tax-qualified pension plans are also 
subject to nondiscrimination rules designed to ensure that an 
employer's pension plans benefit a broad cross section of 
employees. For purposes of applying these rules, compensation 
is generally defined as under Code section 415(c)(3). However, 
an employer can elect not to include as compensation salary 
reduction contributions under a section 401(k) plan, 403(b) 
annuity, or cafeteria plan. In addition, as provided by the 
Secretary, an employer can use an alternative definition of 
compensation for nondiscrimination testing purposes. Any such 
alternative definitions must not discriminate in favor of 
highly compensated employees.

                        Explanation of Provision

    The Act permits employers to offer employees a choice 
between cash compensation or any qualified transportation 
benefit or a combination of any of such benefits. Thus, under 
the Act, no amount is includible in gross income or wages 
merely because the employee is offered the choice of cash in 
lieu of one or more qualified transportation benefits (up to 
the applicable dollar limit). Also, no amount is includible in 
income or wages merely because the employee is offered a choice 
among qualified transportation benefits. The amount of cash 
offered is includible in income and wages only to the extent 
the employee elects cash.
    It is intended that salary reduction amounts used to 
provide qualified transportation benefits under the provision 
be treated for pension plan purposes the same as other salary 
reduction contributions. Thus, it is intended that such amounts 
be included for purposes of applying the limits on 
contributions and benefits, and that an employer may elect 
whether or not to include such amounts in compensation for 
nondiscrimination testing.<SUP>13</SUP> It is expected that the 
Secretary, in prescribing rules regarding the alternative 
definition of compensation, will treat salary reduction amounts 
under this provision the same as other salary reduction 
contributions.
---------------------------------------------------------------------------
    \13\ A technical correction may be necessary so that the statute 
reflects this intent.
---------------------------------------------------------------------------
    The provision does not change the rules regarding when a 
cash reimbursement for transit passes is treated as a qualified 
transportation fringe benefit.
    In addition, beginning in 2002, the Act increases the 
exclusion for transit passes and vanpooling to $100 per month. 
Beginning in 2003, the $100 amount is indexed as under prior 
law.
    Further, the Act provides that there is no indexing of any 
qualified transportation benefit in 1999.

                             Effective Date

    The provision permitting a cash option for any 
transportation benefit is effective for taxable years beginning 
after December 31, 1997; the increase in the exclusion for 
transit passes and vanpooling to $100 per month is effective 
for taxable years beginning after December 31, 2001; and 
indexing on the $100 amount for transit passes and vanpooling 
is effective for taxable years beginning after December 31, 
2002.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $3 million in 1999, $3 million in 2000, $4 
million in 2001, and to decrease Federal fiscal year budget 
receipts by $1 million in 2002, $3 million in 2003, $10 million 
in 2004, $7 million in 2005, $12 million in 2006, and $8 
million in 2007.

               E. Identification of Limited Tax Benefits

                         (sec. 9012 of the Act)

                         Present and Prior Law

    The Line Item Veto Act amended the Congressional Budget and 
Impoundment Act of 1974 to grant the President the limited 
authority to cancel specific dollar amounts of discretionary 
budget authority, certain new direct spending, and limited tax 
benefits. The Line Item Veto Act provides that the Joint 
Committee on Taxation is required to examine any revenue or 
reconciliation bill or joint resolution that amends the 
Internal Revenue Code of 1986 prior to its filing by a 
conference committee in order to determine whether or not the 
bill or joint resolution contains any limited tax benefits and 
to provide a statement to the conference committee that either 
(1) identifies each limited tax benefit contained in the bill 
or resolution, or (2) states that the bill or resolution 
contains no limited tax benefits. The Line Item Veto Act 
provides that the conferees determine whether or not to include 
the Joint Committee's statement in the conference report. If 
the conference report includes the information from the Joint 
Committee on Taxation identifying provisions that are limited 
tax benefits, then the President can cancel one or more of 
those, but only those, provisions that have been identified. If 
such a conference report contains a statement from the Joint 
Committee on Taxation that none of the provisions in the 
conference report are limited tax benefits, then the President 
has no authority to cancel any of the specific tax provisions, 
because there are no tax provisions that are eligible for 
cancellation under the Line Item Veto Act.
    On June 25, 1998, the U.S. Supreme Court held that the 
cancellation procedures set forth in the Line Item Veto Act are 
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 
(June 25, 1998).

                        Explanation of Provision

    Pursuant to the provisions of the Line Item Veto Act as in 
effect at the time the Surface Transportation Revenue Act of 
1998 was passed by the Congress, that Act included a provision 
stating that the Joint Committee on Taxation determined that 
the Act contains no provision involving limited tax benefits 
within the meaning of the Line Item Veto Act.

PART TWO: INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998 
                        (H.R. 2676)<SUP>14</SUP>
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    \14\ P.L. 105-206. H.R. 2676 was reported by the House Committee on 
Ways and Means on October 31, 1997 (H. Rept. 105-364, Part I). The 
House passed the bill on November 5, 1997, and added (as new Title VI) 
the provisions of H.R. 2645 (``Tax Technical Corrections Act of 1997'') 
as previously reported by the Committee on Ways and Means (H. Rept. 
105-356, October 29, 1997).
    H.R. 2676 was reported, as amended, by the Senate Committee on 
Finance on April 22, 1998 (S. Rept. 105-174), and was passed by the 
Senate, as amended, on May 7, 1998. The conference report on H.R. 2676 
was filed on June 24, 1998 (H. Rept. 105-599). The House passed the 
conference report on June 25, 1998, and the Senate passed it on July 9, 
1998.
    H.R. 2676 was signed by the President on July 22, 1998.
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     TITLE I. REORGANIZATION OF STRUCTURE AND MANAGEMENT OF THE IRS

        A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS mission and restructuring (secs. 1001 and 1002 of the Act)

                               Prior Law

IRS mission statement
    Under prior law, the Internal Revenue Service (``IRS'') 
mission statement provided that:

          The purpose of the Internal Revenue Service is to 
        collect the proper amount of tax revenue at the least 
        cost; serve the public by continually improving the 
        quality of our products and services; and perform in a 
        manner warranting the highest degree of public 
        confidence in our integrity and fairness.
IRS organizational plan
    Under Reorganization Plan No. 1 of 1952, the IRS is 
organized into a 3-tier geographic structure with a multi-
functional National Office, Regional Offices, and District 
Offices. A number of IRS reorganizations have occurred since 
then, but no major changes have been made to the basic 3-tier 
structure. A 1995 reorganization provided for a Regional 
Commissioner, a Regional Counsel and a Regional Director of 
Appeals for each of the following 4 regions: (1) the Northeast 
Region (headquartered in New York); (2) the Southeast Region 
(Atlanta); (3) the Midstates Region (Dallas); and (4) the 
Western Region (San Francisco). There were 33 District Offices, 
10 service centers, and 3 computing centers.

                           Reasons for Change

    The Congress believed that a key reason for taxpayer 
frustration with the IRS is the lack of appropriate attention 
to taxpayer needs. Taxpayers should be able to receive from the 
IRS the same level of service expected from the private sector. 
For example, taxpayer inquiries should be answered promptly and 
accurately; taxpayers should be able to obtain timely 
resolutions of problems and information regarding activity on 
their accounts; and taxpayers should be treated fairly and 
courteously at all times. The Commissioner of Internal Revenue 
has indicated his interest in improving customer service. The 
Congress believed that taxpayer service is of such importance 
that the Congress should not only support the Commissioner's 
efforts, but also mandate that a key part of the IRS mission 
must be taxpayer service.
    The Commissioner announced a broad outline of a plan to 
reorganize the structure of the IRS in order to help make the 
IRS more oriented toward assisting taxpayers and providing 
better taxpayer service. Under this plan, the present regional 
structure would be replaced with a structure based on units 
that serve particular groups of taxpayers with similar needs. 
The Commissioner preliminarily identified four different groups 
of taxpayers with similar needs: individual taxpayers, small 
businesses, large businesses, and the tax-exempt sector 
(including employee plans, exempt organizations and State and 
local governments). Under this structure, each unit would be 
charged with end-to-end responsibility for serving a particular 
group of taxpayers. The Commissioner believed that this type of 
structure will solve many of the problems taxpayers encounter 
now with the IRS. For example, each of the 33 district offices 
and 10 service centers were required to deal with every kind of 
taxpayer and every type of issue. The proposed plan would 
enable IRS personnel to understand the needs and problems 
affecting particular groups of taxpayers, and better address 
those issues. The prior-law structure also impeded continuity 
and accountability. For example, if a taxpayer moved, the 
responsibility for the taxpayer's account moved to another 
geographical area. Further, every taxpayer was serviced by both 
a service center and at least one district. Thus, many 
taxpayers had to deal with different IRS offices on the same 
issues. The proposed structure would eliminate many of these 
problems.
    The Congress believed that the former IRS organizational 
structure was one of the factors contributing to the inability 
of the IRS to properly serve taxpayers and the proposed 
structure would help enable the IRS to better serve taxpayers 
and provide the necessary level of services and accountability 
to taxpayers. The Congress supported the Commissioner in his 
efforts to modernize and update the IRS and believed it 
appropriate to provide statutory direction for the 
reorganization of the IRS.

                        Explanation of Provision

    The IRS is directed to revise its mission statement to 
provide greater emphasis on serving the public and meeting the 
needs of taxpayers.
    The IRS Commissioner is directed to restructure the IRS by 
eliminating or substantially modifying the three-tier 
geographic structure and replacing it with an organizational 
structure that features operating units serving particular 
groups of taxpayers with similar needs. The plan is also 
required to ensure an independent appeals function within the 
IRS. As part of ensuring an independent appeals function, the 
reorganization plan is to prohibit ex parte communications 
between appeals officers and other IRS employees to the extent 
such communications appear to compromise the independence of 
the appeals officers. The legality of IRS actions is not 
affected pending further appropriate statutory changes relating 
to such a reorganization (e.g., eliminating statutory 
references to obsolete positions).

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.
2. Establishment and duties of IRS Oversight Board (sec. 1101 of the 
        Act and sec. 7802 of the Code)

                         Present and Prior Law

    The administration and enforcement of the internal revenue 
laws are performed by or under the supervision of the Secretary 
of the Treasury.<SUP>15</SUP> The Secretary has delegated the 
responsibility to administer and enforce the Internal Revenue 
laws to the Commissioner. The Commissioner has the final 
authority of the IRS concerning the substantive interpretation 
of the tax laws as reflected in legislative and regulatory 
proposals, revenue rulings, letter rulings, and technical 
advice memoranda. The duties of the Chief Counsel of the IRS 
are prescribed by the Secretary. Under prior law, the Secretary 
delegated authority over the Chief Counsel to General Counsel 
of the Treasury, and the General Counsel delegated authority to 
serve as the legal adviser to the Commissioner to the Chief 
Counsel.
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    \15\ Code section 7801(a).
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    Federal employees are subject to rules designed to prevent 
conflicts of interest or the appearance of conflicts of 
interest. The rules applicable to any particular employee 
depend in part on whether the employee is a regular, full-time 
Federal Government employee or a special government employee, 
the length of service of the employee and the pay grade of the 
employee. A ``special government employee'' is, in general, an 
officer or employee of the executive or legislative branch of 
the U.S. government who is appointed or employed to perform 
(with or without compensation) for not to exceed 130 days 
during any period of 365 days, temporary duties either on a 
full-time or intermittent basis. Violations of the ethical 
conduct rules aregenerally punishable by imprisonment for up to 
1 year (5 years in the case of wilful conduct), a civil fine, or both. 
The amount of the fine with respect to each violation cannot exceed the 
greater of $50,000 or the compensation received by the employee in 
connection with the prohibited conduct.
    Under the ethical conduct rules, all Federal Government 
employees (including special government employees) are 
precluded from participating in a matter in which the employee 
(or a related party) has a financial interest. In addition, 
special government employees cannot represent a party (whether 
or not for compensation) or receive compensation for 
representation of a party <SUP>16</SUP> in relation to a matter 
(1) in which the employee has at any time participated 
personally and substantially, or (2) which is pending in the 
department or agency of the Government in which the special 
government employee is serving. In the case of a special 
government employee who has served in a department no more than 
60 days during the immediately preceding 365 days, item (2) 
does not apply. Thus, for example, such an individual can 
receive compensation for representational services with respect 
to matters pending in the department in which the employee 
serves, as long as it is not a matter involving parties in 
which the employee personally and substantially 
participated.<SUP>17</SUP>
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    \16\ The prohibition on receipt of compensation applies regardless 
of whether the services are performed by the Federal employee or 
someone else. For example, it would preclude a Federal employee from 
sharing in the compensation received by a partner of the Federal 
employee with respect to covered matters.
    \17\ More stringent rules apply to regular Federal Government 
employees. Such employees generally cannot receive compensation for 
representational services (whether rendered by the individual or 
another) in matters in which the United States is a party or has a 
direct and substantial interest before any department, agency or court. 
In addition, a Federal Government employee generally cannot act as 
agent or attorney (whether or not for compensation) for prosecuting any 
claim against the United States or act as agent or attorney for anyone 
before any department, agency, or court in which the United States is a 
party or has a direct and substantial interest.
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    The conflict of interest rules also impose restrictions on 
what a Federal Government employee can do after leaving the 
Government. Under these rules, senior level officers and 
employees (including special government employees) who served 
at least 60 days cannot represent anyone other than the United 
States before the individual's former department or agency for 
1 year after terminating employment. Whether an employee is a 
senior level officer or employee is determined by pay grade. 
The one-year post employment restriction does not apply to 
special government employees who serve less than 60 days during 
the 365-day period before termination of 
employment.<SUP>18</SUP>
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    \18\ All Federal Government employees generally are permanently 
prohibited from representing a party other than the government in 
connection with a particular matter (1) in which the government is a 
party or has an interest, (2) in which the individual participated 
personally and substantially, and (3) which involved a specific party 
or parties at the time of their participation. In addition, Federal 
employees generally cannot, within 2 years after terminating 
employment, represent any person other than the United States in 
connection with any matter (1) in which the government is a party or 
has a direct and substantial interest, (2) which the person knows or 
reasonably should know was actually pending under his or her official 
responsibility within one year before termination of employment, and 
(3) which involved a specific party or parties at the time it was 
pending.
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    Federal employees with pay grades above certain levels (and 
who have at least 60 days of service) are required to file 
annually public financial disclosures.

                           Reasons for Change

    The Congress believed that a well-run IRS is critical to 
the operation of our tax system. Public confidence in the IRS 
must be restored so that our system of voluntary compliance 
will not be compromised. The Congress believed that most 
Americans are willing to pay their fair share of taxes, and 
that public confidence in the IRS is key to maintaining that 
willingness.
    The National Commission on Restructuring the IRS (the 
``Restructuring Commission'') conducted a year-long study of 
the IRS and found that a number of factors contribute to 
current IRS management problems. The Restructuring Commission 
found that, while the Treasury is responsible for IRS 
oversight, it has generally provided little consistent 
strategic oversight or guidance to the IRS. The Secretary and 
Deputy Secretary have many other broad responsibilities and 
generally leave the IRS largely independent. The average tenure 
of an IRS Commissioner is under 3 years, as is the average 
tenure of senior Treasury officials responsible for IRS 
oversight. Many of the issues that need to be addressed by the 
IRS require expertise in various areas, particularly management 
and technology.
    The Restructuring Commission concluded the following:

          ``problems throughout the IRS cannot be solved 
        without focus, consistency and direction from the top. 
        The current structure, which includes Congress, the 
        President, the Department of the Treasury, and the IRS 
        itself, does not allow the IRS to set and maintain 
        consistent long-term strategy and priorities, nor to 
        develop and execute focused plans for improvement. 
        Additionally, the structure does not ensure that the 
        IRS budget, staffing and technology are targeted toward 
        achieving organizational success.''

    The Congress shared the concerns of the Commission, and 
believed that fundamental change in IRS management and 
oversight is essential. The Congress believed that a new 
management structure that will bring greater expertise in 
needed areas, and more focus and continuity will help the IRS 
to become an efficient, responsive, and respected agency that 
acts appropriately in carrying out its functions.
    The Congress believed that private sector input is a 
necessary part of any new management structure. The Congress 
believed that appropriate ethics rules should be applied to the 
private sector members of the new IRS management in order to 
enhance the ability of such members to demonstrate impartiality 
in the performance of their duties, while not unduly 
restricting the available pool of potential candidates.
    The Congress was aware that the taxpaying public does not 
relish contacts with the agency responsible for collecting 
taxes. Nevertheless, by establishing a new management structure 
that will better enable the IRS to develop and fulfill long-
term goals, the Congress believed the IRS would provide better 
service and reduce IRS contact with taxpayers. The Congress was 
also aware that changes being made to IRS management structure 
are not the final step, and that continued oversight of the 
IRS, by Congress as well as the Administration, is necessary in 
order to ensure long-term progress.

                        Explanation of Provision

Duties, responsibilities, and powers of the IRS Oversight Board

            General responsibilities of the Board
    The provision provides for the establishment within the 
Treasury Department of the Internal Revenue Service Oversight 
Board (referred to as the ``Board''). The general 
responsibilities of the Board are to oversee the IRS in the 
administration, management, conduct, direction, and supervision 
of the execution and application of the internal revenue laws. 
As part of its oversight responsibilities, the Board has the 
responsibility to ensure that the organization and operation of 
the IRS allow it to carry out its mission.
            Specific responsibilities of the Board
    The Board has the following specific responsibilities: (1) 
to review and approve strategic plans of the IRS, including the 
establishment of mission and objectives (and standards of 
performance) and annual and long-range strategic plans; (2) to 
review the operational functions of the IRS, including plans 
for modernization of the tax administration system, outsourcing 
or managed competition, and training and education; (3) to 
review and approve the Commissioner's plans for major 
reorganization of the IRS; and (4) to review operations of the 
IRS in order to ensure the proper treatment of taxpayers. The 
Board also has the following specific responsibilities relating 
to management: (1) to recommend to the President candidates for 
Commissioner (and to recommend the removal of the 
Commissioner); and (2) to review the Commissioner's selection, 
evaluation, and compensation of IRS senior executives who have 
program management responsibility over significant functions of 
the IRS. The Congress expected that the Chair of the Board will 
consider establishing a financial management subcommittee to 
advise the Commissioner on financial management issues.
    Consistent with the Board's responsibility to review and 
approve plans for major reorganizations, Congress intended for 
the Board to have the authority to review and approve the 
reorganization plan that is contained in Title I of the Act. 
However, to the extent that the Commissioner has already taken 
measures to develop and implement such a plan, Congress did not 
want to impede such efforts. Thus, Congress did not intend in 
any way that the Commissioner should be precluded from moving 
ahead with such planning and implementation prior to the 
appointment of the Board.
    In addition, the Board's specific responsibilities include 
the responsibility to review and approve the budget request of 
the IRS prepared by the Commissioner, submit such budget 
request to the Secretary, and ensure that the budget request 
supports the annual and long-range strategic plans of the IRS. 
The Secretary is required to submit the budget request approved 
by the Board to the President, who is required to submit such 
request, without revision, to the Congress together with the 
President's annual budget request for the IRS. The provision 
does not affect the ability of the President to include, in 
addition, his own budget request relating to the IRS.
    It is intended that the Board will reach a formal decision 
on all matters subject to its review. With respect to those 
matters over which the Board has approval authority, the 
Board's decisions will be determinative.
    The Board has no responsibilities or authority with respect 
to the development and formulation of Federal tax policy 
relating to existing or proposed internal revenue laws. In 
addition, the Board has no authority (1) to intervene in 
specific taxpayer cases, including compliance activities 
involving specific taxpayers such as criminal investigations, 
examinations, and collection activities, (2) to engage in 
specific procurement activities of the IRS (e.g., selecting 
vendors or awarding contracts), or (3) to intervene in specific 
individual personnel matters.
    In exercising its duties, it is expected that the members 
of the Board shall maintain appropriate confidentiality (e.g., 
regarding enforcement matters).
    It is expected that the Treasury Department will no longer 
utilize the IRS Management Board once the new Board created by 
the provision is in place, as the functions of the IRS 
Management Board would be taken over by the new Board.
            Composition of the Board
    The Board is composed of 9 members. Six of the members are 
so-called ``private-life'' members who are not otherwise 
Federal officers or employees. These private-life members are 
appointed by the President, with the advice and consent of the 
Senate. The other members are: (1) the Secretary (or, if the 
Secretary so designates, the Deputy Secretary); (2) the 
Commissioner; and (3) an individual who is a full-time Federal 
employee or a representative of employees (``employee 
representative'') and who is appointed by the President, with 
the advice and consent of the Senate.
            Section 6103 authority
    Board members have limited access to confidential tax 
return and return information under section 6103. This limited 
access permits the Board to receive such information (i.e., 
information that has not been redacted to remove confidential 
tax return and return information) from the Treasury IG for Tax 
Administration or the Commissioner in connection with reports 
made to the Board. This access to section 6103 information does 
not include the taxpayer's name, address, or taxpayer or 
employer identification number. The Board members are subject 
to the anti-browsing rules applicable to IRS employees under 
present law.<SUP>19</SUP>
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    \19\ The provision does not affect the Secretary's (or Deputy 
Secretary's) or the Commissioner's access to section 6103 information 
or the application of the anti-browsing rules to the Secretary (or 
Deputy Secretary) or the Commissioner.
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            Qualifications of Board members
    The private-life members of the Board are appointed without 
regard to political affiliation and based solely on their 
expertise in the following areas: (1) management of large 
service organizations; (2) customer service; (3) the Federal 
tax laws, including administration and compliance; (4) 
information technology; (5) organization development; (6) the 
needs and concerns of taxpayers; and (7) the needs and concerns 
of small businesses. In the aggregate, the private-life members 
of the Board should collectively bring to bear expertise in 
these enumerated areas.
    A private-life Board member and the employee representative 
Board member may be removed at the will of the President. In 
addition, the Secretary (or Deputy Secretary) and the IRS 
Commissioner are automatically removed from the Board upon his 
or her termination of employment as such.

Ethical standards for private-life members

            Representational activities and compensation matters
    The ethical conduct rules applicable to private-life Board 
members depend on whether or not such members are determined to 
be ``special government employees'' under Federal law. It is 
expected that they generally will be.<SUP>20</SUP> In that 
case, they will be subject, at a minimum, to the ethical 
conduct rules applicable to special government employees. In 
addition, during their term as a Board member, a private-life 
Board member cannot represent any party (whether or not for 
compensation) with respect to (1) any matter before the Board 
or the IRS, (2) any tax-related matter before the Treasury 
Department or (3) any court proceeding with respect to a matter 
described in (1) or (2). Thus, for example, the day after 
appointment to the Board, a private-life Board member could not 
meet with representatives of the IRS or Treasury on behalf of a 
client or the Board member's corporate employer with respect to 
proposed tax regulations. On the other hand, the Board member 
could, for example, represent clients before the U.S. Customs 
Service. The special rules applicable to private-life Board 
members generally do not preclude the Board member from sharing 
in compensation from representation of clients by another 
person (e.g., a partner of the Board member) before the IRS or 
Treasury.<SUP>21</SUP>
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    \20\ If the Board members are determined not to be special 
government employees, then they will be subject to the ethical conduct 
rules relating to regular Federal Government employees.
    \21\ Certain limitations to this exception to the otherwise 
applicable ethical rules apply. For example, this exception does not 
apply if the matter was one in which the Board member personally and 
substantially participated.
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            Post-employment restrictions
    Private-life Board members are subject to the 1-year post 
employment restriction applicable to individuals above certain 
pay grades and who have served at least 60 days (whether or not 
the members are special government employees).
            Financial disclosure reports
    The private-life Board members are subject to the public 
financial disclosure rules applicable to Federal government 
employees above certain pay grades and who have at least 60 
days of service. Thus, the private-life Board members are 
required to file a public financial disclosure report for 
purposes of confirmation, annually during their tenure on the 
Board, and upon termination of appointment.

Ethical standards for employee representative

    The same ethics rules applicable to the private-life 
members regarding the representational activities and 
compensation matters apply to the employee representative if 
the individual is a special government employee (i.e., the 
individual is not already an officer or employee of the Federal 
Government). In addition, the same post-employment restrictions 
and the financial disclosure requirements applicable to the 
private-life members apply to the employee representative.
    The provision grants the President the authority to waive, 
at the time the President nominates the employee representative 
to the Board, for the term of the member, any appropriate 
provisions of chapter 11 of title 18 of the United States Code, 
to the extent such waiver is necessary to allow such member to 
participate in the decisions of the Board while continuing 
toserve as an employee representative. Any such waiver is not effective 
unless a written intent of waiver to exempt the member (and the actual 
waiver language) is submitted to the Senate with the nomination of the 
member. It is not intended that waiver of the restrictions on post-
employment provided under the provision be necessary to allow such 
member to participate in the decisions of the Board while continuing to 
serve as an employee representative.

Administrative matters

            Term of appointments
    The 6 private-life Board members and the employee 
representative are appointed for 5-year terms. The private-life 
members and the employee representative may serve no more than 
two 5-year terms. Board member terms are staggered, as a result 
of a special rule providing that some private-life members 
first appointed to the Board serve terms of less than 5 years. 
Under this rule, 2 private-life members first appointed have a 
term of 3 years, 2 private-life members have a term of 4 years, 
and 2 private-life members have a term of 5 years. The terms of 
the initial Board members run from the date of appointment. 
Subsequent terms will run from expiration of the previous term. 
A Board member appointed to fill a vacancy before the 
expiration of a term will be appointed to the remainder of the 
term. Such a member could be appointed to subsequent 5-year 
term.
            Chair of the Board
    The members of the Board are to elect a Chair from the 
private-life members for a 2-year term. Except as otherwise 
provided by a majority of the Board, the authority of the Chair 
includes the authority to hire appropriate staff, call 
meetings, establish committees, establish the agenda for 
meetings, and develop rules for the conduct of business.
            Meetings and quorum
    The Board is required to meet on a regular basis (as 
determined necessary by the Chair), but no less frequently than 
quarterly. The Board can meet privately, and is not subject to 
public disclosure laws.
    A quorum of 5 members is required in order for the Board to 
conduct business. Actions of the Board can be taken by a 
majority vote of those members present and voting.
            Staffing
    The Chair is authorized to hire (and terminate) such 
personnel as the Chair finds necessary to enable the Board to 
carry out its duties. In addition, the Board will have such 
staff as detailed by the Commissioner or from another Federal 
agency at the request of the Chair of the Board. The Chair can 
procure temporary and intermittent services under section 
3109(b) of title 5 of the U.S. Code. The Congress intended that 
the size of the staff be limited to a small number, and the 
Board is encouraged to use outside consultants whenever 
necessary.
            Claims against Board members
    The private-life Board members and the employee 
representative have no personal liability under Federal law 
with respect to any claim arising out of or resulting from an 
act or omission by the Board member within the scope of service 
as a Board member. The provision does not affect any other 
immunities and protections that may be available under 
applicable law or any other right or remedy against the United 
States under applicable law, or limit or alter the immunities 
that are available under applicable law for Federal officers 
and employees.
            Compensation of Board members
    The private-life members of the Board are compensated at a 
rate of $30,000 per year, except that the Chair is compensated 
at a rate of $50,000 a year. The employee representative member 
of the Board is compensated at a rate of $30,000 per year 
unless the individual is already an officer or employee of the 
Federal Government. The other Board members will receive no 
compensation for their services as a Board member. The members 
of the Board are entitled to travel expenses for purposes of 
attending meetings of the Board. Travel expenses other than 
those incurred to attend Board meetings are allowed if approved 
in advance by the Chair, and the Board is to report annually to 
Congress the amount of travel expenditures incurred by the 
Board.
            Reports
    The Board is required to report each year regarding the 
conduct of its responsibilities, and information on travel 
expenditures incurred. The annual report is to be provided to 
the President and the House Committees on Ways and Means, 
Government Reform and Oversight, and Appropriations and the 
Senate Committees on Finance, Governmental Affairs, and 
Appropriations. In addition, the Board is required to report to 
the Ways and Means and Finance Committees if the IRS does not 
address problems identified by the Board.

                             Effective Date

    The provisions relating to the Board are effective on the 
date of enactment (July 22, 1998). The President is directed to 
submit nominations for Board members to the Senate within 6 
months of the date of enactment. Provisions relating to the 
Board are not to be construed to invalidate the actions and 
authority of the IRS prior to the appointment of members of the 
Board.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

  B. Appointment and Duties of IRS Commissioner and Chief Counsel and 
                            Other Personnel

1. IRS Commissioner and other personnel (secs. 1102(a) and 1104 of the 
        Act and secs. 7803 and 7804 of the Code)

                         Present and Prior Law

    Within the Department of the Treasury is a Commissioner of 
Internal Revenue, who is appointed by the President, with the 
advice and consent of the Senate. Under prior law, the 
Commissioner had such duties and powers as were prescribed by 
the Secretary.<SUP>22</SUP> The Secretary has delegated to the 
Commissioner the administration and enforcement of the internal 
revenue laws.<SUP>23</SUP> The Commissioner generally does not 
have authority with respect to tax policy matters.<SUP>24</SUP>
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    \22\ Code section 7802(a).
    \23\ Treasury Order 150-10 (April 22, 1982).
    \24\ See, e.g., Treasury Order 111-2 (March 16, 1981), which 
delegates to the Assistant Secretary (Tax Policy) the exclusive 
authority to make the final determination of the Treasury Department's 
position with respect to issues of tax policy arising in connection 
with regulations, published Revenue Rulings and Revenue Procedures, and 
tax return forms and to determine the time, form and manner for the 
public communication of such position.
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    The Secretary is authorized to employ such persons as the 
Secretary deems appropriate for the administration and 
enforcement of the internal revenue laws and to assign posts of 
duty.

                           Reasons for Change

    The Congress believed that the duties and responsibilities 
of the Commissioner are of such significance that the 
Commissioner should continue to be appointed by the 
President.<SUP>25</SUP> However, the frequency with which the 
Commissioner changes--the average tenure in office is under 3 
years--is one of the factors contributing to lack of IRS 
management continuity. The Congress believed (as did the 
National Commission on Restructuring the IRS) that providing a 
statutory term for the Commissioner to serve would help ensure 
greater continuity of IRS management.
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    \25\ Retaining prior law also eliminates any constitutional issues 
that may arise if the Commissioner is appointed by someone other than 
the President, such as by the Board, as suggested by the National 
Commission on Restructuring the IRS.
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                        Explanation of Provision

    As under prior law, the Commissioner is appointed by the 
President, with the advice and consent of the Senate, and may 
be removed at will by the President. Under the provision, one 
of the qualifications of the Commissioner is demonstrated 
ability in management. The Commissioner is appointed to a 5-
year term, beginning with the date of appointment. The 
Commissioner may be reappointed for more than one 5-year term. 
The Board recommends candidates to the President for the 
position of Commissioner; however, the President is not 
required to nominate for Commissioner a candidate recommended 
by the Board. The Board has the authority to recommend the 
removal of the Commissioner.
    The Commissioner has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
such duties and powers include the power to administer, manage, 
conduct, direct, and supervise the execution and application of 
the internal revenue laws or related statutes and tax 
conventions to which the United States is a party, to exercise 
the IRS' final authority concerning the substantive 
interpretation of the tax laws, and to recommend to the 
President a candidate for Chief Counsel (and recommend the 
removal of the Chief Counsel). If the Secretary determines not 
to delegate such specified duties to the Commissioner, such 
determination will not take effect until 30 days after the 
Secretary notifies the House Committees on Ways and Means, 
Government Reform and Oversight, and Appropriations, and the 
Senate Committees on Finance, Governmental Affairs, and 
Appropriations. The Commissioner is to consult with the Board 
on all matters within the Board's authority (other than the 
recommendation of candidates for Commissioner and the 
recommendation to remove the Commissioner).
    Unless otherwise specified by the Secretary, the 
Commissioner is authorized to employ such persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws and is required to 
issue all necessary directions, instructions, orders, and rules 
applicable to such persons. Unless otherwise provided by the 
Secretary, the Commissioner will determine and designate the 
posts of duty.

                             Effective Date

    The provisions relating to the Commissioner are effective 
on the date of enactment (July 22, 1998). The provision 
relating to the 5-year term of office applies to the 
Commissioner in office on the date of enactment. The 5-year 
term runs from the date of appointment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

2. IRS Chief Counsel (sec. 1102(b) of the Act and sec. 7803 of the 
        Code)

                         Present and Prior Law

    The President is authorized to appoint, by and with the 
consent of the Senate, an Assistant General Counsel of the 
Treasury, who is the Chief Counsel of the IRS. The Chief 
Counsel is the chief law officer for the IRS and has had such 
duties as may be prescribed by the Secretary. The Secretary has 
delegated authority over the Chief Counsel to the Treasury 
General Counsel. Under prior law, the Chief Counsel did not 
report to the Commissioner, but to the Treasury General 
Counsel. As delegated by the Treasury General Counsel, the 
duties of the Chief Counsel included: (1) to be the legal 
advisor to the Commissioner and his or her officers and 
employees; (2) to furnish such legal opinions as may be 
required in the preparation and review of rulings and memoranda 
of technical advice and the performance of other duties 
delegated to the Chief Counsel; (3) to prepare, review, or 
assist in the preparation of proposed legislation, treaties, 
regulations and Executive Orders relating to laws affecting the 
IRS; (4) to represent the Commissioner in cases before the Tax 
Court; (5) to determine what civil actions should be brought in 
the courts under the laws affecting the IRS and to prepare 
recommendations to the Department of Justice for the 
commencement of such actions and to authorize or sanction 
commencement of such actions.

                        Explanation of Provision

    As under prior law, the Chief Counsel is appointed by the 
President, with the advice and consent of the Senate.
    The Chief Counsel is to report directly to the 
Commissioner, with two exceptions. First, the Chief Counsel is 
to report to both the Commissioner and the General Counsel of 
the Treasury Department with respect to (1) legal advice or 
interpretation of the tax law not relating solely to tax 
policy, and (2) tax litigation. Under this rule, the Congress 
intended that the Chief Counsel's dual reporting to the 
Commissioner and to the General Counsel include reporting with 
respect to legal advice or interpretation of the tax law set 
forth in regulations, revenue rulings and revenue procedures, 
technical advice and other similar memoranda, private letter 
rulings, and published guidance not described in the foregoing.
    Second, the Chief Counsel is to report to the General 
Counsel with respect to legal advice or interpretation of the 
tax law relating solely to tax policy. Under this rule, the 
Congress intended that the Chief Counsel's reporting to the 
General Counsel include proposed legislation and international 
tax treaties.
    The provision provides that if there is any disagreement 
between the Commissioner and the General Counsel with respect 
to any matter on which the Chief Counsel has dual reporting to 
both the Commissioner and the General Counsel, the matter is to 
be submitted to the Secretary or the Deputy Secretary of the 
Treasury for resolution.
    The Congress intended that under the general rule, the 
Chief Counsel's reporting directly to the Commissioner include 
reporting with respect to budget, organizational structure and 
reorganizations, mission and strategic plans. In addition, the 
Congress intended that the Chief Counsel's reporting directly 
to the Commissioner include reporting with respect to all 
matters relating to the day-to-day operations of the IRS, such 
as management of the IRS and procurement.
    The provision provides that all personnel in the Office of 
the Chief Counsel are to report to the Chief Counsel (and not 
to any person at the IRS or elsewhere within the Treasury 
Department).
    The Chief Counsel has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
these duties include the duties delegated under prior law to 
the Chief Counsel as described above. If the Secretary 
determines not to delegate such specified duties to the Chief 
Counsel, such determination is subject to the same notice 
requirement applicable to changes in the delegation of 
authority with respect to the Commissioner.

                             Effective Date

    The provision is generally effective on the date of 
enactment (July 22, 1998). The provision providing that the 
Chief Counsel reports directly to the Commissioner is effective 
90 days after the date of enactment (October 20, 1998).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

C. Structure and Funding of the Employee Plans and Exempt Organizations 
 Division (``EP/EO'') (sec. 1101 of the Act and former sec. 7802(b) of 
                               the Code)

                               Prior Law

    Prior to 1974, no one specific office in the IRS had 
primary responsibility for employee plans and tax-exempt 
organizations. As part of the reforms contained in the Employee 
Retirement Income Security Act of 1974 (``ERISA''), Congress 
statutorily created the Office of Employee Plans and Exempt 
Organizations (``EP/EO'') under the direction of an Assistant 
Commissioner.<SUP>26</SUP> EP/EO was created to oversee 
deferred compensation plans governed by sections 401-414 of the 
Code and organizations exempt from tax under Code section 
501(a).
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    \26\ Former Code section 7802(b).
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    In general, EP/EO was established in response to concern 
about the level of IRS resources devoted to oversight of 
employee plans and exempt organizations. The legislative 
history of Code section 7802(b) states that, with respect to 
administration of laws relating to employee plans and exempt 
organizations, ``the natural tendency is for the Service to 
emphasize those areas that produce revenue rather than those 
areas primarily concerned with maintaining the integrity and 
carrying out the purposes of exemption provisions.'' 
<SUP>27</SUP>
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    \27\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 
(1974).
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    To provide funding for the new EP/EO office, ERISA 
authorized the appropriation of an amount equal to the sum of 
the section 4940 excise tax on investment income of private 
foundations (assuming a rate of 2 percent) as would have been 
collected during the second preceding year plus the greater of 
the same amount or $30 million.<SUP>28</SUP> However, amounts 
raised by the section 4940 excise were never dedicated to the 
administration of EP/EO, but were transferred instead to 
general revenues. Thus, the level of EP/EO funding, like that 
of the rest of the IRS, has always been dependent on annual 
Congressional appropriations to the Treasury Department.
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    \28\ Former Code section 7802(b)(2).
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                           Reasons for Change

    To facilitate the reorganization of the IRS along 
functional lines, the Congress believed that the statutory 
provision requiring the establishment of the Office of Employee 
Plans and Exempt Organizations under the direction of an 
Assistant Commissioner should be eliminated. In addition, 
because the funding formula for EP/EO set forth in section 
7802(b)(2) would, if utilized, result in an unstable level of 
funding that may bear little or no relation to the amount of 
financial resources actually required by the EP/EO division, 
the Congress believed that it was appropriate to repeal the 
funding mechanism.

                        Explanation of Provision

    The Act eliminates the statutory requirement contained in 
section 7802(b) that there be an ``Office of Employee Plans and 
Exempt Organizations'' under the supervision and direction of 
an Assistant Commissioner. However, the Congress intended that 
a comparable structure be created administratively to ensure 
that adequate resources within the IRS are devoted to oversight 
of the tax-exempt sector.
    In addition, the Act repeals the funding mechanism set 
forth in section 7802(b)(2). Thus, the appropriate level of 
funding for EP/EO is, consistent with current practice, subject 
to annual Congressional appropriations, as are other functions 
within the IRS. In this regard, however, the Congress noted 
that, given the magnitude of the sectors EP/EO is charged with 
regulating, as well as the unique nature of its mandate, an 
adequately funded EP/EO is extremely important to the efficient 
and fair administration of the Federal tax system. Accordingly, 
the Congress intended that financial resources for EP/EO should 
not be constrained on the basis that EP/EO isa ``non-core'' IRS 
function; rather, EP/EO, like all functions of the IRS, should be 
funded so as to promote the efficient and fair administration of the 
Federal tax system.
    For example, the Congress noted that it is important to 
allocate sufficient funds for EP/EO staffing adequately to 
monitor and assist businesses in establishing and maintaining 
retirement plans. In Revenue Procedure 98-22, the IRS announced 
the e