Economic Recovery Tax Act of 1981

(Conference report filed in House, H. Rept. 97-215)

Economic Recovery Tax Act of 1981 - Title I: Individual Income Tax Provisions - Subtitle A - Tax Reductions - Amends the Internal Revenue Code to reduce individual and estate and trust income tax rates for 1982, 1983, 1984 and thereafter. Reduces the highest marginal tax rate for all types of income from 70 to 50 percent, effective in 1982 (thus repealing the provisions limiting the income tax rate on personal service income to 50 percent). Reduces the alternative minimum tax on individuals and the personal holding company tax to correspond with the reductions in the highest marginal tax rates. Establishes a maximum tax rate on long-term capital gains of 20 percent for sales and exchanges occurring after June 9, 1981.

Allows a tax credit equal to one and one-fourth percent of an individual's regular tax liability for taxable year 1981. Revises withholding requirements to provide for withholding reductions of five percent in 1981, ten percent in 1982, and ten percent in 1983. Authorizes the Secretary of the Treasury to issue regulations permitting wage earners to increase or decrease their withholding allowances.

Allows married individuals filing a joint return an income tax deduction from gross income of ten percent of the lesser of $30,000 or the earned income of the lower income spouse. Specifies that the rate of such deduction will be five percent, instead of ten, in taxable year 1982.

Requires annual cost of living adjustments, based on the Consumer Price Index, to individual income tax rates, the personal tax exemption, withholding requirements, and minimum income tax return amounts, beginning in 1985.

Subtitle B: Income Earned Abroad - Increases from $20,000 to $75,000 in 1982 (with annual adjustments up to $95,000 in 1986 and thereafter) the earned income exclusion for U.S. citizens working abroad who are bona fide residents of a foreign country. Repeals the requirement that, as a condition of their employment, such individuals reside in a hardship area. Reduces from 17 to 11 months the residency requirement for such exclusion. Permits the tax exclusion of the housing costs of such individuals in the amount by which the taxpayer's housing costs exceed 16 percent of a GS-14, step 1 salary level for a Federal employee. Permits a tax deduction for excess housing costs which are not excludable.

Waives the residency requirements for the foreign earned income exclusion if the Secretary determines that the taxpayer would otherwise have met the residency requirement but for the occurrence of civil unrest, war, or other adverse conditions precluding the normal conduct of business. Repeals the existing income tax deduction for certain living expenses of U.S. citizens abroad.

Provides for an income tax exclusion for the value of employer-provided lodging in a camp located in a foreign country in cases where satisfactory housing is not generally available.

Amends the Foreign Earned Income Act of 1978 to revise reporting requirements to require the Secretary and certain Federal Government agencies to report to specified congressional committees on the operation and effects of the foreign earned income exclusion quadrennially beginning after the enactment of this Act.

Subtitle C: Miscellaneous Provisions - Permits taxpayers who do not itemize income tax deductions to claim a deduction from gross income for a specified percentage of their charitable contributions. Terminates such deduction after 1986.

Increases from 18 months to two years the rollover period for the nonrecognition of gain from the sale of a principal residence.

Increases from $100,000 to $125,000 the amount of the one-time exclusion of gain from the sale of a principal residence by taxpayers age 55 and older. Makes such increase applicable to sales after July 30, 1981.

Increases the child and dependent care income tax credit to 30 percent of employment-related expenses for taxpayers with incomes of $10,000 or less, beginning in 1982. Reduces the rate of such credit, but not below 20 percent, by one percent for each $2,000 of taxpayer income in excess of $10,000. Increases the maximum dollar amount of such credit.

Allows the child and dependent care income tax credit for expenses incurred outside the taxpayer's home and for payments to dependent care centers which comply with applicable State and local regulaions.

Excludes from the gross income of employees the value of child and dependent care provided by their employers under a written non-discriminatory dependent care assistance program.

Allows an income tax deduction for adoption expenses, including fees, court costs, attorneys' fees and other necessary expenses. Limits the amount of such deduction to $1,500 for a taxable year.

Decreases the imputed interest rate for installment land sales between family members from ten to seven percent for sales after June 30, 1981. Specifies that the seven percent rate applies only to land sales up to $500,000.

Allows State legislators an income tax deduction for travel expenses incurred while engaged in legislative business away from their home district. Limits such deduction to 110 percent of the daily amount allowable for State employees or the daily amount allowable for Federal employees away from home but serving in the United States. Disallows such deduction for State legislators whose district residence is within 50 miles from the State capitol building.

Provides that the taxable income of a Congressional candidate's principal campaign committee be taxed at the generally applicable corporate income tax rate (rather than the highest corporate income tax rate as under present law).

Title II: Business Incentive Provisions - Subtitle A: Cost Recovery Provisions - Amends the Internal Revenue Code to revise the method for determining useful lives of business assets for purposes of computing allowable depreciation deductions. Replaces the asset depreciation range (ADR) method with a schedule of capital cost recovery periods for four classes of business property.

Establishes cost recovery periods for the following classes of business property: (1) three-year property, including certain tangible personal property with a present class life of four years or less or used for research or experimentation and certain race horses; (2) five-year property, including certain tangible personal property which is not three-year property, ten-year property or 15-year public utility property; (3) ten-year property, including certain public utility property with a present class life of more than 18 but less than 25 years, and certain real property with a present class life of 12.5 years or less, railroad tank cars, manufactured homes, and certain coal utilization property; (4) 15-year public utility property, including all such property with a present class life of more than 25 years. Sets forth separate recovery schedules for property placed in service before 1985 and for property placed in service in 1985 and thereafter.

Establishes as a separate class of business property 15-year real property which does not have a present class life of 12.5 years or less. Directs the Secretary to prescribe a schedule of recovery for such property which provides for a 15-year recovery period and utilizes the 175 percent (200 percent for low-income housing) declining balance method of depreciation in the early years of recovery with a switch to the straight-line method in the remaining years.

Permits taxpayers to elect to use the straight-line method of depreciation with specified other recovery periods in lieu of the prescribed accelerated method.

Defines "unadjusted basis" for purposes of determining gain or loss on the disposition of accelerated recovery property. Sets forth rules for the nonrecognition of gain on the disposition of assets from mass asset accounts.

Excludes from eligibility for accelerated cost recovery the following types of property: (1) property placed in service before January 1, 1981; (2) property depreciable on a basis other than time; (3) public utility property for which the normalization method of accounting is not used; and (4) certain property placed in service prior to 1981 which is transferred or leased in a transaction occurring after 1981.

Revises component depreciation rules to provide that the taxpayer must utilize the same recovery period and method of depreciation for a building and its structural components. Allows separate depreciation of substantial improvements.

Provides special rules for the depreciation of recovery property used predominantly outside of the United States.

Repeals the retirement-replacement-betterment methods of depreciation allowed for certain types of property. Specifies that such property shall be depreciated using a ratable method.

Sets forth rules for determining the eligibility of lessors of recovery property for accelerated depreciation deductions and for the investment tax credit. Includes mass commuting vehicles as qualified leased property. Directs the Secretary to prescribe leasing regulations.

Specifies that the salvage value of cost recovery property shall not be taken into account in computing allowable depreciation.

Provides special rules for determining allowable deductions for recovery property in the case of certain corporate transfers and liquidations.

Provides that gain on the disposition of single purpose agricultural or horticultural facilities and petroleum product storage facilities shall be treated as ordinary income to the extent of prior depreciation taken.

Repeals the Secretary's authority to prescribe regulations on the treatment of repair allowances as presently deductible business expenses.

Permits a taxpayer to elect to expense (i.e. currently deduct) the cost of new or used tangible personal property used in the taxpayer's business during a taxable year in lieu of current provisions permitting additional first year depreciation. Sets the amount of such deduction at $5,000 in 1982 with biennial increments of $2,500 up to $10,000 in 1986.

Requires the recapture as ordinary income of excess depreciation from recovery property which is subsequently sold or exchanged.

Treats the accelerated cost recovery deduction as an item tax preference from purposes of the minimum tax.

Revises the method of computing the adjustment to earnings and profits of corporations for depreciation. Specifies that such adjustments shall be determined using the straight-line method of depreciation over prescribed extended recovery periods.

Extends the carryover periods for certain net operating losses and tax credits.

Subtitle B: Investment Tax Credit Provisions - Revises the applicable percentage of the investment tax credit for recovery property placed in service after January 1, 1981 to: (1) 100 percent of the basis of ten-year, five-year recovery property, or 15 year public utility property; and (2) 60 percent of the basis of three-year recovery property.

Revises the progress expenditure rules to eliminate the useful life requirement for depreciable property being constructed by or for a taxpayer for use in trade or business (qualified process expenditure property) and to apply to such property the revised percentages for determining the investment tax credit under this Act.

Qualifies petroleum product storage facilities for the investment tax credit.

Applies the at-risk rules to the investment tax credit for property placed in service after February 18, 1981.

Prescribes rules for the tax treatment of three-party financing leases and sale-leaseback transactions between corporate taxpayers. Applies such rules for property placed in service after December 31, 1980.

Increases the investment tax credit for qualified rehabilitation expenditures based upon the age of a building or its certification as a historic structure. Repeals the special 60-month amortization rules for certified historic structures and rules permitting accelerated depreciation for rehabilitated certified historic structures.

Increases the limit on the amount of used property eligible for the investment tax credit.

Provides that the present rule denying the investment tax credit for property leased to tax-exempt organizations or governmental units shall not apply to the portion of the basis of a building attributable to qualified rehabilitation expenditures.

Subtitle C: Incentives for Research and Experimentation - Allows a nonrefundable income tax credit for 25 percent of the qualified research expenses made by a taxpayer in carrying on any trade or business to the extent that such expenses exceed the average amount of the taxpayer's expenses in a specified base period. Defines "qualified research expenses" as an amount paid or incurred for in-house and contract research. Allows such credit for basic research contracted out to colleges, universities, and tax-exempt scientific research institutes. Excludes from eligibility for such credit research conducted outside the United States, research in the social sciences or humanities, and research funded by any other person or governmental entity. Provides for a three-year carryback and a 15-year carryover of any unused credit amounts. Terminates such credit after 1985.

Revises the limits on the allowable deduction for corporate charitable contributions of inventory property which is contributed to an institution of higher education and used for research purposes. Sets forth eligibility requirements for such deduction, including the following: (1) that such property be scientific equipment or apparatus; (2) that the donee use such property in the United States; and (3) that the use of the property be for research in the physical or biological sciences. Excludes certain small business corporations, personal holding companies, and service organizations from eligibility for such increased deduction.

Suspends regulations relating to the allocation of research and experminental expenditures paid or incurred for activities conducted in the United States. Requires the Secretary to study and report to Congress on the effect such regulations would have on research and experimental activities conducted in the United States.

Subtitle D: Small Business Provisions - Reduces the corporate income tax for corporations with taxable income of $50,000 or less.

Increases from $150,000 to $250,000 the amount which corporations may accumulate for reasonable needs of the business without being subject to the tax on accumulated earnings. Disallows such increase for corporations performing services in the areas of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

Increases the allowable number of shareholders in a Subchapter S corporation from 15 to 25. Permits qualified trusts to be shareholders of Subchapter S corporations. Allows a beneficiary of such a trust to elect to be treated as the owner of stock in any Subchapter S corporation.

Terminates the status of a qualified Subchapter S trust at any time during which the trust owns no Subchapter S corporation stock or the corporation ceases to qualify as such.

Revises the Last-In-First-Out (LIFO) inventory accounting rules. Directs the Secretary to prescribe regulations permitting the use of certain governmental indexes in inventorying goods under such method. Allows businesses with average gross receipts of $2,000,000 for three years (ending with the taxable year) to elect one inventory pool for purposes of dollar value LIFO inventory accounting. Permits three-year averaging of inventory value for taxpayers who elect LIFO accounting. Requires the Secretary to study and report to Congress on simplified methods of tax accounting for inventory.

Subtitle E: Savings and Loans Associations - Sets forth special rules for the tax treatment of reorganizations involving financially troubled thrift institutions.

Permits tax-free reorganizations of building and loan associations, cooperative banks, and mutual savings banks which are subject to the jurisdiction of the Federal Home Loan Bank Board or the Federal Savings and Loan Insurance Corporation without regard to judicially-created requirements as to the distribution of stocks and securities of the transferee corporation. Requires the mutual acquisition of assets and liabilities between the transferor and transferee corporations.

Specifies rules for the limitation of net operating loss carryovers for certain financial institutions in reorganization.

Exempts distributions to the Federal Savings and Loan Insurance Corporation in redemption of certain interests in a domestic building and loan association from recapture requirements for distributions out of excess bad debt reserves.

Excludes from the gross income of a domestic building and loan association all money or property contributed to such association by the Federal Savings and Loan Insurance Corporation under its financial assistance program without reduction in the basis of the association's property.

Provides for special tax treatment of mutual savings banks which convert to stock associations.

Subtitle F: Stock Options, etc. - Exempts from income taxation any income resulting from the transfer of stock to an individual exercising a stock option under an incentive stock option plan. Specifies that the optionee may not dispose of stock within two years after an option is granted or within one year after the transfer of shares. Requires that the optionee be an employee of the corporation granting such option at all times during the period after an option is granted and until three months before such option is exercised.

Limits the amount of the aggregate fair market value of the stock for which any employee may be granted such stock options in any year. Provides for a carryover of any unused amount of such limit.

Provides that, for purposes of the taxation of property transferred to an employee as compensation for services, such property shall be considered subject to a substantial risk of forfeiture and not transferable if the sale of such property could subject a person to a suit under certain provisions of the Securities and Exchange Act of 1934 or if transfer of the property is restricted under the pooling-of-interests accounting rules.

Subtitle G: Miscellaneous Provisions - Extends the targeted jobs credit through 1982. Extends eligibility for such credit to registrants of the WIN work incentive program, recipients of Aid to Families with Dependent Children and involuntarily terminated CETA employees. Limits eligibility for the cooperative education programs students who are economically disadvantaged. Revises the certification requirements for such credit.

Eliminates the age requirement applicable to Vietnam veterans. Repeals provisions limiting qualifying first-year wages to 30 percent of the unemployment insurance wages paid by an employer. Disallows such credit with respect to amounts paid to certain relatives of the taxpayer or shareholders of the taxpayer corporation.

Extends permanently the exemption of low-income housing from the requirement that construction period interest and taxes be amortized (instead of expensed as an immediate deduction).

Increases the limitation on a corporation's charitable contributions deduction from five to ten percent of taxable income, effective in 1982.

Increases the amount of low-income housing rehabilitation expenditures eligible for amortization from $20,000 to $40,000 per unit if the rehabilitation is conducted under a program certified by the Secretary of Housing and Urban Development or by a State or local government. Requires that the tenants occupy the units as their principal residence and that the program provide for the sale of the units to the tenants at a limited profit to the seller.

Increases the ceiling on the deductibility of awards and gifts given by employers to their employees from $100 to $400. Allows deductible employee awards for productivity (in addition to length of service and safety achievements). Permits a deduction for employee awards given as a part of a written plan or program which does not discriminate in favor of officers' shareholders, or highly compensated employees. Limits the deduction for such award plans.

Provides a tax deduction for the loss of a motor carrier operating authority held by the taxpayer on July 1, 1980. Allows such deduction to be taken ratably over a 60-month period.

Increases the percentage of eligible outstanding loans used to determine the necessary balance of a bank's reserve for losses on loans for purposes of computing the allowable bad debt deduction.

Title III: Savings Provisions - Subtitle A: Interest Exclusion - Excludes from gross income interest received on a savings certificate issued after September 30, 1981, and before January 1, 1983, by a qualified bank, savings and loan institution, credit union, or industrial loan association or bank. Disallows the issuance of tax-exempt savings certificates by foreign branches and international banking facilities of U.S. banks. Requires that such certificates be made available in $500 denominations, have a maturity of one year, and have an investment yield which does not exceed 70 percent of the Treasury bill rate. Permits such exclusion only to the extent that the interest income received by the taxpayer exceeds the amount of such income received in the previous year, up to $1,000 ($2,000 for joint returns). Requires institutions issuing such certificates to invest 75 percent of the proceeds from such certificates or other qualified net savings in residential financing and agricultural loans. Requires the Secretary to report to Congress on such exemption's effectiveness in generating additional savings.

Provides for the exclusion from gross income of 15 percent of a maximum of $3,000 of net interest income (interest income less deductible interest expenses), beginning in 1985. Repeals the aggregate interest and dividend tax exclusion enacted by the Crude Oil Windfall Profit Tax of 1980 and restores the prior law allowing a $100 exclusion of dividends.

Subtitle B: Retirement Savings Provisions - Increases the amount of the income tax deduction for contributions to an individual retirement account (IRA) to the lesser of $2,000 or 100 percent of compensation. Increases the dollar limit for contributions to a spousal IRA to $2,250. Permits employees who are covered by employer-sponsored pension plans to claim the deduction for contributions to an IRA or for voluntary contributions to the employer plan.

Increases the income tax deduction for employer contributions to a simplified employee pension plan to $15,000 or 15 percent of employee compensation. Permits employees to make deductible contributions to a simplified employee pension plan up to $2,000 regardless of the amount of the employer's contribution for the taxable year.

Allows a divorced spouse a tax deduction for contributions to a spousal IRA established by the individual's former spouse at least five years before the divorce if the former spouse contributed to the IRA for at least three of the five years preceding the divorce. Limits such deduction to the lesser of $1,125 or the sum of the divorced spouses' compensation and alimony includible in gross income. Repeals existing provisions relating to the tax deduction for retirement savings for certain married individuals. Requires that the maximum deduction for retirement savings contributions by married individuals be computed separately for each individual.

Increases the amount of the income tax deduction for contributions to a self-employed retirement plan to the lesser of $15,000 or 15 percent of earned income. Increases the amount of earned income upon which the deduction may be computed from $100,000 to $200,000.

Revises rules relating to the taxation of the beneficiaries of qualified bond purchase plans and for the rollover of the proceeds from redemption of such bonds into IRA's and annuities.

Prohibits the investment of IRA funds in collectibles (i.e. art works, gems, coins, etc.).

Subtitle C: Reinvestment of Dividends in Public Utilities - Permits the exclusion from income of up to $1,500 ($3,000 for joint returns) per year of public utility stock dividends by shareholders who choose to receive a common stock dividend rather than other property under a qualified plan established by a domestic public utility corporation. Requires that the stock be newly issued common stock and that the number of shares distributed to any shareholder be determined by a reference to a value which is not less than 95 and not more than 105 percent of the stock's fair market value before distribution. Disallows such exclusion if the corporation has repurchased any of its stock within one year before or after the distribution date unless the corporation establishes a business purpose for such purchase. Excludes trusts and estates, nonresident aliens, and five percent shareholders from eligibility for such exclusion. Provides for the recapture of tax benefits upon disposition of such stock. Terminates such exclusion after 1985.

Subtitle D: Employee Stock Ownership Provisions - Revises provisions allowing an income tax credit for contributions to employee stock ownership plans. Replaces the existing investment tax credit for such plans with an income tax credit for corporate employers equal to a specified percentage of compensation paid to employees who purchase stock pursuant to a qualified plan for taxable years 1983 through 1987.

Allows an income tax deduction for unused employee stock ownership credits which expire at the close of a taxable year. Repeals the employer plan percentage for the investment tax credit allowed an employer for contributions to an ESOP after 1982.

Allows employees a separate tax deduction for amounts paid for the principal or interest on a loan used to purchase employer securities. Limits the deduction for payment of the loan principal to 25 percent of the compensation of all employees under the plan.

Permits a tax credit ESOP, where ownership of all outstanding employer securities is restricted to employees or to a tax-deferred compensation plan, to distribute benefits in cash although it does not permit a participant to exercise the right to demand the benefits be distributed in employer securities.

Qualifies as a tax- deferred compensation plan a stock bonus plan which provides for the exercise of a put option.

Allows banks whose securities are not readily tradable to reduce the period for exercise of a put option to a period of at least 60 days following the date of distribution of employer stock and an additional such period in the following plan year.

Permits distributions from a tax credit ESOP of employer securities allocated to a participant's account in the case of: (1) death, disability, or separation from service; (2) a transfer of a participant to an acquiring employer pursuant to a sale of the assets of the employer corporation or a sale of the stock of a subsidiary; or (3) the disposition of a corporation's stock in a subsidiary which employs the participant.

Removes the present requirement that employees must be able to vote stock allocated to their accounts under a defined contribution plan in the case of certain profit-sharing plans.

Title IV: Estate and Gift Tax Provisions - Subtitle A: Increase in Unified Credit; Rate Reduction; Unlimited Marital Deduction - Amends the Internal Revenue Code to increase the unified credit against the estate and gift taxes from $47,000 to $192,800 by specified annual increments through 1987. Increases from $175,000 to $600,000 by specified annual increments through 1987, the minimum gross estate requirement for filing of a return.

Reduces the maximum estate and gift tax rates to 50 percent by specified annual decrements through 1985.

Repeals the existing limitations on the marital deduction for gift and estate taxes. Revises the definition of "qualified joint interest" for purposes of the 50 percent valuation of interests in property held by the decedent and the decedent's spouse. Qualifies certain terminable interests for the marital deduction. Requires the inclusion in the gross estate any property in which the decedent had an income interest for life if: (1) the marital deduction was allowed with respect to the transfer of such property to the decedent; and (2) the disposition of the income interest in such property is not considered a transfer of such property under other provisions of the Internal Revenue Code.

Provides that any disposition of an income interest for life in any property shall be treated as a transfer of such property if the marital deduction was allowed with respect to the transfer of such property to the donor. Provides for a right of recovery of estate and gift tax in the case of certain marital deduction property.

Subtitle B: Other Estate Tax Provisions - Increases the maximum reduction (currently $500,000) in fair market value under the special estate tax valuation based on use for certain farms and small businesses to $750,000 in 1983 and thereafter.

Allows property put to a qualified use by a family member to qualify for special use valuation.

Qualifies estates of decedents who were disabled or retired for the special valuation of certain farms based on use if such decedents materially participated in the operation of the farm for five out of eight years preceding the year in which they became disabled or eligible for disability benefits under title II (Old Age, Survivors and Disability Insurance) of the Social Security Act.

Permits the spouse of a decedent to use such valuation if the spouse takes over active managements upon the decedent's death.

Reduces from 15 to ten years the length of time a qualified property must be held and put to a qualified use following the decedent's death before it can be disposed of without incurring a recapture of estate tax benefits. Permits active management rather than material participation as a test for qualification of the estate for spouses, children under 21, students, and disabled individuals who receive property from a decedent who qualified for special use valuation.

Allows the like kind exchange of property without loss of special use valuation eligibility. Allows valuation based on net crop share rentals as an alternative method of valuing farms. Repeals the requirement that an heir elect special treatment for involuntary conversions of qualified real property, thus making such treatment automatic upon such conversion.

Includes in the value of woodlands which qualify for the special use valuation the value of the trees growing on such property. Requires the recapture of estate tax benefits upon the disposition or severance of standing timber on such property.

Permits an increase in basis of specially valued property on which a recapture tax is paid. Revises the definition of "family member" for purposes of the special use valuation. Qualifies certain property transfered to discretionary trust and certain property purchased from a decedent's estate for such valuation.

Requires that an election to specially value property be made on the decedent's estate tax return (rather than by the due date of that return as under present law).

Provides that any period of ownership, qualified use, or material participation in the operation of a farm or other business by the decedent or family member shall be applied to qualified replacement property in the case of a like-kind exchange or involuntary conversion of the original property.

Limits the recognition of gain to an estate on the transfer of special use valuation property to the heir of such estate to the extent that the fair market value of such property exceeds the value of such property for estate tax purposes computed without regard to the special use valuation rules.

Modifies the alternate extension of time for payment of the estate tax where the estate consists largely of an interest in a closely held business to: (1) allow an installment payment election if the value of the interest in the closely held business is 35 percent of the value of the gross estate; (2) revise the formula regarding the inclusion in the value of a gross estate of interests in two or more closely held businesses; (3) increase to 50 percent the value of an interest disposed of which will accelerate the payment of tax; (4) permit payment, but with a penalty of an installment within six months after the due date; and (5) provide that payment of tax will not be accelerated upon the death of decedent's heir or a subsequent transferee if the interest passes to a family member.

Provides that, for purposes of the estate and gift tax charitable deduction, a work of art and the copyright on such work of art shall be treated as separate properties.

Provides that the gifts made within three years of a decedent's death shall not be included in the gross estate of a decedent dying after 1981. Disallows such exclusion for certain transfers. Allows a step-up in basis for appreciated property acquired by the decedent by gift within one year of death.

Allows a disclaimer of an interest in property for estate tax purposes in specified circumstances where a written transfer of the transferor's entire interest in the property is executed and the transfer meets certain other requirements.

Repeals the estate tax deduction for bequests to certain minor children.

Postpones the effective date for the generation-skipping transfer tax in the case of certain trusts created by wills or certain revocable trusts.

Provides a special tax credit against the estate taxes imposed on the estate of a specified individual in an amount equal to the lesser of such tax, the fair market value of certain property transferred by such estate to the Smithsonian Institution, or $700,000.

Subtitle C: Other Gift Tax Provisions - Increases from $3,000 to $10,000 the annual gift tax exclusion.

Permits the payment of gift taxes annually rather than quarterly.

Title V: Tax Straddles - Provides that any loss from the holding of one or more positions in certain securities shall be recognized for income tax deduction purposes, only to the extent that it exceeds the unrealized gain (gain which would be recognized if the position had been sold at its fair market value) from the holding of one or more positions which: (1) were acquired before the disposition resulting in the loss; (2) were offsetting positions; and (3) were not part of an identified straddle as of the end of the taxable year. Defines "offsetting position" to mean that there is a substantial reduction of the taxpayer's risk of loss from holding any position with respect to actively traded securities because the taxpayer also holds one or more other positions with respect to such securities (commonly referred to as a "straddle").

Creates a rebuttable presumption that two or more positions are offsetting, for purposes of the definition of a straddle, if: (1) they are in the same personal property, although they may be in a substantially altered form; (2) they are in debt instruments of a similar maturity or certain other debt instruments; (3) they are sold or marketed as such; (4) the aggregate margin requirement for such positions is lower than the sum of the margin requirement for each such position; or (5) there are other factors, as determined by the Secretary pursuant to regulations, which indicate that such positions are offsetting.

Imposes a penalty upon a taxpayer who fails to report each position held with respect to which there is unrealized gain.

Disallows as a deduction, and makes chargeable to capital account, interest and carrying charges with respect to personal property which is part of a straddle.

Treats as sold at its fair market value any regulated futures contract held by the taxpayer at the close of the taxable year. Treats gain or loss with respect to such a contract as: (1) short-term capital gain or loss, to the extent of 40 percent of the gain or loss; and (2) long-term capital gain or loss, to the extent of 60 percent of the gain or loss. Exempts from the loss recognition provisions of this title any straddle consisting entirely of offsetting positions which are regulated futures contracts. Defines a "regulated futures contract" as a contract: (1) which requires delivery of personal property; (2) with respect to which amounts deposited and withdrawn depend on a system of marking to market; and (3) which is traded on or subject to the rules of certain boards of trade.

Limits the three-year carryback of losses from regulated futures contracts to an amount which: (1) does not exceed the lesser of the capital gain net income from regulated futures contracts or all of the capital gain net income; and (2) does not increase or produce a net operating loss.

Provides that obligations of the United States, a State or local government, or U.S. possession issued on a discount basis and payable without interest in less than one year shall be treated as capital assets in determining tax consequences of gain or loss with respect to such obligations. Treats as ordinary income certain amounts of gain realized from the sale or exchange of short-term government obligations.

Excludes from capital gains tax treatment gain by a securities dealer from the sale or exchange of any security, unless the security was clearly identified in the dealer's records before the close of the day on which it was acquired as a security held for investment (currently, before the end of the 30th day after the date of acquisition).

Extends capital gains treatment to gains or losses attributable to the termination of a right or obligation with respect to actively traded securities and which is or would be a capital asset in the hands of the taxpayer.

Title VI: Energy Provisions - Subtitle A: Changes in Windfall Profit Tax - Increases from $1,000 to $2,500 the amount of the credit for any windfall profit tax paid in connection with taxable crude oil which is attributable to a qualified royalty interest and which is removed from the premises during 1981. Exempts royalty interests from the windfall profit tax after 1982 in an amount limited per quarter to the number of days in a quarter multiplied by two barrels for 1982 through 1984, and by three barrels in 1985 and thereafter.

Reduces from 30 to 15 percent the amount of the windfall profit tax on newly discovered tier three oil by specified annual decrements through 1986.

Exempts from the windfall profit tax, beginning in 1983, the stripper well oil of independent producers. Specifies that exempt stripper well oil does not include production attributable to an interest in any property which after July 22, 1981, was owned by a person other than an independent producer.

Exempts from the windfall profit tax oil produced from interests held by or for a residential child care agency. Defines such an agency as a tax-exempt charitable organization operated primarily for the residential placement, care, or treatment of delinquent, dependent, neglected, or handicapped children.

Subtitle B: Miscellaneous Provision - Specifies that the income tax credit for the production of natural gas from nonconventional sources shall apply to natural gas sold during the taxable year only if such gas is sold at a lawful price which is determined without regard to ceiling prices under the Natural Gas Policy Act of 1978.

Title VII: Administrative Provisions - Subtitle A: Prohibition of Disclosure of Audit Methods - Provides that Federal law shall not be construed to require the disclosure of methods for the selection of tax returns for audits.

Subtitle B: Changes in Interest Rates for Overpayments and Underpayments - Revises rules for the determination of the interest rate on overpayment or underpayments of taxes. Changes such rate of interest from 90 percent to 100 percent of the prime rate.

Subtitle C: Changes in Certain Penalties and in Requirements Relating to Returns - Changes certain penalties for providing false information with respect to the withholding of tax. Requires an addition to tax for underpayments of tax by individuals and certain corporations attributable to a valuation overstatement that results in an underpayment of taxes of at least $1,000. Requires an addition to tax for underpayments attributable to negligent or intentional disregard of rules or regulations.

Increases penalties for failure to file certain returns or furnish certain registration statements. Increases the penalty for overstated deposit claims.

Provides that no declaration of estimated tax by individuals is required if such estimated tax is less than a specified amount.

Subtitle D: Cash Management - Increases from 60 to 80 percent the amount in total tax liability which certain large corporations must pay in estimated taxes. Phases in such increase over a three-year period.

Subtitle E: Financing of Railroad Retirement System - Increases the rate of the employer and employee railroad retirement taxes. Allows the Railroad Retirement Account to borrow funds from the Treasury if the balance of such Account is insufficient to pay annuity amounts due. Revises the definition of "compensation" for purposes of the railroad retirement taxes.

Subtitle F: Filing Fees - Increases from $10 to $60 the amount of the filing fee the Tax Court is authorized to impose for the filing of any petition.

Title VIII: Miscellaneous Provisions - Subtitle A: Extensions - Extends through December 31, 1983, the prohibition on the issuance of regulations on the taxation of fringe benefits. Extends through December 31, 1984, the exclusion from an employee's income of employer contributions to and benefits provided under a qualified group legal services plan.

Subtitle B: Tax-Exempt Obligations - Permits the exclusion from gross income of interest on certain industrial development bonds if the proceeds of such bonds are used to finance qualified mass commuting vehicles which are leased to a publicly-owned transportation system. Terminates such exclusion after 1984.

Provides that bonds issued by a volunteer fire department to finance the acquisition, construction, reconstruction, or improvement of firefighting property shall be treated as obligations of a local government and the interest on such bonds shall be excluded from gross income. Provides that a volunteer fire department qualifies for such tax treatment of its bonds if it: (1) is organized and operated to provide firefighting services in an area which does not have any other firefighting services; and (2) is required by local government to furnish firefighting services. Applies such tax treatment retroactively for certain obligations held by the First Bank and Trust Company of Indianapolis, Indiana, which were issued during a specified period.

Subtitle C: Excise Taxes - Extends the excise tax on certain communications services through 1985.

Exempts from unemployment taxes the services of fishing boat crew members if the remuneration for such services is a share of the boat's catch and if the crew is less than ten individuals.

Reduces the amount of income a private foundation is required to distribute annually. Revises the definition of "operating foundation" for purposes of the taxation of such foundations for failure to distribute income.

Subtitle D: Other Provisions - Sets forth rules for the tax treatment of the sales of U.S. real property by foreign investors.