UIPL 12-87 Attachment I

TEXT, EXPLANATION AND INTERPRETATION OF UC AMENDMENTS
Made by Public Law 99-514, The Tax Reform Act of 1986

1. Section 121.  Taxation of Unemployment Compensation.

   1. Text of Amendment.

      1. Amendment to Section 85 of the Internal Revenue Code (IRC) of 1986:

         SEC. 85. UNEMPLOYMENT COMPENSATION.

         (a)  GENERAL RULE--In the case of an individual, gross income includes unemployment compensation.

         (b)  UNEMPLOYMENT COMPENSATION DEFINED.--For purposes of this section the term "unemployment compensation" means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation.

      2. Effective Date:

         SECTION 151. EFFECTIVE DATES.

         (b)  UNEMPLOYMENT COMPENSATION.--The amendment made by section 121 shall apply to amounts received after December 31, 1986, in taxable years ending after such date.

   2. Discussion. The Revenue Act of 1978 designated specific income levels at which unemployment benefits were taxable ($25,000 for joint returns or $20,000 for single returns).  The Tax Equity and Fiscal Responsibility Act of 1982 lowered the applicable income levels to $18,000 for joint returns or $12,000 for single returns.  Section 121 of the Tax Reform Act of 1986 amends the law to provide that gross income shall include all unemployment benefits.

   3. Implementation. Each claimant should be informed of this change in income tax law.  Notices should be furnished to each claimant currently filing and to new and reopening claimants as claims are filed.  Informational pamphlets should be revised when reprinted.  A brief supplemental form can be issued in the interim.

2. Section 122.  Exclusion From the Definition of "Gross Income" Certain Prizes and Awards

   1. General. Section 122 of the Tax Reform Act of 1986 amends Section 74 of the Internal Revenue Code of 1954 concerning exclusions from the definition of "gross income" of certain prizes and awards. The amendment specifies conditions which must be met to allow such exclusions. Determination of FUTA tax liability will be based upon such definition of gross income.

   2. Effective Date. The amendments made by Section 122 apply to prizes and awards granted after December 31, 1986 (Section 151(c)).

   3. mplementation. Since the Internal Revenue Service has the primary authority for administering the FUTA tax provisions it will be responsible for interpreting and applying this provision.

3. Section 1162. 2-YEAR EXTENSION OF EXCLUSIONS FOR EDUCATIONAL ASSISTANCE PROGRAMS AND GROUP LEGAL PLANS.

   1. Text of Amendments to Sections 120 and 127 of the IRC of 1986.

      (a)  EDUCATIONAL ASSISTANCE PROGRAMS.--

      (1)  EXTENSION.--Subsection (d) of section 127 (relating to termination of exclusion for amounts received under educational assistance programs) is amended by striking out "1985" and inserting in lieu thereof "1987".

      (2)  INCREASE IN AMOUNTS.--Paragraph (2) of section 127(a) is amended by striking out "$5,000" each place it appears in the text and the heading thereof and inserting in lieu thereof "$5,250".

      (b)  GROUP LEGAL PLANS.--Subsection (e) of section 120 (relating to termination of exclusion for amounts received under qualified group legal services plans) is amended by striking out "1985" and inserting in lieu thereof "1987".

      (c)  EFFECTIVE DATES.--

      (1)  SUBSECTION (a).--The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1985.

      (2)  SUBSECTION (b).--The amendment made by subsection (b) shall apply to years ending after December 31, 1985.

      (3)  CAFETERIA PLAN WITH GROUP LEGAL BENEFITS.-If, within 60 days after the enactment of this Act, an employee elects under a cafeteria plan under Section 125 of the Internal Revenue Code of 1986 coverage for group legal benefits to which Section 120 of such Code applies, such election may, at the election of the taxpayer, apply to all legal services provided during 1986. The preceding sentence shall not apply to any plan which on August 16, 1986, offered such group legal benefits under such plan.

   2. Discussion. Section 1162 of the Tax Reform Act of 1986 provides a two-year extension of the exclusion from the definition of wages under the FUTA of employer-financed educational assistance and group legal service plans (through December 31, 1987).

   3. Implementation. Since the Internal Revenue Service (IRS) has the primary authority for administering the FUTA tax provisions, it will be responsible for interpreting and applying this provision.

4. Section 1705.  APPLICABILITY OF UNEMPLOYMENT COMPENSATION TAX TO CERTAIN SERVICES PERFORMED FOR CERTAIN INDIAN TRIBAL GOVERNMENTS (This provision does not amend the FUTA).

   1. Text of Section 1705 of the Tax Reform Act of 1986:

      (a)  IN GENERAL.--For purposes of the Federal Unemployment Tax Act, service performed in the employ of a qualified Indian tribal government shall not be treated as employment (within the meaning of section 3306 of such Act) if it is service--

      (1)  which is performed--

      (A)  before, on, or after the date of the enactment of this Act, but before January 1, 1988, and

      (B)  during a period in which the Indian tribal government is not covered by a State unemployment compensation program, and

      (2)  with respect to which the tax imposed under the Federal Unemployment Tax Act has not been paid.

      (b)  DEFINITION.--For purposes of this section, the term "qualified Indian tribal government" means an Indian tribal government the service for which is not covered by a State unemployment compensation program on June 11, 1986.

   2. Discussion. Section 1705 of the Tax Reform Act of 1986 excludes from the definition of employment for Federal unemployment tax purposes services performed for a qualified Indian tribal government during the period prior to January 1, 1988 if the service was not covered by a State law on June 11, 1986.  Presently, the only Indian tribal government we are aware of that meets this requirement is the Ute tribe in Colorado.

   3. Implementation. Since the IRS has the primary authority for administering the FUTA tax collections, it will be responsible for interpreting and applying this provision.

5. Section 1706 of the Tax Reform Act of 1986.  Treatment of Certain Technical Personnel.

   1. Text of Amendment. 

      (a)  IN GENERAL.--Section 530 of the Revenue Act of 1978 is amended by adding at the end thereof the following new subsection:

      (d)  EXCEPTION.--This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work."

      (b)  EFFECTIVE DATE.--The amendment made by this section shall apply to remuneration paid and services rendered after December 31, 1986.

   2. Discussion. Section 530 of the Revenue Act of 1978 (P.L. 95-600) provides that taxpayers who in the past had a reasonable basis, under specified criteria, for not treating workers as employees may continue such treatment without incurring employment tax liability. Section 1706 of the Tax Reform Act of 1986 amends Section 530 to limit its applicability by providing that the section shall not apply to firms engaging the services of such person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. This means that the IRS will apply common-law rules to these firms in determining liability for employment taxes, including the FUTA tax.

   3. Implementation. Since the IRS has the primary authority for administering the FUTA tax provisions, it will be responsible for interpreting and applying this provision.

6. Section 1884 of the Tax Reform Act of 1986.  Technical Corrections in Federal Unemployment Tax Act.

   1. Text of Amendment:

      The Federal Unemployment Tax Act is amended as follows:

      (1)  Subparagraph (B) of section 3302(c)(2) (relating to a limit on the credit against the unemployment tax) is amended--

      (A)  By striking out "determination" the second place it appears in the material preceding clause (i) and inserting in lieu thereof  "denominator", and

      (B) in clause (i)--

      (i)  by striking out "percent" immediately preceding the comma at the end thereof, and

      (ii)  by inserting "percent" after "2.7".

      (2)  Subparagraph (A) of section 3302(f)(8) (relating to a partial limitation on the reduction of the credit against the unemployment tax) is amended by striking out "1987" and inserting in lieu thereof "1986".

      (3)  Clause (i) of section 3306(o)(1)(A) (relating to crew leaders who are registered or provide specialized agricultural labor) is amended by striking out "Farm Labor Contractor Registration Act of 1963" and inserting in lieu thereof "Migrant and Seasonal Agricultural Worker Protection Act".

   2. Discussion. Section 1884 of the Tax Reform Act of 1986 amends Section 3302(f)(8), FUTA, so that the partial limitation on the reduction of the credit against the unemployment tax does not apply after 1985.

   3. Implementation. No changes are required in State law or procedures except that State laws referring to the "Farm Labor Contractor Registration Act," which no longer exists, may want to incorporate reference to the "Migrant and Seasonal Agricultural Worker Protection Act."  This change should be considered where State laws make reference to the "Farm Labor Contractor Registration Act" concerning agricultural coverage requirements or in its definition of a crew leader.