annuity contract for the benefit of such employee were treated as a defined contribution plan maintained by the employer.". (d) EFFECTIVE DATE.— (1) GENERAL RULE.-The amendments made by this section shall apply to years beginning after December 31, 1975. The Secretary of the Treasury shall prescribe such regulations as may be necessary to carry out the provisions of this paragraph. (2) TRANSITION RULE FOR DEFINED BENEFIT PLANS.-In the case of an individual who was an active participant in a defined benefit plan before October 3, 1973, if— 88 STAT. 987 26 USC 415 note. (A) the annual benefit (within the meaning of section 415(b) (2) of the Internal Revenue Code of 1954) payable Ante, p. 979. to such participant on retirement does not exceed 100 percent of his annual rate of compensation on the earlier of (i) October 2, 1973, or (ii) the date on which he separated from the service of the employer, (B) such annual benefit is no greater than the annual benefit which would have been payable to such participant on retirement if (i) all the terms and conditions of such plan in existence on such date had remained in existence until such retirement, and (ii) his compensation taken into account for any period after October 2, 1973, had not exceeded his annual rate of compensation on such date, and (C) in the case of a participant who separated from the service of the employer prior to October 2, 1973, such annual benefit is no greater than his vested accrued benefit as of the date he separated from the service, then such annual benefit shall be treated as not exceeding the limitation of subsection (b) of section 415 of the Internal Revenue Code of 1954. SEC. 2005. TAXATION OF CERTAIN LUMP SUM DISTRIBUTIONS. (a) TREATMENT OF TOTAL DISTRIBUTIONS.-Section 402 (e) (relat- 26 USC 402. ing to certain plan terminations) is amended to read as follows: (e) TAX ON LUMP SUM DISTRIBUTIONS.— (1) IMPOSITION OF SEPARATE TAX ON LUMP SUM DISTRIBUTIONS.— "(B) AMOUNT OF TAX.-The amount of tax imposed by "(C) INITIAL SEPARATE TAX.-The initial separate tax for any taxable year is an amount equal to 10 times the tax which would be imposed by subsection (c) of section 1 if the recipient were an individual referred to in such subsection and the taxable income were an amount equal to one-tenth of the excess of "(i) the total taxable amount of the lump sum distribution for the taxable year, over "(ii) the minimum distribution allowance. 88 STAT. 988 26 USC 401. 26 USC 671. Regulations. 26 USC 403. "(D) MINIMUM DISTRIBUTION ALLOWANCE. For purposes of this paragraph, the minimum distribution allowance for the taxable year is an amount equal to "(i) the lesser of $10,000 or one-half of the total taxable amount of the lump sum distribution for the taxable year, reduced (but not below zero) by "(ii) 20 percent of the amount (if any) by which such total taxable amount exceeds $20,000. "(E) LIABILITY FOR TAX.-The recipient shall be liable for the tax imposed by this paragraph. "(2) MULTIPLE DISTRIBUTIONS AND DISTRIBUTIONS OF ANNUITY CONTRACTS.-In the case of any recipient of a lump sum distribution for the taxable year with respect to whom during the 6-taxable-year period ending on the last day of the taxable year there has been one or more other lump sum distributions after December 31, 1973, or if the distribution (or any part thereof) is an annuity contract, in computing the tax imposed by paragraph (1) (A), the total taxable amounts of all such distributions during such 6-taxable-year period shall be aggregated, but the amount of tax so computed shall be reduced (but not below zero) by the sum of "(A) the amount of the tax imposed by paragraph (1) (A) paid with respect to such other distributions, plus "(B) that portion of the tax on the aggregated total taxable amounts which is attributable to annuity contracts. For purposes of this paragraph, a beneficiary of a trust to which a lump sum distribution is made shall be treated as the recipient of such distribution if the beneficiary is an employee (including an employee within the meaning of section 401 (c) (1)) with respect to the plan under which the distribution is made or if the beneficiary is treated as the owner of such trust for purposes of subpart E of part I of subchapter J. In the case of the distribution of an annuity contract, the taxable amount of such distribution shall be deemed to be the current actuarial value of the contract, determined on the date of such distribution. In the case of a lump sum distribution with respect to any individual which is made only to two or more trusts, the tax imposed by paragraph (1) (A) shall be computed as if such distribution was made to a single trust, but the liability for such tax shall be apportioned among such trusts according to the relative amounts received by each. The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph. "(3) ALLOWANCE OF DEDUCTION. The ordinary income portion of a lump sum distribution for the taxable year shall be allowed as a deduction from gross income for such taxable year, but only to the extent included in the taxpayer's gross income for such taxable year. "(4) DEFINITIONS AND SPECIAL RULES.— "(A) LUMP SUM DISTRIBUTION. For purposes of this section and section 403, the term 'lump sum distribution' means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient- "(i) on account of the employee's death, "(ii) after the employee attains age 592, "(iii) on account of the employee's separation from the service, or 88 STAT. 989 "(iv) after the employee has become disabled (within the meaning of section 72 (m) (7)) from a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501 or from a plan described in section 403 (a). Clause (iii) of this subparagraph shall be applied only with respect to an individual who is an employee without regard to section 401 (c) (1), and clause (iv) shall be applied only with respect to an employee within the meaning of section 401 (c) (1). For purposes of this subparagraph, a distribution of an annuity contract from a trust or annuity plan referred to in the first sentence of this subparagraph shall be treated as a lump sum distribution. For purposes of this subparagraph, a distribution to two or more trusts shall be treated as a distribution to one recipient. "(B) ELECTION OF LUMP SUM TREATMENT.-For purposes of this section and section 403, no amount which is not an annuity contract may be treated as a lump sum distribution under subparagraph (A) unless the taxpayer elects for the taxable year to have all such amounts received during such year so treated at the time and in the manner provided under regulations prescribed by the Secretary or his delegate. Not more than one election may be made under this subparagraph with respect to any individual after such individual has attained age 5912. No election may be made under this subparagraph by any taxpayer other than an individual, an estate, or a trust. In the case of a lump sum distribution made with respect to an employee to two or more trusts, the election under this subparagraph shall be made by the personal representative of the employee. "(C) AGGREGATION OF CERTAIN TRUSTS AND PLANS.-For purposes of determining the balance to the credit of an employee under subparagraph (A)— "(i) all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan, all profitsharing plans maintained by the employer shall be treated as a single plan, and ali stock bonus plans maintained by the employer shall be treated as a single plan, and "(ii) trusts which are not qualified trusts under section 401(a) and annuity contracts which do not satisfy the requirements of section 404 (a) (2) shall not be taken into account. "(D) TOTAL TAXABLE AMOUNT. For purposes of this section and section 403, the term 'total taxable amount' means, with respect to a lump sum distribution, the amount of such distribution which exceeds the sum of— "(i) the amounts considered contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, and "(ii) the net unrealized appreciation attributable to that part of the distribution which consists of the securities of the employer corporation so distributed. "(E) ORDINARY INCOME PORTION.-For purposes of this section, the term 'ordinary income portion' means, with 26 USC 72. 88 STAT. 990 26 USC 401. respect to a lump sum distribution, so much of the total taxable amount of such distribution as is equal to the product of such total taxable amount multiplied by a fraction "(i) the numerator of which is the number of calendar years of active participation by the employee in such plan after December 31, 1973, and "(ii) the denominator of which is the number of calendar years of active participation by the employee in such plan. "(F) EMPLOYEE.-For purposes of this subsection and subsection (a) (2), except as otherwise provided in subparagraph (A), the term 'employee' includes an individual who is an employee within the meaning of section 401 (c) (1) and the employer of such individual is the person treated as his employer under section 401 (c) (4). "(G) COMMUNITY PROPERTY LAWS.-The provisions of this subsection, other than paragraph (3), shall be applied without regard to community property laws. "(H) MINIMUM PERIOD OF SERVICE. For purposes of this subsection (but not for purposes of subsection (a) (2) or section 403(a) (2) (A)), no amount distributed to an employee from or under a plan may be treated as a lump sum distributed under subparagraph (A) unless he has been a participant in the plan for 5 or more taxable years before the taxable year in which such amounts are distributed. "(I) AMOUNTS SUBJECT TO PENALTY.-This subsection shall not apply to amounts described in clause (ii) of subparagraph (A) of section 72 (m) (5) to the extent that section 72 (m) (5) applies to such amounts. "(J) UNREALIZED APPRECIATION OF EMPLOYER SECURITIES. In the case of any distribution including securities of the employer corporation which, without regard to the requirement of subparagraph (H), would be treated as a lump sum distribution under subparagraph (A), there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation so distributed. In the case of any such distribution or any lump sum distribution including securities of the employer corporation, the amount of net unrealized appreciation of such securities and the resulting adjustments to the basis of such securities shall be determined under regulations prescribed by the Secretary or his delegate. "(K) SECURITIES. For purposes of this subsection, the terms 'securities' and 'securities of the employer corporation' have the respective meanings provided by subsection (a) (3).” (b) PHASEOUT OF CAPITAL GAINS TREATMENT. (1) IN GENERAL.-Section 402 (a) (2) (relating to capital gains treatment for certain distributions) is amended to read as follows: "(2) CAPITAL GAINS TREATMENT FOR PORTION OF LUMP SUM DISTRIBUTIONS.-In the case of an employee trust described in section 401(a), which is exempt from tax under section 501(a), so much of the total taxable amount (as defined in subparagraph (D) of subsection (e) (4)) of a lump sum distribution as is equal to the product of such total taxable amount multiplied by a fraction "(A) the numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and "(B) the denominator of which is the number of calendar years of active participation by the employee in such plan, shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of computing the fraction described in this paragraph and the fraction under subsection (e) (4) (E), the Secretary or his delegate may prescribe regulations under which plan years may be used in lieu of calendar years. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c) (1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e) (4) (B), but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph." (2) AMENDMENT OF SECTION 403.-That part of paragraph (2) of section 403 (a) which follows clause (ii) of subparagraph (A) thereof is amended to read as follows: "(iii) a lump sum distribution (as defined in section 402 (e) (4) (A)) is paid to the recipient, 88 STAT. 991 Ante, p. 987. so much of the total taxable amount (as defined in section "(B) CROSS REFERENCE.— "For imposition of separate tax on ordinary income portion of lump sum distribution, see section 402(e).”. (c) CONFORMING AMENDMENTS.- (1) Subparagraph (C) of section 402 (a) (3) is repealed. Repeals. (2) Paragraph (5) (as in effect on December 31, 1973) of sec- 26 USC 402. tion 402 (a) is repealed. (3) Section 72 is amended by striking out subsection (n) thereof and by redesignating subsections (o) and (p) as (n) and (0), respectively. (4) The second sentence of section 46(a)(3) and the second sentence of section 50A (a) (3) are each amended by inserting after "tax preferences)," the following: "section 402 (e) (relating to tax on lump sum distributions),". (5) The third sentence of section 901 (a) is amended by inserting "against the tax imposed by section 402 (e) (relating to tax on lump sum distributions)," before "against the tax imposed by section 531". (6) Subsection 1304 (b) (2) (relating to special rules) is amended by striking out paragraph (2) and by redesignating paragraphs (3), (4), (5), and (6) as paragraphs (2), (3), (4), and (5), respectively. (7) Subparagraph (A) of section 56 (a) (2) and paragraph (1) of section 56(c) are each amended by inserting before "531" the following: "402 (e),”. |