Part III. Administrative, Procedural, and Miscellaneous

nal Revenue Code (“new § 1(h)”) to provide for new capital gains rates for noncorporate taxpayers (individuals, estates, and trusts), effective for tax years ending after May 6, 1997. Pub. L. No. 105–34, § 311, 111 Stat. 788 (Aug. 5, 1997). The chairmen and ranking members of both the House Ways and Means Committee and the Senate Finance Committee have advised the Department of the Treasury of their intent to pursue technical corrections legislation which would correct and clarify the rules for netting capital gains and losses under new § 1(h) and coordinate new § 1(h) with certain other provisions of the Code. Such legislation has already been approved by the House Ways and Means Committee. See H.R. 2645, 105th Cong. § 4(d) (1997). When enacted, the legislation will be effective retroactively for tax years ending after May 6, 1997. This notice summarizes new § 1(h) and describes how the Internal Revenue Service is taking into account the pending retroactive legislative corrections in administering the provision.

BACKGROUND

Under prior law, capital gains were taxed at the same rate as ordinary income, except that a noncorporate taxpayer was subject to a maximum marginal rate of 28 percent on net capital gain. Under § 1222, net capital gain is the excess of net long- term capital gain (from assets held for more than one year) over net short-term capital loss (from assets held for one year or less).

The definitions of net capital gain, net long-term capital gain or loss, and net short-term capital gain or loss were not changed by the 1997 Act. However, under new § 1(h), if a noncorporate taxpayer has a net capital gain, the taxpayer’s long-term capital gains and losses are separated into three tax rate groups.

(1) The 28-percent group. The 28-percent group consists of the following:

(a) capital gains and losses properly taken into account before May 7, 1997, from assets held for more than one year;

(b) capital gains and losses properly taken into account after July 28, 1997, from assets held for more than one year but not more than 18 months; and

1998 Pension Plan Limitations, Etc. ¹

Notice 97–58

Section 415 of the Internal Revenue Code (the Code) provides for dollar limitations on benefits and contributions under qualified plans. Section 415 also requires that the Commissioner annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments.

Effective January 1, 1998, the limitation for the annual benefit under § 415(b)(1)(A) for defined benefit plans is increased from $125,000 to $130,000. For participants who separated from service before January 1, 1998, the limitation for defined benefit plans under § 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 1997 by 1.0220. The limitation for defined contribution plans under § 415(c)(1)(A) remains unchanged at $30,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of § 415(b)(1)(A) is adjusted. These dollar amounts and the adjusted amounts are as follows:

The dollar limitation on early retirement benefits for qualified police or firefighters in a defined benefit plan was amended by § 1527 of the Taxpayer Relief Act of 1997 (TRA ‘97), effective for years beginning after December 31, 1996. This section amended § 415(b)(2)(G) of the Code so that the dollar limitation for qualified police or firefighters is not reduced where the benefit begins before the social security retirement age.

The limitation on the exclusion for elective deferrals under § 402(g)(1) is increased from $9,500 to $10,000.

The dollar amount under § 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $710,000 to $725,000, while the dollar amount used to determine the lengthening of the 5-year

1Based on News Release IR-97-41, dated October 22, 1997.

distribution period is increased from $140,000 to $145,000.

The excess distribution and excess retirement accumulation tax was repealed by § 1073 of TRA ‘97, effective for excess distributions received after, and to estates of decedents dying after, December 31, 1996. This section of TRA ‘97 repealed § 4980A of the Code, thereby removing the threshold amount under § 4980A(c)(1)(B) regarding excess distributions.

The limitation used in the definition of highly compensated employee under § 414(q)(1)(B) remains unchanged at $80,000.

The annual compensation limit under §§ 401(a)(17) and 404(l) remains unchanged at $160,000. The annual compensation limit under § 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under § 401(a)(17) to be taken into account, is $265,000.

The compensation amount under § 408(k)(2)(C) regarding simplified employee pension plans (SEPs) remains unchanged at $400. The compensation amount under § 408(k)(3)(C) for SEPs remains unchanged at $160,000.

The limitation under § 408(p)(2)(A) regarding simple retirement accounts remains unchanged at $6,000.

The limitation on deferrals under § 457(b)(2) and (c)(1) concerning eligible deferred compensation plans of state and local governments and of tax-exempt organizations is increased from $7,500 to $8,000.

Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.

Capital Gains Rates

Notice 97–59

PURPOSE

The Taxpayer Relief Act of 1997 (the “1997 Act”) amended § 1(h) of the Inter

1997–45 I.R.B. 7 November 10, 1997

(3) Alternative minimum tax. Newlyenacted § 55(b)(3) provides favorable alternative minimum tax (“AMT”) rates for certain categories of capital gain. The amounts of these gains are determined according to the principles used for regular tax purposes, although the AMT amounts can vary from the regular tax amounts because of AMT adjustments and preferences.

FORMS AND PUBLICATIONS

The Service is amending relevant forms, instructions, and publications (including Schedule D) to reflect the rules set forth above.

DRAFTING INFORMATION

The principal author of this notice is Susan J. Kassell of the Office of the Assistant Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact Ms. Kassell at (202) 622-4930 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, §§ 41, 446, 481; 1.446–1, 1.481–1, 1.481–4)

Rev. Proc. 97–50