Murkowski Proposes Income Averaging for Fishermen

As with the 1997 reinstatement of income averaging for farmers, this bill would allow fishermen -- "individuals who are in occupations where the predictability of income is uncertain" -- to be able to average their income on the same terms as farmers, according to Murkowski. For the risk management accounts, fishermen could set aside up to 20 percent of income in special savings accounts: "Interest earned in the account would be taxable, but withdrawals would only be taxable in the year of withdrawal," he said.

Cosponsor Ted Stevens, R-Alaska, noted that a similar income averaging provision was included in last year's tax bill, which President Clinton vetoed, and that the Joint Committee on Taxation last summer estimated its cost at about $5 million over 10 years. He noted that a JCT estimate of the risk management account provision projects its cost as $18 million over 10 years.

Text of the bill appears in the Record.

FAIR TAX TREATMENT FOR FISHERMAN ACT OF 2000

Mr. MURKOWSKI. Mr. President, today I am introducing legislation that will ease the financial hardships that fisherman endure because of the uncertainties of their industry. I am very pleased that Senator STEVENS has joined me in co-sponsoring this legislation.

Mr. President, in 1986 when Congress rewrote the tax law and cut the number of tax brackets from 11 to two, one of the provisions of prior law that was repealed was income averaging. The purpose of income averaging was to ameliorate the tax burden on individuals whose incomes varied from year to year. It ensured that an individual whose income increased significantly in one year and then dropped significantly in the next year could average the tax brackets for the two years. With only two brackets, many believed that income averaging was no longer needed.

However, in the 14 years since the 1986 tax reform, we have added three additional brackets to the tax code. And with five brackets there is a clear need for income averaging, especially for individuals who are in occupations where the predictability of income is uncertain. In 1997, we adopted income averaging for farmers because we recognized that weather conditions can significantly impact what a farming family earns in any particular year.

In this legislation we are introducing today, we are adding fishermen to the category eligible for income averaging. Just as farmers cannot predict the weather, fisherman are unable to predict how large or small their catch will be.

Let me give you an example of how the fishermen in Bristol Bay in my home state of Alaska have fared in recent years. Between 1995 and 1998, the fish run dropped from 244 million to barely 58 million last year. At the same time their income has dropped from $188 million to $69 million.

Quite frankly, income averaging is fair for farmers and is equally justified for fishermen.

In addition, our legislation establishes risk management savings accounts which fishermen will be able to draw down when fishing runs are low. Under this proposal, fishermen could set aside up to 20 percent of their income in special savings accounts. Interest earned in the account would be taxable, but withdrawals would only be taxable in the year of the withdrawal.

Mr. President, a recent fishery failure in Alaska resulted in the federal government allocate $50 million to assist the fishermen and their local communities. With these special risk management accounts, fishermen will be less dependent on federal assistance and will be able to more easily survive fishing downturns.

Mr. President, it is my hope that when we consider a tax bill later this year, these modest proposals will be included in that bill.

I ask unanimous consent that the full text of the bill be printed in the RECORD.

There being no objection, the bill was ordered to be printed in the RECORD, as follows:

S. 2203

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; ETC.

(a) Short title. -- This Act may be referred to as the "Fair Tax Treatment for Fishermen Act of 2000".

SEC. 2. INCOME AVERAGING FOR FISHERMEN WITHOUT INCREASING ALTERNATIVE MINIMUM TAX LIABILITY.

(a) In general. -- Section 55(c) (defining regular tax) is amended by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph (1) the following:

"(2) Coordination with income averaging for fishermen. -- Solely for purposes of this section, section 1301 (relating to averaging of fishing income) shall not apply in computing the regular tax.".

(b) Allowing income averaging for fishermen. --

(1) In general. -- Section 1301(a) is amended by striking "farming business" and inserting "farming business or fishing business,".

(2) Definition of elected farm income. --

(A) In general. -- Clause (i) of section 1301(b)(1)(A) is amended by inserting "or fishing business" before the semicolon.

(B) Conforming amendment. -- Subparagraph (B) of section 1301(b)(1) is amended by inserting "or fishing business" after "farming business" both places it occurs.

(3) Definition of fishing business. -- Section 1301(b) is amended by adding at the end the following new paragraph:

"(4) Fishing business. -- The term 'fishing business' means the conduct of commercial fishing (as defined in section 3 of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802, P.L. 94-265 as amended).)".

SEC. 3. FISHING RISK MANAGEMENT ACCOUNTS.

(a) In general. -- Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deductions taken) is amended by inserting after section 468B the following:

"SEC. 468C. FISHING RISK MANAGEMENT ACCOUNTS.

"(a) Deduction allowed. -- In the case of an individual engaged in an eligible commercial fishing activity, there shall be allowed as a deduction for any taxable year the amount paid in cash by the taxpayer during the taxable year Fishing Risk Management Account (hereinafter referred to as the 'FisheRMen Account').

"(b) Limitation. --

"(1) Contributions. -- The amount which a taxpayer may pay into the FisheRMen Account for any taxable year shall not exceed 20 percent of so much of the taxable income of the taxpayer (determined without regard to this section) which is attributable (determined in the manner applicable under section 1301) to any eligible commercial fishing activity.

"(2) Distribution. -- Distributions from a FisheRMen Account may not be used to purchase, lease, or finance any new fishing vessel, add capacity to any fishery, or otherwise contribute to the overcapitalization of any fishery. The Secretary of Commerce shall implement regulations to enforce this paragraph.

"(c) Eligible businesses. -- For purposes of this section --

"(1) Commercial fishing activity. -- The term 'commercial fishing activity' has the meaning given the term 'commercial fishing' by section (3) of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802, P.L. 94-265 as amended) but only if such fishing is not a passive activity (within the meaning of section 469(c)) of the taxpayer.

"(d) Fishermen account. -- For purposes of this section --

"(1) In general. -- The term 'FisheRMen Account' means a trust created or organized in the United States for the exclusive benefit of the taxpayer, but only if the written governing instrument creating the trust meets the following requirements:

"(A) No contribution will be accepted for any taxable year in excess of the amount allowed as a deduction under subsection (a) for such year.

"(B) The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.

"(C) The assets of the trust consist entirely of cash or of obligations which have adequate stated interest (as defined in section 1274(c)(2)) and which pay such interest not less often than annually.

"(D) All income of the trust is distributed currently to the grantor.

"(E) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

"(2) Account taxed as grantor trust. -- The grantor of a FisheRMen Account shall be treated for purposes of this title as the owner of such Account and shall be subject to tax thereon in accordance with subpart E of part I of subchapter J of this chapter (relating to grantors and others treated as substantial owners).

"(e) Inclusion of amounts distributed. --

"(1) In general. -- Except as provided in paragraph (2), there shall be includable in the gross income of the taxpayer for any taxable year --

"(A) any amount distributed from a FisheRMen Account of the taxpayer during such taxable year, and

"(B) any deemed distribution under --

"(i) subsection (f)(1) (relating to deposits not distributed within 5 years),

"(ii) subsection (f)(2) (relating to cessation in eligible commercial fishing activities), and

"(iii) subparagraph (A) or (B) of subsection (f)(3) (relating to prohibited transactions and pledging account as security).

"(2) Exceptions. -- Paragraph (1)(A) shall not apply to --

"(A) any distribution to the extent attributable to income of the Account, and

"(B) the distribution of any contribution paid during a taxable year to a FisheRMen Account to the extent that such contribution exceeds the limitation applicable under subsection (b) if requirements similar to the requirements of section 408(d)(4) are met. For purposes of subparagraph (A), distributions shall be treated as first attributable to income and then to other amounts.

"(f) Special rules. --

"(1) Tax on deposits in account which are not distributed within 5 years. --

"(A) In general. -- If, at the close of any taxable year, there is a nonqualified balance in any FisheRMen Account --

"(i) there shall be deemed distributed from such Account during such taxable year an amount equal to such balance, and

"(ii) the taxpayer's tax imposed by this chapter for such taxable year shall be increased by 10 percent of such deemed distribution. The preceding sentence shall not apply if an amount equal to such nonqualified balance is distributed from such Account to the taxpayer before the due date (including extensions) for filing the return of tax imposed by this chapter for such year (or, if earlier, the date the taxpayer files such return for such year).

"(B) Nonqualified balance. -- For purposes of subparagraph (A), the term 'nonqualified balance' means any balance in the Account on the last day of the taxable year which is attributable to amounts deposited in such Account before the 4th preceding taxable year.

"(C) Ordering rule. -- For purposes of this paragraph, distributions from FisheRMen Account (other than distributions of current income) shall be treated as made from deposits in the order in which such deposits were made, beginning with the earliest deposits.

"(2) Cessation in eligible business. -- At the close of the first disqualification period after a period for which the taxpayer was engaged in an eligible commercial fishing activity, there shall be deemed distributed from the FisheRMen Account of the taxpayer an amount equal to the balance in such Account (if any) at the close of such disqualification period. For purposes of the preceding sentence, the term 'disqualification period' means any period of 2 consecutive taxable years for which the taxpayer is not engaged in an eligible commercial fishing activity.

"(3) Certain rules to apply. -- Rules similar to the following rules shall apply for purposes of this section:

"(A) Section 220(f)(8) (relating to treatment on death).

"(B) Section 408(e)(2) (relating to loss of exemption of account where individual engages in prohibited transaction).

"(C) Section 408(e)(4) (relating to effect of pledging account as security).

"(D) Section 408(g) (relating to community property laws).

"(E) Section 408(h) (relating to custodial accounts).

"(4) Time when payments deemed made. -- For purposes of this section, a taxpayer shall be deemed to have made a payment to a FisheRMen Account on the last day of a taxable year if such payment is made on account of such taxable year and is made on or before the due date (without regard to extensions) for filing the return of tax for such taxable year.

"(5) Individual. -- For purpose of this section, the term 'individual' shall not include an estate or trust.

"(6) Deduction not allowed for self-employment tax. -- The deduction allowable by reason of subsection (a) shall not be taken into account in determining an individual's net earnings from self- employment (within the meaning of section 1402(a)) for purposes of chapter 2.

"(g) Reports. -- The trustee of a FisheRMen Account shall make such reports regarding such Account to the Secretary and to the person for whose benefit the Account is maintained with respect to contributions, distributions, and such other matters as the Secretary may require under regulations. The reports required by this subsection shall be filed at such time and in such manner and furnished to such persons at such time and in such manner as may be required by such regulations.'.

(b) Tax on excess contributions. --

(1) Subsection (a) of section 4973 (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking "or" at the end of paragraph (3), by redesignating paragraph (4) as paragraph (5), and by inserting after paragraph (3) the following:

"(4) a FisheRMen Account (within the meaning of section 468C(d)), or".

(2) Section 4973 is amended by adding at the end the following:

"(g) Excess contributions to fishermen accounts. -- For purposes of this section, in the case of a FisheRMen Account (within the meaning of section 468C(d)), the term 'excess contributions' means the amount by which the amount contributed for the taxable year to the Account exceeds the amount which may be contributed to the Account under section 468C(b) for such taxable year. For purposes of this subsection, any contribution which is distributed out of the FisheRMen Account in a distribution to which section 468C(e)(2)(B) applies shall be treated as an amount not contributed.".

(e) The section heading for section 4973 is amended to read as follows:

"SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, ANNUITIES, ETC.".

(4) The table of sections or chapter 43 is amended by striking the item relating to section 4973 and inserting the following:

"Sec. 4973. Excess contributions to certain accounts, annuities, etc.".

(c) Tax on prohibited transactions. --

(1) Subsection (c) of section 4975 (relating to tax on prohibited transactions) is amended by adding at the end the following:

"(6) Special rule for fishermen accounts. -- A person for whose benefit a FisheRMen Account (within the meaning of section 468C(d)) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a FisheRMen Account by reason of the application of section 468C(f)(3)(A) to such account."

(2) Paragraph (1) of section 4975(e) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and by inserting after subparagraph (D) the following.

"(E) a FisheRMen Account described in section 468C(d).".

(d) Failure to provide reports on fishermen accounts. -- Paragraph (2) of section 6693(a) (relating to failure to provide reports on certain tax-favored accounts or annuities) is amended by redesignating subparagraph (C) and (D) and (E), respectively, and by inserting after subparagraph (B) the following:

"(C) section 468C(g) (relating to FisheRMen Accounts),".

(e) Clerical amendment. -- The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by inserting after the item relating to section 468B the following:

"Sec. 468C. Fishing Risk Management Accounts.".

SECTION 4. EFFECTIVE DATE.

(a) The changes made by this Act shall apply to taxable years beginning after December 31, 2000.

Mr. STEVENS. Mr. President, I am pleased to join my colleague from Alaska in introducing this important piece of legislation. As a member of the Senate Finance Committee he is all too aware of the need for equity in our tax system and simplicity in our Tax Code.

The first portion of the bill we introduce today would allow fishermen to average income and would not penalize that election with the alternative minimum tax. Up until 1986, individuals, including farmers and fishermen, could elect to average income under section 1301. That choice was no longer available after Congress repealed section 1301 in 1986. Later, in 1997, Congress inserted a new version of section 1301 with a modified form of income averaging for farmers. Section 1301 currently allows farmers engaged in an eligible farming business to average income for tax purposes. This allows farmers to take the fluctuations of their markets, prices and crop conditions into account when calculating income taxes. Fishermen should be afforded the same opportunities as farmers -- they are the farmers of the sea and should be treated as such under the Tax Code.

A provision similar to this was included in the Taxpayer Refund Act of 1999 that was vetoed by the President last year. It is not a controversial measure, and its impact on the Treasury is minimal. The Joint Committee on Tax estimated last summer that this provision would cost approximately $5 million over the next ten years. This is a small price to pay to create equity and fairness in our Tax Code and to ensure fishermen receive the same benefits as farmers. While this is one step toward equal treatment for our fishermen, it is an important part of ensuring the long-term sustainability of our fishing industry.

The second portion of the bill we introduce today would allow fishermen to establish tax deferred risk management savings accounts to help them through downturns in the market. The Taxpayer Refund Act of 1999 included similar language. These new risk management accounts would be used to let fishermen set aside up to 20 percent of their income on a tax deferred basis. The money could be held for up to five years, then it would have to be withdrawn from the individual's account. Once the money is withdrawn from the account, the fishermen would pay tax on the amount that was originally deferred. Any interest earned on the money in the account would be taxed in the year that it was earned.

This approach to encouraging fishermen to set some money aside for downturns in the market makes sense. The Joint Committee on Taxation estimated last year that allowing fishermen to set aside 20 percent of their income into these tax deferred accounts would cost only $18 million over 10 years. This is a small price to pay to encourage fishermen to be pro-active in planning for downturns rather than having to be reactive when markets collapse or fishing stocks are weak.

In previous years we have had to bail out fishing areas that have been hit hard by fishery failures. A recent fishery failure in Alaska, and the impact of that failure on families and communities, is still being felt today. We were forced to allocate $50 million to bail out those fishermen and the local communities. This provision, at a cost of $18 million over ten years, is a far-sighted way to let fishermen play a part in a disaster recovery and preserve the proud self-reliance that marks their industry.

I thank my colleague from Alaska, Senator MURKOWSKI, for his support of this bill and I encourage all Senators to support these provisions.