[JPRT 107-2-01]
[From the U.S. Government Publishing Office]




                                                               JCS-2-01

                                     

                        [JOINT COMMITTEE PRINT]



                        GENERAL EXPLANATION OF


                            TAX LEGISLATION


                     ENACTED IN THE 106TH CONGRESS

                               ----------                              

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION


 [GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                             APRIL 19, 2001
  GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 106TH CONGRESS
                                                               JCS-2-01

                                     

                        [JOINT COMMITTEE PRINT]



 
                        GENERAL EXPLANATION OF
                            TAX LEGISLATION
                     ENACTED IN THE 106TH CONGRESS

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION


 [GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                             APRIL 19, 2001
                      JOINT COMMITTEE ON TAXATION

                      107th Congress, 1st Session
                                ------                                --
                                  ----
               HOUSE                               SENATE
WILLIAM M. THOMAS, California,       CHARLES E. GRASSLEY, Iowa,
  Chairman                             Vice Chairman
PHILIP M. CRANE, Illinois            ORRIN G. HATCH, Utah
E. CLAY SHAW, Jr., Florida           FRANK H. MURKOWSKI, Alaska
CHARLES B. RANGEL, New York          MAX BAUCUS, Montana
FORTNEY PETE STARK, California       JOHN D. ROCKEFELLER IV, West 
                                         Virginia
                     Lindy L. Paull, Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff
                 Mary M. Schmitt, Deputy Chief of Staff
                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Availability of Certain Tax Benefits for Services for 
  Part of Operation Allied Force (Public Law 106-21).............     3

Part Two: Miscellaneous Trade and Technical Corrections Act of 
  1999 (Public Law 106-36).......................................     9

Part Three: Tax Relief Extension Act of 1999 (Public Law 106-170)    12

Part Four: Trade and Development Act of 2000 (Public Law 106-200)    75

Part Five: Amending the Internal Revenue Code to Require 527 
  Organizations to Disclose Their Political Activities (Public 
  Law 106-230)...................................................    79

Part Six: Miscellaneous Trade and Technical Corrections Act of 
  2000 (Public Law 106-476)......................................    82

Part Seven: FSC Repeal and Extraterritorial Income Exclusion Act 
  of 2000 (Public Law 106-519)...................................    84

Part Eight: The Community Renewal Tax Relief Act of 2000 (Public 
  Law 106-554; H.R. 5662)........................................   114

Part Nine: Installment Tax Correction Act of 2000 (Public Law 
  106-573).......................................................   176

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 106th Congress.............................................   179

                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: Availability of Certain Tax Benefits for Services for 
  Part of Operation Allied Force (Public Law 106-21).............     3

Part Two: Miscellaneous Trade and Technical Corrections Act of 
  1999 (Public Law 106-36).......................................     9

        A. Property ``Subject to'' a Liability Treated in the 
            Same Manner as an Assumption of Liability (sec. 3001)     9

Part Three: Tax Relief Extension Act of 1999 (Public Law 106-170)    12

    I. Extension of Expiring Tax Provisions......................    12

        A. Extend Minimum Tax Relief for Individuals (sec. 501)..    12

        B. Extension of Research Tax Credit (sec. 502)...........    13

        C. Subpart F Exemption for Active Financing Income (sec. 
            503).................................................    16

        D. Taxable Income Limit on Percentage Depletion for 
            Marginal Production (sec. 504).......................    19

        E. Extend the Work Opportunity Tax Credit (sec. 505).....    21

        F. Extend the Welfare-to-Work Tax Credit (sec. 505)......    22

        G. Extend Exclusion for Employer-Provided Educational 
            Assistance (sec. 506)................................    23

        H. Extension and Modification of Credit for Producing 
            Electricity From Certain Renewable Resources (sec. 
            507).................................................    25

        I. Extension of Authority to Issue Qualified Zone Academy 
            Bonds (sec. 509).....................................    26

        J. Extend the Tax Credit for First-Time D.C. Homebuyers 
            (sec. 510)...........................................    27

        K. Extend Expensing of Environmental Remediation 
            Expenditures (sec. 511)..............................    28

        L. Temporary Increase in Amount of Rum Excise Tax Covered 
            Over to Puerto Rico and the Virgin Islands (sec. 512)    29

    II. Other Time-Sensitive Provisions..........................    32

        A. Prohibit Disclosure of APAs and APA Background Files 
            (sec. 521)...........................................    32

        B. Authority to Postpone Certain Tax-Related Deadlines by 
            Reason of Year 2000 Failures (sec. 522)..............    37

        C. Add Certain Vaccines Against Streptococcus Pneumoniae 
            to the List of Taxable Vaccines (sec. 523)...........    39

        D. Delay in Effective Date of Requirement for Approved 
            Diesel or Kerosene Terminal (sec. 524)...............    41

        E. Production Flexibility Contract Payments (sec. 525)...    42

    III. Revenue Offsets.........................................    44

        A. General Provisions....................................    44

            1. Modification of individual estimated tax safe 
                harbor (sec. 531)................................    44
            2. Clarify the tax treatment of income and losses on 
                derivatives (sec. 532)...........................    45
            3. Expand reporting of cancellation of indebtedness 
                income (sec. 533)................................    47
            4. Limitation on conversion of character of income 
                from constructive ownership transactions (sec. 
                534).............................................    49
            5. Treatment of excess pension assets used for 
                retiree health benefits (sec. 535)...............    52
            6. Modification of installment method and repeal of 
                installment method for accrual method taxpayers 
                (sec. 536).......................................    55
            7. Denial of charitable contribution deduction for 
                transfers associated with split-dollar insurance 
                arrangements (sec. 537)..........................    58
            8. Distributions by a partnership to a corporate 
                partner of stock in another corporation (sec. 
                538).............................................    63

        B. Provisions Relating to Real Estate Investment Trusts 
            (secs. 541-547, 551, 561 and 566)....................    66

            1. General provisions................................    66
            2. Modification of estimated tax rules for closely 
              held REITS.........................................    73

Part Four: Trade and Development Act of 2000 (Public Law 106-200)    75

        A. Application of Denial of Foreign Tax Credit Regarding 
          Trade and Investment With Respect to Certain Foreign 
          Countries (sec. 601)...................................    75

        B. Acceleration of Coverover Payments to Puerto Rico and 
          the Virgin Islands (sec. 602)..........................    76

Part Five: Amending the Internal Revenue Code to Require Section 
  527 Organizations to Disclose Their Political Activities 
  (Public Law 106-230)...........................................    79

Part Six: Miscellaneous Trade and Technical Corrections Act of 
  2000 (Public Law 106-476)......................................    82

        A. Imported Cigarette Compliance Act of 2000 (secs. 4001-
          4003)..................................................    82

Part Seven: FSC Repeal and Extraterritorial Income Exclusion Act 
  of 2000 (Public Law 106-519)...................................    84

Part Eight: The Community Renewal Tax Relief Act of 2000 (Public 
  Law 106-554; H.R. 5662)........................................   114

    Title I. Community Renewal Provisions........................   114

        A. Renewal Community Provisions (secs. 101-102 of H.R. 
          5662)..................................................   114

        B. Empowerment Zone Tax Incentives.......................   118

            1. Extension and expansion of empowerment zones 
              (secs. 111-115 of H.R. 5662).......................   118
            2. Rollover of gain from the sale of qualified 
              empowerment zone investments (sec. 116 of H.R. 
              5662)..............................................   120
            3. Increased exclusion of gain from the sale of 
              qualifying empowerment zone stock (sec. 117 of H.R. 
              5662)..............................................   121

        C. New Markets Tax Credit (sec. 121 of H.R. 5662)........   122

        D. Increase the Low-Income Housing Tax Credit Cap and 
          Make Other Modifications (secs. 131-137 of H.R. 5662)..   125

        E. Accelerate Scheduled Increase in State Volume Limits 
          on Tax-Exempt Private Activity Bonds (sec. 161 of H.R. 
          5662)..................................................   128

        F. Extension and Modification to Expensing of 
          Environmental Remediation Costs (sec. 162 of H.R. 5662)   129

        G. Expansion of District of Columbia Homebuyer Tax Credit 
          (sec. 163 of H.R. 5662)................................   130

        H. Extension of D.C. Enterprise Zone (sec. 164 of H.R. 
          5662)..................................................   131

        I. Extension and Modification of Enhanced Deduction for 
          Corporate Donations of Computer Technology (sec. 165 of 
          H.R. 5662).............................................   132

        J. Treatment of Indian Tribes as Non-Profit Organizations 
          and State or Local Governments for Purposes of the 
          Federal Unemployment Tax (``FUTA'') (sec. 166 of H.R. 
          5662)..................................................   134

    Title II. Medical Savings Accounts (``MSAs'') (secs. 201-202 
      of H.R. 5662)..............................................   135

    Title III. Administrative and Technical Corrections 
      Provisions.................................................   138

        Subtitle A. Administrative Provisions....................   138

            A. Exempt Certain Reports From Elimination Under the 
              Federal Reports Elimination and Sunset Act of 1995 
              (sec. 301 of H.R. 5662)............................   138

            B. Extension of Deadlines for IRS Compliance with 
              Certain Notice Requirements (sec. 302 of H.R. 5662)   138

            C. Extension of Authority for Undercover Operations 
              (sec. 303 of H.R. 5662)............................   139

            D. Competent Authority and Pre-Filing Agreements 
              (sec. 304 of H.R. 5662)............................   140

            E. Increase Joint Committee on Taxation Refund Review 
              Threshold to $2 Million (sec. 305 of H.R. 5662)....   148

            F. Clarify the Allowance of Certain Tax Benefits With 
              Respect to Kidnapped Children (sec. 306 of H.R. 
              5662)..............................................   149

            G. Conforming Changes to Accommodate Reduced 
              Issuances of Certain Treasury Securities (sec. 307 
              of H.R. 5662)......................................   150

            H. Authorization of Agencies to Use Corrected 
              Consumer Price Index (sec. 308 of H.R. 5662).......   151

            I. Prevent Duplication or Acceleration of Loss 
              Through Assumption of Certain Liabilities (sec. 309 
              of H.R. 5662)......................................   153

            J. Disclosure of Return Information to the 
              Congressional Budget Office (sec. 310 of H.R. 5662)   156

        Subtitle B. Tax Technical Corrections (secs. 311-319 of 
          H.R. 5662).............................................   158

    Title IV. Tax Treatment of Securities Futures Contracts (sec. 
      401 of H.R. 5662)..........................................   169

Part Nine: Installment Tax Correction Act of 2000 (Public Law 
  106-573).......................................................   176

Appendix: Estimated Budget Effects of Tax Legislation Enacted 
  106th Congress.................................................   179
                              INTRODUCTION

    This pamphlet,\1\ prepared by the staff of the Joint 
Committee on Taxation in consultation with the staffs of the 
House Committee on Ways and Means and Senate Committee on 
Finance, provides an explanation of tax legislation enacted in 
the 106th Congress. The explanation follows the chronological 
order of the tax legislation as signed into law.
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    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in the 106th 
Congress (JCS-2- 01), April 19, 2001.
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    A committee report on legislation issued by a Congressional 
committee sets forth the committee's explanation of the bill as 
it was reported by that committee. In some instances, a 
committee report does not serve as an explanation of the final 
provisions of the legislation as enacted. This is because the 
version of the bill enacted after action by the Conference 
Committee may differ significantly from the versions of the 
bill reported by the House and Senate Committees and passed by 
the House and Senate. The material contained in this pamphlet 
is prepared so that Members of Congress, tax practitioners, and 
other interested parties can have an explanation in one volume 
of the final tax legislation enacted in 106th Congress.
    In some instances, provisions included in legislation 
enacted in the 106th Congress were not reported out of 
committee before enactment. As a result, the legislative 
history of such provisions does not include the reasons for 
change normally included in a committee report. In the case of 
such provisions, no reasons for change are included with the 
explanation of the provision in this pamphlet.
    Part One of the pamphlet is a explanation of the provisions 
of the Availability of Certain Tax Benefits for Services for 
Part of Operation Allied Force (P.L. 106-21), relating to tax 
treatment of certain of military personnel and civilian 
employees in the Federal Republic of Yugoslavia (Bosnia/
Montenegro), Albania, the Adriatic Sea, and the northern Ionian 
Sea above the 39th parallel. Part Two is an explanation of the 
revenue provisions of the Miscellaneous Trade and Technical 
Corrections Act of 1999 (P.L. 106-36), relating to treatment of 
certain property subject to a liability. Part Three is an 
explanation of the Tax Relief Extension Act of 1999 (Title V of 
the Ticket to Work and Work Incentives Improvement Act of 1999, 
P.L. 106-170), relating to extension of expiring provisions and 
other time-sensitive provisions, with revenue offset 
provisions. Part Four is an explanation of the revenue 
provisions of the Trade and Development Act of 2000 (P.L. 106-
200), relating to foreign tax credit rules and cover over 
payments to Puerto Rico and the Virgin Islands. Part Five is an 
explanation of provisions Amending the Internal Revenue Code to 
Require 527 Organizations to Disclose their Political 
Activities (P.L. 106-230), Part Six is an explanation of the 
revenue provisions of the Miscellaneous Trade and Technical 
Corrections Act of 2000 (P.L. 106-476), relating to imported 
cigarette compliance. Part Seven is an explanation of the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000 (P.L. 
106-519), relating to repeal of rules for foreign sales 
corporations. Part Eight is an explanation of the revenue 
provisions of the Community Renewal Tax Relief Act of 2000 
(P.L. 106-554, H.R. 5662), relating to community renewal, 
medical savings accounts, administrative and technical 
corrections, and tax treatment of securities futures contracts. 
Part Nine is an explanation of the Installment Tax Correction 
Act of 2000 (P.L. 106-573), relating to repeal of the 
prohibition on the use of the installment method of accounting 
for certain dispositions. The Appendix provides the estimated 
budget effects of tax legislation enacted in the 106th 
Congress.

PART ONE: AVAILABILITY OF CERTAIN TAX BENEFITS FOR SERVICES FOR PART OF 
             OPERATION ALLIED FORCE (PUBLIC LAW 106-21) \2\
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    \2\ H.R. 1376. The bill was ordered reported by the House Committee 
on Ways and Means on April 13, 1999 (H. Rep. 106-90). The House and the 
Senate both passed the bill on April 15, 1999. The bill was signed by 
the President on April 19, 1999.
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                         Present and Prior Law

General time limits for filing tax returns
    Individuals generally must file their Federal income tax 
returns by April 15 of the year following the close of a 
taxable year (sec. 6072). The Secretary may grant reasonable 
extensions of time for filing such returns (sec. 6081). 
Treasury regulations provide an additional automatic two-month 
extension (until June 15 for calendar-year individuals) for 
United States citizens and residents in military or naval 
service on duty on April 15 of the following year (the 
otherwise applicable due date of the return) outside the United 
States (Treas. Reg. sec. 1.6081-5(a)(6)). No action is 
necessary to apply for this extension, but taxpayers must 
indicate on their returns (when filed) that they are claiming 
this extension. Unlike most extensions of time to file, this 
extension applies to both filing returns and paying the tax 
due.
    Treasury regulations also provide, upon application on the 
proper form, an automatic four-month extension (until August 15 
for calendar-year individuals) for any individual timely filing 
that form and paying the amount of tax estimated to be due 
(Treas. Reg. sec. 1.6081-4).
    In general, individuals must make quarterly estimated tax 
payments by April 15, June 15, September 15, and January 15 of 
the following taxable year. Wage withholding is considered to 
be a payment of estimated taxes.
Suspension of time periods
    In general, the period of time for performing various acts 
under the Internal Revenue Code, such as filing tax returns, 
paying taxes, or filing a claim for credit or refund of tax, is 
suspended for any individual serving in the Armed Forces of the 
United States in an area designated as a ``combat zone'' during 
the period of combatant activities (sec. 7508). An individual 
who becomes a prisoner of war is considered to continue in 
active service and is therefore also eligible for these 
suspension of time provisions. The suspension of time also 
applies to an individual serving in support of such Armed 
Forces in the combat zone, such as Red Cross personnel, 
accredited correspondents, and civilian personnel acting under 
the direction of the Armed Forces in support of those Forces. 
The designation of a combat zone must be made by the President 
in an Executive Order. The President must also designate the 
period of combatant activities in the combat zone (the starting 
date and the termination date of combat).
    The suspension of time encompasses the period of service in 
the combat zone during the period of combatant activities in 
the zone, as well as (1) any time of continuous qualified 
hospitalization resulting from injury received in the combat 
zone \3\ or (2) time in missing in action status, plus the next 
180 days.
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    \3\ Two special rules apply to continuous hospitalization inside 
the United States. First, the suspension of time provisions based on 
continuous hospitalization inside the United States are applicable only 
to the hospitalized individual; they are not applicable to the spouse 
of such individual. Second, in no event do the suspension of time 
provisions based on continuous hospitalization inside the United States 
extend beyond five years from the date the individual returns to the 
United States. These two special rules do not apply to continuous 
hospitalization outside the United States.
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    The suspension of time applies to the following acts:
          (1) Filing any return of income, estate, or gift tax 
        (except employment and withholding taxes);
          (2) Payment of any income, estate, or gift tax 
        (except employment and withholding taxes);
          (3) Filing a petition with the Tax Court for 
        redetermination of a deficiency, or for review of a 
        decision rendered by the Tax Court;
          (4) Allowance of a credit or refund of any tax;
          (5) Filing a claim for credit or refund of any tax;
          (6) Bringing suit upon any such claim for credit or 
        refund;
          (7) Assessment of any tax;
          (8) Giving or making any notice or demand for the 
        payment of any tax, or with respect to any liability to 
        the United States in respect of any tax;
          (9) Collection of the amount of any liability in 
        respect of any tax;
          (10) Bringing suit by the United States in respect of 
        any liability in respect of any tax; and
          (11) Any other act required or permitted under the 
        internal revenue laws specified in regulations 
        prescribed under section 7508 by the Secretary of the 
        Treasury.
    Individuals may, if they choose, perform any of these acts 
during the period of suspension.
    Spouses of qualifying individuals are entitled to the same 
suspension of time, except that the spouse is ineligible for 
this suspension for any taxable year beginning more than two 
years after the date of termination of combatant activities in 
the combat zone.

Exclusion for combat zone compensation

    Gross income does not include certain combat zone 
compensation of members of the Armed Forces (sec. 112). If 
enlisted personnel serve in a combat zone during any part of 
any month, military pay for that month is excluded from gross 
income. In addition, if enlisted personnel are hospitalized as 
a result of injuries, wounds, or disease incurred in a combat 
zone, military pay for that month is also excluded from gross 
income; this exclusion is limited, however, to hospitalization 
during any part of any month beginning not more than two years 
after the end of combat in the zone. In the case of 
commissioned officers, these exclusions from income are limited 
to the maximum enlisted amount \4\ of military pay.
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    \4\ This is defined as the higher rate of basic pay at the highest 
pay grade applicable for that month to any enlisted member of the Armed 
Forces of the United States, plus, in the case of an officer entitled 
to combat pay, the amount of combat pay payable to that officer for 
that month. (sec. 112(c)(5)).
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    Income tax withholding does not apply to military pay to 
the extent that an employee (whether enlisted personnel or 
commissioned officer) is entitled to the exclusion from income 
for combat pay (sec. 3401(a)(1)).

Exemption from tax upon death in a combat zone

    An individual in active service as a member of the Armed 
Forces who dies while serving in a combat zone (or as a result 
of wounds, disease, or injury received while serving in a 
combat zone) is not subject to income tax for the year of death 
(as well as for any prior taxable year ending on or after the 
first day the individual served in the combat zone) (sec. 692). 
Special computational rules apply in the case of joint returns. 
A reduction in estate taxes is also provided with respect to 
individuals dying under these circumstances (sec. 2201).
    Special rules permit the filing of a joint return where a 
spouse is in missing status as a result of service in a combat 
zone (sec. 6013(f)(1)). Special rules for determining surviving 
spouse status apply where the deceased spouse was in missing 
status as a result of service in a combat zone (sec. 2(a)(3)).

Exemption from telephone excise tax

    The telephone excise tax is not imposed on ``any toll 
telephone service'' that originates in a combat zone (sec. 
4253(d)).

Operation Desert Storm: Executive Order designating Persian Gulf Area 
        as a combat zone

    On January 21, 1991, President Bush signed Executive Order 
12744, designating the Persian Gulf Area as a combat zone. This 
designation was retroactive to January 17, 1991, the date 
combat commenced in that area, and continues in effect until 
terminated by another Executive Order. An Executive Order 
terminating this combat zone designation has not been issued. 
Thus, individuals serving in the Persian Gulf Area are eligible 
for the suspension of time provisions and military pay 
exclusions (among other provisions) described above, beginning 
on January 17, 1991.
    The Executive Order specifies that the Persian Gulf Area is 
the Persian Gulf, the Red Sea, the Gulf of Oman, part of the 
Arabian Sea, the Gulf of Aden, and the entire land areas of 
Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the 
United Arab Emirates.

Operation Desert Shield: Legislative extension of time

    On January 30, 1991, President Bush signed Public Law 102-
2. This Act amended section 7508 by providing that any 
individual who performs Desert Shield services (and the spouse 
of such an individual) is entitled to the benefits of the 
suspension of time provisions of section 7508. Desert Shield 
services are defined as services in the Armed Forces of the 
United States (or in support of those Armed Forces) if such 
services are performed in the area designated by the President 
as the ``Persian Gulf Desert Shield area'' and such services 
are performed during the period beginning August 2, 1990, and 
ending on the date on which any portion of the area was 
designated by the President as a combat zone pursuant to 
section 112 (which was January 17, 1991).

Operation Joint Endeavor: Administrative extension of time

    On December 12, 1995, the Internal Revenue Service 
announced \5\ that it was administratively extending the time 
to file tax returns until December 15, 1996, for members of the 
Armed Forces ``departing 'Operation Joint Endeavor''' on or 
after March 1, 1996. In addition, the IRS stated that the 
penalties for failure to file tax returns and failure to pay 
taxes would not be assessed with respect to these individuals. 
Also, the IRS stated that it would administratively place any 
balance due accounts into suspense status and suspend 
examinations while the member is serving in ``Operation Joint 
Endeavor.''
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    \5\ Letter dated December 12, 1995, from John T. Lyons, Assistant 
Commissioner (International), Internal Revenue Service, to Lt. Col. 
David M. Pronchick, Armed Forces Tax Counsel, Department of Defense.
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Operation Joint Endeavor and Operation Able Sentry: Legislative 
        treatment as if a combat zone

    Pursuant to Public Law 104-117,\6\ a qualified hazardous 
duty area is treated in the same manner as if it were a combat 
zone for purposes of the following provisions of the Code:
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    \6\ 110 Stat. 827 (March 20, 1996).
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          (1) the special rule for determining surviving spouse 
        status where the deceased spouse was in missing status 
        as a result of service in a combat zone (sec. 2(a)(3));
          (2) the exclusions from income for combat pay (sec. 
        112);
          (3) forgiveness of income taxes of members of the 
        Armed Forces dying in the combat zone or by reason of 
        combat-zone incurred wounds (sec. 692);
          (4) the reduction in estate taxes for members of the 
        Armed Forces dying in the combat zone or by reason of 
        combat-zone incurred wounds (sec. 2201);
          (5) the exemption from income tax withholding for 
        military pay for any month in which an employee is 
        entitled to the exclusion from income (sec. 
        3401(a)(1));
          (6) the exemption from the telephone excise tax for 
        toll telephone service that originates in a combat zone 
        (sec. 4253(d));
          (7) the special rule permitting filing of a joint 
        return where a spouse is in missing status as a result 
        of service in a combat zone (sec. 6013(f)(1)); and
          (8) the suspension of time provisions (sec. 7508).
    A qualified hazardous duty area means Bosnia and 
Herzegovina, Croatia, or Macedonia, if, as of the date of 
enactment, any member of the Armed Forces is entitled to 
hostile fire/imminent danger pay for services performed in such 
country. Members of the Armed Forces are in Bosnia and 
Herzegovina and Croatia as part of ``Operation Joint Endeavor'' 
(the NATO operation).\7\ Members of the Armed Forces are in 
Macedonia as part of ``Operation Able Sentry'' (the United 
Nations operation). In addition, persons other than Members of 
the Armed Forces who are serving in support of these operations 
of the Armed Forces are eligible for the suspension of time 
provisions in section 7508 of the Code.\8\ This provision was 
effective on November 21, 1995 (the date the Dayton Accord was 
initialed).
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    \7\ Operation Joint Endeavor has been replaced by Operation Joint 
Forge. The IRS has stated that personnel serving under Operation Joint 
Forge will be treated the same as personnel under Operation Joint 
Endeavor because Joint Forge is ``the substantive continuation'' of 
Joint Endeavor. Letter dated July 17, 1998, from Tommy G. DeWeese, 
District Director for the International District, Internal Revenue 
Service, to LTC Thomas K. Emswiler, Armed Forces Tax Council, 
Department of Defense.
    \8\ In addition, persons other than Members of the Armed Forces are 
eligible for some of the other seven provisions listed above, under 
specified circumstances. For example, civilian employees of the United 
States are eligible for the forgiveness of income tax provisions of 
section 692 if they die as a result of injuries sustained overseas in 
specified terroristic or military actions.
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Suspension of time provisions for other Operation Joint Endeavor 
        personnel

    An individual who is performing services as part of 
Operation Joint Endeavor outside the United States while 
deployed away from the individual's permanent duty station will 
qualify for the suspension of time provisions in section 7508 
of the Code during the period that hostile fire/imminent danger 
pay is paid in Bosnia and Herzegovina, Croatia, or Macedonia.

Announcement of intention to issue Executive Order designating Kosovo 
        area of operations as a combat zone

    On April 12, 1999, President Clinton announced his 
intention to issue an Executive Order designating the Federal 
Republic of Yugoslavia (Serbia/Montenegro), Albania, the 
Adriatic Sea, and the northern Ionian Sea (including all of 
their air spaces) as a combat zone for purposes of the Internal 
Revenue Code.

                           Reasons for Change

    The Congress believed that it was appropriate to apply the 
special tax rules applicable to combat zones to service in the 
Federal Republic of Yugoslavia (Serbia/Montenegro), Albania, 
the Adriatic Sea, and the Northern Ionian Sea in the same 
manner as if those areas were a combat zone. In addition, the 
Congress believed that it was appropriate to provide that 
military personnel performing services outside of those areas 
but still a part of Operation Allied Force qualify for the 
suspension of time provisions in section 7508 of the Code 
during the period that hostile fire/imminent danger pay is paid 
with respect to those areas, provided that those services are 
performed both outside the United States and while deployed 
away from that individual's duty station.

                        Explanation of Provision

    The Act contains two elements. First, the Act treats the 
Federal Republic of Yugoslavia (Serbia/Montenegro), Albania, 
the Adriatic Sea, and the northern Ionian Sea above the 39th 
parallel (including all of their air spaces) as a qualified 
hazardous duty area. Consequently, military personnel serving 
in those areas are entitled to relief under all eight of the 
hazardous duty area provisions listed above. Several special 
rules apply to civilian personnel. Civilian personnel serving 
in those areas in support of the Armed Forces are entitled to 
the suspension of time provisions in section 7508 of the Code. 
In addition, civilian employees of the United States serving in 
those areas are entitled to (a) the special rule for 
determining surviving spouse status where the deceased spouse 
was in missing status as a result of service in a combat zone 
(sec. 2(a)(3)); (b) forgiveness of income taxes of employees 
dying in the combat zone or by reason of combat-zone incurred 
wounds (sec. 692); and (c) the special rule permitting filing 
of a joint return where a spouse is in missing status as a 
result of service in a combat zone (sec. 6013(f)(1)).
    Second, the Act also provides that military personnel 
performing services outside of those areas but still a part of 
Operation Allied Force qualify for the suspension of time 
provisions in section 7508 of the Code during the period that 
hostile fire/imminent danger pay is paid with respect to those 
areas, provided that those services are performed both outside 
the United States and while deployed away from that 
individual's duty station.
    Accordingly, the Act provides the same treatment for those 
serving in (or in support of) Operation Allied Force as is 
provided under present law to those serving in (or in support 
of) Operation Joint Endeavor.

                             Effective Date

    The provision is effective on March 24, 1999 (the date on 
which Operation Allied Force commenced).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

  PART TWO: MISCELLANEOUS TRADE AND TECHNICAL CORRECTIONS ACT OF 1999 
                        (PUBLIC LAW 106-36) \9\
---------------------------------------------------------------------------

    \9\ H.R. 435 was referred to the House Committee on Ways and Means 
on February 2, 1999 and was passed by the House under suspension of the 
rules on February 9, 1999. No separate House Report was filed.
    S. 262 was reported by the Senate Committee on Finance on February 
3, 1999 (S. Rep. 106-2). On May 27, 1999, the Senate passed H.R. 435, 
with an amendment by Senator Snowe for Senator Roth in the nature of a 
substitute (Amendment No. 481). The amendment contained provisions 
similar to those of S. 262 as reported by the Senate Committee on 
Finance.
    Under suspension of the rules, the House concurred with the Senate 
amendments to H.R. 435 on June 7, 1999.
    H.R. 435 was signed by the President on June 25, 1999.
    A provision substantially identical to the tax provision contained 
in sec. 3001 of H.R. 435 was introduced in the House of Representatives 
by Mr. Archer on October 19, 1998 (H.R. 4852) and was contained in the 
Miscellaneous Trade and Technical Corrections Act of 1998 (H.R. 4856) 
as passed by the House of Representatives on October 20, 1998.
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A. Property ``Subject to'' a Liability Treated in the Same Manner as an 
   Assumption of Liability (sec. 3001 of the Miscellaneous Trade and 
      Technical Corrections Act and secs. 357 and 362 of the Code)

                         Present and Prior Law

    A transferor of property does not recognize gain or loss if 
the property is exchanged solely for qualified stock in a 
controlled corporation (sec. 351). The assumption by the 
controlled corporation of a liability of the transferor (or the 
acquisition of property ``subject to'' a liability) generally 
does not cause the transferor to recognize gain. However, under 
section 357(c), the transferor does recognize gain to the 
extent that the sum of the assumed liabilities, together with 
the liabilities to which the transferred property is subject, 
exceeds the transferor's basis in the transferred property. If 
the transferred property is ``subject to'' a liability, 
Treasury regulations indicate that the amount of the liability 
is included in the calculation regardless of whether the 
underlying liability is assumed by the controlled corporation. 
Similar rules apply to reorganizations described in section 
368(a)(1)(D).
    The gain recognition rule of section 357(c) is applied 
separately to each transferor in a section 351 exchange.
    The basis of the property in the hands of the controlled 
corporation equals the transferor's basis in such property, 
increased by the amount of gain recognized by the transferor, 
including section 357(c) gain.

                           Reasons for Change

    The tax treatment under prior law was unclear in situations 
involving the transfer of certain liabilities. As a result, the 
Congress was concerned that some taxpayers may be structuring 
transactions to take advantage of the uncertainty. For example, 
where more than one asset secures a single liability, some 
taxpayers might take the position that, on a transfer of the 
assets to different subsidiaries, each subsidiary counts the 
entire liability in determining the basis of the asset. This 
interpretation arguably might result in the duplication of tax 
basis or in assets having a tax basis in excess of their value, 
resulting in excessive depreciation deductions and 
mismeasurement of income. The provision is intended to 
eliminate the uncertainty, and to better reflect the underlying 
economics of these corporate transfers.

                        Explanation of Provision

    Under the provision, the distinction between the assumption 
of a liability and the acquisition of an asset subject to a 
liability generally is eliminated. First, except as provided in 
Treasury regulations, a recourse liability (or any portion 
thereof) is treated as having been assumed if, as determined on 
the basis of all facts and circumstances, the transferee has 
agreed to, and is expected to satisfy the liability or portion 
thereof (whether or not the transferor has been relieved of the 
liability). Thus, where more than one person agrees to satisfy 
a liability or portion thereof, only one would be expected to 
satisfy such liability or portion thereof. Second, except as 
provided in Treasury regulations, a nonrecourse liability (or 
any portion thereof) is treated as having been assumed by the 
transferee of any asset that is subject to the liability. 
However, this amount is reduced in cases where an owner of 
other assets subject to the same nonrecourse liability agrees 
with the transferee to, and is expected to, satisfy the 
liability (up to the fair market value of the other assets, 
determined without regard to section 7701(g)).
    In determining whether any person has agreed to and is 
expected to satisfy a liability, all facts and circumstances 
are to be considered. In any case where the transferee does 
agree to satisfy a liability, the transferee also will be 
expected to satisfy the liability in the absence of facts 
indicating the contrary.
    In determining any increase to the basis of property 
transferred to the transferee as a result of gain recognized 
because of the assumption of liabilities under section 357, in 
no event will the increase cause the basis to exceed the fair 
market value of the property (determined without regard to sec. 
7701(g)).
    If gain is recognized to the transferor as the result of an 
assumption by a corporation of a nonrecourse liability that 
also is secured by any assets not transferred to the 
corporation, and if no person is subject to Federal income tax 
on such gain, then for purposes of determining the basis of 
assets transferred, the amount of gain treated as recognized as 
the result of such assumption of liability shall be determined 
as if the liability assumed by the transferee equaled such 
transferee's ratable portion of the liability, based on the 
relative fair market values (determined without regard to sec. 
7701(g)) of all assets subject to such nonrecourse liability. 
In no event will the gain cause the resulting basis to exceed 
the fair market value of the property (determined without 
regard to sec. 7701(g)).
    The Treasury Department has authority to prescribe such 
regulations as may be necessary to carry out the purposes of 
the provision. This authority includes the authority to specify 
adjustments in the treatment of any subsequent transactions 
involving the liability, including the treatment of payments 
actually made with respect to any liability as well as 
appropriate basis and other adjustments with respect to such 
payments. Where appropriate, the Treasury Department also may 
prescribe regulations that provide that the manner in which a 
liability is treated as assumed under the provision is applied 
elsewhere in the Code.

                             Effective Date

    The provision is effective for transfers on or after 
October 19, 1998. No inference regarding the tax treatment 
under prior law is intended.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $7 million in 1999, $12 million in 2000, $14 
million in 2001, $16 million in 2002, $18 million in 2003, $20 
million in 2004, $22 million in 2005, $24 million in 2006, $26 
million in 2007, $28 million in 2008, $30 million in 2009, and 
$32 million in 2010.

 PART THREE: TAX RELIEF EXTENSION ACT OF 1999 (PUBLIC LAW 106-170) \10\
---------------------------------------------------------------------------

    \10\ The Tax Relief Extension Act was enacted as Title V of the 
Ticket to Work and Work Incentives Improvement Act of 1999 (H.R. 1180). 
For legislative background, see H.R. 2923, as reported by the House 
Ways and Means Committee, H. Rep. 106-344 (September 28, 1999); S. 
1792, as reported by the Senate Finance Committee, S. Rep. 106-201 
(October 26, 1999); and Title V of H.R. 1180, H. Rep. 106-478 (Joint 
Explanatory Statement of the Committee on Conference) (November 17, 
1999). Reasons for change appearing in this document for the provisions 
in this Act are taken from H. Rep. 106-344 or S. Rep. 106-201 unless 
otherwise indicated.
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                I. EXTENSION OF EXPIRING TAX PROVISIONS

   A. Extend Minimum Tax Relief for Individuals (sec. 501 of the Tax 
         Relief Extension Act and secs. 24 and 26 of the Code)

                         Present and Prior Law

    Present and prior law provides for certain nonrefundable 
personal tax credits (i.e., the dependent care credit, the 
credit for the elderly and disabled, the adoption credit, the 
child tax credit, the credit for interest on certain home 
mortgages, the HOPE Scholarship and Lifetime Learning credits, 
and the D.C. homebuyer's credit). Under prior law, except for 
taxable years beginning during 1998, these credits were allowed 
only to the extent that the individual's regular income tax 
liability exceeds the individual's tentative minimum tax, 
determined without regard to the minimum tax foreign tax 
credit; for taxable years beginning during 1998, these credits 
were allowed to the extent of the full amount of the 
individual's regular tax (without regard to the tentative 
minimum tax).
    An individual's tentative minimum tax is an amount equal to 
(1) 26 percent of the first $175,000 ($87,500 in the case of a 
married individual filing a separate return) of alternative 
minimum taxable income (``AMTI'') in excess of a phased-out 
exemption amount and (2) 28 percent of the remaining AMTI. The 
maximum tax rates on net capital gain used in computing the 
tentative minimum tax are the same as under the regular tax. 
AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments. The exemption 
amounts are: (1) $45,000 in the case of married individuals 
filing a joint return and surviving spouses; (2) $33,750 in the 
case of other unmarried individuals; and (3) $22,500 in the 
case of married individuals filing a separate return, estates 
and trusts. The exemption amounts are phased out by an amount 
equal to 25 percent of the amount by which the individual's 
AMTI exceeds (1) $150,000 in the case of married individuals 
filing a joint return and surviving spouses, (2) $112,500 in 
the case of other unmarried individuals, and (3) $75,000 in the 
case of married individuals filing separate returns or an 
estate or a trust. These amounts are not indexed for inflation.
    For families with three or more qualifying children, a 
refundable child credit is provided, up to the amount by which 
the liability for social security taxes exceeds the amount of 
the earned income credit (sec. 24(d)). Under prior law, for 
taxable years beginning after 1998, the refundable child credit 
was reduced by the amount of the individual's minimum tax 
liability (i.e., the amount by which the tentative minimum tax 
exceeds the regular tax liability).

                           Reasons for Change

    The Congress believed that middle-income families should be 
able to use the nonrefundable credits without limitation by 
reason of the minimum tax. This provision will result in 
significant simplification by reducing the number of 
individuals required to make AMT computations for purposes of 
determining their personal credits.

                        Explanation of Provision

    The Tax Relief Extension Act extends the provision that 
allows the nonrefundable credits to offset the individual's 
regular tax liability in full (as opposed to only the amount by 
which the regular tax exceeds the tentative minimum tax) to 
taxable years beginning in 1999. For taxable years beginning in 
2000 and 2001 the personal nonrefundable credits may offset 
both the regular tax and the minimum tax.\11\
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    \11\ The foreign tax credit will be allowed before the personal 
credits in computing the regular tax for these years.
---------------------------------------------------------------------------
    Under the Tax Relief Extension Act, the refundable child 
credit will not be reduced by the amount of an individual's 
minimum tax in taxable years beginning in 1999, 2000, and 2001.

                             Effective Date

    The provisions apply to taxable years beginning in 1999, 
2000, and 2001.

                             Revenue Effect

    The provisions are estimated to reduce Federal fiscal year 
budget receipts by $972 million in 2000, $977 million in 2001, 
and $943 million in 2002.

    B. Extension of Research Tax Credit (sec. 502 of the Tax Relief 
                 Extension Act and sec. 41 of the Code)

                         Present and Prior Law

    Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenditures for a taxable year exceeded its base amount for 
that year. The research tax credit expired and generally does 
not apply to amounts paid or incurred after June 30, 1999.
    Except for certain university basic research payments made 
by corporations, the research tax credit applies only to the 
extent that the taxpayer's qualified research expenditures for 
the current taxable year exceed its base amount. The base 
amount for the current year generally is computed by 
multiplying the taxpayer's ``fixed-base percentage'' by the 
average amount of the taxpayer's gross receipts for the four 
preceding years. If a taxpayer both incurred qualified research 
expenditures and had gross receipts during each of at least 
three years from 1984 through 1988, then its ``fixed-base 
percentage'' is the ratio that its total qualified research 
expenditures for the 1984-1988 period bears to its total gross 
receipts for that period (subject to a maximum ratio of .16). 
All other taxpayers (so-called ``start- up firms'') are 
assigned a fixed-base percentage of 3.0 percent. Expenditures 
attributable to research that is conducted outside the United 
States do not enter into the credit computation.
    Taxpayers are allowed to elect an alternative incremental 
research credit regime. If a taxpayer elects to be subject to 
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base 
percentage otherwise applicable under present law) and the 
credit rate likewise is reduced. Under the alternative credit 
regime, a credit rate of 1.65 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of 1 percent 
(i.e., the base amount equals 1 percent of the taxpayer's 
average gross receipts for the four preceding years) but do not 
exceed a base amount computed by using a fixed-base percentage 
of 1.5 percent. A credit rate of 2.2 percent applies to the 
extent that a taxpayer's current-year research expenses exceed 
a base amount computed by using a fixed-base percentage of 1.5 
percent but do not exceed a base amount computed by using a 
fixed-base percentage of 2 percent. A credit rate of 2.75 
percent applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of 2 percent. An election to be subject 
to this alternative incremental credit regime may be made for 
any taxable year beginning after June 30, 1996, and such an 
election applies to that taxable year and all subsequent years 
(in the event that the credit subsequently is extended by 
Congress) unless revoked with the consent of the Secretary of 
the Treasury.

                           Reasons for Change

    The Congress believed that increasing technological 
knowledge ultimately will lead to new and better products 
produced at lower costs. New and better products and lower 
production costs are the genesis of economic growth. For this 
reason, the Congress believed it was important to extend the 
research and experimentation tax credit.
    In addition, the Congress believed the alternative 
incremental credit enacted in 1996 should be strengthened. The 
alternative incremental research credit was enacted to respond 
to the changing economic circumstances of many taxpayers, which 
invest heavily in research. However, the Congress believed 
that, under current law, the alternative incremental research 
credit provides less of a research incentive than does the 
regular research and experimentation tax credit. Therefore, the 
Congress believed it was appropriate to increase the rate of 
the alternative incremental research credit.
    Lastly, the Congress believed that qualified research 
expenditures incurred in Puerto Rico and other possessions 
should qualify for purposes of determination of the research 
credit, so long as such expenses are not otherwise related to 
credits allowable under sec. 30A (``Puerto Rico economic 
activity credit'') or under sec. 936 (``Puerto Rico and 
possession tax credit'').

                        Explanation of Provision

    The provision extends the research credit through June 30, 
2004.
    In addition, the provision increases the credit rate 
applicable under the alternative incremental research credit by 
one percentage point per step. The provision also expands the 
definition of qualified research to include research undertaken 
in Puerto Rico and possessions of the United States.
    Research tax credits that are attributable to the period 
beginning on July 1, 1999, and ending on September 30, 2000, 
may not be taken into account in determining any amount 
required to be paid for any purpose under the Internal Revenue 
Code prior to October 1, 2000. On or after October 1, 2000, 
such credits may be taken into account through the filing of an 
amended return, an application for expedited refund, an 
adjustment of estimated taxes, or other means that are allowed 
by the Code. The prohibition on taking credits attributable to 
the period beginning on July 1, 1999, and ending on September 
30, 2000, into account as payments prior to October 1, 2000, 
extends to the determination of any penalty or interest under 
the Code. For example, the amount of tax required to be shown 
on a return that is due prior to October 1, 2000 (excluding 
extensions) may not be reduced by any such credits. In 
addition, the Congress clarified that deductions under section 
174 are reduced by credits allowable under section 41 as under 
present law, not withstanding the delay in taking the credit 
into account created by this provision.
    Similarly, research tax credits that are attributable to 
the period beginning October 1, 2000, and ending on September 
30, 2001, may not be taken into account in determining any 
amount required to be paid for any purpose under the Internal 
Revenue Code prior to October 1, 2001. On or after October 1, 
2001, such credits may be taken into account through the filing 
of an amended return, an application for expedited refund, an 
adjustment of estimated taxes, or other means that are allowed 
by the Code. Likewise, the prohibition on taking credits 
attributable to the period beginning on October 1, 2000, and 
ending on September 30, 2001, into account as payments prior to 
October 1, 2001, extends to the determination of any penalty or 
interest under the Code.
    In extending the research credit, the Congress expressed 
concern that the definition of qualified research be 
administered in a manner that is consistent with the intent 
Congress has expressed in enacting and extending the research 
credit. The Congress urged the Secretary to consider carefully 
the comments he had and may receive regarding the proposed 
regulations relating to the computation of the credit under 
section 41(c) and the definition of qualified research under 
section 41(d), particularly regarding the ``common knowledge'' 
standard. The Congress further noted the rapid pace of 
technological advance, especially in service-related 
industries, and urged the Secretary to consider carefully the 
comments he had and may receive in promulgating regulations in 
connection with what constitutes ``internal use'' with regard 
to software expenditures. The Congress also observed that 
software research, that otherwise satisfies the requirements of 
section 41, which is undertaken to support the provision of a 
service, should not be deemed ``internal use'' solely because 
the business component involves the provision of a service.
    The Congress reaffirmed that qualified research is research 
undertaken for the purpose of discovering new information, 
which is technological in nature. For purposes of applying this 
definition, new information is information that is new to the 
taxpayer, is not freely available to the general public, and 
otherwise satisfies the requirements of section 41. Employing 
existing technologies in a particular field or relying on 
existing principles of engineering or science is qualified 
research, if such activities are otherwise undertaken for 
purposes of discovering information and satisfy the other 
requirements under section 41.
    The Congress also was concerned about unnecessary and 
costly taxpayer record keeping burdens and reaffirm that 
eligibility for the credit is not intended to be contingent on 
meeting unreasonable record keeping requirements.

                             Effective Date

    The extension of the research credit is effective for 
qualified research expenditures paid or incurred during the 
period July 1, 1999, through June 30, 2004. The increase in the 
credit rate under the alternative incremental research credit 
is effective for taxable years beginning after June 30, 1999.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
receipts by $1,661 million in 2001, $4,082 million in 2002, 
$2,541 million in 2003, $2,242 million in 2004, $1,343 million 
in 2005, $708 million in 2006, $386 million in 2007, $150 
million in 2008, and $26 million in 2009.

C. Subpart F Exemption for Active Financing Income (sec. 503 of the Tax 
        Relief Extension Act and secs. 953 and 954 of the Code)


                         Present and Prior Law

    Under the subpart F rules, 10-percent U.S. shareholders of 
a controlled foreign corporation (``CFC'') are subject to U.S. 
tax currently on certain income earned by the CFC, whether or 
not such income is distributed to the shareholders. The income 
subject to current inclusion under the subpart F rules 
includes, among other things, foreign personal holding company 
income and insurance income. In addition, 10-percent U.S. 
shareholders of a CFC are subject to current inclusion with 
respect to their shares of the CFC's foreign base company 
services income (i.e., income derived from services performed 
for a related person outside the country in which the CFC is 
organized).
    Foreign personal holding company income generally consists 
of the following: (1) dividends, interest, royalties, rents, 
and annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and REMICs; (3) net gains from 
commodities transactions; (4) net gains from foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; and (7) payments in 
lieu of dividends.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other-country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income (Prop. 
Treas. Reg. sec. 1.953-1(a)).
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business 
(so-called ``active financing income''). These exceptions are 
applicable only for taxable years beginning in 1999.\12\
---------------------------------------------------------------------------
    \12\ Temporary exceptions from the subpart F provisions for certain 
active financing income applied only for taxable years beginning in 
1998. Those exceptions were extended and modified as part of the 
present-law provision.
---------------------------------------------------------------------------
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is eligible for the exceptions if, 
among other things, substantially all of the activities in 
connection with such transactions are conducted directly by the 
CFC or QBU in its home country, and such income is treated as 
earned by the CFC or QBU in its home country for purposes of 
such country's tax laws. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
    In the case of insurance, in addition to a temporary 
exception from foreign personal holding company income for 
certain income of a qualifying insurance company with respect 
to risks located within the CFC's country of creation or 
organization, certain temporary exceptions from insurance 
income and from foreign personal holding company income apply 
for certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch, provided certain requirements are met 
under each of the exceptions. Further, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met.

                           Reasons for Change

    In the Taxpayer Relief Act of 1997, one-year temporary 
exceptions from foreign personal holding company income were 
enacted \13\ for income from the active conduct of an 
insurance, banking, financing, or similar business. In the Tax 
and Trade Relief Extension Act of 1998 (the ``1998 Act''),\14\ 
the Congress extended the temporary exceptions for an 
additional year, with certain modifications designed to treat 
various types of businesses with active financing income more 
similarly to each other than did the 1997 provision. The 
Congress believed that it was appropriate to extend the 
temporary exceptions, as modified in the 1998 Act, for another 
two years.
---------------------------------------------------------------------------
    \13\ The President canceled this provision in 1997 pursuant to the 
Line Item Veto Act. On June 25, 1998, the U.S. Supreme Court held that 
the cancellation procedures set forth in the Line Item Veto Act are 
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June 
25, 1998).
    \14\ The Tax and Trade Relief Extension Act of 1998, Division J, 
Making Omnibus Consolidated and Emergency Supplemental Appropriations 
for Fiscal Year 1999, P.L. 105-277, sec. 1005, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends for two years the present-law 
temporary exceptions from subpart F foreign personal holding 
company income, foreign base company services income, and 
insurance income for certain income that is derived in the 
active conduct of a banking, financing, or similar business, or 
in the conduct of an insurance business.
    The Congress clarified that if the temporary exception from 
subpart F insurance income does not apply for a taxable year 
beginning after December 31, 2001, section 953(a) is to be 
applied to such taxable year in the same manner as it would for 
a taxable year beginning in 1998 (i.e., under the law in effect 
before amendments to section 953(a) were made in 1998).\15\ 
Thus, for future periods in which the temporary exception 
relating to insurance income is not in effect, the same-country 
exception from subpart F insurance income applies as under 
prior law.
---------------------------------------------------------------------------
    \15\ Id.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 1999, and before 
January 1, 2002, and for taxable years of U.S. shareholders 
with or within which such taxable years of such foreign 
corporations end.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $187 million in 2000, $785 million in 2001, 
and $744 million in 2002.

D. Taxable Income Limit on Percentage Depletion for Marginal Production 
  (sec. 504 of the Tax Relief Extension Act and sec. 613A of the Code)


                              Present Law


In general

    Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas property are recovered through 
the depletion deduction. These include costs of acquiring the 
lease or other interest in the property and geological and 
geophysical costs (in advance of actual drilling). Depletion is 
available to any person having an economic interest in a 
producing property.
    Two methods of depletion are allowable under the Code: (1) 
the cost depletion method, and (2) the percentage depletion 
method (secs. 611-613). Under the cost depletion method, the 
taxpayer deducts that portion of the adjusted basis of the 
depletable property which is equal to the ratio of units sold 
from that property during the taxable year to the number of 
units remaining as of the end of taxable year plus the number 
of units sold during the taxable year. Thus, the amount 
recovered under cost depletion may never exceed the taxpayer's 
basis in the property.
    Under the percentage depletion method, generally, 15 
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year (sec. 613A(c)). The amount deducted generally may not 
exceed 100 percent of the net income from that property in any 
year (the ``net-income limitation'') (sec. 613(a)). The 
Taxpayer Relief Act of 1997 suspended the 100-percent-of-net-
income limitation for production from marginal wells for 
taxable years beginning after December 31, 1997, and before 
January 1, 2000. Additionally, the percentage depletion 
deduction for all oil and gas properties may not exceed 65 
percent of the taxpayer's overall taxable income (determined 
before such deduction and adjusted for certain loss carrybacks 
and trust distributions) (sec. 613A(d)(1)).\16\ Because 
percentage depletion, unlike cost depletion, is computed 
without regard to the taxpayer's basis in the depletable 
property, cumulative depletion deductions may be greater than 
the amount expended by the taxpayer to acquire or develop the 
property.
---------------------------------------------------------------------------
    \16\ Amounts disallowed as a result of this rule may be carried 
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years.
---------------------------------------------------------------------------
    A taxpayer is required to determine the depletion deduction 
for each oil or gas property under both the percentage 
depletion method (if the taxpayer is entitled to use this 
method) and the cost depletion method. If the cost depletion 
deduction is larger, the taxpayer must utilize that method for 
the taxable year in question (sec. 613(a)).

Limitation of oil and gas percentage depletion to independent producers 
        and royalty owners

    Generally, only independent producers and royalty owners 
(as contrasted to integrated oil companies) are allowed to 
claim percentage depletion. Percentage depletion for eligible 
taxpayers is allowed only with respect to up to 1,000 barrels 
of average daily production of domestic crude oil or an 
equivalent amount of domestic natural gas (sec. 613A(c)). For 
producers of both oil and natural gas, this limitation applies 
on a combined basis.
    In addition to the independent producer and royalty owner 
exception, certain sales of natural gas under a fixed contract 
in effect on February 1, 1975, and certain natural gas from 
geopressured brine, are eligible for percentage depletion, at 
rates of 22 percent and 10 percent, respectively. These 
exceptions apply without regard to the 1,000-barrel-per-day 
limitation and regardless of whether the producer is an 
independent producer or an integrated oil company.

                           Reasons for Change

    The Congress noted that oil is, and will continue to be, 
vital to the American economy. The Congress observed that low 
oil prices had created substantial economic hardship in the oil 
industry and particularly in those communities where the 
majority of jobs are related to providing this vital commodity 
to the nation. Skilled workers and industry know-how will be 
critical to the exploration for and production of oil and gas 
in the future. The Congress, therefore, was concerned that 
economic hardship in the industry could lead to business 
failures and job losses.

                        Explanation of Provision

    The provision extends the period when the 100-percent net-
income limit is suspended to include taxable years beginning 
after December 31, 1999 and before January 1, 2002.

                             Effective Date

    The provision became effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
revenues by $23 million in 2000, by $35 million in 2001, and by 
$12 million in 2002.

 E. Extend the Work Opportunity Tax Credit (sec. 505 of the Tax Relief 
                 Extension Act and sec. 51 of the Code)


                         Present and Prior Law


In general

    The work opportunity tax credit (``WOTC''), which expired 
on June 30, 1999, was available on an elective basis for 
employers hiring individuals from one or more of eight targeted 
groups. The credit equals 40 percent (25 percent for employment 
of 400 hours or less) of qualified wages. Generally, qualified 
wages are wages attributable to service rendered by a member of 
a targeted group during the one-year period beginning with the 
day the individual began work for the employer.
    The maximum credit per employee is $2,400 (40% of the first 
$6,000 of qualified first-year wages). With respect to 
qualified summer youth employees, the maximum credit is $1,200 
(40 percent of the first $3,000 of qualified first-year wages).
    The employer's deduction for wages is reduced by the amount 
of the credit.

Targeted groups eligible for the credit

    The eight targeted groups are: (1) families eligible to 
receive benefits under the Temporary Assistance for Needy 
Families (TANF) Program; (2) high-risk youth; (3) qualified ex-
felons; (4) vocational rehabilitation referrals; (5) qualified 
summer youth employees; (6) qualified veterans; (7) families 
receiving food stamps; and (8) persons receiving certain 
Supplemental Security Income (SSI) benefits.

Minimum employment period

    No credit is allowed for wages paid to employees who work 
less than 120 hours in the first year of employment.

Expiration date

    The credit was effective for wages paid or incurred to a 
qualified individual who began work for an employer before July 
1, 1999.

                           Reasons for Change

    The Congress believed the preliminary experience of the 
WOTC is promising as an incentive for employers to hire 
individuals who are under-skilled, undereducated, or who 
generally may be less desirable (e.g., lacking in work 
experience) to employers. A temporary extension of this credit 
will allow the Congress and the Treasury and Labor Departments 
to continue to monitor the effectiveness of the credit. The 
Congress also believed that the electronic filing of the 
request for certification (the ``Form 8850'') will reduce the 
administrative burden involved in claiming the credit and 
encourage more employers to participate in the program.

                        Explanation of Provision

    The Tax Relief Extension Act provides for a 30-month 
extension of the work opportunity tax credit (through December 
31, 2001) and includes a clarification of the definition of 
first year of employment for purposes of the WOTC. Also, the 
Tax Relief Extension Act directed the Secretary of the Treasury 
to expedite the use of electronic filing of requests for 
certification under the credit.

                             Effective Date

    The provision is effective for wages paid or incurred to 
qualified individuals who begin work for the employer on or 
after July 1, 1999, and before January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $229 million in 2000, $321 million in 2001, 
$293 million in 2002, $151 million in 2003, $58 million in 
2004, $19 million in 2005, and $3 million in 2006.

 F. Extend the Welfare-To-Work Tax Credit (sec. 505 of the Tax Relief 
                Extension Act and sec. 51A of the Code)


                         Present and Prior Law

    The Code provided to employers a tax credit on the first 
$20,000 of eligible wages paid to qualified long-term family 
assistance (AFDC or its successor program) recipients during 
the first two years of employment. The credit is 35 percent of 
the first $10,000 of eligible wages in the first year of 
employment and 50 percent of the first $10,000 of eligible 
wages in the second year of employment. The maximum credit is 
$8,500 per qualified employee.
    Qualified long-term family assistance recipients are: (1) 
members of a family that has received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that has received family assistance for a 
total of at least 18 months (whether or not consecutive) after 
the date of enactment of this credit if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within 2 years after the Federal or State time 
limits made the family ineligible for family assistance.
    Eligible wages include cash wages paid to an employee plus 
amounts paid by the employer for the following: (1) educational 
assistance excludable under a section 127 program (or that 
would be excludable but for the expiration of sec. 127); (2) 
health plan coverage for the employee, but not more than the 
applicable premium defined under section 4980B(f)(4); and (3) 
dependent care assistance excludable under section 129.
    The welfare to work credit was effective for wages paid or 
incurred to a qualified individual who begins work for an 
employer on or after January 1, 1998, and before July 1, 1999.

                           Reasons for Change

    When enacted in the Taxpayer Relief Act of 1997, the goals 
of the welfare-to-work credit were: (1) to provide an incentive 
to hire long-term welfare recipients; (2) to promote the 
transition from welfare to work by increasing access to 
employment; and (3) to encourage employers to provide these 
individuals with training, health coverage, dependent care and 
ultimately better job attachment. The Congress believed that 
the credit should be temporarily extended to provide the 
Congress and the Treasury and Labor Departments a better 
opportunity to assess the operation and effectiveness of the 
credit in meeting its goals.

                        Explanation of Provision

    The Tax Relief Extension Act provides for a 30-month 
extension of the welfare-to-work tax credit (through December 
31, 2001).

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after July 1, 1999, and before January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $49 million in 2000, $77 million in 2001, 
$79 million in 2002, $47 million in 2003, $19 million in 2004, 
$7 million in 2005, and $2 million in 2006.

G. Extend Exclusion for Employer-Provided Educational Assistance (sec. 
     506 of the Tax Relief Extension Act and sec. 127 of the Code)


                         Present and Prior Law

    Educational expenses paid by an employer for the employer's 
employees are generally deductible to the employer.
    Employer-paid educational expenses are excludable from the 
gross income and wages of an employee if provided under a 
section 127 educational assistance plan or if the expenses 
qualify as a working condition fringe benefit under section 
132. Section 127 provides an exclusion of $5,250 annually for 
employer-provided educational assistance. Under prior law, the 
exclusion expired with respect to graduate-level courses 
beginning after June 30, 1996. With respect to undergraduate-
level courses, the exclusion for employer-provided educational 
assistance expired under prior law with respect to courses 
beginning on or after June 1, 2000.
    In order for the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
educational assistance program must not discriminate in favor 
of highly compensated employees. In addition, not more than 5 
percent of the amounts paid or incurred by the employer during 
the year for educational assistance under a qualified 
educational assistance plan can be provided for the class of 
individuals consisting of more than 5-percent owners of the 
employer (and their spouses and dependents).
    Educational expenses that do not qualify for the section 
127 exclusion may be excludable from income as a working 
condition fringe benefit.\17\ In general, education qualifies 
as a working condition fringe benefit if the employee could 
have deducted the education expenses under section 162 if the 
employee paid for the education. In general, education expenses 
are deductible by an individual under section 162 if the 
education (1) maintains or improves a skill required in a trade 
or business currently engaged in by the taxpayer, or (2) meets 
the express requirements of the taxpayer's employer, applicable 
law or regulations imposed as a condition of continued 
employment. However, education expenses are generally not 
deductible if they relate to certain minimum educational 
requirements or to education or training that enables a 
taxpayer to begin working in a new trade or business.\18\
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    \17\ These rules also apply in the event that section 127 expires 
and is not reinstated.
    \18\ In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized deduction 
only if such expenses, along with other miscellaneous deductions, 
exceed 2 percent of the taxpayer's AGI. The 2-percent floor limitation 
is disregarded in determining whether an item is excludable as a 
working condition fringe benefit.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that the exclusion for employer-
provided educational assistance has enabled millions of workers 
to advance their education and improve their job skills without 
incurring additional taxes and a reduction in take-home pay. In 
addition, the exclusion lessens the complexity of the tax laws. 
Without the special exclusion, a worker receiving educational 
assistance from his or her employer is subject to tax on the 
assistance, unless the education is related to the worker's 
current job. Because the determination of whether particular 
educational assistance is job-related is based on the facts and 
circumstances, it may be difficult to determine with certainty 
whether the educational assistance is excludable from income. 
This uncertainty may lead to disputes between taxpayers and the 
Internal Revenue Service.
    The past experience of allowing the exclusion to expire and 
subsequently retroactively extending it has created burdens for 
employers and employees. Employees may have difficulty planning 
for their educational goals if they do not know whether their 
tax bills will increase. For employers, the fits and starts of 
the legislative history of the provision have caused severe 
administrative problems. The Congress believed that uncertainty 
about the exclusion's future may discourage some employers from 
providing educational benefits. Thus, the Congress believed it 
appropriate to extend the provisions so that employers and 
employees can plan for some time into the future.

                        Explanation of Provision

    The Tax Relief Extension Act extends the exclusion for 
employer-provided educational assistance through December 31, 
2001. The exclusion does not apply with respect to graduate-
level courses.

                             Effective Date

    The provision is effective with respect to courses 
beginning after May 31, 2000, and before January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $134 million in 2000, $318 million in 2001, 
and $132 million in 2002.

H. Extension and Modification of Credit for Producing Electricity From 
 Certain Renewable Resources (sec. 507 of the Tax Relief Extension Act 
                        and sec. 45 of the Code)


                         Present and Prior Law

    An income tax credit is allowed for the production of 
electricity from either qualified wind energy or qualified 
``closed-loop'' biomass facilities (sec. 45).
    The credit applies to electricity produced by a qualified 
wind energy facility placed in service after December 31, 1993, 
and before July 1, 1999, and to electricity produced by a 
qualified closed-loop biomass facility placed in service after 
December 31, 1992, and before July 1, 1999. The credit is 
allowable for production during the 10-year period after a 
facility is originally placed in service.
    Closed-loop biomass is the use of plant matter, where the 
plants are grown for the sole purpose of being used to generate 
electricity. It does not include the use of waste materials 
(including, but not limited to, scrap wood, manure, and 
municipal or agricultural waste). The credit also is not 
available to taxpayers who use standing timber to produce 
electricity. In order to claim the credit, a taxpayer must own 
the facility and sell the electricity produced by the facility 
to an unrelated party.
    The credit for electricity produced from wind or closed-
loop biomass is a component of the general business credit 
(sec. 28(b)(1)). This credit, when combined with all other 
components of the general business credit, generally may not 
exceed for any taxable year the excess of the taxpayer's net 
income tax over the greater of (1) 25 percent of net regular 
tax liability above $25,000 or (2) the tentative minimum tax. 
An unused general business credit generally may be carried back 
one taxable year and carried forward 20 taxable years (sec. 
39).

                           Reasons for Change

    The Congress believed that the credit provided under 
section 45 has been important to the development of 
environmentally friendly, renewable wind power and that 
extending the placed in service date will increase the further 
development of wind resources.
    The Congress observed, however, that there is organic waste 
that is disposed of in an uncontrolled manner. Such organic 
waste can be a fuel source that, if utilized, can promote a 
cleaner environment. The Congress believed that providing a 
credit to utilize these organic fuel sources can help produce 
needed electricity while providing environmental benefits for 
communities and the nation.

                        Explanation of Provision

    The provision extends the present-law tax credit for 
electricity produced by wind and closed-loop biomass for 
facilities placed in service after June 30, 1999, and before 
January 1, 2002. The provision also modifies the tax credit to 
include electricity produced from poultry litter, for 
facilities placed in service after December 31, 1999, and 
before January 1, 2002. In addition, the provision clarifies 
which wind facilities are eligible for the credit.

                             Effective Date

    The provision is effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
receipts by $9 million in 2000, $25 million in 2001, $33 
million in 2002, $33 million in 2003, $34 million in 2004, $35 
million in 2005, $36 million in 2006, $37 million in 2007, $38 
million in 2008, $38 million in 2009, and $39 million in 2010.

 I. Extension of Authority to Issue Qualified Zone Academy Bonds (sec. 
    509 of the Tax Relief Extension Act and sec. 1397E of the Code)


                         Present and Prior Law


Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units, including the financing of 
public schools (sec. 103).

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments are given the authority to issue 
``qualified zone academy bonds'' (``QZABs'') (sec. 1397E). A 
total of $400 million of qualified zone academy bonds could be 
issued in each of 1998 and 1999. The $400 million aggregate 
bond cap is allocated each year to the States according to 
their respective populations of individuals below the poverty 
line. Each State, in turn, allocates the credit authority to 
qualified zone academies within such State. Under prior law, a 
State could carry over any unused allocation indefinitely into 
subsequent years.
    Certain financial institutions that hold qualified zone 
academy bonds are entitled to a nonrefundable tax credit in an 
amount equal to a credit rate multiplied by the face amount of 
the bond. A taxpayer holding a qualified zone academy bond on 
the credit allowance date is entitled to a credit. The credit 
is includable in gross income (as if it were a taxable interest 
payment on the bond), and may be claimed against regular income 
tax and AMT liability.
    The Treasury Department sets the credit rate at a rate 
estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer. The 
maximum term of the bond is determined by the Treasury 
Department, so that the present value of the obligation to 
repay the bond is 50 percent of the face value of the bond.
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A school is a ``qualified zone academy'' if (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zones 
enterprise community designated under the Code, or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.

                        Explanation of Provision

    The provision authorized up to $400 million of qualified 
zone academy bonds to be issued in each of calendar years 2000 
and 2001. Unused QZAB authority arising in 1998 and 1999 may be 
carried forward by the State or local government entity to 
which it is (or was) allocated for up to three years after the 
year in which the authority originally arose. Unused QZAB 
authority arising in 2000 and 2001 may be carried forward for 
two years after the year in which it arises. Each issuer is 
deemed to use the oldest QZAB authority that has been allocated 
to it first when new bonds are issued.

                             Effective Date

    The provision became effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
revenues by $3 million in 2000, $11 million in 2001, $20 
million in 2002, $28 million in 2003, $30 million annually in 
2004 through 2010.

 J. Extend the Tax Credit for First-Time D.C. Homebuyers (sec. 510 of 
        the Tax Relief Extension Act and sec. 1400C of the Code)


                         Present and Prior Law

    First-time homebuyers of a principal residence in the 
District of Columbia are eligible for a nonrefundable tax 
credit of up to $5,000 of the amount of the purchase price. The 
$5,000 maximum credit applies both to individuals and married 
couples. Married individuals filing separately can claim a 
maximum credit of $2,500 each. The credit phases out for 
individual taxpayers with adjusted gross income between $70,000 
and $90,000 ($110,000-$130,000 for joint filers). For purposes 
of eligibility, a ``first-time homebuyer'' means any individual 
if such individual did not have a present ownership interest in 
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence 
to which the credit applies. Under prior law, the credit was 
scheduled to expire for residences purchased after December 31, 
2000.

                        Explanation of Provision

    The provision extends the tax credit for first-time D.C. 
homebuyers for one year (so that it applies to residences 
purchased on or before December 31, 2001).\19\
---------------------------------------------------------------------------
    \19\ A subsequent provision described below in Part Eight (sec. 164 
of H.R. 5662, The Community Renewal Tax Relief Act of 2000) extends the 
D.C. homebuyer credit for an additional two years (through December 31, 
2003).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for residences purchased after 
December 31, 2000 and before January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $5 million in 2001, $15 million in 2002, and 
less than $500,000 in each of the years 2003 through 2010.

K. Extend Expensing of Environmental Remediation Expenditures (sec. 511 
       of the Tax Relief Extension Act and sec. 198 of the Code)


                         Present and Prior Law

    Taxpayers can elect to treat certain environmental 
remediation expenditures that would otherwise be chargeable to 
capital account as deductible in the year paid or incurred 
(sec. 198). The deduction applies for both regular and 
alternative minimum tax purposes. The expenditure must be 
incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site.
    A ``qualified contaminated site'' generally is any property 
that (1) is held for use in a trade or business, for the 
production of income, or as inventory; (2) is certified by the 
appropriate State environmental agency to be located within a 
targeted area; and (3) contains (or potentially contains) a 
hazardous substance (so-called ``brownfields''). Targeted areas 
are defined as: (1) empowerment zones and enterprise 
communities as designated under present law; (2) sites 
announced before February, 1997, as being subject to one of the 
76 Environmental Protection Agency (``EPA'') Brownfields 
Pilots; (3) any population census tract with a poverty rate of 
20 percent or more; and (4) certain industrial and commercial 
areas that are adjacent to tracts described in (3) above. 
However, sites that are identified on the national priorities 
list under the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 cannot qualify as 
targeted areas.
    Eligible expenditures are those paid or incurred before 
January 1, 2001.

                           Reasons for Change


Report of Senate Committee on Finance \20\
---------------------------------------------------------------------------

    \20\ H.R. 1180 as passed by the House and amended by the Senate did 
not contain any provision relating to sec. 198. However, S. 1792, as 
passed by the Senate, would have eliminated the targeted area 
requirement, thereby, expanding eligible sites to include any site 
containing (or potentially containing) a hazardous substance that is 
certified by the appropriate State environmental agency, but not those 
sites that are identified on the national priorities list under the 
Comprehensive Environmental Response, Compensation, and Liability Act 
of 1980. The conference agreement did not adopt the provision of S. 
1792, but, as explained below, extended the date by which qualifying 
expenditures are to be incurred. The reasons for change reported here 
reprint the reasons for change reported in the committee report 
accompanying S. 1792 (S. Rep. 106-201, 17).
---------------------------------------------------------------------------
    The Committee would like to see more so-called 
``brownfield'' sites brought back into productive use in the 
economy. Cleaning up such sites mitigates potential harms to 
public health and can help revitalize affected communities. The 
Committee seeks to encourage the clean up of contaminated 
sites. To achieve this goal, the Committee believes it is 
necessary to expand the set of brownfield sites that may claim 
the tax benefits of expending beyond the relatively narrow 
class of sites identified in the Taxpayer Relief Act of 1997.

                        Explanation of Provision

    The provision extends the present-law expiration date for 
sec. 198 to include those expenditures paid or incurred before 
January 1, 2002.

                             Effective Date

    The provision to extend the expiration date is effective 
upon the date of enactment (December 17, 1999).

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $11 million in 2000, to reduce Federal 
fiscal year budget receipts by $43 million in 2001, $59 million 
in 2002, $20 million in 2003, $2 million in 2004, $1 million in 
2005, and to increase Federal fiscal year budget receipts by $2 
million in 2006, $5 million in 2007, $6 million in 2008, $8 
million in 2009, and $10 million in 2010.

   L. Temporary Increase in Amount of Rum Excise Tax Covered Over to 
    Puerto Rico and the Virgin Islands (sec. 512 of the Tax Relief 
                Extension Act and sec. 7652 of the Code)


                         Present and Prior Law

    A $13.50 per proof gallon \21\ excise tax is imposed on 
distilled spirits produced in, or imported or brought into, the 
United States (sec. 5001). The excise tax does not apply to 
distilled spirits that are exported from the United States or 
to distilled spirits that are consumed in U.S. possessions 
(e.g., Puerto Rico and the Virgin Islands).
---------------------------------------------------------------------------
    \21\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol.
---------------------------------------------------------------------------
    Under present and prior law the Code provides for payment 
(``coverover'') of $10.50 per proof gallon of the excise tax 
imposed on rum imported (or brought) into the United States 
(without regard to the country of origin) to Puerto Rico and 
the Virgin Islands (sec. 7652). During the five-year period 
ending on September 30, 1998, the amount covered over was 
$11.30 per proof gallon. This temporary increase was enacted in 
1993 as transitional relief accompanying a reduction in certain 
tax benefits for corporations operating in Puerto Rico and the 
Virgin Islands (sec. 936).
    Amounts covered over to Puerto Rico and the Virgin Islands 
are deposited in the treasuries of the two possessions for use 
as those possessions determine.

                           Reasons for Change

    The Congress found that the fiscal needs of Puerto Rico and 
the Virgin Islands remained substantial and, therefore, found 
it appropriate to increase and extend the coverover of excise 
tax receipts to Puerto Rico and the Virgin Islands.

                        Explanation of Provision

    The provision increases the rum excise tax coverover to a 
rate of $13.25 per proof gallon during the period from July 1, 
1999, through December 31, 2001.
    The provision also includes a special rule for payment of 
the $2.75 per proof gallon increase in the coverover rate for 
Puerto Rico and the Virgin Islands. The rule applies to 
payments that otherwise would have been made in Fiscal Year 
2000. Under this rule, amounts attributable to the increase in 
the coverover rate that would have been transferred to Puerto 
Rico and the Virgin Islands after June 30, 1999 and before the 
date of the provision's enactment, were to be paid on the date 
which was 15 days after the date of enactment. However, the 
total amount of this initial payment (aggregated for both 
possessions) could not exceed $20 million.\22\
---------------------------------------------------------------------------
    \22\ This limitation subsequently was repealed by the Trade and 
Development Act of 2000.
---------------------------------------------------------------------------
    The next payment to Puerto Rico and the Virgin Islands with 
respect to the $2.75 increase in the coverover rate was to be 
made on October 1, 2000. This payment was to equal the total 
amount attributable to the increase that otherwise would have 
be transferred to Puerto Rico and the Virgin Islands before 
October 1, 2000 (less the payment of up to $20 million made 15 
days after the date of enactment).
    Payments for the remainder of the period through December 
31, 2001, are to be paid as provided under the present- and 
prior-law rules for the $10.50 per proof gallon coverover rate.
    The special payment rule does not affect payments to Puerto 
Rico and the Virgin Islands with respect to the permanent 
$10.50 per proof gallon coverover rate.

                             Effective Date

    The provision became effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget outlays by $21 million in 2000, $115 million in 2002, 
and $15 million in 2003.

                  II. OTHER TIME-SENSITIVE PROVISIONS


 A. Prohibit Disclosure of APAs and APA Background Files (sec. 521 of 
   the Tax Relief Extension Act and secs. 6103 and 6110 of the Code)


                         Present and Prior Law


Section 6103

    Under present and prior law, returns and return information 
are confidential and cannot be disclosed unless authorized by 
the Internal Revenue Code.
    The Code defines ``return information'' broadly. Under 
present and prior law, return information includes:
          (1) a taxpayer's identity, the nature, source or 
        amount of income, payments, receipts, deductions, 
        exemptions, credits, assets, liabilities, net worth, 
        tax liability, tax withheld, deficiencies, 
        overassessments, or tax payments;
          (2) whether the taxpayer's return was, is being, or 
        will be examined or subject to other investigation or 
        processing; or
          (3) any other data, received by, recorded by, 
        prepared by, furnished to, or collected by the 
        Secretary with respect to a return or with respect to 
        the determination of the existence, or possible 
        existence, of liability (or the amount thereof) of any 
        person under this title for any tax, penalty, interest, 
        fine, forfeiture, or other imposition, or offense,\23\ 
        and
---------------------------------------------------------------------------
    \23\ Sec. 6103(b)(2)(A).
---------------------------------------------------------------------------
          (4) any part of any written determination or any 
        background file document relating to such written 
        determination which is not open to public inspection 
        under section 6110.\24\
---------------------------------------------------------------------------
    \24\ Sec. 6103(b)(2)(B).
---------------------------------------------------------------------------

Section 6110 and the Freedom of Information Act

    With certain exceptions, present and prior law makes the 
text of any written determination the Internal Revenue Service 
(``IRS'') issues available for public inspection. Once the IRS 
makes the written determination publicly available, the 
background file documents associated with such written 
determination are available for public inspection upon written 
request. The Code defines ``background file documents'' as any 
written material submitted in support of the request. 
Background file documents also include any communications 
between the IRS and persons outside the IRS concerning such 
written determination that occur before the IRS issues the 
determination.
    Before making them available for public inspection, section 
6110 requires the IRS to delete specific categories of 
sensitive information from the written determination and 
background file documents.\25\ It also provides judicial and 
administrative procedures to resolve disputes over the scope of 
the information the IRS will disclose. In addition, Congress 
has also wholly exempted certain matters from section 6110's 
public disclosure requirements.\26\ Any part of a written 
determination or background file that is not disclosed under 
section 6110 constitutes ``return information.'' \27\
---------------------------------------------------------------------------
    \25\ Sec. 6110(c) provides for the deletion of identifying 
information, trade secrets, confidential commercial and financial 
information and other material.
    \26\ Sec. 6110(l).
    \27\ Sec. 6103(b)(2)(B) (``The term `return information' means . . 
. any part of any written determination or any background file document 
relating to such written determination (as such terms are defined in 
section 6110(b)) which is not open to public inspection under section 
6110'').
---------------------------------------------------------------------------
    The Freedom of Information Act (FOIA) lists categories of 
information that a federal agency must make available for 
public inspection.\28\ It establishes a presumption that agency 
records are accessible to the public. The FOIA, however, also 
provides nine exemptions from public disclosure. One of those 
exemptions is for matters specifically exempted from disclosure 
by a statute other than the FOIA if the exempting statute meets 
certain requirements.\29\ Section 6103 qualifies as an 
exempting statute under this FOIA provision. Thus, returns and 
return information that section 6103 deems confidential are 
exempt from disclosure under the FOIA.
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    \28\ Unless published promptly and offered for sale, an agency must 
provide for public inspection and copying: (1) final opinions as well 
as orders made in the adjudication of cases; (2) statements of policy 
and interpretations not published in the Federal Register; (3) 
administrative staff manuals and instructions to staff that affect a 
member of the public; and (4) agency records which have been or the 
agency expects to be, the subject of repetitive FOIA requests. 5 U.S.C. 
sec. 552(a)(2). An agency must also publish in the Federal Register: 
the organizational structure of the agency and procedures for obtaining 
information under the FOIA; statements describing the functions of the 
agency and all formal and informal procedures; rules of procedure, 
descriptions of forms and statements describing all papers, reports and 
examinations; rules of general applicability and statements of general 
policy; and amendments, revisions and repeals of the foregoing. 5 
U.S.C. sec. 552(a)(1). All other agency records can be sought by FOIA 
request; however, some records may be exempt from disclosure.
    \29\ Exemption 3 of the FOIA provides that an agency is not 
required to disclose matters that are:
    (3) specifically exempted from disclosure by statute (other than 
section 552b of this title) provided that such statute (A) requires 
that the matters be withheld from the public in such a manner as to 
leave no discretion on the issue, or (B) establishes particular 
criteria for withholding or refers to particular types of matters to be 
withheld; . . .
    5 U.S.C. 552(b)(3).
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    Section 6110 is the exclusive means for the public to view 
IRS written determinations.\30\ If section 6110 covers the 
written determination, then the public cannot use the FOIA to 
obtain that determination.
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    \30\ Sec. 6110(m).
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Advance Pricing Agreements

    The Advanced Pricing Agreement (``APA'') program is an 
alternative dispute resolution program conducted by the IRS, 
which resolves international transfer pricing issues prior to 
the filing of the corporate tax return. Specifically, an APA is 
an advance agreement establishing an approved transfer pricing 
methodology entered into among the taxpayer, the IRS, and a 
foreign tax authority. The IRS and the foreign tax authority 
generally agree to accept the results of such approved 
methodology. Alternatively, an APA also may be negotiated 
between just the taxpayer and the IRS; such an APA establishes 
an approved transfer pricing methodology for U.S. tax purposes. 
The APA program focuses on identifying the appropriate transfer 
pricing methodology; it does not determine a taxpayer's tax 
liability. Taxpayers voluntarily participate in the program.
    To resolve the transfer pricing issues, the taxpayer 
submits detailed and confidential financial information, 
business plans and projections to the IRS for consideration. 
Resolution involves an extensive analysis of the taxpayer's 
functions and risks.
    Pending in the U.S. District Court for the District of 
Columbia were three consolidated lawsuits asserting that, under 
prior law, APAs were subject to public disclosure under either 
section 6110 or the FOIA.\31\ Prior to this litigation and 
since the inception of the APA program, the IRS held the 
position that APAs were confidential return information 
protected from disclosure by section 6103.\32\ On January 11, 
1999, the IRS conceded that APAs are ``rulings'' and therefore 
are ``written determinations'' for purposes of section 
6110.\33\ Although the court had not issued a ruling in the 
case, the IRS announced its plan to publicly release both 
existing and future APAs. The IRS then transmitted existing 
APAs to the respective taxpayers with proposed deletions. It 
received comments from some of the affected taxpayers. Where 
appropriate, foreign tax authorities also received copies of 
the relevant APAs for comment on the proposed deletions. No 
APAs were released to the public.
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    \31\ BNA v. IRS, Nos. 96-376, 96-2820, and 96-1473 (D.D.C.). The 
Bureau of National Affairs, Inc. (BNA) publishes matters of interest 
for use by its subscribers. BNA contended that APAs were not return 
information as they are prospective in application. Thus, at the time 
they are entered into, they do not relate to ``the determination of the 
existence, or possible existence, of liability or amount thereof . . 
.''
    \32\ The IRS contended that information received or generated as 
part of the APA process pertains to a taxpayer's liability and 
therefore was return information as defined in sec. 6103(b)(2)(A). 
Thus, the information was subject to section 6103's restrictions on the 
dissemination of returns and return information. Rev. Proc. 91-22, sec. 
11, 1991-1 C.B. 526, 534 and Rev. Proc. 96-53, sec. 12, 1996-2 C.B. 
375, 386.
    \33\ IR 1999-05.
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    Some taxpayers asserted that the IRS erred in adopting the 
position under prior law that APAs are subject to section 6110 
public disclosure. Several had sought to participate as amici 
in the lawsuit to block the release of APAs. They were 
concerned that release under section 6110 could expose them to 
expensive litigation to defend the deletion of the confidential 
information from their APAs. They were also concerned that the 
section 6110 procedures are insufficient to protect the 
confidentiality of their trade secrets and other financial and 
commercial information.

                           Reasons for Change

    The APA program has been a successful mechanism for 
resolving transfer pricing issues, not only for future years, 
but, in some instances, for prior open years as well 
(rollbacks). It reduces protracted disputes and costly 
litigation between taxpayers and the government. The program 
involves not only taxpayers and the IRS, but also foreign 
taxing authorities.
    As part of the program, the taxpayer voluntarily provides 
substantial, sensitive information to the IRS. The proprietary 
information necessary to support a claim of comparability may 
be among a company's most closely guarded trade secrets. 
Similarly, information regarding production costs and customer 
pricing may also be extremely sensitive information.
    From the program's inception, the IRS had assured taxpayers 
and foreign governments that the information received or 
generated in the APA process would be protected as confidential 
return information. Such assurances were based on published IRS 
materials.
    The APA process is based on taxpayers' cooperation and 
voluntary disclosure to the IRS of sensitive information. The 
Congress believed that the continued confidentiality of this 
information was vital to the APA program. Otherwise, the 
Congress believed that some taxpayers may refuse to participate 
in this successful program, causing a decline in its 
usefulness.
    The Congress must balance the need for confidentiality with 
the general public's need for practical tax guidance. Some 
members of the public have expressed concern that the APA 
program has led to the development of a body of ``secret law,'' 
known only to a few members of the tax profession. In addition, 
some members of the public contend that taxpayers have received 
APAs permitting the use of transfer pricing methodologies not 
contemplated in the section 482 regulations. They also contend 
that APAs have provided interpretations of law not available to 
taxpayers that do not participate in the APA process. Such 
concerns could undermine the public's confidence in the IRS's 
ability to enforce fairly the transfer pricing rules. Thus, the 
provision requires the Department of the Treasury to prepare 
and publish an annual report regarding APAs, which will provide 
extensive information regarding the program, while clarifying 
that existing and future APAs and related background 
information continue to be confidential return information.

                        Explanation of Provision

    The provision amends section 6103 to provide that APAs and 
related background information are confidential return 
information under section 6103. Related background information 
includes: the request for an APA, any material submitted in 
support of the request, and any communication (written or 
otherwise) prepared or received by the Secretary in connection 
with an APA, regardless of when such communication is prepared 
or received. Protection is not limited to agreements actually 
executed; it includes material received and generated in the 
APA process that does not result in an executed agreement.
    Further, APAs and related background information are not 
``written determinations'' as that term is defined in section 
6110. Therefore, the public inspection requirements of section 
6110 do not apply to APAs and related background information. A 
document's incorporation in a background file, however, is not 
intended to be grounds for not disclosing an otherwise 
disclosable document from a source other than a background 
file.
    The provision statutorily requires that the Treasury 
Department prepare and publish an annual report on the status 
of APAs. The annual report is to contain the following 
information:
          (1) Information about the structure, composition and, 
        operation of the APA program office;
          (2) A copy of each current model APA;
          (3) Statistics regarding the amount of time to 
        complete new and renewal APAs;
          (4) The number of APA applications filed during such 
        year;
          (5) The number of APAs executed to date and for the 
        year;
          (6) The number of APA renewals issued to date and for 
        the year;
          (7) The number of pending APA requests;
          (8) The number of pending APA renewals;
          (9) The number of APAs executed and pending 
        (including renewals and renewal requests) that are 
        unilateral, bilateral and multilateral, respectively;
          (10) The number of APAs revoked or canceled, and the 
        number of withdrawals from the APA program, to date and 
        for the year;
          (11) The number of finalized new APAs and renewals by 
        industry.\34\
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    \34\ This information was previously released in IRS Publication 
3218, ``IRS Report on Application and Administration of I.R.C. Section 
482.''
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    In addition, the annual report is to contain general 
descriptions of:
          (1) the nature of the relationships between the 
        related organizations, trades, or businesses covered by 
        APAs;
          (2) the related organizations, trades, or businesses 
        whose prices or results are tested to determine 
        compliance with the transfer pricing methodology 
        prescribed in the APA;
          (3) the covered transactions and the functions 
        performed and risks assumed by the related 
        organizations, trades or businesses involved;
          (4) methodologies used to evaluate tested parties and 
        transactions and the circumstances leading to the use 
        of those methodologies;
          (5) critical assumptions;
          (6) sources of comparables;
          (7) comparable selection criteria and the rationale 
        used in determining such criteria;
          (8) the nature of adjustments to comparables and/or 
        tested parties;
          (9) the nature of any range agreed to, including 
        information such as whether no range was used and why, 
        whether an inter-quartile range was used, or whether 
        there was a statistical narrowing of the comparables;
          (10) adjustment mechanisms provided to rectify 
        results that fall outside of the agreed upon APA range;
          (11) the various term lengths for APAs, including 
        rollback years, and the number of APAs with each such 
        term length;
          (12) the nature of documentation required; and
          (13) approaches for sharing of currency or other 
        risks.
    In addition, the provision requires the Treasury Department 
to describe, in each annual report, its efforts to ensure 
compliance with existing APA agreements. The first report is to 
cover the period January 1, 1991, through the calendar year 
including the date of enactment. The Treasury Department cannot 
include any information in the report which would have been 
deleted under section 6110(c) if the report were a written 
determination as defined in section 6110. Additionally, the 
report cannot include any information which can be associated 
with or otherwise identify, directly or indirectly, a 
particular taxpayer. The Secretary is expected to obtain input 
from taxpayers to ensure proper protection of taxpayer 
information and, if necessary, utilize its regulatory authority 
to implement appropriate processes for obtaining this input. 
For purposes of section 6103, the report requirement is treated 
as part of Title 26.
    While the provision statutorily requires an annual report, 
it is not intended to discourage the Treasury Department from 
issuing other forms of guidance, such as regulations or revenue 
rulings, consistent with the confidentiality provisions of the 
Code.

                             Effective Date

    The provision is effective on the date of enactment; 
accordingly, no APAs, regardless of whether executed before or 
after enactment, or related background file documents, can be 
released to the public after the date of enactment (December 
17, 1999). It required the Treasury Department to publish the 
first annual report no later than March 30, 2000.\35\
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    \35\ The first APA report was released on March 30, 2000. Internal 
Revenue Service, Announcement and Report Concerning Advance Pricing 
Agreements, 2000-16 IRB 1. A second APA report was released on March 
30, 2001. Internal Revenue Service, Announcement 2001-32, Announcement 
and Report Concerning Advance Pricing Agreements, 2001-17 IRB 1.
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                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

  B. Authority to Postpone Certain Tax-Related Deadlines by Reason of 
     Year 2000 Failures (sec. 522 of the Tax Relief Extension Act)


                         Present and Prior Law

    There were no specific provisions in prior law that 
permitted the Secretary of the Treasury to postpone tax-related 
deadlines by reason of Year 2000 (also known as ``Y2K'') 
failures. The Secretary is, however, permitted (under present 
and prior law) to postpone tax-related deadlines for other 
reasons. For example, the Secretary may specify that certain 
deadlines are postponed for a period of up to 90 days in the 
case of a taxpayer determined to be affected by a 
Presidentially declared disaster. The deadlines that may be 
postponed are the same as are postponed by reason of service in 
a combat zone. The provision does not apply for purposes of 
determining interest on any overpayment or underpayment.
    The suspension of time applies to the following acts: (1) 
filing any return of income, estate, or gift tax (except 
employment and withholding taxes); (2) payment of any income, 
estate, or gift tax (except employment and withholding taxes); 
(3) filing a petition with the Tax Court for a redetermination 
of deficiency, or for review of a decision rendered by the Tax 
Court; (4) allowance of a credit or refund of any tax; (5) 
filing a claim for credit or refund of any tax; (6) bringing 
suit upon any such claim for credit or refund; (7) assessment 
of any tax; (8) giving or making any notice or demand for 
payment of any tax, or with respect to any liability to the 
United States in respect of any tax; (9) collection of the 
amount of any liability in respect of any tax; (10) bringing 
suit by the United States in respect of any liability in 
respect of any tax; and (11) any other act required or 
permitted under the internal revenue laws specified in 
regulations prescribed under section 7508 by the Secretary.

                           Reasons for Change

    Although the Congress anticipated that Y2K compliance would 
be high and that widespread failures would be unlikely, the 
Congress believed that it was appropriate to provide the 
Secretary with discretion to provide relief to affected 
taxpayers. The Congress believed that delegating this authority 
to the Secretary was appropriate, because any Y2K failures 
likely would have occurred while the Congress was not in 
session. Therefore, the Congress believed that it was 
appropriate to give the Secretary the authority to provide 
relief by postponing tax-related deadlines for those taxpayers 
who, despite have made good faith and reasonable efforts to 
avoid any such failures, were affected by an actual Y2K 
failure.

                        Explanation of Provision

    The provision permits the Secretary to postpone, on a 
taxpayer-by-taxpayer basis, certain tax-related deadlines for a 
period of up to 90 days in the case of a taxpayer that the 
Secretary determines to have been affected by an actual Y2K 
related failure. In order to be eligible for relief, taxpayers 
must have made good faith, reasonable efforts to avoid any Y2K 
related failures. The relief is similar to that granted under 
the Presidentially declared disaster and combat zone 
provisions, except that employment and withholding taxes also 
are eligible for relief. The relief permits the abatement of 
both penalties and interest.
    The relief may apply to the following acts: (1) filing of 
any return of income, estate, or gift tax, including employment 
and withholding taxes; (2) payment of any income, estate, or 
gift tax, including employment and withholding taxes; (3) 
filing a petition with the Tax Court; (4) allowance of a credit 
or refund of any tax; (5) filing a claim for credit or refund 
of any tax; (6) bringing suit upon any such claim for credit or 
refund; (7) assessment of any tax; (8) giving or making any 
notice or demand for payment of any tax, or with respect to any 
liability to the United States in respect of any tax; (9) 
collection of the amount of any liability in respect of any 
tax; (10) bringing suit by the United States in respect of any 
liability in respect of any tax; and (11) any other act 
required or permitted under the internal revenue laws specified 
or prescribed by the Secretary.

                             Effective Date

    The provision is effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

C. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of 
 Taxable Vaccines (sec. 523 of the Tax Relief Extension Act and secs. 
                       4131 and 4132 of the Code)


                               Prior Law

    A manufacturer's excise tax is imposed at the rate of 75 
cents per dose (sec. 4131) on the following vaccines 
recommended for routine administration to children: diphtheria, 
pertussis, tetanus, measles, mumps, rubella, polio, HIB 
(haemophilus influenza type B), hepatitis B, varicella (chicken 
pox), and rotavirus gastroenteritis. The tax applied to any 
vaccine that is a combination of vaccine components equals 75 
cents times the number of components in the combined vaccine.
    Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund 
(``Vaccine Trust Fund'') to finance compensation awards under 
the Federal Vaccine Injury Compensation Program for individuals 
who suffer certain injuries following administration of the 
taxable vaccines. This program provides a substitute Federal, 
``no fault'' insurance system for the State-law tort and 
private liability insurance systems otherwise applicable to 
vaccine manufacturers and physicians. All persons immunized 
after September 30, 1988, with covered vaccines must pursue 
compensation under this Federal program before bringing civil 
tort actions under State law.

                           Reasons for Change

    Streptococcus pneumoniae (often referred to as 
pneumococcus) is a bacteria that can cause bacterial 
meningitis, a brain or spinal cord infection, bacteremia, a 
bloodstream infection, and otitis media (ear infection). The 
Congress understood that each year in the United States, 
pneumococcal disease accounts for an estimated 3,000 cases of 
bacterial meningitis, 50,000 cases of bacteremia, 500,000 cases 
of pneumonia, and 7 million cases of otitis media among all age 
groups. The Congress understood that, while there currently was 
a vaccine effective in preventing pneumococcal diseases in 
adults, that vaccine, a polysaccaride vaccine, did not induce 
an adequate immune response in young children and therefore did 
not protect children against these diseases. The Congress 
further understood that the Food and Drug Administration's (the 
``FDA'') was expected to approve a new, sugar protein conjugate 
vaccine against the disease and the Centers for Disease Control 
were expected to recommend this conjugate vaccine for routine 
inoculation of children. The Congress believed American 
children would benefit from wide use of this new vaccine. The 
Congress believed that, by including the new vaccine with those 
presently covered by the Vaccine Trust Fund, greater 
application of the vaccine will be promoted. The Congress, 
therefore, believed it is appropriate to add the conjugate 
vaccine against streptococcus pneumoniae to the list of taxable 
vaccines.
    The Congress was aware that the Vaccine Trust Fund had a 
current cash-flow surplus in excess of $1.3 billion 
dollars.\36\ However, the Congress thought was it prudent to 
gather more detailed information on the operation of the 
Vaccine Injury Compensation Program and likely future claims to 
assess the adequacy of the Vaccine Trust Fund. Therefore, the 
Congress found it appropriate to direct the Comptroller General 
of the United States to report on the operation and management 
of expenditures from the Vaccine Trust Fund and to advise the 
Congress on the adequacy of the Vaccine Trust Fund to meet 
future claims under the Federal Vaccine Injury Compensation 
Program.
---------------------------------------------------------------------------
    \36\ Joint Committee on Taxation, Schedule of Present Federal 
Excise Taxes (as of January 1, 1999) (JCS-2-99), March 29, 1999, p. 48.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision adds any conjugate vaccine against 
streptococcus pneumoniae to the list of taxable vaccines. The 
provision also changes the effective date enacted in Public Law 
105-277 and certain other conforming amendments to expenditure 
purposes to enable certain payments to be made from the Trust 
Fund.
    In addition, the provision directs the General Accounting 
Office (``GAO'') to report to the House Committee on Ways and 
Means and the Senate Committee on Finance on the operation and 
management of expenditures from the Vaccine Trust Fund and to 
advise the Committees on the adequacy of the Vaccine Trust Fund 
to meet future claims under the Federal Vaccine Injury 
Compensation Program.
    Within its report, to the greatest extent possible, the 
Congress requested a thorough statistical report of the number 
of claims submitted annually, the number of claims settled 
annually, and the value of settlements. The Congress requested 
analysis of the statistical distribution of settlements, 
including the mean and median values of settlements, and the 
extent to which the value of settlements varies with an injury 
attributed to an identifiable vaccine. The Congress also 
requested analysis of the settlement process, including a 
statistical distribution of the amount of time required from 
the initial filing of a claim to a final resolution.
    The Code provides that certain administrative expenses may 
be charged to the Vaccine Trust Fund. The Congress intended 
that the GAO report include an analysis of the overhead and 
administrative expenses charged to the Vaccine Trust Fund.
    The GAO is directed to report its findings to the House 
Committee on Ways and Means and the Senate Committee on Finance 
by January 31, 2000.\37\
---------------------------------------------------------------------------
    \37\ The GAO delivered its report on March 31, 2000. See, United 
States General Accounting Office, Vaccine Injury Trust Fund Revenue 
Exceeds Current Need for Paying Claims, GAO/HEHS-00-67, March 2000.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for vaccine sales beginning on 
the day after the date of enactment (December 17, 1999). No 
floor stocks tax is to be collected for amounts held for sale 
on that date. For sales on or before that date for which 
delivery is made after such date, the delivery date is deemed 
to be the sale date. The addition of conjugate streptococcus 
pneumoniae vaccines to the list of taxable vaccines is 
contingent upon the inclusion in this legislation of the 
modifications to Public Law 105-277.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $4 million in 2000, $7 million in 2001, $9 
million in 2002, $10 million in 2003, $10 million in 2004, $10 
million in 2005, $10 million in 2006, $10 million in 2007, $10 
million in 2008, $11 million in 2009, and $11 million in 2010.

   D. Delay in Effective Date of Requirement for Approved Diesel or 
 Kerosene Terminal (sec. 524 of the Tax Relief Extension Act and sec. 
                           4101 of the Code)


                         Present and Prior Law

    Excise taxes are imposed on highway motor fuels, including 
gasoline, diesel fuel, and kerosene, to finance the Highway 
Trust Fund programs. Subject to limited exceptions, these taxes 
are imposed on all such fuels when they are removed from 
registered pipeline or barge terminal facilities, with any tax-
exemptions being accomplished by means of refunds to consumers 
of the fuel.\38\ One such exception allows removal of diesel 
fuel without payment of tax if the fuel is destined for a 
nontaxable use (e.g., use as heating oil) and is indelibly 
dyed.
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    \38\ Tax is imposed before that point if the motor fuel is 
transferred (other than in bulk) from a refinery or if the fuel is sold 
to an unregistered party while still held in the refinery or bulk 
distribution system (e.g., in a pipeline or terminal facility).
---------------------------------------------------------------------------
    Terminal facilities are not permitted to receive and store 
non-tax-paid motor fuels unless they are registered with the 
Internal Revenue Service. Under present law, a prerequisite to 
registration is that if the terminal offers for sale diesel 
fuel, it must offer both dyed and undyed diesel fuel. 
Similarly, if the terminal offers for sale kerosene, it must 
offer both dyed and undyed kerosene. This ``dyed-fuel mandate'' 
was enacted in 1997, to be effective on July 1, 1998. 
Subsequently, the effective date was delayed until July 1, 
2000.

                           Reasons for Change

    When the rules governing taxation of kerosene used as a 
highway motor fuel were enacted in 1997, the Congress was 
concerned that dyed kerosene (destined for nontaxable use) 
might not be available in markets where that fuel was commonly 
used (e.g., as heating oil). To ensure availability of untaxed 
kerosene for these uses, the Congress included a requirement 
that terminals offer both dyed and undyed kerosene and diesel 
fuel (if they offered the fuels for sale at all) as a condition 
of receiving untaxed fuels. Since that time, markets have 
provided dyed kerosene and diesel fuel for nontaxable uses in 
markets where there is a demand for such fuel even in the 
absence of a statutory mandate for such fuels. The Congress 
found that a further delay in this registration requirement was 
appropriate to allow a more complete evaluation before a 
decision is made on whether to repeal or retain the mandate.

                        Explanation of Provision

    The provision delayed the effective date of the diesel fuel 
and kerosene-dyeing mandate through December 31, 2001. No other 
changes were made to the highway motor fuels excise tax rules.

                             Effective Date

    The provision became effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

E. Production Flexibility Contract Payments (sec. 525 of the Tax Relief 
                             Extension Act)


                         Present and Prior Law

    A taxpayer generally is required to include an item in 
income no later than the time of its actual or constructive 
receipt, unless such amount properly is accounted for in a 
different period under the taxpayer's method of accounting. If 
a taxpayer has an unrestricted right to demand the payment of 
an amount, the taxpayer is in constructive receipt of that 
amount whether or not the taxpayer makes the demand and 
actually receives the payment.
    The Federal Agriculture Improvement and Reform Act of 1996 
(the ``FAIR Act'') provides for production flexibility 
contracts between certain eligible owners and producers and the 
Secretary of Agriculture. These contracts generally cover crop 
years from 1996 through 2002. Annual payments are made under 
such contracts at specific times during the Federal 
government's fiscal year. Section 112(d)(2) of the FAIR Act 
provides that one-half of each annual payment is to be made on 
either December 15 or January 15 of the fiscal year, at the 
option of the recipient.\39\ The remaining one-half of the 
annual payment must be made no later than September 30 of the 
fiscal year. The Emergency Farm Financial Relief Act of 1998 
added section 112(d)(3) to the FAIR Act which provides that all 
payments for fiscal year 1999 are to be paid at such time or 
times during fiscal year 1999 as the recipient may specify. 
Thus, the one-half of the annual amount that would otherwise be 
required to be paid no later than September 30, 1999 can be 
specified for payment in calendar year 1998.
---------------------------------------------------------------------------
    \39\ This rule applies to fiscal years after 1996. For fiscal year 
1996, this payment was to be made not later than 30 days after the 
production flexibility contract was entered into.
---------------------------------------------------------------------------
    These options potentially would have resulted in the 
constructive receipt (and thus inclusion in income) of the 
payments to which they relate at the time they could have been 
exercised, whether or not they were in fact exercised. However, 
section 2012 of the Tax and Trade Relief Extension Act of 1998 
provided that the time a production flexibility contract 
payment under the FAIR Act properly is includible in income is 
to be determined without regard to either option, effective for 
production flexibility contract payments made under the FAIR 
Act in taxable years ending after December 31, 1995.

                        Reasons for Change \40\

    The Congress did not believe that farmers should be 
required to accelerate the recognition of income on production 
flexibility contract payments solely because Congress creates 
an option for the accelerated receipt of such payments.
---------------------------------------------------------------------------
    \40\ The conference report to H.R. 1180 indicates that there was 
neither a House bill provision nor a Senate amendment provision. 
However, it refers to a provision included as section 711 of the 
conference agreement to H.R. 2488, the ``Taxpayer Refund and Relief Act 
of 1999'' (H. Rep. 106-289, Aug. 4, 1999), which was vetoed by 
President Clinton. The provision was reported by the House Ways and 
Means Committee as section 711 of H.R. 2488, the ``Financial Freedom 
Act of 1999'' (H. Rep. 106-238, July 16, 1999), from which these 
reasons for change are reproduced.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that any option to accelerate the 
receipt of any payment under a production flexibility contract 
which is payable under the FAIR Act, as in effect on the date 
of enactment of the provision, is to be disregarded in 
determining the taxable year in which such payment is properly 
included in gross income. Options to accelerate payments that 
are enacted in the future are covered by this rule, providing 
the payment to which they relate is mandated by the FAIR Act as 
in effect on the date of enactment of this Act.
    The provision does not delay the inclusion of any amount in 
gross income beyond the taxable period in which the amount is 
received.

                             Effective Date

    The provision is effective on the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

                          III. REVENUE OFFSETS


                         A. General Provisions


1. Modification of individual estimated tax safe harbor (sec. 531 of 
        the Tax Relief Extension Act and sec. 6654 of the Code)

                         Present and Prior Law

    An individual taxpayer generally is subject to an addition 
to tax for any underpayment of estimated tax. An individual 
generally does not have an underpayment of estimated tax if he 
or she makes timely estimated tax payments at least equal to: 
(1) 90 percent of the tax shown on the current year's return or 
(2) 100 percent of the prior year's tax. For taxpayers with a 
prior year's AGI above $150,000,\41\ however, the rule that 
allows payment of 100 percent of prior year's tax is modified. 
Those taxpayers with AGI above $150,000 generally must make 
estimated payments based on either (1) 90 percent of the tax 
shown on the current year's return or (2) 110 percent of the 
prior year's tax.
---------------------------------------------------------------------------
    \41\ $75,000 for married taxpayers filing separately.
---------------------------------------------------------------------------
    For taxpayers with a prior year's AGI above $150,000, the 
prior year's tax safe harbor is modified for estimated tax 
payments made for taxable years through 2002. Under prior law, 
for such taxpayers making estimated tax payments based on prior 
year's tax, payments must be made based on 105 percent of prior 
year's tax for taxable years beginning in 1999, 106 percent of 
prior year's tax for taxable years beginning in 2000 and 2001, 
and 112 percent of prior year's tax for taxable years beginning 
in 2002.

                           Reasons for Change

    The Congress believed that is appropriate to modify the 
applicability of the estimated tax safe harbor.

                        Explanation of Provision

    The provision provides that taxpayers with prior year's AGI 
above $150,000 who make estimated tax payments based on prior 
year's tax must do so based on 108.6 percent of prior year's 
tax for estimated tax payments made for taxable year 2000. 
Taxpayers with prior year's AGI above $150,000 who make 
estimated tax payments based on prior year's tax must do so 
based on 110 percent of prior year's tax for estimated tax 
payments made for taxable year 2001. The Act does not change 
the modified safe harbor percentage for estimated tax payments 
made for any taxable years other than 2000 and 2001.

                             Effective Date

    The provision is effective for estimated tax payments made 
for taxable years beginning after December 31, 1999, and before 
January 1, 2002.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $1,560 million in 2000 and $840 million in 
2001, and to reduce Federal fiscal year budget receipts by 
$2,400 million in 2002.

2. Clarify the tax treatment of income and losses on derivatives (sec. 
        532 of the Tax Relief Extension Act and sec. 1221 of the Code)

                         Present and Prior Law

    Capital gain treatment applies to gain on the sale or 
exchange of a capital asset. Capital assets include property 
other than (1) stock in trade or other types of assets 
includible in inventory, (2) property used in a trade or 
business that is real property or property subject to 
depreciation, (3) accounts or notes receivable acquired in the 
ordinary course of a trade or business, (4) certain copyrights 
(or similar property), and (5) U.S. government publications. 
Gain or loss on such assets generally is treated as ordinary, 
rather than capital, gain or loss. Certain other Code sections 
also treat gains or losses as ordinary. For example, the gains 
or losses of securities dealers or certain electing commodities 
dealers or electing traders in securities or commodities that 
are subject to ``mark-to-market'' accounting are treated as 
ordinary (sec. 475).
    Under case law in a number of Federal courts prior to 1988, 
business hedges generally were treated as giving rise to 
ordinary, rather than capital, gain or loss. In 1988, the U.S. 
Supreme Court rejected this interpretation in Arkansas Best v. 
Commissioner which, relying on the statutory definition of a 
capital asset described above, held that a loss realized on a 
sale of stock was capital even though the stock was purchased 
for a business, rather than an investment, purpose.\42\
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    \42\ 485 U.S. 212 (1988).
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    Treasury regulations (which were finalized in 1994) under 
prior law require ordinary character treatment for most 
business hedges and provide timing rules requiring that gains 
or losses on hedging transactions be taken into account in a 
manner that matches the income or loss from the hedged item or 
items. The regulations apply to hedges that meet a standard of 
``risk reduction'' with respect to ordinary property held (or 
to be held) or certain liabilities incurred (or to be incurred) 
by the taxpayer and that meet certain identification and other 
requirements (Treas. Reg. sec. 1.1221-2).

                           Reasons for Change

    Absent an election by a commodities derivatives dealer to 
be treated the same as a dealer in securities under section 
475, the character of the gains and losses with respect to 
commodities derivative financial instruments entered into by 
such a dealer may have been unclear under prior law. The 
Congress was concerned that this uncertainty (i.e., the 
potential for capital treatment of the commodities derivatives 
financial instruments) could inhibit commodities derivatives 
dealers from entering into transactions with respect to 
commodities derivative financial instruments that qualify as 
``hedging transactions'' within the meaning of the Treasury 
regulations under section 1221. The Congress believes that 
commodities derivatives financial instruments are integrally 
related to the ordinary course of the trade or business of 
commodities derivatives dealers and, therefore, such assets 
should be treated as ordinary assets.
    The Congress further believes that ordinary character 
treatment is proper for business hedges with respect to 
ordinary property. The Congress believes that the approach 
taken in the Treasury regulations under prior law with respect 
to the character of hedging transactions generally should be 
codified as an appropriate interpretation of prior law. Those 
Treasury regulations, however, modeled the definition of a 
hedging transaction after the prior-law definition contained in 
section 1256, which generally required that a hedging 
transaction ``reduces'' a taxpayer's risk. The Congress 
believes that a ``risk management'' standard better describes 
modern business hedging practices that should be accorded 
ordinary character treatment.\43\
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    \43\ The Congress believed that the Treasury regulations under 
prior law appropriately interpret ``risk reduction'' flexibly within 
the constraints of prior law. For example, the regulations recognize 
that certain transactions that economically convert an interest rate or 
price from a fixed rate or price to a floating rate or price may 
qualify as hedging transactions (Treas. Reg. sec. 1.1221-
2(c)(1)(ii)(B)). Similarly, the regulations provide hedging treatment 
for certain written call options, hedges of aggregate risk, ``dynamic 
hedges'' (under which a taxpayer can more frequently manage or adjust 
its exposure to identified risk), partial hedges, ``recycled'' hedges 
(using a position entered into to hedge one asset or liability to hedge 
another asset or liability), and hedges of aggregate risk (Treas. Reg. 
sec. 1.1221-2(c)). The Congress believed that (depending on the facts) 
treatment of such transactions as hedging transactions was appropriate 
and that it also was appropriate to modernize the definition of a 
hedging transaction by providing risk management as the standard.
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    In adopting a risk management standard, however, the 
Congress did not intend that speculative transactions or other 
transactions not entered into in the normal course of a 
taxpayer's trade or business should qualify for ordinary 
character treatment, and risk management should not be 
interpreted so broadly as to cover such transactions. In 
addition, to minimize whipsaw potential, the Congress believes 
that it is essential for hedging transactions to be properly 
identified by the taxpayer when the hedging transaction is 
entered into.
    Finally, because hedging status under prior law and present 
law is dependent upon the ordinary character of the property 
being hedged, an issue arises with respect to hedges of certain 
supplies, sales of which could give rise to capital gain, but 
which are generally consumed in the ordinary course of a 
taxpayer's trade or business and that would give rise to 
ordinary deductions. For purposes of defining a hedging 
transaction, Treasury regulations treat such supplies as 
ordinary property.\44\ The Congress believes that it was 
appropriate to confirm this treatment by specifying that such 
supplies are ordinary assets.
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    \44\ Treas. Reg. sec. 1.1221-2(c)(5)(ii).
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                        Explanation of Provision

    The provision adds three categories to the list of assets 
the gain or loss on which is treated as ordinary (sec. 1221). 
The new categories are: (1) commodities derivative financial 
instruments entered into by commodities derivatives dealers; 
(2) hedging transactions; and (3) supplies of a type regularly 
consumed by the taxpayer in the ordinary course of a taxpayer's 
trade or business.
    For this purpose, a commodities derivatives dealer is any 
person that regularly offers to enter into, assume, offset, 
assign or terminate positions in commodities derivative 
financial instruments with customers in the ordinary course of 
a trade or business. A commodities derivative financial 
instrument means a contract or financial instrument with 
respect to commodities, the value or settlement price of which 
is calculated by reference to any combination of a fixed rate, 
price, or amount, or a variable rate, price, or amount, which 
is based on current, objectively determinable financial or 
economic information. This includes swaps, caps, floors, 
options, futures contracts, forward contracts, and similar 
financial instruments with respect to commodities. It does not 
include shares of stock in a corporation; a beneficial interest 
in a partnership or trust; a note, bond, debenture, or other 
evidence of indebtedness; or a contract to which section 1256 
applies.
    In defining a hedging transaction, the provision generally 
codifies the approach taken by the Treasury regulations under 
prior law, but modifies the rules. The ``risk reduction'' 
standard of the regulations is broadened to ``risk management'' 
with respect to ordinary property held (or to be held) or 
certain liabilities incurred (or to be incurred). In addition, 
the Treasury Secretary is granted authority to treat 
transactions that manage other risks as hedging transactions. 
As under the prior-law Treasury regulations, the transaction 
must be identified as a hedge of specified property. It is 
intended that this be the exclusive means through which the 
gains or losses with respect to a hedging transaction are 
treated as ordinary. Authority is provided for Treasury 
regulations that would address improperly identified or non-
identified hedging transactions. The Treasury Secretary is also 
given authority to apply these rules to related parties.

                             Effective Date

    The provision is effective for any instrument held, 
acquired or entered into, any transaction entered into, and 
supplies held or acquired on or after the date of enactment 
(December 17, 1999).

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by less than $500,000 for 2000, and $1 million 
in each of the years 2001 through 2010.

3. Expand reporting of cancellation of indebtedness income (sec. 533 of 
        the Tax Relief Extension Act and sec. 6050P of the Code)

                         Present and Prior Law

    Under section 61(a)(12), a taxpayer's gross income includes 
income from the discharge of indebtedness. Section 6050P 
requires ``applicable entities'' to file information returns 
with the Internal Revenue Service (IRS) regarding any discharge 
of indebtedness of $600 or more.
    The information return must set forth the name, address, 
and taxpayer identification number of the person whose debt was 
discharged, the amount of debt discharged, the date on which 
the debt was discharged, and any other information that the IRS 
requires to be provided. The information return must be filed 
in the manner and at the time specified by the IRS. The same 
information also must be provided to the person whose debt is 
discharged by January 31 of the year following the discharge.
    Under prior law, ``applicable entities'' included only: (1) 
the Federal Deposit Insurance Corporation (FDIC), the 
Resolution Trust Corporation (RTC), the National Credit Union 
Administration, and any successor or subunit of any of them; 
(2) any financial institution (as described in sec. 581 
(relating to banks) or sec. 591(a) (relating to savings 
institutions)); (3) any credit union; (4) any corporation that 
is a direct or indirect subsidiary of an entity described in 
(2) or (3) which, by virtue of being affiliated with such 
entity, is subject to supervision and examination by a Federal 
or State agency regulating such entities; and (5) an executive, 
judicial, or legislative agency (as defined in 31 U.S.C. sec. 
3701(a)(4)).
    Failures to file correct information returns with the IRS 
or to furnish statements to taxpayers with respect to these 
discharges of indebtedness are subject to the same general 
penalty that is imposed with respect to failures to provide 
other types of information returns. Accordingly, the penalty 
for failure to furnish statements to taxpayers is generally $50 
per failure, subject to a maximum of $100,000 for any calendar 
year. These penalties are not applicable if the failure is due 
to reasonable cause and not to willful neglect.

                           Reasons for Change

    The Congress believed that it was appropriate to treat 
discharges of indebtedness that are made by similar entities in 
a similar manner. Accordingly, the Congress believed that it 
was appropriate to extend the scope of this information 
reporting provision to include indebtedness discharged by any 
organization a significant trade or business of which is the 
lending of money (such as finance companies and credit card 
companies whether or not affiliated with financial 
institutions).

                        Explanation of Provision

    The provision requires information reporting on 
indebtedness discharged by any organization a significant trade 
or business of which is the lending of money (such as finance 
companies and credit card companies whether or not affiliated 
with financial institutions).

                             Effective Date

    The provision is effective with respect to discharges of 
indebtedness after December 31, 1999.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $7 million in each of the years 2001 through 
2010.

4. Limitation on conversion of character of income from constructive 
        ownership transactions (sec. 534 of the Tax Relief Extension 
        Act and new sec. 1260 of the Code)

                         Present and Prior Law

    The maximum individual income tax rate on ordinary income 
and short-term capital gain is 39.6 percent, while the maximum 
individual income tax rate on long-term capital gain generally 
is 20 percent. Long-term capital gain means gain from the sale 
or exchange of a capital asset held more than one year. For 
this purpose, gain from the termination of a right with respect 
to property which would be a capital asset in the hands of the 
taxpayer is treated as capital gain.\45\
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    \45\ Section 1234A, as amended by the Taxpayer Relief Act of 1997.
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    A pass-thru entity (such as a partnership) generally is not 
subject to Federal income tax. Rather, each owner includes its 
share of a pass-thru entity's income, gain, loss, deduction or 
credit in its taxable income. Generally, the character of the 
item is determined at the entity level and flows through to the 
owners. Thus, for example, the treatment of an item of income 
by a partnership as ordinary income, short-term capital gain, 
or long-term capital gain retains its character when reported 
by each of the partners.
    Investors could enter into forward contracts, notional 
principal contracts, and other similar arrangements with 
respect to property that provided the investor with the same or 
similar economic benefits as owning the property directly but 
with potentially different tax consequences (as to the 
character and timing of any gain).

                           Reasons for Change

    The Congress was concerned with the use of derivative 
contracts by taxpayers in arrangements that are primarily 
designed to convert what otherwise would be ordinary income and 
short-term capital gain into long-term capital gain. Of 
particular concern were derivative contracts with respect to 
partnerships and other pass-thru entities. The use of such 
derivative contracts could result in the taxpayer being taxed 
in a more favorable manner than had the taxpayer actually 
acquired an ownership interest in the entity. The rules 
designed to prevent the conversion of ordinary income into 
capital gain (sec. 1258) only apply to transactions where the 
taxpayer's expected return is attributable solely to the time 
value of the taxpayer's net investment.
    One example of a conversion transaction involving a 
derivative contract is when a taxpayer enters into an 
arrangement with a securities dealer \46\ whereby the dealer 
agrees to pay the taxpayer any appreciation with respect to a 
notional investment in a hedge fund. In return, the taxpayer 
agrees to pay the securities dealer any depreciation in the 
value of the notional investment. The arrangement lasts for 
more than one year. The taxpayer is substantially in the same 
economic position as if he or she owned the interest in the 
hedge fund. However, the taxpayer may treat any appreciation 
resulting from the contractual arrangement as long-term capital 
gain. Moreover, any tax attributable to such gain is deferred 
until the arrangement is terminated.
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    \46\ Assuming the securities dealer purchases the financial asset, 
the dealer would mark both the financial asset and the contractual 
arrangement to market under Code sec. 475, and the economic (and tax) 
consequences of the two positions would offset each other.
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                        Explanation of Provision

    The provision limits the amount of long-term capital gain a 
taxpayer can recognize from certain derivative contracts 
(''constructive ownership transactions'') with respect to 
certain financial assets. The amount of long-term capital gain 
is limited to the amount of such gain the taxpayer would have 
recognized if the taxpayer held the financial asset directly 
during the term of the derivative contract. Any gain in excess 
of this amount is treated as ordinary income. An interest 
charge is imposed on the amount of gain that is treated as 
ordinary income. The provision does not alter the tax treatment 
of the long-term capital gain that is not treated as ordinary 
income.
    A taxpayer is treated as having entered into a constructive 
ownership transaction if the taxpayer (1) holds a long position 
under a notional principal contract with respect to the 
financial asset, (2) enters into a forward contract to acquire 
the financial asset, (3) is the holder of a call option, and 
the grantor of a put option, with respect to a financial asset, 
and the options have substantially equal strike prices and 
substantially contemporaneous maturity dates, or (4) to the 
extent provided in regulations, enters into one or more 
transactions, or acquires one or more other positions, that 
have substantially the same effect as any of the transactions 
described. Treasury regulations, when issued, are expected to 
provide specific standards for determining when other types of 
financial transactions, like those specified in the provision, 
have substantially the same effect of replicating the economic 
benefits of direct ownership of a financial asset without a 
significant change in the risk-reward profile with respect to 
the underlying transaction.\47\
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    \47\ It is not expected that leverage in a constructive ownership 
transaction would change the risk-reward profile with respect to the 
underlying transaction.
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    A ``financial asset'' is defined as (1) any equity interest 
in a pass-thru entity, and (2) to the extent provided in 
regulations, any debt instrument and any stock in a corporation 
that is not a pass-thru entity. A ``pass-thru entity'' refers 
to (1) a regulated investment company, (2) a real estate 
investment trust, (3) a real estate mortgage investment 
conduit, (4) an S corporation, (5) a partnership, (6) a trust, 
(7) a common trust fund, (8) a passive foreign investment 
company,\48\ (9) a foreign personal holding company, and (10) a 
foreign investment company.
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    \48\ For this purpose, a passive foreign investment company 
includes an investment company that is also a controlled foreign 
corporation.
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    The amount of recharacterized gain is calculated as the 
excess of the amount of long-term capital gain the taxpayer 
would have had absent this provision over the ``net underlying 
long-term capital gain'' attributable to the financial asset. 
The net underlying long-term capital gain is the amount of net 
capital gain the taxpayer would have realized if it had 
acquired the financial asset for its fair market value on the 
date the constructive ownership transaction was opened and sold 
the financial asset on the date the transaction was closed 
(only taking into account gains and losses that would have 
resulted from a deemed ownership of the financial asset).\49\ 
The long-term capital gains rate on the net underlying long-
term capital gain is determined by reference to the individual 
capital gains rates in section 1(h).
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    \49\ A taxpayer must establish the amount of the net underlying 
long-term capital gain with clear and convincing evidence; otherwise, 
the amount is deemed to be zero. To the extent that the economic 
positions of the taxpayer and the counterparty do not equally offset 
each other, the amount of the net underlying long-term capital gain may 
be difficult to establish.
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    Example 1: On January 1, 2000, Taxpayer enters into a 
three- year notional principal contract (a constructive 
ownership transaction) with a securities dealer whereby, on the 
settlement date, the dealer agrees to pay Taxpayer the amount 
of any increase in the notional value of an interest in an 
investment partnership (the financial asset). After three 
years, the value of the notional principal contract increased 
by $200,000, of which $150,000 is attributable to ordinary 
income and net short-term capital gain ($50,000 is attributable 
to net long-term capital gains). The amount of the net 
underlying long-term capital gains is $50,000, and the amount 
of gain that is recharacterized as ordinary income is $150,000 
(the excess of $200,000 of long-term gain over the $50,000 of 
net underlying long-term capital gain).
    An interest charge is imposed on the underpayment of tax 
for each year that the constructive ownership transaction was 
open. The interest charge is the amount of interest that would 
be imposed under section 6601 had the recharacterized gain been 
included in the taxpayer's gross income during the term of the 
constructive ownership transaction. The recharacterized gain is 
treated as having accrued such that the gain in each successive 
year is equal to the gain in the prior year increased by a 
constant growth rate \50\ during the term of the constructive 
ownership transaction.
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    \50\ The accrual rate is the applicable Federal rate on the day the 
transaction closed.
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    Example 2: Same facts as in example 1, and assume the 
applicable Federal rate on December 31, 2002, is six percent. 
For purposes of calculating the interest charge, Taxpayer must 
allocate the $150,000 of recharacterized ordinary income to the 
three year-term of the constructive ownership transaction as 
follows: $47,116.47 is allocated to year 2000, $49,943.46 is 
allocated to year 2001, and $52,940.07 is allocated to year 
2002.
    A taxpayer is treated as holding a long position under a 
notional principal contract with respect to a financial asset 
if the person (1) has the right to be paid (or receive credit 
for) all or substantially all of the investment yield 
(including appreciation) on the financial asset for a specified 
period, and (2) is obligated to reimburse (or provide credit) 
for all or substantially all of any decline in the value of the 
financial asset. A forward contract is a contract to acquire in 
the future (or provide or receive credit for the future value 
of) any financial asset.
    If the constructive ownership transaction is closed by 
reason of taking delivery of the underlying financial asset, 
the taxpayer is treated as having sold the contract, option, or 
other position that is part of the transaction for its fair 
market value on the closing date. However, the amount of gain 
that is recognized as a result of having taken delivery is 
limited to the amount of gain that is treated as ordinary 
income by reason of this provision (with appropriate basis 
adjustments for such gain).
    The provision does not apply to any constructive ownership 
transaction if all of the positions that are part of the 
transaction are marked to market under the Code or regulations. 
The Treasury Department is authorized to prescribe regulations 
as necessary to carry out the purposes of the provision, 
including to (1) permit taxpayers to mark to market 
constructive ownership transactions in lieu of the provision, 
and (2) exclude certain forward contracts that do not convey 
substantially all of the economic return with respect to a 
financial asset.
    No inference is intended as to the proper treatment of a 
constructive ownership transaction entered into prior to the 
effective date of this provision.

                             Effective Date

    The provision applies to transactions entered into on or 
after July 12, 1999. For this purpose, it is expected that a 
contract, option or any other arrangement that is entered into 
or exercised on or after July 12, 1999, which extends or 
otherwise modifies the terms of a transaction entered into 
prior to such date will be treated as a transaction entered 
into on or after July 12, 1999, unless a party to the 
transaction other than the taxpayer has, as of July 12, 1999, 
the exclusive right to extend the terms of the transaction, and 
the length of such extension does not exceed the first business 
day following a period of five years from the original 
termination date under the transaction.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $15 million in 2000, $45 million in 2001, 
$47 million in 2002, $49 million in 2003, $51 million in 2004, 
$54 million in 2005, $58 million in 2006, $62 million in 2007, 
$66 million in 2008, $70 million in 2009, and $74 million in 
2010.

5. Treatment of excess pension assets used for retiree health benefits 
        (sec. 535 of the Tax Relief Extension Act, sec. 420 of the 
        Code, and secs. 101, 403, and 408 of ERISA)

                         Present and Prior Law

    Defined benefit pension plan assets generally may not 
revert to an employer prior to the termination of the plan and 
the satisfaction of all plan liabilities. A reversion prior to 
plan termination may constitute a prohibited transaction and 
may result in disqualification of the plan. Certain limitations 
and procedural requirements apply to a reversion upon plan 
termination. Any assets that revert to the employer upon plan 
termination are includible in the gross income of the employer 
and subject to an excise tax. The excise tax rate, which may be 
as high as 50 percent of the reversion, varies depending upon 
whether or not the employer maintains a replacement plan or 
makes certain benefit increases. Upon plan termination, the 
accrued benefits of all plan participants are required to be 
100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a section 401(h) account that is a part of 
such plan. A qualified transfer of excess assets of a defined 
benefit pension plan (other than a multiemployer plan) into a 
section 401(h) account that is a part of such plan does not 
result in plan disqualification and is not treated as a 
reversion to the employer or a prohibited transaction. 
Therefore, the transferred assets are not includible in the 
gross income of the employer and are not subject to the excise 
tax on reversions.
    Qualified transfers are subject to amount and frequency 
limitations, use requirements, deduction limitations, and 
vesting requirements. Under prior law, qualified transfers were 
also subject to minimum benefit requirements.
    Excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No more than one qualified transfer with respect 
to any plan may occur in any taxable year.
    The transferred assets (and any income thereon) must be 
used to pay qualified current retiree health liabilities 
(either directly or through reimbursement) for the taxable year 
of the transfer. Transferred amounts generally must benefit all 
pension plan participants, other than key employees, who are 
entitled upon retirement to receive retiree medical benefits 
through the section 401(h) account. Retiree health benefits of 
key employees may not be paid (directly or indirectly) out of 
transferred assets. Amounts not used to pay qualified current 
retiree health liabilities for the taxable year of the transfer 
are to be returned at the end of the taxable year to the 
general assets of the plan. These amounts are not includible in 
the gross income of the employer, but are treated as an 
employer reversion and are subject to a 20-percent excise tax.
    No deduction is allowed for (1) a qualified transfer of 
excess pension assets into a section 401(h) account, (2) the 
payment of qualified current retiree health liabilities out of 
transferred assets (and any income thereon) or (3) a return of 
amounts not used to pay qualified current retiree health 
liabilities to the general assets of the pension plan.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer.
    Under prior law, the minimum benefit requirement required 
each group health plan under which applicable health benefits 
were provided to provide substantially the same level of 
applicable health benefits for the taxable year of the transfer 
and the following 4 taxable years. The level of benefits that 
were required to be maintained was based on benefits provided 
in the year immediately preceding the taxable year of the 
transfer. Applicable health benefits are health benefits or 
coverage that are provided to (1) retirees who, immediately 
before the transfer, are entitled to receive such benefits upon 
retirement and who are entitled to pension benefits under the 
plan and (2) the spouses and dependents of such retirees.
    Under prior law, the provision permitting a qualified 
transfer of excess pension assets to pay qualified current 
retiree health liabilities expired for taxable years beginning 
after December 31, 2000.\51\
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    \51\ Title I of the Employee Retirement Income Security Act of 
1974, as amended (``ERISA''), provides that plan participants, the 
Secretaries of Treasury and the Department of Labor, the plan 
administrator, and each employee organization representing plan 
participants must be notified 60 days before a qualified transfer of 
excess assets to a retiree health benefits account occurs (ERISA sec. 
103(e)). ERISA also provides that a qualified transfer is not a 
prohibited transaction under ERISA (ERISA sec. 408(b)(13)) or a 
prohibited reversion of assets to the employer (ERISA sec. 403(c)(1)). 
For purposes of these provisions, a qualified transfer was generally 
defined under prior law as a transfer pursuant to section 420 of the 
Internal Revenue Code, as in effect on January 1, 1995.
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                           Reasons for Change

    The Congress believed that it is appropriate to provide a 
temporary extension of the rule permitting an employer to make 
a qualified transfer of excess pension assets to a section 
401(h) account for retiree health benefits as long as the 
security of employees' pension benefits is not threatened by 
the transfer. In light of the increasing cost of retiree health 
benefits, the Congress also believed that it is appropriate to 
replace the minimum benefit requirement applicable to qualified 
transfers under prior law with a minimum cost requirement.

                        Explanation of Provision

    The Tax Relief Extension Act extends the provision 
permitting qualified transfers of excess defined benefit 
pension plan assets to provide retiree health benefits under a 
section 401(h) account through December 31, 2005.\52\ In 
addition, the Tax Relief Extension Act replaces the prior-law 
minimum benefit requirement with the minimum cost requirement 
that applied to qualified transfers before December 9, 1994, to 
section 401(h) accounts. Therefore, each group health plan or 
arrangement under which applicable health benefits are provided 
is required to provide a minimum dollar level of retiree health 
expenditures for the taxable year of the transfer and the 
following 4 taxable years. The minimum dollar level is the 
higher of the applicable employer costs for each of the 2 
taxable years immediately preceding the taxable year of the 
transfer. The applicable employer cost for a taxable year is 
determined by dividing the employer's qualified current retiree 
health liabilities by the number of individuals to whom 
coverage for applicable health benefits was provided during the 
taxable year. The modification of the minimum benefit 
requirement is effective with respect to transfers after the 
date of enactment. The Secretary of the Treasury is directed to 
prescribe such regulations as may be necessary to prevent an 
employer who significantly reduces retiree health coverage 
during the cost maintenance period from being treated as 
satisfying the minimum cost requirement. In addition, the Tax 
Relief Extension Act contains a transition rule regarding the 
minimum cost requirement. Under this rule, an employer must 
satisfy the minimum benefit requirement with respect to a 
qualified transfer that occurs after the date of enactment 
during the portion of the cost maintenance period of such 
transfer that overlaps the benefit maintenance period of a 
qualified transfer that occurs on or before the date of 
enactment. For example, suppose an employer (with a calendar 
year taxable year) made a qualified transfer in 1998. The 
minimum benefit requirement must be satisfied for calendar 
years 1998, 1999, 2000, 2001, and 2002. Suppose the employer 
also makes a qualified transfer in 2000. Then, the employer is 
required to satisfy the minimum benefit requirement in 2000, 
2001, and 2002, and is required to satisfy the minimum cost 
requirement in 2003 and 2004.
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    \52\ The Tax Relief Extension Act modifies the corresponding 
provisions of ERISA.
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                             Effective Date

    The provision is effective with respect to qualified 
transfers of excess defined benefit pension plan assets to 
section 401(h) accounts after December 31, 2000, and before 
January 1, 2006. The modification of the minimum benefit 
requirement is effective with respect to transfers after the 
date of enactment. In addition, the provision contains a 
transition rule regarding the minimum cost requirement. Under 
this rule, an employer must satisfy the minimum benefit 
requirement with respect to a qualified transfer that occurs 
after the date of enactment during the portion of the cost 
maintenance period of such transfer that overlaps the benefit 
maintenance period of a qualified transfer that occurs on or 
before the date of enactment. For example, suppose an employer 
(with a calendar year taxable year) made a qualified transfer 
in 1998. The minimum benefit requirement must be satisfied for 
calendar years 1998, 1999, 2000, 2001, and 2002. Suppose the 
employer also makes a qualified transfer in 2000. Then, the 
employer is required to satisfy the minimum benefit requirement 
in 2000, 2001, and 2002, and is required to satisfy the minimum 
cost requirement in 2003 and 2004.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $19 million in 2001, $38 million in 2002, 
$39 million in 2003, $40 million in 2004, $43 million in 2005, 
and $23 million in 2006.

6. Modification of installment method and repeal of installment method 
        for accrual method taxpayers (sec. 536 of the Tax Relief 
        Extension Act and sections 453 and 453A of the Code)

                         Present and Prior Law

    An accrual method taxpayer is generally required to 
recognize income when all the events have occurred that fix the 
right to the receipt of the income and the amount of the income 
can be determined with reasonable accuracy. The installment 
method of accounting provides an exception to this general 
principle of income recognition by allowing a taxpayer to defer 
the recognition of income from the disposition of certain 
property until payment is received. Sales to customers in the 
ordinary course of business are not eligible for the 
installment method, except for sales of property that is used 
or produced in the trade or business of farming and sales of 
timeshares and residential lots if an election to pay interest 
under section 453(l)(2)(B) is made.
    A pledge rule provides that if an installment obligation is 
pledged as security for any indebtedness, the net proceeds \53\ 
of such indebtedness are treated as a payment on the 
obligation, triggering the recognition of income. Actual 
payments received on the installment obligation subsequent to 
the receipt of the loan proceeds are not taken into account 
until such subsequent payments exceed the loan proceeds that 
were treated as payments. The pledge rule does not apply to 
sales of property used or produced in the trade or business of 
farming, to sales of timeshares and residential lots where the 
taxpayer elects to pay interest under section 453(l)(2)(B), or 
to dispositions where the sales price does not exceed $150,000.
---------------------------------------------------------------------------
    \53\ The net proceeds equal the gross loan proceeds less the direct 
expenses of obtaining the loan.
---------------------------------------------------------------------------
    An additional rule requires the payment of interest on the 
deferred tax that is attributable to most large installment 
sales.

                           Reasons for Change

    The Congress believed that the installment method is 
inconsistent with the use of an accrual method of accounting 
and should not be allowed in situations where the disposition 
of property would otherwise be reported using the accrual 
method. The Congress was concerned that the continued use of 
the installment method in such situations would allow a 
deferral of gain that is inconsistent with the requirement of 
the accrual method that income be reported in the period it is 
earned, rather than the period it is received.
    The Congress also believed that the installment method, 
where its use is appropriate, should not serve to defer the 
recognition of gain beyond the time when funds are received. 
Accordingly, the Congress believed that proceeds of a loan 
should be treated in the same manner as a payment on an 
installment obligation if the loan is dependent on the 
existence of the installment obligation, such as where the loan 
is secured by the installment obligation or can be satisfied by 
the delivery of the installment obligation.

                        Explanation of Provision


Repeal of the installment method for accrual method taxpayers \54\

    The Act generally prohibits the use of the installment 
method of accounting for dispositions of property that would 
otherwise be reported for Federal income tax purposes using an 
accrual method of accounting. The provision does not change 
present law regarding the availability of the installment 
method for dispositions of property used or produced in the 
trade or business of farming. The provision also does not 
change present law regarding the availability of the 
installment method for dispositions of timeshares or 
residential lots if the taxpayer elects to pay interest under 
section 453(l).
---------------------------------------------------------------------------
    \54\ The Installment Tax Correction Act of 2000 (P.L. 106-573) 
subsequently repealed the prohibition of the use of the installment 
method for accrual method taxpayers as if it had not been enacted. The 
Installment Tax Correction Act of 2000 left unchanged the modifications 
made by this provision to the pledge rule.
---------------------------------------------------------------------------
    The provision does not change the ability of a cash method 
taxpayer to use the installment method. For example, a cash 
method individual owns all of the stock of a closely held 
accrual method corporation. This individual sells his stock for 
cash, a ten-year note, and a percentage of the gross revenues 
of the company for next ten years. The provision does not 
change the ability of this individual to use the installment 
method in reporting the gain on the sale of the stock.

Modifications to the pledge rule

    The Act modifies the pledge rule to provide that entering 
into any arrangement that gives the taxpayer the right to 
satisfy an obligation with an installment note will be treated 
in the same manner as the direct pledge of the installment 
note. For example, a taxpayer disposes of property for an 
installment note. The disposition is properly reported using 
the installment method. The taxpayer only recognizes gain as it 
receives the deferred payment. However, were the taxpayer to 
pledge the installment note as security for a loan, the 
taxpayer would be required to treat the proceeds of such loan 
as a payment on the installment note, and recognize the 
appropriate amount of gain. Under the provision, the taxpayer 
would also be required to treat the proceeds of a loan as 
payment on the installment note to the extent the taxpayer had 
the right to ``put'' or repay the loan by transferring the 
installment note to the taxpayer's creditor. Other arrangements 
that have a similar effect would be treated in the same manner.
    The modification of the pledge rule applies only to 
installment sales where the pledge rule of present law applies. 
Accordingly, the provision does not apply to (1) installment 
method sales made by a dealer in timeshares and residential 
lots where the taxpayer elects to pay interest under section 
453(l)(2)(B), (2) sales of property used or produced in the 
trade or business of farming, or (3) dispositions where the 
sales price does not exceed $150,000, since such sales are not 
subject to the pledge rule under present law.

                             Effective Date

    The provision is effective for sales or other dispositions 
entered into on or after the date of enactment (December 17, 
1999).

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $489 million in 2000, $694 million in 2001, 
$416 million in 2002, $257 million in 2003, $72 million in 
2004, $10 million in 2005, $21 million in 2006, $35 million in 
2007, $48 million in 2008, $62 million in 2009, and $78 million 
in 2010.

7. Denial of charitable contribution deduction for transfers associated 
        with split-dollar insurance arrangements (sec. 537 of the Tax 
        Relief Extension Act and new sec. 501(c)(28) of the Code)

                         Present and Prior Law

    Under present and prior law, in computing taxable income, a 
taxpayer who itemizes deductions generally is allowed to deduct 
charitable contributions paid during the taxable year. The 
amount of the deduction allowable for a taxable year with 
respect to any charitable contribution depends on the type of 
property contributed, the type of organization to which the 
property is contributed, and the income of the taxpayer (secs. 
170(b) and 170(e)). A charitable contribution is defined to 
mean a contribution or gift to or for the use of a charitable 
organization or certain other entities (sec. 170(c)). The term 
``contribution or gift'' is not defined by statute, but 
generally is interpreted to mean a voluntary transfer of money 
or other property without receipt of adequate consideration and 
with donative intent. If a taxpayer receives or expects to 
receive a quid pro quo in exchange for a transfer to charity, 
the taxpayer may be able to deduct the excess of the amount 
transferred over the fair market value of any benefit received 
in return, provided the excess payment is made with the 
intention of making a gift.\55\
---------------------------------------------------------------------------
    \55\ United States v. American Bar Endowment, 477 U.S. 105 (1986). 
Treas. Reg. sec. 1.170A-1(h).
---------------------------------------------------------------------------
    In general, no charitable contribution deduction is allowed 
for a transfer to charity of less than the taxpayer's entire 
interest (i.e., a partial interest) in any property (sec. 
170(f)(3)). In addition, no deduction is allowed for any 
contribution of $250 or more unless the taxpayer obtains a 
contemporaneous written acknowledgment from the donee 
organization that includes a description and good faith 
estimate of the value of any goods or services provided by the 
donee organization to the taxpayer in consideration, whole or 
part, for the taxpayer's contribution (sec. 170(f)(8)).

                           Reasons for Change

    The Congress was concerned about an abusive scheme \56\ 
referred to as charitable split-dollar life insurance, and the 
provision is designed to stop the spread of this scheme. Under 
this scheme, taxpayers typically transfer money to a charity, 
which the charity then uses to pay premiums for cash value life 
insurance on the transferor or another person. The 
beneficiaries under the life insurance contract typically 
include members of the transferor's family (either directly or 
through a family trust or family partnership). Having passed 
the money through a charity, the transferor claims a charitable 
contribution deduction for money that is actually being used to 
benefit the transferor and his or her family. If the transferor 
or the transferor's family paid the premium directly, the 
payment would not be deductible. Although the charity 
eventually may get some of the benefit under the life insurance 
contract, it does not have unfettered use of the transferred 
funds.
---------------------------------------------------------------------------
    \56\ ``A Popular Tax Shelter for `Angry Affluent' Prompts Ire of 
Others,'' Wall Street Journal, Jan. 22, 1999, p. A1; ``U.S. Treasury 
Officials Investigating Charitable Split-Dollar Insurance Plan,'' Wall 
Street Journal, Jan. 29, 1999, p. B5; ``Brilliant Deduction?,'' The 
Chronicle of Philanthropy, Aug. 13, 1998, p. 24; ``Charitable Reverse 
Split-Dollar: Bonanza or Booby Trap,'' Journal of Gift Planning, 2nd 
quarter 1998.
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    The Congress was concerned that this type of transaction 
represents an abuse of the charitable contribution deduction. 
The Congress was also concerned that the charity often gets 
relatively little benefit from this type of scheme, and serves 
merely as a conduit or accommodation party, which the Congress 
did not view as appropriate for an organization with tax-exempt 
status. In substance, the charity receives a transfer of a 
partial interest in an insurance policy, for which no 
charitable contribution deduction is allowed. While there was 
no basis under prior law for allowing a charitable contribution 
deduction in these circumstances, the Congress intended that 
the provision stop the marketing of these transactions 
immediately.
    Therefore, the provision clarifies prior law by 
specifically denying a charitable contribution deduction for a 
transfer to a charity if the charity directly or indirectly 
pays or paid any premium on a life insurance, annuity or 
endowment contract in connection with the transfer, and any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
noncharitable person chosen by the transferor. In addition, the 
provision clarifies prior law by specifically denying the 
deduction for a charitable contribution if, in connection with 
a transfer to the charity, there is an understanding or 
expectation that any person will directly or indirectly pay any 
premium on any such contract.
    The provision provides that certain persons are not treated 
as indirect beneficiaries, in certain cases in which a 
charitable organization purchases an annuity contract to fund 
an obligation to pay a charitable gift annuity. The provision 
also provides that a person is not treated as an indirect 
beneficiary solely by reason of being a noncharitable recipient 
of an annuity or unitrust amount paid by a charitable remainder 
trust that holds a life insurance, annuity or endowment 
contract. The rationale for these rules is that the amount of 
the charitable contribution deduction is limited under prior 
and present law to the value of the charitable organization's 
interest. Congress had previously enacted rules designed to 
prevent a charitable contribution deduction for the value of 
any personal benefit to the donor in these circumstances, and 
the Congress expected that the personal benefit to the donor be 
appropriately valued.
    Further, the provision imposes an excise tax on the 
charity, equal to the amount of the premiums paid by the 
charity. Finally, the provision requires a charity to report 
annually to the Internal Revenue Service the amount of premiums 
subject to this excise tax and information about the 
beneficiaries under the contract.

                        Explanation of Provision


Deduction denial

    The provision \57\ restates prior law to provide that no 
charitable contribution deduction is allowed for purposes of 
Federal tax, for a transfer to or for the use of an 
organization described in section 170(c) of the Internal 
Revenue Code, if in connection with the transfer (1) the 
organization directly or indirectly pays, or has previously 
paid, any premium on any ``personal benefit contract'' with 
respect to the transferor, or (2) there is an understanding or 
expectation that any person will directly or indirectly pay any 
premium on any ``personal benefit contract'' with respect to 
the transferor. It is intended that an organization be 
considered as indirectly paying premiums if, for example, 
another person pays premiums on its behalf.
---------------------------------------------------------------------------
    \57\ The provision is similar to H.R. 630, introduced by Mr. Archer 
and Mr. Rangel (106th Cong., 1st Sess.).
---------------------------------------------------------------------------
    A personal benefit contract with respect to the transferor 
is any life insurance, annuity, or endowment contract, if any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
person (other than a section 170(c) organization) designated by 
the transferor. For example, such a beneficiary would include a 
trust having a direct or indirect beneficiary who is the 
transferor or any member of the transferor's family, and would 
include an entity that is controlled by the transferor or any 
member of the transferor's family. It is intended that a 
beneficiary under the contract include any beneficiary under 
any side agreement relating to the contract. If a transferor 
contributes a life insurance contract to a section 170(c) 
organization and designates one or more section 170(c) 
organizations as the sole beneficiaries under the contract, 
generally, it is not intended that the deduction denial rule 
under the provision apply. If, however, there is an outstanding 
loan under the contract upon the transfer of the contract, then 
the transferor is considered as a beneficiary. The fact that a 
contract also has other direct or indirect beneficiaries 
(persons who are not the transferor or a family member, or 
designated by the transferor) does not prevent it from being a 
personal benefit contract. The provision is not intended to 
affect situations in which an organization pays premiums under 
a legitimate fringe benefit plan for employees.
    It is intended that a person be considered as an indirect 
beneficiary under a contract if, for example, the person 
receives or will receive any economic benefit as a result of 
amounts paid under or with respect to the contract. For this 
purpose, as described below, an indirect beneficiary is not 
intended to include a person that benefits exclusively under a 
bona fide charitable gift annuity (within the meaning of sec. 
501(m)).
    In the case of a charitable gift annuity, if the charitable 
organization purchases an annuity contract issued by an 
insurance company to fund its obligation to pay the charitable 
gift annuity, a person receiving payments under the charitable 
gift annuity is not treated as an indirect beneficiary, 
provided certain requirements are met. The requirements are 
that (1) the charitable organization possess all of the 
incidents of ownership (within the meaning of Treas. Reg. sec. 
20.2042-1(c)) under the annuity contract purchased by the 
charitable organization; (2) the charitable organization be 
entitled to all the payments under the contract; and (3) the 
timing and amount of payments under the contract be 
substantially the same as the timing and amount of payments to 
each person under the organization's obligation under the 
charitable gift annuity (as in effect at the time of the 
transfer to the charitable organization).
    Under the provision, an individual's family consists of the 
individual's grandparents, the grandparents of the individual's 
spouse, the lineal descendants of such grandparents, and any 
spouse of such a lineal descendant.
    In the case of a charitable gift annuity obligation that is 
issued under the laws of a State that requires, in order for 
the charitable gift annuity to be exempt from insurance 
regulation by that State, that each beneficiary under the 
charitable gift annuity be named as a beneficiary under an 
annuity contract issued by an insurance company authorized to 
transact business in that State, then the foregoing 
requirements (1) and (2) are treated as if they are met, 
provided that certain additional requirements are met. The 
additional requirements are that the State law requirement was 
in effect on February 8, 1999, each beneficiary under the 
charitable gift annuity is a bona fide resident of the State at 
the time the charitable gift annuity was issued, the only 
persons entitled to payments under the annuity contract issued 
by the insurance company are persons entitled to payments under 
the charitable gift annuity when it was issued, and (as 
required by clause (iii) of subparagraph (D) of the provision) 
the timing and amount of payments under the annuity contract to 
each person are substantially the same as the timing and amount 
of payments to the person under the charitable organization's 
obligation under the charitable gift annuity (as in effect at 
the time of the transfer to the charitable organization).
    In the case of a charitable remainder annuity trust or 
charitable remainder unitrust (as defined in section 664(d)) 
that holds a life insurance, endowment or annuity contract 
issued by an insurance company, a person is not treated as an 
indirect beneficiary under the contract held by the trust, 
solely by reason of being a recipient of an annuity or unitrust 
amount paid by the trust, provided that the trust possesses all 
of the incidents of ownership under the contract and is 
entitled to all the payments under such contract. No inference 
is intended as to the applicability of other provisions of the 
Code with respect to the acquisition by the trust of a life 
insurance, endowment or annuity contract, or the 
appropriateness of such an investment by a charitable remainder 
trust.
    Nothing in the provision is intended to suggest that a life 
insurance, endowment, or annuity contract would be a personal 
benefit contract, solely because an individual who is a 
recipient of an annuity or unitrust amount paid by a charitable 
remainder annuity trust or charitable remainder unitrust uses 
such a payment to purchase a life insurance, endowment or 
annuity contract, and a beneficiary under the contract is the 
recipient, a member of his or her family, or another person he 
or she designates.

Excise tax

    The provision imposes on any organization described in 
section 170(c) of the Code an excise tax, equal to the amount 
of the premiums paid by the organization on any life insurance, 
annuity, or endowment contract, if the premiums are paid in 
connection with a transfer for which a deduction is not 
allowable under the deduction denial rule of the provision 
(without regard to when the transfer to the charitable 
organization was made). The excise tax does not apply if all of 
the direct and indirect beneficiaries under the contract 
(including any related side agreement) are organizations 
described in section 170(c). Under the provision, payments are 
treated as made by the organization, if they are made by any 
other person pursuant to an understanding or expectation of 
payment. The excise tax is to be applied taking into account 
rules ordinarily applicable to excise taxes in chapter 41 or 42 
of the Code (e.g., statute of limitation rules).

Reporting

    The provision requires that the charitable organization 
annually report the amount of premiums that is paid during the 
year and that is subject to the excise tax imposed under the 
provision, and the name and taxpayer identification number of 
each beneficiary under the life insurance, annuity or endowment 
contract to which the premiums relate, as well as other 
information required by the Secretary of the Treasury. For this 
purpose, it is intended that a beneficiary include any 
beneficiary under any side agreement to which the section 
170(c) organization is a party (or of which it is otherwise 
aware). Penalties applicable to returns required under Code 
section 6033 apply to returns under this reporting requirement. 
Returns required under this provision are to be furnished at 
such time and in such manner as the Secretary shall by forms or 
regulations require.

Regulations

    The provision provides for the promulgation of regulations 
necessary or appropriate to carry out the purposes of the 
provisions, including regulations to prevent the avoidance of 
the purposes of the provision. For example, it is intended that 
regulations prevent avoidance of the purposes of the provision 
by inappropriate or improper reliance on the limited exceptions 
provided for certain beneficiaries under bona fide charitable 
gift annuities and for certain noncharitable recipients of an 
annuity or unitrust amount paid by a charitable remainder 
trust.

                             Effective Date

    The deduction denial provision applies to transfers after 
February 8, 1999 (as provided in H.R. 630). The excise tax 
provision applies to premiums paid after the date of enactment. 
The reporting provision applies to premiums paid after February 
8, 1999 (determined as if the excise tax imposed under the 
provision applied to premiums paid after that date).
    No inference is intended that a charitable contribution 
deduction was allowed under prior law with respect to a 
charitable split-dollar insurance arrangement. The provision 
does not change the rules with respect to fraud or criminal or 
civil penalties under prior or present law; thus, actions 
constituting fraud or that are subject to penalties under prior 
or present law would still constitute fraud or be subject to 
the penalties after enactment of the provision.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

8. Distributions by a partnership to a corporate partner of stock in 
        another corporation (sec. 538 of the Tax Relief Extension Act 
        and new sec. 732(f) of the Code)

                         Present and Prior Law

    Present and prior law generally provide that no gain or 
loss is recognized on the receipt by a corporation of property 
distributed in complete liquidation of another corporation in 
which it holds 80 percent of the stock (by vote and value) 
(sec. 332). The basis of property received by a corporate 
distributee in the distribution in complete liquidation of the 
80-percent-owned subsidiary is a carryover basis, i.e., the 
same as the basis in the hands of the subsidiary (provided no 
gain or loss is recognized by the liquidating corporation with 
respect to the distributed property) (sec. 334(b)).
    Present and prior law provide two different rules for 
determining a partner's basis in distributed property, 
depending on whether or not the distribution is in liquidation 
of the partner's interest in the partnership. Generally, a 
substituted basis rule applies to property distributed to a 
partner in liquidation. Thus, the basis of property distributed 
in liquidation of a partner's interest is equal to the 
partner's adjusted basis in its partnership interest (reduced 
by any money distributed in the same transaction) (sec. 
732(b)).
    By contrast, generally, a carryover basis rule applies to 
property distributed to a partner other than in liquidation of 
its partnership interest, subject to a cap (sec. 732(a)). Thus, 
in a non-liquidating distribution, the distributee partner's 
basis in the property is equal to the partnership's adjusted 
basis in the property immediately before the distribution, but 
not to exceed the partner's adjusted basis in its partnership 
interest (reduced by any money distributed in the same 
transaction). In a non-liquidating distribution, the partner's 
basis in its partnership interest is reduced by the amount of 
the basis to the distributee partner of the property 
distributed and is reduced by the amount of any money 
distributed (sec. 733).
    If corporate stock is distributed by a partnership to a 
corporate partner with a low basis in its partnership interest, 
the basis of the stock is reduced in the hands of the partner 
so that the stock basis equals the distributee partner's 
adjusted basis in its partnership interest. Under prior law, no 
comparable reduction was made in the basis of the corporation's 
assets, however. Under prior law, the effect of reducing the 
stock basis could be negated by a subsequent liquidation of the 
corporation under section 332.\58\
---------------------------------------------------------------------------
    \58\ In a similar situation involving the purchase of stock of a 
subsidiary corporation as replacement property following an involuntary 
conversion, the Code generally requires the basis of the assets held by 
the subsidiary to be reduced to the extent that the basis of the stock 
in the replacement corporation itself is reduced (sec. 1033).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress was concerned that the downward adjustment to 
the basis of property distributed by a partnership may be 
nullified if the distributed property is corporate stock. The 
distributed corporation could be liquidated by the corporate 
partner, so that the stock basis adjustment would have no 
effect. Similarly, if the corporations file a consolidated 
return, their taxable income may be computed without reference 
to the downward adjustment to the basis of the stock. These 
results could occur either if the partnership has contributed 
property to the distributed corporation, or if the property was 
held by the corporation before the distribution. Therefore, the 
provision requires a basis reduction to the property of the 
distributed corporation.

                        Explanation of Provision


In general

    The provision provides for a basis reduction to assets of a 
corporation, if stock in that corporation is distributed by a 
partnership to a corporate partner. The reduction applies if, 
after the distribution, the corporate partner controls the 
distributed corporation.

Amount of the basis reduction

    Under the provision, the amount of the reduction in basis 
of property of the distributed corporation generally equals the 
amount of the excess of (1) the partnership's adjusted basis in 
the stock of the distributed corporation immediately before the 
distribution, over (2) the corporate partner's basis in that 
stock immediately after the distribution.
    The provision limits the amount of the basis reduction in 
two respects. First, the amount of the basis reduction may not 
exceed the amount by which (1) the sum of the aggregate 
adjusted bases of the property and the amount of money of the 
distributed corporation exceeds (2) the corporate partner's 
adjusted basis in the stock of the distributed corporation. 
Thus, for example, if the distributed corporation has cash of 
$300 and other property with a basis of $600 and the corporate 
partner's basis in the stock of the distributed corporation is 
$400, then the amount of the basis reduction could not exceed 
$500 (i.e., ($300 + $600) - $400 = $500).
    Second, the amount of the basis reduction may not exceed 
the adjusted basis of the property of the distributed 
corporation. Thus, the basis of property (other than money) of 
the distributed corporation could not be reduced below zero 
under the provision, even though the total amount of the basis 
reduction would otherwise be greater.
    The provision provides that the corporate partner 
recognizes long-term capital gain to the extent the amount of 
the basis reduction exceeds the basis of the property (other 
than money) of the distributed corporation. In addition, the 
corporate partner's adjusted basis in the stock of the 
distribution is increased in the same amount. For example, if 
the amount of the basis reduction were $400, and the 
distributed corporation has money of $200 and other property 
with an adjusted basis of $300, then the corporate partner 
would recognize a $100 capital gain under the provision. The 
corporate partner's basis in the stock of the distributed 
corporation is also increased by $100 in this example, under 
the provision.
    The basis reduction is allocated among assets of the 
controlled corporation in accordance with the rules provided 
under section 732(c).

Partnership distributions resulting in control

    The basis reduction generally applies with respect to a 
partnership distribution of stock if the corporate partner 
controls the distributed corporation immediately after the 
distribution or at any time thereafter. For this purpose, the 
term control means ownership of stock meeting the requirements 
of section 1504(a)(2) (generally, an 80-percent vote and value 
requirement).\59\
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    \59\ Note that a technical correction to this provision was enacted 
in The Community Renewal Tax Relief Act of 2000 (106th Cong., 2d Sess., 
P.L. 106-554) (described in this volume). Section 311(c) of H.R. 5662 
as incorporated in that Act provides that the rule in the consolidated 
return regulations (Treas. Reg. sec. 1.1502-34) aggregating stock 
ownership for purposes of section 332 (relating to complete liquidation 
of a subsidiary that is a controlled corporation) also applies for 
purposes of section 732(f) (relating to basis adjustments to assets of 
a controlled corporation received in a partnership distribution).
---------------------------------------------------------------------------
    The provision applies to reduce the basis of any property 
held by the distributed corporation immediately after the 
distribution, or, if the corporate partner does not control the 
distributed corporation at that time, then at the time the 
corporate partner first has such control. The provision does 
not apply to any distribution if the corporate partner does not 
have control of the distributed corporation immediately after 
the distribution and establishes that the distribution was not 
part of a plan or arrangement to acquire control.
    For purposes of the provision, if a corporation acquires 
(other than in a distribution from a partnership) stock the 
basis of which is determined (by reason of being distributed 
from a partnership) in whole or in part by reference to section 
732(a)(2) or (b), then the corporation is treated as receiving 
a distribution of stock from a partnership. For example, if a 
partnership distributes property other than stock (such as real 
estate) to a corporate partner, and that corporate partner 
contributes the real estate to another corporation in a section 
351 transaction, then the stock received in the section 351 
transaction is not treated as distributed by a partnership, and 
the basis reduction under this provision does not apply. As 
another example, if a partnership distributes stock to two 
corporate partners, neither of which have control of the 
distributed corporation, and the two corporate partners merge 
and the survivor obtains control of the distributed 
corporation, the stock of the distributed corporation that is 
acquired as a result of the merger is treated as received in a 
partnership distribution; the basis reduction rule of the 
provision applies.
    In the case of tiered corporations, a special rule provides 
that if the property held by a distributed corporation is stock 
in a corporation that the distributed corporation controls, 
then the provision is applied to reduce the basis of the 
property of that controlled corporation. The provision is also 
reapplied to any property of any controlled corporation that is 
stock in a corporation that it controls. Thus, for example, if 
stock of a controlled corporation is distributed to a corporate 
partner, and the controlled corporation has a subsidiary, the 
amount of the basis reduction allocable to stock of the 
subsidiary is applied again to reduce the basis of the assets 
of the subsidiary, under the special rule.
    The provision also provides for regulations, including 
regulations to avoid double counting and to prevent the abuse 
of the purposes of the provision. It is intended that 
regulations prevent the avoidance of the purposes of the 
provision through the use of tiered partnerships.

                             Effective Date

    The provision is effective generally for distributions made 
after July 14, 1999. However, in the case of a corporation that 
is a partner in a partnership as of July 14, 1999, the 
provision is effective for any distribution made (or treated as 
made) to that partner from that partnership after June 30, 
2001. In the case of any such distribution after the date of 
enactment and before July 1, 2001, the rule of the preceding 
sentence does not apply unless that partner makes an election 
to have the rule apply to the distribution on the partner's 
return of Federal income tax for the taxable year in which the 
distribution occurs.
    No inference is intended that distributions that are not 
subject to the provision achieve a particular tax result under 
present law, and no inference is intended that enactment of the 
provision limits the application of tax rules or principles 
under present or prior law.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $2 million in 2000, $4 million in 2001, $7 
million in 2002, and $10 million in each of the years 2003 
through 2010.

B. Provisions Relating to Real Estate Investment Trusts (sec. 541-547, 
 551, 556, 561, 566, and 571 of the Tax Relief Extension Act and secs. 
                  852, 856, 857, and 6655 of the Code)


1. General provisions

                         Present and Prior Law

    A real estate investment trust (``REIT'') is an entity that 
receives most of its income from passive real-estate related 
investments and that essentially receives pass-through 
treatment for income that is distributed to shareholders.
    If an electing entity meets the requirements for REIT 
status, the portion of its income that is distributed to the 
investors each year generally is taxed to the investors without 
being subjected to a tax at the REIT level. In general, a REIT 
must derive its income from passive sources and not engage in 
any active trade or business.
    A REIT must satisfy a number of tests on an annual basis 
that relate to the entity's (1) organizational structure; (2) 
source of income; (3) nature of assets; and (4) distribution of 
income. Under the source-of-income tests, at least 95 percent 
of its gross income generally must be derived from rents from 
real property, dividends, interest, and certain other passive 
sources (the ``95 percent test''). In addition, at least 75 
percent of its gross income generally must be from real estate 
sources, including rents from real property and interest on 
mortgages secured by real property. For purposes of the 95 and 
75 percent tests, qualified income includes amounts received 
from certain ``foreclosure property,'' treated as such for 3 
years after the property is acquired by the REIT in foreclosure 
after a default (or imminent default) on a lease of such 
property or on indebtedness which such property secured.
    In general, for purposes of the 95 percent and 75 percent 
tests, rents from real property do not include amounts for 
services to tenants or for managing or operating real property. 
However, there are some exceptions. Qualified rents include 
amounts received for services that are ``customarily furnished 
or rendered'' in connection with the rental of real property, 
so long as the services are furnished through an independent 
contractor from whom the REIT does not derive any income. 
Amounts received for services that are not ``customarily 
furnished or rendered'' are not qualified rents.
    An independent contractor is defined as a person who does 
not own, directly or indirectly, more than 35 percent of the 
shares of the REIT. Also, no more than 35 percent of the total 
shares of stock of an independent contractor (or of the 
interests in assets or net profits, if not a corporation) can 
be owned directly or indirectly by persons owning 35 percent or 
more of the interests in the REIT. In addition, a REIT cannot 
derive any income from an independent contractor.
    Rents for certain personal property leased in connection 
with real property are treated as rents from real property if 
the adjusted basis of the personal property does not exceed 15 
percent of the aggregate adjusted bases of the real and the 
personal property.
    In general, rents from real property do not include amounts 
received from any corporation if the REIT owns 10 percent or 
more of the voting power or of the total number of shares of 
all classes of stock of such corporation. Similarly, in the 
case of other entities, rents are not qualified if the REIT 
owns 10 percent of more in the assets or net profits of such 
person.
    At the close of each quarter of the taxable year, at least 
75 percent of the value of total REIT assets must be 
represented by real estate assets, cash and cash items, and 
Government securities. Also, a REIT cannot own securities 
(other than Government securities and certain real estate 
assets) in an amount greater than 25 percent of the value of 
REIT assets. In addition, under prior law, a REIT could not own 
securities of any one issuer representing more than 5 percent 
of the total value of REIT assets or more than 10 percent of 
the voting securities of any corporate issuer. Securities for 
purposes of these rules are defined by reference to the 
Investment Company Act of 1940.\60\
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    \60\ 15 U.S.C. 80a-1 and following. See Code section 856(c)(5)(F).
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    Under an exception to the ownership rule, a REIT is 
permitted to have a wholly owned subsidiary corporation, but 
the assets and items of income and deduction of such 
corporation are treated as those of the REIT, and thus can 
affect the qualification of the REIT under the income and asset 
tests.
    A REIT generally is required to distribute 95 percent of 
its income before the end of its taxable year, as deductible 
dividends paid to shareholders. This rule is similar to a rule 
for regulated investment companies (``RICs'') that requires 
distribution of 90 percent of income. Both REITS and RICs can 
make certain ``deficiency dividends'' after the close of the 
taxable year, and have these treated as made before the end of 
the year. The regulations applicable to REITS state that a 
distribution will be treated as a ``deficiency dividend'' (and, 
thus, as made before the end of the prior taxable year) only to 
the extent the earnings and profits for that year exceed the 
amount of distributions actually made during the taxable 
year.\61\
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    \61\ Treas. Reg. sec. 1.858-1(b)(2).
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    A REIT that has been or has combined with a C corporation 
\62\ will be disqualified if, as of the end of its taxable 
year, it has accumulated earnings and profits from a non-REIT 
year. A similar rule applies to regulated investment companies 
(``RICs''). In the case of a REIT, any distribution made in 
order to comply with this requirement is treated as being first 
from pre-REIT accumulated earnings and profits. RICs do not 
have a similar ordering rule.
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    \62\ A ``C corporation'' is a corporation that is subject to 
taxation under the rules of subchapter C of the Internal Revenue Code, 
which generally provides for a corporate level tax on corporate income. 
Thus, a C corporation is not a pass-through entity. Earnings and 
profits of a C corporation, when distributed to shareholders, are taxed 
to the shareholders as dividends.
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    In the case of a RIC, any distribution made within a 
specified period after determination that the investment 
company did not qualify as a RIC for the taxable year will be 
treated as applying to the RIC for the non-RIC year, ``for 
purposes of applying [the earnings and profits rule that 
forbids a RIC to have non-RIC earnings and profits] to 
subsequent taxable years.'' The REIT rules do not specify any 
particular separate treatment of distributions made after the 
end of the taxable year for purposes of the earnings and 
profits rule. Treasury regulations under the REIT provisions 
state that ``distribution procedures similar to those . . . for 
regulated investment companies apply to non-REIT earnings and 
profits of a real estate investment trust.'' \63\
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    \63\ Treas. Reg. sec. 1.857-11(c).
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                           Reasons for Change

    The Congress was concerned that nonqualified income of a 
REIT might be avoided under prior law through transactions with 
entities that engaged in activities producing nonqualified 
income and that were effectively owned by the REIT. For 
example, a REIT might invest in an entity in which it owned 
virtually all the value (e.g., through preferred stock) even 
though it owned only a small amount of the vote. The remainder 
of the voting power might be held by persons related to the 
REIT such as its officers, directors, or employees. The REIT 
might effectively be a beneficiary of virtually all the 
earnings of the entity, through its preferred stock ownership. 
Also, the REIT might hold significant debt in the entity, and 
receive significant interest income that reduced the entity's 
taxable income (subject to corporate level tax if the entity is 
a C corporation) while producing permissible income to the 
REIT.
    Similarly, if the entity was a partnership engaged in 
activities that would generate nonqualified income for the REIT 
if done directly, the REIT might use a significant debt 
investment in the partnership combined with a small equity 
interest, to reduce the amount of nonqualified income the REIT 
would report from the partnership through its partnership 
interest, while still receiving a significant income stream 
through the debt.
    As a result of these concerns, the Congress believed that a 
10-percent value, as well as a 10-percent vote test, generally 
is appropriate to test the permitted relationship of a REIT to 
the entities in which it invests.
    The Congress believed however, that certain types of 
activities that relate to the REIT's real estate investments 
should be permitted to be performed under the control of the 
REIT, through the establishment of a ``taxable REIT 
subsidiary'' where there are rules which limit the amount of 
the subsidiary's income that can be reduced through 
transactions with the REIT. A limit on the amount of REIT asset 
value that can be represented by investment in such 
subsidiaries was also desirable. In addition, the Congress 
believed it is desirable to obtain information regarding the 
extent of use of the new taxable REIT subsidiaries and the 
amount of corporate Federal income tax that such subsidiaries 
are paying. One type of activity is the provision of tenant 
services that the REIT wishes to provide in order to remain 
competitive that might not be considered customary because they 
are relatively new or ``cutting-edge''. The Congress believed 
that provision of tenant services by taxable REIT subsidiaries 
will simplify such rental operations since uncertainty whether 
a particular service provided by a subsidiary is ``customary'' 
will not affect the parent's qualification as a REIT. Another 
type of activity that the Congress believed appropriate for a 
subsidiary is management and operation of the real estate in 
which a REIT has developed expertise with respect to its own 
properties that it also would like to provide to third parties.
    The Congress believed that allowing operation of health 
care facilities directly by a REIT for a limited period of time 
is appropriate to assure continuous provision of health care 
services where the facilities are acquired by the REIT upon 
termination of a lease (as upon foreclosure) where there may 
not be enough time to obtain a new independent provider of such 
health care services.
    Finally, the Congress believed that a number of other 
simplifying changes are desirable, including simplifying the 
determination whether a publicly traded entity is an 
independent contractor and modifying and conforming certain RIC 
and REIT distribution rules.

                        Explanation of Provision


Investment limitations and taxable REIT subsidiaries

            Investment limitations
    General rule.--Under the provision, a REIT generally cannot 
own more than 10 percent of the total value of securities of a 
single issuer, in addition to the prior law rule that a REIT 
cannot own more than 10 percent of the outstanding voting 
securities of a single issuer. In addition, no more than 20 
percent of the value of a REIT's assets can be represented by 
securities (as defined in the Investment Company Act of 1940) 
of taxable REIT subsidiaries that are permitted under the Act.
    Exception for safe-harbor debt.--For purposes of the new 
10-percent value test, securities generally are defined to 
exclude safe harbor ``straight debt'' owned by a REIT (as 
defined in Code sections 1361(c)(5)(B)(i) and (ii)) if the 
issuer is an individual, or if the REIT (and any taxable REIT 
subsidiary of such REIT) owns no other securities of the 
issuer. However, in the case of a REIT that owns securities of 
a partnership, safe harbor debt is excluded from the definition 
of securities only if the REIT owns at least 20-percent or more 
of the profits interest in the partnership. The purpose of the 
partnership rule requiring a 20 percent profits interest is to 
assure that if the partnership produces income that would be 
disqualified income to the REIT, the REIT will be treated as 
receiving a significant portion of that income directly through 
its partnership interest, even though it also may derive 
qualified interest income through its safe harbor debt 
interest.
            Exception for taxable REIT subsidiaries
    In general.--An exception to the limitations on ownership 
of securities of a single issuer applies in the case of a 
``taxable REIT subsidiary'' that meets certain requirements. 
However, securities (as defined in the Investment Company Act 
of 1940) of taxable REIT subsidiaries cannot not exceed 20 
percent of the total value of a REIT's assets.
    Joint election requirement.--To qualify as a taxable REIT 
subsidiary, both the REIT and the subsidiary corporation must 
join in an election. In addition, any corporation (other than a 
REIT or a qualified REIT subsidiary under section 856(i) that 
does not properly elect with the REIT to be a taxable REIT 
subsidiary) of which a taxable REIT subsidiary owns, directly 
or indirectly, more than 35 percent of the vote or value is 
automatically treated as a taxable REIT subsidiary.
    Permitted activities of a taxable REIT subsidiary.--A 
taxable REIT subsidiary can engage in certain business 
activities that under prior law could disqualify the REIT 
because, but for the provision, the taxable REIT subsidiary's 
activities and relationship with the REIT would have prevented 
certain income from qualifying as rents from real property. 
Specifically, the subsidiary can provide services to tenants of 
REIT property (even if such services were not considered 
services customarily furnished in connection with the rental of 
real property), and can manage or operate properties, generally 
for third parties, without causing amounts received or accrued 
directly or indirectly by the REIT for such activities to fail 
to be treated as rents from real property. However, rents paid 
to a REIT generally are not qualified rents if the REIT owns 
more than 10 percent of the value (as well as of the vote) of a 
corporation paying the rents. The only exceptions are for rents 
that are paid by taxable REIT subsidiaries and that also meet a 
limited rental exception (where 90 percent of space is leased 
to third parties at comparable rents) and an exception for 
rents from certain lodging facilities (operated by an 
independent contractor).
    However, the subsidiary cannot directly or indirectly 
operate or manage a lodging or healthcare facility. 
Nevertheless, it can lease a qualified lodging facility (e.g., 
a hotel) from the REIT (provided no gambling revenues were 
derived by the hotel or on its premises); and the rents paid 
are treated as rents from real property so long as the lodging 
facility was operated by an independent contractor for a fee. 
The subsidiary can bear all expenses of operating the facility 
and receive all the net revenues, minus the independent 
contractor's fee.
    For purposes of the rule that an independent contractor may 
operate a qualified lodging facility, an independent contractor 
will qualify so long as, at the time it enters into the 
management agreement with the taxable REIT subsidiary, it is 
actively engaged in the trade or business of operating 
qualified lodging facilities for any person who is not related 
to the REIT or the taxable REIT subsidiary. The REIT may 
receive income from such an independent contractor with respect 
to certain pre-existing leases.
    Also, the subsidiary generally cannot provide to any person 
rights to any brand name under which hotels or healthcare 
facilities are operated. An exception applies to rights 
provided to an independent contractor to operate or manage a 
lodging facility, if the rights are held by the subsidiary as 
licensee or franchisee, and the lodging facility is owned by 
the subsidiary or leased to it by the REIT.
    Special rules to limit income of taxable REIT subsidiary 
going to REIT.--Interest paid by a taxable REIT subsidiary to 
the related REIT is subject to the earnings stripping rules of 
section 163(j). Thus the taxable REIT subsidiary cannot deduct 
interest in any year that would exceed 50 percent of the 
subsidiary's adjusted gross income.
    If any amount of interest, rent, or other deductions of the 
taxable REIT subsidiary for amounts paid to the REIT is 
determined to be other than at arm's length (``redetermined'' 
items), an excise tax of 100 percent is imposed on the portion 
that was excessive. ``Safe harbors'' are provided for certain 
rental payments where (1) the amounts are de minimis, (2) there 
is specified evidence that charges to unrelated parties are 
substantially comparable, (3) certain charges for services from 
the taxable REIT subsidiary are separately stated, or (4) the 
subsidiary's gross income from the service is not less than 150 
percent of the subsidiary's direct cost in furnishing the 
service.\64\
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    \64\ A technical correction described below (sec. 311(b) of H.R. 
5662) clarified that redetermined rent does not include any amount 
received from a taxable REIT subsidiary that would be excluded from 
unrelated business taxable income (under section 512(b)(3)).
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    In determining whether rents are arm's length rents, the 
fact that such rents do not meet the requirements of the 
specified safe harbors shall not be taken into account. In 
addition, rent received by a REIT shall not fail to qualify as 
rents from real property by reason of the fact that all or any 
portion of such rent is redetermined for purposes of the excise 
tax.
    Treasury study of taxable REIT subsidiaries.--The Treasury 
Department is to conduct a study to determine how many taxable 
REIT subsidiaries are in existence and the aggregate amount of 
taxes paid by such subsidiaries and shall submit a report to 
the Congress describing the results of such study.

Health care REITS

    The provision permits a REIT to own and operate a health 
care facility for at least two years, and treat it as permitted 
``foreclosure'' property, if the facility is acquired by the 
termination or expiration of a lease of the property. 
Extensions of the 2-year period can be granted.

Conformity with regulated investment company rules

    Under the provision, the REIT distribution requirements are 
modified to conform to the rules for regulated investment 
companies. Specifically, a REIT is required to distribute only 
90 percent, rather than 95 percent, of its income.

Definition of independent contractor

    If any class of stock of the REIT or the person being 
tested as an independent contractor is regularly traded on an 
established securities market, only persons who directly or 
indirectly own 5 percent or more of such class of stock shall 
be counted in determining whether the 35 percent ownership 
limitations have been exceeded.

Modification of earnings and profits rules for RICs and REITS

    The rule allowing a RIC to make a distribution after a 
determination that it had failed RIC status, and thus meet the 
requirement of no non-RIC earnings and profits in subsequent 
years, is modified to clarify that, when the sole reason for 
the determination is that the RIC had non-RIC earnings and 
profits in the initial year (i.e. because it was determined not 
to have distributed all C corporation earnings and profits), 
the procedure would apply to permit RIC qualification in the 
initial year to which such determination applied, in addition 
to subsequent years.
    The provision modifies both the RIC and REIT earnings and 
profits rules to provide a more specific ordering rule, similar 
to the present-law REIT rule. The new ordering rule treats a 
distribution to meet the requirement of no non-RIC or non-REIT 
earnings and profits as coming, on a first-in, first-out basis, 
from earnings and profits which, if not distributed, would 
result in a failure to meet such requirement. Thus, such 
earnings and profits are deemed distributed first from earnings 
and profits that would cause such a failure, starting with the 
earliest RIC or REIT year for which such failure would occur. 
In addition, the REIT deficiency dividend rules are modified to 
take account of this ordering rule.

Provision regarding rental income from certain personal property

    The provision modifies the rule permitting certain rents 
from personal property to be treated as real estate rental 
income if such personal property did not exceed 15 percent of 
the aggregate of real and personal property. The provision 
replaces the prior law comparison of the adjusted bases of 
properties with a comparison based on fair market values.

                             Effective Date

    In general.--The provision is effective for taxable years 
beginning after December 31, 2000. The provision with respect 
to modification of earnings and profits rules is effective for 
distributions after December 31, 2000.
    Transition rules.--The new rules forbidding a REIT to own 
more than 10 percent of the value of securities of a single 
issuer do not apply to a REIT with respect to securities held 
directly or indirectly by such REIT on July 12, 1999, or 
acquired pursuant to the terms of a written binding contract in 
effect on that date and at all times thereafter until the 
acquisition. Securities received in a tax-free exchange or 
reorganization, with respect to or in exchange for such 
grandfathered securities, are also grandfathered.
    The grandfathering of securities ceases to apply if the 
REIT acquires additional securities of that issuer after July 
12,1999, other than pursuant to a binding contract in effect on 
that date and at all times thereafter, or in a reorganization 
with another corporation the securities of which are 
grandfathered.
    This transition also ceases to apply to securities of a 
corporation as of the first day after July 12, 1999, on which 
such corporation engages in a substantial new line of business, 
or acquires any substantial asset, other than pursuant to a 
binding contract in effect on such date and at all times 
thereafter, or in a reorganization or transaction in which gain 
or loss is not recognized by reason of section 1031 or 1033 of 
the Code. If a corporation makes an election to become a 
taxable REIT subsidiary, effective before January 1, 2004, and 
at a time when the REIT's ownership is grandfathered under 
these rules, the election is treated as a reorganization under 
section 368(a)(1)(A) of the Code.
    Qualified rents.--The new 10 percent of value limitation 
for purposes of defining qualified rents is effective for 
taxable years beginning after December 31, 2000. There is an 
exception for rents paid under a lease or pursuant to a binding 
contract in effect on July 12, 1999, and at all times 
thereafter.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $46 million in 2001, $136 million in 2002, 
$49 million in 2003, and $24 million in 2004, and is estimated 
to reduce Federal fiscal year budget receipts by $4 million in 
2005, $34 million in 2006, $67 million in 2007, $101 million in 
2008, $140 million in 2009, and $182 million in 2010.

2. Modification of estimated tax rules for closely held REITs

                         Present and Prior Law

    If a person has a direct interest or a partnership interest 
in assets that produce income throughout the year (including 
mortgages or other securities), that person's estimated tax 
payments must reflect the quarterly amounts expected from the 
asset. However, under prior law, a dividend distribution of 
earnings from a real estate investment trust (``REIT'') was 
considered for estimated tax purposes to produce income when 
the dividend is paid.

                           Reasons for Change

    The Congress was concerned that REITs might be used to 
defer estimated taxes. Income producing property might be 
acquired in or transferred to a REIT, and a dividend paid from 
the REIT only at the end of the year. So long as the dividend 
was paid by year end (or within a certain period after year 
end), the REIT pays no tax on the dividend, while the 
shareholder of the REIT did not include the payment in income 
until the dividend is paid. Thus, the income from the assets 
was not counted in the earlier quarters of the year, for 
purposes of the shareholder's estimated tax.
    The Congress was concerned that this type of situation was 
most likely to occur in cases where a REIT is relatively 
closely held and might be used to structure payments for the 
benefit of significant shareholders. In such situations, the 
Congress believed that persons who are significant shareholders 
in the REIT should be able to obtain sufficient information 
regarding the quarterly income of the REIT to determine their 
share of that income for estimated tax purposes.

                        Explanation of Provision

    Under the provision, in the case of a REIT that is closely 
held, any person owning at least 10 percent of the vote or 
value of the REIT is required to accelerate the recognition of 
year-end dividends attributable to the closely held REIT, for 
purposes of such person's estimated tax payments. A closely 
held REIT is defined as one in which at least 50 percent of the 
vote or value is owed by five or fewer persons. Attribution 
rules apply to determine ownership.
    No inference is intended regarding the treatment of any 
transaction prior to the effective date.

                             Effective Date

    The provision is effective for estimated tax payments due 
on or after December 15, 1999.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $40 million in 2000, and $1 million for each 
of the years 2001 through 2010.

 PART FOUR: TRADE AND DEVELOPMENT ACT OF 2000 (PUBLIC LAW 106-200) \65\
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    \65\ H.R. 434 (``Trade and Development Act of 2000''); P.L. 106-
200. On November 3, 1999, the Senate passed a version of H.R. 434 
(''Trade and Development Act of 1999'') which included provisions 
relating to the waiver of denial of foreign tax credits under section 
901(j) and the acceleration of rum cover over payments to Puerto Rico 
and the Virgin Islands. The Senate amendment to H.R. 434 relating to 
the waiver of denial of foreign tax credits under section 901(j) is 
similar to a provision included in the conference agreement to H.R. 
2488 (``Taxpayer Refund and Relief Act of 1999'') (H. Rep. 106-289). 
The Senate amendment to H.R. 434 relating to the rum cover over 
payments to Puerto Rico and the Virgin Islands is the same as a 
provision included in H.R. 984 (``Caribbean and Central America Relief 
and Economic Stabilization Act'') as reported by the House Committee on 
Ways and Means on March 13, 2000 (H. Rep. 106-519, Part 1). The 
conference agreement to H.R. 434 was reported on May 4, 2000 (H. Rep. 
106-606). The conference agreement to H.R. 434 was passed by the House 
on May 4, 2000 and by the Senate on May 11, 2000. H.R. 434 was signed 
by the President on May 18, 2000.
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  A. Application of Denial of Foreign Tax Credit Regarding Trade and 
 Investment With Respect to Certain Foreign Countries (sec. 601 of the 
         Trade and Development Act and sec. 901(j) of the Code)

                         Present and Prior Law

    In general, U.S. persons may credit foreign taxes against 
U.S. tax on foreign-source income. The amount of foreign tax 
credits that can be claimed in a year is subject to a 
limitation that prevents taxpayers from using foreign tax 
credits to offset U.S. tax on U.S.-source income. Separate 
limitations are applied to specific categories of income.
    Pursuant to special rules applicable to taxes paid to 
certain foreign countries, no foreign tax credit is allowed for 
income, war profits, or excess profits taxed paid, accrued, or 
deemed paid to a country which satisfies specified criteria, to 
the extent that the taxes are with respect to income 
attributable to a period during which such criteria were 
satisfied (sec. 901(j)). Section 901(j) applies with respect to 
any foreign country: (1) the government of which the United 
States does not recognize, unless such government is otherwise 
eligible to purchase defense articles or services under the 
Arms Export Control Act, (2) with respect to which the United 
States has severed diplomatic relations, (3) with respect to 
which the United States has not severed diplomatic relations 
but does not conduct such relations, or (4) which the Secretary 
of State has, pursuant to section 6(j) of the Export 
Administration Act of 1979, as amended, designated as a foreign 
country which repeatedly provides support for acts of 
international terrorisms (a ``section 901(j) foreign 
country''). The denial of credits applies to any foreign 
country during the period beginning on the later of January 1, 
1987, or six months after such country becomes a section 901(j) 
country, and ending on the date the Secretary of State 
certifies to the Secretary of the Treasury that such country is 
no longer a section 901(j) country.
    Taxes treated as noncreditable under section 901(j) 
generally are permitted to be deducted notwithstanding the fact 
that the taxpayer elects use of the foreign tax credit for the 
taxable year with respect to other taxes. In addition, income 
for which foreign tax credits are denied generally cannot be 
sheltered from U.S. tax by other creditable foreign taxes.
    Under the rules of subpart F, U.S. 10-percent shareholders 
of a controlled foreign corporation (``CFC'') are required to 
include in income currently certain types of income of the CFC, 
whether or not such income is actually distributed currently to 
the shareholders (referred to as ``subpart F income''). Subpart 
F income includes income derived from any foreign country 
during a period in which the taxes imposed by that country are 
denied eligibility for the foreign tax credit under section 
901(j) (sec. 952(a)(5)).

                        Reasons for Change \66\
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    \66\ The legislative history of this provision did not include a 
reasons for change section. The reasons for change reported here are 
drawn from the reasons for change reported in a House Committee on Ways 
and Means report to H.R. 2488 (``Financial Freedom Act of 1999'') with 
respect to a similar provision concerning the waiver of denial of 
foreign tax credits under section 901(j). See H. Rep. 106-238 at 255-
256 (1999).
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    The Congress has observed that the automatic denial of 
foreign tax credits under section 901(j) with respect to a 
foreign country may in certain cases conflict with other policy 
interests of the United States. The Congress believed that it 
is appropriate to provide a mechanism for the waiver of the 
denial of foreign tax credits in certain cases.

                        Explanation of Provision

    The provision provides that section 901(j) no longer 
applies with respect to a foreign country if: (1) the President 
determines that a waiver of the application of section 901(j) 
to such foreign country is in the national interest of the 
United States and will expand trade and investment 
opportunities for U.S. companies in such foreign country, and 
(2) the President reports to Congress, not less than 30 days 
before the waiver is granted, the intention to grant such a 
waiver and the reason for such waiver.

                             Effective Date

    The provision is effective on or after February 1, 2001.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

  B. Acceleration of Coverover Payments to Puerto Rico and the Virgin 
Islands (sec. 602 of the Trade and Development Act and sec. 7652 of the 
                                 Code)

                         Present and Prior Law

    A $13.50 per proof gallon \67\ excise tax is imposed on 
distilled spirits produced in, or imported or brought into, the 
United States. The excise tax does not apply to distilled 
spirits that are exported from the United States or to 
distilled spirits that are consumed in U.S. possessions (e.g., 
Puerto Rico and the Virgin Islands).
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    \67\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol.
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    The Code provides for coverover (payment) of $13.25 per 
proof gallon of the excise tax imposed on rum imported (or 
brought) into the United States (without regard to the country 
of origin) to Puerto Rico and the Virgin Islands during the 
period July 1, 1999 through December 31, 2001. Effective on 
January 1, 2002, the coverover rate is scheduled to return to 
its permanent level of $10.50 per proof gallon. Under prior 
law, the maximum amount attributable to the increased coverover 
rate over the permanent rate of $10.50 per proof gallon that 
could be paid to Puerto Rico and the Virgin Islands before 
October 1, 2000 was $20 million. Payment of this amount was 
made on January 3, 2000.\68\ Any remaining amounts attributable 
to the increased coverover rate were to be paid on October 1, 
2000.
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    \68\ The Department of the Interior, which administers the 
coverover for rum imported into the United States from the U.S. Virgin 
Islands, erroneously authorized full payment to the Virgin Islands of 
the increased coverover rate on that rum notwithstanding the statutory 
limit on these transfers for periods before October 1, 2000. The Bureau 
of Alcohol, Tobacco, and Firearms, which administers the coverover 
payments for the Virgin Islands' portion of tax collected on rum 
imported from other countries, complied with the statutory limit.
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    Amounts covered over to Puerto Rico and the Virgin Islands 
are deposited into the treasuries of the two possessions for 
use as those possessions determine.

                        Explanation of Provision

    The provision provides that unpaid amounts attributable to 
the increase in the coverover rate to $13.25 per proof gallon 
for the period from July 1, 1999 through the last day of the 
month prior to the date of enactment would be paid on the first 
monthly payment date following the date of enactment.\69\ With 
respect to amounts attributable to the period beginning with 
the month of the provision's enactment, payments are based on 
the full $13.25 per proof gallon rate.
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    \69\ Thus, this provision applies only to payments to Puerto Rico 
and to payments of the Virgin Islands' portion of tax on rum imported 
from other countries because the Interior Department erroneously has 
already paid in full amounts attributable to rum imported from the 
Virgin Islands.
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    The provision further includes two clarifications to the 
rules governing coverover payments. First, clarification is 
provided that payments to the Virgin Islands with respect to 
rum imported from that possession are to be made annually in 
advance (base