[WPRT 108-10]
[From the U.S. Government Publishing Office]



108th Congress 
 2nd Session                COMMITTEE PRINT                       WMCP:
                                                                 108-10
_______________________________________________________________________
 
                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                               __________

                            WRITTEN COMMENTS

                                   on

          H.R. 3654, THE ``TECHNICAL CORRECTIONS ACT OF 2003''

                                     
[GRAPHIC] [TIFF OMITTED] CONGRESS.#13

                                     

                            JANUARY 23, 2004

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.














                            C O N T E N T S

                               __________
                                                                   Page
Advisory of Tuesday, December 9, 2003, announcing request for 
  written comments on H.R. 3654, the ``Technical Corrections Act 
  of 2003''......................................................     1

                                 ______

BDO Seidman, LLP, National Tax Office, Donald A. Barnes, letter..     2
Burlington Northern Santa Fe Corporation, Fort Worth, TX, Thomas 
  N. Hund, letter................................................     4
Iacopi, Lenz & Company Accountancy Corporation, Stockton, CA, 
  Constance Logan, statement.....................................     5
Investment Company Institute, statement and attachment...........    11
Jackson & Campbell, PC, Michael J. Grace, letter.................    14
National Association of Real Estate Investment Trusts, Tony M. 
  Edwards, letter................................................    17
Perkins & Company, PC, Portland, OR, Christopher J. Loughran, 
  letter.........................................................    18
Vinson & Elkins, LLP, Christine L. Vaughn, and Thomas Crichton, 
  IV, letter.....................................................    20
Vitter, Hon. David, a Representative in Congress from the State 
  of Louisiana, letter...........................................    23
















ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
December 9, 2003
No. FC-10

                      Thomas Announces Request for

                   Written Comments on H.R. 3654, the

                 ``Technical Corrections Act of 2003''

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee is requesting written 
public comments for the record from all parties interested in H.R. 
3654, the ``Technical Corrections Act of 2003.''
      

BACKGROUND:

      
    Yesterday, Chairman Bill Thomas, along with Ranking Member Charles 
Rangel (D-NY), introduced H.R. 3654, the ``Technical Corrections Act of 
2003.''
      
    H.R. 3654 includes provisions that technically correct and clarify 
the intent of previous tax laws.
      
    ``We hope the public will review the proposed changes and provide 
comments during the coming months so we can send appropriate 
legislation to the President as soon as possible,'' said Thomas.
      
    The bill includes technical corrections to the provisions relating 
to dividends taxed at capital gains rates that were enacted in the Jobs 
and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-26). The 
bill also includes technical corrections to the rules relating to bonus 
depreciation, carryback of net operating losses and other provisions 
that were enacted in the Job Creation and Worker Assistance Act of 2002 
(P.L. 107-147).
      
    Technical corrections and clerical amendments to other enacted tax 
legislation, including the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (P.L. 107-16), the Victims of Terrorism Tax 
Relief Act of 2001 (P.L. 107-134), the Community Renewal Act of 2000 
(P.L. 106-554), the Taxpayer Relief Act of 1997 (P.L. 105-34) and the 
Small Business Job Protection Act of 1996 (P.L. 104-188) are also 
included in the bill.
      
    Senate Finance Chairman Charles Grassley (R-IA) and Ranking Member 
Max Baucus (D-MT) have introduced companion legislation in the Senate.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit written comments for 
the record should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by close of business Friday, January 23, 2004. Please 
note that in the immediate future, the Committee website will allow for 
electronic submissions to be included in the printed record. Before 
submitting your comments, check to see if this function is available. 
Finally, due to the change in House mail policy, the U.S. Capitol 
Police will refuse sealed-packaged deliveries to all House Office 
Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

                                 

                              BDO Seidman, LLP, National Tax Office
                                               Washington, DC 20036
                                                   January 23, 2004

Chairman William M. Thomas
House Ways and Means Committee
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Thomas,

    In response to your request for comments regarding additional 
technical corrections that may be needed to the Job Creation and Worker 
Assistance Act of 2002, we respectfully submit the following comments. 
We ask that the taxwriting Committees consider a minor addition to 
section 3(b) of the Tax Technical Corrections Act of 2003 to rectify 
the problem described below.

I. Applicable Statutory Provisions

    IRC Sec. 172(b)(1)(H) provides that ``[i]n the case of a taxpayer 
which has a net operating loss for any taxable year ending during 2001 
or 2002, subparagraph (A)(i) shall be applied by substituting `5' for 
`2' and subparagraph (F) shall not apply.''
    IRC Sec. 172(b)(3) provides that ``[a]ny taxpayer entitled to a 
carryback period under paragraph (1) may elect to relinquish the entire 
carryback period with respect to a net operating loss for any taxable 
year.''
    IRC Sec. 172(j) provides that ``[a]ny taxpayer entitled to a 5-year 
carryback under subsection (b)(1)(H) from any loss year may elect to 
have the carryback period with respect to such loss year determined 
without regard to subsection (b)(1)(H).''

II. Problem

    The 2002 tax legislation was enacted in March 2002, after some 
taxpayers had filed their tax returns for 2001. In May 2002, the 
Internal Revenue Service issued Rev. Proc. 2002-40, 2002-1 C.B. 1096, 
the purpose of which was to provide administrative relief for taxpayers 
that filed tax returns for 2001 or 2002 without taking advantage of the 
new 5-year NOL carryback period provided by IRC Sec. 172(b)(1)(H). The 
administrative guidance provided by Rev. Proc. 2002-40 is applicable 
whether the taxpayer filed its 2001 or 2002 tax returns before or after 
enactment of the 2002 tax legislation.
    Section 5 of Rev. Proc. 2002-40 addressed taxpayers that previously 
filed a NOL carryback claim from tax years ending in 2001 or 2002 using 
a 2-year carryback period. Section 5 is subdivided in two parts--
Sec. 5.01 is directed to those taxpayers that filed a 2-year carryback 
claim but want to use a 5-year carryback period, and Sec. 5.02 is 
directed to those taxpayers that filed a 2-year carryback claim and 
want to use a 2-year carryback period.
    The factual situation we are concerned about involves corporate 
taxpayers that had net operating losses in their taxable years ending 
during 2001, did not make an election under IRC Sec. 172(b)(3), filed a 
2-year carryback claim before enactment of the 2002 tax legislation, 
want to use a 5-year carryback period, but did not file a carryback 
claim using a 5-year period by October 31, 2002 as required by Rev. 
Proc. 2002-40, Sec. 5.01. Some taxpayers in this category had 
significant financial or operational problems and were unable to obtain 
professional tax advice regarding the somewhat unusual filing 
requirement imposed by Rev. Proc. 2002-40, Sec. 5.01.
    For the reasons discussed below, we think these taxpayers should be 
provided relief in the Technical Corrections Act.

III. Reasons Why Relief Should Be Provided in the Tax Technical 
        Corrections Act of 2003

    For several reasons, we believe taxpayers that filed their 2001 tax 
returns prior to enactment of the 2002 tax legislation should be 
entitled to a 5-year carryback of those NOLs even if they did not meet 
the filing requirement imposed by Rev. Proc. 2002-40, Sec. 5.01, and 
that the carryback should be available as long as the statute of 
limitations is open for the year in which the NOL was incurred.

A. LRev. Proc. 2002-40, Sec. 5.01 imposes an extra-statutory 
requirement.

    The Job Creation and Worker Assistance Act of 2002 permits 
taxpayers to carry back NOLs incurred in taxable years ending during 
2001 or 2002 5 years and does not address the situation of taxpayers 
that had filed tax returns and carryback claims for 2001 or 2002 prior 
to enactment of the statute.
    In pertinent part, Rev. Proc. 2002-40, Sec. 5.01 reads as follows:

    L  ``If a taxpayer that previously filed an application for a 
tentative carryback adjustment (whether or not the Service has acted 
upon such application) or an amended return using a 2-year carryback 
period for an NOL incurred in a taxable year ending in 2001 or 2002, 
and that did not elect to forgo the 5-year carryback period under 
172(j), wants to use the 5-year carryback period provided under 
172(b)(1)(H), the taxpayer may do so by following the procedures of 
section 7 of this revenue procedure on or before October 31, 2002.''

    Rev. Proc. 2002-40, Sec. 7.01 requires a corporate taxpayer to file 
a Form 1139 or Form 1120X using a 5-year carryback period by October 
31, 2002.
    The general rule in IRC Sec. 172 is that taxpayers must carry back 
NOLs 5 years, unless they elect not to carry back the NOL at all, or 
elect to forego the 5-year carryback period in favor of the 2-year 
carryback period. Thus, the general rule is that taxpayers are entitled 
to a 5-year carryback of NOLs incurred in tax years ending in 2001 or 
2002 if they do nothing and make no elections. Rev. Proc. 2002-40, 
Sec. 5.01 reverses this statutory presumption and imposes an 
affirmative election and filing obligation on taxpayers that want to 
carry back their NOLs 5 years.
    Furthermore, the October 31, 2002 filing deadline imposed by Rev. 
Proc. 2002-40, Sec. 5.01 has no basis in the statute. We understand the 
October 31, 2002 deadline was an arbitrary date selected by the Service 
to provide taxpayers with additional time to revoke an IRC 
Sec. 172(b)(3) election, to make an IRC Sec. 172(j) election, or to 
file a Form 1139. While providing taxpayers additional time to meet 
these statutory deadlines is appropriate, it is not appropriate to 
impose an arbitrary deadline for the filing of 5-year carryback claims.
    If taxpayers that filed their 2001 tax returns prior to enactment 
of the Job Creation and Worker Assistance Act of 2002 did not make an 
election under IRC Sec. 172(b)(3), they should be entitled to carry 
back their 2001 NOLs 5 years, assuming their carryback claims are 
timely filed within the applicable statute of limitations.

B. LTaxpayers that filed a 2-year carryback claim are at a disadvantage 
compared to similarly situated taxpayers that did not file any 
carryback claim.

    Rev. Proc. 2002-40 distinguishes between taxpayers depending upon 
whether the taxpayer has filed a 2-year carryback claim. Rev. Proc. 
2002-40, Sec. 5 is applicable to taxpayers with NOLs that filed a 2-
year carryback claim, whereas Rev. Proc. 2002-40, Sec. 6 is applicable 
to taxpayers with NOLs that had not filed a 2-year carryback claim.
    If a taxpayer filed a 2-year carryback claim, Rev. Proc. 2002-40, 
Sec. 5.01 requires the taxpayer to file a carryback claim using a 5-
year period by October 31, 2002. In contrast, if a similar taxpayer 
with a NOL had not filed a 2-year carryback claim, Rev. Proc. 2002-40, 
Sec. 6.02 provides that the taxpayer need do nothing and will be 
entitled to the 5-year carryback period ``by operation of law.''
    The foregoing distinction drawn by Rev. Proc. 2002-40 is not 
reasonable. It imposes an affirmative obligation on taxpayers that 
filed 2-year carryback claims before enactment of the 2002 tax 
legislation, but no obligation on taxpayers that did not file 2-year 
carryback claims. The same rule should apply to both. Under the general 
statutory rules, taxpayers may file amended tax returns carrying back 
NOLs any time before expiration of the statute of limitations under IRC 
Sec. 6511 for the taxable year in which the NOL was incurred. Taxpayers 
that filed 2-year carryback claims before enactment of the 2002 tax 
legislation were not required to file those claims. Taxpayers can amend 
carryback claims any time before expiration of the statute of 
limitations.

IV. Proposal for Tax Technical Corrections Act of 2003

    To provide relief for taxpayers described above, we would suggest 
that a new subsection (D) be added to Sec. 3(b) of the Tax Technical 
Corrections Act of 2003, as follows:

      L``(2) In the case of a net operating loss for a taxable year 
ending during 2001 or 2002----
                    *                *                *
      L(D) if no election was made under section 172(b)(3) on a tax 
return filed before enactment of the Job Creation and Worker Assistance 
Act of 2002, the carryback period under section 172(b)(1)(H) shall 
apply if a 5-year carryback claim is timely filed within the applicable 
period of limitations.''

    This proposed provision would permit taxpayers that filed their 
2001 tax returns before enactment of the 2002 tax legislation an option 
to carry back their 2001 NOLs either 2 years or 5 years. This 
flexibility seems appropriate in light of all the circumstances. 
Offering these taxpayers the flexibility of carrying back their NOLs 5 
years, even though they failed to meet the October 31, 2002 deadline 
imposed by Rev. Proc. 2002-40, Sec. 5.01, would be consistent with the 
objectives of the legislation.
    We appreciate your attention to this matter. If you need any 
additional information, please feel free to contact me.

            Very truly yours,

                                                   Donald A. Barnes

                                 

                           Burlington Northern Santa Fe Corporation
                                            Fort Worth, Texas 76131
                                                   January 21, 2004

The Honorable William M. Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Mr. Chairman:

    Pursuant to your request for written comments on H.R. 3654, the 
``Technical Corrections Act of 2003,'' (``Introduced Act''). We 
appreciate the opportunity you have provided for receiving our comments 
on this legislation.
    I would like to bring to your attention our concerns with the 
retroactive application of the ``binding contract rule'' included in 
the bonus depreciation provision of the Introduced Act, which we 
believe represents a substantive change to the bonus depreciation 
provision of the Job Creation and Worker Assistance Act of 2002 (``Job 
Creation Act'') and not a mere technical correction. Taxpayers who made 
business decisions on the basis of the existing law not only relied on 
those provisions in making investment decisions but have already filed 
tax returns for 2001 and 2002 on the basis of these rules. We request 
your assistance in modifying it to limit its application to the time 
period beginning December 8, 2003, which is the date the bill was first 
introduced in the House of Representatives.
    As you know, the Job Creation Act provides a bonus depreciation 
deduction equal to 30% of the basis of qualified property in the year 
the property is placed in service. To be qualified property, (i) the 
property must have been acquired by the taxpayer after September 10, 
2001, (ii) the original use of the property must commence with the 
taxpayer on or after September 11, 2001 and (iii) the taxpayer could 
not have entered into a written binding contract for the acquisition of 
the property before September 11, 2001. The Job Creation Act also 
provides that self-constructed property will be considered to be 
acquired by the taxpayer after September 10, 2001, if manufacture, 
construction, or production began after that date even if the taxpayer 
had a binding contract before September 11, 2001.
    The Introduced Act would substantially alter the property 
qualifying for bonus depreciation. One result of these changes would be 
to deny bonus depreciation where there was a commitment in place before 
September 11, 2001 to acquire property or if construction commenced 
before September 11, 2001, even if the person that eventually acquires 
the property after the commitment date is not a direct party to those 
plans or a person related to a party to those plans. Therefore, a 
taxpayer who was unrelated to the earlier transaction and who qualified 
for bonus depreciation under the previous rules will now in 2003 be 
disqualified from such benefit. The existing rules accomplished their 
goals by bringing new investors and capital to market in situations the 
``technical corrections'' will retroactively deem not eligible for 
these incentives.
    The provisions of the Introduced Act are unduly burdensome on both 
taxpayers and the government and their application cannot be reasonably 
made in every instance. The retroactive application of the Introduced 
Act, which clearly changes the existing law, would especially harm 
capital intensive taxpayers that have made a series of investment 
decisions subsequent to the enactment of the Job Creation Act and prior 
to December 8, 2003 assuming an investment qualifies for bonus 
depreciation, which will be incorrect if the Introduced Act becomes 
law.
    I would like to again request your support to modify the proposed 
``binding contract rule'' by limiting its application to transactions 
entered into on or after December 8, 2003, which is the date this 
change in law first came to the general attention of taxpayers. 
Taxpayers that in reliance on the existing law entered into contracts 
after September 11, 2001 and placed the relevant property in service on 
or before December 8, 2003 can be assured that the property qualifies 
for bonus depreciation based on the rules in effect when they entered 
into their agreements.
    Please contact Ms. Shelley Venick, Vice President and Tax Counsel, 
at 817-352-3400 should you have any questions or comments concerning 
the above. We appreciate your consideration of this matter and look 
forward to working with you on this issue.

            Respectfully submitted,

                                                     Thomas N. Hund
                                           Executive Vice President
                                            Chief Financial Officer

                                 
   Statement of Constance Logan, Iacopi, Lenz & Company Accountancy 
                   Corporation, Stockton, California
I. Introduction
    The purpose of this comment is to suggest that section 168(k) be 
amended to clarify whether certain farmers who have elected out of the 
provisions of IRC 263A under section 263A(d)(3) and are therefore 
committed under section 263A(e)(2) to using the Alternative 
Depreciation (ADS Farmers) qualify for the special 50% 168(k) Bonus 
Depreciation. The Code is ambiguous regarding this issue, and both the 
Committee reports and the legislative Blue Book are silent about the 
application to these farmers. However, the Treasury Department issued 
pronouncements interpreting this section to exclude the ADS farmers 
from the benefits of Bonus Depreciation.
    Impact: The farmers targeted by the Treasury rulings are 
essentially cash-basis small- to mid-sized farmers that have incurred 
pre-production or development costs (i.e. planting, fertilizer, 
irrigation, and so forth) for orchards and vineyards and have elected 
to expense rather than capitalize these costs. Farmers who are required 
to use the accrual method of accounting under sections 447 or 483 may 
not make this election. This 263A(d) election is irrevocable (except 
with the permission of the Secretary of the Treasury) and the 
263A(e)(2) ADS requirement applies to the year that the development 
costs are incurred and to all subsequent years. It applies not just to 
development costs but to all depreciable property acquired by the 
farmers for use in their farming business (i.e. harvesting equipment, 
sprinkler systems, new trees and vines, and so forth) in all the 
subsequent years. A farmer may have made an election 10 years ago to 
expense development costs and because of this will not qualify for the 
50% Bonus Depreciation on new harvesting equipment that he purchases in 
2003. While these farmers may only comprise a minority of farmers, 
their economic contributions are substantial, and if the Treasury 
Department's interpretation is correct, the farming industry as a whole 
will be adversely affected.
II. Ambiguous Code Language
    Section 168(k) allows an additional first year depreciation 
deduction of 50% \1\ of the cost of a qualified asset. The remaining 
balance of the cost of the asset is depreciated using the normal MACRS 
rates. To be a qualified asset, it must be new (the original use begins 
with the taxpayer) and have a cost recovery period (depreciable life) 
of 20 years or less. Further, it must be MACRS property, which is 
tangible property used in a trade or business or for the production of 
income and subject to an allowance for depreciation.\2\ Unlike section 
179, there is no dollar limit to the amount of Bonus Depreciation that 
may be claimed and no limit on the cost of property that qualifies.\3\ 
The Bonus Depreciation provisions are temporary and are scheduled to 
expire December 31, 2004.\4\ Farmers could potentially reap huge 
benefits if they are allowed to claim the Bonus Depreciation. Typical 
farm assets that would qualify if they were purchased new for the farm 
business are planting and harvesting equipment (5 year property), farm 
vehicles (5 year property), special purpose agricultural or 
horticultural buildings (10 year property), barns and silos (20 year 
property), irrigation systems (15 year property), and trees and vines 
\5\ (10 year property).
---------------------------------------------------------------------------
    \1\ This was originally 30% for assets acquired after Sept. 10, 
2001 but was increased to 50% by the Jobs and Growth Tax Relief 
Reconciliation Act of 2003 for assets acquired after May 5, 2003.
    \2\ 2002 Tax Legislation, Law, Explanation and Analysis Job 
Creation and Worker Assistance Act of 2002 Sec. 305.
    \3\ See IRC Sec. 179 (restricting additional first year 
depreciation under that section to $100,000 and eliminating the 
deduction if qualified property purchases exceed $400,000 during the 
tax period).
    \4\ Job Creation and Worker Assistance Act of 2002, P.L. 107-147, 
Act Sec. 101(a) (March 9, 2002). This date is extended to December 31, 
2004 by the 2003 Tax Act.
    \5\ To qualify as ``new'' for bonus depreciation, trees and vines 
must be planted after Sept. 11, 2001 and produce a marketable crop 
before Jan. 1, 2006.
---------------------------------------------------------------------------
    It is the complex interrelationship between the depreciation rules 
of Section 168(g) and (k) and the uniform capitalization rules of 
Section 263A(d) and (e) that provides the ambiguity that needs to be 
resolved.

    IRC Section 168: Bonus Depreciation under section 168(k) is not 
applicable to businesses required to use the Alternative Depreciation 
System (ADS) under Section 168(g).\6\ The ADS is basically a straight-
line depreciation system with longer depreciable lives unlike the MACRS 
accelerated system that uses shorter lives and higher rates (i.e. 
double the straight line rate). Section 168(k)(2)(C) specifically 
identifies 2 categories of property that are excluded from ``qualified 
property'' for Bonus Depreciation: (1) property to which the 
alternative depreciation applies under Section 168(g), and (2) Section 
280F(b) (listed property with predominant personal use).\7\ Section 
168(g) provides that the ``depreciation deduction provided . . . shall 
be determined under the alternative depreciation system'' for four 
specific categories of property: (1) Foreign use property, (2) Tax-
exempt use property, (3) Tax-exempt bond financed property, and (4) 
Property identified by Executive Order.\8\ Use of the ADS method is 
also required if the taxpayer makes an election to use ADS under 
Section 168(g)(7).\9\ This section provides for a separate election to 
use the alternative depreciation system and does not identify any 
particular type of property. Pursuant to Section 168(k)(2)(C)(i)(I) 
this election will not eliminate the bonus depreciation on property for 
which this election is made.
---------------------------------------------------------------------------
    \6\ IRC Sec. 168(k)(1)(C).
    \7\ ``(i) Alternative depreciation property. The term ``qualified 
property'' shall not include any property to which the alternative 
depreciation system under subsection (g) applies, determined:
    (I) without regard to paragraph (7) of subsection (g) (relating to 
election to have system apply), and
    (II) after application of Section 280F(b) (relating to listed 
property with limited business use).''
    \8\ IRC 168(g)(1)(A)-(D).
    \9\ IRC 168(g)(1)(E).
---------------------------------------------------------------------------
    In addition to those assets specifically identified in Section 
168(g), two other code sections specify assets for which the use of the 
ADS is required under certain circumstances. One is referenced in 
Section 168(k)(2)(C)(i)(II), Section 280F(b) \10\ (relating to 
``listed'' property) \11\ and one is not referenced, Section 263A(e) 
(relating to certain farmers). Section 280F(d) was specifically 
identified in Section 168(k)(1)(C)(i)(II) as being excluded from Bonus 
Depreciation. However, the language in Section 168(g) or 168(k) does 
notably not exclude farmers either by reference to farmers or to 
Section 263A(e)(2).\12\ Certain farmers may be excluded under the broad 
phrase ``property to which the alternative depreciation system under 
[168(g)] applies'' \13\ depending on how this section and Section 
263A(e) are interpreted. If the phrase ``property to which 168(g) 
applies'' encompasses Section 263A(e) and 280F(b) property, then it is 
redundant to add 280F(b) as another exception in Section 
168(k)(2)(C)(i)(II).
---------------------------------------------------------------------------
    \10\ Relating to Listed Property which is certain dual use property 
used more for personal than for business.
    \11\ See CCH Federal Tax Service Sec. G:16.262 (including as listed 
property as any passenger automobile, transportation equipment, or 
computers).
    \12\ Reference to Code Section 263A(e)(2) was how the IRS and 
Treasury excluded certain farmers from the Bonus Depreciation rules.
    \13\ IRC 168(k)(2)(C).

    Section 263A: Section 263A(d) Farmers' election out of the Uniform 
Capitalization rules allows farmers to expense pre-production costs for 
orchards and vineyards rather than to capitalize these costs and 
postpone recovery until the trees or vines start producing. As a 
condition of making this election, the farmer must (1) use the ADS 
depreciation method and (2) recapture any capital outlay expended 
through 263A(d) as ordinary income rather than capital gain income upon 
the sale of the orchard or vineyard.
    The provisions of 263A(d) and (e) apply to any farm crop with a 
pre-production period of 2 years or more but generally would apply only 
to trees \14\ and vines. The election is irrevocable (without the 
consent of the Secretary of the Treasury Department) and the ADS 
straight-line method applies prospectively to all assets purchased for 
farm use (not just the trees and vines or assets purchased during the 
pre-productive period).
---------------------------------------------------------------------------
    \14\ Other than citrus or almond trees.
---------------------------------------------------------------------------
    If farm property of farmers who have elected out of the Uniform 
Capitalization Rules is ``any property to which the alternative 
depreciation system under subsection (g) applies'' then farmers would 
not be able to claim the Bonus Depreciation. This is precisely the 
phrase that is ambiguous and subject to differing interpretations. The 
key to resolving this ambiguity is an analysis of Legislative Intent 
regarding the application of 168(k) to ADS Farmers.
III. Analysis of Legislative Intent
    When a statute is not clear on its face, legislative intent may be 
inferred from many extrinsic sources including the avowed purpose of 
the statute, the committee reports and other reference materials 
referred to by the lawmakers in making their decision, and the 
statute's relationship to the whole legislative scheme currently and 
historically.

  A.  Purpose: The expressed legislative intent of the Job Creation and 
      Worker Assistance Act of 2002 was to create jobs and assist 
      workers and to help the country recover from the economic effects 
      of the September 11th tragedy. One way they intended to do this 
      was by providing tax incentives to businesses, in the form of 
      Bonus Depreciation in order to encourage purchases of new 
      equipment and other assets. Encouraging capital investments in 
      new assets would stimulate the demand for new assets and 
      ultimately the increased manufacturing and supply of these assets 
      thus creating more jobs. The investment in capital assets and the 
      additional funds from tax savings would also stimulate the 
      expansion of businesses with increased production and sales that 
      also would require the hiring of new employees.
       L  It is understandable why Congress would not allow the Bonus 
Depreciation for property that would be used outside of the United 
States,\15\ because this would stimulate foreign markets not the U.S. 
economy. It is also understandable why they would exclude listed 
property under Section 280F(b),\16\ because this property is only 
excluded if the personal use is 50% or more. So these would essentially 
be personal, not business assets. Also, it was the tax incentives that 
would provide the stimulus so it is equally understandable why Congress 
would exclude tax-exempt use property. It is not, however, 
understandable why Congress would intend to exclude ADS Farmers' 
property. Farms are businesses that could hire new employees if they 
had tax incentives to help them expand by buying new assets. Also, a 
demand for new farm equipment would spur the economy by supporting 
increased manufacture of farm equipment. Further, farmers tend to hire 
unskilled labor, the group with the highest unemployment rate.
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    \15\ See IRC 168(k)(2)(C) (referring to the excluded taxpayers in 
IRC 168(g)(1)).
    \16\ IRC 168(k)(2)(C).

  B.  Committee Reports and Legislative Blue Book: When Congress' 
      intent is not clear from the actual language of a statute or the 
      surrounding text, the intent may often be discerned from the 
      congressional committee reports and if that is not conclusive, 
      from the language or intent of other legislative publications. 
      The staff of the Joint Committee prepared a legislative summary 
      on March 22, 2002.\17\ The document lists four basic requirements 
      for Bonus Depreciation but there is no mention of 263A(e)(2) or 
      farmers in this entire document. Therefore, it is certainly not 
      clear from this document that the legislators intended to exclude 
      the 263A(2)(e) farmers.
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    \17\ Joint Committee on Taxation, Summary of P.L. 107-147, the 
``Job Creation and Worker Assistance Act of 2002'' (JCX-22-02), March 
22, 2002.
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       L  The Jobs Growth and Tax Relief Reconciliation Act of 2003 
(2003 Act) increased the bonus depreciation rate from 30%-50% and 
extended the applicable period. The committee reports for this Act do 
not address the 263A(e)(2) farmer issue or any of the specifically 
excluded types of property. This Act became law on May 28, 2003 which 
was after the publication of the IRS Revenue Procedure \18\ excluding 
ADS Farmers and after the legislative analysis contained in the ``Blue 
Book,'' \19\ but before the Treasury Department Temporary Regulation 
excluding ADS Farmers.\20\ Does the failure to specifically exclude 
263A(e)(2) from Section 168(k) bonus depreciation in the amendment to 
Section 168(k) mean that Congress was ratifying the position taken in 
the IRS Revenue Procedure or that Congress was not aware of the IRS 
position? It is here postulated that based on the totality of the 
information available to the legislatures at the time of the enactment, 
including committee reports and the Blue Book Explanation, they were 
unaware of either the Treasury position or the impact of 168(k) on the 
ADS farmers. No mention was made of either in any of the documents. The 
Blue Book specifically listed the four excluded categories of taxpayers 
in Section 168(g) \21\ and Section 280F(b) but did not mention 
263A(e)(2) or farmers.
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    \18\ I.R.B. 2002-20, 963, April 29, 2002.
    \19\ Joint Committee on Taxation's General Explanation of Tax 
Legislation Enacted in the 107th Congress (Blue Book), (JCS-1-03, 
January 24, 2003).
    \20\ I.T. Reg. 1.168(k)-1T.
    \21\ Foreign use property, tax-exempt use property, tax-exempt bond 
financed property, and Executive Order property.
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       L  It is interesting to note that in June 2002 the Joint 
Committee staff prepared a summary for S. 312, the ``Tax Empowerment 
and Relief for Farmers and Fisherman Act,'' \22\ which proposed tax law 
changes that would help farmers. This summary included an overview of 
current law but did not mention the Section 263A(e)(2) farmers Bonus 
Depreciation dilemma. A logical inference is that the drafters were not 
aware of the adverse impact of the Treasury interpretation on certain 
farmers.
---------------------------------------------------------------------------
    \22\ Joint Committee on Taxation, Overview of Present Law and 
Selected Proposals Regarding the Federal Income Taxation of Small 
Business and Agriculture (JCX-45-02), May 31, 2002.

  C.  Legislative Scheme: The staff of the Joint Committee on Taxation 
      \23\ explaining the 2002 Act indicated that the ``present law'' 
      that was the starting point for the recommended Bonus 
      Depreciation provision was Section 179 that allows an additional 
      first year depreciation expensing option for certain property. 
      There are many restrictions on the application of Section 179 
      most of which were minimized by the 2002 Act.\24\ ADS Farmers are 
      qualified to claim the benefits of Section 179. However, neither 
      foreign use property nor tax-exempt use property are qualified 
      Section 179 property,\25\ and neither is Section 280F(d) 
      property.\26\ No effort was made to restrict ADS Farmers' use of 
      Section 179. And, as was mentioned above, the Committee Reports 
      are silent on the issue of farmer's depreciation.
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    \23\ Technical Explanation of the ``Job Creation and Worker 
Assistance Act of 2002.''
    \24\ Notably the amount that can be expensed was increased from 
$24,000 to $100,000 per year and the maximum dollar amount of Section 
179 placed in service during the taxable year was raised from $200,000 
to $400,000 thus qualifying more taxpayers for the deduction.
    \25\ IRC 179(d)(1); IRC 50(b).
    \26\ IRC 280F(d)(1) Coordination with Section 179.
---------------------------------------------------------------------------
       L  Section 280F, which restricts depreciation on Luxury Autos 
and certain personal use property (listed property), was modified by 
the 2002 Act in two ways. The dollar limitation for deductions was 
increased and Section 280F(b) property that is used more than 50% for 
personal use was specifically excluded from the benefits of Section 
168(k). The fact that this section, which is the only other section 
that requires the use of the ADS method, was specifically addressed by 
legislation whereas Section 263A(e)(2) was not addressed indicates that 
the impact of Section 168(k) on farmers may not have been brought to 
the attention of the legislators.

  D.  Legislative History: There are numerous code sections that 
      manifest the legislator's intent to provide tax benefits to 
      farmers. A Congressional intent to exclude farmers from Section 
      168(k) Bonus Depreciation would seem counter-intuitive to all 
      these other sections.
       1. LSection 263A(d): Allows farmers to elect to expense pre-
productive costs rather than postponing cost recovery through delayed 
depreciation deductions. This initially came at a cost to the farmer 
but at the time of its enactment, it was considered beneficial for the 
farmer. In retrospect, any election under this section would not have 
been made if anyone realized Congress would pass a law with a 
retroactive negative impact such as Section 168(k) as interpreted by 
the IRS.
       2. LFarmers' Income Averaging: This allows farmers to average 
income over a three-year period to help even out fluctuations in income 
and to take advantage of lower tax rates. When Congress realized that 
the Alternative Minimum Tax (AMT) interfered with the benefits of 
income averaging, they proposed a change to the AMT rules.\27\
---------------------------------------------------------------------------
    \27\ Joint Committee on Taxation, Overview of Present Law and 
Selected Proposals Regarding the Federal Income Taxation of Small 
Business and Agriculture (JCX-45-02), May 31, 2002.
---------------------------------------------------------------------------
       3. LEstimated Tax Payments: Farmers are not required to pay 
estimated taxes if they file their tax returns by March 1 of the 
following year and pay all taxes due at that time.
       4. LCash Method of Accounting: Most farmers are allowed to use 
the cash method of accounting which allows them to deduct expenses when 
paid and report income when received. Other comparably situated 
taxpayers generally must use the accrual method of accounting.\28\
---------------------------------------------------------------------------
    \28\ IRC Sec. 446; IRC 447; IRC 448(a)(3).
---------------------------------------------------------------------------
       5. LNet operating loss carryback: Before the 2002 Tax Act, 
farmers were allowed to carry back net operating losses from the 
farming business for 5 years.\29\ This was another mechanism to even 
out fluctuating income and it provided for immediate refund of taxes 
paid in past years. Other taxpayers were restricted to a 2-year carry 
back period.
---------------------------------------------------------------------------
    \29\ IRC Sec. 172.
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IV. IRS and Treasury Department Interpretation of Section 168(k)
    In April 2002 the Internal Revenue Service issued a Revenue 
Procedure regarding the application of Section 168(k) Bonus 
Depreciation and as part of their interpretation, summarily excluded 
farmers who had made the 263A election and as a result were using ADS 
to calculate depreciation.\30\ The Treasury Department incorporated the 
IRS interpretation in a regulation issued on September 5, 2003.
---------------------------------------------------------------------------
    \30\ I.R.B. 2002-20, 963, April 29, 2002.

    A.
       LRevenue the IRS issued Procedure 2002-33 on April 29, 2002 to 
provide ``procedures for a taxpayer to claim the additional 30% 
depreciation . . . provided by Sec. 168(k).'' \31\ In Section 2 
paragraph .04 the procedure states, ``The additional first year 
depreciation must not be deducted for, among other things: (1) property 
that is required to be depreciated under the alternative depreciation 
system of Sec. 168(g) pursuant to Sec. 168(g)(1)(A) through (D) or 
other provisions under the Code (for example, property described in 
Sec. 263A(e)(2)(A) or Sec. 280F(b)(1).'' (Italics added for emphasis). 
Throughout the six page Revenue Procedure this was the only reference 
to the 263A(e)(2) ADS farmers. Although there were pages of 
explanations for other provisions there was neither a reference to this 
statement nor any analysis.\32\ A few words in one part of a 
parenthetical phrase and the benefits of bonus deprecation are 
abolished for the ADS farmers.
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    \31\ I.R.B. 2002-20, 963, April 29, 2002. (Just 51 days after the 
enactment of P.L. 107-147 on March 9, 2002).
    \32\ There was no analysis for Section 280F(d) either, however this 
code section was specifically identified in the Code.
---------------------------------------------------------------------------
       L  Immediately after Section 168(k) was passed, commentators 
offered interpretations of how the 263A(d) election would affect 
farmers and all considered Section 168(k)(C) ambiguous and open to 
interpretation. After the IRS ruling there were no further comments in 
the tax literature.

    B.
       LTemporary Treasury Regulation 1.168(k)-1T was issued September 
5, 2003 \33\ to ``provide the requirements that must be met for 
depreciable property to qualify for the additional first year 
depreciation deduction provided by Section 168(k).'' \34\ Using wording 
almost identical to the Revenue Procedure,\35\ the regulation at 
1.168(k)-1T(b)(2)(ii) provides ``property will not meet the 
requirements of [168(k)] if the property is . . . (2) required to be 
depreciated under the alternative depreciation system of Section 168(g) 
pursuant to Section 168(g)(1)(A) through (D) or other provisions of the 
Internal Revenue Code (for example, property described in Section 
263A(e)(2)(A) or Section 280F(b)(1)'' \36\ This was the only reference 
to Section 263A(e)(2) ADS farmers, and, as with the revenue procedure, 
there was no explanation or analysis. The IRS employee who authored 
both pronouncements, explained his reasoning in a letter dated December 
2, 2003: ``Because the alternative depreciation system of Section 
168(g) applies to property the taxpayer made the election for under 
Section 263A(d)(3), this property is not eligible for the additional 
first year depreciation deduction. This result occurs because Section 
168(k)(2)(C)(i) does not provide an exception for property the taxpayer 
made the election for under Section 263A(d)(3).\37,38\ Based on this 
reasoning, it could equally be argued that because Section 
168(k)(2)(C)(i) does not specifically exclude Section 263A(e)(2) from 
Bonus Depreciation (as it does Section 280F(b)), ADS farmers should be 
eligible for the deduction. It should be noted that both the IRS and 
the Treasury Department included 263A(e)(2) farmers in the same phrase 
with Section 280F(b) listed property although the latter was 
specifically excluded from 168(k) by the language of the code. The fact 
that these sections were not both mentioned in the code (and the fact 
that 263A(e)(2) was not mentioned in the code, Committee reports, or 
the Blue Book) should have prompted some analysis by the IRS of the 
intent of this section of the legislation. It is clear from the 
language of the code that Congress intended to exclude Section 280F(b) 
property. It is not clear that Congress intended to exclude Section 
263A(2)(e) property. On the contrary, it is apparent that the issue of 
the ADS farmers regarding Bonus Depreciation was not considered by the 
legislature at all.
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    \33\ T.D. 9091 (Sept. 5, 2003).
    \34\ Preamble to I.T. Reg. 1.168(k)-1T.
    \35\ Both the Revenue Procedure and the Temporary Regulations were 
authored by Douglas Kim from the IRS.
    \36\ I.T. Reg. 1.168-T.
    \37\ Letter dated Dec. 2, 2003 from Douglas H. Kim, Id. at No. 50-
12306, Internal Revenue Service Department of the Treasury, Washington, 
DC 20024.
    \38\ The ``exceptions'' in Section 168(k)(2)(C) are the property 
that does not qualify. Mr. Kim apparently meant to say ``exclusion from 
the 168(g) exception.''
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V. Conclusion
    Based on the forgoing, this commentator recommends that Section 
168(k)(2)(C) be amended to read as follows:

      L``168(k)(2)(C)(i)(I) without regard to paragraph (7) of 
subSection (g) (relating to election to have system apply), or Section 
263A(e)(2)(A) (relating to the effects of a Section 263A(d)(3) 
election), and''

    It is respectfully submitted that this amendment would clarify the 
legislative intent of the original enactment and would eliminate the 
uncertainty in the administration of IRC Sec. 168(k) while extending 
the benefits of Bonus Depreciation to deserving farmers who have been 
inadvertently excluded.

                                 
               Statement of Investment Company Institute
    The Investment Company Institute (the ``Institute'') \1\ strongly 
supports the Tax Technical Corrections Act of 2003 (``TTCA'') \2\ and 
urges its prompt enactment. In particular, we support the technical 
corrections to the Jobs and Growth Tax Relief and Reconciliation Act of 
2003 (``JGTRRA'') that clarify rules relating to qualified dividend 
income (``QDI'') taxable at the new 15 percent maximum tax rate. The 
approximately 25 million mutual fund shareholders who invest through 
taxable accounts in funds holding equities would benefit from these 
changes to Internal Revenue Code Section 854 \3\ (which provides the 
rules pursuant to which QDI received by a mutual fund beginning January 
1, 2003 retains its character when paid by the fund to its 
shareholders).
---------------------------------------------------------------------------
    \1\ The Investment Company Institute is the national association of 
the American investment company industry. Its membership includes 8,672 
open-end investment companies (``mutual funds''), 605 closed-end 
investment companies, 108 exchange-traded funds and 6 sponsors of unit 
investment trusts. Its mutual fund members have assets of about $7.149 
trillion. These assets account for more than 95% of assets of all U.S. 
mutual funds. Individual owners represented by ICI member firms number 
86.6 million as of mid 2003, representing 50.6 million households.
    \2\ H.R. 3654, S. 1984.
    \3\ All references to sections, unless otherwise indicated, are to 
sections of the Internal Revenue Code.

---------------------------------------------------------------------------
Transition Relief From 60-Day Designation Requirement

    Section 854(b)(2), as amended by JGTRRA, provides that the amount 
of any distribution by a fund that may be treated as QDI shall not 
exceed the amount designated by the fund ``in a written notice to its 
shareholders mailed not later than 60 days after the close of its 
taxable year.'' For funds with taxable years that ended more than 60 
days before JGTRRA was enacted (i.e., funds with January and February 
year-ends), there was no opportunity to make this 60-day designation 
for distributions made during the taxable year. Even for funds with 
later taxable year-ends, the ability to make prompt designations has 
been hampered by delays in the issuance of comprehensive Treasury 
guidance (particularly before the recent release of guidance regarding 
dividends from foreign corporations) and by the funds' need to review 
2003 transaction histories.
    The TTCA would provide transition relief for 2003 from the 60-day 
designation requirement. Specifically, the TTCA would provide that, 
with respect to the taxable year of a fund ending on or before November 
30, 2003, the period for providing notice of the qualified dividend 
amount, as required under Section 854(b)(2), does not expire prior to 
the date by which the fund must provide IRS Form 1099 information to 
shareholders in accordance with Section 6042(c) (i.e., January 31, 
2004).

Flow Through of QDI From Qualified Foreign Corporations and REITs

    Under Section 854(b)(1)(B), as enacted in JGTRRA, if the aggregate 
dividends received by a fund are less than 95 percent of its gross 
income for the year, then shareholders can treat as QDI only the 
portion of the fund's dividends designated by the fund as such. Section 
854(b)(1)(C) limits the amount of dividends that a fund may designate 
as QDI to the amount of aggregate dividends received by the fund for 
the taxable year.
    The definition of aggregate dividends provided by Section 854(b)(3) 
prior to enactment of JGTRRA excluded certain dividends that generally 
are treated as QDI and also included other dividends that generally are 
not treated as QDI. To address the under-inclusiveness of Section 
854(b)(3), JGTRRA added new clauses (iii) and (iv) of Section 
854(b)(1)(B) to expand the definition of aggregate dividends for 
purposes of clause (i) of Section 854(b)(1)(B) to include dividends 
received from qualified foreign corporations and certain dividends 
received from a real estate investment trust (``REIT''). To address the 
over-inclusiveness of the term ``aggregate dividends,'' JGTRRA added 
new Section 854(b)(5) to limit the amount that a fund can include in 
aggregate dividends, for purposes of Section 854(b)(1)(B), to the QDI 
of the fund.
    The JGTRRA provisions designed to address the under-inclusiveness 
of Section 854(b)(3)--by expanding the definition of aggregate 
dividends--apparently do not apply for purposes of Section 
854(b)(1)(C), which limits the amount of QDI the fund can designate 
under Section 854(b)(1)(B) to the amount of aggregate dividends 
received by the fund. Likewise, the JGTRRA provisions designed to 
address the over-inclusiveness of Section 854(b)(3)--by limiting the 
amount that a fund can include in aggregate dividends--apparently do 
not apply for purposes of the Section 854(b)(1)(C) limitation.
    The effect of the JGTRRA changes not applying for purposes of 
Section 854(b)(1)(C) would be to prevent funds that do not receive at 
least 95 percent of their gross income from qualifying dividends from 
treating any dividends received from qualified foreign corporations and 
REITs as part of the aggregate dividends that may be designated as QDI.
    To ensure that Section 854 operates as intended, the TTCA would 
modify the limitation on the designation of QDI and thereby clarify 
that dividends from qualified foreign corporations and eligible REIT 
dividends may flow through a fund to its shareholders.

Effective Date for Partnerships in Master Feeder Structures

    The 15 percent maximum tax rate on QDI provided by JGTRRA applies 
to dividends received by individuals in taxable years beginning after 
December 31, 2002. In the case of dividends received by funds, JGTRRA 
applies to dividends received after December 31, 2002 (without regard 
to the fund's taxable year).
    A recently issued IRS Announcement interpreting the JGTRRA 
effective date provisions (Announcement 2003-56) states that, in the 
case of partnerships with fiscal years beginning in 2002 and ending in 
2003, no dividends received by the partnership during that fiscal year 
may be treated as qualified dividends, even if received during 2003. By 
its terms, this announcement would appear to apply to funds that invest 
in partnerships, including funds that are part of a master-feeder 
structure.
    The master-feeder structure, which is common in the mutual fund 
industry,\4\ typically consists of one or more mutual funds, known as 
``feeder funds,'' with substantially identical investment objectives 
that pool their assets in a single investment pool, or ``master fund,'' 
that is classified as a partnership for Federal income tax purposes. 
The feeder funds and the master fund typically have the same taxable 
year. Feeder funds, as partners in a partnership, do not receive 
dividends directly; instead, they take into income their distributive 
shares of the dividend income received by the master fund partnership 
pursuant to Section 702.
---------------------------------------------------------------------------
    \4\ Feeder funds have approximately $50 billion of assets in master 
funds holding equities.
---------------------------------------------------------------------------
    Under the effective date provision applicable to mutual funds, a 
mutual fund with a taxable year ending on June 30, 2003 would treat the 
new qualified dividend provisions as applying to dividends it received 
during the period from January 1, 2003 through June 30, 2003. We 
believe that this result was intended to apply without regard to 
whether the mutual fund received the dividends directly from the 
distributing corporation or through a master fund that held the stock 
of the distributing corporation.
    The TTCA would modify JGTRRA by essentially providing partnerships 
with the same effective date that applies to funds. Under the TTCA, 
partnerships, like funds, would be permitted to treat as QDI the 
eligible dividends received after 2002, even if the partnership's 
fiscal year began before January 2003.

Mutual Fund Distribution of Subchapter C Earnings and Profits

    JGTRRA does not include any specific provision pursuant to which a 
fund may treat as QDI a distribution of subchapter C earnings and 
profits that it acquired in a tax-free acquisition of a C corporation's 
assets or as a result of a C corporation converting to a mutual fund; 
these amounts must be distributed by the fund to maintain its status as 
a regulated investment company under subchapter M.
    Subchapter C earnings and profits have been taxed at the entity 
level and hence may be distributed to the C corporation's shareholders 
as QDI. Shareholders in a fund that distributes Subchapter C earnings 
and profits received in situations described above likewise should be 
permitted to treat the distributed amounts as QDI. Treatment as QDI 
should not be forfeited merely because the Subchapter C earnings and 
profits are distributed by the fund rather than by the C corporation.
    The TTCA would modify Section 854(b)(1)(C) to provide that the 
amount that may be designated by a fund as QDI under Section 
854(b)(1)(B) shall not exceed the sum of QDI and ``the amount of any 
earnings and profits which were distributed by the company for such 
taxable year in order to comply with the requirements of Section 
852(a)(2)(B) and accumulated in a taxable year with respect to which 
this part did not apply.''

Holding Period Requirement for Qualified Dividend Income

    In order for a dividend on common stock to be treated as QDI under 
JGTRRA, the taxpayer must hold the stock on which the dividend is paid 
for at least 61 days. Sections 1(h)(11)(B)(iii) and 246(c). For this 
purpose, only days during the 120-day period beginning on the date that 
is 60 days before the ex-dividend date are taken into account. Also for 
this purpose, the taxpayer's holding period begins the day after the 
date on which the stock is acquired. Section 246(c)(3).
    JGTRRA, as originally enacted, prevents a taxpayer who acquires 
common stock the day before the ex-dividend date from meeting the 61-
day holding period requirement for that dividend. For example, if an 
individual acquires stock on July 30 that goes ex-dividend on July 31, 
the 120-day period begins on June 1 (60 days before the July 31 ex-
dividend date) and ends on September 28 (59 days after the July 31 ex-
dividend date). Because the taxpayer's holding period begins on July 31 
(the day after the purchase date) and only 59 days remain (after July 
31) in the 120-day period, the taxpayer can never meet the 61-day 
holding period requirement for that first dividend. The 2003 Form 1040 
Instructions, reflecting JGTRRA as enacted, contain a similar example 
and indicate that such a dividend is not QDI.\5\
---------------------------------------------------------------------------
    \5\ See, 2003 Form 1040 Instructions, p. 23, Line 9b, ex. 2.
---------------------------------------------------------------------------
    The TTCA would allow an investor who acquires common stock the day 
before it goes ex-dividend to meet the 61-day holding-period 
requirement by extending the 120-day holding period to 121 days--
thereby providing a period that includes 60 days both before and after 
the ex-dividend date.\6\
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    \6\ The TTCA also extends the holding period with respect to 
preferred stock from 180 to 181 days.

                               __________
                             SUMMARY POINTS
I. The Tax Technical Corrections Act of 2003 Should Be Enacted Promptly

    The Investment Company Institute strongly supports the Tax 
Technical Corrections Act of 2003 (``TTCA'') and urges its prompt 
enactment. In particular, we support the technical corrections to the 
Jobs and Growth Tax Relief and Reconciliation Act of 2003 (``JGTRRA'') 
that clarify rules relating to qualified dividend income (``QDI'') 
taxable at the new 15 percent maximum tax rate. These technical 
corrections would provide the approximately 25 million mutual fund 
shareholders who invest through taxable accounts in funds holding 
equities with the tax benefits intended by Congress when JGTRRA was 
enacted.

II. Effect of Technical Corrections on Mutual Fund Shareholders
    A. Transition Relief From 60-Day Designation Requirement

    The TTCA includes transition relief from the statutory requirements 
for timely designating the character of dividends paid. QDI 
designations for distributions made by funds for taxable years ending 
during 2003 are being made, taking this transition relief into account, 
by January 31, 2004 (the date by which the fund must provide IRS Form 
1099 information to shareholders for payments made in 2003).

    B. Flow Through of QDI From Qualified Foreign Corporations and 
        REITs

    The TTCA clarifies that dividends received by a fund from qualified 
foreign corporations and REITs that are eligible for QDI treatment do 
not inadvertently lose that eligibility when they flow through a fund 
to its shareholders.

    C. Effective Date for Partnerships in Master Feeder Structures

    The TTCA clarifies that JGTRRA provides investors in partnerships 
with the same effective date for QDI benefits that JGTRRA expressly 
provides to shareholders in mutual funds. Among other things, the 
clarification will permit fund shareholders who invest in a feeder fund 
that holds an interest in a master fund partnership (where the 
portfolio management is performed) to receive the same benefits as 
other fund shareholders.

    D. Mutual Fund Distribution of Subchapter C Earnings and Profits

    The TTCA clarifies that a fund shareholder will receive QDI 
treatment for dividends attributable to amounts previously taxed to a 
fund's predecessor.

    E. Holding Period Requirement for Qualified Dividend Income

    The TTCA clarifies that the period during which common stock must 
be held for 61 days to receive QDI treatment is 121, rather than 120, 
days (i.e., 60 days both before and after the ex-dividend date). This 
clarification will permit an investor who acquires stock the day before 
it goes ex-dividend to meet the holding-period requirement.

                                 

                                             Jackson & Campbell, PC
                                               Washington, DC 20036
                                                   January 23, 2004

Chairman William M. Thomas
Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515-6348

Dear Chairman Thomas,

    We appreciate the opportunity to comment on H.R. 3654/S. 1984, the 
``Tax Technical Corrections Bill of 2003.'' i The TCB would 
correct a technical glitch involving dividends that individual 
taxpayers receive through passthrough entities. We urge the Congress to 
approve the correction promptly. We also urge the IRS quickly to 
announce that it will follow the anticipated technical correction in 
processing 2003 tax returns.
---------------------------------------------------------------------------
    \i\ H.R. 3654, introduced in the House of Representatives December 
8, 2003, and referred to the Committee on Ways and Means; S. 1984, 
introduced in the Senate December 9, 2003, and referred to the 
Committee on Finance (the ``TCB''). On December 9, 2003, the Committees 
requested written public comments for the record on the TCB. See 
ADVISORY from the Committee on Ways and Means, ``Thomas Announces 
Request for Written Comments on H.R. 3654, the Technical Corrections 
Act of 2003'' (December 9, 2003), and U.S. Senate Committee on Finance, 
``Senators Introduce Tax Technical Corrections Bill'' (December 9, 
2003).
---------------------------------------------------------------------------
Context
Jobs and Growth Tax Relief Reconciliation Act of 2003 ii

    The 2003 Act taxes ``qualified dividend income'' of individuals at 
a maximum tax rate of 15%.iii In general, this amendment 
applied to ``taxable years beginning after December 31, 2002.'' 
iv The following special effective date rule was provided 
for regulated investment companies (``RICs'') and real estate 
investment trusts (``REITs''):
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    \ii\ Public Law 108-27 [H.R. 2], May 28, 2003 (the ``2003 Act'').
    \iii\ 2003 Act, Sec. 302(a), adding IRC Section 1(h)(11), which 
treats ``qualified dividend income'' of individuals as net capital gain 
for purposes of the maximum capital gain rate in IRC Sec. 1(h). See 
also the Joint Explanatory Statement of the Committee of Conference, 
May 22, 2003 (the ``Conference Report''), Section III B.
    \iv\ 2003 Act, Sec. 302(f)(1).
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      L(2) Regulated investment companies and real estate investment 
trusts. In the case of a regulated investment company or a real estate 
investment trust, the amendments made by this section shall apply to 
taxable years ending after December 31, 2002; except that dividends 
received by such a company or trust on or before such date shall not be 
treated as qualified dividend income (as defined in Section 1(h)(11)(B) 
of the Internal Revenue Code 1986, as added by this Act).v 
[Emphasis supplied.]
---------------------------------------------------------------------------
    \v\ 2003 Act, Sec. 302(f)(2).
---------------------------------------------------------------------------
IRS Position
Announcement 2003-56

    As a result of the 2003 Act, the IRS announced in Announcement 
2003-56 changes in the reporting requirements for certain 2002 tax 
forms filed by entities with 2002-2003 fiscal years ending after May 5, 
2003.vi Although the Announcement primarily addressed the 
taxation of capital gains, it included the following note:
---------------------------------------------------------------------------
    \vi\ Announcement 2003-56, 2003-39 IRB 694 (September 29, 2003) 
(the ``Announcement''). The Announcement referred to May 5, 2003 on 
account of the transitional rules in 2003 Act Sec. 301(c) governing the 
taxation of net capital gains for taxable years which include May 6, 
2003.

      LNote: Dividends received in a tax year beginning in 2002 and 
ending in 2003 are not qualified dividends, even if the dividends are 
received during 2003. Therefore, [i]ndividuals and estates with 2002-
2003 fiscal years cannot have any qualified dividends for that tax 
year. Partnerships, S corporations, and estates with 2002-2003 fiscal 
years have no qualified dividends to pass through to their partners, 
---------------------------------------------------------------------------
shareholders, or beneficiaries.

Example vii

    Assume, for example, that a partnership owns stock in a domestic 
corporation or a qualified foreign corporation.viii The 
partnership uses as its taxable year a fiscal year ending September 30. 
Assume also that all of the partners are individuals who use the 
calendar year as their taxable years. After December 31, 2002 but on or 
before September 30, 2003, the partnership received dividends from a 
corporation in which the partnership owns stock. For its taxable year 
ended September 30, 2003, the partnership reports to the partners their 
respective distributive shares of these dividends.ix The 
partners report their shares of the dividends on their individual tax 
returns for their taxable years ended December 31, 2003. According to 
Announcement 2003-56, the partners may not treat these passthrough 
dividends as qualified dividends. The result would be the same, 
according to the Announcement, in the case of an S corporation 
receiving dividends the prorata shares of which the S shareholders take 
into account on their individual tax returns for the taxable years in 
this example.
---------------------------------------------------------------------------
    \vii\ Announcement 2003-56 does not contain this example. It is 
provided here solely to illuminate the issue that this comment letter 
addresses.
    \viii\ Under IRC Sec. 1(h)(11), ``qualified dividend income'' 
generally means dividends received during the taxable year from 
domestic corporations and qualified foreign corporations.
    \ix\ See IRC Sec. 702(a). The 2003 Act conformed Sec. 702(a) to 
reflect the possibility of a partnership reporting qualified dividends 
to its partners. As amended by Sec. 302(e)(8) of the 2003 Act, IRC 
702(a)(5) now requires each partner to take into account separately: 
``(5) dividends with respect to which Section 1(h)(11) or Part XIII of 
subchapter B applies.'' In this amended language, ``Section 1(h)(11)'' 
refers to the provision of the Code taxing individuals' qualified 
dividend income as net capital gain. See also note 3.
---------------------------------------------------------------------------
Proposed Technical Correction
    The TCB would extend to additional passthrough entities the 2003 
Act's special effective date rule applicable to REITs and RICs. Section 
2(a)(5) of the Bill reads as follows:

      L(5) Paragraph (2) of Section 302(f) of the Jobs and Growth Tax 
Relief Reconciliation Act of 2003 x is amended to read as 
follows:
---------------------------------------------------------------------------
    \x\ As previously explained, Sec. 302(f) of the 2003 Act states the 
effective date of IRC Sec. 1(h)(11), which taxes qualified dividend 
income of individual taxpayers at the same rates as net capital gain. 
See notes 4 and 5.

      L`(2) PASS-THRU ENTITIES--In the case of a pass-thru entity 
described in subparagraph (A), (B), (C), (D), (E), or (F) of Section 
1(h)(10) of the Internal Revenue Code 1986, as amended by this Act, the 
amendments made by this section shall apply to taxable years ending 
after December 31, 2002; except that dividends received by such an 
entity on or before such date shall not be treated as qualified 
dividend income (as defined in Section 1(h)(11)(B) of such Code, as 
added by this Act).'. [Emphasis supplied.] xi
---------------------------------------------------------------------------
    \xi\ TCB Sec. 2(a)(5). The entities cross referenced in IRC 
Sec. 1(h)(10) are: RICs, REITs, S corporations, partnerships, estates, 
trusts, and common trust funds.

    This amendment would take effect as if included in Section 302 of 
the 2003 Act.xii
---------------------------------------------------------------------------
    \xii\ TCB Sec. 2(b).
---------------------------------------------------------------------------
    The Staff of the Joint Committee on Taxation has explained the 
proposed technical correction as follows:

      LThe provision provides that, in the case of partnerships, S 
corporations, common trust funds, trusts, and estates, Section 302 of 
the [2003] Act applies to taxable years ending after December 31, 2002, 
except that dividends received by the entity prior to January 1, 2003, 
are not treated as qualified dividend income. The [2003] Act provided a 
similar rule in the case of RICs and REITs.xiii
---------------------------------------------------------------------------
    \xiii\ Staff of the Joint Committee on Taxation, Description of the 
``Tax Technical Corrections Act of 2003,'' JCX-104-03 (December 9, 
2003), page 2.
---------------------------------------------------------------------------
Support for Proposed Technical Correction
    The proposed amendment of the 2003 Act's effective date makes 
perfect sense and should be enacted for various reasons.

    1. LThe proposed technical correction merely clarifies the general 
effective date. The 2003 Act provided that dividends received by 
individual shareholders are subject to tax at a rate not exceeding 15% 
if the dividends are received in taxable years of individuals beginning 
after December 31, 2002.xiv Both the substantive rule and 
its general effective date xv focus on the treatment of 
dividends, not by any intervening passthrough entity but, rather, by 
the person ultimately receiving and taxable on the dividends. The 
proposed technical correction merely clarifies that dividends are 
subject to the same treatment when received through a 2002-2003 fiscal 
year of a passthrough entity.
---------------------------------------------------------------------------
    \xiv\ ``Under the House Bill, dividends received by an individual 
shareholder from domestic corporations are taxed at the same rates that 
apply to net capital gain.'' House Bill as summarized in the Conference 
Report, Section III B. The 2003 Act's reduction of individual tax rates 
on capital gains and dividends are scheduled to sunset for taxable 
years beginning after December 21, 2008. 2003 Act, Sec. 303.
    \xv\ 2003 Act, Sec. 302(f)(1).
---------------------------------------------------------------------------
    2. LPassthrough dividends should not be taxed differently than 
directly received dividends. Dividends of individuals should qualify 
for the preferential rate whether received directly or through a 
passthrough entity, provided that (i) the individual receives the 
dividends in a taxable year of the individual beginning after December 
31, 2002 and (ii) the entity passing through the dividends receives 
them after December 31, 2002.xvi The Legislative History of 
the 2003 Act anticipated no different treatment of dividends received 
through passthrough entities having 2002-2003 fiscal years.
---------------------------------------------------------------------------
    \xvi\ In some cases, an individual may receive dividends through 
two or more vertical levels or ``tiers'' of passthrough entities. 
Treasury regulations or other administrative guidance should provide 
that such dividends qualify for the preferential rate only if no entity 
in the tiered structured received the dividends before January 1, 2003.

    When Congress in the 2003 Act wanted the character of income to be 
determined at the level of a passthrough entity, Congress so provided. 
The 2003 Act's reduction of individual tax rates on net capital gains 
generally applied to taxable years ending on or after May 6, 
2003.xvii Transitional rules were provided for taxable years 
which include May 6, 2003.xviii In applying these 
transitional rules to capital gains received through passthrough 
entities, Congress directed that the determination of when gains and 
losses are properly taken into account shall be made at the entity 
level.xix Congress did not similarly require that the 
character of dividends (as qualified dividend income) be determined at 
the level of a passthrough entity. Consequently, whether or not 
dividends received through passthrough entities qualify to be taxed at 
the 2003 Act's reduced rates should be determined at the individual 
recipient's level.
---------------------------------------------------------------------------
    \xvii\ 2003 Act, Sec. 301(d)(1).
    \xviii\ 2003 Act, Sec. 301(c).
    \xix\ 2003 Act, Sec. 301(c)(4).

    3. LThe 2003 Act's special effective date for dividends received 
through RICS and REITs makes even more sense for other types of 
passthrough entities. REITs and RICs are hybrid entities. They 
technically are subject to tax as entities separate from their owners. 
They typically pay no tax provided that they distribute sufficient 
income to their owners.xx The 2003 Act provided rules for 
determining the extent to which REITs and RICs ``pass through'' 
qualified dividend income to their shareholders.xxi
---------------------------------------------------------------------------
    \xx\ IRC Sec. Sec. 852(b) and 857(b).
    \xxi\ See IRC Sec. Sec. 854(b)(1)(B) and 854(b)(5) (RICs), as 
amended by 2003 Act, Sec. 302(c), and IRC Sec. 857(a)(2) (REITs), as 
amended by 2003 Act, Sec. 302(d).

    Partnerships and S corporations are pure passthrough entities. They 
generally are not subject to tax as entities separate from their 
owners.xxii Partners and S corporation shareholders are 
subject to tax on their respective shares of the entity's income 
regardless of whether or when distributed. This flow through income has 
the same character as if realized directly from the source from which 
the partnership or S corporation realized it.xxiii 
Therefore, dividends that a partnership or an S corporation receives 
after December 31, 2002 should be taxable to the entities' owners 
(partners and S shareholders, respectively) as though the owners 
received the dividends directly.xxiv
---------------------------------------------------------------------------
    \xxii\ Under targeted exceptions to this construct, S corporations 
are subject as entities to tax on their built-in gains and excess 
passive investment income and to a LIFO recapture tax. See IRC sections 
1374, 1375, and 1363(d).
    \xxiii\ IRC Sec. Sec. 702(b) and 1366(b). Congress should consider 
amending IRC Sec. 1366(a)(1) to clarify that qualified dividends are a 
``separately computed'' item of S corporations. Compare IRC 
Sec. 702(a)(5) as amended by the 2003 Act.
    \xxiv\ Similarly, the 2003 Act's amendment of IRC Sec. 702(a)(5) 
treating a partnership's qualified dividends as a ``separately stated 
item'' should be interpreted consistently with the proposed technical 
correction, i.e., by reference to the taxable years of the partners to 
whom the partnership reports the dividends. See Letter from Richard M. 
Hervey of November 25, 2003 to Michael S. Novey, Associate Tax 
Legislative Counsel, U.S. Department of the Treasury, 2004 TNT 1-27 
(January 12, 2004).
---------------------------------------------------------------------------
Coordination With Internal Revenue Service
    The issue of how to treat dividends received through fiscal year 
2002-2003 passthrough entities arises in preparing entity and 
individual tax returns for 2003. Returns of entities categorizing the 
dividends must be filed (absent extensions) within either 2.5 months or 
3.5 months after the end of the entity's fiscal year.xxv The 
passthrough dividends must be correctly reported on the returns of 
individual partners and shareholders. Calendar-year partners and S 
shareholders generally must file their 2003 returns (absent extensions) 
by April 15, 2004.xxvi
---------------------------------------------------------------------------
    \xxv\ S corporations must file their returns within 2.5 months 
after the end of the tax year. Partnerships, trusts, and estates must 
file their returns within 3.5 months after the end of the tax year. IRC 
Sec. Sec. 6072 and 6037.
    \xxvi\ IRC Sec. 6072.
---------------------------------------------------------------------------
    We urge the IRS quickly to announce that in processing returns for 
2003 tax years it will follow the TCB's anticipated clarification as 
though enacted. As previously explained, the proposed technical 
correction merely clarifies the general effective date of the 2003 
Act's taxation of qualified dividends. Announcement 2003-56 should be 
modified accordingly.ixxvii
---------------------------------------------------------------------------
    \xxvii\ The proposed technical correction and the IRS' adopting it 
would not prevent recipients of dividends from electing to treat them 
as investment income under IRC Sec. 163(d) rather than as qualified 
dividend income. See IRC Sec. Sec. 1(h)(11)(D)(i) and 163(d)(4)(B), as 
amended by Sec. 302 of the 2003 Act.
---------------------------------------------------------------------------
    Thank you for carefully considering these comments. Should you want 
to discuss them, please feel free to call me at 202-457-4278 (through 
January 31, 2004) or 202-452-7965 (beginning February 1, 2004).

            Sincerely,

                                                   Michael J. Grace

                                 

              National Association of Real Estate Investment Trusts
                                               Washington, DC 20006
                                                   January 22, 2004

The Honorable William M. Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Thomas:

    Pursuant to the instructions contained in Ways and Means Committee 
Press Release No. FC-10, this statement is made by the National 
Association of Real Estate Investment Trusts' (``NAREIT'') 
regarding H.R. 3654, the ``Tax Technical Corrections Act of 2003'' 
(``TTCA'').
    NAREIT is the national trade association for real estate companies. 
Members are REITs and other publicly-traded businesses that own, 
operate and finance income-producing real estate, as well as those 
firms and individuals who advise, study and service these businesses. 
REITs are companies whose income and assets are mainly connected to 
income-producing real estate. By law, REITs regularly distribute most 
of their taxable income to shareholders as dividends. NAREIT represents 
approximately 170 REITs or other publicly-traded real estate companies, 
as well as over 1,300 investment bankers, analysts, accountants, 
lawyers and other professionals who provide services to REITs.
    NAREIT strongly supports the TTCA and urges its enactment. NAREIT 
specifically would like to thank the Ways and Means Committee for the 
helpful and appropriate changes relating to REIT dividends included in 
the TTCA.
    Among other items, the TTCA would provide technical corrections to 
Public Law No. 108-27, the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 (``JGTRRA''). As you know, JGTRRA provides that the 
``qualified dividend income'' (``QDI'') of non-corporate taxpayers is 
taxed at the same rate as ``net capital gain,'' at a maximum rate of 
15%. JGTRRA's policy goal in reducing the tax rate applicable to QDI 
was to minimize the double taxation (at the corporate and shareholder 
levels) otherwise applicable to income earned by corporations.
    JGTRRA permits the following type of REIT dividends to qualify for 
this lower rate:
    (1) distributions by the REIT of income attributable to dividends 
from a taxable REIT subsidiary (``TRS'') or other corporation; (2) 
distributions attributable to income on which tax was payable in the 
previous year due to distributing less than 100% of its REIT taxable 
income; and (3) distributions of income on which tax was payable for 
the previous taxable year due to the ``built in gains'' tax under the 
Sec. 337(d) regulations, in both cases less the tax payable on such 
income.
    Although JGTRRA provides for these three items to qualify as QDI 
when distributed by a REIT, there is some ambiguity in the JGTRRA's 
statutory language. Specifically, there is ambiguity under JGTRRA as to 
whether a REIT is ``treated as receiving'' QDI from a TRS and ambiguity 
as to whether a mutual fund may distribute QDI attributable to REIT 
distributions. Both individual taxpayers who invest in REITs directly 
and through mutual funds, as well as the entire REIT industry, could 
benefit from clarifications to this language.
    Furthermore, consistent with the policy goal of minimizing double 
taxation applicable to corporate-earned income, REIT distributions of 
``earnings and profits'' earned by C corporations (and therefore 
already subject to tax at the corporate level) should be permitted to 
qualify as QDI. Accordingly, NAREIT welcomes the provisions in the TTCA 
that would incorporate these changes.
    I would be pleased to discuss NAREIT's comments with you in more 
detail. Please contact me at (202) 739-9408 if you have any questions. 
Thank you.

            Sincerely,

                                                    Tony M. Edwards
                            Senior Vice President & General Counsel

                                 

                                              Perkins & Company, PC
                                             Portland, Oregon 97204
                                                   January 22, 2004

Chairman William M. Thomas
House Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Thomas:

    We are hereby requesting clarifying language (or Joint Committee 
explanation with similar effect) with respect to the Tax Technical 
Corrections Act of 2003, Section 3(b)(2)(C), and IRC Section 172(j) of 
the Internal Revenue Code, as enacted by the Job Creation and Workers 
Act of 2002 (2002 Act). The purpose of the clarifying language would be 
to ensure that the five year net operating loss (NOL) carryback 
provision from the 2002 Act would be implemented by the IRS consistent 
with the plain language of the statute at IRC Section 172(j) and 
Congressional intent. IRC Section 172(j) states that the five year 
carryback is mandatory unless the taxpayer elects otherwise.

The clarifying language suggested would be as follows:

    To provide the result intended by IRC Section 172(j) and IRC 
Section 172(b)(1)(H) as further explained below, and to disadvantage no 
taxpayer, new subsection ``(D)'' [new subsection 3(b)(2)(D)] could be 
added to section 3(b) of the Tax Technical Corrections Act of 2003 as 
follows:

      L  ``(D) if no election was made under section 172(b)(3) or 
section 172(j) on a tax return filed before enactment of the Job 
Creation and Worker Assistance Act of 2002, the carryback period under 
section 172(b)(1)(H) shall apply if a 5-year carryback claim is timely 
filed within the applicable period of limitations.''

    Although the above would be the clearest method of ensuring the 
proper result, if as a practical matter, merely providing clarifying 
language via the Joint Committee explanation is the only realistic 
approach, we would suggest as an alternative the following language be 
incorporated in the Joint Committee's discussion of the ``five-year 
carryback of net operating losses'' contained in its explanation with 
respect to the Tax Technical Corrections Act of 2003:

      L  ``The filing of a two year net operating loss carryback for a 
year ending in 2001 or 2002, where such two year loss carryback was 
filed before the enactment of the Job Creation and Workers Act of 2002 
on March 9, 2002, shall not be construed to be an election under 
section 172(j) to elect out of the 5 year carryback period (i.e. no 
deemed election will be forced upon a taxpayer), if the taxpayer timely 
files, or has filed, an amended return or tentative carryback 
adjustment for such year within the otherwise applicable period of 
limitations under IRC section 6511 or 6411 reflecting the 5 year loss 
carryback.''

Explanatory Support for Requested Clarification

    The clarifying language does no harm to any taxpayer that relied on 
the administrative guidance provided in section 5 of Revenue Procedure 
2002-40. Any taxpayer who relied on that guidance desiring to elect out 
of the 5 year carryback period by having a previously filed 2 year 
carryback constitute such election, will obtain that result even with 
the clarifying language (such taxpayer has to do nothing further to 
obtain the desired result).
    On the other hand, where a taxpayer relied on the plain language of 
the statute in IRC section 172(j) [and the historical norm with respect 
to such elections, that the taxpayer must make an affirmative election 
to avoid the mandatory carryback period], and in good faith reliance on 
the statute, took no affirmative action to elect out of the 5 year 
carryback period (because it wanted a 5 year carryback to apply), such 
taxpayer should not have a deemed election to forego the 5 year 
carryback period forced upon it. A taxpayer relying on the plain 
language of section 172(j) and the historical norm for such elections 
(that the taxpayer must affirmatively elect out), had no reason to 
anticipate that through administrative guidance (Revenue Procedure 
2002-40, section 5.02) a deemed election would be forced on it at an 
arbitrary date, such date being potentially years before the taxpayer 
otherwise anticipated that the amended return was required to be filed 
under pursuant to the normal period of limitations under IRC section 
6511.
    The fact that a taxpayer properly filed a 2 year NOL carryback 
before section 172(j) was enacted (e.g. prior to March 9, 2002) could 
not be properly construed to indicate the taxpayer desired to elect out 
of the 5 year carryback period. Properly construed, it is merely 
evidence that the taxpayer sought to use the NOL carryback to the 
fullest extent possible, under the law that existed at the time, which 
allowed only a 2 year carryback.
    In an illustrative example we are familiar with, the taxpayer had a 
fiscal year end 3/31/01 return which generated an NOL. The loss year 
return (Form 1120) for FYE 3/31/01 was filed on October 11, 2001, and 
the 2 year NOL carryback on Form 1139 (the only carryback allowed by 
law at that point) was filed immediately after October 11, 2001 (during 
October 2001). The 2002 Act was then passed 5 months later on March 9, 
2002, containing section 172(b)(1)(H), which mandates a 5 year NOL 
carryback for the loss for FYE 3/31/01, unless the taxpayer elects out 
of the 5 year carryback period under section 172(j).
    The taxpayer had no desire to elect out of the 5 year carryback 
period, and understood that per the plain language of the statute at 
section 172(b)(1)(H) a 5 year carryback was mandatory, but that the 
statutory period of limitations allowed the amended return to report 
the 5 year loss carryback to be filed as late as October 11, 2004.
    The taxpayer filed a Chapter 11 bankruptcy petition on April 10, 
2002, before the taxpayer was able to have a Form 1120X to claim the 5 
year carryback prepared. As part of the bankruptcy proceeding the 
taxpayer (which did not have in-house tax counsel or in-house cpas) was 
not able to engage third party tax advisors, and had no such advisors 
when Revenue Procedure 2002-40 was issued on 5/22/2002.
    The taxpayer correctly understood the statute under section 
6511(d)(2) allowed the 5 year NOL carryback claim (Form 1120X) to be 
filed within 3 years of the date the loss year return was filed. 
Therefore the taxpayer had until 10/11/2004 to file the 5 year 
carryback claim under well known period of limitation rules. The 
taxpayer remained in bankruptcy proceedings through 10/31/2002, and was 
never aware of the administrative acceleration provision within Revenue 
Procedure 2002-40, section 5, which purports to force a deemed election 
under section 172(j) onto them (if the Form 1120X was not filed by 10/
31/2002). The taxpayer filed the 5 year carryback claim as soon as 
possible after it became aware of the issue, filing Form 1120X to carry 
the FYE 3/31/01 NOL back 5 years on 1/3/2003. The IRS Service Center 
rejected the claim (relying on Rev. Proc. 2002-40, section 5), and 
despite efforts of the Taxpayer Advocate Office, has thus far refused 
to process the claim.
    We have tried to resolve the matter administratively through 
multiple channels at the IRS without success. We initially contacted 
the author of Revenue Procedure 2002-40, Martin Scully. He indicated 
agreement that the result was inequitable under the facts presented, 
and indicated that the 10/31/02 required action date contained in 
section 5 of Rev. Proc. 2002-40 was arbitrarily selected. However, he 
said that he could not provide any relief, and suggested we file the 
amended return reporting the 5 year carryback although he was not sure 
if it would be accepted. We then contacted the Taxpayer Advocate 
Office, and the representative there, Marron Dooney, agreed the claim 
had merit and should be processed, but was unable to convince the IRS 
Service Center. The taxpayer is pursuing its remaining administrative 
appeal rights within the IRS, but the concern is that unless there is 
language clarifying that the deemed election provision of Rev. Proc. 
2002-40, section 5, is inappropriate and contrary to the statute, it 
will be difficult to obtain an equitable and just appeals decision.
    Note that a similarly situated taxpayer, with a FYE 3/31/01 loss 
year, who has done nothing except file its loss return on 10/11/2001, 
would still have until 10/11/2004 to file its 5 year loss carryback 
return on Form 1120X. In the example above, it is only the fact the 
taxpayer timely filed its 2 year carryback return (before the 5 year 
carryback statute existed), that it is denied by Rev. Proc. 2002-40 its 
statutory right to a 5 year carryback period.
    There is no advantage being gained by the taxpayer(s) via the 
requested clarification. There is no new information relating to the 2 
or 5 year carryback period that is available to any taxpayer after 10/
31/02 that was not available to the taxpayer before that date. So 
allowing the taxpayer to file its 5 year carryback under the normal (3 
year) period of limitations rules does not create any advantage for the 
taxpayer as compared to what the statute allowed. The clarifying 
language also does not disadvantage any taxpayer that was aware Rev. 
Proc. 2002-40 existed, and desired a 2 year carryback period, and 
therefore intentionally let the 10/31/2002 date pass. If that was their 
desire, they need not take any additional action and they have obtained 
the result they desired.
    Thank you for your assistance with this matter. You can reach the 
undersigned at (503) 221-7565 or the address indicated above if you 
have any questions or wish clarification.

            Very truly yours,

                                            Christopher J. Loughran
                                                  CPA & Shareholder

                                 

                                               Vinson & Elkins, LLP
                                               Washington, DC 20004
                                                   January 23, 2004

The Honorable William M. Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    In response to your request for comments on H.R. 3654, the Tax 
Technical Corrections Act of 2003, we are hereby submitting an 
additional provision for inclusion in the bill.
    The need for the proposed technical correction arises because the 
Internal Revenue Service has recently asserted a change in its position 
regarding the treatment under the foreign tax credit rules of certain 
business arrangements that have been excluded from partnership 
treatment by virtue of having made an election under section 761(a) of 
the Internal Revenue Code.\1\ These co-ownership arrangements are 
referred to as ``Elect-Out Arrangements,'' and the election out is a 
common fixture of oil and gas operating agreements.
---------------------------------------------------------------------------
    \1\ All section references are to the Internal Revenue Code of 
1986, as amended, unless otherwise noted.
---------------------------------------------------------------------------
    The tax code has provided an election for co-owners to be excluded 
from partnership treatment under certain circumstances since 1954, and 
oil and gas joint venturers have relied on this feature in order to be 
taxed as co-owners of oil and gas property rather than as partners in a 
partnership.\2\ In the absence of an election, co-ownership of oil and 
gas property would be treated for Federal income tax purposes (but not 
for any other legal purpose) as a partnership among the co-owners. 
Thus, an Elect-Out Arrangement generally is taxed as a direct, rather 
than indirect, property investment by each co-owner.
---------------------------------------------------------------------------
    \2\ An Elect-Out Arrangement is generally characterized by (i) the 
direct co-ownership of undivided interests in property rather than 
ownership through a partnership or other legally recognizable entity, 
(ii) the right of each co-owner separately to take in kind and dispose 
of the property produced or extracted, and (iii) prohibitions on joint 
marketing activity, whether directly or through the grant to any co-
owner of collective irrevocable representative capacity. See Treas. 
Reg. Sec. 1.761-2(a)(3).
---------------------------------------------------------------------------
    Historically, the sale of an interest in a jointly-owned property 
held through an Elect-Out Arrangement has been treated for tax purposes 
as a sale of the co-owner's interest in the underlying assets. 
Recently, however, the Internal Revenue Service has asserted that this 
well-settled characterization should not apply for foreign tax credit 
purposes, based on its interpretation of the combined effect of two 
disparate statutory changes--one to the foreign personal holding 
company rules made in 1988 and the other to the foreign tax credit 
limitation rules of section 904(d) made in 1993. Section 1012(i)(18) of 
the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) amended 
section 954(c)(1)(B) of the Code to include gain on the sale of an 
``interest in a . . . partnership'' in the definition of foreign 
personal holding company income. Section 904(d)(2)(A)(i) cross 
references section 954(c)(1)(B) to define passive income for purposes 
of the foreign tax credit separate basket limitations. Section 
13235(a)(2) of the Omnibus Reconciliation Act of 1993 (OBRA) amended 
section 904(d)(2)(A)(iii) to remove foreign oil and gas extraction 
income (FOGEI) from a list of specific exclusions from the definition 
of passive income for section 904 purposes.

    Asserted IRS Position. The IRS is asserting that (i) because 
section 954(c)(1)(B), as amended by TAMRA, by its terms specifically 
refers to a partnership interest, a section 761(a) election will not 
preclude application of the provision, and (ii) because section 
904(c)(2)(A)(iii), as amended by OBRA, no longer specifically excludes 
FOGEI from passive income characterization, the fact that any gain on a 
disposition of an interest held through an Elect-Out Arrangement 
involving foreign oil and gas producing properties is FOGEI does not 
prevent its treatment as ``passive income'' for purposes of section 
904(d). The IRS refuses to undertake an analysis of the interdependence 
of the foreign personal holding company and foreign tax credit rules 
with the partnership rules of Subchapter K, ignoring judicial authority 
and prior IRS interpretation. Under the IRS approach, foreign oil and 
gas extraction taxes cannot be credited against U.S. tax liability with 
respect to gain on the sale of an undivided interest in a foreign oil 
and gas concession which has an Elect-Out Arrangement in effect. The 
IRS is attempting to treat the sale as the sale of a partnership 
interest rather than as the sale of the co-owned assets.

    Proposed Technical Correction. A correct reading of the foreign 
personal holding company rules would give effect to the section 761(a) 
election. Section 954(c)(1)(B) should be amended to make clear that a 
sale of an interest in a co-ownership arrangement that has in effect a 
valid election under section 761(a) will not be treated as a sale of a 
partnership interest but instead will be treated as a sale of the 
underlying assets of such arrangement.

    Reasons for Change. The proposed technical correction, which would 
reflect current law, is consistent with Congressional intent, judicial 
authority, and IRS interpretation contemporaneous with enactment of the 
1988 statute. In addition, this technical correction would parallel the 
technical correction to section 1031(a) Congress enacted in 1990, which 
expressly provided that an interest in a co-ownership arrangement for 
which a valid section 761(a) election is in effect shall not be treated 
as a partnership interest for section 1031 purposes, but rather as an 
interest in the underlying assets.\3\ Congress enacted this technical 
correction in direct response to an indication that the IRS intended to 
interpret the statute to the contrary, and related its effective date 
back to the 1984 change to section 1031 that excluded exchanges of 
interests in partnerships from favorable nonrecognition treatment.\4\
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    \3\ Omnibus Budget Reconciliation Act of 1990, P.L. No. 101-508, 
Sec. 11703(d)(1).
    \4\ Deficit Reduction Act of 1984, P.L. No. 98-369, Sec. 77(a).
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    Prior to 1988, it was well settled that the sale of an interest in 
an Elect Out Arrangement was treated as the sale of the underlying 
assets of the organization for purposes of determining the appropriate 
section 904 foreign tax credit basket.\5\
---------------------------------------------------------------------------
    \5\ See Priv. Ltr. Rul. 87-26-061 (April 1, 1987).
---------------------------------------------------------------------------
    The TAMRA change relates to revisions to section 954 contained in 
the Tax Reform Act of 1986. The legislative history accompanying the 
1986 legislation makes clear that Congress intended to treat gain from 
the sale of property which does not generate active trade or business 
income as passive for purposes of the foreign personal holding company 
rules. The legislative history for the TAMRA change does not indicate 
any further reason for including gain from the sale of a partnership 
interest in section 954(c)(1)(B), nor is any reference made to the 
existence of Elect-Out Arrangements. It is reasonable to infer that the 
treatment of sales of interests in Elect-Out Arrangements in the oil 
and gas industry was not addressed at the time because (i) they were 
not treated as sales of interests in partnerships, based upon judicial 
authority, existing IRS position, and industry practice, (ii) they did 
not give rise to passive income or gain from their operation or 
disposition, and (iii) in any event the income from the sale of an 
interest in an Elect-Out Arrangement with respect to an oil and gas 
working interest constitutes FOGEI, which at the time was expressly 
excluded from the term passive income in section 904(d).
    The OBRA legislative history makes clear that the amendment to 
section 904(d)(2)(A)(iii) some 5 years later was intended to subject 
interest income earned on working capital in an oil and gas extraction 
business to treatment as passive income under section 904, 
notwithstanding its character as FOGEI. No reference to passive 
treatment for any other type of FOGEI appears in the legislative 
history. There simply is no evidence Congress intended to alter the 
treatment of gain from the disposition of an undivided interest in an 
oil and gas property held through an Elect-Out Arrangement under 
section 904.
    Under existing judicial authority, a section 761(a) election 
applies to negate the applicability of all provisions within Subchapter 
K and all provisions outside of Subchapter K that are interdependent 
with Subchapter K. The determination of interdependence properly is 
based on all the relevant facts and circumstances.
    The first case to consider the scope of the section 761(a) election 
was Bryant v. Commissioner.\6\ The Tax Court held that, despite the 
existence of a section 761(a) election, a joint venture should be 
treated as a partnership for purposes of section 48(c), and therefore, 
a limitation on the investment tax credit in section 48(c) should be 
applied both to the Elect-Out Arrangement as an entity and to the 
participants therein. In explaining its reasoning, the Court noted 
that, ``In our opinion, sections 761(a) and 48(c)(2)(D) are not 
interdependent.'' \7\
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    \6\ 46 T.C. 848 (1966), aff'd., 399 F.2d 800 (5th Cir. 1968).
    \7\ Bryant, 46 T.C. at 864.
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    An inflexible rule whereby a section 761(a) election does not apply 
to any Code section outside of Subchapter K would be unworkable, and 
there is universal agreement that there are clearly some sections 
outside of Subchapter K to which a section 761(a) election applies.\8\ 
Non-Subchapter K Code provisions that require the filing of a 
partnership return or the computation of partnership income are 
numerous. Without the flexibility provided by an interdependence 
analysis, virtually all co-ownership arrangements that have made a 
valid section 761(a) election could be forced to adhere to the 
provisions of Subchapter K, which in effect would nullify the elect-out 
provision. Accordingly, subsequent court decisions and IRS rulings have 
interpreted Bryant as holding that a section 761(a) election is 
applicable to a Code section outside of Subchapter K only if the 
section is ``interdependent'' with Subchapter K.\9\
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    \8\ See Rev. Rul. 83-129, 1983-2 C.B. 105; Priv. Ltr. Rul. 79-26-
088; Priv. Ltr. Rul. 79-30-028; Priv. Ltr. Rul. 79-38-046.
    \9\ See McMahon, The Availability and Effect of Election Out of 
Partnership Status Under Section 761(a), 9 Va. Tax Rev. 1, 32 (1989). 
The IRS, however, apparently based on dicta in Madison Gas & Electric 
Co. v. Commissioner, 72 T.C. 521 (1979), aff'd. 633 F.2d 512 (7th Cir. 
1980) and Cokes v. Commissioner, 91 T.C. 222 (1988), applies this rule 
counter-intuitively, i.e., only if the non-Subchapter K Code provision 
in question does not specifically refer to partnerships. Logically, it 
would seem that a statutory reference to partnerships would increase 
the likelihood of, rather than negate, an interdependency of the 
provision with Subchapter K.
---------------------------------------------------------------------------
    In the most recent case dealing with the interdependence test, 
Travelers Insurance Co. v. United States, the Court of Federal Claims 
held that a special rule applicable to ``partnerships'' in former 
section 907(c)(3)(D) (now section 907(c)(3)(C)) was interdependent with 
Subchapter K and therefore inapplicable to an Elect-Out 
Arrangement.\10\ The taxpayer in Travelers had argued that because 
former section 907(c)(3)(D) expressly provided that FOGEI and FORI 
includes a taxpayer's ``distributive share of partnership income,'' the 
section 761(a) election had no effect on section 907(c)(3)(D), and 
therefore the taxpayer should be treated as a partner of a partnership 
for purposes of this section. The Government argued that section 907(c) 
was inapplicable because the taxpayer elected under section 761(a) not 
to be treated as a partner under Subchapter K of the Code.\11\ The 
Court held that the Elect-Out Arrangement was not a partnership for 
purposes of section 907(c) despite the fact that section 907(c)(3)(D) 
specifically referred to partnerships. The Court explained that 
``section 907(c) and Subchapter K are plainly interdependent as the 
latter defines the terms of the former.'' \12\
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    \10\ 28 Fed. C. 602 (Ct. Fed. Cl. 1993), rev'd on other grounds, 
303 F.3d 1373 (Fed. Cir. 2002).
    \11\ Ironically, the IRS is claiming with respect to section 
954(c)(1)(B) that the inclusion of the term ``partnership'' in the 
statute per se causes the section not to be interdependent with 
Subchapter K. In Travelers, it was the taxpayer that was arguing the 
inclusion of the term ``partnership'' in section 907(c) resulted in per 
se non-interdependence, and the government was arguing for a facts and 
circumstances application of interdependence.
    \12\ Id. at 609.
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    The IRS has itself concluded that the application of the section 
761(a) election should not be strictly limited to Subchapter K. For 
example, in Revenue Ruling 83-129, the Service held that section 761(a) 
extended to section 616, and that as a result, two joint venturers who 
had elected out of Subchapter K could make different individual 
elections under sections 616(a) and 616(b). General Counsel Memorandum 
39043, issued in 1983, supported this position, stating that, ``if the 
limitation or rule outside of Subchapter K [cannot] be applied without 
doing violence to the concept of electing out of Subchapter K and 
computing income and deductions at the partner level,'' such limitation 
or rule is ``interdependent'' with (and subject to) section 761(a).\13\
---------------------------------------------------------------------------
    \13\ GCM 39,043 (Aug. 5, 1983).
---------------------------------------------------------------------------
    So far as the foreign personal holding company rules in section 
954(c)(1)(B)(ii) relate to partnership interests, they are clearly 
interdependent with the partnership rules of Subchapter K--computation 
of the amount of gain from the disposition of a partnership interest 
under section 954(c)(1)(B)(ii) would require the calculation of its 
basis through application of sections 705, 701, 702, and 752, all of 
which are inapplicable to Elect-Out Arrangements. The results of the 
interdependence analysis show that the section 761(a) election must be 
given effect for purposes of section 954(b)(1)(C).
    Finally, the IRS has consistently treated the sale of an interest 
in a domestic Elect-Out Arrangement as the disposition of the seller's 
proportionate share of the underlying assets, with the character of the 
gain or loss determined by the nature of the underlying assets. Recent 
technical advice and field service advice memoranda contain detailed 
analysis supporting this approach.\14\ However, none of this analysis 
supports treating the sale of a foreign Elect-Out Arrangement 
differently from the sale of a domestic Elect-Out Arrangement.
---------------------------------------------------------------------------
    \14\ Tech. Adv. Mem. 92-14-011 (April 3, 1992); Tech. Adv. Mem. 95-
04-001 (January 27, 1995).
---------------------------------------------------------------------------
    Based on the foregoing, adoption of the proposed technical 
correction to section 1012(i)(18) of TAMRA would properly reflect 
Congressional intent and the appropriate scope of section 761(a).
    Thank you for your consideration of this proposal. If you have any 
further questions or need any additional information, please do not 
hesitate to contact us.

            Respectfully submitted,

                        Christine L. Vaughn and Thomas Crichton, IV

                                 

                                               Washington, DC 20515
                                                   January 15, 2004

The Honorable Bill Thomas
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Mr. Chairman:

    In response to your request for written comments on H.R. 3654, the 
Tax Technical Corrections Act of 2003, I hereby submit the following 
request.
    With Reps. Crane and McCrery as original cosponsors, I introduced a 
bill on April 11, 2003 that would amend the Internal Revenue Code of 
1986, to allow certified U.S. legal tender coins to be acquired by 
individual retirement accounts and other individually directed pension 
plan accounts. That bill, H.R. 1820, was referred to Ways and Means 
Committee.
    I feel H.R. 3654 is an appropriate vehicle for H.R. 1820 because 
H.R. 3654 contains technical corrections to the Taxpayer Relief Act of 
1997, the last piece of legislation which addressed the issue of 
certain coins being allowed in individual retirement accounts and other 
individually directed pension plan accounts. In that instance, the menu 
of coins available for inclusion in these plans was expanded to allow 
platinum coins within the plans. As a result, today IRA investors can 
choose from a range of investment options in physical precious metals, 
in both coin and bar form.
    As way of background, prior to 1981, all rare coins qualified as 
investments for self-directed retirement accounts. The Economic 
Recovery Tax Act of 1981 added section 408(m) to the U.S. Code, which 
created a category of ``collectibles'' that were no longer eligible for 
future investments in self-directed retirement accounts, such as 
Individual Retirement Accounts (IRAs). This category of collectibles 
included such things as wines, rugs, jewelry, antiques, and art. 
Arbitrarily, two long-tested and respected investments, rare coins, 
including investment grade U.S. legal tender coinage, and precious 
metals, were inappropriately included in this category, limiting 
investors' freedom of choice for investments.
    The irony is that these coins are already allowed in corporate 
pension plans. The American investing public should not be penalized 
for not having access to corporate pension options. Because U.S. legal 
tender coin investments can be included in defined contribution pension 
and profit-sharing plans, it is only equitable to provide such 
investment options for self-directed retirement plans. Removing current 
restrictions would allow individual investors, whose total investment 
program (or much of it) consists of their IRAs or other self-directed 
accounts, to select from the same investment options currently 
available to corporate investors.
    Such legislation simply expands the menu of options for investors 
and allows them to diversify and stabilize their retirement portfolios. 
Some investors are understandably nervous having all their investment 
``eggs'' in a volatile stock market basket. Allowing tangible assets in 
an investment portfolio creates certain safeguards for the overall 
investment portfolio ``basket.'' Indeed, as current stock portfolios 
are losing value, the certified coin market has been extremely active 
and coin values have been rising.
    H.R. 1820 ensures that certified U.S. legal tender coins purchased 
for self-directed retirement accounts must be in the control of a 
qualified, third party trustee (as defined by the IRS), and not in the 
control of the investor. Also, coins eligible for inclusion in a self-
directed retirement account must be certified by a recognized, 
independent third-party grading service, i.e., graded and encapsulated 
in a sealed plastic case. Each coin, therefore, has a unique 
identification number, grade, and description. Further, liquidity is 
assured by including as eligible only those coins that trade on 
recognized national electronic coin exchanges, or that are listed by a 
recognized wholesale reporting service.
    The Joint Committee on Taxation has previously determined that the 
proposal to restore certified legal tender coins, as qualified 
investments will have negligible economic impact on federal revenues.
    I am hopeful that H.R. 1820 can be included within H.R. 3654, and 
if I can provide further information or answer any questions, please 
feel free to call on me or contact Chris Stanley on my staff at 53015.

            Sincerely,

                                         The Honorable David Vitter
                                                 Member of Congress

                                
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