[WPRT 109-6]
[From the U.S. Government Publishing Office]


109th Congress                                                    WMCP:
                            COMMITTEE PRINT                       
 1st Session                                                      109-6
_______________________________________________________________________

                                     


                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                               __________

                            WRITTEN COMMENTS

                                   on
 
        H.R. 3376, THE ``TAX TECHNICAL CORRECTIONS ACT OF 2005''


                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     
                            AUGUST 31, 2005

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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of Thursday, July 22, 2005, announcing request for 
  written comments on H.R. 3376, the ``Tax Technical Corrections 
  Act of 2005''..................................................     1

                                 ______

Accenture, Palo Alto, CA, Douglas G. Scrivner, letter............     2
AEGON USA, Inc., Cedar Rapids, IA, Arthur C. Schneider, letter...     4
Alticor Global Holdings, Inc., Linda Carlisle and Jonathan 
  Talisman, joint letter.........................................     8
American Apparel & Footwear Association, Arlington, VA, Kevin M. 
  Burke, statement...............................................    10
American Association of Port Authorities, Kurt J. Nagle, letter..    11
American Bankers Association, Ed Yingling, America's Community 
  Bankers, Diane Casey-Landry, Independent Community Bankers of 
  America, Camden R. Fine, joint letter..........................    13
American Council of Engineering Companies, Danielle Marks, letter    13
American Council of Life Insurers, Gregory F. Jenner, letter and 
  attachment.....................................................    15
American Electronics Association, Marie K. Lee, letter and 
  attachment.....................................................    17
American Forest & Paper Association, David G. Koenig, statement..    20
American Ocean Enterprises, Inc., APL, Ltd., Central Gulf Lines, 
  Inc., Maersk Lines Limited, Waterman Steamship Corp., American 
  Maritime Congress, Maritime Institute for Research and 
  Development, The Transportation Institute, joint letter and 
  attachment.....................................................    22
American Petroleum Institute, Mark W. Kibbe, statement...........    24
Association of American Publishers, Inc., Patricia Schroeder, 
  letter.........................................................    28
Boies, Schiller and Flexner LLP, Miami, FL, Michael Kosnitzky, 
  letter.........................................................    30
Cigar Association of America, Inc., Norman F. Sharp, letter......    32
Clark Consulting, Kenneth J. Kies, letter........................    34
Financial Executives International, Committee on Taxation, 
  Michael Reilly, letter.........................................    37
Florida Institute of Certified Public Accountants, Federal 
  Taxation Committee, Tallahassee, FL, Ignacio J. Abella, letter.    37
Levin, Carl, a U.S. Senator from the State of Michigan, Richard 
  Neal, a Representative in Congress from the State of 
  Massachusetts, Lloyd Doggett, a Representative in Congress from 
  the State of Texas, Rosa DeLauro, a Representative in Congress 
  from the State of Connecticut, Marion Berry, a Representative 
  in Congress from the State of Arkansas, Louise Slaughter, a 
  Representative in Congress from the State of New York, John 
  Lewis, a Representative in Congress from the State of Georgia, 
  joint letter...................................................    38
Mcintire School of Commerce, Charlottesville, VA, David W. LaRue, 
  letter.........................................................    39
Nalco Co., Naperville, IL, Michael R. Bushman, letter and 
  attachment.....................................................    43
National Association of Home Builders, James Tobin, statement....    45
National Association of Real Estate Investment Trusts, Tony M. 
  Edwards, statement.............................................    46
National Council of Farmer Cooperatives, Jean-Mari Peltier, 
  letter.........................................................    52
Nova Southeastern University Law Center, Fort Lauderdale-Davie, 
  FL, Gail Levin Richmond, J.D., statement.......................    55
Organization for International Investment, Todd M. Malan, letter.    56
Subpart F Shipping Coalition, Kenneth J. Kies, Clark Consulting, 
  Stephen Fiamma, Allen & Overy LLP, Warren Dean, Thompson Coburn 
  LLP, Alex Trostorff, Jones Walker, joint letter................    59
Tailored Clothing Association, David Starr, letter...............    64
Terech, John, Milan, MI, letter..................................    65
Williams & Jensen, LLC, David Starr, letter......................    66
      

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
July 22, 2005
No. FC-12

                      Thomas Announces Request for

                   Written Comments on H.R. 3376, the

               ``Tax Technical Corrections Act of 2005''

    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 on H.R. 
3376, the ``Tax Technical Corrections Act of 2005.''
      

BACKGROUND:

      
    On Thursday, July 22, 2005, Chairman Bill Thomas introduced H.R. 
3376, the ``Tax Technical Corrections Act of 2005.'' The legislation 
contains technical corrections needed with respect to recently enacted 
tax legislation.
      
    ``We hope the public will review the proposed text and provide 
comments during the coming weeks on any amendments that may be 
necessary so that Congress can send appropriate legislation to the 
President as soon as possible,'' stated Thomas.
      
    The bill includes technical corrections to provisions in the 
``American Jobs Creation Act of 2005'' (P.L. 108-357), and other 
legislation.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the record must follow the appropriate link on the hearing page of 
the Committee website and complete the informational forms. From the 
Committee homepage, http://waysandmeans.house.gov, select ``109th 
Congress'' from the menu entitled, ``Hearing Archives'' (http://
waysandmeans.house.gov/Hearings.asp?congress=16). Select the request 
for written comments for which you would like to submit, and click on 
the link entitled, ``Click here to provide a submission for the 
record.'' Once you have followed the online instructions, completing 
all informational forms and clicking ``submit'' on the final page, an 
email will be sent to the address which you supply confirming your 
interest in providing a submission for the record. You MUST REPLY to 
the email and ATTACH your submission as a Word or WordPerfect document, 
in compliance with the formatting requirements listed below, by close 
of business Wednesday, August 31, 2005. Finally, please note that due 
to the change in House mail policy, the U.S. Capitol Police will refuse 
sealed-package deliveries to all House Office Buildings. For questions, 
or if you encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item 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. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies 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. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission 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.

                                 

                                                          Accenture
                                        Palo Alto, California 94304
                                                    August 31, 2005

The Honorable Charles Grassley
Chairman
Senate Finance Committee
219 Dirksen Office Building
Washington, DC 20510

The Honorable Max Baucus
Ranking Member
Senate Finance Committee
511 Hart Office Building
Washington, DC 20510

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

The Honorable Charlie Rangel
Ranking Member
House Ways and Means Committee
2354 Rayburn Office Building
Washington, DC 20515

Dear Chairmen Grassley and Thomas and Ranking Members Baucus and 
Rangel:

    On behalf of Accenture and its 120,000 employees, including the 
28,000 U.S. employees of Accenture LLP, we thank you for the 
opportunity to comment on recently introduced legislation, the Tax 
Technical Corrections Act of 2005, pursuant to your press release of 
August 8, 2005.
    As we have discussed with you and your staff, the ``corporate 
inversion'' provisions as passed in the Jobs Creation Act of 2004 are 
broad in their scope. Accordingly, it could potentially lead to the 
unintended application of the law to the transactions of a foreign 
multinational company. Without further guidance or clarification, 
taxpayers cannot be certain regarding a company's status under section 
7874. Now, more than ever, public companies need certainty. Although we 
believe that we are not impacted by the statute, we urge Congress to 
provide a technical correction to provide greater certainty.
    It is important to emphasize that Accenture did not engage in an 
inversion transaction.

      Prior to May 2001, Accenture operated as a series of 
separate legal entities organized under the laws of more than 40 
countries, including the U.S. Accenture, as a multinational enterprise, 
has never operated under a U.S. parent corporation or partnership.
      In May 2001, Accenture completed the transaction in which 
the owners of U.S. and non-U.S. businesses each combined the separate 
locally owned businesses into one global corporate structure.
      In July 2001, Accenture successfully completed an initial 
public offering.
      Accenture did not engage in an inversion by moving its 
place of incorporation from the U.S. to Bermuda. The U.S. General 
Accounting Office (GAO) confirms this. A GAO report in October 2002 did 
not include Accenture on a list of government contractors that 
undertook corporate inversions. In media coverage of the report, the 
GAO's Director of Tax Issues, James White, said: ``Since Accenture 
didn't have a corporate structure to begin with, it didn't have a 
corporate structure to invert.'' The GAO report provides a brief 
history of Accenture's pre-incorporation operation, explaining that 
Accenture was a series of locally owned partnerships coordinated 
through a Swiss entity.
      Accenture pays, and has always paid, tax in each of the 
countries in which we generate income. Accenture LLP pays U.S. tax on 
income generated by our U.S. operations, and the appropriate entities 
pay tax on non-U.S. income in the countries in which that income is 
generated. In fact, Accenture's annual effective tax rate as disclosed 
in its Securities and Exchange Commission (SEC) filings is high 
compared to those of most companies. As reported in our most recent 
10K, our annual effective tax rate for the fiscal year ending August 
31, 2004 was 32%.

    Although Accenture did not engage in an inversion transaction, the 
broad scope of the JOBS Act continues to create uncertainty.

      Along with many other companies and commentators, we have 
previously expressed our concerns regarding the legislation's broad 
scope and its potential for misapplication to the various types of 
restructurings of foreign multinational companies.
      While transactions before March 4, 2003, and internal 
restructurings are not among the transactions that the legislation was 
apparently intended to target, a taxpayer cannot be certain given the 
breadth of the statute.
      The broad reach of the legislation is particularly a 
concern to taxpayers where the legislation applies to a transaction 
that was completed before March 4, 2003. As a result, every 
multinational company must examine past transactions to determine if 
the legislation applies.
      The consequence to taxpayers of an unclear statute is, 
for example, as reflected in our most recent 10K filing: ``We do not 
believe this legislation applies to Accenture. However, we are not able 
to predict with certainty whether the U.S. Internal Revenue Service 
will challenge our interpretation of the legislation. Nor are we able 
to predict with certainty the impact of regulations or other 
interpretations that might be issued related to this legislation. It is 
possible that certain interpretations could materially increase our tax 
burden.'' The consequence of inappropriate or retroactive application 
is to impose on non-U.S. operating income a U.S. income tax burden that 
neither the multinational company nor the investment community could or 
should have anticipated.

    We as taxpayers, and our shareholders, need greater certainty. We 
believe that by clarifying the proper scope of the legislation through 
technical corrections legislation and guidance, Congress would be 
providing the greater certainty that is appropriate in today's 
environment.
    We appreciate having the opportunity to provide our views on this 
important matter.

                                                Douglas G. Scrivner
                                      General Counsel and Secretary

                                 

                                                    AEGON USA, Inc.
                                               Washington, DC 20515
                                                    August 19, 2005

The Honorable William Thomas, Chairman
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515-6348

Dear Chairman Thomas,

    On behalf of AEGON USA, I am writing to comment on the proposed 
legislation to make technical changes in the tax code, H.R. 3376, the 
Tax Technical Corrections Act of 2005. I appreciate the opportunity to 
raise the following points with the Ways and Means Committee about the 
potential inclusion of an additional technical correction related to 
the identified straddle amendments included in H.R. 4520, the American 
Jobs Creation Act of 2004 (the ``Act'').
    The specific concern with this provision is that it could be 
interpreted so as to result in a permanent disallowance of a loss 
rather than a loss deferral. In addition, there is some question as to 
the effectiveness of the provision prior to the promulgation of 
guidance by the Secretary. Based on discussions with the staff of the 
Ways and Means Committee, Finance Committee and Joint Committee of 
Taxation, as well as with Treasury Department personnel, it does not 
appear that the intent of the new provision was to eliminate losses 
altogether or to delay the effective date of the new rules until 
regulations are issued. As a result, we ask you to consider making 
technical corrections to this provision to ensure it operates as 
intended.

Background
    Included in the Act was a provision revising the existing rules on 
straddles, including a reform that was viewed as simplifying the law 
for so-called identified straddles. To avoid abuses, the general 
straddle rules require a taxpayer to defer losses incurred until gains 
in offsetting positions are realized. Previous law provided an 
exception to this rule for certain identified straddles. The new 
statutory language replaced this exception with a basis adjustment rule 
and appeared to provide more flexibility for taxpayers to use 
identified straddles. This new provision is of interest to AEGON USA 
and other insurers because, as insurance companies, we are in the 
business of managing risks, including investment risks. We frequently 
enter into offsetting positions in the ordinary course of our business 
to conservatively manage such risks. As a result, we have transactions 
that could be subject to the general straddle rules, absent the ability 
to use alternatives such as identified straddles.\1\
---------------------------------------------------------------------------
    \1\ There are other potential exceptions to the straddle rules, 
such as the tax hedging rules of IRC section 1221(a)(7) or other 
hedging provisions (Treas. Reg. section 1.988-5 and Treas. Reg. section 
1.1275-6). However, these hedging exceptions are narrowly drawn and are 
not always available to an insurance company with a large, actively 
managed investment portfolio.
---------------------------------------------------------------------------
    The legislation passed last year was initially viewed by us and 
others in the insurance industry as a welcome clarification and 
simplification of the identified straddle rules. Unfortunately, recent 
comments by Treasury and IRS personnel have suggested an interpretation 
outside the apparent intent of Congress. As noted above, their 
interpretation is that the new statutory language might result in the 
permanent denial of a loss, rather than loss deferral. Such a dramatic 
change in the straddle rules is not discussed in any of the legislative 
history, nor does it fit with the simplification and clarification 
theme of the provision.
    Moreover, taxpayers who wish to use the identified straddle regime 
need clarification that, until the Treasury Department issues 
regulations, they may use reasonable methods to identify straddles. 
Congress enacted the new identified straddle rules effective October 
22, 2004, and taxpayers should not be forced to wait for Treasury to 
issue regulations before being able to utilize the new rules.
    It seems that these two issues should appropriately be addressed in 
a technical corrections bill to ensure that the provision operates as 
intended.

Identified Straddle Exception--Losses in Excess of Unrecognized Gains
    The tax straddle rules (IRC section 1092) generally require 
taxpayers to defer realized losses on a straddle position to the extent 
the taxpayer has unrecognized gains on offsetting straddle positions. 
Losses in excess of unrecognized gains, however, are not limited by the 
straddle rules. In addition, losses that are deferred under the 
straddle rules can be carried forward indefinitely and become available 
to the taxpayer in a future year to the extent such deferred losses 
exceed unrecognized gains on offsetting straddle positions. This can 
occur, for example, when gains on an offsetting straddle position are 
recognized upon a subsequent sale of the offsetting position.
    Although the basic goal of the straddle rules can be easily 
described, application of the rules can be problematic. The straddle 
rules are written in a manner that assumes that the offsetting 
positions in a tax straddle are readily determinable. While this may be 
true for an investor with a limited number of positions, determining 
the positions that make up a tax straddle is a difficult and uncertain 
proposition for a taxpayer, such as an insurance company, holding and 
managing a large investment portfolio in the ordinary course of its 
business. When the tax straddle rules were originally enacted in 1981, 
Congress directed the Secretary to promulgate guidance providing a 
method to be used by taxpayers in the determination of the positions 
making up a tax straddle. No such guidance, however, was ever provided 
by the Secretary.
    Section 888 of the Act significantly extended the availability of 
the prior law exception for qualifying ``identified straddles.'' The 
amendments made by the Act reflect Congress' frustration with the 
failure of the Secretary to provide required guidance on the 
application of the straddle rules to ``unbalanced'' straddle positions, 
which the Secretary had been instructed to provide under the original 
straddle legislation adopted in 1981.\2\
---------------------------------------------------------------------------
    \2\ In 2001, in a study of simplification alternatives for the tax 
code, the Joint Committee on Taxation proposed several changes to the 
straddle rules including what we believe is the first version of a 
proposal to statutorily clarify the identified straddle regime; a 
proposal that was ultimately enacted as Section 888 of the American 
Jobs Creation Act of 2004 (P.L. 108-357). In the discussion by the 
Joint Committee on Taxation, the staff noted that the Treasury 
Department had not issued regulations since 1981, when Congress had 
directed Treasury to issue regulations related to identified straddles 
and unbalanced straddles. The staff recommended a new identification 
regime as well as a capitalization regime that ultimately was included 
in the American Jobs Creation Act of 2004 (Joint Committee on Taxation, 
Study of the Overall State of the Federal Tax System and 
Recommendations for Simplification, Pursuant to Section 8022(3)(B) of 
the Internal Revenue Code of 1986 (JCS-3-02), pp. 339-342).
---------------------------------------------------------------------------
    Under the new ``identified straddle'' rules, taxpayers are allowed 
to identify the offsetting positions making up the straddle. The 
positions making up an identified straddle are then excepted from the 
general straddle loss deferral rules, and are instead subject to the 
special rules for identified straddles. The identified straddle rules 
are important in providing taxpayers some certainty over the positions 
making up a tax straddle, thereby precluding such identified positions 
from being arbitrarily considered a tax straddle with respect to other 
positions on an after-the-fact basis.
    In addition to exempting the offsetting positions of an identified 
straddle from the general straddle loss deferral rules, the new 
identified straddle rules also provide that realized losses from any 
position included in an identified straddle are added to the tax basis 
of those offsetting identified positions with ``unrecognized gain,'' 
but only to the extent of the amount of such unrecognized gain. For 
purposes of the identified straddle rules, ``unrecognized gain'' is 
defined as the excess (if any) of (1) the fair market value of a 
position as of the date a loss on an offsetting position in the 
identified straddle is realized (the ``determination date'') over (2) 
the fair market value of the position on the date the identified 
straddle was entered into. Realized losses that are added to the tax 
basis of an offsetting identified straddle position are essentially 
deferred until the offsetting position is subsequently disposed of. 
Losses in excess of ``unrecognized gains'' are exempt from the straddle 
rules.
    Notwithstanding what appears to be clear Congressional intent to 
provide an exception to the straddle rules for qualifying identified 
straddles, the amendments made by the Act could be construed in a 
manner that would permanently disallow realized losses on offsetting 
positions in an identified straddle. Specifically, IRC section 
1092(a)(2)(A)(ii) requires that the tax basis of each of the identified 
offsetting positions in the identified straddle be increased ``by an 
amount that bears the same ratio to the loss as the unrecognized gain 
with respect to such offsetting position bears to the aggregate 
unrecognized gain with respect to all such offsetting positions.'' IRC 
section 1092(a)(2)(A)(iii) then states that ``any loss described in 
clause (ii) shall not otherwise be taken into account for purposes of 
this title.'' (Emphasis added.)
    It seems clear that the ``not otherwise taken into account'' 
reference in IRC section 1092(a)(2)(A)(iii) was simply intended to 
prevent taxpayers from attempting to ``double dip'' or utilize the same 
loss twice. In other words, to the extent any portion of a realized 
loss is added to the tax basis of an offsetting position included in an 
identified straddle, that portion of the loss would not otherwise be 
deductible. The legislative history to the Act confirms this intent by 
stating that any loss with respect to an identified position that is 
part of an identified straddle ``cannot otherwise be taken into account 
by the taxpayer or any other person to the extent that the loss 
increases the basis of any identified positions that offset the loss 
position in the identified straddle.'' (Emphasis added.)
    Notwithstanding this logical interpretation, some Administration 
personnel have publicly stated that the modified identified straddle 
rules can be interpreted to cause permanent denial of a portion of a 
taxpayer's realized losses on positions included in an identified 
straddle--a result that is contrary to both the normal straddle loss 
deferral rules, as well as to the exception provided for qualifying 
identified straddles. If such an interpretation were correct, the 
modified identified straddle rules would actually result in a dramatic 
shift in policy from deferring losses to permanently denying losses. 
This would mean that an amendment that was intended to provide 
taxpayers with relief from the general straddle rules would instead 
result in identified straddles being subjected to more onerous rules. 
This potential interpretation of the identified straddle rules, however 
remote, makes the modified identified straddle rules a potential tax 
trap.
    Technical corrections to the amended identified straddle rules are 
necessary to make it clear that realized losses resulting from an 
offsetting position in an identified straddle that exceed unrecognized 
gains on other positions included in the identified straddle do not 
disappear, but are available in the year realized.

Example of Losses in Excess of Unrecognized Gains
    Because a straddle involves ``offsetting positions,'' one might 
wonder why a loss on one position would not be offset by unrecognized 
gain in the other position. It is possible, however, for an identified 
straddle to have a result in which there is no unrecognized gain on an 
offsetting position. Such a result may occur, for example, when an 
unrelated risk that is not offset causes the value in the offsetting 
position to decrease.
    For example:
    In the ordinary course of its business, an insurance company buys a 
corporate bond for $95 to back its insurance liabilities. Because the 
company is concerned that interest rates will rise, it also enters into 
an interest rate swap to hedge this risk. Assume that the company 
properly and timely identified the bond and the swap as the positions 
making up an ``identified straddle'' under new IRC Sec. 1092(a)(2).
    If interest rates rise, the bond market value may drop to $92, but 
the swap will be worth $3. If interest rates fall, the bond market 
value may increase to $97, but the swap will be worth ($2). In both 
situations, the company is economically in the same position. If the 
swap were to be sold in the first instance, a $3 gain would be 
recognized. Under the new identified straddle rule, if the swap were to 
be sold in the second instance, the basis of the bond would be 
increased by the $2 realized loss on the swap.
    However, assume that interest rates fall as in the second scenario 
and that the bond's credit rating also is downgraded. Assume that as a 
result of these events, the bond's market value falls to $80, while the 
swap value is ($2). If the swap were to be sold in this situation, the 
treatment of the $2 realized loss is not clear under the new statutory 
language because the loss exceeds the amount of unrecognized gain 
(which is $0) on the offsetting position.
    Under the Administration's potential interpretation of the new 
identified straddle language, the taxpayer in the above example would 
be permanently denied the $2 true economic loss on the swap if there is 
not an equal amount of unrecognized gain on the offsetting bond. It 
appears obvious that this result is not appropriate and was not 
intended as part of the amendments to IRC Sec. 1092(a)(2).

Technical Correction Needed
    Our concerns about the identified straddle language result from 
public comments made by both Treasury and IRS officials who have stated 
that a literal interpretation of the new language could result in loss 
denial rather than loss deferral. One of the same Treasury officials 
also indicated that clarifying the operation of this provision might 
not be possible by way of regulations, noting that ``[f]rankly I don't 
know how we in the administration would correct that.'' (``Officials 
Cite Problems with Changes to the Straddle Rules,'' Tax Notes, June 6, 
2005, p. 1229-30). The clear implication is that the statute must be 
corrected by a technical correction.
    Representatives from AEGON USA have met with the Joint Committee on 
Taxation and the respective staffs of the tax writing committees. At 
this stage, no one has suggested that Congress had intended (in the 
straddle language adopted) to deny losses completely. The legislative 
history does not suggest such an outcome either. As such, we believe 
that this issue is appropriate for a technical correction to clarify 
the application of the new identified straddle provision in cases where 
losses from an identified straddle position exceed unrecognized gains 
on identified offsetting positions.
    The legislative history clearly supports the conclusion that 
Congress did not intend to deny losses as is illustrated in the example 
above. Further, as noted above, the relevant legislative history 
indicates that losses in excess of unrecognized gains may be taken 
immediately, by stating that ``Any loss with respect to an identified 
position that is part of an identified straddle cannot otherwise be 
taken into account by the taxpayer or any other person to the extent 
that the loss increases the basis of any identified positions that 
offset the loss position in the identified straddle.'' (H. Rpt. 108-
755, American Jobs Creation Act of 2004, Conference Report to Accompany 
H.R. 4520, pp. 756-57) (emphasis added). To the extent the losses in 
the example set out above do not increase the basis of any identified 
offsetting positions in the straddle, the reasonable interpretation of 
the new statutory language and the relevant legislative history is that 
the taxpayer should be able to immediately deduct such a loss. This 
legislative history is repeated in the Blue Book for the 108th 
Congress. (Joint Committee on Taxation, ``General Explanation of Tax 
Legislation Enacted in the 108th Congress'' (JCS-5-05), May 2005, p. 
484).

Identified Straddle Exception--Effectiveness
    Finally, Treasury officials have also suggested that the new 
identified straddle provisions do not take effect unless and until the 
Secretary prescribes regulations specifying, among other items, the 
proper methods for clearly identifying a straddle as part of an 
identified straddle.
    The Administration's suggestion that the new identified straddle 
rules are not effective unless and until regulations are promulgated by 
the Secretary does not appear to have any support in the statute itself 
or the accompanying legislative history. This interpretation also seems 
wholly inconsistent with the rationale for amending IRC section 
1092(a)(2) itself, namely the failure of the Secretary to have 
prescribed regulations pursuant to the 1981 legislative mandate 
obligating the Secretary to establish guidance for unbalanced straddle 
positions.
    The Joint Committee on Taxation, in explaining the reasons why the 
identified straddle rules were changed, states ``While the prior-law 
rules provided authority for the Secretary to issue guidance concerning 
unbalanced straddles, the Congress was of the view that such guidance 
was not forthcoming. Therefore, the Congress believed that it was 
necessary to provide such guidance by statute.'' (Joint Committee on 
Taxation, ``General Explanation of Tax Legislation Enacted in the 108th 
Congress'' (JCS-5-05), May 2005, p. 483). In fact, Treasury has had the 
opportunity to issue regulations for nearly 23 years, and it has chosen 
not to do so. It may take significant time for any such future guidance 
from Treasury. The statute's language, on its face, applies to 
positions established on or after October 22, 2004. Therefore, we 
suggest a technical correction making it clear that a taxpayer can use 
a reasonable method to identify the positions making up an ``identified 
straddle'' until such time as the Treasury issues regulations under IRC 
section 1092(a)(2).

Proposed Technical Corrections
    We respectfully submit the attached technical correction language 
as a proposal that would ensure that the new identified straddle 
provision operates as intended and cannot be interpreted to permanently 
deny realized losses that exceed unrecognized gains.
    The suggested language in subclause I is drawn directly from the 
legislative history. (See, e.g., H. Rpt. 108-755, American Jobs 
Creation Act of 2004, Conference Report to Accompany H.R. 4520, p. 
756). We believe this approach--which confirms that losses from 
identified straddle positions that exceed unrecognized gains on 
offsetting positions are available in the year realized--is supported 
by the legislative history and a fair reading of the statute.
    Alternatively if the Committee determines that the intent of the 
modified identified straddle rules was to parallel the general straddle 
loss deferral rule, a second option would be to capitalize all losses 
realized on positions included in an identified straddle, not just 
losses up to the amount of ``unrecognized gain'' on offsetting 
positions. We could support an interpretation that requires 
capitalization of the full amount of realized losses on positions 
included in an identified straddle since this alternative would at 
least provide taxpayers with assurances as to the positions making up a 
tax straddle. This clarification would in and of itself be valuable in 
that it would provide taxpayers with certainty as to the operation of 
the straddle rules and, as a result of the basis adjustments to 
offsetting positions, the time at which losses would eventually be made 
available. The attached proposed technical correction does not reflect 
such a broad policy change and, if this approach were adopted, further 
revisions to the proposed technical correction to IRC section 
1092(a)(2) would be required.
    We also suggest a clarification to explicitly allow taxpayers to 
use any reasonable method to identify straddles unless and until the 
Treasury issues regulations.

Conclusion
    Thank you for the opportunity to comment on the H.R. 3376, the Tax 
Technical Corrections Act of 2005. I hope you will look favorably on 
including the requested technical corrections in the legislation.

                                                Arthur C. Schneider
                        Senior Vice President and Chief Tax Officer

                                 

                                      Alticor Global Holdings, Inc.
                                               Washington, DC 20001
                                                    August 31, 2005

House Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515

    To whom it may concern:

    In response to the request for additional technical corrections 
dated July 21, 2005, we would like to submit, on behalf of our client 
Alticor Global Holdings Inc., the following request regarding the 
treatment of wholly owned partnerships under new section 199. The 
recently introduced technical corrections bill (H.R. 3376/S. 1447) adds 
a provision that generally would treat a partnership and the members of 
an expanded affiliated group (EAG) as a single taxpayer (for purposes 
of determining domestic production gross receipts) where the 
partnership is owned entirely by members of the EAG. For the reasons 
described below, we respectfully request that a similar rule be applied 
to situations where a partnership is wholly owned by entities that, in 
turn, are owned entirely by a common parent. We see no policy reason to 
distinguish between the two situations.

Applicable Facts
    Alticor Global Holdings Inc. (AGHI) is a U.S. S corporation. It is 
the common parent of several entities that are collectively engaged in 
the business of manufacturing and selling a wide range of consumer 
products. These products are sold in more than 60 countries under 
trademarks and trade names owned by AGHI and its affiliates. AGHI owns 
indirectly 100 percent of Alticor Enterprises Inc. (AEI), which, in 
turn, is the common parent of Alticor Distribution Inc. (ADI) and 
Access Business Group LLC (ABGL). AGHI intends to elect to treat AEI 
and ADI as ``qualified subchapter S subsidiaries.'' ABGL is a 
subchapter C corporation.
    ADI and ABGL collectively own 100 percent of Access Business Group 
International LLC (ABGIL), a Delaware limited liability company that is 
treated as a partnership for Federal tax purposes. ABGIL was formed as 
a partnership rather than as a corporation for local law purposes. (A 
diagram of this corporate structure is attached to this letter.)
    ABGIL owns title to the manufacturing intangibles for most of the 
products produced by the group. It also performs the research and 
development for the group. ABGIL does not itself manufacture the 
products it distributes, but rather contracts with ABGL, the group's 
manufacturer, to produce the products. Under the contracts, ABGL has 
the right to use ABGIL's manufacturing intangibles and to affix ABGIL's 
trademarks and trade names to the products. The products are 
manufactured entirely in the United States.

Section 199
    Section 199 was enacted under the American Jobs Creation Act of 
2004 to encourage the domestic production of goods and to help replace 
the export tax incentives. In general, Section 199 effectively provides 
taxpayers with a deduction for a portion of their income derived from 
property manufactured or produced ``by the taxpayer in whole or 
significant part within the United States.''
    To fully encourage domestic production, Congress has evinced a 
policy that integrated producers should be able to treat both their 
production income and their distribution income as subject to Section 
199. This is true regardless of whether the distribution activity takes 
place in the same entity as the production function, or is undertaken 
by a related party. For example, by providing that the members of an 
EAG are treated as a single taxpayer, Congress clearly intended that 
the Section 199 production incentive apply to both the production 
income and the distribution income of an integrated group. Similarly, 
the example in the legislative history regarding the roasting of coffee 
beans also indicates that distribution income qualifies for the benefit 
of Section 199 in the case of an integrated producer. Finally, the 
recently introduced technical corrections bill provides that a 
partnership and the members of an EAG will be treated as a single 
taxpayer if the partnership is wholly-owned for its entire taxable year 
by the members of the EAG. Thus, if the partnership distributes 
products produced by members of the EAG, the technical correction would 
allow both the production income derived by members of the EAG and the 
distribution income derived by the partnership to qualify for the 
benefits of Section 199.
    It is also important to note that tax incentives under both the 
Foreign Sales Corporation regime and the Extraterritorial Income regime 
would apply to the distribution income of an integrated production 
group. Section 199 was a replacement for these two regimes and the 
statutory scheme is similar in many respects.
    The failure to adopt our requested technical correction may cause 
anomalous results and provide some wholly owned corporate groups with a 
competitive advantage over others. For example, distributor A is a 
partnership owned by two C corporations, both of which are members of 
the same EAG. One of A's corporate partners manufactures all of A's 
products in the United States. Distributor B is a major competitor of 
distributor A. Distributor B is a partnership that is owned by a QSS 
and a C corporation, both of which are wholly owned by a common parent 
S corporation. The C corporation partner manufactures all of B's 
products in the United States. A and B both own all of the 
manufacturing intangibles related to the production of their respective 
group's products.
    In the case of distributor A, both the production income earned by 
A's corporate affiliate and the distribution income earned by A would 
qualify as QPAI under the recently introduced technical corrections 
bill (because the partnership and the members of the EAG would be 
treated as a single taxpayer). By contrast, in the case of distributor 
B, the manufacturing income earned by B's corporate affiliate may not 
qualify as QPAI (under the benefits and burdens test of Notice 2005-
14). Obviously, if B were denied similar treatment to A, it would 
provide A (and its corporate affiliates) a significant competitive 
advantage over B (and its corporate affiliates). As with A, both the 
production income and the distribution income derived by B and its 
corporate affiliates should be eligible for treatment as QPAI.

Requested Technical Correction
    In light of the foregoing issues, we respectfully request that a 
technical correction be adopted clarifying the application of section 
199 to situations where a partnership is wholly owned by entities that, 
in turn, are owned entirely by a common parent. We suggest that either 
of the following two alternatives would properly address our issues. We 
believe either change is consistent with the legislative policy 
underlying section 199.

Option 1
    For purposes of determining domestic production gross receipts, if 
a group of entities are wholly owned (directly or indirectly) by a 
common parent corporation during the entire taxable year of such parent 
corporation, each such entity and the common parent corporation shall 
be treated as a single taxpayer.

Option 2
    The definition of ``expanded affiliated group'' in section 199 
could be amended to include S corporations by modifying the language of 
section 199(d)(4)(B)(ii) to read as follows: ``without regard to 
paragraphs (2), (4), and (8) of section 1504(b).''
    We very much appreciate the opportunity to submit our comments 
regarding proposed technical corrections. We would be happy to meet 
with you to discuss these issues further. Also, if you have any 
questions or need additional information, please call either of us.

                                                     Linda Carlisle
                                                       White & Case

                                                  Jonathan Talisman
                                               Capitol Tax Partners

                                 
 Statement of Kevin M. Burke, American Apparel & Footwear Association, 
                          Arlington, Virginia

    On behalf of the American Apparel & Footwear Association (AAFA), I 
am pleased to submit comments to the Committee on Ways and Means 
regarding some of the undefined issues contained in the American Jobs 
Creation Act of 2004, P.L. 108-357. AAFA is the national trade 
association representing over 400 companies in apparel, footwear and 
other sewn products companies, and their suppliers. AAFA members 
include American companies that produce clothing, footwear, textile 
inputs, and related equipment in the United States and around the 
world. Many of our domestic manufacturing members specialize in 
supplying sewn products to the military. Our motto, ``We Dress the 
World,'' accurately portrays the market our members represent, on the 
commercial side and the military.
    AAFA previously submitted comments to the Department of Treasury 
regarding the promotion of two key points for consideration in 
Treasury's interpretation of P.L. 108-357. Unfortunately, the Treasury 
did not agree with AAFA's position on these issues; therefore, it is up 
to the Committee to effect any change in the Treasury's current 
interpretation.
    Our main area of focus was having domestic contract manufacturing 
arrangements considered as separate qualifying production activities 
for the purposes of the manufacturing tax deduction. As design/
development is an integral part of the manufacturing process for 
apparel and footwear production, it is our position that companies 
investing in this domestic production should also benefit from the 
manufacturing tax deduction proportional to the amount of production 
completed domestically.
    H.R. 3376 does not currently address either of the issues important 
to AAFA. On behalf of our members I urge the committee to consider 
providing Treasury with additional direction in these areas so that 
small businesses that engage primarily in subcontracting and 
multinational companies that perform their design and development 
domestically can also benefit from these changes in the tax code. Under 
the current interpretation of the Department of Treasury, contract 
manufacturing is not eligible for the deduction as only the taxpayer 
owning the tangible property during the manufacturing process is 
considered the manufacturer.

Contract Manufacturing
    Both domestic and multinational companies routinely contract 
portions of the manufacturing process to other companies. Recognizing 
domestic contract manufacturing arrangements as part of the 
manufacturing process is paramount for apparel and footwear companies 
and especially for the smaller companies as subcontract jobs can make 
up a significant part of their business. Many AAFA domestic 
manufacturers regularly accept subcontracts from larger companies and 
also subcontract portions of the highly competitive government 
contracts.
    Government contracts for apparel and footwear, as with other 
industries, typically span several years. The difficulties of 
accurately predicting long-term work flow, the rise and fall of demand 
and cost of supplier components among other factors, can contribute to 
an overload on occasion. Rather than forfeit a contract, any company 
will attempt to subcontract a portion of the original contract. In 
addition, in most manufacturing processes and businesses, in order to 
remain competitive, develop niche markets and specialized expertise. 
This fosters an atmosphere ripe for subcontracting specific portions of 
a program. There may be one or only a few companies that have the 
capabilities to perform certain functions in the apparel and footwear 
manufacturing process and thus contributing to the additional demand 
for subcontracting particular portions.
    Under current U.S. Code 26 Section 263A, production or the term 
produce ``includes construct, build, install, manufacture, develop, or 
improve.'' Also under this section, ``the taxpayer shall be treated as 
producing any property produced for the taxpayer under a contract with 
the taxpayer; except that only costs paid or incurred by the taxpayer 
(whether under such contract or otherwise) shall be taken into account 
in applying'' direct and indirect costs to the taxpayer. AAFA supports 
the inclusion of this language in the interpretation of P.L. 108-357, 
which would allow the producer or taxpayer, including subcontractors, 
of the apparel and footwear manufacturing process to benefit from the 
manufacturing tax deduction.
    Under P.L. 108-357, the deduction is based on the lesser of the 
qualified production activities (QPA) income of the taxpayer or taxable 
income. The qualified production activities income is equal to the 
excess of the domestic production gross receipts over the sum of (1) 
the cost of goods sold allocable to such receipts, (2) other 
deductions, expenses, or losses directly allocable to such receipts and 
(3) a ratable portion of other deductions, expenses, and losses not 
directly allocable to such receipts or another class of income. 
Domestic production gross receipts, as it applies to AAFA members, 
consists of the receipts for any lease, rental, license, sale, 
exchange, or other disposition of qualifying production property which 
was manufactured, produced, grown, or extracted by the taxpayer in 
whole or in significant part within the United States. Qualifying 
production property as it applies to AAFA members is the tangible 
personal property--apparel and footwear.
    The deduction is based on profit--the cost for producing the item 
from a subcontract basis is included in the original taxpayer's overall 
costs. Therefore, the deduction for the original taxpayer is not for 
the same profit received by the subcontractor to make a portion of the 
product. This allows for both the subcontractor and original taxpayer 
to take advantage of the deduction. AAFA supports separately computed 
deductions for the original taxpayer and the contractor.

Design and Development
    An essential part of the process for manufacturers of apparel and 
footwear and for most manufacturing is design and development. The 
process of producing a design and parlaying that design into a sample 
product is the beginning of the manufacturing process. In most 
instances, without the design and development, there would be no 
production. Many U.S. apparel and footwear companies complete all of 
the design and development in the U.S. and under the current 
interpretation of Treasury, packaging, design, and development are not 
included in the consideration for the application of the ``significant 
part'' test for the purposes of determining tangible personal property.
    As the face of apparel and footwear manufacturing continues to 
evolve due to the removal of quotas worldwide on January 1, 2005, the 
current practice of completing the design and development in the U.S. 
may change. Companies are consolidating their sourcing in fewer 
countries and with the advent of manufacturing cities, which include 
every component in the manufacturing process in one location--from the 
supply of yarn, fabric, thread, buttons, zippers, cutting and sewing, 
what is there to keep this part of the process in the U.S. Due to this 
type of sweeping transformation in the way apparel and footwear 
companies do business, an incentive to keep the design and development 
in the U.S. could not come at a better time. The manufacturing 
deduction would serve as incentive for companies to continue to make a 
substantive investment in the people and process that make up this 
important phase of the manufacturing process. The ability to take 
advantage of a QPA deduction for this part of the manufacturing process 
will contribute significantly toward keeping this element of the 
process in the U.S. Therefore, as an integral part of the apparel and 
footwear manufacturing process, AAFA strongly urges the Committee to 
consider providing Treasury with more specific direction that would 
allow companies performing their design and development in the U.S. to 
benefit from the deduction in P.L. 108-357.
    AAFA appreciates the opportunity to comment on the Committee on 
Ways and Means regarding H.R. 3376. If you have any questions about 
AAFA's position on any of the above comments, please feel free to 
contact Felicia Cheek at 703.797.9039.

                                 

                           American Association of Port Authorities
                                         Alexandria, Virginia 22314
                                                    August 31, 2005

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

Dear Chairman Thomas,

    I am writing to you today regarding your request for written 
comments on H.R. 3376, the ``Tax Technical Corrections Act of 2005.'' 
Recently, Congressmen Dave Weldon and Christopher Shays introduced H.R. 
3319 to amend the IRS Code to exempt domestic intermodal cargo 
containers and cargo loaded on a vessel by means of wheeled technology 
from the Harbor Maintenance Tax. The American Association of Port 
Authorities (AAPA) urges you to include this provision in your 
technical corrections bill. AAPA represents the leading public port 
authorities in the Western Hemisphere, and these comments reflect the 
position of our U.S. members. Most maritime trade that flows in and out 
of the U.S. transits through AAPA member ports.
    As the primary congressional committee dealing with trade, you are 
well aware of the importance of trade to this nation and the 
projections for increases in the coming years. Ports are looking 
strategically at how to accommodate this growth, especially in terms of 
transporting cargo out of the port facilities in a way that will not 
overload our current highway and rail transportation systems. Road 
congestion and projected increases in trade volumes have spurred many 
in the maritime industry, including the Maritime Administration, to try 
to encourage the use of short sea shipping to carry some of the 
domestic load. This industry is well developed in Europe, and maritime 
transportation is underutilized in the U.S. for domestic shipping.
    In the United States, most cargo imported or exported through 
seaports is transported by truck or rail. Congestion is evident at most 
large U.S. ports, many of which are also located in heavily congested 
urban areas. A March 2003 report from the U.S. Chamber of Commerce, 
Trade and Transportation: A Study of North American Port and Intermodal 
Systems, highlighted this growth in trade and the need to ``proactively 
address the current crisis in the capacity of our intermodal system.'' 
Short sea shipping is one part of this solution.
    Domestic short sea shipping would also allow this country to 
accommodate the increase in cargo trade by providing an alternative to 
the already overburdened highways and railroads. Unfortunately, the 
Harbor Maintenance Tax has been identified by experts as a cost 
disincentive to the development of this new industry. Trucking rates 
and rail rates are very competitive with short sea shipping. Exempting 
certain domestic cargo from the Harbor Maintenance Tax would encourage 
the expansion of short sea shipping.
    Established in 1986, the Harbor Maintenance Tax (HMT) is an ad 
valorem tax on the value of commercial cargo. The tax is deposited into 
a trust fund to pay 100% of maintenance dredging of harbors, which is 
conducted by the U.S. Army Corps of Engineers. Unfortunately, Congress 
has not allowed full use of this trust fund, and there is currently a 
surplus of $2.6 billion.
    There are currently several exemptions from the HMT, and we hope 
your committee will endorse an additional exemption for certain 
intermodal cargo shipped on coastal routes or rivers between U.S. ports 
as outlined in H.R. 3319. The current law excludes ferries, cargo 
moving to and from Alaska and Hawaii other than Alaskan crude oil, and 
any cargo associated with vessel movements to and from most of the 
inland waterways system. We are not encouraging a full domestic 
exemption, only a tax law change that would impact containerized cargo 
and cargo loaded on vessels by means of wheeled technology. Bulk cargos 
would not be exempt, since much of this type of cargo already uses the 
maritime system heavily.
    As with any tax change, it is important to consider the cost. 
Preliminary estimates put the cost of this new exemption at under $2 
million a year. The Corps of Engineers reports that for FY'02 (the most 
recent report on the Harbor Maintenance Trust Fund) the total of all 
HMT domestic payments was $28 million. Also, total domestic cargo was 
only 4.3% of the total HMT collected in 2002. This provision would only 
be a small subset of the domestic total. With a $2.6 billion surplus in 
the trust fund that continues to grow each year, adding this exemption 
to the law would not harm the trust fund.
    Short sea shipping is an exciting opportunity that shows great 
promise for helping the U.S. address the cargo congestion brought on by 
growth of trade in this country. By recommending a change in the tax 
law to provide an additional exemption for certain domestic cargos, 
your committee would be doing a great service to this nation by 
promoting the transportation solutions for tomorrow.
    The American Association of Port Authorities thanks you for your 
consideration of this important maritime issue and would be very 
interested in discussing this matter further as you develop changes to 
the Tax Technical Corrections Act of 2005.

                                                      Kurt J. Nagle
                                                          President

                                 

                                       American Bankers Association
                                               Washington, DC 20036
                                                    August 30, 2005

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

Dear Chairman Thomas:

    The undersigned banking trade associations offer our support for 
the Technical Tax Corrections Act of 2005 (H.R. 3376 and S. 1447). Late 
last year, the enactment of the American Jobs Creation Act of 2004 
(``AJCA'') provided many positive and pro-growth tax reforms, including 
significant Subchapter S Corporation reforms. Fortunately, the 
Technical Tax Corrections Act of 2005 will ensure that provisions 
included in AJCA can be properly implemented as intended by Congress. 
We support this important effort and urge lawmakers to quickly pass the 
Technical Tax Corrections Act as introduced.
    We are especially pleased to see that the Technical Tax Corrections 
Act of 2005 includes several needed technical corrections to the S 
Corporation reforms included in the AJCA.
    Specifically, the Technical Tax Corrections Act helps clarify that 
eligible Subchapter S shareholders include IRAs holding stock in a 
bank, bank holding company, or thrift holding company. The legislation 
will also make clear that the scope of the passive income exemption 
provision encompasses thrift holding companies. Moreover, important 
language is included that will clarify that a qualified Subchapter S 
subsidiary is a separate entity for purposes of information returns. 
This legislation will also ensure that the estate of a family member is 
treated as a member of the family for purposes of determining the 
number of shareholders. Finally this measure will verify that eligible 
adopted and foster children will be treated as ``lineal descendants'' 
or ``common ancestors'' in the definition of ``members of the family'' 
in the tax code.
    These crucial technical corrections to the Subchapter S reforms in 
the AJCA will provide our membership with much-needed clarity. We 
appreciate your efforts and urge speedy passage of this important 
legislation.

                                                        Ed Yingling
                                                  President and CEO

                                                 Diane Casey-Landry
                   President and CEO of America's Community Bankers

                                                     Camden R. Fine
      President and CEO of Independent Community Bankers of America

                                 

                          American Council of Engineering Companies
                                               Washington, DC 20005
                                                    August 31, 2005

    The American Council of Engineering Companies (ACEC) submits these 
comments in regard to the Tax Technical Corrections Act of 2005. ACEC 
is the business association of America's engineering industry, 
representing approximately 5,500 independent engineering companies 
throughout the United States engaged in the development of America's 
transportation, environmental, industrial, and other infrastructure. 
ACEC thanks the Ways and Means Committee for their work to ensure that 
the implementation of the American Jobs Creation Act (P.L. 108-357) is 
carried out smoothly and to solicit the input of the regulated 
community on this process.

Definition of Engineering
    The proposed definition in the Notice for ``engineering and 
architectural services'' is consistent with IRS Regulation Section 
1.924(a)-1T(e)(5) and -1T(e)(6):
    (b) Engineering services. Engineering services in connection with 
any construction project include any professional services requiring 
engineering education, training, and experience and the application of 
special knowledge of the mathematical, physical, or engineering 
sciences to those professional services such as consultation, 
investigation, evaluation, planning, design, or responsible supervision 
of construction for the purpose of assuring compliance with plans, 
specifications, and design.
    While this definition is consistent with previous relevant IRS 
definitions, it could be interpreted to exclude engineering services 
that are related to a construction project, but occur after 
construction is completed. ACEC suggests Congress include in the Tax 
Technical Correction Act language to amend the definition to:
    (b) Engineering services. Engineering services in connection with 
any construction project include any professional services requiring 
engineering education, training, and experience and the application of 
special knowledge of the mathematical, physical, or engineering 
sciences to those professional services such as consultation, 
investigation, evaluation, planning, design, responsible supervision of 
construction for the purpose of assuring compliance with plans, 
specifications, and design or the inspection of the constructed 
facilities after construction.
    This amended definition would clarify that projects like bridge 
inspections and other post-construction engineering studies, 
evaluations and audits would qualify for the deduction. These 
engineering services are crucial to ensuring the safety of construction 
projects.

Accounting Burden
    Engineering firms undertake an enormous volume of projects in a 
given year. For our larger firms, the contracts associated with 
engineering and construction/construction management annually number in 
the thousands, and the projects associated with those contracts would 
be more than ten-thousand for any given year. Additionally, projects 
are further broken down into task and sub-tasks, significantly 
expanding the level of detail. These facts are consistent throughout 
the architectural and engineering industry.
    The IRS Notice on Section 199 requires that the determination of 
Qualified Production Activities Income be:
    ``On an item-by-item basis (and not, for example, on a division-by-
division, product line-by-product line, or transaction-by-transaction 
basis) and is the sum of QPAI derived by the taxpayer from each item.''
    The Notice also states that (emphasis added):
    ``The Engineering or architectural services must relate to real 
property, must be performed in the United States, and the taxpayer 
providing these services must be able to substantiate that the services 
relate to a construction project within the United States.''
    ACEC believes that the rigorous requirements for determining QPAI 
``on an item-by-item basis'' will impose a substantial and unreasonable 
burden to taxpayers which will overwhelm tax departments and result in 
firms not taking advantage of the tax treatment that they are entitled 
to. The ``item-by-item basis'' could result in each invoice and job 
scope needing to be reviewed in order to determine whether the Section 
199 requirements are met.
    ACEC requests that Congress include in the Tax Technical 
Corrections Act an instruction to the IRS and the Treasury to examine 
methods that would reduce the accounting burden for engineering firms 
who are affected by the item-by-item provision. These methods should 
include the allowance of statistical sampling as already provided in 
Rev. Procs. 2004-29, 2004-34 and Rev. Proc. 81-70.

Real Property Restriction
    ACEC is concerned about troubling and restrictive language that 
requires that ``engineering or architectural services must relate to 
real property . . .'' which was contained in the Tax Technical 
Corrections Act and also in Treasury Notice 2005-14, the Interim 
Guidance on Income Attributable to Domestic Production Activities 
[hereinafter, Notice]. The Notice defined real property as 
``residential and commercial buildings (including items that are 
structural components of such buildings), inherently permanent 
structures other than tangible property in the nature of machinery, 
inherently permanent land improvements, and infrastructure.'' Also, the 
Notice defines construction to mean ``the construction of real 
property. . . .'' Section 4.04(11). The Notice also states that 
``tangible personal property (as defined under section 4.04(8)(b)) (for 
example, appliances, furniture and fixtures) that is sold as part of a 
construction project is not considered real property for this 
purpose.''
    ACEC recommends that the provision requiring that engineering 
services ``must relate to real property'' in order to qualify for the 
tax relief included in the American Jobs Creation Act (P.L. 108-357) 
should be removed from the Tax Technical Corrections Act and that 
Congress should instruct the Treasury Department to provide a more 
inclusive definition for ``real property'' as related to construction 
projects. This language, as written, will result in the non-
applicability of the provision to engineering work that Congress 
intended the provision to apply to and will create an undue compliance 
burden for engineering firms.
    The real property restriction in its current form will create 
difficulties for engineering firms in determining whether they qualify 
for the benefit. In many cases, an engineering and/or architectural 
design firm or a construction firm may design or build a project that 
contains both real and personal property elements. With the many 
projects that engineering firms undertake each year, the task of 
determining what percentage of the project fee related to real property 
and what percentage related to personal property will be extremely 
complex and will require the firm to expend considerable resources. 
This may result in many firms not taking advantage of the tax treatment 
that Congress intended.
    In addition to the compliance aspect, certain work that qualified 
for the export tax deduction under Domestic International Sales 
Corporation (DISC), the Foreign Sales Corporation (FSC), and the 
Extraterritorial Income (ETI) would not qualify for the Domestic 
Production Activities benefit if the proposed real property restriction 
is included in the final regulation. For example, the design and 
construction of clean rooms, power plants, steam generating units, and 
oil refineries would not benefit for the deduction, which was not 
Congress' intent. Congress intended for this legislation to provide 
much needed tax relief and to ensure that U.S. business can remain 
competitive in the global marketplace. The restriction for real 
property would not fulfill those goals.
    ACEC strongly recommends the current language relating to real 
property should be removed from the Tax Technical Corrections Act and 
that Congress should instruct the Treasury Department to reconsider 
their definition of ``real property'' as related to construction 
projects in any regulations that are promulgated.
    ACEC and our member organizations stand ready to provide you with 
any additional information necessary to help you implement the American 
Jobs Creation Act. In addition, we realize that other issues of concern 
may arise during the implementation of H.R. 4520 and look forward to 
continuing this dialogue as needed.
    Thank you in advance for your consideration of these matters. 
Please do not hesitate to contact us with any questions.

                                                     Danielle Marks
                           Director, Finance and Regulatory Affairs

                                 

                                  American Council of Life Insurers
                                               Washington, DC 20001
                                                    August 31, 2005

Mr. Robert Winters
Chief Tax Counsel
Committee on Ways and Means
United States House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Mr. John Buckley
Minority Chief Tax Counsel
Committee on Ways and Means
United States House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Gentlemen:

    Attached are the comments of the American Council of Life Insurers 
regarding a technical correction that we feel is required to section 
888(a) of the American Jobs Creation Act of 2005 (P.L. 108-357). The 
ACLI is the principal trade association of life insurance companies, 
representing 356 members that account for, in the aggregate, and 80 
percent of the assets of legal reserve life insurance companies in the 
United States.
    In the course of conservatively investing company assets for the 
benefit of their insurance customers, our companies will often engage 
in hedging transactions to manage interest rate and other risks. 
Therefore, they are keenly interested in seeing that the changes to 
Internal Revenue Code section 1092 contained in section 888(a) of the 
Jobs Act work correctly and clearly reflect Congressional intent. Our 
comments below explain the issue and our proposed solution.
    We appreciate the opportunity to provide our comments and would 
welcome the opportunity to work with Congressional staff on this issue.

                                                  Gregory F. Jenner
                                 ------------
         Proposed Technical Correction to Section 888(a) of the
                       American Jobs Creation Act

    Issue_Section 888(a) of the Jobs Act amended Internal Revenue Code 
Section 1092(a)(2), which sets forth the tax treatment of identified 
straddles. Before the Jobs Act amendment, the identified straddle rule 
provided an exception from the general loss deferral regime applicable 
to straddles. The new rules now require that if a loss is realized on 
an identified straddle position, the basis of the remaining offsetting 
position(s) of the identified straddle shall be increased by the 
realized loss. The new rules are effective for positions established on 
or after October 22, 2004.
    Importance_Life insurance companies often use hedging techniques to 
manage interest rate and other risks. Because of this, life insurers 
may have transactions that could be subject to the general straddle 
rules (i.e., loss deferral) absent the ability to use narrowly crafted 
relief provisions such as identified straddles.
    Need for Correction_Initially the Jobs Act amendment was viewed as 
a welcome simplification of the identified straddle rules. The straddle 
rules are intended to provide a clear reflection of income by deferring 
loss until gain in offsetting positions is recognized. However, recent 
comments by Treasury and IRS officials have indicated that the new 
statutory language could be interpreted to result in a permanent loss 
denial or a loss deferral in amounts exceeding the losses that would be 
deferred under the general straddle rules, a result that is contrary to 
the clear reflection of income principle.
    As enacted, the amendments to section 1092(a)(2) appear to assume 
that, if one position of the identified straddle is disposed of at a 
loss, there will be gain in the offsetting position. The new rules do 
not provide what the result will be where there is no gain in the 
offsetting position. The absence of a specific rule has prompted 
Treasury and IRS officials to suggest that this may result in a 
permanent denial of the loss, a result we believe would be entirely 
inappropriate from a tax policy perspective.
    Moreover, where there is insufficient unrecognized gain in the 
remaining position(s) to offset the entire loss, the new rules appear 
to result in a deferral of the entire loss, whereas the general 
straddle rules would permit immediate deduction of the excess loss. 
Nothing in the legislative history of the provision suggests that 
Congress intended to enact a more onerous rule than prior law.
    Finally, it has been suggested by certain Treasury and IRS 
officials that regulatory guidance may be required before taxpayers can 
take advantage of these new rules. While the statute, by its terms, is 
clearly self-executing, we believe it is essential that this be 
clarified by Congress in order to prevent frustration of Congressional 
intent.

Specific Changes_
    1.  Section 1092 should be amended to specify the treatment of any 
realized loss on a position in an identified straddle where such loss 
exceeds the unrecognized gain in the offsetting position(s). One 
possible approach is to allow the excess loss to be deductible 
currently. This would be a simple extension of the general straddle 
rules that defer losses on straddles only to the extent of the 
unrealized gains in the offsetting positions.
    2.  If Congress concludes that no loss should be allowed until the 
offsetting position is disposed of, a rule is still needed under 
section 1092 to cover situations in which there is no gain in the 
offsetting position. In those instances, the loss should not be 
permanently denied. Instead, the loss should be allocated to the basis 
of the offsetting position so that the loss would be recovered upon 
disposition of the offsetting position. This could be done in several 
tax neutral ways, including allocating based on fair market value or 
basis. We would be happy to work with Congressional staff with respect 
to this issue.
    3.  The provision relating to Treasury guidance should be amended 
to provide that, until such time as there is any such guidance, any 
reasonable identification method is sufficient. Alternatively, 
legislative history with respect to the technical corrections bill 
could provide a similar clarification for taxpayers and regulators.

                                 

                                   American Electronics Association
                                               Washington, DC 20004
                                                    August 31, 2005

The Honorable William Thomas, Chairman
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Charles Grassley, Chairman
The Honorable Max Baucus, Ranking Minority Member
Committee on Finance
United States Senate
219 Dirksen Senate Office Building
Washington, DC 20510

Dear Chairmen Thomas and Grassley and Senator Baucus:

    On behalf of AeA (American Electronics Association), I am writing 
to propose an additional provision be included in the foreign 
repatriation-related provisions in the Tax Technical Corrections Act of 
2005, H.R. 3376 and S. 1447.
    AeA is the nation's largest high-tech trade association, 
representing more than 2,500 member companies that span the high-
technology spectrum, from software, semiconductors, and computers to 
Internet technology, advanced electronics, and telecommunications 
systems and services. AeA members include small, medium, and large 
high-tech companies.
    Section 965 (often referred to as the ``Homeland Investment Act'' 
or ``HIA'') allows U.S. corporations to elect, for one year only, to 
claim a dividends received deduction (``HIA DRD'') equal to 85 percent 
of qualifying cash dividends (``HIA dividends'') received from 
controlled foreign corporations (``CFCs''). The HIA DRD allows U.S. 
corporations to receive HIA dividends subject to a 5.25% effective tax 
rate, instead of the normal 35% tax rate. HIA is intended to encourage 
U.S. corporations to repatriate cash from foreign subsidiaries for 
investment in the United States.
    As described below, currently there is uncertainty regarding the 
portion of a distribution from a CFC that qualifies as a distribution 
out of earnings and profits (``E&P'') attributable to previously taxed 
income (``PTI'') as defined in section 959(c), i.e., the portion of the 
distribution that is not a dividend. With respect to the year for which 
the section 965 election is in effect (the ``HIA election year''), this 
uncertainty complicates the calculation of the HIA DRD and therefore 
discourages maximum repatriations of offshore cash to the United 
States.
    In order to eliminate this uncertainty, a technical correction 
should provide that the portion of a distribution from a CFC made 
during the HIA election year (``HIA distribution'') which is treated as 
a PTI distribution will be based on the CFC's undistributed PTI for the 
most recent taxable year ending on or before June 30, 2003, as reduced 
by subsequent PTI distributions. This technical correction would be 
consistent with other provisions of section 965, which provide for 
computations based on amounts that are fixed prior to the HIA election 
year.

Issue
    There are three components of a distribution under section 965: (1) 
the distribution of PTI; (2) the base period dividend distribution; and 
(3) the HIA dividend distribution of deferred earnings. Section 965 
currently allows taxpayers to determine with certainty some, but not 
all, of the material elements of the required calculation. While the 
statute allows taxpayers to determine the base period amount (as 
defined in section 965(b)(2)(B)) and the deferred earnings amount (as 
defined in section 965(b)(1)) with certainty, there is no certainty 
with respect to the amount of a CFC's PTI that will have to be taken 
into account to determine either (i) the dividends which are declared 
to satisfy the base period dividend requirement, or (ii) the HIA 
dividend itself. This lack of certainty may prevent taxpayers from 
maximizing the amount of HIA distributions, and therefore prevent 
taxpayers from maximizing the amount of offshore earnings reinvested in 
the United States.
    Absent further guidance, a CFC must distribute all of its PTI, 
determined as of the end of the HIA election year, before it can 
distribute a HIA dividend. The amount of the CFC's PTI as of the end of 
the HIA election year, however, will not be known with certainty on the 
date that it makes an HIA distribution. The tax return for the HIA 
election year will not be filed until several months after the date of 
the HIA distribution. The tax return for the prior taxable year also 
may be filed after the date of the HIA distribution if the distribution 
is made early in the HIA election year.
    In addition, there may be amended returns or audit adjustments for 
various open years up to and including the HIA election year that 
affect PTI but which are not finally determined until after the date of 
the HIA distribution. Despite the Service's laudable initiative to 
bring large taxpayers current in their audit cycles, many large 
taxpayers with offshore earnings which potentially could be reinvested 
in the United States still have several taxable years open to 
examination. Under the statute as currently drafted, any adjustment by 
audit or amended return that increases PTI for any taxable year through 
the HIA election year would retrospectively reduce the HIA dividend, 
dollar for dollar, by recharacterizing a portion of the HIA 
distribution as a PTI distribution. Similarly, changes to PTI may 
affect whether the taxpayer received dividends in excess of the base 
period amount.
    This uncertainty complicates the calculation of the HIA dividend 
and the tax accrual for that dividend. Corporate tax managers are under 
increasing pressure to precisely quantify the amount of the income tax 
accrual for all transactions. For many taxpayers, the decision whether 
to make an HIA distribution is a very significant one, which can be 
made only with a full understanding of the financial consequences. The 
existing uncertainty makes that determination difficult, which 
discourages maximum reinvestment of offshore earnings in the United 
States.

Proposed Technical Correction
    A technical correction should be enacted to provide taxpayers the 
same certainty in determining the PTI amount for purposes of 
calculating the HIA dividend that exists in determining the base period 
amount and the deferred earnings amount. Both of those amounts are 
determined as of June 30, 2003. The technical correction should provide 
that, for purposes of determining the amount of HIA dividends and 
dividends that are necessary to meet the base period amount, the amount 
of the distributing CFC's PTI that is taken into account shall not 
exceed the PTI amount as shown on the most recent return filed for the 
most recent taxable year ending on or before June 30, 2003 (excluding 
amended returns filed after that date) (``Fixed PTI Amount''), reduced 
by actual PTI distributions made prior to the HIA election year.
    This proposal would allow taxpayers to calculate their HIA dividend 
with certainty and to distribute the maximum allowable HIA dividend. 
Taxpayers would not be required to base their HIA calculations on 
tentative estimates of a PTI amount that could change by the end of the 
HIA election year or that could be affected by subsequent audit 
adjustments.
    Under this proposal, taxpayers will be required to distribute the 
full Fixed PTI Amount prior to distributing an HIA dividend. That 
distribution could occur in any taxable year after the year in which 
the Fixed PTI Amount is determined, up to and including the HIA 
election year. Therefore, if an amount equal to the Fixed PTI Amount 
had been distributed prior to the HIA election year, distributions 
would first be made from other E&P, rather than from PTI, up to the 
applicable base period dividend amount (to the extent not paid by other 
CFCs) and HIA dividend limits. The CFC's PTI account would remain 
intact, and distributions in excess of the CFC's share of the base 
period dividend and the HIA dividend would be attributable to the CFC's 
PTI account under normal rules.
    If it is ultimately determined that, as of the end of the HIA 
election year, a distributing CFC had PTI in excess of the Fixed PTI 
Amount, that additional PTI would remain PTI of the CFC. Distributions 
exceeding the CFC's share of the base period dividend and the HIA 
dividend made during the HIA election year, or any distribution made in 
a subsequent year, would be made out of such additional undistributed 
PTI and other E&P under the normal ordering rules. Accordingly, any 
uncertainty over the CFC's actual PTI amount would not affect the 
calculation of the HIA dividend.
    The Service may require taxpayers to attach a statement to the 
return for the HIA election year designating the E&P pools from which 
these distributions are made.
    I have attached a draft of the proposed technical correction as an 
exhibit.

Policy Reasons for Change
    Congress enacted section 965 to encourage cash repatriation to fund 
investment and job creation in the United States. The proposed 
technical correction furthers this goal because it increases the 
certainty with which taxpayers can calculate the HIA dividend, thereby 
encouraging taxpayers to maximize repatriations to and investment in 
the United States.
    The proposal is consistent with other elements of section 965 which 
provide certainty in computing the amount of the HIA dividend by 
allowing taxpayers to rely on tax attributes that are fixed prior to 
the beginning of the HIA election year.
    All other existing limits under section 965 are preserved. The 
amount of the HIA dividend still could not exceed the distributing 
CFC's current or accumulated E&P in excess of undistributed PTI, as 
determined after all audit adjustments for all years through the HIA 
election year. In addition, this proposal does not affect the amount of 
deferred earnings that are eligible for the HIA DRD, and it does not 
alter the base period computation or the reinvestment plan requirement.
    In light of the fact that some companies have already made an HIA 
distribution, it may be appropriate to provide this resolution to 
affected taxpayers by election.
    This uncertainty is created by the unique situation that an HIA 
distribution can be made for only one taxable year, while the 
underlying elements that determine the amount of the HIA dividend may 
cover several years. This proposed technical correction will eliminate 
this unique uncertainty, and therefore will encourage maximum 
reinvestment and job creation in the United States. Since it deals with 
the one-time event of section 965, it will have no future impact on any 
taxpayer after the completion of the HIA distribution.
    Thank you for the opportunity to submit this proposed addition to 
the Tax Technical Corrections Act of 2005. If you have any questions 
about this letter, please feel free to contact me at (202) 682-4448.

                                                       Marie K. Lee
                                                        Tax Counsel

                               __________
                                Exhibit
New Section 965(c)(4). To be inserted between current Section 965(c)(3) 
and Section 965(c)(4).

(4)
      COORDINATION WITH SECTION 959.--Notwithstanding the rules of 
section 959, distributions of earnings and profits made by a controlled 
foreign corporation, which has a United States shareholder that has 
made an election under this section, shall be applied for the year of 
election in the following manner:
     (A)
          First, out of earnings and profits described in section 
959(c)(1) and (c)(2), in the order specified in section 959(c), up to 
the amount of such earnings and profits shown on the most recent return 
filed for the most recent taxable year ending on or before June 30, 
2003 (except that amended returns filed after June 30, 2003, shall not 
be taken into account), reduced by the amount of distributions that
         (i)
             are excluded from gross income under section 959, and
         (ii)
             are distributed after the most recent taxable year ending 
on or before June 30, 2003, and before the taxable year for which the 
election under this section is in effect;
     (B)
          Second, out of earnings and profits described in section 
959(c)(3), to the extent that dividends received by the United States 
shareholder from other controlled foreign corporations during such year 
are less than the amount stated in section 965(b)(2)(B);
     (C)
          Third, out of earnings and profits described in section 
959(c)(3), to the extent of the amount distributed by such controlled 
foreign corporation which qualifies for the deduction provided in 
subsection (a)(1); and
     (D)
          Fourth, out of earnings and profits in the manner described 
in section 959(c).

New Section 959(g).

(g)
      COORDINATION WITH SECTION 965.--For special rules relating to the 
application of this section in years for which an election is made 
under section 965(f), see section 965(c)(4).

                                 

                                American Forest & Paper Association
                                               Washington, DC 20036
                                                    August 31, 2005

The Honorable William Thomas
Chairman, Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    The American Forest & Paper Association is pleased to submit the 
following comments on H.R. 3376, the Tax Technical Corrections Act of 
2005.
    The American Forest & Paper Association (AF&PA) is the national 
trade association for the forest products industry. We represent more 
than 200 companies and related associations that engage in or represent 
the manufacturers of pulp, paper, paperboard and wood products. 
America's forest and paper industry ranges from the state-of-the-art 
paper mills to small, family owned sawmills and some 10 million 
individual woodlot owners. The U.S. forest products industry is vital 
to the nation's economy. We employ approximately 1.3 million people and 
rank among the top ten manufacturing employers in 42 states with an 
estimated payroll of $50 billion. Sales of the paper and forest 
products industry top $230 billion annually in the U.S. and export 
markets. We are the world's largest producer of forest products.
    AF&PA very much appreciates the inclusion of technical corrections 
clarifying the enhanced reforestation amortization (sec. 2(j)(2)(B) of 
H.R. 3376) and the definition of open-loop biomass under IRC section 45 
(sec. 2(t)(2) of H.R. 3376).
    Our comments focus on section 2(t)(2) of H.R. 3376, which clarifies 
the definition of open-loop biomass under IRC section 45:
    (2) Clause (ii) of section 45(c)(3)(A) [definition of open-loop 
biomass] is amended by inserting `or any nonhazardous lignin waste 
material' after `cellulosic waste material.'
    The description of H.R. 3376 indicates that this provision 
``clarifies that open-loop biomass resources include both cellulosic 
and lignin waste material.'' Joint Committee on Taxation, Description 
of the ``Tax Technical Corrections Act of 2005,'' JCX-55-05, page 10.
    Subsequent to the introduction of H.R. 3376, this technical 
correction was enacted as part of the Energy Policy Act of 2005 (sec. 
1301(f)(2) of H.R. 6).
    AF&PA understands the legislative intent behind the word 
``nonhazardous'' was to ensure that hazardous materials do not qualify 
for the credit. Lignin is not a hazardous material. In the context of 
our processes that produces steam and electricity from lignin, however, 
we are concerned that there could be unintended confusion as explained 
below. Similarly, we understand that ``waste'' was included to ensure 
that the tax incentive did not create competition for woody-biomass 
material that could be used to make paper or solid wood products. 
However, as explained below, there could be unintended confusion 
resulting from a previous IRS ruling that, in another context, found 
lignin to not be considered ``waste.'' For these reasons AF&PA is 
seeking further clarification of this language (see also ``Written 
Statement for the Hearing Record,'' submitted by AF&PA to the 
Subcommittee on Select Revenue Measures, on June 6, 2005, copy 
attached).
    Wood is composed primarily of cellulose (wood fibers) held together 
by lignin (the fiber binding agent). The processing of wood for making 
paper has several stages. The first stage involves the use of pulping 
chemicals to dissolve wood into cellulose wood fibers and wood residues 
(mostly lignin). The cellulose wood fibers then are separated and 
further processed to become paper products. What remains is a 
combination of pulping chemicals and wood residues or lignin. This 
combination is referred to as pulping liquors. The next stage involves 
a process to separate the pulping chemicals from the wood residues or 
lignin. The pulping chemicals are recovered for reuse in the pulping 
process. The wood residues (lignin) are burned to generate heat for 
making steam and electricity.
    AF&PA requests two clarifications. First, a clarification that the 
wood residues are not considered hazardous because they are combined 
with pulping chemicals prior to their use to generate steam and 
electricity. Second, a clearer description of lignin to indicate it is 
a ``by product'' of the pulping process, rather than ``waste'' 
material. This is important because, in a different context, there is 
an interpretation by the Internal Revenue Service that lignin from the 
pulping process is not ``waste'' material (see Technical Advice 
Memorandum TAM 8722005, February 6, 1987).
    AF&PA therefore suggests the following change to the Tax Technical 
Corrections Act language cited above, with the changes noted in bold:
    (2) Clause (ii) of section 45(c)(3)(A) is amended by inserting `or 
any by product of wood or paper mill operations, including lignin in 
pulping liquors,' after `cellulosic waste material.'
    This clarification is consistent with the definition of biomass in 
new IRC section 48B(c)(4)(A) (relating to a new tax credit for 
qualifying gasification projects).
    The description of this provision should be modified to read:
    Open-loop biomass (including agricultural livestock waste 
nutrients) facility
    An open-loop biomass facility is a facility using open-loop biomass 
to produce electricity. Open-loop biomass is defined as (1) any 
agricultural livestock waste nutrients, or (2) any solid, nonhazardous, 
cellulosic waste material or by product of wood or paper mill 
operations, including lignin in pulping liquors, which is derived from 
certain forest-related resources, solid wood waste materials, or 
agricultural sources and which is segregated from other waste 
materials. Eligible forest-related resources are mill residues, 
precommercial thinnings, slash, and brush. Solid wood waste materials 
include waste pallets, crates, dunnage, manufacturing and construction 
wood wastes (other than pressure-treated, chemically-treated, or 
painted wood wastes), and landscape or right-of-way tree trimmings. 
Agricultural sources include orchard tree crops, vineyard, grain, 
legumes, sugar, and other crop by-products or residues. However, 
qualifying open-loop biomass does not include municipal solid waste 
(garbage), gas derived from biodegradation of solid waste, or paper 
that is commonly recycled. In addition, open-loop biomass does not 
include closed-loop biomass or any biomass burned in conjunction with 
fossil fuel (co-firing) beyond such fossil fuel required for start up 
and flame stabilization. (Excerpt from Statement of Managers of H.R. 6, 
page 17.)
    AF&PA appreciates the opportunity to present you with these 
comments. We would welcome the opportunity to discuss this issue with 
you or to answer any questions you may have.

                                                    David G. Koenig
                                               Director, Tax Policy
                               __________

    The American Forest & Paper Association (AF&PA) is the national 
trade association for the forest products industry. We represent more 
than 200 companies and related associations that engage in or represent 
the manufacturers of pulp, paper, paperboard and wood products. 
America's forest and paper industry ranges from the state-of-the-art 
paper mills to small, family owned sawmills and some 10 million 
individual woodlot owners. The U.S. forest products industry is vital 
to the nation's economy. We employ approximately 1.3 million people and 
rank among the top ten manufacturing employers in 42 states with an 
estimated payroll of $50 billion. Sales of the paper and forest 
products industry top $230 billion annually in the U.S. and export 
markets. We are the world's largest producer of forest products.
    Today, the U.S. forest products industry is facing serious domestic 
and international challenges. Since 1997, 101 pulp and paper mills have 
closed in the U.S., resulting in a loss of 70,000 jobs, or 32% of our 
workforce. An additional 67,000 jobs have been lost in the wood 
products industry since 1997. New capacity growth is now taking place 
in other countries, where forestry, labor, and environmental practices 
may not be as responsible as those in the U.S.
    Energy is the third largest operating cost for the forest products 
industry. In the pulp, paper and paperboard sector of the industry, 
energy makes up 10-15 percent of the total operating costs. Since 1972, 
our industry has reduced its average total energy usage by 17 percent 
through increased efficiencies in the manufacturing and production 
process. In addition, we have reduced our fossil fuel and purchased 
energy consumption by 38 percent, and increased our energy self-
sufficiency by 46 percent.
    The American Jobs Creation Act (H.R. 4520) included a provision to 
expand the Section 45 tax credit to include open-loop biomass. For 
purposes of the credit, open-loop biomass is defined as any solid, non-
hazardous, cellulosic waste material which is segregated from other 
waste materials and which is derived from forest-related resources, 
solid wood waste materials, or agricultural sources. Eligible forest-
related resources are mill and harvesting residues, pre-commercial 
thinnings, slash, and brush. The 2005 credit for electricity produced 
from open-loop biomass facilities is 0.9 cents per kilowatt hour 
compared with 1.9 cents per kilowatt hour of electricity generated from 
closed-loop biomass facilities. To qualify for the credit for both open 
and closed-loop biomass, the facility must be placed in service prior 
to January 1, 2006.
    The forest products industry is the largest user of biomass for 
energy production, which is used largely to fuel our wood and paper 
manufacturing facilities. In addition to biomass like bark, sawdust, 
and other residues from the wood harvesting and product manufacturing 
processes, the industry uses biomass in the form of ``spent pulping 
liquors.'' Spent pulping liquors are created as a residual during the 
pulping process, and the wood residuals (mostly lignin) are burned in a 
process that separates and recovers the chemicals for reuse and 
captures the heat value from the lignin to create steam and 
electricity. In total, the forest products industry currently uses 
biomass to generate 60% of its power needs. With continued research and 
development of new technologies, and expanded tax incentives, the 
potential exists to greatly increase our industry's capacity for energy 
production.
    Regarding Section 45, the placed in service date for facilities 
that produce electricity from open-loop biomass needs to be extended 
from January 1, 2006 to January 1, 2010. Such projects take several 
years to complete and the industry needs the certainty of knowing that 
the current tax credit will be available in the future to take the risk 
of making the investment. At the very minimum, Congress should extend 
the placed in service date to January 1, 2008 as the Administration 
proposed in its FY 2006 budget.
    Also, clarification is necessary to the Section 45 definition of 
open-loop biomass to ensure inclusion of the lignin content from spent 
pulping liquors used to produce electricity at new or expanded 
facilities. Wood is composed primarily of cellulose (wood fibers) held 
together by lignin. Wood bark is composed of hemicelluloses. Pulping 
chemicals are used to dissolve the wood used for making paper. The 
cellulose fibers become paper products, the pulping chemicals are 
recycled from recovery boilers for reuse in the pulping process, and 
the wood residues (mostly lignin) are used to generate heat for making 
steam and electricity.
    Finally, the current inflation adjusted tax credit of 0.9 cents per 
kilowatt hour needs to be increased to 1.5 cents per kilowatt hour to 
make the additional electricity produced competitive with other 
traditional forms of electric generation. The increased tax credit 
would provide a critical incentive for new investments in energy 
production facilities connected to current paper mill infrastructure, 
thus helping to improve the competitive position of the forest products 
industry.
    We appreciate the subcommittee's interest in our thoughts on the 
need to extend and modify the Open-Loop Biomass component of the 
Section 45 tax credit.

                                 

                                               Washington, DC 20006
                                                    August 31, 2005

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

Dear Chairman Thomas:

    The undersigned U.S. flag ocean carriers and associations are 
writing to propose certain technical corrections to the tonnage tax 
provisions (Subchapter R) of the American Jobs Creation Act. We would 
like to express our sincere appreciation for your efforts and those of 
the Congress to revitalize the U.S. shipping industry and to bring the 
taxation of U.S. shipping into conformity with global practices 
regarding the taxation of shipping. We note that H.R. 3376 as 
introduced contains certain provisions relating to the tonnage tax and 
we endorse those provisions. We have one additional suggestion that we 
offer as follows.
    The technical correction we propose would define the term 
``operating agreement'' which was introduced in the tonnage tax 
provisions late in the legislative process. The amendment would define 
the term consistent with industry practices and provide that operating 
agreement revenues received by a corporation otherwise eligible for 
tonnage tax treatment would also be subject to the tonnage tax regime. 
Whether a corporation meets the ``shipping activity'' requirement of 
the Code would, however, be determined without regard to the 
corporation's operating agreement. We enclose a more detailed 
explanation of the proposed amendment and legislative language for your 
consideration.
    The amendment meets the standards of a technical correction in that 
it defines terms not otherwise defined and clarifies the relation of 
such terms to the structure of the tonnage tax regime. We urge that 
these provisions be included in the Tax Technical Corrections Act.

                                   American Ocean Enterprises, Inc.
                                                          APL, Ltd.
                                           Central Gulf Lines, Inc.
                                               Maersk Lines Limited
                                     Waterman Steamship Corporation
                                         American Maritime Congress
                    Maritime Institute for Research and Development
                                       The Transportation Institute
                               __________

Legislative Language of Proposed Amendment
(a) Amendment Related to the American Jobs Creation Act of 2004.--
    (1) Amendment related to section 248 of the act.--Paragraph (8) of 
Subsection (a) of section 1355 of the Internal Revenue Code of 1986 is 
amended by adding at the end the following: ``An `operating agreement' 
means an agreement to provide vessel operating services in respect of a 
qualifying vessel, such as crew, technical, commercial, or other vessel 
management services or the provision of related equipment, tools, 
provisions, and supplies by the person providing the operating 
services. A vessel in respect of which an operating agreement exists 
shall be treated as bareboat (or sub-bareboat) chartered to the person 
providing services under the operating agreement and time chartered 
back to the other party to the agreement. This paragraph shall apply 
only in the case of a corporation that meets (or is a member of a 
controlled group that meets) the shipping activity requirement in 
subsection (c) without regard to this paragraph.''

General Explanation of Proposed Amendment
    Congress believed operators of U.S. flag vessels in international 
trade generally were subject to higher taxes than their international 
competitors, who benefited from tonnage tax and other preferential 
income tax regimes. Congress believed that this tax differential caused 
a steady and substantial decline of the U.S. industry and its well-
paying, unionized U.S. jobs.
    Therefore, Section 248 of the American Jobs Creation Act of 2004 
(the ``Jobs Act''), added a tonnage tax regime for the taxation of 
certain U.S. flag vessels. A provision stating that the term 
``charter'' includes an ``operating agreement'' was added in the 
conference. No definition of the term ``operating agreement'' was 
provided or included in the legislative history, and neither this 
provision nor the legislative history clarified the consequences of 
treating an ``operating agreement'' as a charter to the parties to such 
an agreement.
    The technical correction provides a definition of the term 
operating agreement that reflects customary practices in the industry, 
and provides that an operating agreement would be treated as a bareboat 
charter of the vessel to the operator and a time charter back to the 
person owning the vessel. This definition applies only to a corporation 
(or a member of a controlled group) that otherwise meets the statutory 
shipping activity requirement.
    An operating agreement is defined to include an agreement to 
provide vessel operating services in respect of a qualifying vessel, 
such as crew, technical, commercial or other vessel management services 
or the provision of related equipment, tools, provisions, and supplies 
by the person providing the operating services.
    Under the amendment, both the owner and the person providing the 
operating services qualify for tonnage tax treatment with respect to 
earnings realized from the operation of the vessel in a qualified 
trade.
    Because the proposed amendment would treat a vessel subject to an 
operating agreement as bareboat chartered to the person providing the 
operating services, the operator is permitted to count the vessel that 
is the subject of the operating agreement for purposes of meeting the 
``Shipping Activity Requirement'' applicable to the operator as is the 
other party to the operating agreement.
    In summary, this technical correction is needed to clarify 
application of the statute, reflect industry practices, and maintain 
the competitiveness of U.S. industry.

Technical Explanation of Proposed Amendment
    In the Conference on H.R. 4520, the American Jobs Creation Act of 
2004 (the ``Jobs Act''), Paragraph (8) of Subsection (a) of new section 
1355 of the Internal Revenue Code of 1986, as amended (the ``Code'') 
was added and provided that the term ``charter'' includes an 
``operating agreement.'' No definition of the term ``operating 
agreement'' was provided or included in the legislative history, and 
neither this provision nor the legislative history clarified the 
consequences of treating an ``operating agreement'' as a charter to the 
parties to such an agreement.
    Section 1355 of the Code is part of the alternative tonnage tax 
regime (Subchapter R) enacted by the Jobs Act, under which a 
``qualifying vessel operator'' may generally elect to be subject to the 
corporate income tax on certain notional shipping income in lieu of 
actual amounts of income from ``qualifying shipping activities.'' A 
``qualifying vessel operator'' is defined as any corporation who 
operates one or more qualifying vessels and who meets the shipping 
activity requirement of Subsection (c) of section 1355. For purposes of 
the first prong of the test, a person is generally considered to 
operate a qualifying vessel during any period that it either owns or 
charters (including time charters) the vessel (the ``Operates 
Requirement''). Although a person is generally not considered to 
operate or use a vessel that it charters out on bareboat charter terms, 
exceptions apply where the vessel is bareboat chartered to another 
member of such person's controlled group, or where the vessel is 
bareboat chartered to either a controlled group member or an unrelated 
person who sub-bareboat charters or time charters the same vessel back 
to the owner or another member of the controlled group (who ultimately 
uses the vessel as a qualifying vessel). The second prong of the test, 
the ``Shipping Activity Requirement,'' is met for any taxable year, if, 
on average during such year, at least 25 percent of the aggregate 
tonnage of qualifying vessels used by the corporation (or other members 
of the corporation's controlled group) were owned by such corporation 
or chartered to such corporation on bareboat charter terms.
    The first sentence of the attached technical corrections amendment 
provides a definition of an ``operating agreement'' that would cover 
agreements typically used in the shipping industry for the provision of 
vessel operating services in respect of a qualifying vessel.
    The second sentence of the proposed amendment clarifies how both 
parties to an operating agreement can qualify for the tonnage tax 
provisions in respect of a vessel subject to an operating agreement, 
assuming that the Shipping Activity Requirement and all of the other 
requirements of this Subchapter are met. Since the proposed amendment 
would treat such a vessel as bareboat chartered to the person providing 
the services under an ``operating agreement,'' such person is treated 
as satisfying the Operates Requirement. Furthermore, since the proposed 
amendment treats the vessel in respect of which an operating agreement 
exists as bareboat (or sub-bareboat) chartered to the person providing 
the services under the operating agreement and time chartered back to 
the other party to the agreement, such other party is also treated as 
satisfying the Operates Requirement, regardless of whether the parties 
to the operating agreement are members of the same controlled group.
    The third sentence of this proposed amendment limits applicability 
of this provision to corporations that meet (or are members of 
controlled groups that meet) the Shipping Activity Requirement without 
regard to the treatment of operating agreements as charters under this 
paragraph. Thus, a corporation will not meet the Shipping Activity 
Requirement and qualify for the tonnage tax provisions solely by reason 
of an operating agreement. However, if a corporation (or its controlled 
group) independently meets the Shipping Activity Requirement (by owning 
or bareboat chartering sufficient tonnage of other qualifying vessels), 
it will qualify for the tonnage tax provisions in respect of any 
qualifying vessel that it is treated as operating by reason of 
providing services under an operating agreement.

                                 
        Statement of Mark W. Kibbe, American Petroleum Institute
I. INTRODUCTION
    These comments are submitted by the American Petroleum Institute 
(API) for consideration by the U.S. House Committee on Ways and Means 
on H.R. 3376, the ``Tax Technical Corrections Act of 2005,'' 
specifically technical corrections to provisions contained in the 
``American Jobs Creation Act of 2004'' (P.L. 108-357). API represents 
more than 400 member companies involved in all aspects of the oil and 
natural gas industry, including exploration, production, 
transportation, refining, and marketing.

II. PROPOSED TECHNICAL CORRECTIONS
Item 1:

Elimination of Foreign Base Company Shipping Income
Prior Law
    For tax years prior to 2005, the subpart F rules required U.S. 
shareholders with a 10-percent or greater interest in a controlled 
foreign corporation (``CFC'') to include currently in income for U.S. 
tax purposes foreign base company shipping income (``FBCShI'') earned 
by that CFC. FBCShI was income derived from the use of vessels in 
foreign commerce and generally included the transportation of property 
between a port in the U.S. and a foreign port, two ports in the same 
foreign country or two ports in different foreign countries. Prior to 
its elimination, income qualifying as FBCShI could not be considered 
any other type of foreign base company income under section 954(a) of 
the Internal Revenue Code \1\ (see section 954(b)(6)).
---------------------------------------------------------------------------
    \1\ All sections noted herein refer to the Internal Revenue Code of 
1986, unless otherwise stated.
---------------------------------------------------------------------------
    The subpart F rules also require U.S. shareholders of CFCs to 
currently recognize in income foreign base company oil related income 
(``FBCORI''). FBCORI includes foreign oil related income as defined by 
section 907(c) with certain specific exceptions. Section 907(c)(2)(B) 
defines foreign oil related income as taxable income derived from 
sources outside the U.S. from, among other items, the transportation of 
minerals from oil and gas wells or their primary products.
    Under section 904(d)(1)(D), taxpayers with shipping income are 
required to separately calculate a foreign tax limitation on such 
income. Under section 904(d)(2)(D), shipping income means any income 
received or accrued by any person which is of a kind which would be 
FBCShI (as defined by section 954(f)). Income currently recognized as 
FBCORI is included in the general limitation basket for purposes of 
section 904.

New Law
    The American Jobs Creation Act of 2004 (the ``2004 Act'') 
eliminated FBCShI as a category of subpart F income. No conforming 
amendments were included to address the definition of shipping income 
for purposes of section 904. However, the 2004 Act does reduce the 
number of section 904 baskets from nine to two for tax years beginning 
after December 31, 2006.

Treatment of FBCORI
    Eliminating FBCShI allows many taxpayers to defer current 
recognition of such income for U.S. tax purposes until the U.S. 
shareholder repatriates it. However, some income earned by CFCs and 
once qualifying as FBCShI (i.e., shipping income earned from 
transporting crude from one country to another country) may now also 
constitute FBCORI, as section 954(b)(6) is no longer operative. 
Therefore, such income will still be recognized currently for U.S. tax 
purposes. Further, for section 904 purposes, as the shipping basket in 
section 904(d)(1)(D) remains in effect through the end of 2006, the 
FBCORI would not be included in the general limitation basket but 
would, instead, be recategorized as shipping income. Therefore, for 
taxpayers incurring certain FBCORI, the current state of the law after 
the 2004 Act is as if FBCShI were never eliminated.
    This is not the same for all taxpayers that have shipping income. 
Taxpayers with CFCs earning shipping income that is not otherwise 
subpart F income are able to defer the inclusion of such income until 
2007 when the section 904 shipping basket is eliminated. After that 
date, the repatriation of such income will likely result in inclusion 
in the general limitation basket for purposes of section 904.
    It is not apparent why the policy behind the 2004 Act provision 
eliminating FBCShI would allow it to essentially remain in effect for 
taxpayers earning transportation income that also constitutes FBCORI. 
Even though such income is not deferred due to other subpart F 
provisions, it should not have to be recategorized as shipping income 
for purposes of section 904.

Proposed Technical Correction
    There is likely a need to retain section 904(d)(1)(D) to the extent 
taxpayers with CFCs earning shipping income effectively chooses to 
repatriate such income prior to 2007. However, the shipping basket 
should be given a lower priority for purposes of section 904 than 
income recognized as FBCORI. Thus, we recommend the following technical 
changes to the current statutory language of section 904(d)(2)(D):

Section 904(d)(2)(D)--Proposed technical correction (changes 
        highlighted):
    The term ``shipping income'' means any income received or accrued 
by any person which is of a kind which would be foreign base company 
shipping income (as defined in section 954(f) as in effect before its 
repeal). Such term does not include any financial services income, and 
does not include any foreign base company oil related income (as 
defined in section 954(g)).

Section 904(d)(2)(D)--Proposed technical correction (clean version):
    The term ``shipping income'' means any income received or accrued 
by any person which is of a kind which would be foreign base company 
shipping income (as defined in section 954(f) as in effect before its 
repeal). Such term does not include any financial services income, and 
does not include any foreign base company oil related income (as 
defined in section 954(g)).

Item 2:

Sale of Partnership Interests
Prior Law
    For tax years prior to 2005, the sale of a partnership interest 
constituted passive income for U.S. foreign tax credit purposes 
(sections 904(d)(1)(A) and 954(c)(1)(B) (ii)).

New Law
    The 2004 Act adopted a ``look-thru'' rule for certain partnership 
sales. Specifically, the 2004 Act added section 954(c)(4) which 
provides that, in the case of any sale by a controlled foreign 
corporation of an interest in a partnership with respect to which such 
corporation is a 25-perecent owner, such corporation shall be treated 
as selling the proportionate share of the assets of the partnership 
attributable to such interest. In effect, the 2004 Act applies an 
``aggregate'' approach (vs. an ``entity'' approach) in characterizing 
gain on the sale of a partnership interest, i.e., it is treated the 
same as a sale of an interest in a disregarded entity. This is similar 
to the general approach of other international provisions relating to 
partnerships. As a result, to the extent that the assets of a 
partnership are used in a trade or business, the gain on the sale of 
the interest in the partnership should not be foreign personal holding 
company income under Subpart F. As a consequence, it should also not be 
passive income for foreign tax credit purposes.

Ownership Attribution Issue
    In order to qualify for the ``look-thru'' rule for partnership 
sales, the seller must meet the 25-percent ownership requirement. The 
Committee Report specifically refers to partners who meet this 
requirement as ones ``owning directly, indirectly, or constructively at 
least 25 percent of a capital or profits interest in the partnership'' 
\2\ [emphasis added]. Thus, if a U.S. company owns a 25% (or greater) 
interest in a partnership through two ``sister'' CFCs, the 
``constructive'' ownership principle would mean that the ownership 
interests of the sister companies would be combined in testing the 25% 
ownership level. Unfortunately, the statutory language did not follow 
the Committee Report statements, in that no mention of constructive 
ownership is included in new section 954(c)(4). There is no tax policy 
reason for this omission, and it appears that it was simply a technical 
oversight. We recommend a technical correction to conform the statutory 
language to the stated legislative intent expressed in the Committee 
Report.
---------------------------------------------------------------------------
    \2\ House Committee Report (Act Sec. 412, H.R. Rep. No. 108-548, 
pt. 1). The Senate amendment was the same as the House bill, and the 
conference agreement followed the House bill and the Senate amendment. 
See Conference Committee Report (Act Sec. 412, H.R. Conf. Rep. No. 108-
755). The report language was the same as the language used by the 
Staff of the Joint Committee on Taxation to describe this same 
provision in H.R. 4520 (JCX-41-04, p. 90) and H.R. 2896 (JCX-72-03, p. 
46).
---------------------------------------------------------------------------
Proposed Technical Correction
    The constructive ownership rules of section 958(b) apply for 
purposes of most of the provisions of Subpart F, and applying these 
rules for purposes of new section 954(c)(4) would properly allow look-
thru treatment where a 25% (or greater) ownership interest in a 
partnership is split between two (or more) related entities. Thus we 
recommend the following technical changes to the current statutory 
language of sections 954(c)(4)(B) and 958(b):

Section 954(c)(4)(B)--Proposed technical correction (changes 
        highlighted):
    25-PERCENT OWNER.--For purposes of this paragraph, the term ``25-
percent owner'' means a controlled foreign corporation which owns 
directly, indirectly, or constructively (under the rules of section 
958) 25 percent or more of the capital or profits interest in a 
partnership.

Section 954(c)(4)(B)--Proposed technical correction (clean version):
    25-PERCENT OWNER.--For purposes of this paragraph, the term ``25-
percent owner'' means a controlled foreign corporation which owns 
directly, indirectly, or constructively (under the rules of section 
958) 25 percent or more of the capital or profits interest in a 
partnership.

Section 958(b)--Proposed conforming amendment (changes highlighted):
    CONSTRUCTIVE OWNERSHIP.--For purposes of section 951(b), 
954(c)(4)(B), 954(d)(3), 956(c)(2), and 957, section 318(a) (relating 
to constructive ownership of stock) shall apply to the extent that the 
effect is to treat any United States person as a United States 
shareholder within the meaning of section 951(b), to treat a controlled 
foreign corporation as a 25% owner of a partnership under section 
954(c)(4)(B), to treat a person as a related person within the meaning 
of section 954(d)(3), to treat the stock of a domestic corporation as 
owned by a United States shareholder of the controlled foreign 
corporation for purposes of section 956(c)(2), or to treat a foreign 
corporation as a controlled foreign corporation under section 957, 
except that . . .

Section 958(b)--Proposed conforming amendment (clear version):
    CONSTRUCTIVE OWNERSHIP.--For purposes of section 951(b), 
954(c)(4)(B), 954(d)(3), 956(c)(2), and 957, section 318(a) (relating 
to constructive ownership of stock) shall apply to the extent that the 
effect is to treat any United States person as a United States 
shareholder within the meaning of section 951(b), to treat a controlled 
foreign corporation as a 25% owner of a partnership under section 
954(c)(4)(B), to treat a person as a related person within the meaning 
of section 954(d)(3), to treat the stock of a domestic corporation as 
owned by a United States shareholder of the controlled foreign 
corporation for purposes of section 956(c)(2), or to treat a foreign 
corporation as a controlled foreign corporation under section 957, 
except that . . .

Item 3:

Redesignation of Reference to Qualified Activity

    In section 952(c)(1)(B)(ii)

Prior Law
    Prior to the passage of the 2004 Act, under the flush language in 
section 952(c)(1)(B)(ii), a qualified deficit that taxpayers could use 
to offset FBCORI of a CFC included deficits attributable to qualified 
FBCORI activities arising from 1983 forward. Shipping income, though, 
could only be offset by shipping deficits arising 1987 forward.

New Law
    With the elimination of the shipping income under 954 in the 2004 
Act, a conforming amendment was included that eliminated shipping 
income as a qualified activity under section 952(c)(1)(B)(iii). The 
remaining activities in that section were also redesignated. However, 
the flush language in section 952(c)(1)(B)(ii) was never amended to 
address the redesignation. Accordingly, this section now currently 
provides that FBCORI deficits prior to 1987 can not be used to offset 
CFC FBCORI. This was clearly not the intention of the changes adopted 
by the 2004 Act and, as such, the flush language in 952(c)(1)(B)(ii) 
should be changed.

Proposed Technical Correction
    To address the proper redesignation of which qualified deficits may 
be used prior to 1986 we propose the following:

Section 952(c)(1)(B)(ii) flush language--Proposed conforming amendment 
        (changes highlighted):
    In determining the deficit attributable to qualified activities 
described in clause (iii)(II) or (III), deficits in earnings and 
profits (to the extent not previously taken into account under this 
section) for taxable years beginning after 1962 and before 1987 also 
shall be taken into account. In the case of the qualified activity 
described in clause (iii)(I), the rule for the preceding sentence shall 
apply, except that ``1982'' shall be substituted for ``1962.''

Section 952(c)(1)(B)(ii) flush language--Proposed conforming amendment 
        (clean version):
    In determining the deficit attributable to qualified activities 
described in clause (iii)(II) or (III), deficits in earnings and 
profits (to the extent not previously taken into account under this 
section) for taxable years beginning after 1962 and before 1987 also 
shall be taken into account. In the case of the qualified activity 
described in clause (iii)(I), the rule for the preceding sentence shall 
apply, except that ``1982'' shall be substituted for ``1962.''

Item 4:

Treatment of Wholly Owned Partnerships for Purposes of Domestic 
Manufacturing Deduction

    Section 2(a)(7) of the Tax Technical Corrections Act of 2005 
(``H.R. 3376'') would amend section 199(c) by adding in relevant part:
    (D) Partnerships Owned by Expanded Affiliated Groups--For purposes 
of this paragraph, if all of the interests in the capital and profits 
of a partnership are owned by the members of a single expanded 
affiliated group at all times during the taxable year of such 
partnership, the partnership and all members of such group shall be 
treated as a single taxpayer during such period.
    Because the proposed correction is limited to section 199(c), it is 
unclear how partnerships that are wholly owned by members of a single 
expanded affiliated group should be treated for all other purposes of 
section 199. Therefore, further guidance is needed to ensure that 
partnerships that are wholly owned by members of a single expanded 
affiliated group are treated in the same manner as corporations that 
satisfy the definition of expanded affiliated group under section 
199(d)(4)(b).
    In addition, the proposed correction requires the partnership to be 
wholly owned by the members of a single expanded affiliated group at 
all times during its taxable year. This does not reflect the realities 
of the business environment where an interest in a wholly owned 
partnership might be transferred to an entity that is not a member of 
the same expanded affiliated group without causing a termination of the 
partnership's taxable year. In such instances, the partnership should 
be treated as a member of the expanded affiliated group prior to the 
transfer.
    To this end, we propose that for purposes of clarifying section 
199, the language cited above in Section 2(a)(7) of H.R. 3376 be 
deleted from the bill. We further suggest that in addition to the 
changes proposed in H.R. 3376 to section 199(d)(4), the following 
language be added:
    Sec. 199(d)(4) is amended by adding at the end the following new 
subparagraph:
    (D) Partnerships Owned by Expanded Affiliated Groups--If all of the 
interests in the capital and profits of a partnership are owned by the 
members of a single expanded affiliated group, the partnership shall be 
treated as a member of such expanded affiliated group for purposes of 
this section.

                                 

                           Association of American Publishers, Inc.
                                               Washington, DC 20001
                                                    August 31, 2005

The Honorable William Thomas
Chairman
Committee on Ways & Means
United States House of Representatives
Washington, DC 20515

Dear Messrs. Thomas, Grassley and Baucus:

    On behalf of The Association of American Publishers (``AAP''), I 
want to thank you for including book publishing within the definition 
of ``qualifying production property'' in Section 199 of the Internal 
Revenue Code of 1986, as amended (``Code''). As you know, the AAP is 
the principal trade association of the U.S. book publishing industry, 
with over 300 members. Book publishing is very labor intensive so the 
inclusion of book publishing clearly promotes the purposes of the 
American Jobs Creation Act of 2004.
    On February 14, 2005, the Treasury Department issued Notice 2005-
14, I.R.B. 2005-7 (``Notice''), in an effort to resolve certain 
interpretive issues that have arisen under Code Section 199. The 
Treasury Department invited comments regarding the Notice and the AAP 
submitted comments to the Treasury Department on the Notice on March 
22, 2005 (copy of our comments are attached for your review).
    An issue of specific interest to the publishing industry concerns 
gross receipts derived from the distribution of books, journals, and 
similar materials irrespective of the physical or electronic or other 
medium used to effectuate such distribution to the customer. Our 
members' publications are increasingly being made available in 
electronic or other medium in addition to, or in lieu of, traditional 
printed copies, leaving open the question of whether receipts from the 
distribution of these materials in electronic or other medium also 
constitute ``domestic production gross receipts'' as defined in Code 
Section 199(c)(4). We have reviewed your letter to the Honorable John 
W. Snow, Secretary of the Treasury, dated July 21, 2005, where you note 
near the end ``. . . that gross receipts from the provision of services 
are not treated as domestic production gross receipts, regardless of 
the fact that computer software may be used to facilitate such service 
transactions.'' We do not believe that the mere provision of a book or 
journal in electronic or other medium should be considered a service.
    The Notice uses Treasury Regulations (``Regs.'') Section 1.48-1(c) 
as the basis to determine what is included in the definition of 
``tangible personal property.'' The provisions of Regs. Section 1.48-
1(c) were drafted to maximize the benefits available to taxpayers 
eligible to claim the investment tax credit. It is understandable that 
the provisions of Regs. Section 1.48-1(c) focus more on the distinction 
between real and personal property than the distinction between 
tangible and intangible property. The investment tax credit was 
available only with respect to qualified investment in depreciable 
tangible personal property. Accordingly, the investment tax credit was 
generally available with respect to the purchase of machinery used to 
manufacture or produce inventory. It was generally not available with 
respect to the inventory itself. As a result, the distinction between 
real and personal tangible property was of critical importance for many 
taxpayers; the distinction between tangible and intangible personal 
property was much less often of critical importance.
    By contrast, the provisions of Code Section 199 deal with gross 
receipts from the sale of tangible personal property. In few cases will 
the tangible personal property that falls within the provisions of Code 
Section 199 be depreciable. In the vast majority of instances, it will 
constitute inventory or property held for sale to customers in the 
ordinary course of business. As a result, the context in which the 
distinction between tangible and intangible property is to be made is 
dramatically different from that existing for purposes of Regs. Section 
1.48-1(c). Consequently, the flexibility brought to bear in making the 
distinction between tangible and intangible personal property for 
purposes of Code Section 199 should be the same as that brought to bear 
in making the distinction between real and personal tangible property 
for purposes of Regs. Section 1.48-1(c).
    The provisions of Code Section 263A and the Regs. adopted there 
under which are also used as a basis in the Notice. The principal focus 
of the provisions of Code Section 263A is on the production of 
inventory (or other property held for sale to customers) and is thus 
similar to the principal focus of Code Section 199 which is on the 
generation of gross receipts from the sale of inventory (or property 
held for sale to customers). In each case, it is inventory (or property 
held for sale to customers) that is at issue. The focus of the analysis 
as to what distinguishes tangible from intangible property for purposes 
of Code Section 199 should therefore be similar to that embodied in the 
Regs. adopted under Code Section 263A.
    Regs. Section 1.263A-2(a)(2)(i) confirms that, in general, 
``section 263A applies to the costs of producing tangible personal 
property.'' Regs. Section 1.263A-2(a)(2)(ii), which is cited with 
approval in Section 3.04(8)(b) of the Notice, includes in the term 
``tangible personal property'' videocassettes, computer diskettes, 
books, and similar items. Regs. Section 1.263A-2(a)(2)(ii)(A)(1) deals 
specifically with books. It provides that Code Section 263A applies to 
various categories of prepublication costs, including the costs 
incurred by publishers in writing, editing, compiling, illustrating, 
designing and developing a book. Regs. Section 1.263A-2(a)(2)(ii)(A)(1) 
explicitly states that these prepublication costs are required to be 
capitalized as costs of producing tangible personal property.
    If we were permitted to borrow and rephrase the well-known 
utterance of Gertrude Stein, we would suggest that what Regs. Section 
1.263A-2(a)(2)(ii) in essence provides is that ``a book is a book is a 
book'' for purposes of Code Section 263A regardless of the medium by 
which it is transmitted to the customer, and that, as such, it is 
treated as tangible personal property for purposes of Code Section 
263A. We respectfully submit that the same non-technical line of 
analysis should apply for purposes of determining whether a book or 
journal constitutes tangible or intangible inventory for purposes of 
Code Section 199. We believe that a book transmitted electronically to 
the customer should be classified as a tangible item of inventory for 
purposes of both Code Section 199 and Code Section 263A.
    Clearly, the proper focus of Code Section 199 should be on the 
treatment of the qualification of a publisher's prepublication costs 
rather than the method of delivery selected by the customer. The 
majority of the production activities and costs involved in the 
publishing of a book, journal or magazine occur before the activities 
associated with the determination of the medium of presentation.
    Finally, we note that applying a more expansive, non-technical 
analysis to the definition of the term ``tangible personal property'' 
for purposes of Code Section 199 would not be inconsistent with the 
provisions of Federal copyright law or recent judicial decisions issued 
interpreting such law. In this regard, 17 U.S.C.A. Section 102(a) 
provides,
    ``Copyright protection subsists, in accordance with this title, in 
original works of authorship fixed in any tangible medium of 
expression, now known or later developed, from which they can be 
perceived, reproduced, or otherwise communicated, either directly or 
with the aid of a machine or device.''
    Thus, copyright protection depends on some degree of embodiment in 
a tangible medium of expression. The policy behind the Copyright Act 
was to foster the creation of original works of authorship in an era of 
rapid changes in the technology of delivery, and it has worked very 
well. We submit that the same policy considerations are applicable in 
this instance.
    While we hope that the Treasury Department will adopt our comments 
when regulations are issued, our members wanted to voice their concerns 
now in the event that some corrections may be needed as a result of the 
issuance of regulations which may occur within the next month.

                                                 Patricia Schroeder
                                                    President & CEO

                                 

                                    Boies, Schiller and Flexner LLP
                                               Miami, Florida 33131
                                                    August 25, 2005

The Honorable Bill Thomas
Chairman of the Committee on Ways and Means
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    We are pleased to submit our written public comment in response to 
your request for comments related to the ``Tax Technical Corrections 
Act of 2005'' (H.R. 3376, S. 1447) (the ``Technical Correction''). We 
believe the bill clarifies certain aspects of the Jobs Creation Act of 
2004 (the ``Act''), and offers both practitioners and taxpayers a more 
reliable framework for the application of the Act. Although the bill is 
certainly an improvement, we believe that an additional clarification 
in the Technical Correction would further enhance the reliability of 
the Act.

PRE-ACT RULES
    Of particular concern is the repeal of the ``stock exception to the 
straddle rule.'' In their day-to-day operations, our clients, and a 
multitude of other taxpayers, enter into long and short positions, some 
of which are structured to minimize risk. Section 1092(a)(1)(A) of the 
Internal Revenue Code, in pertinent part, provides that a loss with 
respect to a position shall be taken into account only to the extent 
that the amount of such loss exceeds the unrecognized gain with respect 
to one or more offsetting positions. This is referred to as the ``loss 
deferral'' straddle rule; this rule defers losses on the unwinding of 
the loss leg of a straddle. The straddle rule has other implications as 
well, including suspension of the holding period on property for 
purposes of determining long-term or short-term holding periods. 
Interest costs incurred on a straddle position must also be capitalized 
rather than being deducted as a current expense.
    For these rules to apply, there, first and foremost, must be a 
straddle. Section 1092(c)(1) defines a ``straddle'' as an ``offsetting 
position with respect to personal property.'' In general, before the 
adoption of the Act, the term ``personal property'' did not include 
stock except under certain limited circumstances. One such 
circumstance, resulting in a ``straddle'' under old section 1092(d)(3), 
was a position in stock, the offsetting position of which was one with 
respect to substantially similar or related property (other than 
stock). The aforementioned circumstance, also known as the ``stock 
exception to the straddle rule,'' was interpreted by many practitioners 
to mean that a position in stock would not constitute ``personal 
property'' as long as such position was offset by another position in 
respect to the same or similar stock. This meant, for example, that if 
a taxpayer held a position in stock and an offsetting position in a 
short equity swap in the same or a similar stock, the stock would not 
be treated as ``personal property.'' This notion, however, changed with 
the introduction of proposed regulations section 1.1092(d)-2(c), which 
narrowed the initial interpretation of the statute to apply only to 
offsetting positions that were directly in stock or a short sale of 
stock. Consequently, if a taxpayer established a position in stock and 
an offsetting position in an equity swap in respect to the same stock, 
the stock would be treated as ``personal property'' because the 
offsetting position was not directly in stock or a short sale of stock.

POST-ACT RULES
    The Act modified section 1092(d)(3)(A)(i) to read as follows: ``In 
the case of stock, the term `personal property' includes stock only 
if--(i) such stock is of a type which is actively traded and at least 1 
of the positions offsetting such stock is a position with respect to 
such stock or substantially similar or related property'' (emphasis 
added). The presumed intended effect of this provision was to repeal 
the ``stock exception to the straddle rule.'' The conference report and 
the JCT 2004 explanations (the 2004 Blue Book) supports this intention, 
that ``[t]he Act also eliminates the exception from the straddle rules 
for stock (other than the exception relating to qualified covered call 
options).'' Problematically, footnote 867 of the Conference Report 
states that, ``[it] is intended that Treasury regulations defining 
substantially similar or related property for this purpose will 
continue to apply subsequent to repeal of the stock exception and 
generally will constitute the exclusive definition of a straddle with 
respect to offsetting positions involving stock. See Prop. Treas. Reg. 
sec. 1.1092(d)-2(b).''

NEED FOR CLARIFICATION
    The language of the new provision in the Act itself suggests that 
the ``stock exception to the straddle rule'' is repealed in its 
entirety. As such, a long position in stock offset by a short position 
in the same stock, or a short position in a similar stock, should 
presumably lead to the classification as ``personal property'' and, 
hence, to a straddle. However, the underlying history behind the 
provision may lead to a different interpretation. As we suggest below, 
footnote 867 may be interpreted to stand for the proposition that the 
Act repeals only the stock exception in respect to short positions in 
the same stock, but not short positions in stock that is 
``substantially similar or related property'' (``SSRP'').
    The straddle rule was enacted in 1981 for the principal purpose of 
defeating certain shelter arrangements proliferating at that time by 
prohibiting the selective realization of losses. To accomplish this, 
the provision treats two ostensibly separate transactions as if they 
were one because of the interdependency of the economic relationships 
and because the taxpayer, but for the loss deduction, would not have 
changed his underlying economic position.
    We believe the failure to clarify the scope of the repeal of the 
stock exception in the Technical Correction will create unnecessary 
burden and unintended consequences to taxpayers engaged in non-abusive 
transactions. For example, a taxpayer holding a long position in GE 
stock and a short position in a non-grantor trust regulated investment 
company (a ``RIC'') holding some GE stock will have to determine under 
the SSRP regulations (Reg. Sec. 1.246-5, Prop. Regs. Sec. 1.1092(d)-2) 
whether the RIC is SSRP with respect to the GE stock, and based on that 
determination, whether the positions constitute a straddle under 
section 1092. Conceivably, for example, at the time the long GE 
position and the short RIC position were established, the RIC might not 
have held any GE stock, but might later acquire such GE stock in the 
ordinary course of business, under which circumstances the taxpayer may 
then be deemed to have an ``unintended'' or ``unexpected'' straddle. A 
RIC should not be treated the same as a synthetic hedging product. 
Rather, a RIC is a common non-abusive investment product which, because 
of its investment objectives and the independence of its investment 
advisors, makes it an unlikely candidate for tax arbitrage. The 
additional burden imposed by the Act on taxpayers holding short 
positions in RICs will outweigh the limited potential for abuse 
resulting from a taxpayer's limited ability to selectively realize 
losses under these circumstances.
    Footnote 867 also states that proposed regulations section 
1.1092(d)-2 will constitute the exclusive definition of a straddle. 
Apart from the fact that the proposed regulations do not contain a 
definition of a straddle, the proposed regulations expressly provide 
that ``a position with respect to substantially similar or related 
property (other than stock) does not include direct ownership of stock 
or a short sale of stock but includes any other position with respect 
to substantially similar or related property.'' If, as the footnote 
suggests, the proposed regulations continue to be applicable, a short 
position in a ``similar stock''(e.g. a short position in a non-grantor 
RIC) or a direct position in a ``similar stock'' would not be a 
position in respect to ``substantially similar or related property'' 
for purposes of section 1092(d). Accordingly, the offset stock would 
not be ``personal property.''
    Because the proposed regulations do not provide an exception for 
short sales in the same stock, the new statute in combination with the 
proposed regulations should be interpreted to only repeal the stock 
exception in respect to short sales in the same stock, and to preserve 
the stock exception for short sales in ``similar or related'' stock. To 
interpret the legislative history and the statute otherwise would 
unduly burden taxpayers such as those holding short positions in RICs, 
with the duty to verify whether each long position they sell at a loss 
is a part of a straddle with respect to any such short RIC positions. 
Additionally, any position in a RIC provides limited, if any, potential 
for abuse through the selective realization of losses.
    For the reasons discussed above, we believe footnote 867 should be 
construed such that the Act repeals only the stock exception in respect 
to short positions in the same stock, and not short positions in stock 
that is ``substantially similar or related property.''

RECOMMENDATION

    We believe that Congress intended to resolve the previous ambiguity 
stemming from the old statute and the proposed regulations, and also 
intended to repeal the stock exception to the straddle rule with 
respect to short sales in the same stock, but not short sales in 
similar or related property such as stock similar to the offset stock. 
Thus, section 1092(d)(3)(A)(i) should be corrected to unambiguously 
reflect the intent of Congress. We suggest the following language 
clarification be included in the Technical Correction (clarification in 
bold):

(3) Special Rules For Stock--For purposes of paragraph (1)----
     (A) 
          In General--In the case of stock, the term `personal 
property' includes stock only if----
         (i) such stock is of a type which is actively traded and at 
least 1 of the positions offsetting such stock is a position with 
respect to such stock or substantially similar or related property 
(other than stock), or
         (ii) such stock is of a corporation formed or availed of to 
take positions in personal property which offset positions taken by any 
shareholder.

    This language, in conjunction with the proposed regulations, 
unambiguously states that if the offsetting position is in the same 
stock, or similar or related property other than a direct ownership of 
stock or a short sale of stock, the stock will be treated as ``personal 
property.''
    We are pleased to have been able to offer this comment, and we hope 
that it will help in clarifying the intent of Congress in respect to 
the repeal of the stock exception in section 1092. Please do not 
hesitate to contact us should you have any questions regarding this 
comment.

                                                  Michael Kosnitzky

                                 

                                 Cigar Association of America, Inc.
                                               Washington, DC 20006
                                                    August 31, 2005

The Honorable Bill Thomas
Chairman
Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Dear Chairman Thomas:

    In response to your request for comments on H.R. 3376, the Cigar 
Association of America would urge you to make a technical correction to 
the American Jobs Creation Act of 2004 (``AJCA''), specifically to the 
provisions under Title VI, the Fair and Equitable Tobacco Reform Act of 
2004 (``FETRA''), providing for the buyout of tobacco quota owners and 
growers. The members of the Cigar Association of America account for 
more than 96 percent of cigars manufactured, imported, and sold in the 
United States.
    Our comments relate to AJCA section 625, which provides for 
imposition of assessments as a source for the payments to tobacco quota 
owners and growers. Section 625(b) requires the Secretary of 
Agriculture to impose quarterly assessments (during the FY 2005-14 
period) on tobacco product manufacturers and importers selling products 
in the United States, including manufacturers and importers of 
cigarettes, cigars, snuff, roll-your-own tobacco, chewing tobacco, and 
pipe tobacco. Section 625(c) provides rules for allocating shares of 
the total assessment to these different classes of tobacco products.
Cigars erroneously subjected to assessments
    From a policy perspective, it was a clear mistake for cigars to be 
included in the AJCA tobacco buyout assessment regime. The apparent 
policy justification for the tobacco buyout assessments was that the 
manufacturing beneficiaries of the Federal tobacco quota/price support 
program should bear the cost of retiring that program.
    That policy does not argue for imposition of the assessments on 
cigars. The cigar industry simply does not make use of quota tobacco. 
In 2002, the cigar industry's use of quota tobacco was just 0.025 
percent of the total 905 million pounds of quota tobacco grown in the 
United States. In fact, domestic quota tobacco was used by only one 
small company in Scranton, Pennsylvania that makes only 0.3 percent of 
all cigars sold in the United States. By way of comparison, we believe 
the amount of quota tobacco used by the cigar industry is about the 
same as the amount used in medical research programs.
    Nor does the cigar industry use any significant amount of imported 
quota-type tobacco. When imported quota-type tobacco is added to 
domestic quota tobacco, the cigar industry's use of such tobacco 
remains de minimis--just 0.14 percent of the total used by the entire 
tobacco industry in 2002. The fact is, cigars sold in the United States 
are made from a completely different class of tobacco than that at 
issue in the quota buyout program.
    The inclusion of cigars in the AJCA buyout program has much to do, 
we suspect, with the speed in which the AJCA conference negotiations 
were concluded. Neither the House-passed nor the Senate-passed buy-out 
provisions included any buyout assessments with respect to cigars. The 
House-passed bill included no buyout assessment scheme, while the 
Senate version's buyout assessment provisions specifically (and 
correctly) exempted cigars. The assessment regime included in the 
conference report was wholly new, and developed without the benefit of 
a full and open airing of views that we believe would have led 
lawmakers to exempt cigars.

Cigar industry's assessment allocation is miscalculated
    A further injustice to the cigar industry is the fact that the 
industry's allocated share of the total buyout assessment is 
overstated.
    The AJCA initial allocation percentages were determined by 
reference to 2003 excise tax data. Specifically, the assessment 
allocations were calculated by multiplying tobacco products (both 
domestic and imported) ``removed'' (i.e., subject to tax) in 2003 by 
the maximum excise tax rate for each class of tobacco. The AJCA 
methodology resulted in an estimate that cigars accounted for 2.783 
percent of total tobacco excise taxes in 2003.
    This methodology erroneously assumes that all large cigars were 
taxed at the maximum rate of $48.75 per 1,000 cigars. In reality, 
however, a sizable number of cigars are sold at a price that yields a 
tax per 1,000 that is significantly lower. Furthermore, final 
Department of Agriculture regulations implementing the assessment 
regime compound this problem by providing that the same flawed 
methodology will apply for purposes of determining class allocations 
for all subsequent years. Accordingly, absent the appropriate exercise 
by the Department of Agriculture of its regulatory authority to base 
future assessments on actual tax collections, the allocation percentage 
for cigars will continue to be misstated going forward.
    Actual excise tax data for imported and domestic tobacco shows 
conclusively that the 2.783 percent share for the cigar industry was 
grossly overstated. Consider the following:

      U.S. Customs and Border Protection, in an April 21, 2005, 
letter to the Honorable Jim McCrery (R-LA) (attached), estimated that 
cigars accounted for 1.5 percent of a total $475.278 million in FY 2003 
excise taxes collected on imported tobacco products. Thus, a total of 
$7.129 million in excise taxes was collected in FY 2003 on cigar 
imports.
      The Treasury Department Alcohol and Tobacco Tax and Trade 
Bureau, in a February 11, 2005, letter to Representative McCrery 
(attached), stated that cigars in FY 2003 accounted for $156.181 
million (2.076 percent) of total domestic tobacco excise tax liability 
of $7,521.707 million. The Treasury letter stated that product class 
statistics are not maintained with respect to collections.
      Total FY 2003 domestic tobacco excise tax collections 
were $7,435.498 million, according to Alcohol and Tobacco Tax and Trade 
Bureau Statistical Release TTB S 5630-FY-2003. If one simply applies 
the 2.076 percent cigar share of total tobacco excise tax liability to 
this aggregate collection amount, one can reasonably estimate that 
total cigar domestic excise tax collections were $154.361 million in FY 
2003.

    The government data therefore indicates that cigars accounted for 
$161.490 million ($154.361 million domestic plus $7.129 million 
imported) of total FY 2003 tobacco excise tax collections of $7,910.776 
million ($7,435.498 million domestic plus $475.278 million imported), 
or 2.04 percent.
    Thus, if cigars must be assessed under the buyout program, and the 
assessment must be based on excise taxes, the industry's allocation 
should be 2.04 percent--not 2.783 percent as enacted under AJCA.
    Unfortunately, the situation only will get worse for the industry 
over the 2005-14 life of the assessment program. Because the large 
cigar excise tax is the only ad valorem tobacco excise tax, the cigar 
industry's share of total industry excise taxes will continue to climb 
as large cigar prices increase--even if cigar use (relative to other 
products) remains constant. As the cigar industry's share of taxes 
rises, its assessment allocation likewise will increase. Based on our 
projections, the cigar industry's share of total assessments will climb 
from 2.783 percent to more than 5 percent before the assessments 
terminate. Looked at another way, the cigar industry's share of 
assessments will increase from $282 million over 10 years (if the 
first-year assessment were held constant) to nearly $400 million.

Recommendation
    It remains the strong view of the Cigar Association of America that 
cigars should be removed from the tobacco-buyout assessment regime, for 
all of the reasons discussed above. Accordingly, we urge you to 
consider an AJCA technical correction that would accomplish this 
result.
    If a decision is made not to remove cigars from the buyout regime, 
the alternative technical correction would be to set allocations by 
reference to the actual share of tobacco excise taxes paid (i.e., 2.04 
percent in 2003). Further, in light of the unfair application of the 
assessment regime to the cigar industry, we would urge that the 
industry's allocation be frozen at that level for the duration of the 
assessments.

                                                    Norman F. Sharp
                                                          President

                                 

                                                   Clark Consulting
                                               Washington, DC 20001
                                                    August 25, 2005

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

Dear Chairman Thomas:

    I am writing in response to your request for comments on the 
technical corrections legislation (H.R. 3376) you introduced on July 
21, 2005. These comments relate to section 965 of the Internal Revenue 
Code, enacted as part of the American Jobs Creation Act of 2004, and 
certain H.R. 3376 technical corrections provisions relating to section 
965. As discussed below, clarifications to section 965 may be necessary 
to allow foreign-owned U.S. companies to repatriate earnings in 
accordance with the policy intended by Congress in enacting this 
provision.

Section 965(b)(3) concerns
    By way of background, section 965 generally allows an 85-percent 
dividends-received deduction for cash dividends received by a U.S. 
shareholder from a controlled foreign corporation (``CFC'') in the U.S. 
shareholder's 2004 or 2005 taxable year.
    Section 965(b)(3) sets forth a limitation based on a CFC's related-
party indebtedness. Specifically, the amount of dividends eligible for 
the deduction is reduced by any increase in CFC indebtedness to related 
persons between October 3, 2004, and the close of the taxable year for 
which the deduction is being claimed. Section 965(b)(3)(A) defines a 
``related person'' for this purpose by reference to section 954(d)(3), 
which defines a related person of a CFC broadly to include any entity 
that controls the CFC and any entity that is controlled by the same 
entity that controls the CFC. Section 965(b)(3) treats all CFCs of a 
U.S. taxpayer as a single corporation for purposes of the borrowing 
limitation.
    The AJCA conference agreement explains that the section 965(b)(3) 
related-party borrowing limitation is intended to prevent a deduction 
from being claimed when a U.S. shareholder lends to a CFC in order to 
finance the payment by the CFC of the dividend. In that case, there 
would be no net increase in cash in the United States.
    The section 965(b)(3) limitation on related-party indebtedness does 
not appear to have contemplated situations in which a foreign owned 
U.S. corporation repatriates foreign earnings. While not the 
prototypical fact pattern, many foreign-owned U.S. companies own a CFC 
that may be in a position to bring earnings back to the United States. 
As is the case with CFCs of U.S.-owned multinational corporations, such 
a CFC may need to access funds in order to pay a dividend. Potential 
sources could include the foreign parent of the U.S. shareholder and 
foreign subsidiaries of the foreign parent itself.

[GRAPHIC] [TIFF OMITTED] T3731A.001


    As drafted, however, the section 965(b)(3) limitation will deny the 
CFC the ability to borrow from these non-CFC related foreign persons in 
order to fund the payment of a dividend that otherwise would qualify 
for the repatriation provision deduction. This result may have been 
inadvertent, since payment of a dividend funded by borrowing from a 
related foreign entity would indeed bring cash to the United States. 
Funds would move from the foreign entity to the CFC and then to the 
U.S. shareholder for investment in the United States. This movement of 
cash is fully consistent with the repatriation provision's intent. 
These additional potential sources of borrowing (i.e., the ultimate 
foreign parent and foreign subsidiaries of the foreign parent) 
available to foreign-owned U.S. companies do not exist for CFCs of 
U.S.-owned multinational corporations that may have been the prototype 
for drafters of the provision.

Concerns re: H.R. 3376
    H.R. 3376 would expand on the 965(b)(3) related-party debt rule by 
providing Treasury with explicit regulatory authority to reduce the 
amount of eligible dividends in certain instances in which dividends 
are funded by cash transfers from a related party. Specifically, 
section 2(q)(3) of the bill provides:
    The Secretary may prescribe such regulations as may be necessary or 
appropriate to prevent the avoidance of the purposes of this paragraph, 
including regulations which provide that cash dividends shall not be 
taken into account under subsection (a) to the extent such dividends 
are attributable to the direct or indirect transfer (including through 
the use of intervening entities or capital contributions) of cash or 
other property from a related person (as so defined) to a controlled 
foreign corporation.
    The Joint Committee on Taxation (``JCT'') summary (JCX-55-05) 
explains that this regulatory authority ``supplements existing 
principles relating to the treatment of circular flows of cash.'' The 
JCT summary further states that this regulatory authority is to be 
exercised ``only in cases in which the transfer is part of an 
arrangement undertaken with a principal purpose of avoiding the 
purposes of the related-party debt rule of Code section 965(b)(3).'' 
The summary further discusses certain transfers (e.g., cash 
contributions for purposes of working capital) that would not be 
considered as having been undertaken to avoid section 965(b)(3).
    The H.R. 3376 cash-transfer rule raises the same policy concerns as 
are raised by the underlying section 965(b)(3) limitation. That is, the 
amount of eligible dividends may be reduced when cash is transferred 
from a related foreign person to a CFC that pays an otherwise-eligible 
dividend to the U.S. shareholder. This is the result even though such 
transactions do not involve a circular cash flow (i.e., from the United 
States to the CFC and back to the United States) and will result in a 
net increase in cash for domestic investment which is fully consistent 
with the intent of Congress.
    From a practical perspective, the H.R. 3376 cash-transfer rule is 
creating significant uncertainty in some situations. While the JCT's 
list of ``good'' cash transfers is helpful, it is not exhaustive. For 
example, there may be uncertainty when a CFC sells assets to a related 
foreign person for cash and pays an otherwise-eligible dividend to the 
U.S. shareholder.\1\ While the taxpayer might argue that such a cash 
transfer was not made with the principal purpose of avoiding the 
section 965(b)(3) limitation, both the proposed statutory language and 
the JCT explanation are sufficiently broad to create uncertainty 
regarding the ultimate interpretation of this provision. The risk 
(i.e., the difference between a 35-percent tax rate and a 5.25-percent 
effective tax rate) would discourage payment of a dividend to the U.S. 
shareholder in this instance.
---------------------------------------------------------------------------
    \1\ I am aware of one proposed repatriation transaction viewed now 
(i.e., after introduction of H.R. 3376) with at least some uncertainty 
that involves a sale of CFC assets that is required by a foreign 
regulatory authority and whose planning began prior to enactment of 
section 965--hardly the type of transaction that should be viewed as 
abusive in connection with a CFC's payment of a dividend to the United 
States.
---------------------------------------------------------------------------
Solution
    The solution to the concerns discussed above would be to amend 
section 965(b)(3) to clarify that funding via a loan or cash transfer 
from a CFC's ultimate foreign parent or a foreign subsidiary of the 
foreign parent does not disqualify otherwise-qualifying repatriation 
transactions from the benefits of section 965(a). This could be 
accomplished by a technical correction excluding foreign related 
persons from the definition of related persons for purposes of the 
section 965(b)(3) related-party borrowing limitation:

SEC. __. AMENDMENT RELATED TO THE AMERICAN JOBS CREATION ACT OF 2004.

    (a) AMENDMENT RELATED TO SECTION 422 OF THE ACT--Section 
965(b)(3)(A) of the Internal Revenue Code of 1986 is amended by 
striking `(as defined in section 954(d)(3))' and inserting in its place 
`(as defined in section 954(d)(3), except that related persons for this 
purpose shall not include any foreign persons).'
    Thus, the section 965(b)(3) limitation would disregard any 
borrowing by a CFC from its ultimate foreign parent or a foreign 
subsidiary of the foreign parent. This definition of ``related 
persons'' also would apply, by extension, for purposes of the H.R. 3376 
cash-transfer rule, which ``piggybacks'' off of the section 
965(b)(3)(A) definition.
    To avoid any potential abuse from a circular flow of cash, the 
legislative history would provide that Congress expects Treasury would 
treat any back-to-back funding or cash transfer (e.g., a loan from a 
U.S. related party to a foreign related party coupled with a loan from 
the foreign related party to the CFC) as a direct cash transfer from a 
U.S. related party to the CFC for purposes of the related-party 
indebtedness rule.
    A narrower solution, at least for some taxpayers contemplating 
repatriation transactions, would be to clarify that a cash transfer to 
a CFC as a result of the sale of assets by the CFC to a foreign related 
party or a transfer of cash by a foreign related party to repay a bona 
fide debt owed to a CFC would not be considered as having been 
undertaken primarily to avoid section 965(b)(3).
    In either case, because repatriation transactions generally must be 
completed by the end of 2005, it would be necessary to communicate this 
clarification as quickly as possible if technical corrections 
legislation cannot be enacted in an expeditious manner.

            Sincerely,

                                                    Kenneth J. Kies

                                 

                                 Financial Executives International
                                               Washington, DC 20005
                                                    August 25, 2005
The Honorable Bill Thomas
Chairman
Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Dear Chairman Thomas:

    On behalf of the Financial Executives International's (FEI) 
Committee on Taxation (COT), I am writing to suggest some important 
revisions to H.R. 3376, the ``Tax Technical Corrections Act of 2005.'' 
Specifically, we would like to propose some changes to Section 2(a) of 
the bill, which includes corrections and amendments to Section 199 of 
the ``American Jobs Creation Act of 2004'' (Public Law No: 108-357).
    FEI is a professional association representing the interest of more 
than 15,000 CFOs, treasurers, controllers, tax directors, and other 
senior financial executives from over 8,000 major companies throughout 
the United States and Canada. FEI represents both providers and users 
of financial information. The FEI Tax Committee formulates tax policy 
for FEI in line with the views of the membership. This letter 
represents the views of the Committee on Taxation.
    As drafted, Section 2(a)(7) of the technical corrections bill would 
amend I.R.C. Section 199(c) by adding in relevant part:
    (D) Partnerships Owned by Expanded Affiliated Groups--For purposes 
of this paragraph, if all of the interests in the capital and profits 
of a partnership are owned by the members of a single expanded 
affiliated group at all times during the taxable year of such 
partnership, the partnership and all members of such group shall be 
treated as a single taxpayer during such period.
    Because the proposed correction is limited to I.R.C. Section 
199(c), it is unclear how partnerships that are wholly owned by members 
of a single expanded affiliated group should be treated for all other 
purposes of IRC Section 199. Therefore, further guidance is needed to 
ensure that partnerships that are wholly owned by members of a single 
expanded affiliated group are treated in the same manner as 
corporations that satisfy the definition of expanded affiliated group 
under subsection (d)(4)(b).
    In addition, the proposed correction requires the partnership to be 
wholly owned by the members of a single expanded affiliated group at 
all times during its taxable year. This does not reflect the realities 
of the business environment where an interest in a wholly owned 
partnership might be transferred to an entity that is not a member of 
the same expanded affiliated group without causing a termination of the 
partnership's taxable year. In such instances, the partnership should 
be treated as a member of the expanded affiliated group prior to the 
transfer.
    To this end, we propose that for purposes of clarifying I.R.C. 
Section 199, the language cited above in Section 2(a)(7) be deleted 
from the bill and the following be added to Section 2(a)(10):
    Sec. 199(d)(4) is amended by adding at the end the following new 
subparagraph:
    (D) Partnerships Owned by Expanded Affiliated Groups--If all of the 
interests in the capital and profits of a partnership are owned by the 
members of a single expanded affiliated group, the partnership shall be 
treated as a member of such expanded affiliated group for purposes of 
this section.
    Thank you for your consideration of our views regarding the tax 
technical corrections bill. Should you or your staff wish to discuss 
this matter in further detail, please contact Mark Prysock of FEI's 
Washington office at (202) 626-7804.

                                                     Michael Reilly
                                Chairman, FEI Committee on Taxation

                                 

                                          Florida Institute of CPAs
                                         Tallahassee, Florida 32314
                                                    August 29, 2005
The Honorable Bill Thomas
U.S. House of Representatives
Chairman, Committee on Ways and Means
2208 Rayburn
Washington, DC 20515

Dear Chairman Thomas:

    On behalf of the Federal Taxation Committee of the Florida 
Institute of Certified Public Accountants (FICPA), we offer the 
following comments on the Tax Technical Corrections Act of 2005 (H.R. 
3376):
    Section 231 of the American Jobs Creation Act of 2004, which deals 
with members of a family being treated as one shareholder for the 
number of shareholders limit on S corporations, should be amended so 
that the treatment is automatic and does not require an election to be 
made by any family member.
    We believe that the requirement for an election to be made by a 
family member was carried forward from previous versions of this 
section which would have limited the number of families permitted to be 
treated as one shareholder for the number of shareholders limitation. 
Since any number of families can now be subject to this provision, 
there no longer seems to be a need for an election to be made. The 
provision for members of a family to be counted as one shareholder 
should be parallel to the provision that treats a husband and wife as 
one shareholder without any requirement for one of the spouses to make 
an election.
    Thank you for this opportunity to submit these comments to you.

                                                  Ignacio J. Abella
                                                              Chair

                                 

                                               Washington, DC 20515
                                                    August 31, 2005

Dear Chairmen Grassley and Thomas and Ranking Members Baucus and 
Rangel:

    We are pleased to note that H.R. 3376, the ``Tax Technical 
Corrections Act of 2005'' does not include a special provision to 
shield Accenture from the anti-inversion provisions passed as part of 
last year's international tax law. Please continue to keep such 
provisions out. Writing new rules with the specific purpose of allowing 
Accenture to avoid paying millions of dollars in U.S. taxes on its 
international profits would be extremely unfair to U.S. companies who 
pay their fair share. We urge you not to incorporate these 
controversial measures into the bill as it proceeds through the 
legislative process.
    When Congress passed the American Jobs Creation Act last year, it 
specifically condemned the practice of corporate expatriation. The 
House report accompanying the legislation states, ``The Committee 
believes that certain inversion transactions are a means of avoiding 
U.S. tax and should be curtailed.'' The Committee had it right last 
year: Accenture's inversion transaction was obviously a means of 
avoiding U.S. taxes and it should be curtailed--not condoned and 
rewarded.
    This is a question of responsibility. Hard-working Americans, Mom 
and Pop small businesses, and thousands of corporations with integrity 
meet their responsibilities by paying their fair share of taxes. 
Accenture chose a different path: pushing its share of the burden onto 
others. The Finance Committee and the Ways and Means Committees both 
have responsibilities of their own: to protect the taxpayers who play 
by the rules. We appreciate the responsible approach these committees 
have taken to date by rejecting Accenture's unworthy efforts to flout 
the laws that bind everyone else.
    Please continue to exclude any provisions designed to shield 
specific companies from existing anti-inversion laws.

                                                         Carl Levin
                                                       U.S. Senator

                                                       Richard Neal
                                                 Member of Congress

                                                      Lloyd Doggett
                                                 Member of Congress

                                                       Rosa DeLauro
                                                 Member of Congress

                                                       Marion Berry
                                                 Member of Congress

                                                   Louise Slaughter
                                                 Member of Congress

                                                         John Lewis
                                                 Member of Congress

                                 

                                        Mcintire School of Commerce
                                    Charlottesville, Virginia 22947
                                                    August 27, 2005

The Honorable William Thomas
Chairman, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    I am writing to request that the Committee on Ways and Means 
consider technical corrections to Internal Revenue Code Sections 
1371(c) and 1367(a)(2)(D) that are, in my opinion, required for the 
proper and equitable treatment of the incremental taxes incurred by a 
LIFO-method S corporation under Section 1363(d).

LIFO Recapture under Section 1363(d)
    Section 1363(d), which was enacted as part of the Revenue Act of 
1987, requires any C corporation that uses the ``last-in, first-out'' 
[``LIFO''] method to account for one or more of its inventories and 
that elects S status,\1\ to recognize the ``LIFO recapture amount'' 
built into its LIFO inventories as of the end of its last tax year as a 
C corporation. The ``LIFO recapture amount'' [``LRA''] is the excess, 
if any, of the inventory's value determined under the ``first-in, 
first-out'' [``FIFO''] method over its actual LIFO value.\2\ This 
amount is included in the converting corporation's ordinary gross 
income on its final C corporation income tax return, and the resulting 
incremental income tax is payable in four interest-free annual 
installments, commencing with the due date for its final C corporation 
return.\3\
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    \1\ In 1993, the Treasury Department extended the scope of the 
application of Section 1363(d) to any C corporation that transfers LIFO 
inventory to a new or pre-existing S corporation in an otherwise 
nontaxable carryover-basis transaction (e.g., certain corporate 
reorganizations described in Section 368(a) and certain corporate 
divisions described in Sections 368(a)(1)(D)/355). Reg. Sec. 1.1363-
2(a)(2) (proposed August 19, 1993 and finalized October 6, 1994).
    \2\ Stated differently, the ``LIFO recapture amount'' is the 
cumulative net amount of gross income that the converting corporation 
(i.e., a C corporation converting to S status) has deferred by using 
the LIFO method, rather than the FIFO method, to account for its 
inventory.
    \3\ The statute also provides for the converting corporation to 
increase the tax basis of its LIFO inventories to reflect its 
recognition of this income. LIFO recapture under Section 1363(d) does 
not terminate the converting corporation's LIFO election.
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Adjustments to ``Earnings and Profits'' and to Stockholder Basis for 
        the Incremental Tax Imposed on the Section 1363(d) Inclusion
    Background. The statute variously requires that the earnings and 
profits [``E&P''] of a C corporation, the ``accumulated adjustment 
account'' [``AAA''] of an S corporation,\4\ and the basis the 
shareholders of an S corporation have in their stock \5\ be reduced by 
nondeductible, noncapital expenses. Federal income taxes, and more 
specifically, the corporate-level income taxes imposed on the income 
recognized under Section 1363(d), are nondeductible, noncapital 
expenses. Since the converting corporation will be a C corporation at 
the time the taxes resulting from the recapture of the LRA become 
``fixed and determinable,'' \6\ but it (or, following a nontaxable 
carryover-basis transaction, its successor) will be an S corporation at 
the time these taxes are actually paid,\7\ questions arise as to 
whether the corporation's E&P, AAA, and/or its shareholders' stock 
basis are to be adjusted for them, and, if so, when the adjustment is 
to be made (i.e., immediately on the recapture date or as the 
installments are actually paid).
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    \4\ I.R.C. Sec. 1368(e)(1)(A); Reg. Sec. 1.1368-2(a)(3)(i)(C)(1).
    \5\ I.R.C. Sec. 1367(a)(2)(D); Reg. Sec. 1.1367-1(c)(2).
    \6\ As of the last day of the converting corporation's last C year, 
all events will have occurred which determine the fact of its liability 
under Section 1363(d) and the amount of that liability will have become 
determinable with reasonable accuracy. See I.R.C. Sec. 461(h)(4).
    \7\ This assumes, of course, that the converting corporation's S 
election (or the S election of its successor corporation) does not 
terminate prior to the payment of the final installment.
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    The statute expressly provides that in computing an S corporation's 
AAA, no reduction is to be made for federal taxes ``attributable to'' 
any tax year in which the corporation was a C corporation.\8\ Although 
neither the statute nor the regulations define the phrase 
``attributable to,'' the incremental tax imposed on the converting 
corporation's LRA clearly falls within its scope.
---------------------------------------------------------------------------
    \8\ I.R.C. Sec. 1368(e)(1)(A); Reg. Sec. 1.1368-2(a)(3)(C)(1).
---------------------------------------------------------------------------
    The effect of the incremental tax on the converting corporation's 
E&P \9\ and on the stock basis of its (or its successor's) shareholders 
is not, however, predicated upon whether or not this tax is 
``attributable to'' a C-corporation tax year of the converting 
corporation. The touchstone for making these determinations is, 
instead, whether the incremental tax is deemed to have been 
``incurred'' in the converting corporation's last C year or, 
alternatively, in a subsequent S year. Simply put, any portion of the 
incremental tax that is incurred in a C year will reduce the converting 
corporation's E&P and will have no effect on the stock basis of its (or 
its successor's) stockholders. Conversely, any portion of the 
incremental tax that is incurred in the converted corporation's S years 
will have no effect on its E&P and will reduce its shareholders' stock 
basis.
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    \9\ The accumulated E&P of a C corporation does not disappear upon 
its conversion to S status or upon the transfer of its assets to an S 
corporation in a nontaxable carryover-basis transaction. Instead, the 
converting corporation's E&P reside in the S corporation (either the 
converting corporation itself or the transferee of the converting 
corporation's assets (Sections 381(c)(2) or 312(h))) until they are 
distributed to its shareholders (as a dividend under Section 
1368(c)(2), in redemption of stock, or in complete liquidation), or 
until they are transferred to another corporation under Section 
381(c)(2) or Section 312(h). I.R.C. Sec. Sec. 1371(c)(2) and (3).
    Unfortunately, the converting corporation's E&P has the potential 
to create significant tax liabilities for the S corporation and/or its 
shareholders. First, nonliquidating, nonredemption distributions of an 
S corporation's E&P will be taxable to its shareholders as dividend 
income. I.R.C. Sec. Sec. 1368(c)(1) and (2). Second, if the S 
corporation has any E&P as of the end of any tax year and it has 
passive investment income in excess of 25% of its gross receipts for 
the year, it may be liable for a flat 35% corporate-level tax under 
Section 1375. Finally, if the corporation has E&P and excess passive 
investment income for three consecutive tax years, its S election will 
generally terminate as of the beginning of the fourth tax year. I.R.C. 
Sec. 1362(d)(3).
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    The ``Economic Performance'' Test. An accrual-method corporation's 
liability for federal, state, and local income taxes is ``incurred'' 
(and therefore ``recognized'') for any and all federal income tax 
purposes \10\ only when the ``all-events'' test of Section 461(h)(4) is 
met.\11\ The all-events test is met no earlier than when the ``economic 
performance'' occurs.\12\ For liabilities in the form of ``taxes,'' 
economic performance does not generally occur until the tax in question 
is actually paid.\13\
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    \10\ I.R.C. Sec. 461(h)(1) reads as follows:
    ``In general. For purposes of this title, in determining whether an 
amount has been incurred with respect to any item during any taxable 
year, the all events test shall not be treated as met any earlier than 
when economic performance with respect to such item occurs.'' [Emphasis 
supplied.]
    \11\ ``All events test. For purposes of this subsection, the all 
events test is met with respect to any item if all events have occurred 
which determine the fact of liability and the amount of such liability 
can be determined with reasonable accuracy.'' See also Reg. 
Sec. Sec. 1.446-1(c)(1)(ii)(A) and 1.451-1(a).
    \12\ I.R.C. Sec. 461(h), which generally applies to amounts 
incurred on or after July 18, 1984. See also Reg. Sec. 1.461-
1(a)(2)(i).
    \13\ Reg. Sec. 1.461-4(g)(6). (An exception to this requirement is 
available under Section 461(c), which allows an accrual method taxpayer 
to elect to accrue certain real property taxes ratably over the period 
to which they relate, regardless of when those taxes are actually 
paid.)
    See also P.L.R. 199904036 (Feb. 1, 1999), where the taxing 
authority allowed the taxpayer to pay a sales tax liability resulting 
from an asset acquisition over a period of years. The I.R.S. held that 
payment, and therefore economic performance, occurred as each payment 
was made and not when the asset was acquired.
---------------------------------------------------------------------------
    An exception to the ``payment'' requirement is available to accrual 
method taxpayers that adopt the ``recurring item exception'' of Section 
461(h)(3).\14\ Under this exception, taxes will be treated as having 
been incurred during a particular taxable year if and only if (i) the 
all-events test is satisfied before the close of that taxable year, 
(ii) payment of the tax is made within the shorter of a ``reasonable 
period'' after the close of such taxable year or 8\1/2\ months after 
the close of such taxable year, and (iii) the taxes are recurring in 
nature and the taxpayer consistently treats taxes of the kind in 
question as incurred in the taxable year in which the all-events test 
is satisfied.\15\
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    \14\ An accrual-method taxpayer may generally adopt the recurring 
item exception as method of accounting for one or more types of 
recurring liabilities that it incurs during a taxable year. Reg. 
Sec. 1.461-5(a). See Reg. Sec. 1.461-5(d) for the time and manner of 
adopting the recurring item exception.
    \15\ I.R.C. Sec. 461(h)(3); Reg. Sec. 1.461-5(b). For most 
liabilities, the recurring item exception also requires that either (i) 
the amount of the liability in question is not ``material,'' or that 
(ii) the accrual of that liability in the taxable year in which the 
all-events test is met results in a better ``matching'' with the income 
to which it relates than would result from accruing that liability in 
the taxable year in which economic performance occurs. This requirement 
is automatically satisfied where the liability at issue is a tax 
liability. Reg. Sec. 1.461-5(b)(5)(ii).
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    With respect to the incremental tax on the Section 1363(d) 
inclusion, the converting corporation will have been a C corporation at 
the time the all-events test of Section 461(h)(4) was satisfied, but it 
(or its successor) will be an S corporation at the time these taxes are 
actually paid.\16\ A converting corporation that has adopted the 
recurring item exception, and that pays the incremental tax in 
installments as they become due, should be permitted to treat the tax 
paid with the first installment as having been incurred in the 
recognition year--while it was still a C corporation.\17\ The taxes 
paid with the last three annual installments, however, will be treated 
as having been incurred in years during which the converted corporation 
was an S corporation.
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    \16\ This assumes, of course, that the converting corporation does 
not prepay the entire incremental tax in the recognition year and that 
its S election (or the S election of its successor corporation) does 
not terminate prior to the payment of the final installment.
    \17\ See, for example, Reg. Sec. 1.461-4(g)(8), Ex. 8.
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    Earnings and Profits. The E&P of an accrual method C corporation 
are reduced by accrued federal income taxes. Section 1371(c), however, 
provides that no adjustments are to be made to the E&P of an S 
corporation except (i) where those earnings are distributed out to the 
shareholders as dividends under Section 1368(c)(2), (ii) where the 
corporation redeems its stock or liquidates, or (iii) where the 
corporation acquires, disposes, or allocates E&P as a result of the 
application of a subchapter C provision to a reorganization or 
division.\18,19\ Section 1371(d)(3) provides another exception that 
permits an S corporation to reduce its E&P for any additional taxes for 
which it is liable under the investment credit recapture provisions of 
Sections 49(b) or 50(a).
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    \18\ Consequently, for example, neither the recognition of built-in 
gains and losses under Section 1374, nor the payment of corporate-level 
taxes on net recognized built-in gains will have any effect on an S 
corporation's E&P. Nor will the recognition of ``excess net passive 
income'' or the payment of corporate-level taxes thereon under Section 
1375 have any affect on an S corporation's E&P.
    \19\ I.R.C. Sec. 1371(c) was enacted as part of the Subchapter S 
Revision Act of 1982.
---------------------------------------------------------------------------
    Read literally and together, Sections 1371(c) and 461(h) preclude a 
reduction in the converting corporation's E&P for any amount of the 
incremental tax not deemed to have been incurred while it was still a C 
corporation--notwithstanding the fact that such tax is ``attributable 
to'' a C year of that corporation. Consequently, a converting 
corporation that has not adopted the recurring item exception will not 
reduce its E&P for any amount of the incremental tax paid after the 
close of the recognition year. A converting corporation that has 
adopted the recurring item exception and that pays the incremental tax 
in installments as they become due will reduce its E&P by the amount of 
the first installment, but no reduction will be permitted for any of 
the three remaining installments. However, a converting corporation 
that has adopted the recurring item exception should be permitted to 
reduce its E&P by any prepayments on the final three installments that 
are made within a ``reasonable period'' (or 8\1/2\ months, whichever is 
shorter) following the close of the recognition year.\20\
---------------------------------------------------------------------------
    \20\ Since the converting corporation's liability for the 
incremental tax on the Section 1363(d) inclusion becomes ``fixed and 
determinable'' in the recognition year, and since the statute expressly 
authorizes the prepayment of this tax, it seems clear that, for a 
converting corporation that has adopted the recurring item exception, a 
prepayment of all or part of any or all of the last three installments 
within a ``reasonable period'' (or 8\1/2\ months, whichever is shorter) 
following the close of the recognition year, will result in those taxes 
being ``incurred'' in the recognition year. I.R.C. Sec. 1363(d)(2)(B) 
(``. . . the 3 succeeding installments shall be paid on or before the 
due date . . . for the corporation's return for the 3 succeeding 
taxable years.'' [Emphasis supplied.]
---------------------------------------------------------------------------
    The failure of the statute or regulations to permit the converting 
corporation to reduce its E&P by the full amount of the incremental tax 
in the recognition year is clearly at odds with the whole concept of 
corporate E&P, i.e., that the before-tax corporate-level earnings and 
profits of a C corporation should be reduced by the corporate-level 
taxes attributable to them. In a closely analogous situation, Congress 
belatedly ``clarified'' the treatment of federal income taxes paid by 
an S corporation upon the recapture of investment tax credits 
previously claimed by the corporation in a prior C year. As noted 
above, Section 1371(d)(3) permits an S corporation to reduce its E&P by 
the full amount of such taxes.\21\
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    \21\ ``The Act clarifies that an S corporation's accumulated 
earnings and profits will be reduced by the amount of investment credit 
recapture tax . . . imposed on the corporation with respect to these 
credits, since the earnings and profits were not previously reduced by 
the amount of tax savings attributable to the credit.'' [Emphasis 
supplied.] Staff of Joint Comm. on Taxation, 98th Cong., 2d Sess., 
General Explanation of the Revenue Provisions of the Deficit Reduction 
Act of 1984 (1984): pp. 1019-1025.
---------------------------------------------------------------------------
    The failure of the current statute to permit a converting 
corporation to reduce its E&P by the full amount of the incremental tax 
also conflicts with the legislative purpose that triggered the 
enactment of Section 1363(d): to ``eliminate this potential disparity 
in treatment'' between FIFO-method and LIFO-method converting 
corporations.\22\ As of the date of its conversion to S status, a FIFO-
method C corporation would have already reduced its E&P by the income 
taxes attributable to its inventory profits.
---------------------------------------------------------------------------
    \22\ H.R. Rep. No. 100-391, Part 2 (1987):
    ``The committee is concerned that taxpayers using the LIFO method 
may avoid the built-in gain rules of section 1374. It believes that 
LIFO method taxpayers, which have enjoyed the deferral benefits of the 
LIFO method during their status as a C corporation, should not be 
treated more favorably than their FIFO (first-in, first-out) 
counterparts. To eliminate this potential disparity in treatment, the 
committee believes it is appropriate to require a LIFO taxpayer to 
recapture the benefits of using the LIFO method in the year of 
conversion to S status.'' (At p. 1098.)
---------------------------------------------------------------------------
    Shareholder Stock Basis. Failure to adjust the converting 
corporation's E&P by the incremental tax is an inequity that is 
exacerbated by Section 1367(a)(2)(D), which requires, without 
qualification, that the shareholders of an accrual-method S corporation 
reduce their stock bases by their pro rata share of the nondeductible, 
noncapitalizable expenses incurred during the year.\23\ It seems clear 
that this requirement extends to any amount of the incremental tax that 
is deemed, under the rules discussed above, to have been incurred 
during an S year of the converted corporation, notwithstanding the fact 
that such tax is, in its entirety, attributable to a C year of the 
converting corporation.\24,25\
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    \23\ Reg. Sec. Sec. 1.1367-1(c)(2) and -1(d)(2).
    \24\ Although Reg. Sec. 1.1367-1(c)(2) does not include the 
incremental tax on the Section 1363(d) inclusion in its listing of the 
types of nondeductible, noncapitalizable expenses that fall into this 
category, that regulation expressly states that the listing is 
illustrative, not exclusive. See also Section 1368(e)(1)(A), which 
directs that AAA is computed by making adjustments that are ``similar 
to the adjustments under Section 1367,'' but that ``no adjustment shall 
be made for Federal taxes attributable to any taxable year in which the 
corporation was a C corporation.'' This language seems to confirm that 
federal income taxes attributable to taxable years in which the 
corporation was a C corporation are taken into account in making basis 
adjustments under Section 1367 when they are incurred in an S year.
    See also Preamble, T.D. 9210 (July 11, 2005), which states that 
``[t]he issues raised by the payment by an S corporation of taxes 
attributable to a taxable year in which the corporation was a C 
corporation are not unique to a payment of the LIFO recapture tax. . . 
.'' (T.D. 9210 extended the application of Section 1363(d) to LIFO 
inventory held indirectly by a converting corporation through a 
partnership.)
    In my opinion, the Section 1363(d) incremental tax is unique and 
this uniqueness warrants the special treatment described below.
    \25\ Note that the income taxes payable by a converted corporation 
under Section 1374 also reduce stock basis. I.R.C. Sec. Sec. 1366(f)(2) 
and 1367(a)(2)(B) and (C). However, unlike Section 1363(d), stock basis 
is also increased by the net recognized built-in gain on which the tax 
is imposed.
---------------------------------------------------------------------------
    Technical Corrections Needed. The literal application of these 
current provisions creates the potential for substantial distortions in 
the amount, timing, and character of the income ultimately recognized 
by the shareholders of the converted corporation. For the reasons 
stated above, Sections 1371 and 1367 should, in my opinion, be revised 
to require the accrual of the entire amount of the Section 1363(d) 
incremental tax on the recapture date--i.e., at the time the liability 
for that tax becomes ``fixed and determinable,'' without regard to when 
economic performance ultimately occurs. These revisions would be 
consistent with the concept of E&P, with the legislative purpose that 
prompted the enactment of Section 1363(d), with the treatment of 
corporate-level recapture taxes under Section 1371(d)(3), and with the 
regulations under Section 1374 (which apply the all-events test without 
regard to the economic performance requirement in distinguishing 
deductions that were built-in as of the last day of the converting 
corporations last tax year as a C corporation, and those that accrued 
subsequent to the start of the Section 1374 recognition period).\26\ 
These changes would also be consistent with the legislative purposes 
that inspired the changes made to Subchapter S by the American Jobs 
Creation Act of 2004.\27\
---------------------------------------------------------------------------
    \26\ Reg. Sec. 1.1374-4(b)(2), which reads, in part, as follows:
    ``Deduction items. Except as otherwise provided in this Section, 
any item of deduction properly taken into account during the 10-year 
recognition period is recognized built-in loss if the item would have 
been properly allowed as a deduction against gross income before the 
beginning of the 10-year recognition period to an accrual method 
taxpayer. . . . In determining whether an item would have been properly 
allowed as a deduction against gross income by an accrual method 
taxpayer for purposes of this paragraph, Section 461(h)(2)(C) and 
Section 1.461-4(g) (relating to liabilities for . . . taxes . . .) do 
not apply.'' [Emphasis supplied.]
    Note also that the corporate-level tax imposed under Section 1374 
is treated as a loss sustained by the S corporation for the taxable 
year in which the built-in income or gain is recognized and the tax is 
imposed, regardless of the year in which the tax is actually paid. 
I.R.C. Sec. 1366(f)(2) and Reg. Sec. 1.1366-4(b).
    \27\ P.L. 108-357. The revisions to Subchapter S were designed to 
``modernize the S corporation rules and eliminate undue restrictions on 
S corporations in order to expand the application of the S corporation 
provisions so that more corporations and their shareholders will be 
able to enjoy the benefits of subchapter S status.'' H. Rep. No. 108-
548, 108th Cong. 2nd Sess. 128 (2004).
---------------------------------------------------------------------------
    Thank you for your time and consideration.

                                              David W. LaRue, Ph.D.

                                 

                                                      Nalco Company
                                         Naperville, Illinois 60563
                                                    August 29, 2005

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

Dear Chairman Thomas and Committee Members:

    On behalf of Nalco Company, I submit the attached proposed 
amendment to H.R. 3376 to clarify the circumstances under which tax 
credits may be earned under Section 45 of the tax code, as added under 
provisions of the American Jobs Creation Act of 2004 (the ``Act''). The 
attached clarifying language, provided in draft bill form, relates to 
Section 710 of the Act.
    Among other water treatment and process improvement services, Nalco 
Company supplies coal preparation and related environmental materials 
and consulting services. We believe that ambiguous definitions in the 
Act raise enough uncertainties to limit its potential value. In our 
view, clarifying language would help ensure that benefits are realized 
from the Act's intended support for waste coal re-mining and related 
site reclamation, as well as for technologies to create energy from 
waste coal with lower sulfur dioxide, nitrogen oxide and/or mercury 
emissions.
    The Internal Revenue Service took more than a decade and hundreds 
of Private Letter Ruling precedents to implement Section 29. 
Ambiguities in the Act as it exists for Section 45 today, when combined 
with the limited size of the credit, could well result in similar 
delays or complete avoidance of the technology development needed to 
enable waste coal re-mining and emission reductions from coal 
preparation technologies.
    Additional legislative clarity is needed to provide reasonable 
assurance that interpretations of legislative intent will remain stable 
as companies decide whether or not to invest in research and 
development to support the Act's legislative objective. The attached 
proposed language represents our best efforts to further clarify 
several key points. Specifically, the language is intended to clarify 
that:

      Impoundment waste coal is included in the definition of 
``feedstock.''
      The per-ton credit applies to only the energy-producing 
coal tonnage left after the waste coal is refined to eliminate non-
energy-producing materials.
      Refined waste coal may be blended with newly mined coal 
in energy production, while applying the credit only to the refined 
coal.
      Any positive market value for refined waste coal should 
meet the 50 percent market value improvement criteria, as this waste 
coal has no value or a negative value in situ.
      An average of 20 percent emission reductions of two of 
the three pollutant sources discussed in the Act--nitrogen oxide, 
sulfur dioxide and/or mercury--to enhance the potential producers' 
ability to meet the Act's intended environmental benefits.

    We appreciate the Committee's consideration of our proposal and 
would be happy to respond to any questions.

                                                 Michael R. Bushman
                               __________

DRAFT BILL

    To amend the Internal Revenue Code of 1986 to make technical 
corrections, and for other purposes.
    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
    This Act may be cited as the ``[Renewable Credit and Refined Coal 
Credit] Tax Technical Corrections Act of 2005.''
SEC. 2. TECHNICAL CORRECTIONS.
    (a) AMENDMENTS RELATED TO THE AMERICAN JOBS CREATION ACT OF 2004.--
    (1) Amendments Related to Section 710 of the Act.--
    (A) Clause (i) of section 45(c)(7)(A) of the Internal Revenue Code 
of 1986 is amended to read as follows:
    ``(i) is a liquid, gaseous, or solid synthetic fuel produced from 
coal (including lignite and waste coal) or high carbon fly ash, 
including such fuel used as a feedstock.''
    (B) Clause (iv) of section 45(c)(7)(A) of such Code is amended to 
read as follows:
    ``(iv) is produced in such a manner as to result in an increase of 
at least 50 percent in the market value of the refined coal (excluding 
any increase in heat value caused by materials combined or added during 
the production process), as compared to the value of the feedstock 
coal.''
    (C) Subparagraph (B) of section 45(c)(7) of such Code is amended to 
read as follows:
    ``(B) QUALIFIED EMISSION REDUCTION.--
    The term `qualified emission reduction' means a reduction of at 
least 20 percent of the total emissions of nitrogen oxide and either 
sulfur dioxide or mercury released when burning the refined coal 
(excluding any dilution caused by materials combined or added during 
the production process), as compared to the emissions released when 
burning the feedstock coal or comparable coal predominantly available 
in the marketplace as of January 1, 2003.''
DESCRIPTION OF THE [RENEWABLE CREDIT AND REFINED COAL CREDIT] TAX 
        TECHNICAL CORRECTIONS ACT OF 2005
TAX TECHNICAL CORRECTIONS
    The draft bill includes technical corrections to the recently 
enacted American Jobs Creation Act of 2004 (the ``Act''). The 
amendments made by the technical corrections contained in the draft 
bill take effect as if included in the Act.
    Clarifications relating to tax credit for production and sale of 
refined coal (Act sec. 710).--The provision clarifies that waste coal 
(including coal fines) is a qualifying feedstock which may be converted 
into qualified refined coal, the production and sale of which generally 
qualifies for a tax credit of $4.375 per ton of qualified refined coal, 
subject to adjustment and phase-out. As a consequence, it is against 
this waste coal feedstock that the 20 percent total emission reduction 
and 50 percent value increase requirements are applied. If the waste 
coal has no value, the 50 percent value increase requirement thus will 
be satisfied to the extent that the synthetic coal has a positive 
value. This clarification is supported by one of the legislative 
purposes underlying the enactment of this provision, i.e., encouraging 
the reclamation and use of waste coals.
    The provision also clarifies that the 50 percent value increase 
requirement should not take into account any value increment resulting 
from heat value increases due to materials combined or added during the 
production process. However, the 50 percent value increase requirement 
should take into account any value increase resulting from the addition 
of materials in order to obtain a ``qualified emission reduction.'' A 
significant legislative purpose underlying this provision is the 
achievement of a ``qualified emission reduction.'' This legislative 
purpose should not be undercut by excluding value increases 
attributable to the introduction of materials necessary to achieve a 
``qualified emission reduction.''
    The provision clarifies the definition of a ``qualified emission 
reduction.'' A ``qualified emission reduction'' is tied to a reduction 
of the emissions of three substances--nitrogen oxide, sulfur dioxide, 
and mercury. The provision clarifies that a ``qualified emission 
reduction'' is achieved if the process results in a average 20 percent 
reduction of the total emissions of two of these pollutants, with one 
of the reduced substances being nitrogen oxide. Achieving 20 percent 
reduction in the total emissions of two of these pollutants will 
satisfy the policy of a significant improvement to air quality. 
Moreover, the 50 percent value increase fundamentally operates to 
further ensure that the achieved emission reduction is considered 
valuable by the market, which value inherently is driven by achieving 
targeted emission reductions and other environmental goals.

                                 
    Statement of James Tobin, National Association of Home Builders
    Thank you for the opportunity to submit comments presenting the 
views of the National Association of Home Builders (NAHB) on H.R. 3376, 
the Tax Technical Corrections Act of 2005, and the impact the 
legislation may have on homeowners and the home building industry. NAHB 
represents more than 220,000 member firms involved in home building, 
remodeling, multifamily construction, property management, housing 
finance, building product manufacturing and other aspects of 
residential and light commercial construction. The success of the home 
building industry and the benefits of homeownership have been clearly 
evident in recent years with the housing sector continuing to be an 
engine of economic growth.
    In 2004, in response to World Trade Organization rulings that 
declared the foreign sales corporation (FSC) regime and the 
extraterritorial income (ETI) regime prohibited export subsidies, 
Congress enacted the American Jobs Creation Act of 2004. The American 
Jobs Creation Act replaced the FSC/ETI regimes with new tax provisions 
to aid domestic manufacturers. By reducing the tax burden on domestic 
manufacturers, the American Jobs Creation Act sought to improve the 
cash flow of domestic manufacturers and increase investment in domestic 
manufacturing.
    The American Jobs Creation Act created a new deduction for domestic 
production activities, which is limited to fifty percent of the wages 
(i.e. wages reported on Form W-2) paid by the taxpayer. Included in the 
definition of ``qualified production activities income'' was domestic 
production gross receipts generated from construction activities 
performed in the United States. For this purpose, construction 
activities are activities directly related to the erection of 
residential and commercial buildings and infrastructure, including 
substantial renovation. The new deduction will be a real tax benefit 
for most home builders and, because the deduction is calculated using 
wages paid, could represent a substantial deduction for home builders 
who have a significant number of employees. The deduction will help 
home builders maintain their role as an engine of economic growth by 
offsetting some of the escalating costs of developing and constructing 
a home. For homeowners and potential new home buyers, the deduction 
will help reduce the cost of owning a new home.
    Inevitably, major tax legislation requires technical corrections to 
ensure the implementation of the new law reflects the intent of the 
Congressional authors, and the American Jobs Creation Act of 2004 is no 
exception. H.R. 3376, the Tax Technical Corrections Act of 2005, 
contains technical corrections with respect to the American Jobs 
Creation Act. NAHB's comments address a specific provision in H.R. 3376 
that seeks to clarify that ``domestic production gross receipts'' 
exclude gross receipts derived from the lease, rental, license, sale, 
exchange or other disposition of land (Sec. 2(a)(6)).
    The construction of a home, or any structure, begins with the 
improvement of raw land. Many of NAHB's members purchase land and later 
sell the land to another builder to complete the final phase of 
construction. Under the proposal contained in Section 2(a)(6) of H.R. 
3376, any income derived from the passive holding of land would be 
excluded from ``domestic production gross receipts'' for the purpose of 
computing the domestic production deduction. This exclusion is unfair 
and unnecessarily burdensome to home builders.
    Excluding land holdings, the raw material on which home 
construction depends, is unfair to businesses whose livelihood depends 
upon land acquisition as the basis for their construction activities. 
Excluding gross receipts derived from the lease, rental, license, sale, 
exchange or other disposition of land, fails to recognize the true 
costs, and business, of constructing a home. The passive holding of 
land is a legitimate business activity and represents a small portion 
of the income of a home builder. By far, home builders earn the largest 
part of their income from the construction and sale of homes, an 
approved activity under the American Jobs Creation Act, not from the 
buying and selling of land. NAHB believes that this reality makes the 
exclusion unnecessary.
    Further, excluding the lease, rental, license, sale, exchange or 
other disposition of land would require an overly burdensome accounting 
of gross receipts; complex calculations attempting to divine permitted 
construction activities from excluded passive land holdings. A large 
percentage of the 70,000 builder members of NAHB would be required to 
create land values for each parcel of land in their inventories. For 
NAHB's members, the majority of which are small businesses and who 
build only a few homes each year, the information required to identify 
and separate the gross receipts of a permitted construction activity 
and an excluded passive land holding is burdensome. For our large-
volume members, which potentially have thousands of transactions each 
year, these calculations are complex and the costs are enormous.
    Given the small percentage of gross receipts that home builders 
derive from passive land holdings and the overly burdensome 
requirements of computing passive land holdings, NAHB urges you to 
eliminate the proposed exclusion for the lease, rental, license, sale, 
exchange or other disposition of land.
    Again, thank you for the opportunity to comment on H.R. 3376, the 
Tax Technical Corrections Act of 2005. NAHB looks forward to working 
with you and the members of the House Committee on Ways and Means as 
you continue to develop legislation designed to ensure that the new 
domestic manufacturing deduction reflects your intent.

                                 

 Statement of the Tony M. Edwards, National Association of Real Estate 
                           Investment Trusts

    As requested in Press Release No. FC-12 (July 22, 2005), the 
National Association of Real Estate Investment Trusts (``NAREIT'') 
respectfully submits these comments in connection with the Committee on 
Ways and Means' review of H.R. 3376, the ``Tax Technical Corrections 
Act of 2005'' (the TTCA). As stated in Press Release No. FC-12, the 
TTCA includes technical corrections to, among other things, the 
American Jobs Creation Act of 2004, Pub. L. No. 108-357 (the Jobs Act) 
including certain provisions relating to real estate investment trusts, 
which was signed into law on October 22, 2004. NAREIT thanks the 
Chairman and the Committee for the opportunity to share its views on 
several important, but technical, issues relating to the Jobs Act's 
effect on real estate investment trusts.
    NAREIT is the representative voice for United States real estate 
investment trusts (REITs) and publicly traded real estate companies 
worldwide. Members are REITs and other businesses that own, operate and 
finance income-producing real estate, as well as those firms and 
individuals who advise, study and service these businesses.

EXECUTIVE SUMMARY
    By way of background, the Jobs Act contains all three titles of the 
NAREIT-supported REIT Improvement Act (RIA), which was introduced as 
H.R. 1890. First, Title I of the RIA includes a number of provisions, 
including one that allows a REIT to make certain loans in the ordinary 
course of business without the risk of losing REIT status and another 
that permits timberland dispositions to qualify for a new safe harbor 
from the 100% prohibited transactions tax. Second, Title II of the RIA 
substantially conforms the treatment under the FIRPTA rules of foreign 
shareholders in publicly traded REITs to that of foreign shareholders 
in other publicly traded U.S. companies. Finally, Title III of the RIA 
(the REIT Savings provisions) allows companies to avoid REIT 
disqualification for unintentional REIT test violations either by, 
among other things, paying a monetary penalty if the violation was due 
to reasonable cause or, for certain de minimis violations, by bringing 
themselves into compliance with the REIT rules.
    Because certain provisions of the Jobs Act could have resulted in 
retroactive REIT disqualification and/or considerable additional 
expense, NAREIT submitted written comments to the tax-writing 
Committees suggesting certain clarifications to the REIT-related 
provisions in the Jobs Act. NAREIT would like to thank the Ways and 
Means Committee for favorably addressing these RIA-related changes. 
However, we have been informed by practitioners that there still may be 
some potential ambiguity concerning the application of a few of the 
TTCA provisions concerning effective date issues. Accordingly, as 
further described below, we have requested further clarification either 
in statutory language or legislative history. In addition and as 
further described below, we respectfully request that cross-references 
be updated in connection with the new safe harbor from the 100% 
prohibited transactions tax for timberland dispositions. Finally, 
NAREIT requests the Committee to clarify that REITs are not considered 
``pass-thru entities'' for purposes of Sec. 470 of the Internal Revenue 
Code, as amended (the Code).\1\
---------------------------------------------------------------------------
    \1\ Unless otherwise provided, all ``section'' or ``Sec. '' 
references in this submission shall be to a section of the code. 
Sec. 470 was added by the Jobs Act.
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    The specific RIA-related items are as follows:

    1.  A clarification to the transition rule concerning the 
calculation of ``safe harbor securities'' under Sec. 856(m)(1) in order 
to prevent retroactive disqualification of REITs that had held 
qualifying securities and other securities in compliance with the 
provisions of pre-Act Sec. 856(c)(7) but did not continue to hold such 
securities on the date of enactment of the Jobs Act (or shortly 
thereafter);
    2.  Clarification either to the statutory language or the 
legislative history of the REIT Savings procedures, so that it is clear 
that it applies to failures of the REIT tests (including those with 
respect to taxable years prior to date of enactment of the Jobs Act) 
that are discovered and satisfied after October 22, 2004;
    3.  A clarification either to the statutory language or the 
legislative history of the ``deficiency dividend'' procedure, so that 
it is clear that statements filed with the IRS in taxable years 
beginning after October 22, 2004 can relate to distribution errors that 
occurred in earlier taxable years as well;
    4.  A clarification of the effective date of the new FIRPTA 
provisions of the Jobs Act to include ``deficiency dividends'' of 
capital gains attributable to pre-Jobs Act years; and,
    5.  An update of a cross reference in the REIT provisions of the 
Internal Revenue Code concerning the new safe harbor from the 100% tax 
for timber sales, to clarify that, based on all the surrounding facts 
and circumstances, a sale can avoid characterization as a ``prohibited 
transaction'' even if all of the requirements of the new safe harbor 
are not satisfied.

DISCUSSION
  A. Transition Rule for Expansion of ``Straight Debt'' Safe Harbor

    1.  Background

    In general, a REIT may not own more than 10% of the value of any 
other entity's securities other than those of a taxable REIT subsidiary 
(TRS) or another REIT. Prior to enactment of the Jobs Act, an exception 
to this rule existed for securities that met the definition of 
``straight debt,'' and, in the case of ``straight debt'' securities 
issued by a partnership, the exception required (at least for REITs 
that held non-straight debt and equity partnership securities) that the 
REIT own at least a 20% profits interest in a partnership. 
Unfortunately, this straight debt exception did not apply to many 
situations in which individuals and/or businesses owed some debt to a 
REIT, including non-abusive loans issued in the ordinary course of 
business.

    2.  Jobs Act Change and Technical Issue

    The Jobs Act exempted from the 10% test categories of loans that 
are non-abusive and presented little or no opportunity for the REIT to 
participate in the profits of the issuer's business. The Jobs Act also 
eliminated the requirement that a REIT hold a 20% profits interest in a 
partnership, but included a limitation that could disqualify from the 
new ``straight debt'' safe harbor otherwise qualifying debt securities 
if the REIT owned non-qualifying securities in the partnership with a 
value in excess of 1% of the partnership's outstanding securities. 
Sec. 856(m)(2)(C). The Jobs Act also included a new safe harbor for 
partnership debt securities that prospectively treats them as 
qualifying ``safe harbor'' securities if at least 75% of the 
partnership's gross income is from the ``real estate-related'' sources 
described in Code section 856(c)(3) (such as mortgages and rents).
    NAREIT applauds Congress' leadership in enacting these changes and 
appreciates greatly that they were made on a retroactive basis to 2001, 
in recognition of the fact that prior to the amendment the ``straight 
debt'' rules did not reflect the regulatory regime Congress had 
originally intended.
    Nevertheless, several practitioners have raised the concern that 
the Jobs Act's retroactive change concerning partnership debt could 
have resulted in retroactive failures of the asset test for certain 
REITs that had complied with the provisions of the prior ``straight 
debt'' safe harbor, and, accordingly, NAREIT submitted comments to the 
tax-writing committees expressing this concern. For example, under the 
Jobs Act, a REIT that owned the following securities in a partnership 
prior to the enactment of the Act would have been in full compliance 
with prior law but would fail the 10% value test retroactively after 
the Jobs Act: (a) at least a 20% profits interest in the partnership; 
(b) ``straight debt'' securities under Sec. 856(c)(7) (and under 
Sec. 856(m)(1) prior to the application of Sec. 856(m)(2)(C)) with an 
aggregate value in excess of 10% of the partnership's outstanding 
securities; and (c) non-``straight debt'' securities with an aggregate 
value greater than 1%, but less than 10%, of the partnership's 
outstanding securities that do not qualify for the ``real estate 
partnership'' exception.

    3.  TTCA Creation of a Transition Rule

    In general, the TTCA evidences the intent to make the Jobs Act's 
revisions to the prior law ``straight debt'' safe harbor apply 
prospectively when the Jobs Act provisions are stricter than prior law. 
The TTCA 2005 would clarify that securities of a partnership that are 
held by a REIT on or after October 22, 2004, and that would have 
qualified and continue to qualify as straight debt of that partnership 
under prior law rules that required a REIT (that held any partnership 
equity) to hold at least 20% of the partnership equity, will continue 
to so qualify while held by that REIT (or successor) until the earlier 
of the disposition or the original maturity date of the securities.

    4.  Potential Issues Raised by TTCA Statutory Language

        a.  REIT Disposed of Pre-Jobs Act Qualifying Securities Prior 
to October 22, 2004

    One potentially outstanding issue regarding the TTCA ``straight 
debt'' change is that the TTCA requires that the securities have been 
held by the REIT on October 22, 2004, and continuously thereafter. 
However, the TTCA did not otherwise change the Jobs Act's retroactive 
amendment to the prior law ``straight debt'' exception. As a result, it 
would appear that it still may be possible for a REIT that held a 20% 
profits interest in a partnership, along with other qualifying and non-
qualifying debt securities, and which met the pre-Jobs Act ``straight 
debt'' safe harbor prior to its retroactive change by the Jobs Act on 
October 22, 2004, but which disposed of the non-qualifying securities 
prior to October 22, 2004 to face retroactive disqualification because 
it would not be holding the 20% profits interest in the partnership on 
October 22, 2004.

        b.  REIT Disposed of Pre-Jobs Act Partnership Equity Interest 
Shortly After October 22, 2004

    Another potential issue stems from the fact that the TTCA appears 
to require a REIT that potentially faced retroactive disqualification 
under the Jobs Act due to its ownership of a 20% profits interest in a 
partnership in which it also held ``straight debt'' securities to 
continue to own a 20% profits interest following the enactment of the 
Jobs Act in order for its previously qualifying straight debt 
securities to continue to be considered ``straight debt.''
    Following enactment of the Jobs Act on October 22, 2004, REITs that 
faced this retroactive disqualification may have disposed of their 
partnership profits interest bringing themselves into compliance on a 
going-forward basis and hoping that any modification to the 
retroactivity issue raised by NAREIT would be solved only 
retroactively. Unfortunately, this action appears to eliminate their 
ability to meet the TTCA 2005's transition rule. Once the REIT no 
longer holds at least a 20% profits interest, its ownership of other 
partnership securities may result in the REIT's retroactive 
disqualification because the REIT would not meet the TTCA's requirement 
that it continue to comply with the pre-Jobs Act ``straight debt'' safe 
harbor.

    5.  Recommended Solution

    We suggest essentially the same solution that we proposed in our 
earlier comments on this issue. Specifically, we suggest that any 
technical corrections legislation treat the specific securities held by 
a REIT (or a successor under Sec. 381) on or prior to October 22, 2004, 
that qualified as ``straight debt'' as continuing to qualify for the 
Sec. 856(m)(1) safe harbor (without requiring continued compliance with 
the pre-Jobs Act safe harbor following October 22, 2004). By enacting 
such a rule, a REIT that held both straight debt and non-straight debt 
partnership securities and a 20% partnership profits interest pre-Jobs 
Act (in compliance with the then-existing safe harbor), but which 
disposed of any of the securities before October 22, 2004, would not be 
retroactively disqualified. Similarly, the REIT that held a similar 
portfolio of debt securities of a partnership's outstanding securities, 
along with a 20% profits interest (in compliance with the pre-Jobs Act 
safe harbor), but disposed of some or all of the profits interest 
between October 22, 2004 and January 1, 2005, also would not be 
disqualified retroactively. In the latter case, the REIT would have met 
the pre-Jobs Act safe harbor for taxable years beginning before October 
22, 2004, and the post Jobs Act safe harbor for subsequent taxable 
years.
  B. Clarification That REIT Savings Procedures Apply to Failures of 
        the REIT Tests Both Before and After October 22, 2004 That Are 
        Discovered and Satisfied After October 22, 2004

    1.  Violation of REIT Tests Under Prior Law

    Prior to the Jobs Act change, a REIT could lose REIT status by 
failing to satisfy a myriad of tests relating to its organizational 
structure, its sources of gross income, its assets, the distribution of 
its income, its compliance with various procedures, the transferability 
of its shares, etc.

    2.  Jobs Act Change

    The Jobs Act allows a REIT that fails the asset tests to avoid 
disqualification by bringing itself into compliance with the asset 
tests, and in certain cases, paying a penalty. In addition to 
provisions relating to failures to satisfy the asset tests, the Jobs 
Act also imposes a monetary penalty of $50,000 in lieu of 
disqualification for each reasonable cause failure to satisfy the other 
REIT tests. Intentional violations continue to result in REIT 
disqualification.

    3.  Effective Date of Jobs Act Change

    The effective date of the REIT Savings provisions in the Jobs Act, 
both for violations of the REIT asset tests and for other REIT test 
violations, was for ``taxable years beginning after the date of 
enactment.'' This language could be interpreted to mean that if, for 
example, in 2006, a REIT found a problem with respect to any of REIT 
requirements relating to 2004 or earlier, the REIT Savings provisions 
would not apply. Accordingly, NAREIT requested that the REIT Savings 
provisions be clarified to apply to failures ``discovered'' in taxable 
years after date of enactment of the Jobs Act.

    4.  TTCA 2005 Change to the REIT Savings Effective Date

    The TTCA 2005 would amend the effective date for the REIT Savings 
provisions of the Jobs Act to apply to failures of the REIT tests with 
respect to which the requirements of the new rules are satisfied after 
October 22, 2004 (that is, meets the reasonable cause standard if 
applicable, pays the penalty if applicable, and disposes of assets or 
otherwise brings itself into compliance). Specifically, in the case of 
non-de minimis failures of the REIT asset tests, the TTCA would modify 
Sec. 243(g)(4)(A) of the Jobs Act so that it applies to ``failures with 
respect to which the requirements of subparagraph (A) or (B) of section 
856(c)(7) . . . are satisfied after date of enactment [October 22, 
2004].'' (emphasis added).
    This change appears to mean, for example, that the new REIT Savings 
provisions apply starting as early as October 23, 2004, when a REIT 
discovers an asset test violation and then undertakes to cure it, which 
is what NAREIT had requested. Because asset test violations only can 
occur on the last date of each calendar quarter, in such a case, the 
asset test violation must have occurred no later than the last testing 
date, or September 30, 2004. Nevertheless, some practitioners had 
expressed concern that the TTCA would not appear to include errors that 
may have occurred before October 22, 2004, but that were discovered 
after such date, and requested clarification of this point.
    The concern is that because Sec. 856(c)(7)(A)(ii) requires that the 
asset test failure be ``due to reasonable cause and not willful 
neglect,'' technically, a pre-date of enactment asset test failure 
would have been due to reasonable cause pre-date of enactment, and the 
TTCA requirement that the requirements of Sec. 856(c)(7)(A) be 
satisfied after the date of enactment would not be met. A further 
source of confusion is that the Joint Committee pamphlet (JCS-55-05) 
describing this provision in the TTCA states on page 5 that ``the new 
rules that permit the curing of certain REIT failures apply to failures 
with respect to which the requirements of the new rules are satisfied 
in taxable years of the REIT beginning after date of enactment'' 
(emphasis added). This language is inconsistent with the statutory 
language, which allows for satisfaction of the new rules presumably 
immediately after date of enactment, rather than in the next taxable 
year.

    5.  Proposed Solution: Clarification in Legislative History or 
Statutory Language

    NAREIT urges that the legislative history clarify (or the statutory 
language be modified) to make clear that the REIT Savings procedures 
apply to relevant failures of the REIT tests satisfied in taxable years 
beginning after date of enactment of the Jobs Act (but the failures 
that are remedied may have occurred prior to such date). At the very 
least, the legislative history should use language similar to that 
contained in the statute and should include an express statement that 
the intention is to apply the new relief rules to all failures 
discovered after October 22, 2004.
  C. Clarification That Statements Concerning ``Deficiency Dividends'' 
        Can Relate to Distribution Errors That Occurred in Earlier 
        Taxable Years
    Similarly to section B above, the TTCA provision concerning 
``deficiency dividends'' should clarify that the change to Sec. 860 
applies to determinations made in taxable years beginning after date of 
enactment of the Jobs Act and, thus, to errors that may have occurred 
prior to such date. At the very least, the legislative history should 
use language similar to that contained in the statute.
  D. Clarification of the Effective Date of the New FIRPTA Provisions 
        of the Jobs Act to Include ``Deficiency Dividends'' of Capital 
        Gains Attributable to Pre-Jobs Act Years

    1.  Jobs Act Provisions

    Prior to the Jobs Act, the ``Foreign Investment in Real Property 
Tax'' (FIRPTA) required a foreign investor who received a REIT capital 
gain distribution to file a U.S. tax return as though the investor were 
doing business in the U.S. and, if the investor was taxable as a 
corporation for U.S. tax purposes, possibly to pay a ``branch profits 
tax.'' Furthermore, the REIT was required to withhold a 35% tax on such 
distribution. The Jobs Act modified this rule to treat a capital gain 
distribution of a publicly traded REIT to a non-U.S. investor as an 
ordinary dividend so long as the investor owns 5% or less of the 
distributing REIT ``at any time during the taxable year.'' The change 
applied to taxable years beginning after October 22, 2004.

    2.  Technical Issues Under the Jobs Act

    Because deficiency dividends are treated as deductions in the year 
in which they relate (that is, the year in which the REIT failed to 
satisfy the distribution test), it is theoretically possible that a 
REIT could make a deficiency dividend including capital gain 
distributions in a taxable year beginning after October 22, 2004, that 
relates to a taxable year that began prior to October 22, 2004. In such 
a case, the TTCA's change to the FIRPTA rules would not apply because 
the deduction would relate to a taxable year prior to date of 
enactment. Certain practitioners have informed us that this issue is 
substantial enough that could prevent a ``clean'' opinion to be issued 
about the non-FIRPTA status of REIT capital gains distributions paid 
starting in 2005.

    3.  Proposed Solution

    The TTCA clarifies that the FIRPTA change applies to any 
distribution of a REIT that is treated as a deduction of a REIT for 
taxable years beginning after date of enactment. NAREIT suggests that 
this provision be modified so it also applies to capital gain 
deficiency dividends that are paid after October 22, 2004.
  E. Update Cross References in the REIT Provisions of the Code 
        Concerning the New Safe Harbor from the 100% Prohibited 
        Transactions Tax for Timber Sales

    1.  Jobs Act Created Safe Harbor from 100% Tax For Timberland 
Dispositions

    The Jobs Act establishes a new safe harbor from the 100% prohibited 
transactions tax on gains attributable to the sale of ``dealer 
property'' for sales of timberland. This change is accomplished by 
adding a new subparagraph to Sec. 857(b)(6). Under previous law, which 
was not amended, Sec. 857(b)(6)(C) provided for a safe harbor from the 
prohibited transaction tax from sales of rental property if certain 
requirements were met (the Rental Safe Harbor). Rules of application 
relating to the Rental Safe Harbor were contained in Sec. 857(b)(6)(D). 
Further, Sec. 857(b)(6)(E) specifically provided that the Rental Safe 
Harbor was merely a safe harbor, and a REIT that failed to meet the 
safe harbor still could avoid the 100% tax by applying a facts and 
circumstances test as though the Rental Safe Harbor and the attendant 
rules of application had not been enacted.
    Section 321 of the Jobs Act, entitled ``Modification of Safe Harbor 
Rules for Timber REITs,'' (emphasis added), added a new subparagraph 
(D) to Sec. 857(b)(6) that establishes a safe harbor for property held 
for the production of timber (the Timber Safe Harbor). It did so merely 
by redesignating Sec. Sec. 857(b)(6)(D) and (E) as 
Sec. Sec. 857(b)(6)(E) and (F) and inserting new subparagraph (D).

    2.  Omission of Cross References Including Rules of Application of 
Timber Safe Harbor and Specific Treatment of Timber Safe Harbor as a 
Safe Harbor

    Although the Jobs Act created the Timber REIT Safe Harbor, it made 
no other changes to the provisions that referenced subparagraph (C) of 
Sec. 857(b)(6), the Rental Safe Harbor. As a result, the rules of 
application contained in former Sec. 857(b)(6)(D) (redesignated 
Sec. 857(b)(6)(E)) were not extended to the Timber Safe Harbor. Perhaps 
more importantly, the rules of former Sec. 857(b)(6)(E) (redesignated 
Sec. 857(b)(6)(F)), allowing a REIT to treat the Rental Safe Harbor as 
merely a safe harbor, were not extended to the Timber Safe Harbor. As a 
result, one could make the negative inference that a timber REIT, which 
under prior law could avoid the 100% prohibited transaction tax if its 
sold property was not ``dealer property'' after application of a facts 
and circumstances analysis, could not do under post-Jobs Act law if it 
failed to meet the specific Timber Safe Harbor.

    3.  Proposal

    Both the rules of application and the provision treating the Rental 
Safe Harbor as merely a safe harbor should be extended to apply to 
timberland sales. Specifically, both subparagraphs (E) and (F) to 
Sec. 857(b)(6) should be amended to make reference to subparagraph (D) 
after the reference to subparagraph (C). As a result, property sales by 
timber REITs, like property sales by REITs that own rental property, 
will be judged based on the rules of application of Sec. 857(b)(6)(E). 
Furthermore, adding the reference to subparagraph (D) (the Timber Safe 
Harbor) in Sec. 857(b)(6)(F) will make clear that the Timber Safe 
Harbor is in fact merely a safe harbor to avoidance of the 100% 
prohibited transactions tax, rather than the only way for a transaction 
to not be considered a prohibited transaction.
  F. Clarification that REIT is not ``Pass-Thru Entity'' Under New 
        Section 470

    1.  Background

    Section 470, added by the Jobs Act, prohibits a taxpayer from 
claiming a deduction in excess of the taxpayer's gross income with 
respect to the lease of ``tax-exempt use property.'' \2\ The term 
``tax-exempt use property'' is defined by reference to section 168(h), 
which includes: (i) tangible property leased to tax-exempt entities; 
\3\ and, (ii) any property owned by a pass-thru entity with a tax-
exempt entity as an owner if the pass-thru entity's allocation of items 
to the tax-exempt does not constitute a qualified allocation.\4\ Thus, 
under section 168(h) and, in turn, section 470, tax-exempt use property 
includes not only real property leased to tax-exempt entities but also 
all other real property, regardless of its use, owned by a pass-thru 
entity with a tax-exempt or foreign owner.\5\
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    \2\ Section 470(a).
    \3\ Id. Sec. 168(h)(1).
    \4\ Id. Sec. Sec. 168(h)(6)(A), (E).
    \5\ Id. Sec. 168(h)(6)(A).

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    2.  Issue

    Our concern arises from the fact that neither sections 470 and 
168(h) nor the accompanying legislative history defines a pass-thru 
entity for this purpose. Adding to the uncertainty is the fact that, 
notwithstanding the general tax treatment of a REIT as a corporation, 
there are a few instances in the Code in which a pass-thru entity is 
defined to include a REIT.\6\
---------------------------------------------------------------------------
    \6\ Id. Sec. Sec. 1(h)(10)(B); 860E(e)(6)(B); 1260(c)(2).
---------------------------------------------------------------------------
    The statutory language and legislative history clearly indicate 
that REITs were not the target of this provision. Instead, section 470 
was designed to prevent taxpayers from claiming tax benefits generated 
in ``Sale-In Lease-Out'' (``SILO'') transactions,\7\ which the IRS 
recently declared to be abusive tax avoidance arrangements.\8\ First, a 
REIT by definition is required to be taxable as a domestic 
corporation.\9\ Further, section 1361(a)(2) states that ``[f]or 
purposes of this title'' the term ``C corporation'' is defined as a 
corporation that is not an S corporation. Thus, REITs are C 
corporations for all purposes of the Code unless a Code section 
otherwise expressly provides. As you know, widely held C corporations 
rarely are considered pass-thru entities for federal income tax 
purposes because they cannot pass through losses to their 
shareholders.\10\ In fact, we are not aware of any IRS guidance holding 
that a REIT is a pass-thru entity in the absence of express statutory 
direction. Unlike other Code sections, neither section 168 nor section 
470 provides that REITs are pass-thru entities rather than C 
corporations.
---------------------------------------------------------------------------
    \7\ H.R. Rep. No. 108-548, pt. 1, at 313-14 (2004) (noting that the 
prior law was ineffective in curtailing the ability of a tax-exempt 
entity to transfer tax benefits to a taxable entity through certain 
leasing arrangements); S. Rep. No. 108-192, at 198 (2003) (same).
    \8\ Notice 2005-13, 2005-9 I.R.B. 1 (designating SILOs as a listed 
transaction).
    \9\ Section 857(a)(3).
    \10\ See, e.g., section 469(a)(2), which applies the passive loss 
rules only to individuals, estates, trusts, personal service 
corporations, and closely held C corporations.
---------------------------------------------------------------------------
    Second, even prior to the enactment of section 470, REITs generally 
had no incentive to engage in a SILO-type transaction because, unlike 
traditional pass-thru entities (i.e., a partnership), REIT-level losses 
or credits do not flow through to its shareholders. Further, a REIT 
generally has little or no taxable income because it may deduct 
dividends paid to shareholders, and it must distribute most of its 
taxable income as dividends.\11\ Given the tax treatment of REITs, 
there was no benefit to its shareholders for a REIT to create 
deductible losses through a SILO arrangement. In fact, one of the most 
attractive features of investing in a REIT is earning positive income 
through the high dividend yield that results from the requirement that 
a REIT must distribute at least 90 percent of its taxable income 
annually.\12\ In most cases, investing in a SILO arrangement actually 
would have an adverse effect on a REIT because the losses associated 
with a SILO would decrease REIT taxable income, which, in turn, would 
decrease the all-important dividend yield of the REIT's stock. Further, 
presumably the promoters of SILOs price into the transaction tax 
benefits that investors receive from artificial losses or credits. 
Thus, SILO transactions should generate less cash to REITs and their 
investors compared to the economic leasing transactions that are the 
basis on which REIT investors evaluate REIT management.
---------------------------------------------------------------------------
    \11\ Id. Sec. 561.
    \12\ Id. Sec. 857(a)(1).
---------------------------------------------------------------------------
    A REIT is principally evaluated by the public markets based on the 
consistency of its income generating capacity and its ability to grow 
the income stream over time. Thus, a REIT property usually does not 
generate deductions in excess of income, other than when it is newly 
constructed or renovated and has not yet ``stabilized'' its tenant 
base. Yet, even though section 470 would rarely operate to suspend 
losses for a REIT property, an SEC-registered REIT would be compelled 
to undertake substantial verification procedures to document each 
property's profitability. Public REITs already are expending millions 
to comply with section 404 of the Sarbanes-Oxley Act, and to layer on 
top of this extensive review procedure additional inquiries for the 
rare instance when a property generates a net loss that cannot even be 
allocated to a REIT shareholder is excessive, unnecessary, and 
unproductive both for the REIT and the IRS. This waste of resources is 
particularly acute with respect to transactions entered into in 2004, 
for which REITs are currently preparing SEC filings.

    3.  Proposal

    For these reasons, NAREIT respectfully requests that the TTCA 
clarify that, for purposes of sections 470 and 168, a REIT is not pass-
thru entity within the context of section 168(h)(6)(E).
    NAREIT thanks the Committee for the opportunity to comment on this 
important legislation.

                                 

                            National Council of Farmer Cooperatives
                                               Washington, DC 20001
                                                    August 31, 2005

United States House of Representatives
Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20510

Dear Chairman Thomas:

    The National Council of Farmer Cooperatives (NCFC) respectfully 
submits the following comments on H.R. 3376, the Tax Technical 
Corrections Act of 2005 (the Act). NCFC would like to commend you for 
your leadership on the passage of the ``American Jobs Creation Act'' 
(AJCA). We believe the new Internal Revenue Code Section 199 deduction 
for qualified production activities income, created by the AJCA, will 
spur economic growth and will help farmer cooperatives and their 
members realize greater income potential.
    Farmer cooperatives provide over 300,000 jobs in the United States, 
with a total payroll in excess of $8 billion, and contribute 
significantly to the economic well-being of rural America. Since 1929, 
NCFC has been the voice of America's farmer cooperatives. Our members 
are regional and national farmer cooperatives, which are in turn 
comprised of more than 3,000 local farmer cooperatives across the 
country.
    Our comments address several issues relating to the implementation 
of the Section 199 deduction.
Clarify Language Regarding Denial of Deduction for Portion of Qualified 
        Payments
    The Act proposes the language of Code Section 199(d)(3)(B) as 
follows:
    ``(B) COOPERATIVE DENIED DEDUCTION FOR PORTION OF QUALIFIED 
PAYMENTS.--The taxable income of a specified agricultural or 
horticultural cooperative shall not be reduced under section 1382 by 
reason of that portion of any qualified payment as does not exceed the 
deduction allowable under subparagraph (A) with respect to such 
payment.''
    Our understanding of the meaning and purpose of the language is 
illustrated by the following example:
    Assume a ``specified agricultural or horticultural cooperative'' 
has net earnings of $1 million for its fiscal year ended September 30, 
2006, from marketing the agricultural or horticultural products of its 
members. All of the net earnings are qualified production activities 
income by reason of Section 199(d)(3)(D). The cooperative markets its 
members' products on a buy/sell rather than a pooling basis.
    On December 15, 2006, the cooperative pays a patronage dividend of 
$1 million to its members and notifies its members that it is passing 
through $30,000 of Section 199 deductions. Patron A, whose products 
account for 1 percent of the products marketed by the cooperative for 
the year, receives a $10,000 patronage dividend and is notified that 
$300 of Section 199 deductions has been passed through to him or her.
    In this example, it is our understanding that the ``qualified 
payment'' (i.e., the portion of the patronage dividend ``attributable 
to qualified production activities income with respect to which a 
deduction is allowed to such cooperative under subsection (a)'') is 
$30,000. In this case, since the cooperative passed through the full 
amount of its Section 199(a) deduction for the year, the ``portion of 
any qualified payment as does not exceed the deduction allowable under 
subparagraph (A) with respect to such payment'' is also $30,000. This 
language refers to the deduction allowable to members of the 
cooperative and the members as a group are entitled to deduct $30,000 
under Section 199(a).
    Under Section 199(d)(3)(B), the cooperative is entitled to claim a 
patronage dividend deduction of $970,000 (i.e., its patronage dividend 
reduced by the amount of Section 199 deduction passed through) and to 
claim a Section 199 deduction of $30,000 on its 9/30/2006 return. The 
members (assuming that they are all calendar year taxpayers) are 
required to include $1,000,000 of patronage dividends in income and are 
entitled to deduct $30,000 under Section 199(a) on their 2006 income 
tax returns.
    Absent any special language in Section 199, the cooperative in the 
example would have been entitled to both a Section 1382 patronage 
dividend deduction of $1 million and a Section 199(a) deduction of 
$30,000. The language of Section 199(d)(3)(B) is obviously intended to 
prevent both the cooperative and its members from claiming the benefit 
of the portion of the Section 199(a) deduction passed through.
    However, the approach taken in the Technical Correction, namely 
reducing the cooperative's patronage dividend deduction, while allowing 
both the cooperative and its members to claim a Section 199 deduction 
in the amount of $30,000, is counter-intuitive. We are concerned that 
the IRS might some day argue that both the cooperative's patronage 
dividend deduction and its Section 199(a) deduction should be reduced 
by the amount passed through, a clearly incorrect result. There is no 
clear statement in the Technical Correction that the cooperative 
remains entitled to the full Section 199(a) deduction.
    We assume that the language was drafted as it was in order to leave 
the cooperative (and not the members) accountable if it is later 
determined on audit that the proper amount of the Section 199 deduction 
for the year was less than $30,000. We do not disagree with that 
approach to treating audit adjustments.
    At a minimum, we suggest that an explanation (and perhaps an 
example) should be set forth in any committee report that accompanies 
the Tax Technical Corrections Act of 2005 so that the language of 
Section 199(d)(3)(B) will not later be misconstrued.
    We also question why the phrase ``as does not exceed'' is used in 
this section instead of simply stating that the patronage dividend will 
be reduced by an amount ``equal'' to the Section 199(a) deduction 
passed through. Are there instances where the adjustment to the 
patronage dividend can be less than the amount of the Section 199(a) 
deduction passed through? The language seems to suggest that might be 
the case.
Clarify Timing of the Deduction
    The statutory language as proposed in the Act (Code Section 
199(d)(3)(A)) provides that any person who receives a Section 199 
``qualified payment'' from an agricultural or horticultural cooperative 
will be allowed a deduction ``for the taxable year in which such 
payment is received'' so long as the amount is ``identified by such 
cooperative in a written notice mailed to such person during the 
payment period described in section 1382(d).''
    It is likely that many cooperatives, particularly those that pay 
patronage dividends relatively soon after year end, will not yet know 
the precise amount of their Section 199 deduction for a year when 
patronage dividends are paid. To determine the amount of the Section 
199 deduction, a cooperative's tax return will need to be substantially 
complete. However, Section 6072(d) provides cooperatives with a due 
date (without extensions) for their tax returns that is eight and one-
half months after year end.
    Consequently, the effect of the provision as written is to require 
taxpayers to take the deduction at the time they receive their 
patronage payment (part of which is the ``qualified payment''), even 
though they may be notified of the pass-through of the Section 199(a) 
deduction after they file their returns. This result would require 
taxpayers to file amended returns. A more efficient solution would be 
to allow taxpayers to take the deduction in the tax year in which they 
receive notice from the cooperative.
    To illustrate our concern with the timing of the deduction, we 
offer the following example:
    Assume the facts are the same as the prior example except that the 
cooperative also engages in other nonmember/nonpatronage activities 
which result in net nonmember/nonpatronage income for the year of 
$500,000. At the time the cooperative pays its $1 million patronage 
dividend deduction (December 15, 2006), the cooperative has not yet 
completed its tax return and is uncertain as to the precise amount of 
its qualified production activities income and its Section 199(a) 
deduction. When the cooperative pays its patronage dividend, it passes 
through $25,000 of Section 199(a) deductions, determined based upon a 
conservative estimate. When the cooperative completes its 9/30/2006 tax 
return for filing in June 2007, the cooperative determines that it is 
entitled to a $30,000 Section 199 deduction for the year with respect 
to the business it conducts with its members. The cooperative sends 
notices to its members before June 15, 2007, notifying them that an 
additional $5,000 of Section 199(a) deductions passes through to them.
    Must members amend their 2006 income tax returns if they want to 
claim the benefit of the additional Section 199(a) deductions passed 
through to them on June 15, 2007? That is what the statute seems to 
require. Given that many agricultural and horticultural cooperatives 
have thousands of members, that does not seem to us to be a practical 
result.
Clarify Deduction Applies to Goods Manufactured, Produced, Grown, or 
        Extracted within the United States
    Code Section 199(c)(4)(A)(i)(I) provides that income attributable 
to domestic production activities is income derived from ``qualifying 
production property which was manufactured, produced, grown, or 
extracted by the taxpayer in whole or in significant part within the 
United States . . .'' (emphasis added).
    However, the language of Section 199(d)(3) leaves out these 
critical words in several places. The first is in the definition 
confirming that supply cooperatives can qualify as ``specified 
agricultural and horticultural cooperatives.'' Section 199(d)(3)(F)(i) 
provides that it applies to cooperatives engaging ``(i) in the 
manufacturing, production, growth, or extraction in whole or in 
significant part of any agricultural or horticultural products.'' In 
addition, Section 199(d)(3)(D) states that cooperatives ``shall be 
treated as having manufactured, produced, grown, or extracted in whole 
or significant part any qualifying production property marketed by the 
organization which its patrons have so manufactured, produced, grown, 
or extracted.''
    We recommend that the phrase ``within the United States'' be added 
to Sections 199(d)(3)(D) and 199(d)(e)(F)(i).

Eliminate Ambiguity Regarding Supply Cooperatives
    The statutory language as proposed in the Act (Code Section 
199(d)(3)(F)(i)) provides that the pass-through provisions apply to 
Subchapter T cooperatives engaged ``in the manufacturing, production, 
growth, or extraction in whole or significant part of any agricultural 
or horticultural product . . .''
    This language is intended to include supply cooperatives, as was 
made clear in Footnote 33 of the Managers' Report to the AJCA (H. Rept. 
108-755):
    ``33. For this purpose, agricultural or horticultural products also 
include fertilizer, diesel fuel and other supplies used in agricultural 
or horticultural production that are manufactured, produced, grown, or 
extracted by the cooperative.''
    See also Notice 2005-14, 2005-7 I.R.B. 498 (February 14, 2005), 
Section 4.07 (last sentence), which repeats this language.
    Clearly, Congress intended that supply cooperatives be eligible for 
the pass-through provision. We recommend that the statute be clarified 
as follows (clarifying language is italicized):
    ``(F) SPECIFIED AGRICULTURAL OR HORTICULTURAL COOPERATIVE.--For 
purposes of this paragraph, the term `specified agricultural or 
horticultural cooperative' means an organization to which part I of 
subchapter T applies which is engaged----
    ``(i) in the manufacturing, production, growth, or extraction in 
whole or significant part in the United States of any agricultural or 
horticultural products (including any supplies used in agricultural or 
horticultural production), or
    ``(ii) in the marketing of agricultural or horticultural 
products.''

Clarify Treatment of Wage Limitation
    The statute should clarify that the Section 199 deduction of a 
cooperative is subject to the W-2 wages limitation at the cooperative 
level only and that it is not subject to a second W-2 wages limitation 
at the patron level if it is passed through to the patron.
    We recommend that the statute be clarified by adding the following 
sentence at the end of Section 199(d)(3)(A): ``The limitation of 
Section 199(b) does not apply to the amount received from an 
organization to which part I of subchapter T applies.''
    We appreciate the opportunity to make comments with respect to the 
application of Section 199 to farmer cooperatives and their members. We 
would be happy to answer any questions you may have regarding our 
comments; please direct your questions to Marlis Carson, General 
Counsel, at 202-879-0825.

                                                  Jean-Mari Peltier
                                                  President and CEO

                                 

     Statement of Professor Gail Levin Richmond, Nova Southeastern 
         University Law Center, Fort Lauderdale-Davie, Florida

    This statement is submitted with regard to Act section 2(ee), which 
would amend section 121(d)(10), as added by section 840 of the American 
Jobs Creation Act of 2004. In my comments, which relate to Act section 
2(ee)(2), I refer to the Code section involved as section 121(d)(11) (a 
correction I assume will pass as introduced).
    The proposed change to section 121(d)(11) is an improvement over 
the version enacted in the American Jobs Creation Act of 2004. But, as 
I discuss below, it may not fully solve problems caused by the current 
statutory language.
    The American Jobs Creation Act of 2004 added a new requirement to 
section 121. Property acquired in a section 1031 like-kind exchange is 
ineligible for the section 121 exclusion if it is sold within five 
years of the exchange. That provision had a worthy purpose. Given the 
increase in land prices, a taxpayer could avoid significant gain 
recognition with respect to unimproved land held for investment by 
exchanging it for improved real estate on which a house was situated.
    The taxpayer could rent the house (or merely hold it for future 
appreciation) for the minimum period needed to convince the tryer of 
fact that a section 1031 like-kind exchange actually occurred. (Because 
both the property transferred and the property received must be held 
for business or investment use, a taxpayer could not qualify for like-
kind exchange treatment by exchanging investment land for a principal 
residence.) After the obligatory waiting period, which might be as 
short as a year, the taxpayer could move into the house, live in it for 
two years as a principal residence, and sell it.
    By following that path, a married couple could shelter up to 
$500,000 of gain, much of which could be attributable to investment 
land (whose basis carried over to the home) that was never used as a 
residence, much less a principal residence. Because section 121(c) 
relief was available if unforeseen circumstances triggered an earlier 
sale, taxpayers might still exclude a significant portion of their gain 
even if the sale occurred before two years of residence.
    In attacking that potential abuse, current section 121(d)(11) 
failed to use precise language. It applied the five-year wait period if 
``a'' taxpayer acquired the property in a section 1031 transaction. The 
current language is:
    If a taxpayer acquired property in an exchange to which section 
1031 applied, subsection (a) shall not apply to the sale or exchange of 
such property if it occurs during the 5-year period beginning with the 
date of the acquisition of such property.
    As worded, the five-year taint applies to anyone, even a good faith 
purchaser for value, if ``a'' taxpayer acquired the property in a 
section 1031 exchange. A taxpayer who purchased the property from the 
person who entered into the exchange would have a five-year wait for 
section 121 eligibility even if he or she had never been involved in 
the type of transaction the section was enacted to discourage.
    H.R. 3376 would change the language to eliminate the indefinite 
reference to. It substitutes the following language:
    If a taxpayer acquires property in an exchange with respect to 
which gain is not recognized (in whole or in part) to the taxpayer 
under subsection (a) or (b) of section 1031, subsection (a) shall not 
apply to the sale or exchange of such property by such taxpayer (or by 
any person whose basis in such property is determined, in whole or in 
part, by reference to the basis in the hands of such taxpayer) during 
the 5-year period beginning with the date of such acquisition.
    The proposed language removes the potential taint applied to a good 
faith purchaser. It does not, however, solve every potential problem. 
Before the Committee finalizes the language of section 121(d)(11), I 
hope it will consider whether two groups of individuals should be 
exempted from the five-year taint:
    1. Taxpayers who inherit the property. If section 1014 remains the 
law, they will be exempt from section 121(d)(11) because they do not 
take the basis used by the taxpayer who entered into the exchange. But, 
if section 1014 is repealed and replaced by section 1022 carryover 
basis (currently scheduled for 2010), the recipient will be unable to 
use section 121 until the full five-year taint expires. This could work 
a significant hardship in the situation of an unexpected death.
    2. Taxpayers who receive the home in a divorce and must sell for 
unforeseen circumstances related to health or finances. If the marriage 
occurred after the exchange, it is possible the recipient spouse 
received no benefit from the original section 1031 tax deferral. But, 
because of the section 1041 carryover basis rules, that spouse will be 
burdened by the full built-in gain and will be subject to the taint 
period. Even if both spouses benefited from the exchange, only the 
recipient spouse bears the five-year taint. Perhaps this result could 
be improved if section 121(d)(11) allowed a recipient spouse to qualify 
for section 121(c) relief based on unforeseen circumstances. Section 
121(d)(11) currently appears to preclude such relief. As written, 
section 121(d)(11) is a trap for unwary domestic relations lawyers.
    I have previously discussed problems with the current version of 
this Code section. See, e.g., Gail Levin Richmond, Section 121(d)(10): 
An Article Addressing An Article, Tax Notes, February 14, 2005, at 797; 
Mona L. Hymel, Roberta Mann & Gail Richmond, The American Jobs Creation 
Act's Impact on Individual Investors: A Monster of Complexity?, 22 
Journal of Taxation of Investments 187, 198-204 (2005). I do not 
represent any client or other party in making these comments or in my 
other writings on this topic.

                                 

                          Organization for International Investment
                                               Washington, DC 20036
                                                    August 31, 2005

The Honorable Bill Thomas
Chairman of the Ways and Means Committee
2208 Rayburn House Office Building
United States House of Representatives
Washington, DC 20515

The Honorable Charles Grassley
Chairman of the Finance Committee
135 Hart Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Max Baucus
Ranking Minority Member of the Finance Committee
511 Hart Senate Office Building
United States Senate
Washington, DC 20510

Dear Chairmen Thomas and Grassley and Senator Baucus:

    The Organization for International Investment (``OFII'') 
appreciates your introduction of the Tax Technical Correction Act of 
2005 in July. The enactment of this legislation will resolve a number 
of ambiguities in the American Jobs Creation Act of 2004 (``AJCA''), 
permitting taxpayers to move ahead with their tax compliance and 
planning. OFII offers the following comments.
    OFII respectfully requests that an additional technical correction 
relating to the repatriation provision in section 422 of the AJCA be 
included in the enacted legislation. The correction would clarify that 
loans from foreign parent companies and their foreign affiliates to 
related controlled foreign corporations (``CFCs'') are not related 
person indebtedness (``RPI'') within the meaning of section 965(b)(3) 
and that other cash transfers from foreign parent companies and their 
foreign affiliates to CFCs are not subject to the anti-abuse provision 
to the RPI limitation contained in the proposed technical corrections 
legislation. This clarification is essential so that the RPI limitation 
reduces section 965 benefits solely for the U.S.-funded dividends 
Congress intended and U.S. multinationals with foreign parents are 
treated in the same manner under section 965 as U.S. multinationals 
with U.S. owners.
    Section 965 is intended to benefit net remittances of cash from 
CFCs to their U.S. shareholders. No net remittance of cash occurs if a 
CFC dividend is funded by a loan from its U.S. shareholder. To ensure 
that dividends eligible for the section 965 dividends received 
deduction are not funded by a U.S. shareholder, Congress included the 
RPI limitation in section 965(b)(3). The Conference Report for the AJCA 
is very clear on the RPI limitation's purpose:
    This [RPI] rule is intended to prevent a deduction from being 
claimed in cases in which the U.S. shareholder directly or indirectly 
(e.g., through a related party) finances the payment of a dividend from 
a controlled foreign corporation. In such a case, there may be no net 
repatriation of funds, and thus it would be inappropriate to provide 
the deduction.
    Under the RPI limitation, to the extent that a majority U.S. 
shareholder has indebtedness outstanding to CFCs at the end of the year 
of a section 965 election in amounts greater than its indebtedness 
outstanding to CFCs as of October 3, 2004, the eligible dividend amount 
is reduced dollar-for-dollar.\1\ To define ``related person'' 
indebtedness for purposes of the RPI limitation, Congress incorporated 
by cross-reference the related person definition routinely used for 
U.S. shareholders and CFCs for subpart F purposes. That definition, in 
section 954(d)(3), was drafted long before foreign-parented U.S. 
multinationals were common. The related person definition in section 
954(d)(3), read literally, unfortunately encompasses not only majority 
U.S. shareholders of CFCs but their foreign parents and foreign 
subsidiaries of those foreign parents as well. The implication of this 
literal reading, which we believe was unintended, is that loans 
originating abroad--made by foreign parents and their foreign 
subsidiaries--to related CFCs are swept into the RPI definition and 
therefore may reduce section 965 benefits.
---------------------------------------------------------------------------
    \1\ The statutory language is: ``The amount of dividends which 
would (but for this paragraph) be taken into account under subsection 
(a) shall be reduced proportionately for each shareholder by the excess 
(if any) of--(A) the amount of indebtedness of the controlled foreign 
corporation to any related person (as defined in section 954(d)(3)) as 
of the close of the taxable year for which the election under this 
section is in effect, over (B) the amount of indebtedness of the 
controlled foreign corporation to any related person (as so defined) as 
of the close of October 3, 2004. All controlled foreign corporations 
with respect to which the taxpayer is a United States shareholder shall 
be treated as 1 controlled foreign corporation for purposes of this 
paragraph.'' The initial measurement date may now be the nearest 
quarter-end to October 3, 2004, by taxpayer election. See Notice 2005-
38, section 7.01(b)(vi).
---------------------------------------------------------------------------
    As indicated above, the RPI limitation is intended to police CFC 
borrowing from U.S. persons, not foreign persons. Just as CFC-to-CFC 
loans are generally excluded from the RPI definition, so too should 
loans from foreign parents (or their foreign subsidiaries) to CFCs 
generally be excluded since neither category of loan normally 
originates in the United States and, therefore, reduces net CFC 
remittances to the United States.
    As drafted, the proposed technical corrections legislation would 
add an anti-abuse provision to the RPI limitation. The legislation 
would grant Treasury regulatory authority to prevent the avoidance of 
the purposes of the RPI limitation, including regulations providing 
that cash dividends shall not be eligible for section 965 benefits to 
the extent such dividends are attributable to the direct or indirect 
transfer (including through the use of intervening entities or capital 
contributions) of cash or other property from a related person to a 
CFC. Like loans from foreign parents or their foreign subsidiaries to 
CFCs, transfers of cash or other property from foreign parents or their 
foreign subsidiaries to CFCs, as long as not originating in the U.S., 
should not limit section 965 benefits.\2\ The same is true for deemed 
capital contributions under the Plantation Patterns \3\ doctrine from 
foreign parents (or their foreign subsidiaries) that have guaranteed 
CFC debt. Such deemed capital contributions should be considered to go 
directly from the guarantor to the borrowing CFC and not through the 
intermediary U.S. parent.\4\
---------------------------------------------------------------------------
    \2\ The proposed technical corrections legislation grants ample 
discretionary authority to the Service and Treasury to address any 
abuses that may arise involving loans and other property transfers from 
foreign parents to related CFCs. Specifically, the legislation allows 
the Service and Treasury to limit section 965 benefits in the case of 
indirect as well as direct funding of CFC dividends by U.S. 
shareholders. Under this authority, the Service and Treasury may, on a 
discretionary basis, subject, for example, a foreign parent-to-CFC loan 
to the RPI limitation if it is funded indirectly by a U.S. shareholder 
via a loan or distribution from the U.S. shareholder to the lending 
foreign parent.
    \3\ Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712 (5th 
Cir. 1972).
    \4\ We recommend the points discussed in the last three sentences 
of this paragraph be included in the committee reports as examples of 
how Congress intends the grant of regulatory authority to be exercised 
by the Service and Treasury.
---------------------------------------------------------------------------
    Many foreign-parented multinationals have CFCs with substantial 
earnings the repatriation of which section 965 was intended to 
encourage. The domestic reinvestment plan rules (at section 965(b)(4)) 
ensure that the amount of those repatriated earnings will be spent on 
permitted investments in the United States. As drafted, the RPI 
limitation will discourage foreign members of foreign-owned 
multinational groups from funding related CFC dividends otherwise 
eligible for section 965 treatment and, thus, thwart the purpose of the 
repatriation incentive and treat such groups unfairly.
    In summary, the technical corrections legislation and accompanying 
explanatory language, should clarify that, when the parent company of a 
multinational group to which a CFC belongs is foreign: (1) the RPI 
limitation generally does not apply when CFC dividend funding is 
provided by a related foreign person; and (2) funding for CFC dividends 
may be provided by a related foreign person. The following technical 
correction language would accomplish this result:
    Paragraph (3) of section 965(b) is amended by inserting ``, except 
that no foreign person shall be considered a related person for 
purposes of this paragraph'' after ``section 954(d)(3).''

Re: Suggested Technical Correction Regarding Anti-Inversion Legislation 
        (New Section 7874 of the Code)
    OFII requests a technical correction to the American Jobs Creation 
Act of 2004 with regard to new section 7874. We note that the Senate 
Conference Report included an exception from the application of section 
7874 for the direct or indirect acquisition of the properties of a U.S. 
corporation no class of the stock of which was traded on a public 
exchange for the preceding four year period. We further note that this 
exception was not included in the final legislation and understand that 
you are not entertaining technical corrections to include such an 
exception. The language that we propose is not intended to include such 
an exception. We suggest adding the following language in bold italics 
to section 7874(g):
    (g) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including:
    (1) regulations providing for such adjustments to the application 
of this section as are necessary to prevent the avoidance of the 
purposes of this section, including the avoidance of such purposes 
through----
    (i) the use of related persons, pass-through or other noncorporate 
entities, or other intermediaries, or
    (ii) transactions designed to have persons cease to be (or not 
become) members of expanded affiliated groups or related persons; and
    (2) regulations as are necessary to exempt certain transactions 
from the application of this section that do not involve the relocation 
of a top-tier U.S. parent company as a top-tier foreign parent company, 
including exemptions for internal company restructuring transactions.
    Thank you for your consideration of these matters. If your staff 
has questions about this letter or we can otherwise be of further 
assistance, please have them call us.

            Sincerely,

                                                      Todd M. Malan
                                                    President & CEO

                                 

                                       Subpart F Shipping Coalition
                                               Washington, DC 20001
                                                    August 31, 2005

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

Dear Mr. Chairman:

    We are submitting these comments regarding the technical 
corrections legislation (H.R. 3376) on behalf of the Subpart F Shipping 
Coalition and certain additional shipping companies (the ``Shipping 
Coalition''), a group of the United States (``U.S.'') controlled 
foreign-flag shipping companies that are affected by U.S. international 
taxation policy. The Coalition supports strongly the shipping 
provisions of the American Jobs Creation Act of 2004 (the ``Act'').

PROPOSED TECHNICAL CORRECTION RELATING TO REPEAL OF SUBPART F FOREIGN 
        BASE COMPANY SHIPPING INCOME RULES
    Section 415 of the Act repealed the subpart F rules with respect to 
``foreign base company shipping income'' to restore the competitiveness 
of U.S.-owned foreign subsidiaries engaged in shipping operations. 
Despite the repeal, the income of many of these U.S.-owned foreign 
shipping companies could (depending on the future shape of Treasury 
regulations) still become subject to subpart F's rules as ``foreign 
base company services income,'' thereby frustrating Congress's 
expressed intent. In a similar fashion, dividends, interest, or gains 
that would have been foreign base company shipping income under prior 
law could still become subject to subpart F taxation as ``foreign 
personal holding company income,'' equally frustrating Congress's 
intent. We propose that Congress adopt a technical correction, 
described below, clarifying that (i) income that would have been 
foreign base company shipping income prior to the Act will not be 
treated as foreign base company services income and (ii) certain 
dividends, interest, and gains that would have been foreign base 
company shipping income under prior law, will not be treated as foreign 
personal holding company income, after the effective date of the Act.

Background
    The American Jobs Creation Act of 2004 (the ``Act'') represents the 
most far reaching and significant effort in recent history to restore 
the international competitiveness of U.S. shipping. This industry has 
experienced a significant and steady decline over the last twenty-five 
years, and the nation's technical and support capabilities for this 
important sector have been eroded as a result. In its 2002 Report on 
Corporate Inversion Transactions, Treasury specifically identified the 
current taxation on income earned by U.S.-owned foreign shipping 
subsidiaries as a competitive disadvantage relative to foreign-owned 
corporations. The repeal of subpart F's rules concerning foreign base 
company shipping income in Section 415 of the Act (accompanied by the 
enactment of a tonnage tax system in subchapter R of the Act) was 
intended to reverse this decline and to restore the competitiveness of 
the industry for both economic and national security reasons.
    In repealing the foreign base shipping company rules, Congress 
sought to end the competitive disadvantage of the U.S.-owned shipping 
subsidiaries that fell within anti-deferral rules of subpart F. The 
House Ways and Means Committee noted: \1\
---------------------------------------------------------------------------
    \1\ H. Rpt. 108-548 at 209.
---------------------------------------------------------------------------
    In general, other countries do not tax foreign shipping income, 
whereas the United States imposes immediate U.S. tax on such income. 
The uncompetitive U.S. taxation of shipping income has directly caused 
a steady and substantial decline of the U.S. shipping industry. The 
Committee believes that this provision will provide U.S. shippers the 
opportunity to be competitive with their tax-advantaged foreign 
competitors.
    Unfortunately, there are several regulations that if applied 
without deference to the intent of Congress in the Jobs Act could 
frustrate the realization of the objective of the Jobs Act. The first 
of those, involving the potential application of Treasury's regulations 
under Section 883 of the Code, was addressed constructively by Treasury 
earlier this month. These regulations govern the exclusion from gross 
income of the income derived from the international operation of ships 
and aircraft by certain corporations organized in qualified foreign 
countries. In a recent notice, Treasury stated that the regulation's 
anti-abuse provision (commonly referred to as the income inclusion 
test) would be applied without regard to the repeal of the foreign base 
shipping income rules by the Jobs Act, so that U.S.-owned foreign 
subsidiaries would not be unfairly penalized under those regulations.
    The industry faces a comparable challenge through the potentially 
inappropriate application of IRS regulations designed to capture 
services income. In order to compete effectively, U.S. shipping 
companies provide certain services to their foreign subsidiaries. For 
instance, while the principal asset generating income is the ship owned 
by the foreign subsidiary, the U.S. parent often assists in providing 
or arranging for legal, engineering, marketing and other similar 
services with respect to the vessel's operation. That should not lead 
to the taxation of the vessel's operating income under subpart F 
through the recharacterization of that income as services income. Just 
like Treasury's approach to the Section 883 regulations, U.S.-owned 
shipping subsidiaries benefitting from this assistance should not be 
penalized merely because of the Jobs Act's changes. This is 
particularly the case where the foreign subsidiary has procured those 
services through an arms-length arrangement with its parent.
    For limited liability and other purposes, shipping companies 
generally conduct their shipping operations through the use of multiple 
subsidiary corporations that own and register the vessels. In some 
cases, these companies are joint ventures where one of the owners is a 
foreign subsidiary of a U.S.-based shipping company. An additional 
challenge to the industry is the inappropriate possible application of 
the foreign personal holding company income rules to dividends, 
interest, and gains attributable to shipping income that foreign 
subsidiaries of U.S.-based shipping companies may receive or realize 
with respect to the lower-tier subsidiaries.
    The overall purpose of the Jobs Act was to create jobs in the 
United States, particularly in sectors where sophisticated and high 
technology U.S. workers could be competitive in international markets. 
It would be contrary to the purpose of the Act to tax the ship 
operating income of foreign corporations under subpart F merely because 
U.S. workers from affiliated companies are able to provide technical 
and managerial assistance to those corporations, or because of the fact 
that ships are held in lower-tier subsidiaries.

Foreign Base Company Services Income
    Foreign base company services income of a controlled foreign 
corporation (``CFC'') is defined as income (whether in the form of 
compensation, commissions, fees, or otherwise) derived in connection 
with the performance of technical, managerial, engineering, 
architectural, scientific, skilled, industrial, commercial, or like 
services which (1) are performed for or on behalf of any related person 
and (2) are performed outside the country under the laws of which a CFC 
is created or organized.\2\
---------------------------------------------------------------------------
    \2\ Code section 954(e).
---------------------------------------------------------------------------
    Under Treasury regulations, services subject to the foreign base 
company services income rules include services performed by a CFC where 
``substantial assistance'' contributing to the performance of such 
services has been performed by a related person or persons.\3\ For this 
purpose, assistance furnished by a related person or persons to the CFC 
includes, but is not limited to, direction, supervision, services, 
know-how, financial assistance (other than contributions to capital), 
and equipment, material, or supplies.\4\ This has the effect of 
subjecting all of the CFC's operating income to taxation under subpart 
F merely because of the activities of its parent or other affiliates.
---------------------------------------------------------------------------
    \3\ Treas. reg. sec. 1.954-4(b)(1)(iv).
    \4\ Treas. reg. sec. 1.954-4(b)(2)(ii)(a).
---------------------------------------------------------------------------
    Assistance furnished by a related person or persons to a CFC in the 
form of direction, supervision, services, or know-how is generally not 
considered to be ``substantial'' unless either (1) the assistance 
provides the CFC with skills which are a principal element in producing 
the income from the performance of such services by the CFC or (2) the 
cost to the CFC of the assistance equals 50 percent or more of the 
total cost to the CFC of performing the services performed by the 
CFC.\5\ Also, assistance furnished by a related person or persons to a 
CFC in the form of direction, supervision, services, or know-how is not 
taken into account unless the assistance assists the CFC directly in 
the performance of the services performed by the CFC.\6\ The 
regulations contain various examples demonstrating the potential 
application of these rules in cases where a parent corporation provides 
assistance to its CFC.\7\
---------------------------------------------------------------------------
    \5\ Treas. reg. sec. 1.954-4(b)(2)(ii)(b).
    \6\ Treas. reg. sec. 1.954-4(b)(2)(ii)(e).
    \7\ See, Treas. reg. sec. 1.954-4(b)(3). See, also, GCM 38065, TAM 
8127017, and PLR 8114015.
---------------------------------------------------------------------------
    Prior to the Act, the Code statutorily provided that foreign base 
company shipping income would not be considered foreign base company 
income under any other category of such income.\8\ That provision was 
repealed as a ``conforming amendment'' in connection with the Act's 
repeal of the foreign base company shipping income rules.\9\
---------------------------------------------------------------------------
    \8\ Code section 954(b)(6) (as in effect prior to the Act).
    \9\ Act section 415(c)(2)(b).
---------------------------------------------------------------------------
Foreign Personal Holding Company Income
    The foreign personal holding company income (``FPHCI'') rules 
subject to immediate subpart F taxation a CFC's dividends, interest, 
royalties, rents, and annuities, and its gains (net of losses) from the 
sale or exchange of property giving rise to such income.\10\ Prior to 
the Act, dividends, interest, and gains relating to foreign shipping 
income were treated as foreign base company shipping income and not as 
foreign personal holding company income.\11\
---------------------------------------------------------------------------
    \10\ Code section 954(c)(1)(A), (B).
    \11\ Code section 954(f) (as in effect before the Act) provided 
that foreign base company shipping included:
    (1) dividends and interest received from a foreign corporation in 
respect of which taxes are deemed paid under section 902, and gain from 
the sale, exchange, or disposition of stock or obligations of such 
foreign corporation to the extent that such dividends, interest and 
gains are attributable to foreign base company shipping income, and
    . . . Except as provided in paragraph (1), such term shall not 
include any dividend or interest income which is foreign personal 
holding company income (as defined in subsection (c)).
---------------------------------------------------------------------------
The Potential Problems
    The foreign base company services income rules, as they have been 
expansively interpreted by the Treasury ``substantial assistance'' 
regulations, raise a concern regarding their potential application to 
CFC shipping income. U.S.-owned shipping operations may have 
involvement of the U.S. parent corporation in the operation of foreign 
shipping subsidiaries. This involvement by the parent company is also 
the case for foreign-based competitors.
    Prior to the Act, the Code clearly provided that foreign base 
company shipping income would not be treated as foreign base company 
income under any other potentially applicable category of such income. 
But for the current regulatory provision discussed below, the Act's 
conforming amendment could open the possibility that shipping income 
will become subject to immediate subpart F taxation as foreign base 
company services income in the future.
    Current Treasury regulations provide that foreign base company 
services income does not include, for taxable years beginning after 
December 31, 1975, foreign base company shipping income (as determined 
under Treas. reg. sec. 1.954-6).\12\ However, there is a concern that 
in light of the ``conforming amendment'' discussed above, the Treasury 
Department may consider modifying this regulatory provision.
---------------------------------------------------------------------------
    \12\ Treas. reg. sec. 1.954-4(d)(3).
---------------------------------------------------------------------------
    This concern results from the fact that international shipping 
operations are generally global in scope, and may involve the services 
of many related and unrelated companies. Vessel owners typically employ 
the assistance of brokers, agents, technical managers and economic 
managers. They should not be prohibited from employing the assistance 
of related U.S. companies that may be engaged in those services, since 
the purpose of the Jobs Act was to restore those capabilities in the 
United States. Obviously, the goal of Congress in repealing the subpart 
F shipping income rules would be frustrated if U.S. shipping companies 
remained subject to immediate subpart F taxation on their shipping 
income under some other provision of the foreign base company income 
rules.
    The FPHCI rules may present a problem with respect to foreign 
shipping income earned through lower-tier foreign subsidiaries. The use 
of lower-tier subsidiaries for conducting shipping operations is 
typical in the industry. When lower-tier foreign subsidiaries pay to 
the CFC that owns them dividends or interest attributable to shipping 
income, the FPHCI rules, absent a technical correction, could, in 
certain circumstances, cause the dividend or interest income to become 
subject to immediate federal income taxation even though it has not 
been paid to the ultimate U.S. parent. Similarly, when the CFC sells or 
disposes of a lower-tier subsidiary, the FPHCI rules could subject the 
gain to immediate federal income taxation. It should be noted that 
these foreign personal holding company income problems would not arise 
if foreign shipping operations were conducted through a single CFC 
entity rather than through lower-tier subsidiaries. Obviously, the goal 
of Congress, in repealing the subpart F shipping income rules would 
also be frustrated if U.S. shipping companies remained subject to 
immediate taxation under the FPHCI rules because of the corporate 
structure they have typically used.
    The proposed technical correction below would clarify that income 
that a CFC can show would have been foreign base company shipping 
income prior to the Act, will not be treated as foreign base company 
services income. This change will protect the operating income of the 
CFC from recharacterization. It is without prejudice to the ability of 
the Service by regulation or otherwise to require the related U.S. 
company to recognize income reflecting the value of any assistance it 
may provide to its foreign shipping subsidiary. The proposed technical 
correction would also clarify that dividend, interest, and gain income 
that would have been foreign base company shipping income under prior 
law will not be treated as foreign personal holding company income.

Draft Technical Correction

AMENDMENT RELATED TO SECTION 415 OF THE AMERICAN JOBS CREATION ACT OF 
        2004----
    Section 954(b) is amended by adding at the end thereof the 
following new paragraph:
    (7) Special Rules for Certain Shipping Income.--Income of a 
corporation that would have been foreign base company shipping income 
under paragraph (4) of subsection (a) (as in effect before its repeal 
in the American Jobs Creation Act of 2004) shall not be considered 
foreign base company income of such corporation under paragraph (3) of 
subsection (a) and income that would have been foreign base company 
shipping income under paragraph (1) of subsection (f) (as in effect 
before its repeal in the American Jobs Creation Act of 2004) shall not 
be considered foreign base company income under paragraph (1) of 
subsection (a).

PROPOSED TECHNICAL CORRECTION RELATING TO INCENTIVES TO REINVEST 
        FOREIGN EARNINGS IN THE UNITED STATES
    The Act creates a one-time opportunity for U.S. companies to 
repatriate earnings from their foreign subsidiaries at a reduced rate 
of tax. In order to qualify for this one-time opportunity, U.S. 
companies must utilize such repatriated earnings as part of a 
``domestic reinvestment plan'' designed to encourage domestic 
employment. With the exception of certain related party indebtedness, 
increased leverage is an accepted method of raising funds to facilitate 
the repatriation of the benefited foreign earnings. Certain foreign 
corporations engaged in international shipping, however, are severely 
limited in the amount of indebtedness that they may efficiently incur 
due to the application of an historic tax provision that has little, if 
any, further relevance. We propose that Congress adopt a technical 
correction, described below, clarifying that distributed amounts 
related to previously excluded subpart F income withdrawn from foreign 
base company shipping operations will qualify for the reduced tax rate, 
thereby expanding the potential domestic reinvestment of foreign 
earnings, in accordance with Congressional intent.

Background
    Domestic corporations generally are taxed on all income, whether 
derived in the United States or abroad. Income earned by a domestic 
parent corporation from foreign operations conducted by foreign 
corporate subsidiaries generally is subject to U.S. tax when the income 
is distributed as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is deferred, and 
U.S. tax is imposed on such income only when repatriated. However, 
under certain anti-deferral rules, the domestic parent corporation may 
be taxed on a current basis in the United States with respect to 
certain categories of passive or highly mobile income earned by its 
foreign subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. One of 
the main anti-deferral provisions in this context is the CFC rules of 
subpart F. The U.S. tax owed on foreign-source income, whether earned 
directly by the domestic corporation, repatriated as a dividend from a 
foreign subsidiary, or included in income under the anti-deferral 
rules, may be reduced through foreign tax credits, if any.\13\
---------------------------------------------------------------------------
    \13\ Code sections 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
    Dividends received by a domestic corporation from its foreign 
corporate subsidiaries are ordinarily not eligible for a dividends-
received deduction. Under section 965 of the Code, however, certain 
cash dividends received by a United States corporate shareholder of a 
CFC which are to be reinvested in the United States by such shareholder 
are eligible for an 85-percent dividends-received deduction.\14\ 
Section 965 of the Code was introduced by the Act as an incentive to 
repatriate and reinvest domestically foreign earnings that would 
otherwise likely remain offshore. The deduction provided by section 965 
of the Code is available only for a limited time.\15\ The deduction 
does not apply to items that are not included in gross income as 
dividends, such as subpart F inclusions or deemed repatriations under 
section 956 of the Code. Further, cash dividends excluded from gross 
income under section 959(a) of the Code are ineligible for the 85-
percent dividends-received deduction of section 965. The deduction is 
allowed, however, for cash distributions excluded from gross income 
under section 959(a) of the Code to the extent of subpart F income 
resulting from dividends received by the CFC or a lower tier CFC.\16\ 
Without this exception, a U.S. shareholder of a second tier or lower 
CFC would generally be unable to avail itself of section 965 of the 
Code simply because the distributions themselves generated subpart F 
income.
---------------------------------------------------------------------------
    \14\ Code section 965(a)(1).
    \15\ Code section 965(f).
    \16\ Code section 965(a)(2).
---------------------------------------------------------------------------
The Problem
    U.S. shareholders of foreign shipping companies who wish to 
reinvest their foreign earnings in the United States under section 965 
of the Code may be prohibited from doing so because a distribution of 
those earnings can result in non-qualifying subpart F income. As 
described below, the subpart F income can result from a reduced ``net 
investment in qualified shipping assets'' which may occur as a result 
of this dividend.\17\ In such a case, the distribution is excluded from 
gross income under section 959(a) of the Code and will not benefit from 
the 85-percent dividends-received deduction provided by section 965.
---------------------------------------------------------------------------
    \2\ Code section 955; Treas. Reg. sec. 1.955A.
---------------------------------------------------------------------------
    For taxable years beginning after 1975 and before 1987, the subpart 
F income of a CFC generally did not include foreign base company 
shipping income to the extent that such shipping income was reinvested 
during the taxable year in certain qualified shipping investments.\18\ 
To the extent that, in a subsequent year, a net decrease in qualified 
shipping investments occurred, however, the amount of previously 
excluded subpart F income equal to such decrease was itself considered 
subpart F income.\19\ For taxable years beginning after 1986, the 
exclusion for reinvested foreign base company shipping income was 
repealed.\20\ The provisions relating to the pre-1987 net investment in 
qualified shipping assets, however, were retained. These rules continue 
to apply even after the Act's repeal of the subpart F rules applicable 
to foreign base company shipping income.
---------------------------------------------------------------------------
    \18\ Former Code section 954(b)(2).
    \19\ Code section 955(a).
    \20\ Section 1221(c)(1) of the Tax Reform Act of 1986.
---------------------------------------------------------------------------
    As a consequence of these rules, qualified shipping investments are 
a category of earnings permanently invested abroad which, uniquely, are 
potentially ineligible for the benefits of section 965 of the Code if 
repatriated. Further, and again uniquely, a CFC which maintains such 
investments may be prevented from borrowing from third-party sources to 
fund a dividend which qualifies under section 965 of the Code, since 
such a borrowing will, post-dividend, result in a decrease in the 
amount of such investments. We believe that this result was not 
intended by Congress, since it is caused by the residue of a statutory 
scheme which was repealed almost 20 years ago and which has been 
largely forgotten since. As a result, we believe that it is an 
appropriate candidate for a technical correction.
    The proposed technical correction below clarifies that a United 
States shareholder of a CFC will be allowed to qualify for the 85-
percent dividends-received deduction for cash distributions that are 
excluded from gross income under section 959(a) of the Code to the 
extent of any amount included in the United States shareholder's income 
for the taxable year under the rules relating to the inclusion of 
previously excluded subpart F income withdrawn from foreign base 
company shipping operations (section 951(a)(1)(A)(iii) of the Code). It 
tracks the mechanics of existing section 965 of the Code, which 
addresses a similar problem which could have arisen in the case of 
dividends paid up a multi-tiered chain of CFCs.
    Because of the short remaining time to bring dividends back under 
section 965 (i.e., until December 31, 2005), we would urge an extension 
through December 31, 2006, of the period to repatriate earnings covered 
by this shipping income technical correction.
Section 965 Draft Technical Correction

AMENDMENT RELATED TO SECTION 422 OF THE AMERICAN JOBS CREATION ACT OF 
        2004
    Section 965(a)(2) is amended to read as follows:
    (2) DIVIDENDS PAID INDIRECTLY FROM CONTROLLED FOREIGN CORPORATIONS 
AND PREVIOUSLY EXCLUDED SUBPART F INCOME WITHDRAWN FROM FOREIGN BASE 
COMPANY SHIPPING OPERATIONS.--If, within the taxable year for which the 
election under this section is in effect, a United States shareholder 
receives a cash distribution from a controlled foreign corporation 
which is excluded from gross income under section 959(a), such 
distribution shall be treated for purposes of this section as a cash 
dividend to the extent of
    (A) any amount included in income by such United States shareholder 
under section 951(a)(1)(A) as a result of any cash dividend during such 
taxable year to----
    (i) such controlled foreign corporation from another controlled 
foreign corporation that is in a chain of ownership described in 
section 958(a), or
    (ii) any other controlled foreign corporation in such chain of 
ownership, but only to the extent of cash distributions described in 
section 959(b) which are made during such taxable year to the 
controlled foreign corporation from which such United States 
shareholder received such distribution; and
    (B) any amount included in income for such taxable year by such 
United States shareholder under section 951(a)(1)(A)(iii) (relating to 
previously excluded subpart F income withdrawn from foreign base 
company shipping operations).
    An amount included in income under section 951(a)(1)(A)(iii) in 
respect of a controlled foreign corporation in a chain of ownership 
described in section 958(a) other than the controlled foreign 
corporation from which the United States shareholder receives the cash 
distribution shall be taken into account for purposes of subparagraph 
(B) only to the extent of cash distributions described in section 
959(b) which are made during such taxable year through such chain of 
ownership to the controlled foreign corporation from which the United 
States shareholder receives the cash distribution.

                                                    Kenneth J. Kies
                                                   Clark Consulting

                                                     Stephen Fiamma
                                                  Allen & Overy LLP

                                                        Warren Dean
                                                Thompson Coburn LLP

                                                     Alex Trostorff
                                                       Jones Walker

                                 

                                      Tailored Clothing Association
                                               Washington, DC 20036
                                                    August 22, 2005

The Honorable Clay Shaw
Chairman
Subcommittee on Trade
Committee on Ways and Means
U.S. House of Representatives
1104 Longworth House Office Building
Washington, DC 20515

Dear Chairman Shaw:

    On behalf of the Tailored Clothing Association, I would request 
that the Committee consider making a technical corrections in Title V 
of P.L. 108-429. The Association represents the interests of the men's 
and boys' suit industry and has worked with the Committee on tariff 
relief measures for imported worsted wool fabrics.
    Last year Congress extended the wool tariff relief program by two 
additional years as part of Miscellaneous Trade and Technical 
Corrections Act of 2004 (Title V of P.L. 108-429). The original tariff 
relief would have ended at the end of 2005. However, the sunset date 
for two tariff line (9902.51.15 and 9902.51.16) were unintentionally 
extended by only one year (through 12/12/2006). Other tariff lines 
extended as part of the wool relief extension package received the 
proper extension through the end of 2007.
    The Conference Committee Report language describing the extension 
clearly indicates that the tariff lines were to be extended by two 
years. In addition, Senator Baucus inserted a Senate floor statement 
into the Congressional Record flagging the fact that a technical 
corrections was needed for purposes of this tariff line. The wool 
tariff relief package contains several tariff lines, and all items in 
the package have always had the same sunset dates.
    We would appreciate consideration of making this technical 
corrections this year, so that pricing and fabric selection decisions, 
which are made far in advance of actual imports, can properly factor 
potential duty rate levels.
    We appreciate your consideration of our request.

                                                        David Starr
                                                            Counsel

                                 

                                              Milan, Michigan 48160
                                                    August 31, 2005

Honorable John D. Dingell
U.S. House of Representatives
15th District, Michigan
19855 W. Outer Drive
Suite 103-E
Dearborn, MI 48124

Dear Representative Dingell:

    I had the good fortune of meeting with you in person during an open 
meeting in Dearborn, Michigan on Tuesday, August 30, 2005. The purpose 
of my letter is to better inform you of the specifics regarding a 
rather large AMT tax debt that I incurred on ``phantom'' gains due to 
the application of the Alternative Minimum Tax to incentive stock 
options (ISOs). This letter also comes as a result of your personal 
recommendation during our brief meeting.
    The issue with the AMT and ISOs is very complicated. The table 
below has been added to assist in detailing the financial woes that 
myself, and many others, have learned about ``the hard way.''
    In 2000, I took out a Home Equity loan to cover costs associated 
with the exercise of 13,166 stocks options with my current employer. At 
the time of the sale, the stock was trading at $7.50. My exercise price 
was $3.10 per share, and I chose to ``hold'' the stocks for a minimum 
of one year in order to take advantage of the lower capital gains tax 
rate of 20%. What I did not know at the time of exercise was that my 
unrealized, or ``phantom'' gain of $57,930.40 was subject to a form of 
taxation (the AMT) even though the stocks were not actually sold. As 
such, I incurred a very large, unexpected tax liability when my 2000 
tax returns were completed. At this point, I also ``earned'' an AMT 
credit of $12,403 which could be applied to future taxes, or at least 
that was what I thought.
    Unfortunately, the stock price continued to fall and in 2004 I 
actually sold the securities and realized a gain of $2,399.00. This was 
a far cry from the ``phantom'' gain of $57,930.40 which formed the 
basis of my AMT in 2000. While preparing for my 2004 tax return, I 
assumed that the complete $12,403 tax credit would be refunded to me 
based upon the fact that my realized gain was only a mere 5% of the 
``phantom'' gain. However, after much consultation with my tax advisor, 
I soon learned that this event (the actual sale of the securities) was 
not an adequate event to trigger the complete release of the tax credit 
per our current tax code. The resultant AMT credit carried forward was 
reduced to $11,397.00. Further, my research has shown me that the AMT 
remaining credit is not likely to be refunded over the course of my 
life using conventional means.

[GRAPHIC] [TIFF OMITTED] T3731A.002


    I would like to ask for your active support and co-sponsorship of 
H.R. 3385. This important legislation was recently introduced by Reps. 
Johnson (TX), Neal, McCrery, Jefferson, Ramstad, Lofgren, Shaw, Honda 
and Johnson (CT), to provide relief for taxpayers subjected to unfair 
and unjust tax treatment due to the AMT treatment ISOs. In addition to 
unfairly affecting me, this serious problem has impacted many employees 
of small and large companies across America, often resulting in taxes 
up to and exceeding 300 percent of these employees' annual salaries. 
Workers are being forced to pay tens of thousands, hundreds of 
thousands, and even millions of dollars in tax overpayments on income 
they will never receive.
    Please join the groundswell of support for remedying this serious 
injustice through this ISO AMT legislation. This bi-partisan effort is 
building support in Congress, the Press, Corporate America, the 
Taxpayer Advocate's office. Grassroots organizations like the ReformAMT 
www.reformamt.org and the Coalition for Tax Fairness www.fair-iso.org 
are actively supporting this important legislation, and may be 
contacting your office to secure your support.
    Again, it was a pleasure to meet with you and have the opportunity 
to touch on this issue one on one. I am hopeful that you will see the 
injustice with the portion of the tax code affecting ISOs and take the 
appropriate countermeasures. Should you have any additional questions 
or comments regarding my testimony, please feel free to contact me at 
734-681-1080

            Best Regards,

                                                        John Terech

                                 

                                             Williams & Jensen, LLC
                                               Washington, DC 20036
                                                    August 19, 2005

The Honorable William Thomas, Chairman
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515-6348

Dear Chairman Thomas:

    On behalf of potential applicants for allocations of tax-exempt 
financing authority under section 701 of H.R. 4520, the American Jobs 
Creation Act of 2004 (P.L. 108-357) I am writing to comment on the 
proposed legislation to make technical changes in the tax code, H.R. 
3376, the Tax Technical Corrections Act of 2005. I appreciate the 
opportunity to raise the following points with the Ways and Means 
Committee about the potential inclusion of a technical correction 
related to the ``Brownfields Demonstration Program for Qualified Green 
Building and Sustainable Design Projects'' in H.R. 4520, the American 
Jobs Creation Act of 2004.
Background
    Section 701 of the American Jobs Creation Act of 2004 (P.L. 108-
357) (hereinafter the ``Jobs Act''), creates a new category of exempt-
facility bond under IRC section 142, the qualified green building and 
sustainable design project bond (``qualified green bond'').
    The qualified green bond legislation sets an aggregate limitation 
of $2 billion of qualified green bonds that the Secretary may allocate 
to qualified green building and sustainable design projects. Projects 
were to be nominated within 6 months of enactment, with allocations 
made within 60-days thereafter. The IRS extended this deadline for 
applications in Notice 2005-28 until the date that is 120 days after 
the date it publishes guidance on the subject. The authority to issue 
qualified green bonds terminates after September 30, 2009.
    Under the new IRC section 142(l)(4)(A)(v), the tax benefits of 
qualified green bonds are to be allocated toward financing one or more 
of the following:
    (I) The purchase, construction, integration, or other use of energy 
efficiency, renewable energy, and sustainable design features of the 
project.
    (II) Compliance with certification standards cited under [Section 
142(l)(4)(A)(i)] (i.e., the United States Green Building Council's LEED 
certification).
    (III) The purchase, remediation, and foundation construction and 
preparation of the brownfields site.
    The inclusion of specific first-stage development costs in the 
language of the qualified green bond legislation clearly contemplated 
that the qualified green bond proceeds would be used for such purposes. 
All of the projects that worked with the Committees in developing the 
demonstration program had already acquired and remediated their 
brownfields sites.

Reimbursement Regulations
    Under current federal regulations (Sec. 1.150-2), the proceeds of 
private activity bonds described in section 142 (including qualified 
green bonds) may be used to reimburse an issuer for capital 
expenditures incurred prior to the date of issuance of such bonds 
(``original expenditures''), provided that, not later than 60 days 
after the payment of the original expenditures, the issuer adopted an 
official intent resolution indicating that it reasonably expected to 
reimburse itself for such original expenditures with the proceeds of a 
subsequent bond issue. In addition, under the current regulations, the 
issuer must allocate (in writing) the proceeds of its bonds to the 
original expenditures within 18 months of the later of (i) the date the 
original expenditure is paid or (ii) the date the project is placed in 
service--but in no event more than three years (five years in the case 
of certain long-term construction projects) after the original 
expenditure is paid. The regulations provide certain minor exceptions 
to these rules.
    In the case of a refinancing of interim debt for an exempt 
facility, current federal regulations (Sec. 1.142-4) provide that the 
foregoing rules are applied to the use of the proceeds of the interim 
obligations, except that if the interim obligation is not a state or 
local bond (e.g., a construction loan from a bank to the developer), 
the foregoing rules are applied to the refunding bonds.
Impossibility to Comply with Regulations
    In the case of potential qualified green bonds projects already 
underway, a significant amount of the expenditures that are required to 
make such projects eligible for an allocation from the Secretary under 
the qualified green bond legislation--including, but not limited to, 
the expenditures relating to the purchase, remediation and preparation 
of the brownfield sites--were incurred prior to the adoption of the 
qualified green bond legislation by Congress in October 2004. However, 
prior to the adoption of the qualified green bond legislation by 
Congress, an issuer could not have adopted an official intent 
resolution relating to expenditures for a qualified green bond project.
    Absent a technical correction, the Internal Revenue Service is 
unwilling to waive the requirement for an official intent resolution or 
the timing rules in connection with the reimbursement of expenditures 
related to a qualified green bonds project. Therefore, absent a 
technical correction to the qualified green bond legislation, the 
potential qualified green bonds projects will not be eligible for the 
reimbursement of certain expenditures which Congress clearly envisioned 
as being eligible for qualified green bond financing under section 
142(l) when it adopted the qualified green bonds legislation.
Program Incentives Are Furthered By Refinancing
    In addition, the reimbursement regulations are intended to prevent 
the replacement of taxable financing with tax-exempt financing without 
changing the character of the project financed. In the instant case, 
such a result is impossible. Any project awarded tax-exempt financing 
authority must make significant investments in non-conventional energy 
sources. The projects awarded bonding authority must, in the aggregate:

      Reduce peak rate of consumption of electricity from the 
grid by 150 megawatts through the use of renewable energy, on-site 
power generation, and energy efficiency--equivalent to the peak rate of 
power consumption for approximately 20 million square feet of 
commercial office space or approximately 60,000 homes;
      Install 900,000 square feet of solar panels, or more than 
20 acres;
      Install 10.9 megawatts of fuel cell electric generation, 
which would represent a 27% increase in installed fuel cell electricity 
generating capacity in U.S.; and
      Through the use of renewable energy, on-site power 
generation, and energy efficiency, reduce daily sulfur dioxide 
emissions by at least 10 tons per day compared to coal generation 
power.

    The estimated cost of these investments alone, including design, 
purchase, and installation exceeds $265 million. Thus, the cost of 
deploying these technologies exceeds the financing benefits of $2 
billion in tax-exempt financing. The mandatory expenditures for 
qualification are rigorous and substantial. The capacity to manage cash 
flow for these projects given the tremendous costs of the technologies 
involved is important.
    Finally, the projects must demonstrate that the net tax benefit of 
the tax-exempt financing was used for the purposes described above 
(including brownfields remediation). In essence, Congress inserted into 
the Code a specific rule that displaces the need for a conflicting 
regulatory requirement that restricts refinancings to avoid windfall 
net tax benefits from tax exempt bonds.

Congress and the Implementing Rules Envision a Look Back
    As stated above the projects that worked on developing the language 
of the demonstration program described their progress in detail to the 
tax writing Committees. Even the implementing rules under IRS Notice 
2005-48 reflect the fact that projects envisioned to compete for 
allocation had already been well underway. For example, the Code 
provision requires state and local government resources of at least $5 
million to be contributed towards the project to become eligible. The 
Notice allows such resources to be counted to the extent provided ``at 
any time during the period beginning on October 22, 2001 (three years 
prior to the enactment of the Act). . . .''
    The Jobs Act apparently does not provide sufficient guidance for 
Treasury/IRS to determine how Congress intended the reimbursement 
regulations to interplay with projects already underway. Without such 
guidance, projects that have already made significant expenditures and 
yet have to alter construction and investment plans are disadvantaged 
as opposed to early stage projects that have more flexibility in timing 
a tax-exempt issue to maximize cash flow needs. In Title VIII (entitled 
``Energy Policy Tax Incentives'') of the recently enacted Domenici-
Barton Energy Policy Act of 2005 (H.R. 6, Signed by the President on 
August 8, 2005, Public Law number unavailable), Congress provided more 
specific guidance on how the IRS should treat the refinancing rules 
with respect to newly authorized category of tax credit bonds, Clean 
Renewable Energy Bonds. The new IRC section 54(d)(2)(B) specifically 
discusses conditions under which the bonds may and may not be used to 
refinance existing indebtedness. No similar guidance is included in the 
Jobs Act for the green bonds provision.

Extension of Time
    Because the IRS has delayed the date for submission of project 
nominations beyond the originally contemplated statutory time frames, 
the deadline for issuing qualified green bonds should be extended by 
one year to ensure that the projects can reasonably utilize the 
qualified green bonds. The overall maximum amount of bonds that may be 
issued will not be changed, so the scope and revenue impact will not 
increase.

Technical Correction Language
    To address these technical correction issues related to the 
reimbursement of expenditures for potential qualified green bonds 
projects incurred prior to the issuance of qualified green bonds, the 
following should be enacted as an off-Code provision:
    ``For purposes of the reimbursement allocation regulations 
(including Reg. Sec. Sec. 1.142-4 and 1.150-2), a project described in 
section 142(l) shall be deemed to be a long-term construction project 
as described in Reg. Sec. 1.150-2(d)(2)(iii) and to have had an 
official intent resolution which satisfies the requirements of Reg. 
Sec. 1.150-2 covering the project adopted by an issuer prior to the 
date of the earliest expenditure of any cost described in section 
142(l)(4)(A)(v).''
    To address the reduced time in which a project will have to secure 
financing as a result of current implementation delays, and to maintain 
the five year window to issue bonds as originally contemplated by the 
qualified green bonds legislation, the following Code amendment should 
be enacted:
    ``Section 142(l)(8) and (9) are amended by striking `2009' each 
place it appears and inserting in lieu thereof `2010'.''
    We appreciate the Committee's consideration of our request for 
technical corrections, and we stand prepared to provide additional 
information as you may request.

                                                        David Starr