[WPRT 109-10]
[From the U.S. Government Publishing Office]


109th Congress                                                    WMCP:
                            COMMITTEE PRINT                       
 2nd Session                                                     109-10
_______________________________________________________________________

                                     


                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                               __________

                            WRITTEN COMMENTS

                                   on
 
        H.R. 6264, THE ``TAX TECHNICAL CORRECTIONS ACT OF 2006''


                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     
                            OCTOBER 31, 2006

         Printed for the use of the Committee on Ways and Means



                    U.S. GOVERNMENT PRINTING OFFICE
31-496                      WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                      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           JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
RON LEWIS, Kentucky                  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 Friday, September 29, 2006 announcing request for 
  written comments on H.R. 6264, the ``Tax Technical Corrections 
  Act of 2006''..................................................     1
American Council of Life Insurers, statement.....................     2
API, statement...................................................     5
Citigroup Inc., statement........................................     7
Crowe Chizek and Co. LLC, statement..............................    16
Cubeta, David B., Miller and Chevalier Chartered, letter.........    17
Cuno, James, Eloise Martin, and Julia Getzels, The Art Institute, 
  Chicago, IL, joint letter......................................    20
Davis, Jonathan R., Massachusetts Bay Transportation Authority, 
  Boston, MA, letter.............................................    22
Duffy, Tom, Wubbels and Duffy, letter............................    23
Dwyer, Edward K., Lousiana District Export Council, New Orleans, 
  LA, letter.....................................................    24
Edwards, Tony, National Association of Real Estate Investment 
  Trusts, letter.................................................    26
Englert, Joseph G., Export Assist, San Francisco, CA, letter.....    34
Fleming, Michael, Equipment Leasing Association, Arlington, VA, 
  letter.........................................................    35
Fontaine, Monita, National Marine Manufacturers Association, 
  Chicago, IL, letter............................................    36
Food Donation Connection, Knoxville, TN, statement...............    36
Gaudieri, Millicent Hall, and Anita M. Difanis, Association of 
  Art Museum Directors, joint letter.............................    40
Geelan, Sara, Solomon R. Guggenheim Foundation, New York, NY, 
  letter.........................................................    42
Goldstein, Fred, Los Angeles County Museum of Art, Los Angeles, 
  CA, letter.....................................................    45
Government Finance Officers Association, National Association of 
  Counties, National Association of State Auditors, Comptrollers 
  and Treasurers, and National League of Cities, joint statement.    47
Hand, Ivan L. Jr., Money Management International, Inc., Houston, 
  TX, letter.....................................................    51
Hendricks, Jeff, Alaska Ocean Seafood, Anacortes, WA, letter.....    53
Ickert, David, Air Tractor, Inc., Olney, TX, letter..............    54
Jones, Laura Ellen, Hunton & Williams LLP, Richmond, VA, letter..    56
Kercheval, Nancy, Cascade Fishing, Inc., Seattle, WA, letter.....    57
Levenson, Dana, City of Chicago, letter..........................    58
Lipman, Deborah, Washington Metropolitan Area Transit Authority, 
  letter.........................................................    58
Margro, Thomas, Beverly Scott, Roger Snoble, Nathaniel Ford, Sr., 
  Michael Scanlon, and Michael Burns, California Transit 
  Agencies, joint letter.........................................    59
McCrillis, Richard J., Metropolitan Atlanta Rapid Transit 
  Authority, Atlanta, GA, letter.................................    61
McMahon, Tom, S Corp. Association, letter........................    61
Metropolitan Transportation Authority, New York, NY, statement...    62
Metz, Michael, RSM McGladrey, statement..........................    63
Misey, Robert, Jr., Federal Tax Committee of the Wisconsin 
  Institute of Certified Public Accountants, Brookfield, WI, 
  letter.........................................................    64
Morrison, James, Small Business Exporters Association, letter....    66
National Association of Manufacturers, statement.................    68
Olchyk, Samuel, and E. Ray Beeman, Extended Stay, Inc., joint 
  letter.........................................................    69
Paul, William, U.S. Securities Markets Coalition, letter.........    72
Quitmeyer, Gordon, LI-COR, Inc., letter..........................    74
Real Estate Roundtable, statement................................    75
Rebar, Robert, Rebar & Associates, PLLC, letter..................    84
Riley, Thomas, New York State Society of Certified Public 
  Accountants, New York, NY, letter..............................    85
Schlect, Christian, Northwest Horticultural Council, Yakima, WA, 
  letter.........................................................    88
Schreckhise, Carol, Moore Fans, LLC, Marceline, MO, statment.....    89
Serota, Susan P., American Bar Association, letter...............    89
Starr, David, Williams & Jensen, P.C. on behalf of Church 
  Alliance, letter...............................................   107
Sullivan, Thomas, U.S. Small Business Administration, letter.....   109
Swartz, Peter, NH Research, Irvine, CA, letter...................   110
Wahlin, Donald, Stoughton Trailers, Stoughton, WI, letter........   110
Wasch, Kevin, Software and Information Industry Association, 
  letter.........................................................   111
Wessel, Thomas F., KPMG LLC, letter..............................   112
Williams & Jensen PLLC, on behalf of Houston Firefighters' Relief 
  and Retirement Fund, statement.................................   114
      

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
September 29, 2006
FC-26

                      Thomas Announces Request for

                   Written Comments on H.R. 6264, the

               ``Tax Technical Corrections Act of 2006''

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee is requesting written 
public comments for the record from all parties interested in H.R. 
6264, the ``Tax Technical Corrections Act of 2006.''
      

BACKGROUND:

      
    On Friday, September 29, 2006, Chairman Thomas introduced H.R. 
6264, the ``Tax Technical Corrections Act of 2006.'' The legislation 
contains technical corrections needed with respect to recently enacted 
tax legislation.
      
    ``H.R. 6264 includes important corrections intended to make 
Congressional intent clear regarding crucial components of recent tax 
legislation,'' said Chairman Thomas. ``We are asking the public to 
review the proposed text and provide comments during the coming weeks 
so that Congress can send appropriate legislation to the President as 
soon as possible. Although the Tax Technical Corrections Act of 2006 
does not include any technical corrections to the Pension Protection 
Act of 2006, we are interested in receiving any proposals for technical 
corrections to this important 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=17). 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 Tuesday, October 31, 2006. 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.

                                 
             Statement of American Council of Life Insurers
1. Investment Advice
Need for change
    The provision requires that an eligible investment advice program 
either be based on a computer model or that the fees of the fiduciary 
adviser, including commissions, not be affected by the advice (i.e., 
fee leveling). The provision was intended to apply the fee leveling 
requirement solely to the individual actually providing such advice; 
however, the term used in the section is ``fiduciary adviser'' which is 
defined to include the entity employing the individual providing the 
advice, rather than simply the individual. In addition, the provision 
was intended to require an eligible investment advice arrangement to 
take into account all designated investment vehicles under the plan 
(excluding brokerage windows). Finally, a typographical error in 
section 601(b)(3) of the Act is corrected.
Statutory Change
    Amend section 408(g)(3)(B)(v) of ERISA by deleting the word 
``options'' and insert in lieu thereof ``investments designated''.
    Amend section 4975(f)(8)(C)(ii)(V) of the Code by deleting the word 
``options'' and insert in lieu thereof ``investments designated''.
    Amend section 601(b)(3)(A)(i) by deleting the words ``subparagraphs 
(B) through (F) (and so much of subparagraph (G) as relates to such 
paragraphs) of'' and inserting after the word ``1986'' the following: 
``which are not covered by Part 4 of Title I of ERISA''
    Amend section 601(b)(3)(C)(i)(I) by inserting at the beginning 
thereof the following: Except as the Secretary may otherwise provide by 
regulation, general notice on its website, or otherwise, ``
    Amend section 601(b)(3)(C)(ii)(I) by striking the following: ``and 
section 4975(f)(8) (other than subparagraph (C) thereof)''.
    Amend section 601(b)(3)(C)(ii) by deleting subclauses (I) and (II), 
striking the words ``and as are necessary to --'' and inserting in lieu 
thereof a period.
    Although we understand that there is some dispute among the 
conferees as to who they meant to apply the fee-leveling requirement 
to, we would like to take this opportunity to state that our members 
strongly indicate that the only way to make this requirement workable 
is to apply it to an individual providing advice. Otherwise, applying a 
fee-leveling requirement would be impractical, applying the entire 
audit and fee requirement to the corporation or affiliate offering the 
advice. It is only practical that the adviser's fee be leveled, which 
would disincent conflicted advice, and could be easily and readily 
audited.
2. Scope of IRA Class Exemption
Need for change
    The provision clarifies that the IRA class exemption may apply to 
self-directed accounts are similar to IRAs, including Keogh plans. 
However, Keogh plans covered by Title I of ERISA would continue to be 
subject to the exemption for qualified plans.
Statutory Change
    Amend section 601(b)(3)(A)(i) by deleting the words ``subparagraphs 
(B) through (F) (and so much of subparagraph (G) as relates to such 
paragraphs) of'' and inserting after the word ``1986'' the following: 
``which are not covered by Part 4 of Title I of ERISA.''
3. Clarify Department of Labor Authority to Issue Exemptions for Advice
Need for change
    There is concern that the directive by Congress in the Act could 
prejudice the ability of DOL in the future to issue exemptions for 
other advice arrangements.
Statutory Change
    Amend section 601(b)(3)(C)(i)(I) by inserting at the beginning 
thereof the following: ``Except as the Secretary may otherwise provide 
by regulation, general notice on its website or otherwise,''
4. Clarify Department of Labor Authority Regarding IRA Class Exemption
Need for change
    As currently drafted, subclauses (I) and (II) have been interpreted 
to limit the class exemption's application to the type of guidance 
permitted under Interpretive Bulletin 96-1. The following change is 
intended to clarify the authority of the Secretary of Labor in granting 
a class exemption for IRAs if a computer model is determined not to be 
feasible.
Statutory Change
    Amend section 601(b)(3)(C)(ii)(I) by striking the following: ``and 
section 4975(f)(8) (other than subparagraph (C) thereof)''.
    Amend section 601(b)(3)(C)(ii)(I) by striking the following: ``and 
as are necessary to --'' and inserting in lieu thereof a period.
    In the alternative, the following correction deleting subparagraph 
(C) is necessary to remove the fee leveling requirement should the IRA 
study determine that a computer model for IRAs is not feasible:
    Amend section 601(b)(3)(C)(ii)(I) by striking the following: ``and 
section 4975(f)(8) (other than subparagraph (C) thereof)''.
5. Long-term Care Exchange Effective Date
Need for change
    The Act specifies that long-term care i nsurance contracts are 
covered under section 1035 of the Code for exchanges occurring on or 
after January 1, 2010. Various transactions commonly take place today 
under group contracts, such as replacements of coverage (either between 
carriers or within the same carrier), that often are accompanied by a 
transfer or reallocation of reserves to reduce the premiums that 
otherwise would apply under the new coverage. These transactions are 
subject to various provisions of the Code and state law regarding 
continuation and conversion of coverage rights and replacements. See, 
e.g., section 7702B(g)(2)(A)(i)(IV) and (V) of the Code.
    There are also situations where individual long-term care insurance 
policyholders exchange their contracts for new contracts with improved 
features, e.g., pursuant to state law rules requiring insurers to make 
new improved products available to existing policyholders. In addition, 
an exchange may occur in order to allow a policy or certificate to be 
treated as a ``partnership'' policy under the Medicaid laws, in 
accordance with the recently enacted Deficit Reduction Act of 2005 and 
the express intention of the conferees with respect to such exchanges 
(see H.R. Conf. Rep. 109-362, at 294).The replaced contract does not 
have a cash surrender value and, unlike an annuity, endowment or life 
insurance contract, income on the contract is not realized on its 
exchange that would be recognized if not deferred under Code section 
1035. In each of the above cases, the ``exchange'' serves only to 
reduce premiums under the new qualified long-term care insurance 
policy, compared with the premiums that would apply without regard to 
the prior coverage.
    The suggested language would clarify that such transactions do not 
result in any current taxation to the certificate holder or 
policyholder. In particular, the acceleration of the effective date 
would address any concerns that transactions between enactment and the 
otherwise applicable effective date would be adversely affected.
Statutory Change
    Add the following provision to any technical corrections 
legislation to address this issue:
    SEC. xxx--Technical Correction to Effective Date of Tax-Free 
Exchange Provisions.
    (a) Correction of Effective Date.--Section 844(g) of the Pension 
Protection Act of 2006 is amended by striking paragraph (2) (regarding 
the effective date of amendments made to section 1035 of the Internal 
Revenue Code of 1986) and inserting in lieu thereof the following new 
paragraph:
    ``(2) Tax-Free Exchanges.--
    ``(A) In General.--Except as otherwise provided in subparagraph (B) 
of this paragraph, the amendments made by subsection (b) shall apply 
with respect to exchanges occurring after December 31, 2009.
    ``(B) Exchanges of Qualified Long-Term Care Insurance Contracts.--
The amendment made by paragraph (4) of subsection (b) shall apply with 
respect to exchanges occurring on or after the date of enactment of 
this Act.
    (b) No Inference.--Nothing in the amendments made by this section 
or by section 844(b)(4) of the Pension Protection Act of 2006 shall be 
construed to create an inference with respect to the treatment of 
exchanges of qualified long-term care insurance contracts under the 
Internal Revenue Code as in effect before such amendments.
    (c) Effective Date.--The amendments made by this section shall take 
effect as if included in section 844 of the Pension Protection Act of 
2006.
6. Section 1322 Treament of Death Benefits From Company-Owned Life 
        Insurance
Need for change
    Section 1322 of the Act adds a new section, section 101(j) to the 
Code. The general rule of section 101(j) limits the amount excluded 
from income under section 101(a) to the amount of premiums and other 
amount paid by the policyholder. Section 101(j)(2) provides exceptions 
to this rule. Under section 101(j)(2), the policyholder may exclude all 
death benefits received under a company-owned life insurance policy if 
certain notice and consent requirements are satisfied. Section 
101(j)(2)(A)(ii)(II) provides an exception for employees who are highly 
compensated within the meaning of section 414(q) of the Code. Under 
section 414(q)(1)(B), whether an employee is highly compensated is 
determined by applying a test that considers whether the employee was 
highly compensated for the preceding year.
    While the look back rule of section 414(q)(1)(B) can be applied 
readily in those situations where the employee was employed in the 
preceding year, a problem arises if the insured is a new employee of 
the policyholder. This is because there is no prior year salary history 
applicable to a newly-hired employee. The look-back rule essentially 
disqualifies those employees hired in the same year an employer is 
considering purchase of a company owned life insurance policy. This 
means they cannot be considered as part of the eligible pool of highly 
compensated employees. The impact of this look-back rule is 
particularly harsh on small employers seeking to purchase insurance on 
newly-hired key employees and on start-up companies. We do not believe 
that Congress intended this result when it enacted section 101(j).
Statutory Change
    Therefore, we propose the following amendment to section 
101(j)(2)(A)(ii)(II):
    (II) a highly compensated employee within the meaning of section 
414(q) (without regard to paragraph (1)(B)(ii) thereof, and, for 
purposes of this subsection only, by adding the words ``current or'' 
before ``preceding year'' in section 414(q)(1)(B)), or
    We believe that this change will mitigate the problem created by 
the look-back rule that arises in the case of newly-hired key employees 
without changing the intent of Congress to limit the definition of 
highly compensated employees to those employees describe in either 
section 414(q) or section 105(h)(5).
7. Typographical Errors
Need for change
    The following items involve errors in the nature of incorrect 
cross-references, etc.
Statutory Change
    Amend section 4975(f)(8)(A) of the Code by deleting ``subsection 
(b)(14)'' and inserting in lieu thereof ``subsection (d)(17)''. 
[Subsection (b)(14) does not exist in the Code.]
    Amend section 408(g)(3)(D)(ii) of ERISA by deleting subsection 
``(b)(14)(B)(ii)'' and inserting in lieu thereof ``subsection 
(b)(14)(A)(ii)''. [(B) does not exist; we believe the drafters intended 
the reference to be (b)(14)(A).]
    Amend section 4975(f)(8)(D)(iv) of the Code by deleting 
``(b)(14)(B)(ii)'' and inserting in lieu thereof ``subsection 
(d)(17)(A)(ii)''. [Conforming previous change in the Code.]

                                 

                            Statement of API
    I. INTRODUCTION

    These comments are submitted by API, the national trade association 
of the U.S. oil and gas industry, in connection with U.S. House of 
Representatives Committee on Ways and Means request for comments from 
parties interested in H.R. 6265, the ``Tax Technical Corrections Act of 
2006.'' API represents nearly 400 member companies involved in all 
aspects of the oil and gas industry, including exploration, production, 
transportation, refining, and marketing.
    API is proposing two technical corrections. The first concerns 
I.R.C. section 4082(a)(2) and the dyeing of untaxed diesel fuel. The 
second technical correction concerns I.R.C. section 6427(l)(4) and fuel 
used in commercial aircraft engaged in foreign trade.

II. Mechanical Dye Injection Equipment
Present and Prior Law
    Federal excise tax generally is imposed on gasoline, diesel fuel 
and kerosene when the fuel is removed from a refinery or terminal rack. 
However, tax is not imposed on rack removals of diesel fuel and 
kerosene if, among other things, the fuel is indelibly dyed in 
accordance with regulations prescribed by Treasury. The presence of dye 
in the fuel indicates that the fuel is destined for a nontaxable use. 
Regulations have been issued that specify the allowable types and 
concentration of dye. The regulations do not specify the method of 
adding dye to the fuel.
New Law
    Public Law 108-357 (the American Jobs Creation Act of 2004) amended 
I.R.C. Section 4082(a)(2) (relating to the exemptions from tax for 
diesel fuel and kerosene) to provide that tax will not be imposed on 
removals of diesel and kerosene if, among other things, the fuel is 
indelibly dyed by mechanical injection. In addition, the law added new 
I.R.C. Section 6715A which imposes penalties on persons who tamper with 
a mechanical injection system and on the operator of a mechanical dye 
injection system who fails to maintain security standards for such 
system as established by Treasury.
    The reason for this change in the law, as stated by the Joint 
Committee on Taxation, was that ``Congress remained concerned, however, 
that tax could still be evaded through removals at a terminal of undyed 
fuel that had been designated as dyed. Manual dyeing was inherently 
difficult to monitor. It occurred after diesel fuel had been withdrawn 
from a terminal storage tank, generally required the work of several 
people, was imprecise, and did not automatically create a reliable 
record. The Congress believed that requiring that untaxed diesel fuel 
be dyed only by mechanical injection will significantly reduce the 
opportunities for diesel fuel tax evasion.'' (Emphasis added.) (Joint 
Committee on Taxation, General Explanation of Tax Legislation Enacted 
in the 108th Congress (JCS-5-05), May 2005, at page 437-438.)
Technical Correction
    The new law as written may be interpreted to apply to dyeing which 
occurs today within the bulk distribution system (such as dyeing by 
pipeline operators that routinely occurs as fuel is pumped out of 
intermediate tankfarm facilities to shipper terminals), whereas the 
legislative intent was to address the opportunity for evasion at the 
terminal rack. Therefore, the new law under section 4082(a) should be 
clarified as follows (omissions are struck out and additions are 
underlined):
    SEC. 4082. Exemptions for Diesel Fuel and Kerosene.
    (a) In General.--The tax imposed by section 4081 . . . shall not 
apply to diesel fuel and kerosene--
    (2) which is indelibly dyed in accordance with regulations which 
the Secretary shall prescribe, and
    (3) which meets such marking requirements (if any) as may be 
prescribed by the Secretary in regulations.
In the case of fuel that is dyed coincident with the removal from a 
        terminal as described in section 4081(a)(1)(A)(ii), the 
        requirement of paragraph (2) shall be satisfied only if the 
        fuel is dyed by mechanical injection. Such regulations 
        prescribed under this subsection shall allow an individual 
        choice of dye color approved by the Secretary or chosen from 
        any list of approved dye colors that the Secretary may publish.

III. Fuel Used in Commerical Aircraft Engaged in Foreign Trade--Refunds 
        and LUST
Present Law
    Excise tax is imposed on jet fuel (kerosene) when the fuel is 
removed from a registered pipeline or barge terminal (I.R.C. section 
4081). Except in the case of airports directly served by such a 
terminal and which the Internal Revenue Service (``IRS'') determines to 
be a ``secure'' airport, tax is imposed at a rate of 24.4 cents per 
gallon. At secure airports directly served by registered terminals, tax 
is imposed at 4.4 cents per gallon on jet fuel sold for use in 
commercial aviation (21.9 cents per gallon on noncommercial, or 
general, aviation use) when aircraft are fueled. Registered commercial 
airlines are liable for the tax on jet fuel taxed at 4.4 cents per 
gallon. In other cases, the position holder in the terminal is liable 
for payment of the tax. Commercial aviation is defined as 
transportation of persons or property for hire.
    The jet fuel excise tax rates are comprised of two components: 4.3 
cents per gallon (commercial aviation) or 21.8 cents per gallon 
(general aviation) dedicated to the Airport and Airway Trust Fund 
(``AATF''), and 0.1 cent per gallon dedicated to the Leaking 
Underground Storage Tank (``LUST'') Trust Fund. Jet fuel removed for 
use in commercial aircraft engaged in foreign trade (sec. 4221(d)(3)) 
is exempt from the AATF, but not the LUST, portion of the tax.
    The 24.4-cents-per-gallon rate (and the 4.4--or 21.9-cents-per-
gallon rates on otherwise exempt jet fuel) exceed actual liability. 
Refunds of excess tax imposed under section 4081 are claimed under 
section 6427(l)(4) or section 6427(l)(5). Section 6427(l)(4) applies to 
commercial aviation while section 6427(l)(5) applies in all other 
cases.\1\ Section 6427(l)(4) allows airlines to claim the refund 
directly (e.g., by crediting the excess tax against the airline's 
passenger or property excise tax liability) or to assign the refund to 
their ultimate vendors (if the vendors are registered with the IRS). 
Section 6427(l)(5) limits refunds to registered ultimate vendors.
---------------------------------------------------------------------------
    \1\ The heading to section 6427(l)(5) states that the paragraph 
applies to fuel used in ``noncommercial aviation.''
---------------------------------------------------------------------------
New Law
    As enacted by SAFETEA,\2\ section 6427(l)(4) creates an ambiguity 
as to the proper treatment of refunds for jet fuel sold as supplies for 
aircraft engaged in foreign trade. The ambiguity arises because of a 
parenthetical exclusion in the introductory language of section 
6427(l)(4)(A) for jet fuel used as ``supplies for vessels or aircraft 
within the meaning of section 4221(d)(3).'' The exclusion reflects the 
fact that this fuel, unlike jet fuel used in domestic commercial 
aviation, is not subject to the 4.3-cents-per-gallon AATF tax rate. 
However, the exclusion should not be interpreted to preclude comparable 
refund treatment for jet fuel sold for commercial use in foreign trade 
and identical fuel sold for use in domestic commercial aviation.\3\ The 
IRS has issued rules denying commercial airlines the right to claim 
these refunds directly (by treating the fuel as described in section 
6427(l)(5) rather than section 6427(l)(4)).
---------------------------------------------------------------------------
    \2\ ``SAFETEA'' stands for the Safe, Accountable, Flexible, 
Efficient Transportation Equity Act: A Legacy for Users. SAFETEA was 
enacted on August 10, 2005 as Public Law 109-59.
    \3\ Airlines eligible for the section 4221(d)(3) exemption are 
commercial airlines that, like their domestic counterparts, currently 
collect the AATF excise taxes under section 4261 (in this case, the 
international arrival and departure excise taxes).
---------------------------------------------------------------------------
Technical Correction
    Section 6427(l)(4) should be amended to clarify that excess tax 
collected under section 4081 on jet fuel sold for use as supplies for 
aircraft engaged in foreign trade may be refunded either to registered 
airlines or their ultimate vendors. The amendment may be accomplished 
by deleting the current parenthetical ``(other than supplies for 
vessels or aircraft within the meaning of section 4221(d)(3))'' in 
section 6427(l)(4)(A), and adding a new flush sentence at the end of 
that subparagraph, as follows: ``Clause (ii) shall not apply in the 
case of kerosene used as supplies for vessels or aircraft within the 
meaning of section 4221(d)(3).''
Contacts
    For further information, please contact Anne Price Warhola, Mark 
Kibbe, or Teresa Dondlinger Trissell.

                                 

                      Statement of Citigroup Inc.

I. Introduction.
    Citigroup Inc. is pleased to offer its comments on proposed Section 
6 of H.R. 6264 and S. 4026, the Tax Technical Corrections Act of 2006 
(the ``TTCA''). Section 6 would revise section 470 of the Internal 
Revenue Code (as added to the Code by the American Jobs Creation Act of 
2004, P.L. 108-357), principally by adding a new section 470(e), 
addressing the application of section 470's principles to partnerships.
    Citigroup appreciates the importance of section 470 as it applies 
to leasing, and we also understand and accept the importance of 
ensuring that the Code does not countenance the development of highly-
structured partnership arrangements that replicate all or most of the 
tax benefits of ``LILO'' and ``SILO'' lease structures. At the same 
time, Citigroup remains concerned that an overbroad provision aimed at 
forestalling the development of structured partnership successors to 
``LILOs'' and ``SILOs'' could cause adverse unintended consequences for 
many operating partnerships--partnerships that actively conduct one or 
more trades or businesses--that have nothing in common with ``LILO'' 
and ``SILO'' leasing practices.
    This issue is particularly important to Citigroup because one of 
our largest overseas affiliates is organized as a partnership for U.S. 
tax purposes, with a majority U.S. partner and minority foreign 
partners (which in turn are Citigroup subsidiaries that are taxed as 
``controlled foreign corporations''). The affiliate has thousands of 
employees, billions of dollars in annual revenue, in capital, and in 
assets (comprised predominantly of securities positions, but also 
including property described in section 470(c)(2)), and thousands of 
customers. At worst, an overbroad prophylactic partnership provision 
would deny Citigroup a deduction for depreciation and amortization of 
the affiliate's section 470(c)(2) assets, despite the fact that the 
partnership is actively engaged in a customer-driven business that 
bears no resemblance to LILO/SILO fact patterns. At best, an overbroad 
provision would introduce difficult interpretational and compliance 
issues for the IRS, for Citigroup, and for thousands of other operating 
partnerships across the U.S. economy.
    The comments that follow are designed to honor the concerns that 
motivated Congress to introduce section 470 in 2004, and to preserve 
the general framework of Section 6 of the TTCA, as it is currently 
drafted. The overall purpose of our comments is to focus the language 
of Section 6 as it applies to operating partnerships more closely on 
the nature of the relationship between taxable and tax-exempt partners 
that can give rise to the same concerns that Congress addressed in 
section 470 with respect to a taxable lessor and a tax-exempt lessee.
    Section II of this memorandum describes our overall theme in a 
little more detail. Section III then lays out our specific suggestions, 
and briefly summarizes our reasoning. Finally, we have attached for 
your convenience a copy of current Section 6 of the TTCA, marked to 
show our suggested changes.

II. Translating Section 470 Principles into the Partnership Context.
    We believe that section 470, as it applies to its core subject 
(leasing), is premised on three principles that together define a 
``true'' lease. Section 470 then develops rules to ensure that the 
relationship between a tax-exempt lessee and a taxable lessor does not 
to any significant extent vitiate any of these principles.
    The three principles that section 470 uses to define a ``true'' 
lease when the lessee is a tax-exempt entity are as follows. First, the 
lessor must make a substantial investment of capital in the leased 
property. Second, the lessor must look to the lessee's rental 
obligations for one significant portion of the lessor's economic 
returns. And third, the lessor must also look to the residual value of 
the leased property for another significant portion of its economic 
returns.
    Section 470(d) responds to these three principles with three basic 
operating rules. First, the lessor must make and maintain a significant 
investment in the leased property. (Section 470(d)(2).) Second, the 
lessee must not ``monetize'' (beyond relatively insignificant levels) 
its obligation to pay rent to the lessor, or its option to repurchase 
the leased property.\1\ (Section 470(d)(1).) Third, the lessee must not 
assume any significant risk of loss relating to the residual value of 
the leased property (whether through a lessor ``put'' option or 
otherwise). (Section 470(d)(3).)
---------------------------------------------------------------------------
    \1\ As a strictly logical matter, the inclusion of the monetization 
of a lessee option to purchase the leased property probably does not 
necessarily follow from the three principles summarized earlier. The 
inclusion is best explained as reflecting a deep skepticism on the part 
of Congress that a tax-exempt lessee would ever not exercise a 
``defeased'' purchase option, given the importance of the leased 
property in many cases to the lessee's operations.
---------------------------------------------------------------------------
    We believe that these principles and operating rules help put the 
operation of section 470(d)(1), in particular, into context, as can be 
illustrated by some common LILO/SILO fact patterns. To take one 
example, a loan from a tax-exempt lessee to a taxable lessor might be 
viewed as undercutting the first principle outlined above (that the 
lessor have an at-risk investment in the leased property); section 
470(d)(1) accordingly addresses this fact pattern. A tax-exempt 
lessee's ``defeasance'' of its rental obligations to the taxable lessor 
might be viewed as undercutting the second principle (that the lessor 
look to the lessee for a significant portion of its return); section 
470(d)(1) therefore addresses this fact pattern as well. And finally, a 
lessee fixed price option to purchase the leased property, combined 
with a ``defeasance'' arrangement, was seen by Congress as putting too 
much practical pressure on the third principle (that the lessor look to 
the residual value of the leased property for a significant portion of 
its return); section 470(d)(1) therefore also addresses this case.
    Despite all the complexity of the ``LILO'' and ``SILO'' 
arrangements that impelled Congress to enact section 470, those 
transactions, like all leases, essentially boil down to simple 
bilateral agreements between a (taxable) lessor and a (tax-exempt) 
lessee. Accordingly, section 470(d)(1)(A) applies, first, to set-asides 
or other arrangements that run directly to the benefit of the lessor, 
or to any lender to the lessor (because that is what it means to be a 
``lender'' in a leveraged lease transaction). The party providing these 
set-asides of course is the tax-exempt lessee, because that is the 
counterparty to the lessor (and the lessor's lender). Similarly, 
section 470(d)(1)(A) also applies to set-asides by the lessee that 
directly satisfy its own obligations under the lease--but again those 
obligations (and the destination of the lease rental payments) are to 
the lessor (the only counterparty to the lease), or to the lessor's 
lender. In either case, the presupposition is that there is a lessor 
investment or a lessee obligation to pay rent, the economic 
significance of which to the lessor is undercut by the arrangements 
entered into by the lessee.\2\
---------------------------------------------------------------------------
    \2\ In the case of a fixed-price lessee purchase option, the 
lessee's collateralization of that option was viewed by Congress as 
undercutting the economic uncertainty of the exercise of the option.
---------------------------------------------------------------------------
    Section 470(e)(2)(A), as proposed by the TTCA, is patterned closely 
on current section 470(d)(1)(A), but we believe that partnerships are 
much more complex bundles of agreements than are leases. As a result, 
the partnership analogy to section 470(d)(1)(A) is more complex (and 
less inclusive) than how Section 6 of the TTCA in its current form 
might be read. First, partnerships that operate businesses engage in a 
wide range of transactions with suppliers, customers, counterparties, 
lenders and other third parties that have no direct analogy to the 
narrower sphere of activity embodied in a lease. Second, a partnership 
is simultaneously an entity (conducting business with third parties, 
for example) and a multilateral agreement among its partners (through 
partnership allocations). Third, a lender in a leasing arrangement is 
by definition lending to the owner of the property--the lessor. By 
contrast, a lender to a partnership indirectly is lending to all 
partners, including tax-exempt as well as taxable partners. Some 
aspects of this complex web of relationships can be analogized to a 
tax-exempt lessee monetizing its lease obligations, but many others 
cannot.
    The difficulty, then, is to identify within the complex web of 
relationships that define a modern partnership (relationships between 
the partnership and its suppliers, customers and counterparties; 
relationships among the partners in allocating the returns from the 
partnership's business; relationships between a partnership and its 
lenders, etc.) those relationships that are analogous to a tax-exempt 
lessee setting aside ``funds'' for the benefit of the lessor, or the 
lender to the lessor. For example, we submit that, if a partnership 
borrows money from a third party to acquire depreciable property that 
the partnership operates directly in a manufacturing business, and 
posts collateral to the lender to secure the loan, that partnership is 
not, without more, engaged in a transaction that should fall within the 
scope of new section 470(e)(2)(A), regardless of the nature of the 
collateral, because the loan is made indirectly to tax-exempt as much 
as taxable partners.
    Our suggested language seeks principally to clarify the application 
of new section 470(e)(2)(A) by focusing on those relationships that in 
fact are analogous to a tax-exempt lessee monetizing its obligations to 
a taxable lessor. As revised, the language looks to whether a tax-
exempt partner has an obligation to a taxable partner (either directly 
or indirectly through the partnership), which obligation in turn has 
been ``monetized'' through any set-aside or similar arrangement. We 
believe that this clarification focuses new section 470(e)(2)(A) on the 
correct problem, while preserving its broad application (e.g., through 
fungibility of money principles) to prevent abuse.

III. PROPOSED REVISIONS TO STATUTORY LANGUAGE.
    [All references to page and line numbers are to the official print 
of H.R. 6264 S. 4026]
    1. Amend page 14, line 6, to read:
    ``such property is not described in paragraph (A) or (B), and, 
except as provided in regulations prescribed . . .''
Reason: New section 470(e)(2) is difficult to parse because the 
        operative tests do not clearly relate back to the depreciable 
        property described in new section 470(e)(1)(C). This amendment, 
        and the following one, clarify this relationship. Neither 
        changes the fungibility of money concept embodied in new 
        section 470(e)(2)(A): that is, the ``set aside'' rule applies 
        with respect to any set aside, even if the set aside serves as 
        collateral (for example) for non-depreciable property, so long 
        as there exists some obligation on the part of the tax-exempt 
        partner relating to depreciable property (as described below). 
        The consequence of failing the test, however, is relevant only 
        to depreciable property described in new section 470(e)(1)(C).
    2. Amend page 14, line 14, to read as follows:
    ``respect to any property described in subparagraph (1)(C) owned by 
the partnership . . .''
Reason: See above.
    3. Page 14, strike lines 22 through 25, and Page 15, strike lines 1 
and 2. Replace with the following:
    ``if the purpose or effect of the transaction described in clause 
(i) or (ii) is directly or indirectly to satisfy any obligation 
(whether current, future or contingent) of a tax-exempt partner 
relating to such property and owed to the partnership, any taxable 
partner of the partnership, any lender to the partnership, or any 
lender to a taxable partner of the partnership . . . ''
Reason: This suggestion is designed to implement the fundamental point 
        made in Part II, which is that the analogy to section 470(d)(1) 
        here requires identifying an obligation that a tax-exempt 
        partner has to a taxable partner that relates to property 
        described in section 470(e)(1)(C), which obligation is directly 
        or indirectly satisfied through the monetization transaction 
        described in section 470(e)(2)(A)(i) or (ii). (Options are 
        addressed in proposed section 470(e)(3), below.) The idea here 
        is that simple co-ownership, even with preferred returns or the 
        like, does not by itself give rise to an ``obligation'' of the 
        tax-exempt partner (the lessee equivalent) that is being 
        directly or indirectly monetized for the benefit of the taxable 
        partner (the lessor equivalent).
    It is intended, for example, that a simple purchase-money mortgage 
by which a partnership acquires property from a third party seller 
would in general fall outside the scope of revised section 
470(e)(2)(A), both because there would be no set-aside of, similar 
arrangement with respect to ``funds'', and because the obligation of 
both partners to repay the purchase money indebtedness to the third 
party is not an obligation of one partner to the other partner. On the 
other hand, a tax-exempt partner's obligation (whether contingent or 
current) to fund a capital account deficit, for example, is an 
obligation that indirectly runs to the benefit of the taxable partner; 
if the parties require the tax-exempt partner to monetize that 
obligation, then section 470(e)(2)(A) would be triggered.
    4. Page 16, strike lines 1 through 6, and replace with the 
following:
    ``(C) ARRANGEMENTS.--The arrangements referred to in this 
subparagraph include:
    (i) a loan by a tax-exempt partner to the partnership, any taxable 
partner, or any lender to the partnership or a taxable partner,
    (ii) to the extent of all tax-exempt partners' share thereof, a 
loan by the partnership to any taxable partner or any lender to a 
taxable partner, and
    (iii) any arrangement referred to in subsection (d)(1)(B) that has 
the effect of a transaction described in clause (i) or (ii).''
Reason: This revision, like item 3, above, is intended to focus section 
        470(e)(2)(A) on those partnership arrangements that in fact are 
        analogous to section 470(d)(1)(A)--that is, transactions in 
        which a tax-exempt partner monetizes, whether directly or 
        indirectly through the partnership vehicle, an obligation of 
        that tax-exempt partner to a taxable partner. In addition, 
        section 470(e)(2)(C) as currently written is difficult to 
        parse, as it appears to contemplate, for example, a loan by a 
        partnership to itself. The discussion in Part II and under item 
        3, above, applies with equal force here.
    5. Strike page 16, line 18 through page 17, line 3 and substitute 
the following:
    ``TEST.--Funds shall not be taken into account in applying 
subparagraph (A) to property described in subparagraph (1)(C) if such 
funds bear no connection to the economic relationships among the 
partners (whether reflected in the partnership agreement or otherwise) 
with respect to items of income, gain, loss, expense or credit 
attributable to such property. For this purpose, funds described in 
section 956(c)(2)(J) or section 956(c)(2)(K) shall be deemed not to 
bear any connection to the economic relationships among the partners 
with respect to property described in subparagraph (1)(C).''
Reason: New section 470(e)(2)(D)(ii) is very difficult, if not 
        impossible, for a taxpayer to apply, because as currently 
        drafted it simply provides that a taxpayer shall not take into 
        account funds if those funds ``bear no connection to the 
        economic relationships among the partners.'' But everythingthat 
        a partnership does bears some connection to the economic 
        relationships among the partners: every item of income, or 
        deduction, etc. is shared on some basis among the partners. We 
        believe that a more useful way to reformulate the test would be 
        that funds should be excluded if they do not affect the 
        economic deal with respect to the depreciable property being 
        tested. The proposed replacement language reflects this 
        understanding. Clause (ii) was dropped, because it was believed 
        that the phrase ``(whether reflected in the partnership 
        agreement or otherwise)'' more succinctly makes the same point. 
        Finally, the last sentence of the proposed revision addresses 
        explicitly the ``self-funding'' transactions that all financial 
        institutions employ to acquire ownership or possession of 
        securities in the ordinary course of business. Because the 
        financial institution gives and receives equivalent value (or 
        posts collateral on commercial terms directly in connection 
        with a financial transaction), the transactions cannot be used 
        to accomplish any of the monetization results that are the 
        purpose of section 470(d) and new section 470(e).
    As reformulated, this test will be useful primarily for any 
operating partnership in respect of the funding of its ongoing day-to-
day operations. It would be very extraordinary, for example, for 
partners to be able to demonstrate that a funding arrangement in place 
at the outset of a partnership, or contemplated by the partnership 
agreement (or other operative documents), did not affect the economic 
relationships of the partners in respect of the partnership's section 
470(e)(1)(C) property. This relatively narrow scope is appropriate, in 
light of the fact that new section 470(e)(2)(D)(ii) is intended as an 
exception from an anti-abuse rule.
    For the reasons summarized above, we believe that the reformulated 
test will apply only in clearly delineated cases. If, however, there is 
residual concern that the contours of the proposed test need to be 
defined more sharply, consideration could be given to limiting the 
application of the test only to funds used by a partnership in 
connection with the conduct of an active trade or business. The 
Internal Revenue Code contains several ``active trade or business'' 
tests that might serve as a model. For example, one could fashion a 
rule that permitted partnerships to rely on the ``no connection'' test 
only in cases where no more than 20 percent of the partnership's gross 
income constituted ``foreign personal holding company income'' under 
the principles of section 954(c) (as modified by sections 954(h) and 
(i)) if the partnership hypothetically were organized as a controlled 
foreign corporation.\3\
---------------------------------------------------------------------------
    \3\ Because section 954(c) and its implementing Treasury 
regulations address different concerns than does section 470, care 
would need to be taken to ensure that a cross-reference to the 
principles of section 954(c) would not bring with it rules and 
limitations that would be irrelevant to the test suggested in the text. 
For example, in applying the hypothetical ``if the partnership were a 
controlled foreign corporation,'' what should be done about same-
country limitation? Similarly, section 954(c)(1)(D) (dealing with 
foreign currency gains) probably is unnecessary in the section 470 
contest. And finally, section 954(c) includes a number of temporary 
provisions, including section 954(h) and (i), both of which modify 
section 954(c)(1), and section 954(c)(6). To preserve the intended 
application of the cross reference here, we would suggest that the 
principles of section 954(c) would be defined as those principles that 
would apply in 2006 to a hypothetical controlled foreign corporation 
that was a calendar year taxpayer.
---------------------------------------------------------------------------
    6. Examples. If our understanding of the purpose and scope of new 
section 470(e)(2)(D)(ii) is correct, then the revised statutory 
language can be illustrated in the legislative history with examples 
along the following lines:
Example 1. Partnership ABC has two partners, T (a taxable partner) and 
        TE (a tax-exempt partner). Partnership ABC has been engaged in 
        an active trade or business for many years, and owns many 
        properties, both depreciable and nondepreciable. All items of 
        partnership income are allocated 50-50 between T and TE. In 
        2007, Partnership ABC arranges for long-term nonrecourse 
        financing, secured by a revolving pool of receivables generated 
        by Partnership ABC in the ordinary course of its business, and 
        guaranteed by a third-party financial guarantor. The lenders in 
        the nonrecourse financing are unrelated third parties. 
        Partnership ABC does not amend its partnership agreement in 
        light of the nonrecourse financing, and there is no 
        understanding between T and TE with regard to the sharing of 
        the economics from their respective investments in Partnership 
        ABC that is not reflected in the partnership agreement.
    Under these facts, the nonrecourse financing does not affect the 
economic relationships among the partners with respect to any item of 
depreciable property owned by the Partnership. Accordingly, and without 
regard to whether the arrangement otherwise would be described in 
section 470(e)(2)(A), the nonrecourse financing is not taken into 
account for purposes of section 470(e)(2)(A), by virtue of section 
470(e)(2)(D)(ii).
Example 2. Partnership DEF has two partners, T (a taxable partner) and 
        TE (a tax-exempt partner). Partnership DEF is engaged in an 
        active trade or business that it has conducted for many years. 
        Under the DEF partnership agreement, TE has an obligation to 
        invest additional funds in Partnership DEF under certain 
        defined circumstances. To ensure that TE performs its 
        obligation, the DEF partnership agreement provides that DEF 
        will withhold 50 percent of the profits otherwise distributable 
        to TE and set those funds aside in a portfolio of U.S. Treasury 
        securities, the interest income on which will be allocated to 
        TE and distributed currently to TE. DEF is permitted to 
        withdraw assets from the portfolio and apply them to TE's 
        capital contribution obligations if TE does not otherwise 
        satisfy its obligation within 10 days of the obligation's 
        arising.
    Under these facts, the portfolio of Treasury securities constitutes 
a set-aside of funds that bears a connection to the economic 
relationships among the partners, because the existence of the 
portfolio gives T security that TE in fact will satisfy its contingent 
``capital call'' obligation. Accordingly, partnership DEF may not rely 
on section 470(e)(2)(D)(ii). Moreover, under these facts the 
partnership has monetized an obligation that TE has to the partnership; 
accordingly, if the value of the portfolio of Treasury securities 
exceeds Partnership DEF's allowable partnership amount, the 
requirements of section 470(e)(2)(A) will not be satisfied, and section 
470 will apply to Partnership DEF.
Example 3. Partnership GHI has two partners, T (a taxable partner) and 
        TE (a tax-exempt partner). Partnership GHI has been engaged for 
        many years in an active trade or business as a full-service 
        investment banking firm, including dealing in a wide range of 
        securities. Partnership GHI therefore is a dealer in 
        securities, within the meaning of section 475(c)(1). In the 
        conduct of its business, Partnership GHI maintains large 
        positions in securities (as defined in section 475(c)(2)), the 
        identity and quantities of which fluctuate daily, in response 
        to customer demands and Partnership GHI's hedging and other 
        business requirements. Partnership GHI also owns substantial 
        depreciable and amortizable assets described in section 
        470(c)(2).
    To finance its purchases of U.S. Treasury securities in the 
ordinary course of its activities as a dealer in securities, 
Partnership GHI engages in ``sale-repurchase'' (``repo'') transactions, 
in each of which Partnership GHI ``sells'' a Treasury security to a 
``buyer'' for cash in an amount equal to or slightly less than the fair 
market value of the Treasury security, and Partnership GHI 
simultaneously agrees to ``repurchase'' that Treasury security the next 
business day, for a price equal to the cash received on the first day, 
plus an additional amount equal to one day's interest on that amount. 
(The arrangement might also be defined to cover a specified longer 
term.) The ``buyer'' might be either a third party or an affiliate of 
GHI that in either case seeks to invest cash on a short-term basis. The 
``repo'' arrangement is documented under industry-standard 
documentation. Under the terms of their repo agreement, Partnership GHI 
and the ``buyer'' of the Treasury securities agree to roll over the 
financing from day to day, unless and until either party terminates the 
transaction. The value of the Treasury securities is marked to market 
daily, and the net amount of cash transferred to Partnership GHI in 
turn is adjusted daily, such that the cash held by Partnership GHI in 
respect of the repo transaction never exceeds the fair market value of 
the Treasury securities ``sold'' to the repo ``buyer.''
    Under these facts, the repo arrangement between Partnership GHI and 
the repo ``buyer'' constitutes a transaction described in section 
956(c)(2)(K). Partnership GHI raises funds through the repo 
transaction, but at the same time Partnership GHI gives up possession 
of marketable securities having an equal or greater value. Because 
Partnership GHI employs the repo transaction in the ordinary course of 
its trade or business as a dealer in securities, for example to finance 
its purchases of U.S. Treasury securities, and because the conditions 
of section 956(c)(2)(K) are satisfied, therefore, without regard to 
whether the arrangement otherwise would be described in section 
469(e)(2)(A), the repo financing is not taken into account for purposes 
of section 470(e)(2)(A), by virtue of section 470(e)(2)(D)(ii).
Example 4. The facts are the same as those of Example 3, except that, 
        in addition to the financing described therein, Partnership GHI 
        and TE enter into an arrangement described as a one-year sale-
        repurchase transaction, but in which TE extends $2 million to 
        Partnership GHI in exchange for $1 million in Treasury 
        securities, and Partnership GHI unconditionally promises to 
        repurchase those securities one year in the future for $2 
        million, plus interest thereon. The arrangement falls outside 
        the scope of section 956(c)(2)(K), because the cash received by 
        Partnership GHI exceeds the value of the Treasury securities 
        delivered by Partnership GHI. Moreover, the arrangement is not 
        consistent with market practices among participants in the 
        active repo financing markets.
    Under these facts, the arrangement will be viewed as a $1 million 
sale-repurchase transaction, and an unsecured loan of $1 million by TE 
to Partnership GHI. The unsecured loan by TE falls outside the ordinary 
course of Partnership GHI's business and presumptively affects the 
economic relationships among the partners. Accordingly, unless 
Partnership GHI can otherwise demonstrate that the funds in fact do not 
affect the relationship between T and TE, Partnership GHI cannot rely 
on section 470(e)(2)(D)(ii) to exclude those funds from the possible 
application of section 470(e)(2)(A).
    7. Amend page 17, line 14, to read as follows:
    ``respect to any property described in subparagraph (1)(C) owned by 
the partnership--''
Reason: This revision clarifies that those options to which new section 
        470(e)(3)(A) is addressed are options that relate to 
        depreciable property owned by the partnership. Financial 
        institutions routinely employ options over financial assets in 
        the ordinary course of their trade or business. If a financial 
        institution is organized as a partnership, it would be common 
        for that partnership to enter into such financial options with 
        its partners, as well as other customers. We believe that such 
        options over financial assets, by way of example, have no 
        relationship to the intended scope of new section 470(e)(3)(A). 
        The proposed language confirms this result.
    8. Amend p. 18, line 24, by removing the period and adding at the 
end thereof:
    ``, other than a tax-exempt controlled entity (as defined in 
section 168(h)(6)(F)).''
Reason: A tax-exempt controlled entity is itself a taxpayer. Whatever 
        the purpose for the inclusion of such entities in determining 
        the scope of section 168, in light of the fact that they are 
        taxpayers, there does not appear to be any reason that we can 
        determine for including these entities as possible devices by 
        which a partnership could be employed to accomplish LILO/SILO-
        type results.
    9. Remaining Issues. The suggestions made above do not address a 
fundamental issue with the current draft of new section 470(e), which 
is the consequence of failing the two-part test. Imagine, for example, 
that a tax-exempt partner in a $1 billion partnership improperly 
monetizes a $100 obligation to a taxable partner outside the 
partnership. What consequence should follow from that $100 
monetization? As currently drafted, new section 470(e) appears to 
contemplate that all of the $1 billion partnership's depreciable assets 
would be tainted. We respectfully submit, however, that this 
consequence is wholly disproportionate to the problem. The issue does 
not arise in the context of actual leases, because there section 470 is 
applied on a lease-by-lease basis. As a result, the improper 
monetization of one lease taints only the property subject to that 
lease. We believe that some sort of proportionality rule is required in 
the partnership context. That rule need not be a dollar-for-dollar 
tainting. One can imagine, for example, a rule that provides that every 
$1 of improper monetization requires that $5 of depreciable property be 
subject to section 470. A similar issue arises in respect of the 
differing interests of taxable and tax-exempt partners in partnership 
property. Improper monetization of a lease implies that the taxable 
lessor has an impermissibly small true economic interest in the leased 
property; as a result, section 470 applies to the entirety of the 
leased property. In the partnership context, by contrast, a taxable 
partner might (by way of example) bear 90 percent of the economic risk 
and reward with respect to the depreciable property accrued by the 
partnership. If a tax-exempt partner impermissibly monetizes an 
obligation to the taxable partner, the consequence of that monetization 
should be limited to the tax-exempt partner's interest in partnership 
property (in this example, 10 percent), because that represents the 
greatest extent to which the monetization might fairly be said to shift 
the attributes of the partnership's property to the taxable partner. 
These two issues--the ``cliff effect'' of the current draft of new 
section 470(e), and the failure to recognize a taxable partner's 
genuine investment in partnership property--go to the same ultimate 
point, which is that the consequence of failing the monetization test 
needs to be linked in at least an approximate manner to the extent of 
that monetization. Without such a limitation, new section 470(e) could 
be criticized as imposing tax liabilities wholly disproportionate to 
any possible abuse.

IV. CONCLUSION
    Citigroup appreciates the opportunity to submit these comments. 
Please find on the following pages a marked up version of the 
legislation that includes our proposed edits.
            Sincerely
                                                   Jeffrey R. Levey
                                           Vice President, Director
                                 ______
                                 
    [Citigroup Inc. Suggested Revisions]
    SEC. 6. AMENDMENTS RELATED TO THE AMERICAN JOBS CREATION ACT OF 
2004.
    (a) AMENDMENTS RELATED TO SECTION 710 OF THE ACT.--
    (1) Clause (ii) of section 45(c)(3)(A) is amended by striking 
``which is segregated from other waste materials and''.
    (2) Subparagraph (B) of section 45(d)(2) is amended by inserting 
``and'' at the end of clause (i), by striking clause (ii), and by 
redesignating clause (iii) as clause (ii).
    (b) AMENDMENTS RELATED TO SECTION 848 OF THE ACT.--
    (1) Section 470 is amended by redesignating subsections (e), (f), 
and (g) as subsections (f), (g), and (h) and by inserting after 
subsection (d) the following new subsection:
    ``(e) EXCEPTION FOR CERTAIN PARTNERSHIPS.--
    ``(1) IN GENERAL.--In the case of any property which would (but for 
this subsection) be tax-exempt use property solely by reason of section 
168(h)(6), such property shall not be treated as tax-exempt use 
property for purposes of this section for any taxable year of the 
partnership if--
    ``(A) such property is not property of a character subject to the 
allowance for depreciation,
    ``(B) any credit is allowable under section 42 or 47 with respect 
to such property, or
    ``(C) such property is not described in paragraph (A) or (B), and, 
except as provided in regulations prescribed by the Secretary under 
subsection (h)(4), the requirements of paragraphs (2) and (3) are met 
with respect to such property for such taxable year.
    ``(2) AVAILABILITY OF FUNDS.--
    ``(A) IN GENERAL.--The requirement of this paragraph is met for any 
taxable year with respect to any property described in subparagraph 
(1)(C) owned by the partner ship partnership if (at all times during 
the taxable year) not more than the allowable partnership amount of 
funds are--
    ``(i) subject to any arrangement referred to in subparagraph (C), 
or
    ``(ii) set aside or expected to be set aside,
    to or for the benefit of any taxable partner of the partnership or 
any lender, or to or for the benefit of any tax-exempt partner of the 
partnership if the purpose or effect of the transaction described in 
clause (i) or (ii) is directly or indirectly to satisfy any obligation 
of such tax-exempt partners (whether current, future or contingent) of 
a tax-exempt partner relating to such property and owed to the 
partnership, any taxable partner of the partnership, any lender to the 
partnership, or any lender to a taxable partner of the partnership.
    ``(B) ALLOWABLE PARTNERSHIP AMOUNT.--For purposes of this 
subsection, the term `allowable partnership amount' means, as of any 
date, the greater of--
    ``(i) the sum of--
    ``(I) 20 percent of the sum of the taxable partners' capital 
accounts determined as of such date under the rules of section 704(b), 
plus
    ``(II) 20 percent of the sum of the taxable partners' share of the 
recourse liabilities of the partnership as determined under section 
752, or
    ``(ii) 20 percent of the aggregate debt of the partnership as of 
such date.
    ``(iii) NO ALLOWABLE PARTNERSHIP AMOUNT FOR ARRANGEMENTS OUTSIDE 
THE PARTNERSHIP.--The allowable partnership amount shall be zero with 
respect to any set aside or arrangement under which any of the funds 
referred to in subparagraph (A) are not partnership property.
    ``(C) ARRANGEMENTS.--The arrangements referred to in this 
subparagraph include:
    ``(i) a loan by a tax-exempt partner or the partnership to the 
partnership, any taxable partner, the partnership, or any lender to the 
partnership or a taxable partner,
    ``(ii) to the extent of all tax-exempt partners' share thereof, a 
loan by the partnership to any taxable partner or any lender to a 
taxable partner, and
    ``(iii) any arrangement referred to in subsection (d)(1)(B) that 
has the effect of a transaction described in clause (i) or (ii).
    ``(D) SPECIAL RULES.--
    ``(i) EXCEPTION FOR SHORT-TERM FUNDS.--Funds which are set aside, 
or subject to any arrangement, for a period of less than 12 months 
shall not be taken into account under subparagraph (A). Except as 
provided by the Secretary, all related set asides and arrangements 
shall be treated as 1 arrangement for purposes of this clause.
    ``(ii) ECONOMIC RELATIONSHIP TEST.--Funds shall not be taken into 
account under subparagraph (A) if such funds--in applying subparagraph 
(A) to property described in subparagraph (1)(C) if such funds bear no 
connection to the economic relationships among the partners (whether 
reflected in the partnership agreement or otherwise) with respect to 
items of income, gain, loss, expense or credit attributable to such 
property. For this purpose, funds described in section 956(c)(2)(J) or 
section 956(c)(2)(K) shall be deemed not to bear any connection to the 
economic relationships among the partners with respect to property 
described in subparagraph (1)(C).
    ``(I) bear no connection to the economic relationships among the 
partners, and
    ``(II) bear no connection to the economic relationships among the 
partners and the partnership.
    ``(iii) REASONABLE PERSON STANDARD.--For purpose of subparagraph 
(A)(ii), funds shall be treated as set aside or expected to be set 
aside only if a reasonable person would conclude, based on the facts 
and circumstances, that such funds are set aside or expected to be set 
aside.
    ``(3) OPTION TO PURCHASE.--
    ``(A) IN GENERAL.--The requirement of this paragraph is met for any 
taxable year with respect to any property described in subparagraph 
(1)(C) owned by the partnership if (at all times during such taxable 
year)--
    ``(i) each tax-exempt partner does not have an option to purchase 
(or compel distribution of) such property or any direct or indirect 
interest in the partnership at any time other than at the fair market 
value of such property or interest at the time of such purchase or 
distribution, and
    ``(ii) the partnership and each taxable partner does not have an 
option to sell (or compel distribution of) such property or any direct 
or indirect interest in the partnership to a tax-exempt partner at any 
time other than at the fair market value of such property or interest 
at the time of such sale or distribution.
    ``(B) OPTION FOR DETERMINATION OF FAIR MARKET VALUE.--Under 
regulations prescribed by the Secretary, a value of property determined 
on the basis of a formula shall be treated for purposes of subparagraph 
(A) as the fair market value of such property if such value is 
determined on the basis of objective criteria that are reasonably 
designed to approximate the fair market value of such property at the 
time of the purchase, sale, or distribution, as the case may be.''.
    (2) Subsection (g) of section 470, as redesignated by paragraph 
(1), is amended by adding at the end the following new paragraphs:
    ``(5) TAX-EXEMPT PARTNER.--The term `tax-exempt partner' means, 
with respect to any partnership, any partner of such partnership which 
is a tax-exempt entity within the meaning of section 168(h)(6), other 
than a tax-exempt controlled entity (as defined in section 
168(h)(6)(F)).
    ``(6) TAXABLE PARTNER.--The term `taxable partner' means, with 
respect to any partnership, any partner of such partnership which is 
not a tax-exempt partner.''.
    (3) Subsection (h) of section 470, as redesignated by paragraph 
(1), is amended--
    (A) by striking ``, and'' at the end of paragraph (1) and inserting 
``or owned by the same partnership,'',
    (B) by striking the period at the end of paragraph (2) and 
inserting a comma, and
    (C) by adding at the end the following new paragraphs:
    ``(3) provide for the application of this section to tiered and 
other related partnerships, and
    ``(4) provide for the treatment of partnership property (other than 
property described in subsection (e) (1) (A)) as tax-exempt use 
property if such property is used in an arrangement which is 
inconsistent with the purposes of this section determined by taking 
into account one or more of the following factors:
    ``(A) A tax-exempt partner maintains physical possession or control 
or holds the benefits and burdens of ownership with respect to such 
property.
    ``(B) There is insignificant equity investment in such property by 
any taxable partner.
    ``(C) The transfer of such property to the partnership does not 
result in a change in use of such property.
    ``(D) Such property is necessary for the provision of government 
services.
    ``(E) The deductions for depreciation with respect to such property 
are allocated disproportionately to one or more taxable partners 
relative to such partner's risk of loss with respect to such property 
or to such partner's allocation of other partnership items.
    ``(F) Such other factors as the Secretary may determine.''.
    (4) Paragraph (2) of section 470(c) is amended--
    (A) by striking ``and'' at the end of subparagraph (A), by 
redesignating subparagraph (B) as subparagraph (C), and by inserting 
after subparagraph (A) the following new subparagraph:
    ``(B) by treating the entire property as tax-exempt use property if 
any portion of such property is treated as tax-exempt use property by 
reason of paragraph (6) thereof.'', and
    (B) by striking the flush sentence at the end.
    (5) Subparagraph (A) of section 470(d)(1) is amended by striking 
``(at any time during the lease term)'' and inserting ``(at all times 
during the lease term)''.
    (c) AMENDMENTS RELATED TO SECTION 888 OF THE ACT.--
    (1) Subparagraph (A) of section 1092(a)(2) is amended by striking 
``and'' at the end of clause (ii), by redesignating clause (iii) as 
clause (iv), and by inserting after clause (ii) the following new 
clause:
    ``(iii) if the application of clause (ii) does not result in an 
increase in the basis of any offsetting position in the identified 
straddle, the basis of each of the offsetting positions in the 
identified straddle shall be increased in a manner which--
    ``(I) is reasonable, consistent with the purposes of this 
paragraph, and consistently applied by the tax payer, and
    ``(II) results in an aggregate increase in the basis of such 
offsetting positions which is equal to the loss described in clause 
(ii), and''.
    (2)(A) Subparagraph (B) of section 1092(a)(2) is amended by adding 
at the end the following flush sentence:
    ``A straddle shall be treated as clearly identified for purposes of 
clause (i) only if such identification includes an identification of 
the positions in the straddle which are offsetting with respect other 
positions in the straddle.''.
    (B) Subparagraph (A) of section 1092(a)(2) is amended--
    (i) by striking ``identified positions'' in clause (i) and 
inserting ``positions'',
    (ii) by striking ``identified position'' in clause (ii) and 
inserting ``position'', and
    (iii) by striking ``identified offsetting positions'' in clause 
(ii) and inserting ``offsetting positions''.
    (C) Subparagraph (B) of section 1092(a)(3) is amended by striking 
``identified offsetting position'' and inserting ``offsetting 
position''.
    (3) Paragraph (2) of section 1092(a) is amended by redesignating 
subparagraph (C) as subparagraph (D) and inserting after subparagraph 
(B) the following new subparagraph:
    ``(C) APPLICATION TO LIABILITIES AND OBLIGATIONS.--Except as 
otherwise provided by the Secretary, rules similar to the rules of 
clauses (ii) and (iii) of subparagraph (A) shall apply for purposes of 
this paragraph with respect to any position which is, or has been, a 
liability or obligation.''.
    (4) Subparagraph (D) of section 1092(a)(2), as redesignated by 
paragraph (3), is amended by inserting ``the rules for the application 
of this section to a position which is or has been a liability or 
obligation, methods of loss allocation which satisfy the requirements 
of subparagraph (A)(iii),'' before ``and the ordering rules''.
    (d) EFFECTIVE DATE.--The amendments made by this section shall take 
effect as if included in the provisions of the American Jobs Creation 
Act of 2004 to which they relate.

                                 
               Statement of Crowe Chizek and Company LLC

Proposed
    Sec. 7. AMENDMENT RELATED TO THE JOBS AND GROWTH TAX RELIEF 
RECONCILIATION ACT OF 2003.
    (a) AMENDMENT RELATED TO SECTION 302 OF THE ACT.--Clause (ii) of 
section 1(h)(11)(B) is amended by striking ``and'' at the end of 
subclause (II), by striking the period at the end of subclause (III) 
and inserting ``, and'', and by adding at the end the following new 
subclause:
    ``(IV) any dividend received from a corporation which is a DISC or 
former DISC (as defined in section 992(a)) to the extent such dividend 
is paid out of the corporation's accumulated DISC income or is a deemed 
distribution pursuant to section 995(b)(1).''.
    (b) EFFECTIVE DATE.--The amendment made by this section shall apply 
to dividends received on or after September 29, 2006, in taxable years 
ending after such date.
General Comments
    Congress has a history of stimulating the export of goods from the 
United States. In the past, Congress attempted to increase exports by 
providing incentives to U.S. exporters by enacting the foreign sales 
corporation (``FSC'') and its successor, the extraterritorial income 
exclusion (``ETI'') legislation. However, because the World Trade 
Organization's (``WTO'') challenge of the FSC and ETI regimes resulted 
in the repeal of both pieces of legislation, the only remaining export 
incentive for U.S. exporters is the domestic international sales 
corporation (``DISC'').
    Originally adopted in 1971, the DISC regime was intended to induce 
an increase in export activities for U.S. companies by allowing them to 
receive a deferral on a portion of the income attributable to their 
export activity. Under the DISC regime, a portion of the income 
attributable to the export activity was segregated in a separate legal 
entity, namely the DISC, which was not subject to U.S. income tax. U.S. 
foreign trading partners contended that the DISC regime was an illegal 
export subsidy because it allowed a portion of the DISC earnings to be 
retained tax free without an interest charge. In response, the U.S. 
introduced the ``Interest Charge DISC.'' In order to comply with 
General Agreements on Tariffs and Trade requirements, the U.S. added an 
interest charge component to the DISC in 1984.
    For federal income tax purposes, the DISC is classified as a 
domestic corporation whose income is derived almost exclusively from 
U.S. export-related activities. The DISC itself is not subject to 
income tax; however, DISC shareholders can be taxed on the DISC's 
income for actual or deemed distributions. Despite shareholders' 
taxation on DISC distributions, they still receive limited tax deferral 
on income from export sales and certain other services.
    Under section 1(h)(11) created by the Jobs Growth Tax Relief 
Reconciliation Act of 2003 (``JAGRTA''), certain dividends earned by 
individual taxpayers are taxed at long-term capital gain rates. Section 
1(h)(11) applies to virtually all dividends paid by domestic 
corporations and certain qualified foreign corporations. Further, this 
section provides that the reduced rate is rendered unavailable for 
certain excluded dividends listed under Section 1(h)(11)(B)(ii). A DISC 
is a domestic corporation by definition, and because DISC dividends are 
not listed on the excluded dividends list, they would qualify for 
capital gains rate treatment under the current law. If Congress enacts 
the proposed amendment, dividends from DISCs or former DISCs would be 
considered ineligible for capital gains rate treatment. DISC 
shareholders will no longer be able to take advantage of the favorable 
capital gains rate on the dividend payment from DISCs or former DISCs, 
which will ultimately be detrimental to the U.S. export industry. 
Without the incentive of favorable capital gains rates on dividends 
from DISCs or former DISCs, exports will go down thus having a negative 
impact on the U.S. economy.
    Since the enactment of JAGTRA, two Tax Technical Corrections Acts 
have been submitted to Congress, both of which have not included an 
amendment to change the tax treatment of dividends from a DISC or 
former DISC under section 1(h)(11)(B). Congress' omission of this 
amendment in prior Tax Technical Corrections Acts was generally viewed 
by taxpayers as an indication that Congress had no intention of 
changing the language under section 1(h)(11)(B) to specifically exclude 
dividends received from a DISC or former DISC as qualified dividends 
subject to capital gains rate treatment. Many taxpayers opted to use 
the benefits originally provided under the Interest Charge DISC regime 
and spent considerable sums to

utilize this business entity form. Their reliance on this structure has 
helped to build the economy and stimulate growth in the export 
industry. By taking no prior action, perhaps Congress was acknowledging 
that dividends from DISCs or former DISCs should be qualified under 
section 1(h)(11)(B).
    If Congress pushes forward with the proposed amendment to section 
1(h)(11)(B), we propose the following changes to the amendment:
Effective Date
    At the very least, Congress should consider modifying the effective 
date to allow taxpayers to transition out of the structure. Enacting 
the amendment effective September 29, 2006, will affect taxpayers 
estimated tax payments because under the current law, DISC dividends 
and deemed dividends would still be qualified. By delaying the 
effective date, Congress will give taxpayers time to transition their 
business structures. We propose an effective date for years ending on 
or after January 1, 2008.
Taint Earnings and Profits
    Congress should consider rewording the amendment so that dividends 
from pre-enactment earnings and profits (``E&P'') are still eligible 
for capital gains rate treatment, while those dividends from post-
enactment E&P fall under the proposed change as unqualified dividends 
under section 1(h)(11)(B). In essence, this will taint the E&P rather 
than the dividend stream and will allow taxpayers to take advantage of 
the benefits under the law as originally written. Currently, the 
amendment is written such that dividends from a DISC or former DISC 
will no longer be qualified under section 1(h)(11)(B). Any pre-
enactment E&P of the DISC or former DISC, if distributed after the 
effective date, will be considered unqualified dividends taxed as 
ordinary income even though the E&P was created before the effective 
date. Taxpayers will not be able to take advantage of the lower tax 
rates to which they were initially entitled on the pre-enactment E&P, 
thereby making the proposed legislation, in effect, retroactive rather 
than prospective. A proposed solution is to apply the amendment to the 
E&P created after the effective date, and not to the dividend stream.
    Making these proposed changes to Section 7 of the Tax Technical 
Corrections Act of 2006 will allow taxpayers the time to transition 
their business structures as well as take advantage of the benefits 
under the law as originally written.

                                 

                                     Miller and Chevalier Chartered
                                                   October 31, 2006
    Committee on Ways and Means U.S. House of Representatives Longworth 
House Office Building Washington, DC 20515-6348
    We are writing to propose, as an addition to the pending technical 
corrections bill, a new technical correction to the provision of the 
American Jobs Creation Act of 2004 that extended the application of 
section 108(e)(8) of the Internal Revenue Code to partnerships. We have 
proposed this technical correction previously and have had discussions 
with the staff of the Joint Committee on Taxation with regard to the 
proposal. We would like to follow up on those discussions shortly.
    As part of the American Jobs Creation Act of 2004, section 
108(e)(8) was expanded to cover certain partnership contributions of 
debt in exchange for equity. As explained in more detail in the 
attached document we submitted to the Treasury Department last year, we 
are proposing that section 108(e)(8) be clarified to provide comparable 
scope to both partnerships and corporations. Currently, section 
108(e)(8) does not apply to the contribution of debt to corporate 
equity when the company does not issue shares, such as when the 
shareholders make pro rata contributions of debt and the issuance of 
shares has no economic consequence. The proposed technical correction 
would make it clear that section 108(e)(8) similarly does not apply to 
pro rata debt contributions to partnerships, even though the 
partnership may make capital account adjustments pursuant to the 
section 704(b) safe harbor regulations. The proposal is described in 
more detail in the attached memorandum. We would also be open to 
discussing other alternatives to resolve this problem, such as the 
application of an exception for partnerships among members of a 
consolidated group.
    We will follow up with the Joint Committee on Taxation staff to 
request a meeting to discuss this proposal. In the meantime, please 
call David Zimmerman (202-626-5876), Steven Schneider (202-626-6063) or 
me (202-626-5828) with any questions or comments.
            Sincerely,
                                                    David B. Cubeta
                                 ______
                                 
    Proposed Technical Correction to Section 108(e)(8)--Recognition of 
Cancellation of Indebtedness Income Realized on Satisfaction of 
Indebtedness with a Partnership Interest
Background
    In the American Jobs Creation Act of 2004 (the ``2004 Jobs Act''), 
Congress extended the application of section 108(e)(8) to acquisitions 
of indebtedness by a partnership from a partner in exchange for a 
capital or profits interest in the partnership.\1\ Prior to this 
amendment, section 108(e)(8) had by its terms only applied to 
corporations. As is discussed more fully below, because the safe harbor 
provisions of the section 704(b) regulations require that an adjustment 
be made to the partners' capital accounts when the partners contribute 
debt to the creditor partnership, the partnership may be deemed to have 
issued a capital interest for purposes of section 108(e)(8) even if the 
partnership does not formally issue a partnership interest in exchange 
for its indebtedness. As a result, the partnership will be unable to 
avoid the application of section 108(e)(8) in situations where the 
partners contribute their indebtedness to the partnership on a pro rata 
basis and no partnership interest was actually issued in exchange. In 
similar cases in the corporate context, a corporation has the ability 
to choose whether to be subject to section 108(e)(8) or section 
108(e)(6) by the simple expedient of issuing, or refraining from 
issuing, stock. Because a corporation will generally recognize less 
cancellation of indebtedness income if section 108(e)(6) applies to the 
cancellation of the debt rather than section 108(e)(8), pro rata 
cancellations of shareholder debt, including acquisitions of debt from 
a sole shareholder, are usually structured as capital contributions.
---------------------------------------------------------------------------
    \1\ All section references are to the Internal Revenue Code of 
1986, as amended.
---------------------------------------------------------------------------
Proposal
    Amend section 108(e)(8) to clarify that this section will not apply 
to a pro rata contribution of indebtedness by partners to a 
partnership.
    Specifically, we would recommend that the following sentence be 
added to section 108(e)(8):
    If a debtor partnership acquires its indebtedness from its partners 
proportionate to the manner in which the partners share future profits 
and there have been no changes to any partner's profit sharing as a 
result of such contribution, then this paragraph shall not apply.
Current Law
    If a corporation acquires its indebtedness from its sole 
shareholder or from each of its shareholders on a pro rata basis, the 
corporation and its shareholders will be indifferent as to whether 
additional shares are issued in the transaction. In such circumstances 
if the form of the transaction is respected, section 108(e)(8) will 
apply if the corporation issues its stock in satisfaction of the 
indebtedness and section 108(e)(6) will apply if the shareholders 
contribute the indebtedness to the corporation as a contribution to 
capital. If section 108(e)(6) applies, the corporation is treated as if 
it satisfied the indebtedness for an amount of money equal to the 
shareholder's adjusted basis in the debt. If section 108(e)(8) applies, 
the corporation will be treated as if it satisfied the indebtedness for 
an amount of money equal to the fair market of the stock issued in the 
exchange. The corporation will generally either realize the same or a 
lesser amount of cancellation of indebtedness income under section 
108(e)(6) because the shareholder's adjusted tax basis in the 
indebtedness typically will be equal to or greater than the fair market 
value of the debt.
    Although the IRS does not appear to have a formal ruling policy 
with respect to pro rata cancellations of debt in the corporate arena 
in ``overlap'' cases where the issuance of stock by the corporation in 
exchange for the debt would be economically meaningless and either 
section 108(e)(6) or section 108(e)(8) could be construed to apply to 
the cancellation, the private letter rulings that have been issued to 
date appear to have followed the taxpayer's form in every case.\2\ In 
effect, the IRS does not apply the authorities that might otherwise 
deem stock to be issued based on the ``meaningless gesture'' doctrine 
to section 108(e)(8) in situations where the taxpayer did not issue 
stock.\3\ On the other hand, the IRS does not ignore the issuance of 
stock in situations where the taxpayer in form issued stock. This gives 
a corporation the flexibility to avoid having section 108(e)(8) apply 
to the cancellation.
---------------------------------------------------------------------------
    \2\ See, e.g., PLR 9018005 (Nov. 15, 1989) (applying section 
108(e)(8) to contribution of debt to a wholly owned subsidiary in 
exchange for subsidiary stock); PLR 9024056 (Mar. 20, 1990) 
(contribution of debt to a wholly owned subsidiary respected as capital 
contribution subject to section 108(e)(6) in accordance with form); PLR 
8606032 (Nov. 8, 1985) (same); PLR 9215043 (Jan. 14, 1992) (same); PLR 
9623028 (March 7, 1996) (same); cf. TAM 9822005 (May 29, 1998) (noting 
that there was a potential issue as to whether section 108(e)(6) or 
section 108(e)(8) should be the controlling authority in situations 
where both could apply; ruling did not resolve the issue because either 
section would give equivalent results under the assumed facts of the 
ruling).
    \3\ In certain circumstances, such as for purposes of section 351, 
the IRS and the courts will deem an exchange requirement to have been 
met even though no shares were issued in circumstances where the 
issuance of the shares would have been a ``meaningless gesture.'' See, 
e.g., Rev. Rul. 64-155, 1964-1 C.B. 138 (contribution to 100% owned 
corporation); Lessinger v. Commissioner, 872 F2d 5 19 (2d Cir. 1989) 
(section 351 applies to transfer by 100% shareholder); and Warsaw 
Photographic Associates v. Commissioner, 84 T.C. 21 (1985) (pro rata 
transfer by multiple shareholders).
---------------------------------------------------------------------------
Reasons for Change
    The proposed amendment affords partnerships the same ability to 
avoid the application of section 108(e)(8) as is allowed to 
corporations under the Internal Revenue Service's informal ruling 
policy, and it would limit this flexibility to fact patterns where it 
would be a matter of economic indifference to the partnership and the 
partners whether to issue additional partnership interests in exchange 
for the indebtedness. This would be the case if the debt contribution 
is in proportion to each partner's interest in profits and there is no 
change in the profit allocations of any partner as a result of the 
contribution. In such circumstances, while capital account credit must 
still be assigned to the contributing partner to satisfy the section 
704(b) safe harbor,\4\ the capital account credit will be in proportion 
to each partner's profit sharing ratio and merely represents the same 
amount that the partners otherwise would receive as profits if the 
capital account were not adjusted. Thus, when coupled with the absence 
of any change to the partners' future profit sharing ratios as a result 
of the contributions, the capital account adjustment would be a matter 
of economic indifference to the partners (as in the pro rata case for 
corporations), and there would be no tax policy reason to require 
income recognition as a result of the contribution. Absent 
clarification, it is unclear whether a partnership is afforded 
comparable flexibility because the requisite adjustment to the capital 
account may properly be regarded as the issuance of a capital interest 
and, if so treated, would cause section 108(e)(8) to apply even in the 
case of a pro rata contribution of indebtedness. This change is 
consistent with the clear intent of the 2004 Jobs Act's revision as a 
whole--to treat corporations and partnerships in a like manner for 
purposes of section 108(e)(8). When Congress extended the application 
of section 108(e)(8) to partnerships it is reasonable to assume that 
Congress did not intend to disadvantage partnerships as compared to 
corporations. Nor, in the pro rata case, would there appear to be any 
tax policy justification for requiring a greater amount of cancellation 
of indebtedness income recognition, because there would be no 
meaningful change in the partners' economic sharing arrangement by 
reason of the contributions of debt. Consequently, in the pro rata 
case, the imposition of section 108(e)(8) on the partnership would 
create the potential for a tax ``whipsaw'' on the partners (ordinary 
income allocated to each partner with a corresponding capital loss 
incurred by each partner in its capacity as creditor) in a circumstance 
presenting no underlying economic change of any substance.
---------------------------------------------------------------------------
    \4\ Treas. Reg. Sec. 1. 704-1(b)(2)(iv)(b).
---------------------------------------------------------------------------
    The following examples will help clarify this point.
    Example 1. Pro rata contribution in corporate context. A and B are 
shareholders in Corporation. Each originally contributed $2,000 in 
exchange for 100 shares of stock and loaned $4,000 to Corporation. At a 
time when the fair market value of Corporation's assets is $12,000 and 
the liabilities are $8,000, A and B each contribute their debt to 
Corporation and do not receive any additional stock in return. 
Immediately before the contribution, the Corporation stock was worth 
$4,000 and immediately after the contribution the stock was worth 
$12,000. The value of each shareholder's equity interest has increased 
from $2,000 to $6,000 as a result of the contribution. If Corporation 
had instead issued an additional 200 shares to each shareholder in 
exchange for the contribution of the indebtedness, the value of an 
individual share would be unchanged, but the value of each 
shareholder's total equity interest would have increased from $2,000 to 
$6,000. In this example, the act of issuing additional stock would have 
been a meaningless gesture because A and B each will share in the 
$8,000 net value increase in the same 50:50 ratio whether new stock is 
issued in a 50:50 ratio or whether their historical stock, also held in 
a 50:50 ratio, increases in value.
    Example 2. Pro rata contribution in LLC context--not liquidating in 
accordance with capital accounts. Same as Example 1 except that the 
entity is an LLC that liquidates and shares profit in accordance with 
relative outstanding units. Like Example 1, it would be a meaningless 
gesture to issue additional units because the ``profit'' to each member 
from the increased net value of LLC would be the same whether reflected 
in an increased value of the historical units or in additional units 
with a constant value.
    Example 3. Pro rata contribution in LLC context--liquidating in 
accordance with capital accounts. Same as Example 2 except that the LLC 
follows the section 704(b) safe harbors and liquidates in accordance 
with positive capital accounts. The LLC shares profits in accordance 
with the relative outstanding units, or 50% each to A and B. In this 
example, it would be a meaningless gesture for the LLC to issue 
additional units since they would be issued in the same ratio as the 
existing outstanding units and the issuance of the additional units 
would not affect the relative profit percentages. However, because the 
LLC follows the section 704(b) safe harbors, it must credit the member 
capital accounts in an amount equal to the net fair market value of 
their contributions. In this case, similar to Example 2, this credit 
increases the liquidation rights of the existing units by $4,000 each, 
which is in proportion to both the contributed debt and the members 
relative profit sharing percentages.
    The results would be the same for an entity organized as a state 
law partnership rather than an LLC.
    The progression shown by these examples demonstrates three 
identical economic fact patterns where the issuance of additional stock 
or LLC units would be a meaningless gesture. In all three cases, the 
contributions of debt and any corresponding section 704(b) capital 
account increases were ``pro rata'' to the manner in which the existing 
outstanding shares/units shared in the benefit of the increased net 
value of the entity resulting from the contribution. In other words, 
when the contribution of debt was pro rata to the owners' profit 
sharing percentages, the issuance or non-issuance of additional stock/
units would be a meaningless gesture and would fit within the 
constraints of the proposed technical correction.
    By providing a rule that defines pro rata based on the sharing of 
future profit, any existing partnership special allocations are already 
incorporated into the rule as part of the future profit sharing 
percentages. Similarly, the rules regarding partnership liabilities in 
section 752 would operate as they do under current law, and the manner 
in which the partners share liabilities for purposes of those rules 
would not impact the application of section 108(e)(8) because those 
sharing rules do not reflect the economic and tax policy analysis 
above.
    The proposed technical correction is limited to excluding pro rata 
contributions of indebtedness by partners to partnerships from section 
108(e)(8) treatment. We recognize that it may be logical to apply 
section 108(e)(6) in such circumstances. As section 108(e)(6) by its 
terms applies only to corporations, a further technical correction 
would be necessary to apply section 108(e)(6) in this context. We would 
be happy to provide you with additional input in this regard.

                                 

                                                  The Art Institute
                                            Chicago, Illinois 60603
                                                   October 31, 2006
Honorable Charles E. Grassley, Chairman
Honorable Max Baucus, Ranking Member
Committee on Finance
U.S. Senate
219 Dirksen Senate Office Building
Washington, DC 20510

Honorable William M. Thomas, Chairman
Honorable Charles B. Rangel, Ranking Member
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Gentlemen:

    We are writing to request that certain corrections be included in 
the Tax Technical Corrections Act of 2006 (S. 4026 and H.R. 6264). Our 
requests relate to the provisions on fractional interest gifts found in 
Section 1218 of the Pension Protection Act of 2006 (the ``Act'').
Background
    The Art Institute is deeply concerned that the fractional gift 
provisions of the Act will curtail or even end partial interest gifts 
to museums and will thus deprive the public of the opportunity to see 
great works of art. Like many American museums, the Art Institute has 
received significant works as fractional gifts. Objects we have 
received as partial interest gifts--and that as a result are on public 
view at the museum--include works by Monet, Picasso, Van Gogh, and 
Cezanne, among others.
    Museums rely on gifts to acquire such works for the public; in 
today's art market, museums cannot realistically expect to have the 
funds to purchase such major works on a regular basis. It is the public 
that gains when a museum receives gifts of art, since these 
masterpieces can now be viewed by anyone who visits the museum rather 
than being passed down in families or being sold to other private 
owners.
    Given the critical importance of gifts of art, including fractional 
interest gifts, we are seeking the corrections described below.
Requested Corrections
1. Discrepancy Between Tax Liability and Deduction
    Under Sections 2031 and 2512 of the Internal Revenue Code of 1986, 
as amended (the ``Code''), estate and gift taxes are based on the fair 
market value of an object on the date of death or the date of the gift. 
Under Section 1218 of the Act, however, after a donor makes a gift of a 
fractional interest in an object, the deduction for all subsequent 
fractional interest gifts in the same object is limited to the 
appraised value at the time of the first gift. As a result, if a donor 
makes a gift of a 30% interest in an object in Year 1, the work 
appreciates in value, and he then dies in Year 8 with the remaining 70% 
interest going to the museum at that time, the estate tax will be based 
on the fair market value of the object in Year 8 but the deduction will 
be based on the lower appraised value from Year 1. A similar result 
occurs under the gift tax laws.
    This discrepancy does not seem to promote any policy goal and 
produces a harsh result for individuals who are attempting to make 
charitable gifts. Not surprisingly, perhaps, donors have already 
informed us that because of this discrepancy, they will no longer make 
partial interest gifts. We therefore seek corrections that will 
eliminate this concern.
2. Gifts in Progress
    When museums receive gifts of art, including fractional interests, 
they take the new work into account in developing exhibition and 
programming plans. In addition, they adjust their acquisition plans and 
priorities; having received an interest in a work by a particular 
artist, which brings with it the right to possess that work for some 
period and the expectation of eventually receiving full ownership, a 
museum will focus its acquisition plans on works by other artists or 
works from other periods. Unfortunately, in light of the uncertainty 
created by the Act and the new penalties contained in the Act, donors 
are suspending gifts that were in progress before the new law was 
enacted. Museums, in turn, are facing disruption to plans and a delay 
in receiving gifts that donors long intended to give. To avoid this 
result, the Act should not apply to fractional interest gifts in an 
object if the donor had made at least one fractional interest gift in 
the same object before the law was enacted.
3. Recapture Provision
    The Act provides for recapture of income and gift tax deductions, 
plus a penalty, if the remaining interest in a work has not been 
contributed to the donee ``before the earlier of
    (I) the date that is 10 years after the date of the initial 
fractional contribution, or (II) the date of the death of the donor. . 
. .'' One reading of this language is that the final interest has to 
have been contributed before the date of the donor's death, making it 
impossible for the gift to be completed upon death by way of a will, 
trust, or other instrument without recapture. If the donor dies within 
ten years of making the initial fractional gift, and if the work is in 
fact transferred to the donee upon the donor's death, recapture and 
penalties seem inappropriate.
4. Valuation of Subsequent Gifts
    We are particularly troubled by the provision of the Act stating 
that subsequent gifts must be valued based on the lesser of the fair 
market value at the time of the initial gift or the fair market value 
at the time of the additional contribution. First, of course, this 
provision gives rise to the discrepancy discussed above between the 
deduction and the potential gift and estate tax liability. Second, 
faced with the likelihood of having to take a deduction in the future 
that does not represent the actual market value of the gift, donors may 
choose either not to give the gift at all or to delay and give the 
object as a bequest at death. From the museum's perspective, even a 
delay in making a gift poses a risk; a donor may change his mind about 
making the donation, the work could suffer damage, or the donor's 
circumstances may change such that he is forced to sell the work.
    The concern reflected in this provision appears to be that donors 
are using inaccurate appraisals. Rather than requiring donors to use 
out-of-date valuations, however, an approach generally disfavored in 
other contexts, it would seem more appropriate to focus on assuring 
that appraisals are accurate. We therefore recommend that donors be 
permitted to deduct the current fair market value, but in any case in 
which the work as a whole is valued at $1 million or more, even if the 
gift in question is just a fractional interest, the appraisal should be 
reviewed by the IRS Art Advisory Panel.
5. Ten-Year Recapture Period
    We also recommend a change to the provision in the Act requiring 
recapture and imposing penalties if the gift is not completed by the 
earlier of ten years from the date of the initial contribution or the 
death of the donor. Donors may wish to spread out a gift over more than 
ten years for legitimate reasons such as financial planning or personal 
attachment to the object. A ten-year time limit will likely deter 
donors from making gifts; a collector who owns an object valued at tens 
of millions of dollars may feel he simply cannot donate such a work 
over only ten years, given the contribution limit for gifts of tangible 
personal property, and thus may not give the work at all, while another 
collector may wish to have possession of a particularly treasured 
object for at least some periods throughout his life and therefore may 
decide simply to keep the object until his death. So long as the museum 
ultimately ends up with the object and meets the possession 
requirements during the course of the gift, the period of the gift 
should not matter. To assure that these goals are met, donees could be 
required to file information returns with the Internal Revenue Service 
in the event the gift is not completed or the possession requirements 
are not met. If either event occurs, prior income and gift tax 
deductions could be recaptured.
6. Possession
    Under the Act, donors are subject to recapture and penalties if the 
donee does not have substantial physical possession of the work during 
the period of the gift. We suggest a clarification that the recapture 
and penalties do not apply in the event the donor dies before the donee 
has taken possession. In addition, we recommend the adoption of 
exceptions to the possession requirement for exceptional circumstances, 
such as a significant construction project at the museum that requires 
deinstallation of galleries or because of unique factors relating to 
the particular work of art in question.
    We appreciate your consideration of our suggestions and your 
attention to the important role that fractional interest gifts play in 
allowing museums to build art collections for the benefit of the 
public.
            Very truly yours,
                                                         James Cuno
                                                          President

                                                   Eloise W. Martin
                                                           Director

                                                   Julia E. Getzels
            Executive Vice President, General Counsel and Secretary

                                 

                         Massachusetts Bay Transportation Authority
                                        Boston, Massachusetts 02110
                                                   October 31, 2006
The Honorable Bill Thomas
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas:

    On behalf of the Massachusetts Bay Transportation Authority (MBTA), 
I wish to submit these formal comments pursuant to your request for 
written comments in connection with H.R. 6264, the ``Tax Technical 
Corrections Act of 2006.'' These comments specifically regard the newly 
enacted section 4965 of the Internal Revenue Code. The MBTA is very 
concerned that this new law, depending on interpretation, could impose 
a retroactive and financially damaging excise tax on public sector, 
tax-exempt agencies which have taken part in ``lease in-lease out'' 
(LILO) and ``sale in-lease out'' (SILO) transactions.
    The MBTA is the fifth largest mass transit system in the United 
States, serving over 1.1 million passengers daily. We operate the 
oldest continually operating subway system in the country and seven 
other modes of transit.
    The MBTA's annual operating budget exceeds $1.3 billion and is 
funded from fare revenues, non-fare revenues generated by the MBTA, 
dedicated revenues pledged by the Commonwealth of Massachusetts and its 
communities as well as federal funds. The MBTA is in the midst of a 
fiscal crisis, including a potential $70 million budget shortfall for 
the MBTA's fiscal year ending June 30, 2007. This is mainly due to 
increased fuel costs, high debt service expenses and lower than 
anticipated sales tax revenues. The MBTA has taken appropriate steps to 
address this shortfall by reducing costs and increasing revenues with 
such actions as a fare increase anticipated to take effect in January 
of 2007. Even with these aggressive actions, the MBTA will not have the 
wherewithal to fund a substantial regressive federal excise tax that 
could be imposed on us.
    The MBTA participated in four LILO transactions between 1996 and 
1998, which is prior to the IRS including LILOs as listed tax shelters. 
In each case, the transactions were not only approved by the Federal 
Transit Administration but promoted by that agency as an innovative 
financing tool. The proceeds from these transactions were received by 
the MBTA as upfront payments and have been used to invest in the 
infrastructure of our system and to provide service to our customers. 
The imposition of a retroactive excise tax would have a profoundly 
negative impact on our ability to provide expected service to the 
public.
    The central problem is that section 516 of the Tax Increase 
Prevention and Reconciliation Act does not provide clear definitions of 
``net income'' and ``proceeds'' and, as a result, the Treasury and IRS 
have insufficient guidance in defining those terms as they proceed 
through the regulatory process. The MBTA, along with many other transit 
agencies, is very concerned that this lack of guidance may result in 
regulations with overly broad definitions which will make the MBTA 
subject to a substantial retroactive excise tax.
    Mr. Chairman, as you and your Committee consider this issue, we 
respectfully request that you include in H.R. 6264 a provision which 
would clarify the meaning of the terms ``net income'' and ``proceeds'' 
and the appropriate allocation of such items to ensure that the new 
excise tax is not applied on a retroactive basis to public agencies 
like the MBTA.
    Thank you for your consideration of our views. For a more detailed 
explanation of the issue, we have attached a copy of our comment letter 
to the Treasury Department and IRS. If you have any further questions, 
please feel free to contact me.
            Very truly yours,
                                                  Jonathan R. Davis
                 Deputy General Manager and Chief Financial Officer

                                 

                                                  Wubbels and Duffy
                                                   November 3, 2006
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Re: Written Comments on H.R. 6264.

Dear Sir or Madam,

    With regard to H.R. 6264, we are writing to express our 
disagreement with the amendment related to the Jobs and Growth Tax 
Relief Act of 2003. Included in Section 7 of H.R. 6264 is an amendment 
to Section 302 of the Jobs and Growth Tax Relief Act of 2003 which 
effectively excludes from the definition of qualified dividends ``any 
dividend received from a corporation which is a DISC or former DISC . . 
.''.
    Because the intent of the DISC is to encourage U.S. companies to 
export domestically produced products, this amendment seems contrary to 
the original intent of the DISC. Essentially, this proposed amendment 
specifically singles out exporters for exclusion from qualified 
dividend treatment.
    Why would Congress want to hurt U.S. Exporters?
    We would appreciate your reconsideration of this amendment. We 
believe this amendment should be removed and that dividends paid by 
U.S. manufacturer/exporters using the DISC should receive at least 
equal treatment to that of other U.S. dividend paying companies.
            Sincerely,
                                                          Tom Duffy

                                 

                                   Lousiana District Export Council
                                        New Orleans, Lousiana 70130
                                                   October 26, 2006
The Committee on Ways and Means
U. S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Chairman Thomas and Committee Members:

    This submission is being made on behalf of the Louisiana District 
Export Council, Inc. (``LADEC''), a non-profit organization 
incorporated under the laws of Louisiana. The purpose of LADEC is to 
promote and encourage U.S. exports from Louisiana by: (1) supporting 
Louisiana based businesses and/or Louisiana produced goods and services 
so as to strengthen individual companies, stimulate U.S. economic 
growth, and create Louisiana based export related jobs; (2) supporting 
the activities of the U.S. Commercial Service (``USCS'') at the Delta 
U.S. Export Assistance Center located in New Orleans, LA; and (3) 
initiating or supporting such other export related activities as the 
LADEC Board of Directors with the concurrence by a majority of its 
Members may decide from time to time. We appreciate this opportunity to 
express our views on a matter of great concern to a significant number 
of Louisiana's small business exporters.
    On September 29, 2006, H.R. 6264, the ``Tax Technical Corrections 
Act of 2006'' (``the Bill'') was introduced by Chairman Bill Thomas. On 
the same date, Chairman Thomas requested written public comments for 
the record from all parties interested in H.R. 6264. The Website of the 
Committee on Ways and Means advises that such comments must be 
submitted by the close of business on Tuesday, October 31, 2006. This 
submission is being made within that time period.
Concerns re: H.R. 6264, Section 7
    Included within its proposed ``corrections'' H.R. 6264 includes 
Section 7, which dramatically affects the tax treatment of dividends 
received by non-C corporation shareholders of Interest-Charge Domestic 
International Sales Corporations (``IC-DISCs''). This class generally 
includes those small business taxpayers receiving their IC-DISC 
dividends through an S corporation, or a partnership-owned IC-DISC. As 
proposed, Section 7 would deny ``qualified dividend'' treatment under 
Internal Revenue Code of 1986, as amended (``Code''), Section 
1(h)(11)(B), for all IC-DISC dividend distributions.\*\ Section 7 
provides that such changed treatment be effective with respect to such 
``dividends received on or after September 29, 2006, in taxable years 
ending after such date.''
---------------------------------------------------------------------------
    \*\ The practical effect of this provision would be to more than 
double the taxation of such affected individuals by taxing their IC-
DISC dividends at as high as a 35 percent marginal rate rather than at 
the 15 percent rate currently in effect for qualified dividends.
---------------------------------------------------------------------------
    It is respectfully submitted that Section 7 is not a ``technical'', 
but rather a substantive, change in the tax law treatment of all 
affected individuals receiving dividends from an IC-DISC. A change with 
such a substantial impact, although on an admittedly small segment of 
taxpayers, should neither be part of a ``technical corrections'' Bill, 
nor should it bear an effective date that, although stated as 
prospective from the date of introduction,has the practical effect of 
retroactivity to January 1, 2006.
    Affected taxpayers have structured their eligible export 
transactions for calendar year 2006 in reliance on the law as it has 
existed for over three years, with the reasonable expectation that 
their IC-DISC tax transactions and dividend distributions for the 
calendar year 2006 would be taxed in accordance with existing law.
    In accordance with the applicable IC-DISC transfer pricing rules of 
the Code, the applicable U.S. Treasury regulations, and IC-DISC related 
pronouncements of the Internal Revenue Service, these calculations are 
made, inter-company transaction are effected, and IC-DISC dividends are 
paid, generally only at or near the end of the calendar year concerned, 
when the required information is first available with reasonable 
certainty. Indeed, the IC-DISC ``gross receipts'' and ``assets tests'' 
of Code section 992(a) (1) (A) and (B) for DISC qualification can only 
be made at the end of the year. The practical consequence of enacting 
Section 7 of the Bill with its currently stated effective date would 
therefore be to impose a significant tax increase, in a retroactive 
fashion, on all those affected taxpayers.
Current Law Provisions
    The IC-DISC provisions of Code sections 991-997, as now in effect, 
provide tax incentives for small businesses with respect to their 
export of U.S. manufactured goods and certain export related services, 
by permitting them to defer paying income tax on a limited amount of 
export profits. They may accumulate within the IC-DISC otherwise 
taxable profits attributable to qualified export receipts not exceeding 
$10 million per calendar year, but only if substantially all such 
accumulated DISC profits are reinvested in expanded export assets. The 
price of such deferral is the payment of an interest charge at an 
attractive Treasury Bill rate. Code section 995(f).
    Alternatively, the IC-DISC may distribute some or all of such 
export profits as dividends to the IC-DISC's shareholders. Under 
current law such shareholders who are individuals, including those 
owning their interests in an IC-DISC through a flow-through entity, are 
taxed at a maximum rate of 15 percent on such dividends. Export profits 
of an IC-DISC on its export receipts in excess of $10 million per year 
are deemed distributed to the IC-DISC shareholders, who are taxed on 
such distributions as dividends. Code section 995(b) (1). If such 
shareholders are individuals, the current maximum rate of 15 percent 
also applies to such ``deemed distributions''.
    Many U.S. manufacturers, particularly those with expanding 
businesses, may not be overly burdened by the reinvestment requirement 
for accumulating export profits within their IC-DISC subsidiaries. Such 
taxpayers should also now be deriving benefits from the domestic 
production deduction provided by Code section 199.
Need for a Different Approach to Solving the Perceived Problem
    Many architectural and engineering firms, and small wholesalers and 
retailers that find foreign markets for, and then buy and immediately 
export, U.S. manufactured goods on a C.O.D. or short-term Letter of 
Credit basis, have neither a significant investment in export 
inventories nor require warehouses, nor are they eligible for the Code 
section 199 domestic production deduction with respect to their export 
sales or services. In addition, some ``manufacturers'' may not require 
significant investments in materials, or bricks and mortar type export 
assets, yet incur substantial additional costs in developing an export 
market for their wares. So these taxpayers, due to the peculiar 
circumstances of their export businesses, and although included within 
the intended recipients of the IC-DISC export tax incentives, are often 
unable to meet the reinvestment requirements and will be effectively 
shut out from all export tax incentives unless some form of meaningful, 
if limited, small business exception is made in the Bill's Section 7.
    It is respectfully submitted that a responsible way to deal with 
the unintended consequences to the U.S. Treasury from granting access 
to the 15 percent qualified dividend rate for individuals would be to 
curtail access to this preferential treatment on unlimited amounts of 
deemed distributions from an IC-DISC, preferably on a truly prospective 
basis.
Recommended Solutions
    The preferred 15 percent dividend rate would be retained, but only 
with respect to a very limited amount of dividends to benefit those 
small businesses that would otherwise be left out of the IC-DISC export 
tax incentive. This could be accomplished by retaining the preferred 15 
percent rate on distributions of ``DISC income'' under Code section 
995(f)(1), but denying it with respect to ``deemed distributions'' 
under Code section 995(b)(1).\\
---------------------------------------------------------------------------
    \\ The sole remaining beneficiaries of this limited access 
to the 15 percent qualified dividend rate would be individuals, and the 
amounts of tax benefits derived, in the aggregate, would be quite small 
in macroeconomic terms. Nevertheless, such treatment would still 
provide a limited but meaningful export tax incentive for those 
originally intended beneficiaries of the IC-DISC provisions. This class 
of taxpayers was certainly not the object of the World Trade 
Organization complaints concerning export tax incentives given to major 
U.S. corporations, and it is anticipated that there should be no 
reprisals within the WTO from the retention of such limited benefits to 
an even more limited group of individuals.
---------------------------------------------------------------------------
    The effect of such a limited change would be to provide for 
continuation of the 15 percent rate with respect to annual dividends of 
the IC-DISCprofits from no more than $10 million of qualifying export 
receipts of the IC-DISC and its related supplier(s) within a modified 
controlled group. See Code section 995(b) (4).
    For the typical small business exporter with, say, a 4% net-to-
gross ratio, this would have the maximum effect of a 20 percentage 
point rate reduction in dividends of $400,000 of annual export profits, 
or an aggregate group tax reduction of $80,000. All export profits on 
the group's receipts in excess of $10 million each year would then be 
subject to the full ordinary income tax rate of up to 35 percent. Of 
course for many, indeed most, affected small businesses the actual 
benefit would be considerably less: their actual export sales volumes, 
the profits on which the beneficial rate would apply, would be 
considerably less than the annual maximum of $10 million.
    These changes should be made prospective in a meaningful way, by 
making them applicable to dividends paid in taxable years of IC-DISCs 
beginning after the date of introduction (or, more preferably, after 
the date of enactment).
    In order to accomplish these recommended changes,
    (1) The indented sub-clause in paragraph (a) of Section 7 could be 
changed to read:
        `(IV) any dividend received from a corporation which is a
        DISC or a former DISC, as defined in section 992(a), to the
        extent such dividend is not paid out of its DISC income for
        such year (as defined in section 995(f) (1)).'
    And,
    (2) Paragraph (b) of Section 7 should then be changed to read:
        `(b) Effective Date-The amendment made by this section shall 
apply to dividends paid in IC-DISC taxable years beginning after the 
date of enactment.'
    On behalf of the Louisiana District Export Council, Inc., and the 
small business exporters of Louisiana who are attempting to recover 
from the ravages of Hurricane Katrina, we earnestly solicit your 
adoption of the proposed changes as discussed above, if it is found 
necessary to make any change to the existing rules regarding the tax 
treatment of IC-DISC dividends. Thank you for your consideration of 
these views.
    Of course, if you have any questions or would consider further 
discussion helpful, the undersigned is available to your Staff at the 
above e-mail address or by phone at 251-625-4603.
            Respectfully submitted,
                                               Edward K. Dwyer, CPA
                                                       LADEC Member

                                 

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

The Honorable Charles B. Rangel
Ranking Member
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Thomas and Ranking Member Rangel:

    In response to Advisory Release No. FC-26 (September 29, 2006), the 
National Association of Real Estate Investment Trusts' 
(NAREIT) is submitting these comments regarding TTCA 2006, and in 
particular, the modifications to section 470,\1\ which limits the 
deductions allocable to property used by governmental or other tax-
exempt entities. NAREIT is the representative voice for U.S. 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.
---------------------------------------------------------------------------
    \1\ For purposes of this letter, ``section'' refers to the Internal 
Revenue Code of 1986, as amended (Code), unless otherwise indicated. 
Also, ``section 470'' refers to section 470 as enacted by the American 
Jobs Creation Act of 2004 (AJCA), and ``TTCA 2006, proposed section 
470'' refers to the proposed revisions to section 470 under section 
6(b) of TTCA 2006.
---------------------------------------------------------------------------
    As further described below, NAREIT has two specific comments.
EXCUTIVE SUMMARY
    First, NAREIT requests a statutory change or legislative history 
demonstrating that REITs should not be considered ``pass-thru 
entities'' for purposes of sections 168(h)(6)(E) and 470. This request 
is consistent with federal tax law's general treatment of REITs (with 
rare exceptions) as C corporations and not as pass-thru entities.
    The second comment relates to the umbrella partnership (UPREIT) 
structure utilized by over 60% of the publicly traded REIT industry, by 
many private REITs and by some non-REIT C corporations. As further 
described below, an UPREIT owns and operates its entire property 
portfolio through an operating partnership (OP), the ownership units in 
which are held by the REIT and third parties who, typically after one 
year, have the right to exchange their partnership units for the fair 
market value equivalent of REIT stock or cash (at the REIT or OP's 
option). Because this exchange right does not protect the unitholders 
from risk of loss, but rather is a means to provide them with 
liquidity, NAREIT requests guidance that the existence or funding of 
this redemption right by the REIT or OP in the ordinary course of 
business, by itself, is not considered a ``set aside'' or 
``arrangement'' resulting in the unintended application of the loss 
disallowance rules of section 470.
    NAREIT also supports the more general comments to TTCA 2006 
submitted by The Real Estate Roundtable.
DISCUSSION
I. Background
    As enacted by the AJCA, and proposed to be amended by TTCA 2006, 
section 470 was designed to prevent taxpayers from claiming tax 
benefits generated in ``Sale-In Lease-Out'' (SILO) transactions,\2\ 
which the IRS declared to be abusive tax avoidance arrangements.\3\ 
Presumably to prevent SILO-like transactions from being replicated 
through special allocations made by partnerships, Congress extended 
section 470 to losses attributable to property owned by a ``pass-thru 
entity'' with one or more tax-exempt or foreign owners. Section 470 
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.'' \4\
---------------------------------------------------------------------------
    \2\ H.R. Rep. No. 548, pt. 1, 108th Cong., 2d Sess. 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. 192, 108th 
Cong., 1st Sess. at 198 (2003) (same).
    \3\ Notice 2005-13, 2005-9 I.R.B. 1 (designating SILOs as a listed 
transaction).
    \4\ Section 470(a).
---------------------------------------------------------------------------
    The term ``tax-exempt use property'' is defined by reference to 
section 168(h), which includes: 1) tangible property leased to tax-
exempt entities; \5\ and, 2) 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.\6\ Thus, under section 168(h) and, in turn, section 470, 
tax-exempt use property includes not only property leased to tax-exempt 
entities, but also the proportionate amount of other property, 
regardless of its use, owned by a pass-thru entity and attributable to 
a tax-exempt or foreign owner.\7\ Neither sections 470 and 168(h) nor 
the accompanying legislative history define a pass-thru entity for this 
purpose, and, furthermore, neither does TTCA 2006 address this issue. 
Adding to the uncertainty is the fact that, notwithstanding the general 
tax treatment of a REIT as a corporation,\8\ there are a few instances 
in the Code in which a pass-thru entity is defined to include a 
REIT.\9\
---------------------------------------------------------------------------
    \5\ Id. Sec. 168(h)(1).
    \6\ Id. Sec. Sec. 168(h)(6)(A), (E).
    \7\ Id. Sec. 168(h)(6)(A). TTCA 2006, proposed section 470(c)(2)(B) 
would change section 470 from limiting deductions proportionately based 
on the ownership interests of a tax-exempt or foreign partner in a 
partnership to being completely disallowed. NAREIT opposes this change 
and agrees with the comments of The Real Estate Roundtable which 
discuss this opposition in more detail.
    \8\ Treas. Reg. Sec. 1.856-1(e) (stating that, to the extent not 
inconsistent with the REIT provisions of the Code, other provisions of 
chapter 1 of the Code, such as sections 301 (property distributions); 
302 (distributions in exchange for stock), and 316 (definition of a 
dividend), apply to a REIT and its shareholders ``in the same manner 
that they would apply to any other organization which would be taxable 
as a domestic corporation.'' See also Treas. Reg. Sec. 1.368-2 (tax-
free reorganization rules apply to REITs as corporations); Rev. Rul. 
66-106, 1966-1 C.B. 151 (``provisions of subchapter C pertaining to 
corporate distributions, are applicable with respect to both REITs and 
their shareholders in the same manner that they would apply to any 
other unincorporated trust which would be taxable as a domestic 
corporation'').
    \9\ Sec. Sec. 1(h)(10)(B); 860E(e)(6)(B); 1260(c)(2).
---------------------------------------------------------------------------
II. Guidance Requested That REITs Are Not ``Pass Thru Entities'' Under 
        Section 470
    Much of the discussion below was set forth in a February 25, 2005, 
letter to Treasury Department and IRS officials requesting regulatory 
guidance on this issue. NAREIT understands that regulatory guidance may 
not have been issued in the past given the expectation of technical 
corrections to section 470. Recognizing the difficulty in applying 
section 470 to pass-thru entities in an appropriate manner, the IRS 
issued Notice 2005-29, 2005-13 I.R.B. 796, and then Notice 2006-2, 
2006-2 I.R.B. 278, which provide that in the case of partnerships and 
pass-thru entities described in Sec. 168(h)(6)(E), for taxable years 
that began before January 1, 2006, the IRS will not apply Sec. 470 to 
disallow losses associated with property that is treated as tax-exempt 
use property solely as a result of the application of Sec. 168(h)(6). 
Because TTCA 2006 now has been proposed without addressing the issue of 
a REIT being treated as a pass-thru entity for purposes of section 470, 
and the moratoria have expired, now would be the appropriate time to 
provide certainty to REITs and their investors by resolving this issue.
    This issue is particularly important because, as further described 
below, TTCA 2006 attempts to provide an exception from the application 
of section 470 for certain ``partnerships.'' However, ``REITs'' neither 
would be included in the definition of ``partnerships'' for purposes of 
this exception, nor excluded from the general definition of ``pass thru 
entities'' under the general application of section 470. As a result, 
it is still possible that section 470 could apply to REITs, even under 
TTCA 2006's proposal and without the benefit of the proposal's 
exceptions from section 470). This clearly would be an inappropriate 
result; section 470 simply should not apply at the REIT level.
    The statutory language and legislative history clearly indicate 
that REITs were not the target of this provision. First, a REIT by 
definition is required to be taxable as a domestic corporation.\10\ 
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 or credits to their shareholders.\11\ 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.
---------------------------------------------------------------------------
    \10\ Section 857(a)(3).
    \11\ 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 (e.g., partnerships), REIT-level losses 
or credits do not flow through to shareholders regardless of whether 
the REIT issues a single class of stock or multiple classes of stock. 
Further, a REIT generally has little or no taxable income or tax 
liability to offset with something like SILO deductions or credits 
because it may deduct dividends paid to shareholders, and it must 
distribute most of its taxable income as dividends.\12\ Given the tax 
treatment of REITs, there was no benefit to its shareholders for a REIT 
to acquire tax deductions or credits through a SILO arrangement.\13\ 
The only practical way that a REIT shareholder could offset its REIT 
taxable income or associated tax liability would have been to enter 
into a SILO transaction on its own outside of--and separate and apart 
from--the REIT.
---------------------------------------------------------------------------
    \12\ Id. Sec. 561.
    \13\ To the extent that it could be argued that preferred shares of 
REITs could be issued to tax-exempt investors as some way to 
approximate SILO transactions, the existing fast pay preferred stock 
regulations of Treas. Reg. Sec. 1.7701(1)-3(c)(2) prohibit such abuse 
and is a more targeted anti-abuse method than channeling all REITs into 
the definition of ``pass-thru entity'' under section 470. See C. 
Kulish, J. Sowell, and P. Browne, Section 470 and Pass-thru Entities: A 
Problem in Need of a Solution, 7 Bus. Entities 12, 25-26 (2005), for a 
more detailed explanation of this issue.
---------------------------------------------------------------------------
    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.\14\ 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. REITs had (and have) little incentive to enter into SILO-
like arrangements because they already receive a deduction for 
dividends paid and expend significant resources in order to comply with 
the REIT rules in order to receive this deduction. Thus, SILO 
transactions are unattractive to REITs because they would generate less 
cash to REITs and their investors compared alternative investments such 
as leasing transactions with real economics that are the basis on which 
REIT investors evaluate REIT management.
---------------------------------------------------------------------------
    \14\ 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.
    In order to avoid the unintended application of the loss limitation 
rules of section 470 to REITs with tax-exempt or foreign shareholders, 
NAREIT respectfully requests that Congress provide guidance (by 
statutory changes to TTCA 2006 or in its legislative history) stating 
that a REIT is not pass-thru entity for purposes of sections 470 and 
168(h)(6)(E). Note that even under such guidance, a REIT's lease of 
property to a tax-exempt lessee still could be subject to section 470 
if it uses a partnership; however, the REIT itself would not be a 
``pass thru entity'' subject to section 470.
III. Guidance Requested that the Typical UPREIT Redemption Right Does 
        Not, By Itself, Cause REIT OPs to Be Subject to Section 470
    Recognizing that ``[t]he manner of application of section 470 in 
the case of property owned by a partnership in which a tax-exempt 
entity is a partner is unclear,'' \15\ TTCA 2006 proposes a number of 
changes to section 470's application to partnerships.
---------------------------------------------------------------------------
    \15\ Joint Committee on Taxation, Description of the Tax Technical 
Corrections Act of 2006 (JCX-48-06), October 2, 2006, at page 6.
---------------------------------------------------------------------------
A. TTCA 2006 Proposals
    As relevant to NAREIT's comments, the loss limitation provisions 
under section 470 as amended by TTCA 2006 generally would not apply to 
a partnership if two requirements are met: the ``no set asides'' 
requirement, and the ``no fixed price option'' requirement.\16\ First, 
under the ``no set asides'' requirement, proposed section 470 would not 
apply to a partnership with a tax-exempt/foreign partner so long as 
there are no ``arrangements'' \17\ or ``set asides'' \18\ to, or for 
the benefit of (among others) a taxable or tax-exempt partner of the 
partnership. Although a limited amount of partnership funds could be 
aside with no time limit \19\ or an unlimited amount of partnership 
funds could be set aside for up to 12 months \20\ (with ``related'' 
set-asides and arrangements treated as one arrangement),\21\ no amount 
could be set aside or expected to be set aside by an entity outside of 
the partnership (such as by another partner) to or for the benefit of, 
among others, a taxable or tax-exempt partner of the partnership.\22\
---------------------------------------------------------------------------
    \16\ TTCA 2006, proposed section 470(e)(1)(C).
    \17\ TTCA 2006, proposed sections 470(e)(2)(A)(i) and 470(e)(2)(C); 
section 470(d)(1)(B).
    \18\ TTCA 2006, proposed section 470(e)(2)(A)(ii).
    \19\ TTCA 2006, proposed section 470(e)(2)(B).
    \20\ TTCA 2006, proposed section 470(e)(2)(D)(i).
    \21\ Id.
    \22\ TTCA 2006, proposed section 470(e)(2)(B)(iii).
---------------------------------------------------------------------------
    In addition to this requirement, under the ``no fixed price 
option'' requirement, no tax-exempt partner could have an option to 
purchase or compel the distribution of partnership property or any 
interest in the partnership for other than at fair market value.\23\ 
Similarly, neither the partnership nor any taxable partner could have 
an option to sell or compel distribution of partnership property or any 
interest in the partnership to a tax-exempt partner for other than at 
fair market value.\24\
---------------------------------------------------------------------------
    \23\ TTCA 2006, proposed section 470(e)(3)(A)(i).
    \24\ TTCA 2006, proposed section 470(e)(3)(A)(ii).
---------------------------------------------------------------------------
    While funds would be treated as set aside only if a reasonable 
person would conclude, based on the facts and circumstances, that funds 
are set aside or expected to be set aside, no such ``reasonable 
person'' test applies to an ``arrangement,'' which is defined to 
include, among other things, ``a defeasance arrangement, a letter of 
credit collateralized with cash or cash equivalents, a payment 
undertaking agreement, and any similar arrangement.'' \25\
---------------------------------------------------------------------------
    \25\ Section 470(d)(1)(B).
---------------------------------------------------------------------------
B. Application of TTCA to UPREITs
    Arguably, this rule could result in loss disallowance to partners 
in OPs owned in part by REITs in an UPREIT structure, which is utilized 
by over 60% of the publicly traded REIT industry, by many private REITs 
and by some non-REIT C corporations \26\.
---------------------------------------------------------------------------
    \26\ The discussion herein should apply to a parallel structure 
known as ``DownREITs''. A DownREIT is similar to an UPREIT except that 
in a DownREIT, the REIT may own property directly (in addition to an 
interest in a lower-tier partnership), while in an UPREIT, virtually 
all of the REIT's holdings are through the OP. Our data indicates that 
approximately 10% of publicly traded REITs (by equity market 
capitalization) are DownREITs.
---------------------------------------------------------------------------
    As further described below, because third party partners of the OP 
have the ability to require the OP or REIT to repurchase at fair market 
value of their partnership units for cash or REIT stock, it is possible 
this structure could prevent the UPREIT structure from satisfying the 
``no set asides'' requirement. Because section 470 could apply to these 
non-tax shelter transactions conducted in the ordinary course of the 
REIT's business, NAREIT requests statutory language or legislative 
history clarifying that these transactions are not set-aside/
arrangements contemplated by TTCA 2006.\27\
---------------------------------------------------------------------------
    \27\ While these concerns also apply to the application of existing 
section 470, they are even more valid here given the attempt to clarify 
section 470's application to partnerships.
---------------------------------------------------------------------------
    A general overview of the UPREITs format is below. While the 
structure of specific UPREITs may vary in the details, most will be 
very similar in most, if not all, respects with respect to the matters 
outlined in this overview.
Characteristics of an ``UPRIET''
    An UPREIT generally consists of a publicly traded REIT that owns 
substantially all of its assets and conducts substantially all of its 
operations through an ``operating partnership.'' As a general rule, the 
REIT will own a number of ``common units'' in the OP equal to the 
number of shares of common stock that the REIT has outstanding. If the 
REIT has preferred stock outstanding, the REIT will own ``preferred 
units'' in the OP that correspond to the shares of preferred stock the 
REIT has outstanding.
    The limited partnership interests held by partners in the OP other 
than the REIT also are denominated as ``units.'' Because the REIT owns 
substantially all of its assets and conducts substantially all of its 
operations through the OP, and because the REIT owns a number of OP 
units equal to the number of shares of common stock that it has 
outstanding, there is effectively an economic identity of interest 
between the units in the OP that are owned by the outside limited 
partners and the shares of common stock outstanding in the REIT.
    Typically, the REIT acquires its interest in the OP in one of two 
ways, both evidencing a substantial equity investment in the OP. First, 
the REIT may sell its shares in an initial public offering and 
contribute the cash proceeds to the OP. Alternatively, the REIT may 
contribute real property or partnership interests in partnerships that 
own real property to the OP. Then, the REIT (or a subsidiary) typically 
acts as the sole general partner of the OP, and has the exclusive right 
to manage the affairs of the OP, subject to limitations intended 
primarily to: 1) preserve the effective economic identity of interest 
that exists between the units and the REIT shares; and, 2) avoid the 
REIT or OP taking actions that would eliminate or adversely affect the 
redemption/exchange right for unitholders described below.
    The third party unitholders typically acquire their interests in 
the OP in one of two ways: 1) contributing their direct interests in 
real property to the OP in exchange for OP units, or, 2) contributing 
their interest(s) in pass through entities that own real property to 
the OP in exchange for OP units.
    If new partners are admitted to the OP, the REIT's interest in the 
OP diminishes over time, typically not below 50%. Conversely, as a REIT 
issues secondary offerings and contributes cash to the OP (probably the 
norm), the REIT's interest in the OP increases. The REIT's interest 
also may increase as unitholders exercise their redemption/exchange 
rights described below.
See the diagram below for the basic structure of an UPREIT

[GRAPHIC] [TIFF OMITTED] T1495A.001

Reasons for UPREIT Formation
    The UPREIT structure was developed to facilitate the desire of real 
estate owners to be able to access the public capital markets while 
deferring the immediate recognition of taxable gain that would result 
if they were to transfer their properties or property-owning 
partnership interests directly to the REIT in exchange for REIT shares, 
rather than to the OP in exchange for units.\28\ This tax gain can be 
deferred if the property owner instead receives OP units, rather than 
REIT shares. The IRS has indicated that it does not consider the UPREIT 
structure abusive. See Example 4 of Treas. Reg. Sec. 1.701-2 (the 
partnership anti-abuse regulations). Further, the IRS has issued dozens 
of rulings involving UPREITs.\29\ Since much of the real estate 
industry holds real estate in partnership form, the use of an UPREIT 
structure does not represent a significant departure from that of the 
structures used by non-REIT real estate investors.
---------------------------------------------------------------------------
    \28\ Under Section 351(e) of the Internal Revenue Code, a transfer 
of property to a REIT in exchange for REIT shares in connection with 
the formation of the REIT and an IPO by the REIT often will result in 
the recognition of gain for tax purposes, even though most business 
owners who transfer their businesses to a corporation in connection 
with an IPO would not recognize gain. Nevertheless, the IRS has ruled 
that in certain circumstances property transfers to an existing REIT do 
not trigger income under section 351(e). See, e.g., PLRs 200450018, 
200011036, 199915030, 9801016.
    \29\ See, e.g., PLRs 200011036, 199952071, 9832022.
---------------------------------------------------------------------------
    In general, tax-exempt entities generally do not own OP units 
directly. As noted above, the principal reason for the UPREIT structure 
is to permit a property to defer the recognition of gain through the 
receipt of a partnership interest, rather than shares of REIT stock, 
typically a non-issue for a tax-exempt entity. With that said, there 
may be situations when a tax-exempt (or foreign) entity does own OP 
units.\30\ If tax-exempt entities are unitholders, their redemption/
exchange rights (described below) are likely to be virtually identical 
to those of taxable entities.
---------------------------------------------------------------------------
    \30\ The most likely situation would be where a tax exempt entity 
is an investor with taxable entities in a fund or partnership that 
transfers property to an OP for units, with the fund or partnership 
retaining the units that it received for a period of time.
---------------------------------------------------------------------------
    Publicly traded REIT shares typically are held in ``street name,'' 
and although publicly traded REITs monitor the ownership of more than 
5% shareholders through Forms 13D and 13G filed with the SEC, a 
publicly traded REIT may not always be aware of tax-exempt investors 
that own relatively small indirect interests in its OP, meaning the 
REIT may face uncertainty in whether section 470 may apply in the first 
instance and may even be forced to assume it might apply.
Redemption/Exchange Right Provides Liquidity/Does Not Limit Risk of 
        Loss
    In the typical UPREIT structure, the holder of OP units generally 
have the right to require the REIT or the OP to redeem all or some of 
its units for an amount of cash equal to the agreed upon ``value'' of 
those units. Under the typical partnership agreement for an UPREIT, the 
``value'' of a unit is defined as equal to the value of a common share 
of stock of the REIT so long as the stock of the REIT is publicly 
traded. Typically, the value of a share of the common stock is in fact 
the best approximation of the value of an OP unit.\31\
---------------------------------------------------------------------------
    \31\ Because the REIT generally does not own significant assets 
other than its interest in the OP, and because it owns a number of OP 
units equal to the number of common shares that it has outstanding, the 
value of a share of the common stock is in fact the best approximation 
of the value of an OP unit. In fact, NAREIT assumes that because the 
purchase price of the OP unit would be at fair market value, the ``no 
fixed price purchase option'' requirement would be met.
---------------------------------------------------------------------------
    Although the unitholder's redemption/exchange right is typically 
expressed as the right to receive cash equal to the value of a REIT 
share, the OP and/or the REIT normally have the right, in lieu of 
paying cash, to satisfy the redemption obligation with one share of 
REIT common stock for each OP unit that is redeemed. It is generally 
the parties' expectation that the REIT will elect to satisfy the 
redemption rights with shares of REIT stock, rather than cash, but this 
is not typically required. In some cases, the unitholder will have a 
contractual right directly with the REIT to exchange the units for 
shares of common stock on a one-for-one basis.
    In the typical UPREIT, the common unitholder does not have the 
right to get a fixed amount of cash or notes that is predetermined at 
the time the unit is acquired. Rather, the common unitholder only has a 
right to receive cash in an amount (or at the election of the REIT or 
OP, REIT shares with a value) equal to the agreed upon value of the OP 
units at the time the redemption/exchange right is exercised. The 
redemption/exchange right most typically is set forth in the 
partnership agreement for the OP, although in some cases there will be 
a separate contractual agreement between the unitholder and the REIT 
and/or OP.
Typical UPREIT Does Not Provide For Defeasance/Collateralization of 
        ``Redemption/Exchange'' Right for OP Unitholders
    As described below, in the typical UPREIT, there is no 
collateralization or other similar arrangement with respect to the 
unitholders' redemption or exchange right. With that said, because 
either the REIT or OP stands ready to fund the redemption/exchange 
right, practitioners have expressed a concern that there is ambiguity 
as to whether the ``no set aside'' requirement to avoid application of 
section 470 would be met.
    We are not aware of any REIT that has (or is required to) set aside 
cash to provide for payment of the redemption price when the 
unitholders exercise their redemption right. If, and to the extent 
that, the REIT elects to pay cash in connection with the exercise of 
the redemption right, it generally will fund that cash with operating 
cash flow, borrowings on an existing line of credit or other debt 
arrangement (available and used for other cash needs as well), or the 
proceeds of a new equity issuance. Thus, the REIT may use the cash 
proceeds on hand after sale of a particular property (or after the 
sales of multiple properties) with which to fund a repurchase request. 
The REIT, however, is under no contractual obligation to maintain cash 
on hand, a line of credit or other similar credit facility to permit 
the payment of cash upon exercise of the redemption/exchange right.
    If the REIT (or OP) elects (or is required) to issue shares of REIT 
stock in connection with the exercise of a unitholder redemption/
exchange right, the REIT generally will use ``newly issued'' shares of 
REIT stock. The unitholder typically will want to ensure that the REIT 
has the ability to issue these shares of REIT stock and that the 
unitholder has liquidity for the REIT shares that it receives. This 
objective most typically is achieved by requiring that, once the OP 
units become redeemable or exchangeable, the REIT register with the SEC 
under the Securities Act of 1933 the shares to be issued on redemption/
exchange of the OP units. The registration of these shares merely 
ensures that when the unitholder exercises the redemption or exchange 
right, 1) the REIT will be legally permitted under the securities laws 
to deliver the shares of REIT stock that it has the option to deliver; 
and, 2) that the unitholder receiving those shares of REIT stock will 
be permitted under the securities laws to resell the shares without 
significant restrictions. This registration is accomplished by filing a 
registration statement with the SEC in accordance with the applicable 
SEC rules.\32\
---------------------------------------------------------------------------
    \32\ In some cases, rather than registering the shares when the 
redemption/exchange right first becomes exercisable, the REIT will 
agree to register the shares for ``resale'' when they are actually 
issued, but this alternative is more cumbersome and much less common.
---------------------------------------------------------------------------
    There generally is no obligation for the REIT or the OP to 
repurchase any shares of REIT stock from the unitholder that are issued 
pursuant to the redemption/exchange right. Furthermore, because the 
exercise of the redemption/exchange right is a taxable transaction, and 
its availability provides the OP unitholder with the flexibility of 
deferring taxation until such time that the unitholder has the cash or 
the liquid publicly traded company stock with which to pay the 
corresponding tax liability, neither the OP nor REIT typically has the 
right to require redemption of the unitholder.
Guidance Requested to Prevent Inadvertent TTCA 2006 Proposed Section 
        470 From Applying to Typical UPREIT Structures
    There is ambiguity as to whether proposed section 470 under TTCA 
2006 could apply inadvertently to typical UPREIT structures for the 
following reasons. First, while unusual, it is possible that a REIT's 
OP could have at least one tax-exempt or foreign partner, resulting in 
the potential treatment of all of the OP's property as ``tax-exempt 
property'' subject to section 470's loss limitation provisions absent 
satisfaction of the ``no set asides'' and no ``fixed price purchase 
option'' provisions. Second, the ``no set asides'' requirement to avoid 
application of section 470 could apply inadvertently to the typical 
UPREIT structure (or, at the very least, cannot be considered by the 
publicly traded REIT clearly not to apply, resulting in the potential 
of having to account for uncertain tax positions and having to disallow 
certain deductions) to the typical UPREIT structure if either the OP or 
REIT's standing ready to fund a theoretical tax-exempt or foreign 
partner's repurchase request with REIT stock (marketable securities) or 
cash could be viewed as either: i) a set aside if it is impossible to 
determine that a reasonable person would not so conclude; or, ii) as an 
``arrangement'' (regardless of a reasonable person's conclusion that it 
was not) despite that the IRS already has viewed this structure as non-
abusive in the partnership anti-abuse regulations.
    The absence of clear guidance in this area raises serious tax, 
accounting, and capital market-related issues for the publicly traded 
REIT industry and REIT shareholders. For this reason, NAREIT 
respectfully requests statutory language or legislative history 
providing that the redemption/exchange right present in the typical 
UPREIT structure is not considered to be a set-aside or arrangement 
causing the operating partnership in such structure to be subject to 
section 470.
    NAREIT would welcome the opportunity to discuss our comments with 
you or others in more detail. Please contact me at (202) 739-9408 or 
Dara Bernstein at (202) 739-9446 if you have further questions. Thank 
you.
            Respectfully submitted,
                                                    Tony M. Edwards
                         Executive Vice President & General Counsel

                                 

                                                      Export Assist
                                    San Francisco, California 94104
                                                   October 30, 2006
The Honorable Bill Thomas
Chairman, Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas,

    Export Assist, Inc. has provided export finance management services 
to over 2000 U.S. exporters, most of whom are small to medium-sized 
companies. We appreciate this opportunity to comment on Section 7 of 
the Tax Technical Corrections Act of 2006 (HR6264 and companion S4026).
    Section 7 repeals the 15% Interest Charge Domestic International 
Sales Corporation (IC-DISC) dividend rate as of September 29, 2006. 
This provision could adversely impact privately-held exporters, many of 
whom operate small businesses and work hard to compete in the global 
marketplace. These individuals have invested time, effort and money to 
set up and operate an IC-DISC based upon the legality of the 15% 
dividend rate, as legislated in the Jobs and Growth Tax Relief 
Reconciliation Act of 2003, and the fact that the IC-DISC conforms with 
the GATT findings adopted in 1981. To abruptly remove this tax benefit 
from them without warning not only creates a financial hardship but 
could threaten the success of their export business. Many of these 
small to medium-sized exporters with IC-DISCs are growers in 
California's San Joaquin Valley.
    In order to maintain the ability of U.S. exporters to effectively 
compete worldwide, we propose removing Section 7 from the Bill. If the 
Committee wishes to address the 15% IC-DISC dividend rate, they should 
do so in a way that gives exporters time to debate the ramifications of 
this change in the legislation. These small to medium-sized exporters 
have planned and acted in good faith. We can understand your 
Committee's action but it seems too short a time frame for them to 
adequately respond.
    In addition, please keep in mind that at year-end all export tax 
benefits end except the IC-DISC. More than ever, U.S. exporters and 
Congress need to work together. It is important to have export tax 
benefit legislation that enables exporters to effectively compete 
internationally which in turn helps to reduce the U.S. trade deficit 
which is rapidly approaching $1 trillion a year.
    In the interest of our small and medium-sized export clients, 
Export Assist urges the Committee, before it votes on Section 7, to 
consider the immediate financial hardship that these exporters would 
experience should the Bill pass with Section 7 included. We are 
available to answer any questions that you might have.
            Sincerely,
                                                  Joseph G. Englert
                                                          President

                                 

                                      Equipment Leasing Association
                                          Arlington, Virginia 22203
                                                 September 30, 2005
The Honorable William Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Charles Rangel
1106 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas and Congressman Rangel,

    The Equipment Leasing Association of America (ELA), the trade 
association for the equipment leasing and finance industry, commends 
you for taking the lead in the enactment of bipartisan emergency tax 
relief for the victims of Hurricane Katrina. We also look forward to 
working with you as you examine other tax incentives designed to 
encourage rebuilding and reconstruction in the areas that were 
devastated by Hurricanes Katrina and Rita.
    The availability of leasing capital will be an important component 
of any plan for rebuilding and reconstruction in the areas affected by 
Katrina and Rita. For example, through the use of lease financing, 
businesses in the affected areas will be able to finance 100% of the 
cost of new and replacement equipment, as compared to debt financings 
that normally requires a down payment of some amount.
    For this reason, ELA would urge you to consider the following 
proposals that would enhance the utility of lease financings.

      Eliminate the Mid-quarter Depreciation Convention for the 
Current Year

    Under current law, taxpayers are discouraged from placing 
substantial property in service during the last three months of the 
current taxable year, because the ``mid-quarter depreciation 
convention'' could apply to reduce the first year's depreciation 
deduction. After 9/11, the Internal Revenue Service recognized that the 
mid-quarter convention distorts decisions about the timing of equipment 
acquisitions, and provided a one-time election to ignore this 
depreciation convention for property placed in service in the tax year 
that included September 11, 2001(See, IRS Notice 2001-70). As the staff 
of the Joint Committee on Taxation recommended in its 2001 
simplification report, the permanent elimination of the mid-quarter 
convention would reduce complexity in the tax code. ELA agrees with 
this recommendation and strongly supports the current year elimination 
of the mid-quarter depreciation convention as a means to encourage 
investment at this crucial time.

      Enhance the New Markets Tax Credit. On September 9, 2005, 
Treasury Secretary Snow announced changes to the New Markets Tax Credit 
(NMTC) program to assist recovery efforts in areas affected by 
Hurricane Katrina. ELA supports this initiative and recommends the 
following additional modifications to the NMTC program: (1) the program 
should be more amenable to investments structured as leases (as 
mentioned above, lease financing allows for 100% financing of new and 
replacement equipment); and (2) The NMTC program should be streamlined 
to reduce and eliminate the existing cumbersome application process 
that now applies.

    In the case of these and any other tax incentives for 
reconstructing after Katrina and Rita, it will be important to allow 
the incentives to be used for both regular and alternative minimum tax 
purposes.
    Thank you for considering these important proposals as part of your 
initiative to provide tax incentives to encourage rebuilding and 
reconstruction in the aftermath of Hurricanes Katrina and Rita. Please 
feel free to contact me or ELA's Vice President of Federal Government 
Relations, David Fenig, if you have any questions or would like to 
discuss this proposal further. We can be reached at (703) 527-8655.
            Sincerely,
                                               Michael Fleming, CAE
                                                          President

                                 

                          National Marine Manufacturers Association
                                            Chicago, Illinois 60601
                                                   October 30, 2006
The Honorable Bill Thomas
Chairman, House Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    The National Marine Manufacturers Association (NMMA) appreciates 
the opportunity to offer comments regarding H.R. 6264, the Tax 
Technical Corrections Act of 2006.
    NMMA is the nation's largest recreational marine industry 
association, representing over 1,600 boat builders, engine 
manufacturers and marine accessory manufacturers. NMMA members 
collectively produce more than 80 percent of all recreational marine 
products made in the United States. Recreational boating is a popular 
American pastime and a major economic engine, with almost 71 million 
boaters nationwide and some 13 million registered boats. In 2005 alone, 
annual expenditures on marine recreational products and services 
totaled over $37 billion.
    Although NMMA supports efforts to clarify the tax code through 
technical corrections, we are concerned that Section 7 of H.R. 6264, 
which deals with interest charge-Domestic International Sales 
Corporations (IC-DISC), is a substantive rather than a technical change 
to the law. Currently, under provisions implemented in the Jobs and 
Growth Tax Relief and Reconciliation Act of 2003, small and medium, 
privately-held American exporting companies may defer a portion of 
their export-related income by paying a tax-free commission to a DISC, 
reducing their overall tax liability and paying dividend taxes on 
shareholder income at the capital gains rate of 15 percent. In 2005, 
the American boat and engine export market increased by double digits, 
with exports totaling about $2.2 billion.
    As you know, American manufacturers face substantial and increasing 
structural costs, including the rising price of health care and energy, 
unfair foreign competition, unnecessary and cumbersome regulation and 
an overly-complex tax code. Given a level playing field, American 
producers can compete with any company in the world. However, reducing 
the overall cost of doing business in America is important, 
particularly for small--to medium-sized companies.
    NMMA respectfully urges the Committee to reconsider its inclusion 
of Section 7 regarding the tax treatment of dividends from IC-DISCs in 
H.R. 6264, since we believe this is a substantive change in the tax 
code and that a technical corrections bill is not the appropriate 
vehicle for such a modification.
    Again, NMMA appreciates the opportunity to share its views with the 
Committee. Please do not hesitate to contact Mathew Dunn, Manager, 
Natural Resources and Economic Policy, with any questions or if you 
need additional information.
            Respectfully Submitted,
                                           Monita W. Fontaine, Esq.
                                  Vice President and Senior Counsel

                                 

      Statement of Food Donation Connection, Knoxville, Tennessee

    These comments call attention to a technical correction needed to 
the charitable giving incentives created by recent tax legislation 
found in H.R. 4, the Pension Protection Act of 2006, Section 1202--
``Extension of Modification of Charitable Deduction for Contributions 
of Food Inventory''. This correction would bring the provision in line 
with the original intent of Congress to encourage food donations by all 
business entities.
    Food Donation Connection (FDC) coordinates the donation of 
wholesome prepared food from restaurants and other food service 
organizations to local non-profit agencies that help people in need. 
Federal tax code (IRC Section 170(e)(3)) has provided incentive for C 
corporations to donate their food inventory since 1986. Since its 
founding in 1992, FDC has been involved in the effort to pass 
charitable giving incentives for food donations for all business 
entities and is currently working with several restaurant companies 
that have agreed to donate food if this issue is resolved. FDC has 
coordinated the donation of over 80 million pounds of prepared food for 
companies like Yum! Brands (Pizza Hut, KFC, Taco Bell, Long John 
Silver's, A&W) and Darden Restaurants (Red Lobster, Olive Garden, 
Smokey Bones). We currently coordinate donations from 6,300 restaurants 
to 3,200 non-profit agencies nationwide.
    In our discussion with Yum! Brands franchisees about the charitable 
giving incentives contained in H.R. 4 (Pension Protection Act of 2006, 
which extended the provision of H.R. 3768 (KETRA) to December 31, 2007) 
we discovered an issue in the tax code that negate the tax savings for 
S corporations that donate food. Individual S corporation shareholders 
may not be able to take the deduction for the donation of food 
inventory, depending on their basis in the corporation. In working with 
S corporations we have learned the following:

      S corporation income is distributed to each shareholder 
based on each shareholder's ownership percentage and therefore the 
deductibility of the deduction depends on each shareholder having 
sufficient basis (i.e. at IRS risk rule) in the company to permit 
deduction at the individual level.
      S corporations make ongoing distributions to shareholders 
rather then retain excess funds in the company and therefore S 
corporation shareholders have no basis (i.e. distributions reduce 
basis).
      As a result, S corporation shareholders do not believe 
they are entitled to a tax deduction and do not benefit from recent tax 
law changes and are therefore not motivated to donate.

    Under this current situation, the shareholder basis rule trumps the 
intention of Congress to extend the special rule for certain 
contributions of food inventory to S corporations (H.R. 4 extension of 
H.R. 3768 Sec.305, which modified IRC section 170(e)(3)).
    To remedy this situation, a technical correction could be made to 
the language of H.R. 4, the Pension Protection Act of 2006. The 
following wording would be added to H.R. 4 section 1202:
    (c) In General--Section 170(e)(3)(C) of the Internal Revenue Code 
of 1986 (relating to special rule for certain contributions of 
inventory and other property) is amended by redesignating (iv) as (v) 
and inserting after (iii) the following new paragraph:
    `(iv) S corporation BASIS LIMITATION--In the case of food 
contributions from S corporations, limitations on individual 
shareholder's deductions due to shareholder basis (section 1366(d)(1)) 
on stock and debt do not apply. However, shareholder's basis continues 
to be adjusted consistent with section 1367(a).'
    The immediate impact of this change would mean that over 721 
restaurants in 26 states would be eligible for this deduction for 
donating food, and therefore willing to donate. See the list below for 
additional details.
    It is the intent of Congress to address the needs of Americans by 
providing valuable resources to charitable organizations. This 
technical correction would fulfill the original intent of the 
legislation by allowing S corporations to take advantage of this 
charitable deduction for contributions of food inventory.
    Thank you for considering these comments.
            Sincerely,
                                                         Jim Larson
                                       Program Development Director
                                 ______
                                 
Yum! Brand Franchisees Willing to Donate with S Corp Basis Cost 
        Resolution

    The passage of H.R. 4 has roused the interest of many Yum! Brands 
franchisees to donate food. A number of franchised operators of Pizza 
Hut, KFC and Long John Silver's restaurants that have told Food 
Donation Connection they would start a Harvest food donation program if 
the issue with S corporation basis costs can be corrected.
    The following chart lists the number of new restaurants and the 
pounds of food donations that can be projected from these restaurants. 
The poundage projections are based on averages from Yum! Brands 
operated restaurants. These donations include cooked prepared pizza, 
breadsticks, chicken, fish, mashed potatoes, vegetables, biscuits and 
other items that have been properly saved, packaged and chilled or 
frozen. The saved food would be picked up on a regular basis by local 
food banks and hunger relief agencies and used in the local community.
    Yum! Brands has been donating surplus food from its restaurants 
since 1992. In 2005, over 1,800 local hunger relief agencies received 
about 12 million pounds of prepared food from 3,926 company-operated 
restaurants. This food has been a tremendous help for these agencies, 
as donated food frees up their limited resources for other needs.
    The list of 721 restaurants represents a broad spectrum of 
communities across 26 states and 140 congressional districts. These 
restaurants are operated by 15 different franchised groups. Since the 
Yum! Brands system is over 75% franchised, resolution of the S 
corporation tax deduction issue will result in many more opportunities 
to encourage donation of wholesome prepared food.



                                                                                         #
 State   District                           Representative                          Restaurants    Lbs per Year

   AL          05   Robert E. (Bud) Cramer Jr.                                               2           10,350
   AZ          01   Rick Renzi                                                               6           17,197
   AZ          03   John B. Shadegg                                                          2            5,732
   AZ          07   Raul M. Grijalva                                                        11           31,529
   AZ          08   Jim Kolbe                                                               14           40,127
     CA        24   Elton Gallegly                                                           1            5,175
     CA        26   David Dreier                                                             2           10,350
     CA        27   Brad Sherman                                                             5           25,875
     CA        28   Howard L. Berman                                                         4           20,700
     CA        29   Adam B. Schiff                                                           2           10,350
     CA        30   Henry A. Waxman                                                          4           20,700
     CA        31   Xavier Becerra                                                           2           10,350
     CA        32   Hilda L. Solis                                                           2            6,511
     CA        33   Diane E. Watson                                                          4           20,700
     CA        35   Maxine Waters                                                            1            5,175
     CA        36   Jane Harman                                                              1            5,175
     CA        38   Grace F. Napolitano                                                      4           16,861
     CA        46   Dana Rohrabacher                                                         1            1,336
     CO        03   John T. Salazar                                                          4           20,700
     CO        05   Joel Hefley                                                              1            5,175
    DC   Delegate   Eleanor Holmes Norton                                                    1            5,175
   FL          03   Corrine Brown                                                            1            5,175
   FL          05   Ginny Brown-Waite                                                        5           14,331
   FL          07   John L. Mica                                                             3           15,525
   FL          08   Ric Keller                                                               2           10,350
   FL          12   Adam H. Putnam                                                           1            5,175
   FL          13   Katherine Harris                                                         2           10,350
   FL          15   Dave Weldon                                                              6           31,050
   FL          16   Vacant                                                                   3           15,525
   FL          17   Kendrick B. Meek                                                         5           25,875
   FL          18   Ileana Ros-Lehtinen                                                      4           20,700
   FL          20   Debbie Wasserman Schultz                                                 2           10,350
   FL          21   Lincoln Diaz-Balart                                                      2           10,350
   FL          22   E. Clay Shaw Jr.                                                         5           25,875
   FL          23   Alcee L. Hastings                                                        2           10,350
   FL          24   Tom Feeney                                                               5           25,875
   FL          25   Mario Diaz-Balart                                                        1            5,175
   GA          09   Charlie Norwood                                                          4           11,465
   GA          10   Nathan Deal                                                              2            5,732
   IA          05   Steve King                                                               8           22,930
   IL          12   Jerry F. Costello                                                        1            2,866
   IL          15   Timothy V. Johnson                                                       3            8,599
   IL          19   John Shimkus                                                             4           11,465
   IN          01   Peter J. Visclosky                                                       2            5,732
   IN          02   Chris Chocola                                                            4           11,465
   IN          03   Mark E. Souder                                                           1            2,866
   IN          04   Steve Buyer                                                              1            2,866
   IN          05   Dan Burton                                                               5           16,640
   IN          08   John N. Hostettler                                                       2            5,732
   IN          09   Michael E. Sodrel                                                        1            2,866
   KY          01   Ed Whitfield                                                             2            5,732
   KY          02   Ron Lewis                                                                2            5,732
   KY          04   Geoff Davis                                                              3            8,599
   KY          05   Harold Rogers                                                            7           20,064
   LA          01   Bobby Jindal                                                             6           31,050
   LA          02   William J. Jefferson                                                     8           41,401
   LA          03   Charlie Melancon                                                         1            5,175
   LA          06   Richard H. Baker                                                         9           46,576
   MD          01   Wayne T. Gilchrest                                                       5           23,567
   MD          02   C. A. Dutch Ruppersberger                                                4           20,700
   MD          03   Benjamin L. Cardin                                                       3           15,525
   MD          04   Albert Russell Wynn                                                      1            5,175
   MD          05   Steny H. Hoyer                                                           7           36,226
   MD          07   Elijah E. Cummings                                                       1            5,175
   MI          01   Bart Stupak                                                              9           25,796
   MI          02   Peter Hoekstra                                                           2            5,732
   MI          03   Vernon J. Ehlers                                                        16           45,860
   MI          04   Dave Camp                                                                3            8,599
   MI          05   Dale E. Kildee                                                           1            2,866
   MI          06   Fred Upton                                                               7           20,064
   MI          07   John J. H. ``Joe'' Schwarz                                               8           22,930
   MI          10   Candice S. Miller                                                        2            5,732
   MS          01   Roger F. Wicker                                                         11           56,926
   MS          02   Bennie G. Thompson                                                      10           51,751
   MS          03   Charles W. ``Chip'' Pickering                                           10           51,751
   MS          04   Gene Taylor                                                             19           98,326
    NC         01   G. K. Butterfield                                                        2            5,732
    NC         02   Bob Etheridge                                                            7           31,608
    NC         04   David E. Price                                                          25         106,846
    NC         05   Virginia Foxx                                                           14           53,980
    NC         06   Howard Coble                                                             9           46,576
    NC         10   Patrick T. McHenry                                                       5           14,331
    NC         11   Charles H. Taylor                                                       23           65,924
    NC         12   Melvin L. Watt                                                           5           25,875
    NC         13   Brad Miller                                                             29         122,371
   NE          01   Jeff Fortenberry                                                        11           31,529
   NE          02   Lee Terry                                                               14           40,127
   NE          03   Tom Osborne                                                             12           34,395
   NJ          05   Scott Garrett                                                            5           25,875
   NJ          06   Frank Pallone Jr.                                                        1            5,175
   NJ          07   Mike Ferguson                                                            3           15,525
   NJ          09   Steven R. Rothman                                                        6           31,050
   NJ          10   Donald M. Payne                                                          5           25,875
   NJ          11   Rodney P. Frelinghuysen                                                  4           20,700
   NJ          12   Rush D. Holt                                                             1            5,175
   NJ          13   Vacant                                                                   8           41,401
   NY          07   Joseph Crowley                                                           1            5,175
   NY          13   Vito Fossella                                                            3           15,525
   NY          16   Jose E. Serrano                                                          8           41,401
   NY          17   Eliot L. Engel                                                           3           15,525
   NY          18   Nita M. Lowey                                                            2           10,350
   NY          20   John E. Sweeney                                                          1            2,866
   NY          23   John M. McHugh                                                          16           52,786
   NY          24   Sherwood Boehlert                                                        7           36,226
   NY          25   James T. Walsh                                                           8           41,401
   OH          02   Jean Schmidt                                                             2            5,732
   OH          08   John A. Boehner                                                          1            2,866
   OH          10   Dennis J. Kucinich                                                      11           56,926
   OH          11   Stephanie Tubbs Jones                                                   16           82,801
   OH          13   Sherrod Brown                                                           10           51,751
   OH          14   Steven C. LaTourette                                                     7           36,226
   OH          16   Ralph Regula                                                             2           10,350
   OH          17   Tim Ryan                                                                 2           10,350
   PA          01   Robert A. Brady                                                          1            5,175
   PA          05   John E. Peterson                                                         2            5,732
   PA          06   Jim Gerlach                                                              1            5,175
   PA          09   Bill Shuster                                                             1            5,175
   PA          10   Don Sherwood                                                             2            5,732
   PA          13   Allyson Y. Schwartz                                                      1            5,175
   PA          16   Joseph R. Pitts                                                          4           20,700
   PA          17   Tim Holden                                                               4           20,700
   PA          19   Todd Russell Platts                                                      8           41,401
    SC         01   Henry E. Brown Jr.                                                      12           34,395
    SC         02   Joe Wilson                                                              14           40,127
    SC         03   J. Gresham Barrett                                                       3            8,599
    SC         04   Bob Inglis                                                               6           17,197
    SC         05   John M. Spratt Jr.                                                       6           17,197
    SC         06   James E. Clyburn                                                         5           14,331
   TN          04   Lincoln Davis                                                            1            2,866
   TN          07   Marsha Blackburn                                                         4           20,700
   TN          08   John S. Tanner                                                           1            5,175
   VA          01   Jo Ann Davis                                                             3            8,599
   VA          02   Thelma D. Drake                                                          2            5,732
   VA          05   Virgil H. Goode Jr.                                                      3           10,908
   VA          06   Bob Goodlatte                                                            2            5,732
   VA          07   Eric Cantor                                                              1            2,866
   VA          09   Rick Boucher                                                            13           37,261
   WI          03   Ron Kind                                                                 7           20,064
   WI          07   David R. Obey                                                            1            2,866
   WV          03   Nick J. Rahall II                                                        6           17,197
                    Totals                                                                721       2,930,650


Supplemental Sheet to H.R. 4 Technical Tax Comments
    Food Donation Connection (FDC) administers the Harvest Program to 
coordinate the distribution of excess food from restaurants and other 
food service organizations to qualified local non-profit organizations 
that help people in need. FDC has coordinated prepared food donation 
programs since 1992 involving the donation of over 80 million pounds of 
quality surplus food. We currently coordinate donations from 6,300 
restaurants to 3,200 non-profit agencies nationwide.

                                 

                                Association of Art Museum Directors
                                                   October 30, 2006
Honorable Charles E. Grassley, Chairman
Honorable Max Baucus, Ranking Member
Committee on Finance
U.S. Senate 219
Dirksen Senate Office Building
Washington, DC 20510

Honorable William M. Thomas, Chairman
Honorable Charles B. Rangel, Ranking Member
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Gentlemen:

    The Association of Art Museum Directors, founded in 1916, 
represents 170 art museums nationwide. On behalf of the membership, we 
write to express concern about the amendments to the Internal Revenue 
Code of 1986, as amended (the ``Code'') dealing with gifts of 
fractional interests contained in the Act. As we review the 
legislation, we believe that Congress's intention was to permit 
fractional gifts to be made, but to curb perceived abuses under the old 
law. Unfortunately, we hear from our members that various provisions in 
the law will effectively end fractional gifts, thereby depriving 
museums of a means to acquire great works of art for the benefit of the 
public. The loss will be to the public, to the nation's art museums and 
to the communities that they serve in all states. In order to avoid 
this result, certain technical corrections should be made as soon as 
practicable to avoid what appear to be unintended consequences that 
will paralyze the completion of gifts in progress.
    1. Grandfather existing gift programs. To avoid the disruption of 
pre-existing acquisition, program and development plans by museums, the 
new law should not apply to subsequent gifts of fractional interests in 
property if the donee institution already owned a fractional interest 
in such property on the effective date.
    Because the exception would apply only to works in which fractional 
interests were given prior to enactment, there is no risk that the 
recommended provision will give rise to a pre-effective date flurry of 
fractional gifts. Without this change, donors who have already made 
gifts of fractional interests will be unlikely to give additional 
interests out of fear of becoming subject to the new law's 
uncertainties and harsh penalties, which means that the next 
installment of fractional gifts already in process will most likely not 
come to the museum until the death of the donor.
    2. Correct the mismatch between the estate and gift tax 
consequences. The Act restricts a decedent's charitable deduction for 
subsequent fractional interest gifts (after the first such gift) in a 
work of art to the initial value at the time of the first fractional 
gift, but Sections 2031 and 2512 of the Code provide that for purposes 
of computing the estate tax and the gift tax, the valuation will be the 
fair market value on the date of death or date of the gift. The result 
is a limitation on the amount of the charitable deduction which, 
assuming that the work of art has increased in value from the time of 
the first fractional gift, will be significantly less than the 
valuation for estate or gift tax purposes.
    For example:
    For purposes of the gift tax, a donor could conceivably give the 
entire interest in a work of art to a museum during his/her lifetime 
(and within the 10 years provided by the statute) and incur a gift tax 
because the value of the work increases between the first fractional 
gift and any subsequent fractional gift;
    For purposes of the estate tax, a donor could donate fractional 
interests during his/her lifetime and complete the transfer as part of 
his/her estate plan (and within the 10 years provided by the statute), 
i.e., as part of a disposition by will or trust, and incur an estate 
tax because the value of the work increases between the first 
fractional gift and the donation after death.
    Many have indicated to us that this potential mismatch, because it 
could result in an unintended estate or gift tax, will preclude 
fractional gift giving in the future because the risk is simply too 
great.
    3. Eliminate the recapture of income and gift tax deductions and 
recapture penalty when property is transferred to a charity at death. 
The new statute provides that any income or gift tax deductions are 
recaptured if the remaining interest in the work is not transferred 
before the earlier of 10 years of the initial fractional contribution 
or the date of death. In addition, there is a 10% recapture penalty on 
the amount recaptured. This language could be construed to mean that 
the gift must be completed before death and would not allow a gift of 
the remainder interest by will or trust after death.
    For example:
    If a donor is on schedule to complete a gift in 10 years, but dies 
in year eight, his/her estate could be responsible for recapture, 
interest and penalties because the gift was not completed BEFORE the 
death of the donor.
    We suggest in such circumstances there be no recapture since the 
work of art ultimately is owned by the museum.
    We are mindful of concerns that have been expressed that fractional 
gifts could result in a current income tax deduction without the museum 
receiving the ultimate benefit of a work of art. We support the concept 
in the legislation that a fractional gift should be coupled with a 
commitment to transfer the entirety of the work, ultimately, to the 
museum. Nevertheless, the legislation as drafted (even with the 
corrections to the unintended consequences identified above) would 
continue to discourage generous donors from supporting museums by 
transferring their private wealth to the common good. In order to 
encourage donors in their philanthropy and at the same time increase 
enforcement we recommend the following corrections.
    4. Eliminate the mandatory 10-year period for recapture purposes. 
There does not appear to be any specific policy advanced by requiring 
recapture of deductions and penalties if the remaining interests in the 
property are not transferred prior to the earlier of 10 years from the 
initial transfer or death. Donors, who willingly give partial interests 
in a valuable museum quality work of art, should be able to avail 
themselves of the flexibility of giving their gift over their lifetimes 
if that best suits their financial and personal needs and desires. So 
long as the possession requirements are met, taxpayers should be 
permitted to make fractional interest gifts over any period of time 
without risking recapture of the deductions.
    In place of a limited time period, we suggest that a donor be 
required to pledge at the time of the initial fractional contribution 
that the balance of the interest will be transferred either during 
lifetime or at death. In addition, if the donor failed to complete the 
gift of the entire interest or failed to provide physical possession as 
suggested below, the donee would provide an information return to the 
Internal Revenue Service and, in such event, all prior income and gift 
tax deductions would be recaptured. A binding contract with reporting 
provisions would help ensure that any work for which a deduction was 
taken will ultimately go to the donee museum.
    5. Provide limited exceptions to recapture where required 
possession and use is not practical. The new statute requires recapture 
where the donee does not take physical possession of the property. We 
support the concept that substantial physical possession should occur 
during each 10-year period until the gift is completed (this assumes 
that the mandatory 10-year gifting period is eliminated). As a 
practical reality, however, very fragile, very large, or very rare 
works often should not be subject to travel or frequently moved. We 
suggest that physical possession can be waived if: (a) the donee museum 
certifies that physical possession would not be in the best interest of 
the work of art, the museum or the public because (i) the museum's 
construction commitments would prevent possession of the work during 
the period, or (ii) packing and transporting the work may damage the 
work because of its fragility; or cause serious financial hardship to 
the museum because of the cost of transporting and assembling a large 
work of art, or (b) the donor dies before the donee has an opportunity 
to possess the work.
    6. Restore the fair market value deduction. With the addition of 
enhanced protections to the appraisal process in Section 170(f)(11)(E) 
of the Code and the recently issued guidance in Notice 2006-96, 2006-46 
IRB, the possibility for abusive appraisals is significantly reduced. 
Furthermore, we recommend that appraisals of works with a total value 
(not just the proposed gifted interest) exceeding $1,000,000 be subject 
to automatic review by the IRS Art Advisory Panel. With these changes, 
the donors should be allowed to use the actual value of a donated 
interest rather than the historic and potentially unrealistic value as 
now required by the Act. Furthermore, there seems little logic or 
policy justification to continuing to allow a fair market deduction for 
gifts of fractional interests in real estate to charities and yet 
disallow such a deduction for gifts of works of art.
    The suggested changes will ensure that one of the most significant 
sources for great works of art will continue to come into the public 
domain. We appreciate your willingness to consider these changes.
            Very truly yours,
                                            Millicent Hall Gaudieri
                                                 Executive Director

                                                   Anita M. Difanis
                                     Director of Government Affairs

                                 

                                   Solomon R. Guggenheim Foundation
                                           New York, New York 10128
                                                   October 31, 2006
Honorable William M. Thomas, Chairman
Honorable Charles B. Rangel, Ranking Member
Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Gentlemen:

    Although the current provisions of the Technical Corrections Act of 
2006 (H.R. 6264, S.4026) (the ``Technical Corrections Act'') do not 
apply to the PPA, we understand that you are accepting comments for 
technical corrections to the PPA. We therefore are writing at this time 
to express our general concerns with respect to the impact on museums 
of Section 1218 of the PPA regarding Contributions of Fractional 
Interests in Tangible Personal Property (``Section 1218''), and to 
highlight two issues that we believe would be most appropriately 
addressed in the Technical Corrections Act.
    The Solomon R. Guggenheim Foundation (the ``Guggenheim'') was 
founded in 1937 for the ``promotion and encouragement and education in 
art and the enlightenment of the public.'' It has fulfilled this goal 
through the establishment of an international network of museums and 
exhibition spaces around the world. The Guggenheim currently 
administers museums in Venice, Bilbao, Berlin, and Las Vegas, as well 
as its landmark Frank Lloyd Wright-designed museum in New York. Its 
museums attract over 2.5 million visitors per year, nearly 40 percent 
of whom are visitors to the flagship New York museum. Each year, the 
Guggenheim mounts between 20 and 30 original exhibitions, which are 
usually displayed in one of its United States museums, and may travel 
within the Guggenheim's network and to other museums throughout the 
world.
    The Guggenheim's renowned collection began with gifts from its 
founder, Solomon R. Guggenheim and has been expanded in large part by 
gifts received from art collectors over the years. In the current era 
of formidable and rapidly escalating prices for art, the Guggenheim and 
many other museums have had to rely heavily on gifts and bequests from 
generous donors to allow them to continue to build their collections. 
The prior law governing fractional gifts of art provided museums with 
an effective vehicle to encourage donors to make gifts of art, 
particularly those significant (and valuable) works of art that are so 
difficult for museums to acquire by purchase. We are concerned that 
Section 1218 of the PPA will have a chilling effect on such gifts and, 
therefore, on the ability of museums to acquire works of art for the 
benefit of the public.
I. Overview of the Tax Law Applicable to Fractional Gifts
    Under prior law, donors of fractional interests in tangible 
personal property were allowed to deduct a pro rata share of the fair 
market value of the property proportionate to the percentage interest 
of the gift, based on an appraisal at the time of each fractional gift. 
There was no requirement regarding the amount of time over which the 
gift had to be completed; and many donors reserved the right to retain 
their remaining interest in the property until the later death of the 
donor and the donor's spouse. With each fractional gift, the donee 
institution received the right to possession of the work for a fraction 
of each year proportionate to its ownership interest in the work; 
although case law determined that the institution did not have to 
exercise such right each year, so long as it had the unfettered right 
to possession.
    Section 1218 has changed the law to require a donor to complete a 
fractional interest gift within ten years after the initial fractional 
interest gift (or upon the donor's earlier death); and limits the 
income, estate and gift tax deductions that the donor is entitled to 
receive for each fractional gift to the lesser of a proportionate share 
of (i) the fair market value of the work at the time of the initial 
gift, and (ii) the fair market value at the time of each fractional 
gift. Section 1218 also requires that the donee institution take 
``substantial physical possession'' of the property during the period 
of co-ownership by the donor and the donee institution. If the property 
is not used for the donee's tax-exempt purpose, the gift is not 
completed within ten years, or the donee fails to take substantial 
physical possession of the work during the period of co-ownership, 
Section 1218 provides for the recapture of all income, estate and gift 
tax deductions the donor has taken with regard to the gift of the 
property, with interest and a 10% penalty tax on the amount of 
deductions previously taken.
    We fear that the rigidity of these rules and the harsh penalties to 
which donors may become subject will drastically reduce the number of 
gifts museums receive through the very useful charitable giving vehicle 
of fractional gifts. With fewer incentives to give works of art to 
museums, more donors are likely to delay making commitments to museums. 
As a result, more works will remain in private hands or be sold upon 
the death of the collector, rather than be given to museums for the 
enjoyment of the public.
II. Importance of Fractional Gifts to Museums
    Fractional gifts have been very useful to museums, in part because 
they allowed the institution to encourage a donor to begin giving a 
work of art, even if the donor was not yet willing to commit to giving 
up all possession of the art during her lifetime. A donor of a 
particularly valuable work of art would often choose to give a fraction 
of the work the proportionate value of which was an amount the donor 
would be able to deduct for income tax purposes, taking into account 
the contribution limit for gifts of tangible personal property 
(approximately 30% of the donor's adjusted gross income), and the five-
year carry-forward for the value of the gift in excess of the 
contribution limit. The donor had to relinquish dominion and control of 
the art to the museum only for the portion of the year equal to its 
ownership interest in the work. The promise of additional fair market 
value tax deductions was incentive to encourage the donor to make 
additional fractional interest gifts once she had exhausted the carry-
forwards from her initial gift. With each subsequent fractional 
interest gift, the institution would gain increasing rights of 
possession, and greater decision-making power over the location, care 
and treatment of the work. Even if the museum chose not to take 
possession of a work for its fractional share of a given year, because 
it would not be able to display the work that year, or because frequent 
packing and shipping of the work might damage it or be prohibitively 
costly, the curators knew that the museum would be entitled to 
possession of the work when it ``needed'' it, for inclusion in 
exhibitions.
    The ability to take possession of a fractional interest gift when 
needed means that a museum can truly rely on such a gift in its 
collecting strategy, and does not have to continue to seek to acquire a 
similar work by gift or purchase. This distinguishes fractional gifts 
importantly from ``promised gifts,'' in which the museum gets no 
ownership interest until the donor decides to give the work (usually 
upon death). For these reasons, it is appropriate that donors of 
fractional interests receive income tax deductions for the very real 
present-interest they give in works of art, while no income tax 
deduction is available to those who make promised gifts, or give 
future-interests.
    If there were abuses under the prior law, instances where 
institutions had side agreements with donors that they would not take 
possession of the works during the donors' lifetimes, they were not 
widespread, and could be curbed by less drastic means than those of 
Section 1218. By taking away the incentive of fair market value 
deductions for subsequent fractional interest gifts (after the initial 
fractional interest), and the flexibility of allowing a donor to choose 
his or her own schedule for giving, we fear that the PPA has stripped 
fractional gifts of the attributes that made them attractive to donors 
and a key vehicle for museums to start a dialogue with donors, 
encouraging them to begin to give important works of art.
    Although we are hopeful that Congress will consider these concerns 
and modify Section 1218 in the next Congress, we realize that 
addressing some of these issues is beyond the scope of a technical 
correction. There are however, two matters of a technical nature, which 
we hope will be addressed in the Technical Corrections Act.
III. Proposed Technical Corrections
A. Charitable Gifts Should Not Trigger Estate or Gift Taxes
    Section 1218(b) and (c) provides for caps on the estate and gift 
tax deductions available for ``additional contributions'' of fractional 
interests, after an initial contribution, at the lesser of a 
proportionate share of (i) the fair market of the property at the time 
of the initial contribution, and (ii) the fair market value of the 
property at the time of the additional contribution. While these 
provisions mimic Section 1218(a), which limits the income tax 
deduction, they would produce, in most cases, the clearly unintended 
result of creating gift or estate tax liability for contributions of 
additional fractional interests to a museum, if the work of art has 
appreciated in value since the initial contribution. In fact, in some 
instances, the resulting estate and gift tax liabilities could exceed 
the value of the income tax deductions to the donor, resulting in a net 
cost to a donor to make a charitable gift.
    An example of the application of Section 1218(b) would be a donor 
who gave an initial 10% fractional interest in a work of art worth $1 
million, and gave the remaining 90% of the work to the museum as a 
bequest in his will when he died five years later. If at the time of 
the donor's death the work of art was worth $2 million, the $1.8 
million dollar value of the donor's 90% interest in the work would be 
includable in his estate for estate tax purposes. However, his estate 
tax deduction for the gift of his 90% interest in the work would be 
limited to $900,000 (90% of the $1 million value at the time of the 
initial contribution). Therefore, the donor's estate would be liable 
for estate tax on $900,000 (the $1.8 million value, less the $900,000 
deduction), despite an entirely charitable transfer of the art. This 
result occurs despite the fact that the donor is not responsible for or 
able to manipulate the market value of the work of art, and the fact 
that the donor has complied with the time requirements for completing 
the gift under Section 1218, and had allowed the institution to enjoy 
substantial possession of the work during the period of co-ownership.
    Section 1218(c) would cause a similar result in the gift tax 
context. If the donor in the example above did not die, but gave an 
additional contribution of 10% of the work five years after the initial 
gift, his income tax deduction would be limited to $100,000 (10% of the 
fair market value on the date of the initial gift), and so would his 
charitable gift tax deduction. However, the donor would incur gift tax 
on the $200,000 value of the gift on the date of the additional 
contribution, offset only by the $100,000 deduction. There is no policy 
reason served by causing a donor to pay gift tax (or use up his 
lifetime exemption from gift tax) for making the second charitable 
transfer, which resulted in an increase in the donee museum's ownership 
interest in the work and greater rights of possession.
    We have already heard from counsel for donors that they will advise 
their clients not make any new fractional gifts, for fear of such 
illogical and unjust results. Thus, unless this technical correction is 
made, the enactment of Section 1218 is likely to have the unintended 
consequence of eliminating the ability of museums to receive fractional 
gifts entirely.
B. Fractional Gifts in Progress Should be Grandfathered
    Donors who made one or more fractional interest gifts to a museum 
prior to the enactment of the PPA should be allowed to give their 
remaining interest in those works under the rules of the prior law. 
Without this change, it appears that donors of such gifts-in-progress 
will ``freeze'' their gifts, to avoid having them come under the PPA, 
and the potential for harsh penalties under Section 1218. Museums would 
then have to wait until the death of the donor to receive the remaining 
fractional interest in the work, although that may not have been the 
intention of the donor when he or she began giving fractional 
interests. We do not believe that the intention behind this new law is 
served by slowing-down the process of giving to institutions; it would 
be an unfortunate consequence of the law if museums had to endure 
longer periods with smaller ownership interests in works of art than 
either the institution or the donor had intended when the initial 
fractional gift was made. Since the proposed exception could be drafted 
to apply only to the defined group of donors who have made documented 
fractional interest gifts prior to the effective date of the PPA, there 
would be no potential for abuse or a ``flood'' of gifts in avoidance of 
the new law if such gifts were ``grandfathered'' under the prior law.

                              *    *    *

    We urge you to include in the Technical Corrections Act corrections 
that (i) would ensure that charitable donors would not incur any estate 
or gift taxes as a result of any contribution of a fractional interest 
in tangible personal property, and (ii) grandfather gifts-in-progress, 
so that donors will receive the benefits of the law prior to the 
enactment of the PPA with respect to their additional contributions of 
such property. We also hope that other changes to Section 1218 will be 
considered by the 110th Congress that will restore incentives for 
charitable giving of works of art, while ensuring that those incentives 
are not abused.
    We would be pleased to discuss these comments with you or members 
of your staff at any time. We appreciate your consideration of the 
needs of museums and the important benefits to the public that result 
from fractional interest gifts.
            Sincerely yours,
                                                        Sara Geelan
                                          Associate General Counsel

                                 

                                   Los Angeles County Museum of Art
                                      Los Angeles, California 90036
                                                   October 31, 2006
    On behalf of the Los Angeles County Museum of Art (``LACMA''), I 
urge you to include in the Technical Corrections bill (S. 4026 and H.R. 
6264) the following changes to the provisions on fractional gifts in 
the recently enacted Pension Protection Act of 2006 (Section 1218) (the 
``Act''). Without these technical corrections, the Act will have a 
substantial chilling effect on such fractional gifts, on which the 
LACMA and, indeed, all of our museums rely.
    Here at LACMA, we regularly receive fractional interests in donated 
art works which in fact do become 100% acquisitions. In just the last 
three years, such fractional donations, now 100% owned by LACMA, 
include: 39 etchings by David Hockney, 6 paintings by other artists 
(Matt Mullican, Tim Ebner, Simon de Vlieger, Aelbert Cuyp, Jacob van 
Ruisdael, and Jan van Huysum); an assemblage by Franois 
Morellet;sculptures by Keith Haring and Allen Ruppersberg; 43 
photographs by Robert Stivers and Garry Winogrand, prints by Sam 
Francis and Johann Friedrich Overbeck;and aJapanese screenof Kinoshita 
Itsuun (Shōsai). In addition, LACMA currently owns a fractional 
interest in well more than 100 significant works of art, under gift 
agreements entered into before HR 4 was enacted. Each of these 
agreements will be negatively impacted by the provisions of the Act, if 
it is permitted to apply retroactively.
    Specifically, the following provisions on fractional interests in 
the Act would have a significant, unfavorable effect on LACMA's 
programs:
    1. Estate and Gift Tax Consequence. If a donor were to initiate a 
fractional gift after the effective date of the Act, or if he or she 
were to donate additional fractions of gifts already in progress, each 
successive fraction would trigger either gift tax (during the donor's 
life) or estate tax consequences (after the donor's death), because of 
the difference between the deduction permitted under the Act and the 
actual fair-market value.
To correct the problem: all fractions should be allowed at the fair-
        market value after a qualified appraisal.
    2. Transitional clarification. The new law should not apply to 
subsequent gifts of fractional interests in property if the donee 
institution already owns a fractional interest in such property. This 
would avoid disrupting pre-existing acquisition, program, and 
development plans by museums that were put in place in reliance on 
continuing acquisition of additional fractions of already partially-
owned gifts. Because this clarification would apply only to works in 
which fractional interests were given prior to enactment, there is no 
risk that this change would give rise to a pre-effective date flurry of 
fractional gifts. Without this clarification, donors who have already 
made gifts of fractional interests in works will be unlikely to give 
additional interests out of fear of becoming subject to the new law's 
uncertainties and harsh penalties. Thus the next installment of 
fractional gifts already in process will most likely not come to the 
donee museum until the death of the donor.
To correct the problem: only fractional gifts begun after the effective 
        date should be subject to the new law.
    3. Eliminate the requirement for gifts to be given within 10 years 
or donor's death whichever is sooner. This provision would likely 
result in the postponement, and in some cases, outright elimination of 
some gifts of fractional gifts in artwork to LACMA. Rather than 
surrender a work in so short a time, a potential donor might well 
prefer to wait until later in life. The gift postponed could then 
become the gift denied, if plans change or if the donor dies before 
making the gift. It would be fairer and still encourage giving to 
require that the museum take actual possession for a period of time 
proportional to the fractional gift, rather than imposing an arbitrary 
maximum ten-year period on a donor and donee museum. We do agree that 
the donor should be required to provide for the gift of the remainder 
of the work at or prior to the date of death of the donor (or the 
donor's spouse), which is generally the practice of most museums.
    To correct the problem: allow donors to give the gift over the 
period of time that suits their needs. To ensure the charitable 
disposition of fractional gifts and proper disclosure of such 
donations, the new law should require binding contracts with mandatory 
reporting and recapture of deductions plus interest. This would mark a 
significant change for some institutions and would ensure that any work 
for which a tax deduction is taken will ultimately go to the donee 
museum for the benefit of taxpayers. Such a contract should require:
    a) A donor of an undivided fractional interest in a work of art to 
evidence his or her gift in writing and pledge the remainder of the 
work to the same donee on or before his or her death (or the later 
death of the donor's spouse);
    b) Museums to give written acknowledgment of receipt of fractional 
interest gifts;
    c) Museums, under penalty, to inform the IRS, similar to reporting 
required by IRS Form 8282, if donors fail to give a remaining 
fractional interest, fail to comply with the possession requirements 
detailed above, or fail to honor any other contract requirement;
    d) The recapture of deductions plus interest for donors who fail to 
comply with the terms of fractional gift contracts.
    4. To ensure accurate appraisals. The provision that the donor must 
use the original appraisal, if lower, for each fractional gift is 
simply unfair to the donor and thus a disincentive to giving, since 
donors would not be able to take the full measure of the value of an 
appreciated gift. The more rigorous rules for the appraisal of donated 
personal property should be sufficient to address any perceived abuses. 
In lieu of the punitive requirement that donors use the lower of the 
appraisal at the time of the initial fractional gift or any subsequent 
fractions of the gift, donors should be allowed to use a current, 
accurate, fair-market value appraisal, provided that appraisals for 
fractional gifts in which the value of the work as a whole exceeds $1 
million automatically would be subject to review by the IRS Art 
Advisory Panel. The US Treasury has confirmed the reliability and 
efficacy of the IRS Art Advisory Panel. The technical correction could 
include a requirement directing the IRS to require taxpayers to 
identify such works by checking a box on the appropriate tax form.
To correct the problem: submit all works the whole of which exceeds $1 
        million to the IRS Art Advisory Panel.
    5. Physical possession requirement and exceptions to create a safe 
harbor. Under the Act, the donee institution must take physical 
possession of the work of art for a substantial period within the 10-
year period or before the fractional gift is complete. We don't 
disagree that some requirement of proportional possession be included 
prior to the time the gift is completed, but believe that (1) for 
purposes of determining ``physical possession,'' credit will be given 
for any exhibition of the work to the public at another institution; 
(2) the donee's possession should be proportional over the life of the 
loan (exercised, perhaps, within each 10 year period); and (3) in 
certain cases, physical possession may be waived if either:
    a) The donee museum certifies that physical possession within a 10-
year period would not be in the interest of the work of art, the museum 
or the public because either:
    i) The museum's permanent collection, exhibition, planning, 
educational, or construction commitments would prevent showing the work 
to the public during the period, or
    ii) Packing and transporting the work may damage the work because, 
for example, of its fragility; or cause a serious financial hardship to 
the museum because, for example of the cost of transporting and 
assembling an overly large work of art; or
    b) The donor dies within a 10-year period before the donee has an 
opportunity to possess the work.
To correct the problem: create exceptions in the rare case a museum 
        cannot accommodate a work or the work would risk damage or 
        extraordinary costs to move.
    The mission of LACMA is to serve the public through the collection, 
conservation, exhibition and interpretation of significant works of art 
from a broad range of cultures and historical periods, and through the 
translation of these collections into meaningful educational, 
aesthetic, intellectual and cultural experiences for the widest array 
of audiences.
    To carry out this mission, LACMA relies in substantial part on the 
generosity of donors to increase its permanent collection by the 
donation of works of art. In general, the tax code recognizes and 
supports this activity through its long-standing incentives fostering 
such private philanthropy. Unless these technical corrections are 
adopted, the Act's changes on fractional interests will discourage and 
place significant negative limits on donors wishing to so contribute. 
In turn, this could detrimentally impact LACMA's operations. To ensure 
that the Act does not harm legitimate charitable activity, it is 
important that the Technical Corrections bill eliminate altogether or 
at least modify these harmful provisions in the Act.
    We would appreciate your attention to these suggested technical 
corrections and thank you for your consideration of this request and 
for supporting charitable organizations.
    Yours truly,
                                                     Fred Goldstein
                                                    General Counsel

                                 

 Joint Statement of Government Finance Officers Association, National 
   Association of Counties, National Association of State Auditors, 
       Comptrollers and Treasurers, and National League of Cities

                                          U.S. Conference of Mayors
                                                   October 31, 2006
The Honorable Bill Thomas
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas:

    The Government Finance Officers Association; the National 
Association of Counties; National Association of State Auditors, 
Comptrollers and Treasurers; the National League of Cities; and the 
U.S. Conference of Mayors appreciate the opportunity to provide 
suggestions to H.R. 6264 the Technical Corrections Act of 2006, with 
regard to Section 512 of the Tax Increase and Prevention Act of 2005 
(TIPRA).
    Section 512 of TIPRA, imposes an excise tax on financing 
transactions, such as sale-in-lease-out (SILOs) and lease-in-lease-out 
(LILOs), that state and local governments and their agencies entered 
into until the American Jobs Creation Act labeled them as ``listed 
transactions'' in 2004. Prior to the JOBS Act state and local 
governments, and especially transit authorities, had entered into these 
financings with the encouragement and approval of the U.S. Department 
of Transportation.
    TIPRA allows for a retroactive application of an excise tax penalty 
on transactions that were completed years ago with the full knowledge 
of the Department of Transportation and Treasury Department. The 
retroactive imposition of a substantial excise tax could have 
substantial negative repercussions to many governments, and ultimately 
the citizens that they serve.
    We believe that a remedy for this retroactive application in TIPRA, 
is a clear definition of the term ``proceeds'' and ``net income.'' We 
are concerned that the Treasury and the IRS have insufficient guidance 
in defining these terms and may promulgate regulations with overly 
broad definitions that would be detrimental to governments and transit 
authorities. Therefore, we respectfully request that a provision be 
added to H.R. 6264 that would clarify the meaning of ``proceeds,'' as 
well as ``net income.'' This would allow guidance to be written which 
would provide for the allocation of both ``net income'' and 
``proceeds'' to avoid substantial retroactive consequences.
    Allowing for this technical correction, and subsequent regulations 
from the Department of the Treasury, these transactions would be in 
parity with the exact same type of transit agency SILO financing 
transactions that were ``grandfathered'' by both the JOBS Act and 
TIPRA. Under the current application of the law, the same type of SILO 
transaction receives potentially different treatment, solely due to the 
date when the transaction was pending approval by the Department of the 
Transportation. We believe that this is unfair and should be rectified 
so that all of the financings receive the same treatment as the 
grandfathered deals. As we have stated, this could be accomplished with 
a consistent application of the terms ``proceeds'' and ``net income.''
    Another item worth noting is that Section 512 casts a shadow over 
all future financial transactions entered into by state and local 
governments. Because the legislation is written so broadly, the 
Treasury has the power at any time in the future to administratively 
impose an excise tax retroactively on state and local governments by 
designating a type of transaction as a ``listed transaction.'' Thus, 
transactions that close today could be listed in the future, with no 
debate or public hearing, resulting in state and local governments 
incurring a tax liability with no means of challenging the 
determination. This allows the IRS to tax state and local governments 
without specific Congressional approval, and could adversely affect the 
tax-exempt bond marketplace. Although the IRS can already challenge the 
tax-exempt status of state and local bonds, the potential application 
of Section 4965 creates another avenue for the IRS to weaken the bond 
market, without the possibility of judicial review.
    Mr. Chairman, we again very much appreciate the opportunity to 
comment on the Technical Corrections Act of 2006, and encourage 
inclusion of a provision to clarify the terms ``proceeds'' and ``net 
income'' with regard to Section 512 of TIPRA. A more detailed letter 
that was sent to Treasury by the GFOA regarding this provision is 
attached for your review.
    If you have any questions about our comments, please contact Susan 
Gaffney, Director of GFOA's Federal Liaison Center at 202-393-8020 
x209.
            Sincerely,
                    Government Finance Officers Association
                           National Association of Counties
  National Association of State Auditors, Comptrollers and 
                                                 Treasurers
                                  National League of Cities
                                  U.S. Conference of Mayors
                                 ______
                                 
Dear Sir or Madam:

    On behalf of the 16,500 members of the Government Finance Officers 
Association (GFOA), we appreciate the opportunity to comment on the 
newly created IRC Section 4965 as requested under Treasury notice 2006-
65. The GFOA is a professional association of state and local 
government finance officers dedicated to the sound management of 
government financial resources. Many of our members will be impacted by 
these regulations.
    Based on our analysis, this provision would impose an excise tax on 
state and local governments and their agencies that have entered into 
many types of transactions such as Sale In/Lease Out or Lease In/Lease 
Out (SILOs or LILOs) transactions prior to the date of enactment of the 
Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) 
(P.L.109-222). TIPRA also allows a retroactive excise tax to be applied 
to future state and local government and governmental agency financings 
if they become listed transactions by the U.S. Department of the 
Treasury and the Internal Revenue Service.
    To combat tax shelter concerns with SILO and LILO transactions, 
both Congress and the IRS have acted to abolish these types of 
transactions from occurring. This includes the 2004 American Jobs 
Creation Act (JOBS), which eliminated the tax incentives for SILO and 
LILO transactions. Additionally, the U.S. Department of the Treasury 
issued two Revenue Rulings on this issue that curtailed these 
transactions--the 1999 IRS Revenue Ruling 1999-14 which disallowed the 
depreciation and interest deductions for LILOs and the 2002 IRS Revenue 
Ruling 2002-69 that listed LILO transactions as abusive tax shelters or 
transactions.
    Despite complying with evolving standards on lease-related 
transactions, Section 4965 imposes a new punitive excise tax on state 
and local governments and their agencies that entered into these 
transactions in good faith before such transactions were prohibited. 
Additionally, many SILO and LILO transactions were entered into by 
transit authorities and municipalities with the encouragement and 
approval of the U.S. Department of Transportation. Depending on 
forthcoming regulatory guidance, many of the affected state and local 
governments and their agencies could face significant tax liabilities, 
in some cases in the millions of dollars, even though the proceeds of 
these transactions were typically invested in the capital and operating 
budgets of these public agencies long ago.
    Beyond the retroactive application of Section 4965, we are also 
very concerned about its open-ended nature that will allow an excise 
tax to be applied to future transactions that may become listed by the 
Treasury and the IRS. This creates an ominous cloud over current state 
and local government and governmental agency financings by imposing 
great uncertainty regarding what could become a listed transaction in 
the future. While we believe Congress, the Treasury, and the IRS should 
do everything possible to rid the marketplace of abusive transactions, 
we are concerned that future application of this provision may cause 
unintended consequences, and disrupt the most commonly used market for 
the state and local government financing, the tax-exempt bond arena.
    To deter unfair application of Section 4965 on state and local 
governments and their agencies, we would like to make the following 
suggestions with respect to forthcoming regulatory actions of the 
Department of the Treasury.
    1. Retroactive application of an excise tax on transactions that 
were completed prior to enactment of TIPRA, should not be imposed. Due 
to the fact that most SILO/LILO transactions closed before the 2004 
JOBS Act, and were done in good faith, generally adhering to U.S. 
Department of Transportation guidelines (Innovative Financing 
Techniques for America's Transit Systems--1998), and other accepted tax 
practices, Treasury should consider these transactions completed with 
no net income/proceeds outstanding. As was suggested at our meeting 
with Treasury and IRS officials on July 21, if net income and gross 
proceeds are defined consistently with existing Code, there is 
currently no project income to which the excise tax could apply. 
Alternatively, these transactions could simply be delisted, as is the 
case for nearly a dozen transactions noted in TIPRA. Those delisted 
transactions were originally grandfathered in the JOBS Act, due to the 
fact that they were awaiting approval from the Department of 
Transportation at the time the legislation was introduced in 2003. The 
types of grandfathered/delisted financings are no different than the 
types of transactions that occurred prior to 2003, thus none of the 
SILO/LILO transactions that were completed prior to 2004 should be 
penalized by an excise tax.
    2. Uniform definitions of net income and proceeds should be 
applied. Treasury should seek to define `net income' and `gross 
proceeds' in a manner that is consistent with current IRS Code, and 
reflective of the true nature of SILO/LILO transactions. Below are some 
technical suggestions.
Net Income
      The IRS takes the position that lessors must be taxed in 
accordance with the substance of the LILO/SILO transaction and such 
substance is (i) an up-front payment by the lessor to the lessee and 
(ii) a loan by the lessor to the lessee (the ``Deemed Loan'') in the 
amount that the lessee sets aside to purchase highly-rated securities 
(the ``Equity Collateral'') that defease certain obligations of the 
lessee under the LILO/SILO or, alternatively, in the case of a LILO, a 
purchase of a future leasehold interest in the leased property. The IRS 
takes the position that cash flows in respect of the debt financing 
must be disregarded as circular because the lessee uses the debt 
proceeds to defease the debt-portion of its obligations with an entity 
related to the lender.
      The lessee would have income on receipt of the up front 
payment in the year the LILO/SILO closes and, in the case of a SILO, 
income in respect of earnings on the Equity Collateral that would be 
offset, in timing and amount, by interest deductions attributable to 
the Deemed Loan throughout the term of the transaction. In the case of 
a LILO, the lessee would have either on-going interest income offset by 
an interest deduction, as is the case in SILO transactions, or, 
alternatively, income in the year of closing with respect to the sale 
of a future interest in the property. The only net income from the 
transaction is the Accommodation Fee received by the lessee on closing 
of the transaction, and under an alternative IRS argument with respect 
to LILOs, the payment for the future interest in the property. Under 
normal tax accounting rules, these up-front payments would be taken 
into income on closing of the transaction and would not be allocable to 
subsequent years. In the absence of legislative direction to apply 
different tax accounting principles, normal tax accounting rules should 
apply.
Proceeds
      Section 4965 and its legislative history are silent on 
how the ``proceeds'' of a transaction to which the excise tax applies 
are to be determined. The proper approach would be to treat the up 
front payment as the proceeds of the transaction. The up front payment 
represents the lessee's ``free cash'' from the transaction after 
payment of transaction costs and provision for the defeasance of the 
lessee's obligations and purchase option payment.
      Under the proceeds prong of the measure of the excise 
tax, the tax-exempt entity's tax for a particular year is measured by 
reference to ``the proceeds received by the entity for the taxable 
year,'' and then only to the extent the proceeds received for that year 
are attributable to the transaction. The predicate to the proceeds 
prong is that an amount must be received by the tax-exempt entity for 
the year in question; if no amount is received by the tax-exempt for 
the year, the inquiry stops: no tax is imposed under the proceeds 
prong. In the context of LILO/SILO transactions, no amounts are 
received by the lessee for any year, other than the year the 
transactions closed.

    Additionally, creating uniform definitions will also assist the 
Department of the Treasury with their workload by not having to produce 
new regulations every time a listed transaction is established.
    3. Future application of Section 4965 should only be applied 
prospectively. Procedures should be developed regarding how the Section 
would apply to future transactions. This includes creating a procedure 
so that the excise tax is not automatically applied to newly listed 
transactions. Instead, penalties should only be applied prospectively 
to transactions or at the very least, state and local governments and 
their agencies should be able to provide comments on the newly listed 
transactions and then only in extreme circumstances have the excise tax 
apply to these transactions in a retroactive manner. An independent 
judicial review mechanism should also be sought.
    4. Section 4965 should not apply to tax-exempt bond transactions. A 
regime for compliance in the tax-exempt bond marketplace currently 
exists at the IRS. This includes the relatively recently (1999) created 
``Tax-Exempt Bond Office'' which focuses solely on tax-exempt bond 
transactions with an emphasis on abusive practices. It is unlikely that 
Congress intended the Section to apply to tax-exempt bond financings, 
and it unduly places the potential for substantially greater penalties 
to be imposed upon state and local governments than currently exist, or 
that are in line with possible purported abuses. State and local 
governments and their agencies have little recourse in the tax-exempt 
bond audit program, because of a lack of independent judicial review, 
which is a problem in and of itself, without the further added threat 
of an excise tax penalty regime being imposed upon the same 
transaction, again without an independent judicial review mechanism.
    5. Guidance is needed with respect to the disclosure requirements 
in Section 4965. While the Section requires state and local governments 
and governmental agencies to disclose existing transactions, the 
legislative language does not provide for the specific timing and form 
such disclosure must be made (``in such form and manner and such time 
as determined by the Secretary.''). Ample time and guidance should be 
provided for governments to fulfill this requirement, and Treasury 
should consider exempting the disclosure requirement from applying to 
transactions where there is no current income or proceeds subject to 
the excise tax.
Conclusion
    We are very concerned with the application of Section 4965 on state 
and local governments and governmental authorities. This provision from 
TIPRA creates a turning point in long standing federal/state/local 
government relations, by having a federal excise tax imposed upon state 
and local governments in the manner of a penalty, specifically in a 
retroactive manner. Many governments entered into LILO and SILO 
transactions from the late 1990's through 2004, most with the approval 
of the U.S, Department of Transportation. Having these past 
transactions now taxed is an unfair application of the penalty, and 
could cost state and local governments and agencies millions of dollars 
even though the proceeds of these transactions were generally spent at 
the time the transactions were closed on public infrastructure and 
services. By creating an atmosphere where an excise tax can be applied 
to governments and agencies at any time in the future on transactions 
that occur in the past, the ability of governments to enter into 
financing transactions will be undermined and become more costly, as 
tax lawyers strive to protect the transactions from possible--and 
currently undefined--tax exposure. Clear guidance from Treasury is 
imperative in order for governments to continue to provide the 
essential infrastructure and services that the public demands.
    Thank you for the opportunity to comment on the forthcoming 
guidance.
            Sincerely,
                                                      Susan Gaffney
                                   Director, Federal Liaison Center

                                 

                               Money Management International, Inc.
                                               Houston, Texas 77096
                                                   October 31, 2006
The Hon. William M. Thomas, Chairman
House Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    Money Management International, Inc. (``MMI'') would like to thank 
you for the opportunity to submit comments on the recently enacted 
credit counseling provisions of the Pension Protection Act of 2006 (the 
``Pension Protection Act''), as requested pursuant to the recent 
introduction of House Rule 6264, the Tax Technical Corrections Act of 
2006.
    The Pension Protection Act of 2006 adopted a new section 501(q) of 
the Internal Revenue Code (``Code''), which establishes standards that 
a credit counseling organization must satisfy in order to qualify for 
exemption under Code Section 501(c)(3) or 501(c)(4). We believe that a 
number of technical corrections are necessary in order to make 
Congressional intent clear with respect to the important changes made 
concerning credit counseling organizations.
I. Background.
    MMI is the largest, tax-exempt, non-profit credit counseling 
organization (``CCO'') in the nation and operates six telephone contact 
centers and 135 in--person counseling offices in 22 states and the 
District of Columbia. MMI provides professional financial guidance, 
counseling, community-wide educational programs, and debt management 
assistance. We are licensed in all states that require it of CCOs and 
have been approved by the Executive Office for U.S. Trustees to provide 
both pre-filing bankruptcy counseling and pre-discharge bankruptcy 
education programs in all judicial districts. MMI has been reaccredited 
by the Council on Accreditation after an extensive self-study and 
onsite review process. MMI is a member of, and has taken leadership 
roles in, the two well-regarded and reputable industry trade 
associations, the National Foundation for Credit Counseling (``NFCC'') 
and the Association of Independent Consumer Credit Counseling Agencies 
(``AICCCA''), both of which have strict standards of operation as a 
condition of membership. In the first nine months of 2006, nearly 
500,000 consumers contacted MMI looking for financial education and 
guidance on a wide range of issues, including credit card debt, 
budgeting problems, debt prioritization, housing counseling, bankruptcy 
counseling, and pre-discharge bankruptcy education.
II. Comments.
    Below are our specific comments on the provisions of the Pension 
Protection Act of 2006. In some instances, we propose new text that is 
indicated by double underlines and deletions are indicated using 
strikethroughs.
A. Prohibited ``credit repair activities'' section 1220(a) amendment to 
        Code Section 501(q)(1)(A)(iii).
    We suggest section 1120(a) creating Code Section 501(q)(1)(A)(iii) 
be revised to state ``provides services for the purpose of improving a 
consumer's credit record, credit history, or credit; provided, however, 
that if such services involve only educating a consumer as to how the 
consumer can improve the consumer's credit record, credit history, or 
credit rating, and not acting as an agent on behalf of the consumer to 
do so (such as the organization contacting credit bureaus to correct 
inaccurate items on a consumer's credit record), then such services 
shall be considered the provision of educational information within the 
definition of ``credit counseling services'' and not covered by the 
restrictions of Section 501(q)(1)(A)(iii) or (iv), and''.
    During the credit counseling process, consumers recognize the 
importance of their financial health, often for the first time, and 
numerous questions arise concerning the consumer's credit record, 
credit history and credit rating. While MMI counselors have the 
consumer's attention, it is important to educate them as much as 
possible on the financial issues affecting their lives. Although CCOs 
would like to be able to offer all education assistance free of charge, 
education related to credit history and credit reports is expensive to 
provide, as credit reports with credit scores are not provided to CCOs 
free of charge. With decreasing contributions from creditors and others 
which in the past have covered most of the agency's costs, CCOs should 
be able to offer services related to credit reports and credit scores, 
and collect modest fees to cover their costs, when appropriate.
    It is important to note that it is not MMI's intention to offer 
``credit repair'' advocacy services. By making the suggested changes to 
the Act, we only wish to be able to provide consumers the information 
needed to understand their credit report which will allow them to 
contest any inaccuracies themselves. The intent of our proposed change 
is to clearly distinguish between ``credit repair'' advocacy services 
and traditional credit counseling education services.
B. Referrals section 1220(a) amendment to Code Section 501(q)(1)(F).
    Section 1220(a) of the Pension Protection Act amends Code Section 
501 to require CCOs to adhere to a number of operating requirements, 
including that:
    The organization receives no amount for providing referrals to 
others for debt management plan services, and pays no amount to others 
for obtaining referrals of consumers.
    We believe Code Section 501(q)(1)(F) is unnecessarily restrictive. 
Moreover, the Internal Revenue Service has already published on its web 
site an FAQ that we believe incorrectly interprets this provision.\1\ 
In doing so, the IRS appears to ignore that the referral prohibition 
applies to ``debt management plan services'' and not ``credit 
counseling services.'' These terms are expressly defined in Code 
Section 501(q)(4).
---------------------------------------------------------------------------
    \1\ An Internal Revenue Service FAQ states:
    May I buy lists of potential customers from the Internet site that 
carries my ads?
    No. You cannot purchase leads of customers from third party vendors 
and you cannot sell the names of your customers to other providers.
    Internal Revenue Service Web Site, available at http://www.irs.gov/
charities/article/0,,id=163193,00.html (visited on Oct. 27, 2007). 
Notably, in this FAQ the question asked and the answer provided appears 
to address two different issues. The question asks about advertising 
initiated by the CCO while the question addresses whether a tax-exempt 
nonprofit CCO can purchase ``leads'' of customers from third party 
vendors.
---------------------------------------------------------------------------
    We suggest Code Section 501(q)(1)(F) be revised to state:
    The organization receives no amount for providing referrals to 
others for debt management plan services, and pays no amount to others 
for obtaining referrals of consumers for debt management services who 
do not consent to such referrals. For purposes of this provision, a 
referral shall not include when a consumer seeks debt management plan 
services from an organization that is connected to a credit counseling 
organization. If a credit counseling organization pays or receives a 
fee, for example, for using or maintaining a locator service for 
consumers to find a credit counseling organization, such a fee is not 
considered a referral under this provision. Further, nothing herein 
shall be construed to prohibit a credit counseling organization from 
paying fees for advertising and marketing services rendered.
    We believe it is reasonable to consider the referral prohibition as 
intended to prevent consumers from being diverted from one kind of 
service provider to another, without their consent, for a referral fee, 
bonus or commission and not to prohibit marketing and advertising. 
However, we believe that consumers should not be prevented from being 
connected to CCOs by a source that has their permission to do so.
    We believe that Congress intended to adopt a narrow view of what 
constitutes a ``referral.'' For example, the Joint Committee on 
Taxation made clear that the Code Section 501(q)(1)(F) referral 
prohibition should be interpreted as meaning that ``If a credit 
counseling organization pays or receives a fee, for example, for using 
or maintaining a locator service for consumers to find a credit 
counseling organization; such a fee is not considered a referral.'' \2\ 
To keep costs down for both the agency and consumers, CCOs often 
contract with other organizations that represent a pool of consumers 
(employers, employee assistance programs, creditors, etc.) who may need 
the CCO's services and may provide reimbursement to these organizations 
for their marketing and related costs of making the referral.
---------------------------------------------------------------------------
    \2\ See Joint Committee on Taxation, Technical Explanation of H.R. 
4, page 318, n.436.
---------------------------------------------------------------------------
    We believe CCOs should be able to participate in locator services 
provided by trade associations and other credit counseling industry 
servicing organizations since it clearly improves operating 
efficiencies when offering their services to consumers. These types of 
locator services connect consumers seeking credit counseling and 
financial education with CCOs. This type of service should be 
acceptable to the Congress. Without the continuation of this service, 
consumers may turn to predatory companies, those without strict 
operating standards, as well as companies engaged in unlawful practices 
and not operating in full compliance with applicable laws and 
regulations.
    Finally, as with other organizations, CCOs often engage in 
advertising and marketing campaigns to keep consumers informed of the 
availability of financial counseling and education, the vast majority 
of which is offered at no cost to the consumer. Congress should make 
clear that the referral prohibition is not intended to prevent this 
practice.
C. Internal Revenue Service Disclosures to Third Parties Section 
        1224(a) amendment to subsection (c) of Code Section 6104.
    We suggest section 1224(a) amendment to subsection (c) of Code 
Section 6104 be revised to add the following after paragraph (5):
    ``(6) NOTIFICATION OF DISCLOSURE.--If a State officer receives or 
seeks disclosures pursuant to these provisions (2), (3), (4) or (5), 
the organization shall be included in all correspondence between the 
Secretary and the State officer;
    ``(67) DEFINITIONS.--''
    In the same spirit of disclosure and openness, CCOs should be 
included in the correspondence surrounding the disclosures now 
authorized under the Act. Such notification of disclosure would provide 
CCOs the opportunity to open a dialogue with the States most concerned 
about the CCO industry so that services may be better improved for our 
consumers.
    Please do not hesitate to let me know if you have any questions or 
would like to discuss the comments outlined above. Thank you for your 
consideration of these proposed technical corrections.
            Sincerely,
                                                  Ivan L. Hand, Jr.
                                                  President and CEO

                                 

                                               Alaska Ocean Seafood
                                        Anacortes, Washington 98221
                                                   October 31, 2006

Dear Congressman:

    I am writing to alert you to a pending tax law development that I 
believe will be detrimental to small and mid-sized exporters. While I 
am writing this letter on my Company's behalf, I believe many fellow 
exporters share my views on this subject.
    The Technical Corrections Bill Increases the Foreign Trade Deficit. 
Section 7(b) of the Tax Technical Corrections Act prevents dividends 
received from an IC-DISC from obtaining the same maximum 15% federal 
tax rate as qualifying dividends from other types of corporations. 
Passage of the bill would cause the IC-DISC regime to revert to its 
status prior to 2003. Rapidly growing companies who needed capital to 
expand export operations often came to the conclusion that they could 
not use the IC-DISC structure because the deferral of tax wasn't worth 
the interest charge or the soft costs of implementing the structure. 
But when the tax rules changed in 2003 to allow IC-DISC dividends to 
enjoy a permanent tax savings that the exporter never had to pay back 
to the federal government, the IC-DISC structure came within the reach 
of many companies with export activities.
    One-Time Dividends Received Deduction Did Not Help Most Privately-
Held Companies. Various sources have quoted figures suggesting that 
small businesses represent the vast majority of new jobs created in the 
U.S. My view is that the one-time dividend received deduction available 
for most taxpayers in their 2005 tax year benefited those U.S. 
multinationals who had already exported jobs and who had already built 
up significant foreign infrastructures. There was no corresponding 
reward for those U.S. enterprises that built their businesses at home.
    The Tax-Sophisticated Company Still Obtains Permanent Tax Benefits. 
The Technical Corrections Bill does not eliminate the availability of 
the 15% maximum federal rate on dividends from qualifying foreign 
corporations or qualifying corporations formed in possessions of the 
United States. Therefore, my competitors who happen to have operations 
in China or Switzerland or Puerto Rico or Guam who have hired tax 
advisors to help them manage their tax liabilities outside the U.S. can 
still benefit from the 15% tax rate after passage of the Technical 
Corrections Bill. This result seems unfair.
    The ``Foreign-Owned'' Company Still Benefits. The Technical 
Corrections Bill does not address technical rules that continue to 
allow foreign corporate owners of an IC-DISC to obtain an effective 
U.S. tax rate of 15% or less on profits derived from exporting 
activities. It doesn't seem fair that Congress would enact a Technical 
Correction that seemingly aids the foreign-owned U.S. company at the 
expense of a U.S.-owned, U.S.-based company, both competing in the 
global marketplace.
    WTO Accepts IC-DISC. Congress has sought over years to provide tax 
benefits to U.S. exporters. The original DISC provisions were replaced 
with FSC provisions, and those were eventually replaced with the 
Extraterritorial Income Exclusion (EIE). All have been met with various 
objections from the WTO and the EU. EIE finally phases out at the end 
of 2006, leaving no export incentive except the IC-DISC. This last 
incentive was addressed by the WTO and accepted as not being an unfair 
advantage to U.S. exporters. Now, instead, it is our own government 
that is threatening to take away the only export incentive accepted by 
our trading partners.
Conclusion:
      Section 7(b) the Technical Corrections Bill eliminates 
the ability of most privately-held U.S. companies to obtain a 
permanently reduced federal tax rate on profits attributable to export 
activities.
      Section 7(b) has a disproportionately negative effect 
upon small to mid-sized companies owned by U.S. individuals.
      Section 7(b) can be defeated by taxpayers who can afford 
sophisticated tax advice.

    I therefore urge you to recommend removal of Section 7(b) from the 
pending Tax Technical Corrections Act of 2006. After years of promoting 
exports through DISC, FSC and then EIE legislation, it is difficult to 
accept that the IC-DISC structure that is finally acceptable to the WTO 
risks being struck down by our own government.
    Thank you for your consideration of this letter. I appreciate your 
leadership on this important issue to all U.S.-owned exporters.
            Very truly yours,
                                                     Jeff Hendricks
                                                                CEO

                                 

                                                  Air Tractor, Inc.
                                                       Olney, Texas
                                                   October 27, 2006
The Honorable Bill Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, DC 20515

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

Dear Chairmen Thomas and Grassley:

    Air Tractor, Inc. (``AT'') is a small business located in Olney, 
TX. AT manufactures agriculture and forestry fire bombing airplanes and 
has been in business since 1972. We are a small business with 
employment of approximately 180 people. In addition to selling our 
products domestically, AT also sells aircraft internationally.
    We urge the Committee to reconsider Sec. 7 of the proposed 
legislation, which addresses the tax treatment of IC-DISCs. This 
section as written would bring about substantive (and we believe 
negative) changes to the areas of small business, U.S. trade policy, 
U.S. trade deficit, job creation and operates as a tax increase. In 
view of the wide spectrum of categories impacted, Sec. 7 as currently 
proposed is much more than a technical correction. Since we believe 
that Sec. 7 is much broader than a technical correction, we request 
that it be pulled from the technical corrections legislation. If 
consideration of this section is something that Congress desires to 
undertake, then we respectfully submit that this consideration should 
be careful and in-depth deliberation afforded new legislation, and that 
affected companies like ours be given more opportunity for input.
    Our comments on the major issues that make this section much more 
than a technical correction are as follows:
    --Small Business. Since many of the IC-DISC mechanisms operate 
through a Subchapter S corporation, by definition Sec. 7 is for the 
most part a small business issue. Exporting for small business is an 
important but expensive proposition. Sec. 7 would make this proposition 
more expensive.
    --U.S. Trade Policy. Through WTO rulings, U.S. exporters have lost 
the availability of DISCs, FSCs, and ETI. The IC-DISC remains the lone 
mechanism that the WTO has not ruled against and in fact, has 
specifically let stand. Sec. 7 effectively neuters this remaining, 
approved WTO mechanism.
    --U.S. Trade Deficit. In the month of August 2006, the U.S. 
Department of Commerce announced a record monthly trade deficit of 
$69.9 Billion (second straight monthly ``record''). Our country is on 
target for an annual trade deficit in excess of $800 Billion--
unfortunately another ``record''. The IC-DISC by definition applies to 
small-medium enterprises (``SME'') that engage in exporting. Our 
country should be working hard to reduce the trade deficit. Enactment 
of Sec. 7 takes away another tool of the exporter and works 
counterproductive to trade deficit reduction.
    --Job Creation. Research indicates that companies that began 
trading internationally between 1993 and 2001 had about five times the 
employment growthof other companies. Companies that stopped trading 
during this period actually lost jobs. Additionally, virtually all of 
the Fortune 1000 companies are active international traders already, 
but less than 10% of the nation's small companies export. With 96% of 
the world's consumers living outside of the U.S., with global 
communications rapidly shrinking the world community, and with trade 
deficits threatening our future economic stability, this disappointing 
overall export performance by smaller companies is something our nation 
can no longer afford. Sec. 7 is a negative impact on SMEs that are 
exporting or wish to export. Legislation should be enacted to stimulate 
job growth--not the opposite.
    --Tax Increase. Sec. 7 does not appear to address any specific, 
perceived abuse or situation that would give rise to a need for a 
technical correction. Sec. 7 operates as a straight tax increase.
    Sec. 7 negatively impacts the issues noted above. Each issue alone 
has substantive economic effects. Collectively, the economic effects 
are amplified (in a negative way). Sec. 7 of the bill addresses 
``technical corrections'' to the Jobs and Growth Tax Relief 
Reconciliation Act of 2003. In that context it is instructive to 
examine the House committee reports for that 2003 legislation. House 
Committee Report (H.R. Rep. No. 108-94) as related to Code Sec. 1(h), 
Code Sec. 163(d), Code Sec. 854 and Code Sec. 85c states in the Reason 
For Change, ``The Committee believes it is important that tax policy be 
conducive to economic growth. The Committee believes that reducing the 
individual tax on dividends lowers the cost of capital and will lead to 
economic growth and the creation of jobs.''
    Further in the Reasons For Change, the Committee reached the 
following conclusion, ``It is through such investment that the United 
States' economy can increase output, employment, and productivity.''
    Sec. 7 of the current proposed legislation was classified as a 
technical correction. However, as noted above the enactment of Sec. 7 
would have a negative impact across a broad economic range. The Reasons 
For Change of the legislation that Sec. 7 are proposing to 
``technically correct'' is very clear that the 2003 Act was keyed to 
increasing economic growth and creation of jobs. This puts Sec. 7 
directly opposed to the reasons for enactment of the 2003 and renders 
the term ``technical correction'' dubious relative to the original 
legislation.
    In the Description of the Tax Technical Corrections Act of 2006 
prepared by the staff of the JOINT COMMITTEE ON TAXATION (dated October 
2, 2006, page 10), a justification for the proposed change is linked to 
IRC 246(d). Sec. 246(d) references ``dividend from a corporation which 
is a DISC or former DISC . . .'' Sec. 246(d) was added to the law in 
1971. Much has changed in the economic and exporting landscape in the 
ensuing 35 years. As noted, the WTO recently ruled against DISCs, FSCs 
and ETI. The IC-DISC (which was created in 1984) is one of the few 
mechanisms to stimulate exporting left standing today. Fundamentally, 
the operation of today's IC-DISC (which was created 13 years after 
246(d) was added) in the current economic environment is much different 
than the DISCs addressed in 1971. This further reinforces our assertion 
that today's Sec. 7 is much more than a technical correction. Sec. 7 
has broad (and negative) impacts. We urge that Sec. 7 be eliminated 
from a technical corrections bill.
    Thank you for your consideration.
            Sincerely,
                                                       David Ickert
                                            Vice President--Finance

                                 

                                              Hunton & Williams LLP
                                           Richmond, Virginia 23219
                                                   October 31, 2006
Dear Chairman Thomas and Ranking Member Rangel:

    In response to Advisory Release No. FC-26 (Sept. 29, 2006), Hunton 
& Williams LLP is submitting this comment letter regarding TTCA 2006 on 
behalf of one of its clients. Specifically, our comments relate to 
Section 48A of the Internal Revenue Code (``Section 48A'') as enacted 
by Section 1307 of the Energy Policy Act of 2005.
    Section 48A provides a 20 percent investment tax credit for 
certified qualifying advanced coal projects using integrated 
gasification combined cycle technology (``IGCC'') and a 15 percent 
investment tax credit for projects using an advanced coal-based 
generation technology other than IGCC. The Secretary of Treasury is 
authorized to allocate a maximum of $800 million in tax credits for 
IGCC projects under Section 48A ($267 million to projects using 
bituminous coal, $267 million to projects using subbituminous coal and 
$266 million to project using lignite) and a maximum of $500 million in 
tax credits for project using an advanced coal-based generation 
technology other than IGCC. In order to qualify, a project must (i) be 
certified by the Department of Energy (``DOE''), (ii) receive an 
allocation of tax credits from the Internal Revenue Service (the 
``IRS''), and (iii) meet certain requirements set forth in Section 48A. 
One such requirement is that the generating unit must be ``designed to 
meet'' certain emission performance requirements, including 99 percent 
removal of sulfur dioxide.
    In order to be considered in the initial round of tax credit 
allocations, a taxpayer must have submitted an application for DOE 
certification to DOE by June 30, 2006. DOE was required to notify the 
IRS as to which projects received DOE certification by no later than 
October 1, 2006. Taxpayers were required to submit an application to 
the IRS for an allocation of Section 48A tax credits by no later than 
October 2, 2006. The IRS is expected to notify taxpayers by November 
30, 2006 as to whether they received an allocation.
    We understand that companion bills have been introduced in the 
House and the Senate (the ``Bills'') which would amend the sulfur 
dioxide requirement to provide that such requirement will be satisfied 
if the unit is designed to achieve either 99 percent sulfur dioxide 
removal or the achievement of an emission limit of 0.04 pounds of 
sulfur dioxide per million Btu, on a 30-day average. H.R. 6173 (Sept. 
25, 2006); S. 3883 (Sept. 11, 2006). This revised requirement would be 
applicable to all Section 48A projects and take effect as if included 
in the Energy Policy Act of 2005. Although TTCA 2006 does not currently 
contain the amendment to Section 48A proposed by the Bills, if such 
amendment is included and enacted, it would result in an increase in 
sulfur dioxide emissions beyond those contemplated by Section 48A as 
originally enacted.
    In addition, the deadlines for application for DOE certification 
and for application for a tax credit allocation from the IRS for the 
initial round of allocations has passed (June 30, 2006 and October 2, 
2006, respectively). Because the amendments made by the Bills would 
take effect as if included in the Energy Policy Act of 2005, certain 
taxpayers may not have filed applications due to a belief that they did 
not meet the sulfur dioxide removal requirement as originally enacted. 
These taxpayers would be prejudiced by a retroactive amendment. 
Similarly, projects that meet the sulfur dioxide removal requirement as 
originally enacted may also be prejudiced by a retroactive amendment.
    Accordingly, we respectfully request that the amendment to Section 
48A provided in the Bills not be included in TTCA 2006 as it would 
increase sulfur dioxide emissions and prejudice certain taxpayers that 
did not meet the initial Section 48A deadlines and those that met the 
deadlines and the sulfur dioxide removal requirement as originally 
enacted. However, if the tax writing committees believe the amendment 
is appropriate to be included in TTCA 2006, we respectfully recommend 
that the amendment be effective on a prospective basis after the date 
of enactment. Thus, projects that meet the new alternative sulfur 
dioxide removal requirement would be eligible to participate in 
subsequent tax credit allocation rounds.
    Finally, we understand that the DOE did not certify any of the 
Section 48A IGCC projects using subbituminous coal based on an 
assumption that such projects could not meet the 99 percent sulfur 
dioxide removal requirement. This assumption is incorrect. Although 
subbituminous coal is a low-sulfur coal, 99 percent removal (or more) 
of sulfur dioxide is possible, for example, when additional processes 
are incorporated to further remove pollutants such as sulfur from the 
synthesis gas. Moreover, Section 48A(f)(1) of the Code provides that an 
electric generation unit uses ``advanced coal-based generation 
technology'' if the unit ``is designed to meet'' certain performance 
requirements including a ``design level for the project'' of 99 percent 
sulfur dioxide removal. Thus, if a taxpayer presented technical and 
engineering information demonstrating that the project was designed to 
meet this requirement, the project should be certified by DOE. If the 
project, when completed and operational, does not meet the performance 
characteristics, the IRS can appropriately address this issue on audit.
    We would welcome the opportunity to discuss our comments with you 
in more detail. Please contact me at (804) 788-8746 if you have any 
questions or require further information.
            Respectfully submitted,
                                                  Laura Ellen Jones

                                 

                                              Cascade Fishing, Inc.
                                          Seattle, Washington 98199
                                                   October 31, 2006
    I am writing to you to express my concerns with Section 7 of the 
Technical Corrections Act of 2006 and specifically with the changes 
proposed to the treatment of dividends paid by an IC DISC corporation.
    We oppose the proposed changes to the treatment of dividends paid 
by an IC DISC. First, this change does not seem fitting as a 
``technical correction''. Rather it is a fundamental change in the 
treatment of dividends as paid by an IC DISC. We believe any such 
fundamental change in tax law should be addressed the same way in which 
any other fundamental changes in tax law are addressed, which is 
through the tax approval process and not as a technical correction.
    Second, the suddenness of the enactment date of the proposed change 
undermines basic business planning. As a small business whose sales are 
substantially foreign, we rely on the values the current tax laws allow 
as an important part of our business success for the year. For the tax 
laws on which we rely to suddenly change undermines a good portion of 
our fiscal success. If it is the committee's belief that this major 
change in stance regarding the treatment of dividends is within the 
technical corrections process, we would respectfully request that such 
enactment date be effective December 31, 2006 so as to not undermine a 
planned portion of our business success. It is our understanding the IC 
DISC rules were put in place to help businesses like ours who provide 
U.S. based employment and who export to foreign countries. This sudden 
change in the tax law will have the opposite effect.
    We are a small US based business providing jobs in the US. Where 
specifically provided by our tax code we plan for and rely on the 
benefits this code provides us. These benefits are an integral part of 
our success and the suddenness of changes like it proposed in this area 
of the technical corrections act undermines the basis for our planning 
and success.
    We request you either eliminate this provision in the technical 
corrections act or change the enactment date of this provision to 
December 31, 2006.
            Respectfully submitted,
                                                    Nancy Kercheval
                                                          President

                                 

                                                    City of Chicago
                                            Chicago, Illinois 60602
                                                   October 31, 2006
The Honorable Bill Thomas
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas:

    On behalf of the City of Chicago, I welcome this opportunity to 
submit comments on H.R. 6264, the ``Technical Tax Corrections Act of 
2006''. Our comments discuss issues relevant to the application to the 
City of a new excise tax enacted by Section 516 of the Tax Increase 
Prevention and Reconciliation Act of 2005 (``TIPRA''). I will first 
mention some general concerns about the excise tax and then suggest 
some technical corrections to Section 516 which would alleviate a 
portion of our concerns. We respectfully request that these corrections 
be included in H.R. 6264.
    In general, the City is concerned that the excise tax enacted by 
Section 516 of TIPRA may be applied retroactively to transactions that 
were entered into prior to the Internal Revenue Service issuing any 
guidance or stating any concern that certain transactions may be tax 
shelters. Such retroactivity can be inherently unfair given that state 
and local governments have endeavored to enter into financial 
transactions in accordance with the law. Furthermore, the excise tax 
appears to be a way of taxing state and local government income, which 
is contrary to long-established practice and may invoke constitutional 
issues.
    To turn to more technical concerns and some possible technical 
corrections, the Act and its legislative history do not provide a clear 
definition of ``proceeds,'' on which the excise tax imposed under 
Section 516 of TIPRA is partly based. As a result, the City is 
concerned that the Treasury and the Internal Revenue Service have 
insufficient guidance in defining this term during the regulatory 
process and may promulgate regulations with an overly broad definition 
of this key term. Therefore, the City asks the Committee to focus on 
the economics of the transaction to the City and provide a technical 
clarification of the definition of proceeds that is consistent with the 
fact that the City's only economic benefit from the transaction is 
received on the closing date of the transaction. Similarly, the City 
requests that the Committee consider adding a provision to H.R. 6264 
that would clarify the meanings of ``net income'' and ``proceeds'' as 
such terms are used in Section 516 of TIRPA, and would provide guidance 
on the allocation of both ``net income'' and ``proceeds'' that is 
consistent with the fact that the City's only economic benefit from the 
transaction is received on the closing date of the transaction.
    Thank you for your consideration of our views. If you have any 
further questions, please feel free to contact me.
            Sincerely,
                                                      Dana Levenson
                                            Chief Financial Officer

                                 

                     Washington Metropolitan Area Transit Authority
                                                   October 31, 2006
The Honorable William M. Thomas
Chairman
Committee on Ways & Means
United States Senate
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas:

    The Washington Metropolitan Area Transit Authority (WMATA) is the 
largest public transportation provider in the Washington, D.C. 
metropolitan area and the second largest subway and fifth largest bus 
system nationally. On average, we provide 720,000 rail trips, 439,000 
bus trips, and 4,400 paratransit trips every weekday, and almost half 
of Metrorail's peak period riders are federal employees. Pursuant to 
your request for written comments on September 29, 2006, WMATA is 
pleased to submit formal comments on H.R. 6264, the ``Tax Technical 
Corrections Act of 2006.'' Specifically, our comments relate to the 
application of a new section 4965 of the Internal Revenue Code 
following the enactment of the Tax Increase Protection and 
Reconciliation Act (TIPRA) in May of 2006 (P.L. 109-222).
    WMATA believes that neither TIPRA nor its legislative precedents 
provide a clear definition of the term ``proceeds'' and ``net income,'' 
particularly for the application of Internal Revenue Code Sec. 4965 
(excise taxes). As a result, the U.S. Department of the Treasury and 
the Internal Revenue Service (IRS) may have insufficient guidance to 
define these terms during the regulatory process and could promulgate 
regulations with an overly broad definition of these key terms.
    WMATA is deeply concerned that unless these terms are defined with 
more precision, the IRS may impose an excise tax on proceeds of Sale 
In/Lease Out (SILO) or Lease In/Lease Out (LILO) transactions completed 
by WMATA prior to the passage of TIPRA. Between 1998 and 2003, WMATA 
was the lessee in several LILO and SILO transactions. Consequently, if 
these terms are not clearly defined, the IRS could impose substantial 
excise tax on those transactions, which could have a material adverse 
impact on WMATA's ability to serve our riding public, including over 
360,000 federal employees.
    Therefore, WMATA respectfully requests that the Ways & Means 
Committee include in H.R. 6264 a technical clarification of the 
definitions of ``proceeds'' and ``net income'' that are also consistent 
with the position taken by the IRS in revenue rulings and court 
filings. Specifically, WMATA suggests that for purposes of assessing 
excise taxes, all proceeds and net income be considered to have been 
received at the closing of the transaction when the tax exempt entity 
received a cash payment.
    Thank you for introducing H.R. 6264 and for allowing those affected 
by TIPRA to submit comments. If you or your staff have any further 
questions, please do not hesitate to contact me at 202-962-1003 or Mark 
R. Pohl, WMATA Associate General Counsel at 202-962-2541.
            Sincerely,
                                                  Deborah S. Lipman
                Director, Office of Policy and Government Relations

                                 

                                        California Transit Agencies
                                                   October 24, 2006
The Honorable Charles Grassley
Chairman
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Max Baucus
Ranking Member
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510

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

The Honorable Charles B. Rangel
Ranking Member
House Ways and Means Committee
1106 Longworth House Office Building
Washington, DC 20515

Dear Chairmen and Ranking Members:

    On behalf of transit agencies around the country, California 
transit agencies appreciate your introduction of H.R. 6264, the Tax 
Technical Corrections Act of 2006. Enactment of this measure will 
resolve numerous ambiguities in the Tax Increase Prevention and 
Reconciliation Act (TIPRA), the American Jobs Creation Act of 2004 
(Jobs Act) and other significant tax legislation, improving compliance 
while providing certainty.
    Per the Committees' request for comments on the proposed 
legislation, we respectfully request that an additional technical 
correction relating to the treatment of Sale In/Lease Out transactions 
under Section 4965 be included in the enacted legislation. The 
correction would clarify that TIPRA does not impose an excise tax on 
transit system transactions lawfully entered into before such 
transactions were prohibited under the Jobs Act.
    Enactment of the Jobs Act effectively ended tax-advantaged leasing 
transactions, and none have been entered into since its effective date. 
However, for years prior to the enactment of the Jobs Act, the U.S. 
Department of Transportation (DOT) and its Federal Transit 
Administration (FTA) encouraged transit systems to employ innovative 
financing mechanisms as a means to raise revenue for public transit, 
and in fact heavily promoted the use of tax-advantaged leasing 
transactions to that end. This is evidenced in the 1998 FTA publication 
entitled ``Innovative Financing Techniques for America's Transit 
Systems,'' which specifically encouraged the use of these transactions.
    As such, public transit systems relying not only on DOT's 
encouragement but with the FTA's review and approval acted entirely in 
good faith when entering into these transactions. As intended, the 
proceeds earned under such transactions were long ago used to meet 
critical public transit needs.
    Our concern is that, as currently written, IRC Section 4965 could 
be interpreted to impose an excise tax on transactions involving 
transit systems that were entered into in good faith long before the 
effective date of the Jobs Act. While we believe this interpretation to 
be wrong, it could mean a retroactive application of an excise tax to 
transactions that were not only lawfully entered into, but were 
recommended and approved by the federal government.
    Such an application of Section 4965 would appear to be inconsistent 
with the approach to these leasing transactions taken under the Jobs 
Act. The language of the Jobs Act makes clear that Congress did not 
intend to target benefits received by state and local government 
entities. We believe this Congressional intent is further underscored 
by the Joint Committee on Taxation revenue estimate for TIPRA, which 
does not appear to anticipate taxation of these transactions. Rather, 
the JCT score shows an estimate which does not reflect collections from 
potentially affected transit entities.
    Moreover, the transactions that were pending during consideration 
of the Jobs Act were specifically ``grandfathered'' and are not subject 
to the excise tax as per Section 4965. As a result applying Section 
4965 to past leasing transactions would result in a 100 percent excise 
tax retroactively applied to older transactions, while more recent 
transactions are held harmless. This result would appear to be 
arbitrary and inequitable.
    In light of the foregoing, we respectfully request that the 
technical correction clarify that the excise tax as enacted under TIPRA 
does not apply to transit agency transactions lawfully executed before 
the effective date of the Jobs Act.
    Again, thank you for the opportunity to comment on H.R. 6264, the 
Tax Technical Corrections Act of 2006. We hope that this comment will 
help in clarifying the intent of Congress with respect to the 
applicability of Section 4965. We welcome the opportunity to answer any 
questions or discuss this issue further. Thank you for your 
consideration.
            Sincerely,
                                                   Thomas E. Margro
                                                    General Manager
                      San Francisco Bay Area Rapid Transit District

                                                   Beverly A. Scott
                                                    General Manager
                               Sacramento Regional Transit District

                                                       Roger Snoble
                                            Chief Executive Officer
           Los Angeles County Metropolitan Transportation Authority

                                              Nathaniel P. Ford Sr.
                                             Executive Director/CEO
                                                  San Francisco MTA

                                                    Michael Scanlon
                                                 Executive Director
           Peninsula Corridor Joint Powers Board (PCJPB) / Caltrain

                                                   Michael J. Burns
                                                    General Manager
                        Santa Clara Valley Transportation Authority

                                 

                       Metropolitan Atlanta Rapid Transit Authority
                                             Atlanta, Georgia 30324
                                                   October 24, 2006
The Honorable Bill Thomas
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas:

    The Metropolitan Atlanta Rapid Transit Authority (MARTA) welcomes 
this opportunity to submit formal comments pursuant to your request for 
comments on September 29, 2006. Our comments discuss issues relevant to 
the application of a newly enacted section of the Internal Revenue Code 
to the Metropolitan Atlanta Rapid Transit Authority as a result of 
MARTA's role as a lessee in transactions commonly referred to as LILOs 
and SILOs.
    MARTA is concerned that the excise tax (The Tax Increase Protection 
and Reconciliation Act, Section 516) may be applied retroactively to 
transactions that were entered into prior to the IRS issuing any 
guidance or stating any concern that certain transactions may be tax 
shelters. MARTA was the lessee in several LILO and SILO transactions 
involving assets with an appraised fair market value in excess of $2.2 
billion. Retroactive imposition of a substantial excise tax could have 
a material adverse impact on MARTA's ability to serve our riding 
public.
    The Tax Increase Protection and Reconciliation Act and its 
legislative history do not provide a clear definition of ``proceeds.'' 
As a result, MARTA is also concerned that the Treasury and the IRS have 
insufficient guidance in defining this term during the regulatory 
process and may promulgate regulations with an overly broad definition 
of this key term. Therefore, MARTA asks the Committee to focus on the 
economics of the transaction and provide a technical clarification of 
the definition of proceeds that is also consistent with the position 
taken by the IRS in Revenue Rulings and court filings. Additionally, 
MARTA requests that the Chairman consider adding a provision to the 
recently introduced Tax Technical Correction bill (H.R. 6264) that 
would clarify the meaning of net income and proceeds and would provide 
guidance on the allocation of both net income and proceeds that is 
consistent with the treatment of net income and proceeds by the IRS.
    Thank you for your consideration of our views. For a more detailed 
explanation of the issue, we have attached a copy of our comment letter 
to the Treasury Department and IRS. If you have any further questions, 
please contact me at 404-848-5377.
            Sincerely,
                                               Richard J. McCrillis
                                                General Manager/CEO

                                 

                                          S Corporation Association
                                                   October 24, 2006
The Honorable Bill Thomas
Chairman
House Ways and Means Committee
1102 Longworth House Office Building
Washington, DC 20515

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

Dear Chairmen Thomas and Grassley:

    On behalf of the members of the S Corporation Association and the 
3.2 million S corporations nationwide, we appreciate your introduction 
of H.R. 6264 and S 4026, the Tax Technical Corrections Act of 2006. 
Enactment of this measure will resolve numerous ambiguities in the Tax 
Code, improving compliance while providing certainty.
    Per the Committee's request for comments, I would like to raise 
serious concerns regarding Section 7 of the Act which, if enacted, 
would significantly increase taxes on small and closely-held U.S. 
manufacturing exporters.
    Since the 1970s, the EU has successfully challenged a number of 
U.S. tax provisions--DISC, FSC, and ETI--designed to mitigate the harm 
caused by their use of border-adjustable taxes and to assist U.S. 
exporters competing in the global marketplace. In each of these cases, 
the U.S. has been forced to comply with the EU challenge by eliminating 
the pro-export provision.
    The IC-DISC (Interest Charge Domestic International Sales 
Corporation) was created in 1984 to allow the deferral of tax on IC-
DISC income until it is repatriated as a dividend. The IC-DISC is 
different from DISC in that IC-DISC shareholders must pay interest on 
any deferred taxes. Because it requires shareholders to pay interest on 
any deferred tax liability, the EU has never challenged its legality 
under GATT or WTO.
    Under the IC-DISC, a U.S. exporter pays the IC-DISC an annual 
``commission'' equal to a percentage of its export income. This income 
accumulates untaxed within the IC-DISC. When the IC-DISC income is 
repatriated, it is distributed to the IC-DISC shareholders in the form 
of a dividend. Since the repeal of FSC/ETI and the reduction in the 
dividend tax rate to 15 percent, the IC-DISC has become a very popular 
tool for small and closely held manufacturers seeking to increase their 
exports.
    Section 7 of the Tax Technical Corrections Act of 2006 would 
increase the tax on IC-DISC dividends by making these payments 
ineligible for the lower 15-percent tax rate for dividends. This change 
would apply to dividends paid after September 29, 2006. Our objections 
to this provision are two-fold.
    First, we believe this provision does not qualify as a technical 
correction. It is substantive, controversial, and would significantly 
impact revenues. The question of whether IC-DISC dividends should be 
taxed at 15 or 35 percent is a policy matter for Congress to determine 
through the normal legislative process, not as part of a bill reserved 
for technical and non-controversial adjustments to the tax code.
    Second, Congress should oppose raising taxes on domestic exporters. 
While U.S. exports are on the rise, particularly from smaller 
manufacturers, it is critical that this growth continue for the Untied 
States to continue making progress toward addressing our current trade 
imbalance. Following the repeal of the most recent RSC/ETI regime, the 
IC-DISC provisions are the sole remaining tax provisions targeted 
directly at U.S. exporters. Given the current size of the U.S. trade 
deficit, it makes little sense for Congress to act unilaterally to harm 
small and closely-held manufacturers and other exporters.
    Based on these concerns, we urge you to support America's small and 
closely-held exporters and remove this provision from the Tax Technical 
Corrections Act.
    Thank you for your consideration of our comments and we would be 
pleased to discuss this matter further with you as you work to complete 
this bill.
    With best regards,
                                                        Tom McMahon
                                          Vice President/Operations

                                 

 Statement of Metropolitan Transportation Authority, New York, New York
    The Metropolitan Transportation Authority (``MTA''), a public 
benefit corporation and public authority of the State of New York, 
welcomes this opportunity to submit formal comments pursuant to your 
request for comments to the Tax Technical Correction bill (H.R. 6264).
    MTA is concerned that the newly created IRC section 4965 excise tax 
(The Tax Increase Protection and Reconciliation Act, Section 516) may 
be applied retroactively to transactions that were entered into prior 
to the IRS issuing any guidance or stating any concern that certain 
transactions may be tax shelters or enactment of any legislation 
effecting certain leasing transactions. Between 1997 and 2003, the MTA 
was the lessee in several LILO and SILO transactions involving assets 
with an appraised fair market value of approximately $2.9 billion. 
Retroactive imposition of a substantial excise tax could have a 
material adverse impact on MTA's ability to serve our riding public.
    The Tax Increase Protection and Reconciliation Act and its 
legislative history does not provide a clear definition of 
``proceeds.'' As a result, MTA is also concerned that the Treasury and 
the IRS have insufficient guidance in defining this term during the 
regulatory process and may promulgate regulations with an overly broad 
definition of this key term. Therefore, MTA asks the Committee to focus 
on the economics of the transaction and include a provision that would 
provide a technical clarification of the definition of proceeds and 
would provide guidance on the allocation of both net income and 
proceeds that is also consistent with the position taken by the IRS in 
Revenue Rulings and court filings.
    Thank you for your consideration of our views. For a more detailed 
explanation of the issue, we have attached a copy of our comment letter 
to the Treasury Department and IRS. If you have any further questions, 
please feel free to contact me.

                                 

                       Statement of RSM McGladrey
Introduction
    RSM McGladrey is a leading professional services firm providing 
accounting, tax and business consulting to midsized companies. When 
considered together with McGladrey & Pullen (a partner-owned CPA firm), 
the two companies rank as the fifth largest accounting, tax and 
business consulting firm in the United States. Our client list 
represents some of the top names in manufacturing and distribution, 
construction, real estate, health care, financial services and the 
public sector. RSM McGladrey focuses on the middle market because it 
represents the heart of U.S. commerce and industry, with more than 
500,000 businesses contributing more than 30 percent of the nation's 
gross domestic production and representing one third of all American 
workers. Companies in the middle market are a vital sector of our 
economy and we appreciate the opportunity to comment on legislation 
that affects them.
Overview
    We applaud the efforts of the Committee to promote the pro-growth 
tax relief that is critical to the competitiveness of American 
exporters. Similarly, we appreciate the efforts of the Committee to 
advance legislation (H.R. 6264) that makes needed technical corrections 
to recent tax relief legislation.
    In response to your request for comments on H.R. 6264, we are 
extremely concerned about how Section 7 will change the tax treatment 
of dividends paid from Interest-Charge Domestic International Sales 
Companies (IC-DISCs). If enacted, this provision would make a 
substantive change in the current tax code, resulting in a significant 
hidden retroactive tax increase on many privately-held manufacturing 
companies that export. As H.R. 6264 moves through the legislative 
process, we strongly urge you to drop Sec. 7 from the technical 
corrections bill.
Background
    Continued export growth is critical to addressing our current trade 
deficit. While the U.S. trade deficit is large--on a seasonally 
adjusted basis, the August 2006 deficit in manufactured goods was at an 
annual rate of $536 billion--it has stayed at essentially the same 
range since January 2006. Export growth is stabilizing the balance. 
According to the Commerce Department, August 2006 was the 10th month in 
a row in which manufactured goods exports rose more rapidly than 
imports.
    United States manufacturers play a major role in U.S. exports, 
exporting more than $60 billion in goods every month. In addition, 
exports from the United States have increased by 57 percent over the 
past ten years. Nonetheless, in order for the manufactured goods trade 
imbalance to shrink, it is critical that export growth continue since 
import value is about 50 percent larger than manufactured goods exports 
value.
    While manufacturers of all sizes are exporters, the increase in 
exports by midsized companies has increased significantly in recent 
years. According to the Commerce Department, 97 percent of all 
exporting manufacturers have fewer than 500 employees.
Potential Impact of Tax Law Change
    If enacted, the proposed change in the tax treatment of IC-DISCs 
likely would have a negative impact on U.S. exports. Under current tax 
rules, privately-held companies that export can set up an IC-DISC that 
allows the deferral of taxes on certain income from export activities, 
as long as interest is paid on the deferred tax.
    In addition, when the income is distributed to noncorporate 
shareholders as a dividend, it is taxed at a 15 percent rate. The 
amount of deferral is capped at gross annual export receipts of $10 
million.
    The proposed change in the IC-DISC rules would increase taxes for a 
number of midsized companies in the United States that export 
manufactured goods, making it more difficult for them to compete in the 
global marketplace. Over 90% of the businesses whom we represent have 
1,000 or fewer employees. Most of our clients are privately held and a 
great many of these companies are exporters. A recent survey conducted 
by the National Association of Manufacturers is consistent with our 
experience serving midsized businesses. More than two thirds of 
privately, family or individually owned companies responding to the 
survey said that they export products.
    Section 7 Is a Substantive Law Change
    While the stated purpose of H.R. 6264 is to ``make Congressional 
intent clear regarding crucial components of recent tax legislation,'' 
Section 7 of the bill goes well beyond a clarification. We believe the 
statutory language of the Jobs and Growth Tax Relief Reconciliation Act 
(2003 Act) is unambiguous as it applies to IC-DISCs. However, Section 7 
would significantly increase the tax rate on dividends paid by IC-DISCs 
without any public debate or discussion of the policy ramifications, 
and with no public analysis on the proposal's impact to midsized 
businesses. For this reason we think it is not proper to attempt to 
enact such a change as a ``technical correction.''
    We note that in 1984, and again in 2000 when the FSC regime was 
under challenge, the World Trade Organization (WTO) commented that the 
IC DISC was not to be viewed as an illegal export subsidy. Thus, we 
believe that a repeal of the IC-DISC regime would have been improper 
during consideration of the 2003 Act as this section wasn't one of the 
offending sections that the WTO had highlighted. Obviously, a repeal 
now based upon a ``technical correction'' to the 2003 Act makes no 
sense without a public debate on export tax policies impacting midsized 
businesses.
    Many midsized businesses have made decisions to repatriate earnings 
or expand internationally based upon the laws in effect at the time. In 
addition, midsized businesses are currently making decisions to 
increase exports based upon tax laws applicable to such transactions. 
Changes to the IC-DISC regime need to be carefully considered because 
midsized businesses can't avail themselves of the variety of 
restructuring options available to larger businesses with more 
resources and larger scale. We respectfully believe such changes need 
to be done outside the ``technical corrections'' process.
Conclusion
    The proposed change to the IC-DISC rules in H.R. 6264 represents a 
substantive change to current tax law that would have a negative impact 
on the ability of midsized businesses to export. Thank you in advance 
for considering our request to remove this anti-growth provision from 
the Technical Corrections Act of 2006.
    If you have questions concerning these comments, please contact 
Bill Major, Managing Director, International Tax, RSM McGladrey, at 
1.847.413.6236.
            Sincerely,
                                                    Michael L. Metz
                             Executive Vice President, Tax Services

                                 

     Federal Tax Committee of the Wisconsin Institute of Certified 
                                                 Public Accountants
                                        Brookfield, Wisconsin 53005
                                                   October 23, 2006
The Honorable Senators Chuck Grassley and Max Baucus
U.S. Senate Committee On Finance
219 Dirksen Senate Office Building
Washington, DC 20515

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

Dear Gentlemen:

    As an attorney for numerous small manufacturers and on behalf of 
the Federal Tax Committee of the Wisconsin Institute of Certified 
Public Accountants, I am responding to requests for comments to the Tax 
Technical Corrections Act of 2006 (H.R. 6264/S. 4026).
    If signed into law, section 7 of the Tax Technical Corrections Act 
of 2006 would eliminate the incentive aspect of IC-DISCs for tens of 
thousands of closely-held manufacturers, a sector of the economy 
crucial to long-term growth and prosperity. This comment explains why 
the proposed legislation is inappropriate and would go against the 
longstanding policy of aiding domestic manufacturers of exported goods.
    1. The Proposed Legislation Hurts U.S. Manufacturers of Exported 
Products. Manufacturers are the bedrock of a prosperous economy. 
Manufacturing jobs generally pay higher wages and have more generous 
benefits than jobs in other sectors. Furthermore, manufacturing jobs 
are considered especially valuable because they import wealth from 
around the world. Through their interactions with others, manufacturers 
spur demand in the retail, service and not-for-profit sectors. Now, 
however, with manufacturers closing U.S. plants and moving production 
to less expensive foreign locations, this ripple effect is working in 
reverse, magnifying the economic disruption caused by manufacturer 
exodus. The proposed legislation would effectively eliminate a key 
export incentive that helps put domestic manufacturers in an economic 
position closer to that of their foreign counterparts. Eliminating the 
incentive aspect of IC-DISCs will negatively effect domestic 
manufacturers, leading to reduced exports, lower productivity and fewer 
jobs.
    2. The Proposed Legislation is Unnecessary. More than merely 
providing a ``technical correction,'' the proposed legislation would 
work a substantive change by eliminating an export benefit that has 
existed without question. Nothing in the text or legislative history of 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 suggests that 
the current tax rate on dividends paid from an IC-DISC is something 
that requires correction.
    Furthermore, the Joint Committee's description of the Tax Technical 
Corrections Act of 2006 tries to argue that the proposed legislation is 
similar to the denial of a dividends received deduction on dividends 
received from an IC-DISC found in Code section 246(d). That section 
does deny the dividends received deduction with respect to dividends 
received from IC-DISCs because those dividends have not yet been 
subject to corporate-level tax. Code section 246(d)'s sole purpose is 
to prevent corporate shareholders of IC-DISCs from avoiding corporate-
level tax on IC-DISC dividends altogether. However, this problem does 
not exist with respect to non-corporate IC-DISC shareholders because 
there is no corporate-level tax to avoid.
    3. The Proposed Legislation Goes Against the Longstanding Policy of 
Aiding Domestic Manufacturers of Exported Goods. A review of the 
history of export incentives shows that Congress has a longstanding 
policy of aiding domestic manufacturers of exported goods and has only 
abandoned this policy after significant pressure from our foreign 
trading partners. Our foreign trading partners have not objected to the 
rate of tax paid by individuals on dividends received from IC-DISCs, 
making abandonment of this policy through the proposed legislation 
inappropriate.
    In 1971, Congress enacted the domestic international sales 
corporation (``DISC'') regime in an attempt to stimulate U.S. exports. 
A DISC afforded U.S. exporters some relief from U.S. tax on a portion 
of their export profits by allocating those profits to a special type 
of domestic subsidiary known as a DISC. In the mid-1970s, foreign 
trading partners of the United States began complaining that the DISC 
regime was an illegal export subsidy in violation of the General 
Agreement on Tariffs and Trade (``GATT'').
    In 1984, Congress enacted the foreign sales corporation (``FSC'') 
regime as a replacement for the DISC regime in response to the GATT 
controversy. The FSC regime required U.S. exporters to establish a 
foreign corporation that performs certain activities abroad in order to 
obtain a U.S. tax benefit. Rather than repeal the DISC regime, Congress 
modified it to include an interest charge component, making all DISCs 
from that point forward IC-DISCs. Manufacturers often did not take 
advantage of the IC-DISC because until recently other regimes, such as 
the FSC and ETI exclusion, were more attractive.
    In 1998, the European Union filed a complaint with the World Trade 
Organization (``WTO'') asserting that the FSC regime, similar to the 
original DISC regime that preceded it, was an illegal export subsidy in 
violation of the GATT. In 1999, the WTO released its report on the 
European Union's complaint, ruling that the FSC regime was an illegal 
export subsidy that should be eliminated by 2000.
    In 2000, Congress responded to the WTO's ruling by enacting the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000. The new 
extraterritorial income (``ETI'') exclusion afforded U.S. exporters 
essentially the same tax relief as the FSC regime. Consequently, the 
ETI exclusion did not end this trade controversy as the WTO 
subsequently ruled that the ETI exclusion was an illegal export subsidy 
that should be eliminated.
    In 2004, Congress enacted the American Jobs Creation Act of 2004 
(``2004 Act''), which phased out the ETI exclusion while phasing in a 
domestic production deduction (``DPD''). With the elimination of the 
ETI exclusion, the only remaining incentive for exports was the IC-
DISC. Rather than encouraging exports, the DPD allows a deduction for 
certain domestic production activities. While exporting manufacturers 
may take advantage of the DPD, the tax relief (and concomitant 
incentive to export) of the DPD is far less than that afforded by the 
IC-DISC.
    As the foregoing history shows, Congress has only removed export 
incentives under significant pressure from our foreign trading 
partners. As our foreign trading partners have not objected to the tax 
rate on dividends received from IC-DISCs, it is inappropriate for 
Congress to abandon its longstanding policy of aiding domestic 
manufacturers of exported goods.
    4. The Proposed Legislation Unfairly Impacts Exporters. The 
proposed legislation unfairly impacts exporters who have relied on 
current law to arrange their affairs by applying retroactively to all 
dividends paid from IC-DISCs since the date of its introduction. Even 
in the face of challenges and discontent by the European Union, the 
transition periods for each of the FSC and ETI regimes began several 
months after the dates of their introduction and lasted at least two 
years.
    Here in the Midwest, America's heartland, we are home to more than 
one-third of all manufacturing jobs in the United States and generate 
more than $100 billion in revenue from exports each year. The proposed 
legislation will harm tens of thousands of hard-working small 
businesses whose value to the economy cannot be overstated. 
Furthermore, the proposed legislation has no basis in the text or 
legislative history of the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 and penalizes exporters who reasonably relied on the law. 
Accordingly, section 7 of the Tax Technical Corrections Act of 2006 
should not be enacted into law.
            Yours very truly,
                                         Robert J. Misey, Jr., Esq.

                                 

                               Small Business Exporters Association
                                                   October 27, 2006
Hon. Bill Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Thomas,

    On behalf of the more than 22,000 small and mid-sized exporting 
companies that belong to the Small Business Exporters Association of 
the United States and its affiliated nonprofit organization, the 
National Small Business association, SBEA would like to comment on H.R. 
6424, the Tax Technical Corrections Act of 2006.
    We appreciate the conscientious work that went into this 
legislation, as well as its companion bill S.4026, by the members and 
staff of the House Ways and Means Committee, the Senate Finance 
Committee, and the Joint Committee on Taxation. We know that many 
provisions of the bill will help clarify the tax code for taxpayers, 
tax practioners, and Congress itself.
    However, we do wish to draw the attention of the Ways and Means 
Committee to one section of the bill that we believe requires a more 
extensive analysis and more public input than it is likely to receive 
in this bill.
    Section 7 of the bill would significantly change the tax treatment 
of Interest Charge Domestic International Sales Corporations (IC-
DISC's). We believe these changes would unnecessarily harm small U.S. 
exporters, notably those who manufacture their products.
    Change would disrupt businesses. The IC-DISC form of business 
organization is best suited for privately-held companies with few 
shareholders, such as smaller C corporations and pass-through entities 
like S Corporations. Consequently, nearly all of the companies 
utilizing the IC-DISC are small. Our members who use IC-DISC's tell us 
that they spent tens of thousands of dollars, and considerable amounts 
of time, structuring their companies so as to utilize the IC-DISC 
format, on the basis of assurances from attorneys and CPA's that this 
form of organization was approved by Congress and the World Trade 
Organization.
    Not only would a change in the tax treatment of IC-DISC's expose 
these companies to much greater than anticipated federal taxes, but it 
would require them to yet again restructure their companies, yet again 
spend tens of thousands of dollars on attorneys and accountants, and 
yet again divert precious management time to all of this.
    For a larger company, spending tens of thousands of dollars and 
many hours of management time is not inconsequential, but it can at 
least be spread over tens or hundreds of millions of dollars in sales 
and dozens of managers. Not so a smaller company. For them, this would 
be a real blow.
    The sudden decision by the tax-writing Committees, in the closing 
hours of the last session of Congress, to focus on this provision means 
that almost none of these affected companies are prepared for this 
change. Indeed, the American Institute of Certified Public Accountants 
has just finished holding two programs, in Chicago and San Francisco, 
advising accountants and companies on how to structure IC-DISC's. (Two 
more such programs are planned soon.)
    Legal under the WTO. The IC-DISC is qualitatively different from 
other forms of business organization by exporters that have been 
invalidated by WTO decisions. In the first place, IC-DISC shareholders 
pay interest on any deferred taxes. Secondly, the type of taxation and 
the tax rates levied on IC-DISC income (dividend income taxation and 
rates) are available not only to exporters, but to a broad swath of 
U.S. taxpayers. Thus, the IC-DISC has never been challenged, and indeed 
the WTO has specifically exempted it from its earlier decisions 
affecting DISC's and FSC-ETI. So we see no external reason to tamper 
with it.
    Would increase taxes. An upward revision in the tax rates on IC-
DISC revenue would affect, at a bare minimum, many hundreds of 
companies and many millions of dollars in revenues. This is a tax 
increase; there is no other way to view it. Historically, and as a 
matter of fairness, Congress has allowed those affected by tax 
increases ample opportunity to express their views to their elected 
representatives. That process has included the commissioning of 
economic studies and the debating of alternatives. It has also included 
allowing ample lead time for those affected to plan and adapt.
    None of that has occurred in this situation. With no advanced 
warning or publicity, a significant tax increase has been proposed for 
a whole swath of taxpayers--in the closing moments of a Congressional 
session just before an election. It is further proposed that Congress 
approve this tax increase a week or two after the election, in a ``lame 
duck'' session that may last only a few days. Most of those affected 
are small companies who aren't ``plugged in'' to Washington and have no 
idea what could be coming their way. This isn't right or fair.
    A substantive change. Sometimes, what seems like a modest tweak to 
analysts who concentrate closely on the tax code will seem far more 
sweeping to those who experience the change. We can understand how the 
IC-DISC proposal might seem small to some, and therefore end up in a 
``Technical Corrections'' bill. IC-DISC's have grown quietly over a 
period of years, and those outside the manufacturing and exporting 
communities are probably not that familiar with them. But perhaps more 
than any other provision in the ``Tax Technical Corrections'' bill, 
this one has far-reaching ramifications. It is truly a substantive 
change. It deserves careful deliberation. We ask the Committees to 
refrain from acting on this provision until that more careful 
deliberation has occurred.
    Trade policy considerations. Changing IC-DISC's is not simply a 
matter of tax policy. It is also a matter of trade policy. How can the 
U.S. best deal with a trade deficit that is rapidly ascending to $1 
trillion a year? What needs more emphasis--and less emphasis? Engaging 
American small and mid-sized enterprises in international trade would 
seem to be a crucial piece of the puzzle. Virtually all of our 
country's largest companies are fully globalized, but fewer than 10% of 
U.S. companies that have less than one hundred employees export. How 
can we address the cost of entry hurdles that keep smaller companies 
out of the international marketplace?
    How, too, can we address the global price advantage that border-
adjustable taxes give to countries that offer them? Shall we wait years 
or decades for an overhaul of the U.S. tax system--as trade deficits 
continue rising unimpeded--or shall we do something sooner?
    SBEA urges the Committee to take the time to explore these issues 
before acting on the IC-DISC proposal.
            Regards,
                                                     James Morrison
                                                          President
                                 ______
                                 
The Small Business Exporters Association of the United States
    SBEA is the nation's oldest and largest nonprofit organization 
exclusively representing small and mid-size companies in international 
trade. SBEA is proud to serve as the international trade council of the 
National Small Business Association, the nation's oldest nonprofit 
advocacy organization for small business.

                                 

           Statement of National Association of Manufacturers

Overview
    The National Association of Manufacturers--the nation's largest 
industrial trade association--represents large, mid-size and small 
manufacturers in every industrial sector and in all 50 states. The 
NAM's mission is to enhance the competitiveness of manufacturers by 
shaping a legislative and regulatory environment conducive to U.S. 
economic growth and to increase understanding among policymakers, the 
media and the general public about the vital role of manufacturing to 
America's economic future and living standards.
    NAM members applaud the efforts of the Committee to promote the 
pro-growth tax relief that is critical to the competitiveness of 
American manufacturers. Similarly, we appreciate the efforts of the 
Committee to advance legislation (H.R. 6264) that makes needed 
technical corrections to recent tax relief legislation.
    In response to your request for comments on H.R. 6264, the NAM is 
extremely concerned about a provision (Section 7) included in the bill 
that would change the tax treatment of dividends paid from interest-
charge Domestic International Sales Companies (IC DISCs). If enacted, 
this provision would make a substantive change in the current tax code, 
resulting in a tax increase on many privately-held manufacturing 
companies that export. As H.R. 6264 moves through the legislative 
process, we strongly urge you to drop Sec. 7 from the technical 
corrections bill.

Background
    Continued export growth is critical to addressing our current trade 
deficit. While our trade deficit is large--on a seasonally adjusted 
basis, the August 2006 deficit in manufactured goods was at an annual 
rate of $536 billion--it has stayed at essentially the same range since 
January 2006. Export growth is stabilizing the balance. According to 
the Commerce Department, August 2006 was the 10th month in a row in 
which manufactured goods exports rose more rapidly than imports.
    U.S. manufacturers play a major role in U.S. exports, exporting 
more than $60 billion in goods every month. In addition, exports from 
the United States have increased by 57 percent over the past ten years. 
Nonetheless, in order for the manufactured goods trade imbalance to 
shrink, it is critical that export growth continue since import value 
is about 50 percent larger than manufactured goods exports value.
    While manufacturers of all sizes are exporters, the increase in 
exports by smaller companies has increased significantly in recent 
years. According to the Commerce Department, 97 percent of all 
exporting manufacturers have fewer than 500 employers. The NAM has 
tracked the exporting experience of smaller manufacturers for more than 
a decade. Based on a recent NAM survey, current export activity among 
smaller companies has doubled since 2001.

Potential Impact of Tax Law Change
    If enacted, the proposed change in the tax treatment of IC-DISCs 
likely would have a negative impact on U.S. exports.
    Under current tax rules, a U.S. manufacturing company that exports 
can set up a small IC-DISC that allows the deferral of taxes on certain 
income from export activities, as long as interest is paid on the 
deferred tax. In addition, when the income is distributed to 
noncorporate shareholders as a dividend, it is taxed at a 15 percent 
rate. The amount of deferral is capped at gross annual receipts of $10 
million.
    The proposed change in the IC-DISC rules would increase taxes for 
privately-held companies in the United States that export manufactured 
goods, making it more difficult for them to compete in the global 
marketplace. Roughly 90% of NAM's small and medium size companies 
(SMMs)--generally those with 1,000 or fewer employees--are privately 
held and many of these companies are exporters. In a recent survey of 
NAM's smaller members, more than two thirds of privately, family or 
individually owned companies responding to the survey said that they 
export products.

A Substantive Change
    While the stated purpose of H.R. 6264 is to ``make Congressional 
intent clear regarding crucial components of recent tax legislation, 
``Section 7 of the bill goes well beyond a clarification. Specifically 
Section 7 would significantly increase the tax rate on dividends paid 
by IC-DISCs, a substantive change to existing law, rather than a 
``technical correction.''
Conclusion
    In sum, the proposed changed to the IC-DISC rules in H.R. 6264 
represents a substantive change to current tax law that would have a 
negative impact on the ability of some U.S. companies to export. Thank 
you in advance for considering our request to remove this anti-growth 
provision from the Technical Corrections Act of 2006. The NAM looks 
forward to continuing to work with Congress, the Administration and 
others to promote progrowth tax relief that encourages broad based 
economic growth and U.S. competitiveness.

                                 

                                                Extended Stay, Inc.
                                                   October 31, 2006
The Honorable William M. Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Charles B. Rangel
Ranking Member
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Thomas and Ranking Member Rangel:

    In response to the Committee's request, dated September 29, 2006, 
for comments on the Tax Technical Corrections Act of 2006 (H.R. 6264) 
and proposals for additional technical corrections, we respectfully 
request that you consider including in the bill a new provision that 
would clarify the application of the ``transient basis'' test that is 
used to define a ``lodging facility'' in section 856(d)(9)(D)(ii) for 
purposes of the real estate investment trust (``REIT'') rules regarding 
taxable REIT subsidiaries (``TRS'').\1\
---------------------------------------------------------------------------
    \1\ Unless otherwise noted herein, all references to ``section'' 
are to the Internal Revenue Code of 1986, as amended (the ``Code'').
---------------------------------------------------------------------------
    We are submitting this request on behalf of Extended Stay, Inc. 
(``ESI''), which is a hospitality industry REIT with over 600 lodging 
properties located across the United States--approximately 550 of which 
are owned by ESI and leased to TRSs. As its name suggests, ESI 
specializes in a hospitality market segment that consists of longer 
term (but nevertheless temporary) occupancies. As discussed more fully 
below, a clarification of the TRS transient basis test would address an 
area of significant uncertainty for all hospitality industry REITs that 
utilize a TRS structure.
Background
    To qualify as a REIT, an entity must derive at least 95 percent of 
its gross income from sources listed in section 856(c)(2) and at least 
75 percent of its gross income from sources listed in section 
856(c)(3). Although rents from real property generally are treated as 
qualifying income for purposes of these tests, income from providing 
hotel accommodations to guests is not treated as qualifying income due 
to the service element associated with providing hotel accommodations. 
However, the REIT rules provide that a REIT's gross income derived from 
a hotel property can be treated as qualifying income if the REIT leases 
the hotel property to a third party operator or a TRS (which, in turn, 
must contract with a third party to operate the property).
    The lease payments from a TRS to the REIT under such an arrangement 
are treated as rents from real property (i.e., qualifying income under 
the REIT income tests), provided the leased property constitutes a 
``lodging facility'' (among other requirements). Section 
856(d)(9)(D)(ii) defines a ``lodging facility'' as a ``hotel, motel, or 
other establishment more than one-half of the dwelling units in which 
are used on a transient basis.'' The term ``transient basis'' is not 
defined in section 856 or any regulations thereunder, notwithstanding 
the fact that a failure to satisfy the transient basis test could 
result in a loss of REIT status.
    In the aftermath of Hurricanes Katrina and Rita last year, the 
hospitality industry provided (and continues to provide) lodging for 
evacuees, employees of displaced businesses, and relief workers for 
extended periods of time. To assist hospitality industry REITs in 
meeting these critical housing needs without impacting their compliance 
with the transient basis test, the Internal Revenue Service (the 
``IRS'') issued two notices providing a limited and temporary 
clarification of the transient basis test.
    The IRS announced in Notice 2005-89, 2005-49 I.R.B. 1077, that, for 
purposes of the ``lodging facility'' definition under section 
856(d)(9)(D)(ii), it would treat a dwelling unit within a property as 
being used on a transient basis if the unit was used to provide shelter 
to evacuees, displaced employees or relief workers during the 6-month 
period beginning on August 28, 2005 (the date of the President's first 
major disaster declaration resulting from Hurricane Katrina). Due to 
the magnitude of the damage resulting from Hurricanes Katrina and Rita, 
the IRS later extended and modified this guidance with the issuance of 
Notice 2006-58, 2006-28, I.R.B. 59. In both Notices, the IRS 
acknowledged that ``Section 856 and the regulations thereunder do not 
define the term transient basis'.''
Permanent Clarification of the Transient Basis Test
    While the IRS Notices provided welcome and needed clarification of 
the section 856(d)(9)(D)(ii) transient basis test under extenuating 
circumstances, this clarification is only temporary and limited to 
occupancies related to Hurricanes Katrina and Rita. As an addition to 
the pending technical corrections bill, we respectfully request that 
the application of the section 856(d)(9)(D)(ii) transient basis test be 
clarified permanently and generally, either by providing a 6-month 
quantitative standard for the test (Alternative #1) or by clarifying 
that the transient basis test does not apply to properties that are 
hotels or motels (Alternative #2).
Alternative #1_Clarify that the transient basis test is applied using a 
        six (6)-month period.
    While other Code sections employ variations of the transient basis 
test,\2\ there is no consistent definition of what constitutes a 
transient basis. In fact, we are aware of only a few instances in which 
such a definition has been provided.\3\
---------------------------------------------------------------------------
    \2\ For example, under the investment credit recapture rules of 
section 50(b)(2)(B), property used for lodging is not eligible for the 
credit except for ``property used by a hotel or motel in connection 
with the trade or business of furnishing lodging where the predominant 
portion of the accommodations is used by transients.'' Another example 
of the transient basis test can be found in the accelerated cost 
recovery system depreciation rules of section 168. In distinguishing 
between an apartment lodging facility, which qualifies as residential 
rental property with a 27.5-year recovery period, and a hotel/motel, 
which does not qualify as residential rental property (and has a 39-
year recovery period), section 168(e)(2)(A)(i) provides that the term 
``residential rental property'' means any building or structure if 80 
percent or more of the gross rental income from such building or 
structure for the taxable year is rental income from dwelling units. 
For this purpose, section 168(e)(2)(A)(ii)(I) provides that the term 
``dwelling unit'' means a house or apartment used to provide living 
accommodations in a building or structure, but does not include a unit 
in a hotel, motel, or other establishment more than one-half of the 
units in which are used on a transient basis.
    \3\ See, e.g., former Treas. Reg. section 1.167(k)-3(c) and Treas. 
Reg. section 1.48-1(h)(2)(ii). These regulations provide (or provided) 
that a facility is treated as used on a transient basis if the facility 
is used more than 50 percent of the time for occupancies of less than 
30 days. Although section 48 itself was repealed in 1990, the Treasury 
regulations under section 48 (including Treas. Reg. section 1.48-
1(h)(2)(ii)) have never been removed.
---------------------------------------------------------------------------
    The term ``transient basis'' is used in section 42(i)(3)(B)(i) 
which, for purposes of the low-income housing credit, defines a ``low-
income unit'' as any unit that (among other things) is ``used other 
than on a transient basis.'' As is the case with regard to section 
856(d)(9)(D)(ii), neither section 42 nor the regulations thereunder 
define the term ``transient basis''. However, legislative history 
discussing the low-income housing credit indicates that transient basis 
use of a unit refers to occupancy periods of less than six months: 
``Generally, a unit is considered to be used on a nontransient basis if 
the initial lease term is six months or greater.'' H.R. Conf. Rep. No. 
99-841, at 4183 (1986).
    We believe that the uses of the term ``transient basis'' in the 
section 42 low-income housing credit and in the section 856 REIT TRS 
rules serve the same purpose. In both cases, the term is intended to 
distinguish between property which is used to provide temporary lodging 
for guests and property which is used to provide permanent housing for 
residents. Therefore, if a quantitative standard is used to clarify the 
application of the transient basis test in determining whether property 
constitutes a ``lodging facility'' under section 856(d)(9)(D)(ii), we 
would suggest using the same 6-month standard that is used in 
determining whether a unit is a low-income unit for purposes of the 
low-income housing credit. This clarification also would be consistent 
with the temporary and limited clarification that was provided in the 
IRS Notices relating to Hurricanes Katrina and Rita, which itself 
presumably found support from the low-income housing credit for using a 
6-month period.
    Proposed language--Under Alternative #1, Section 856(d)(9)(D)(ii) 
would be amended to read to as follows:
    ``(ii) LODGING FACILITY.--The term lodging facility' means a hotel, 
motel, or other establishment more than one-half of the dwelling units 
in which are used by persons who occupy the unit for less than 6 
months.'' \4\
---------------------------------------------------------------------------
    \4\ The proposed language eliminates any reference to the term 
``transient basis'' because a quantitative standard would supplant the 
need to use the term, thereby avoiding any unintended interpretive 
consequences for other Code sections that use the term. A further 
refinement to the proposed language also might eliminate the terms 
``hotel'' and ``motel'' as surplusage if the transient basis test 
applies to all ``establishments'' without regard to whether they are 
hotels or motels.
---------------------------------------------------------------------------
Alternative #2_Clarify that the transient basis test applies only to 
        establishments other than hotels and motels.
    Beyond the absence of a definition of the term ``transient basis'', 
the scope of application of the transient basis test for purposes of 
section 856(d)(9)(D)(ii) is unclear with regard to whether the test 
even applies to properties that are hotels or motels. The relevant 
statutory language of section 856(d)(9)(D)(ii)--``hotel, motel, or 
other establishment more than one-half of the dwelling units in which 
are used on a transient basis''--could be interpreted as providing that 
the transient basis test only applies to ``other establishment[s]'' and 
not to hotels or motels, particularly since the terms ``hotel'' and 
``motel'' would appear to be surplusage if, instead, the transient 
basis test applies to all properties without regard to whether they are 
``hotels'', ``motels'' or ``other establishment[s]''.\5\
---------------------------------------------------------------------------
    \5\ See Lawrence Filson, The Legislative Drafter's Desk Reference, 
Congressional Quarterly, Inc. (1993), at 234 (``When setting forth a 
series of items in a sentence either in conjunctive or disjunctive 
form, the last two items in the series, like the earlier items, should 
be separated by a comma. . . . The omission of the final comma in the 
series--a common practice in expository writing--sometimes invites the 
misreading that the last item is part of the preceding one. . . .'').
---------------------------------------------------------------------------
    Such an interpretation does place some definitional pressure on the 
terms ``hotel'' and ``motel''. However, these terms are used in several 
other Code sections, often without any accompanying definitional 
detail.\6\ With regard to whether a property constitutes a ``lodging 
facility'' under section 856(d)(9)(D)(ii), we believe that the plain 
meaning of these terms is sufficiently clear in the vast majority of 
circumstances without the need for further statutory definition. Even 
in the handful of cases in which there might be some factual question 
concerning whether a particular property constitutes a hotel or motel, 
there are certain distinctive features of hotels and motels that can be 
identified and an analysis of the property in question performed to 
determine whether the property possesses the requisite characteristics 
of a hotel or motel.
---------------------------------------------------------------------------
    \6\ See former section 48(a)(3)(B) and sections 50(b)(2)(B), 
168(e)(2)(A)(ii)(I), 179D(f)(2)(C)(i), 280A(f)(1)(B), 1202(e)(3)(E), 
and 3121(d)(3)(D).
---------------------------------------------------------------------------
    For example, hotels and motels may be subject to applicable local 
occupancy taxes that do not apply to residential property, and their 
sites generally are zoned specifically for use by a hotel or motel. In 
addition, the nature of the contractual relationship between the 
provider and occupant of the dwelling units in question (i.e., guest 
registration versus negotiated lease) may be determinative of this 
issue.
    While there may be a few isolated situations in which the terms 
``hotel'' and ``motel'' by themselves are somewhat ambiguous and pose 
some interpretive difficulty, the statutory language of section 
856(d)(9)(D)(ii) at least should be more clear about whether properties 
that are hotels or motels also must satisfy the transient basis test. 
If hotels and motels are required to satisfy the transient basis test, 
then we believe that the transient basis test itself needs to be more 
clearly defined, as proposed by Alternative #1 above. If not, then we 
believe that section 856(d)(9)(D)(ii) needs to be restated to clarify 
that the transient basis test applies only to ``other 
establishment[s]'' and not to ``hotels'' or ``motels''. The proposed 
language below would accomplish this by simply dividing the clause into 
separate subclauses.
    Proposed language--Section 856(d)(9)(D)(ii) would be amended to 
read as follows:
    ``(ii) LODGING FACILITY.--The term `lodging facility' means--
        (I) a hotel or motel, or
        (II) any other establishment more than one-half of the dwelling 
units in which are used on a transient basis.''
    We appreciate your consideration of our request to clarify the 
section 856(d)(9)(D)(ii) transient basis test in the pending technical 
corrections legislation. We would be happy to meet with you to discuss 
this issue further. Please feel free to contact us at (202) 344-4034 
(Sam Olchyk) or (202) 344-4406 (Ray Beeman).
            Sincerely yours,
                                                      Samuel Olchyk
                                                      E. Ray Beeman

                                 

                                  U.S. Securities Markets Coalition
                                                   November 8, 2006
The Honorable William M. Thomas
Chairman
House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Charles E. Grassley
Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20515

The Honorable Charles B. Rangel
Ranking Member
House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Max S. Baucus
Ranking Member
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20515

Gentlemen:

    This letter and the attached memorandum set forth the comments of 
the U.S. Securities Markets Coalition (the ``Coalition'') regarding the 
Tax Technical Corrections Act of 2006 (H.R. 6264 and S. 4026) (the 
``Bill''). The members of the Coalition include the American Stock 
Exchange, the Boston Options Exchange, the Boston Stock Exchange, the 
Chicago Board Options Exchange, the Chicago Stock Exchange, Depository 
Trust & Clearing Corporation, the International Securities Exchange, 
the NASDAQ Stock Market, the National Stock Exchange, NYSE Arca, the 
Options Clearing Corporation, and the Philadelphia Stock Exchange. All 
trading in listed equity options in the United States takes place on 
exchanges that are members of the Coalition.
    The Coalition's comments relate to section 6(c) of the Bill, which 
contains amendments to the ``identified straddle'' provisions of Code 
section 1092. Those provisions were substantially revised by the 
American Jobs Creation Act of 2004 (``AJCA''). The Coalition generally 
supports the approach reflected in the proposed amendments and believes 
that they will eliminate the uncertainty created by AJCA with respect 
to the treatment of losses on positions in identified straddles when 
there are no gains on offsetting positions.
    There is, however, one aspect of the proposed changes that we 
believe warrants further consideration. As explained in the attached 
memorandum, the Bill would expand the requirements for making a proper 
identification of an identified straddle to include the requirement 
that the taxpayer identify which positions in the identified straddle 
are offsetting with respect to one another. Under the Bill, this change 
would apply retroactively to the effective date of the AJCA provisions. 
As explained in the attached memorandum, we question whether this 
additional requirement is necessary or appropriate and recommend that 
Congress leave to Treasury's regulatory authority the issue of whether 
and under what circumstances such additional information would be 
useful. In addition, taxpayers could not have known of this new 
requirement prior to the introduction of the Bill, and it is highly 
likely that many taxpayers, including individuals, did not immediately 
become aware of the expanded requirement upon introduction of the Bill. 
Accordingly, we suggest that if this amendment is preserved in the 
final version of the Bill, its effective date should be tied to the 
date the Bill is enacted.
            Sincerely yours,
                                                    William M. Paul
                                 ______
                                 
Tax Technical Corrections Act of 2006 (H.R. 6264, S. 4026)

Expanded Identification Requirement for ``Identified Straddles'' Under 
Code section 1092(a)(2)

    Code Section 1092(a)(2) provides special rules for identified 
straddles. These rules were substantially revised by the American Jobs 
Creation Act of 2004 (``AJCA''). In order for these special rules to 
apply, a taxpayer must identify the straddle as an identified straddle 
by the close of the day on which the straddle is acquired (or such 
earlier time as Treasury may specify by regulation). Treasury has 
authority to specify, by regulations or other guidance, the proper 
methods for clearly identifying a straddle as an identified straddle 
and for identifying the positions comprising such straddle.\1\
---------------------------------------------------------------------------
    \1\ See Code Sec. 1092(a)(2)(C).
---------------------------------------------------------------------------
    Section 6(c)(2) of the Tax Technical Corrections Act of 2006 (the 
``Bill'') would expand the identification requirement by requiring 
taxpayers not only to identify the positions making up the identified 
straddle but also to identify ``the positions in the straddle which are 
offsetting with respect [to] other positions in the straddle.'' The 
Joint Committee Staff's description of this provision states as 
follows:
    ``Under present law, a straddle is treated as an identified 
straddle only if, among other requirements, it is clearly identified on 
the taxpayer's records as an identified straddle before the earlier of 
(1) the close of the day on which the straddle is acquired, or (2) a 
time that the Secretary of the Treasury may prescribe by regulations. 
The provision clarifies that for purposes of this identification 
requirement, a straddle is clearly identified only if the 
identification includes an identification of the positions in the 
straddle that are offsetting with respect to other positions in the 
straddle. Consequently, taxpayers are required to identify not only the 
positions that make up an identified straddle but also which positions 
in that identified straddle are offsetting with respect to one 
another.'' \2\
---------------------------------------------------------------------------
    \2\ Joint Committee on Taxation, Description of the Tax Technical 
Corrections Act of 2006 (JCX-48-06) at 9-10.
---------------------------------------------------------------------------
    This change, as well as the other changes that the Bill would make 
to Code section 1092(a)(2), would take effect as if included in 
AJCA.\3\
---------------------------------------------------------------------------
    \3\ See section 6(d) of the Bill.
---------------------------------------------------------------------------
    The U.S. Securities Markets Coalition (the ``Coalition'') questions 
whether this additional requirement is necessary or appropriate. In the 
vast majority of straddles, it will be evident which positions in the 
identified straddle are ``long'' positions and which positions are 
``short'' positions. This will certainly be true for identified 
straddles that consist of stock and options with respect to such stock. 
For example, if a taxpayer identifies 1,000 shares of stock and put 
options on those shares as an identified straddle, it is perfectly 
clear that the put options are offsetting positions to the stock. 
Treating identification of such an identified straddle as invalid for 
failure to state expressly that the put options offset the stock will 
needlessly cause a taxpayer who inadvertently omits such a statement to 
be subject to the general loss deferral rule of section 1092(a)(1).\4\ 
Accordingly, the Coalition recommends that any rules along these lines 
be left to Treasury regulations. Such regulations could, for example, 
describe some subset of identified straddles with respect to which 
imposing the additional requirement would result in providing the 
Internal Revenue Service with useful information.
---------------------------------------------------------------------------
    \4\ Alternatively, there may be uncertainty as to whether section 
1092(a)(2) would nevertheless apply to such a straddle. Under section 
1092(a)(2), Treasury has authority to specify the rules for applying 
section 1092 to taxpayers who fail to comply with the identification 
requirements. Until Treasury exercises that authority, taxpayers who 
fail to satisfy the proposed new requirement might be in a position to 
whipsaw the government.
---------------------------------------------------------------------------
    We also note that the requirement that taxpayers identify which 
positions in the identified straddle are offsetting with respect to one 
another is a new requirement that taxpayers could not have been aware 
of or anticipated prior to the introduction of the Bill. While the 
introduction of the Bill may be viewed as putting taxpayers on notice 
of the new requirement, as a practical matter many taxpayers, including 
individuals, who are likely to avail themselves of the identified 
straddle rules would not immediately become aware of the requirement on 
September 29, 2006, the day the Bill was introduced. Accordingly, if 
the new requirement is retained in the final version of the Bill, the 
Coalition recommends that it not apply with respect to identified 
straddles entered into before the date the Bill is enacted.
    We recognize that technical corrections typically have the same 
effective date as the provisions they amend. However, that is not 
always the case. For example, section 7 of the Bill would amend the 
2003 legislation relating to ``qualified dividend income'' eligible for 
the 15% rate by excluding certain dividends paid by a DISC or former 
DISC. This change would apply to dividends received on or after 
September 29, 2006, the date the Bill was introduced. In addition, the 
change made by section 5(d)(3) of the Bill, relating to certain 2005 
amendments to the LUST tax provisions, would apply to fuel sold after 
the date the Bill is enacted. Similar examples of delayed effective 
dates for technical corrections can be found in prior technical 
corrections legislation.\5\ Thus, while there is a presumption that the 
effective date of a technical correction should relate back to the 
effective date of the provision being amended, a later effective date 
may appropriately be adopted where, as here, there is reason to do so.
---------------------------------------------------------------------------
    \5\ See, e.g., Tax Technical Corrections Act of 2005, enacted as 
part of the Gulf Opportunity Zone Act of 2005, Sec. 402(m)(3).

---------------------------------------------------------------------------
                                 

                                                       LI-COR, Inc.
                                                   October 31, 2006

To Whom It May Concern:

    I am writing with respect to Section 7. of H.R. 6264 and companion 
S. 4026--Tax Technical Corrections Act of 2006.
    I am VERY confused. After decades of doing continual battle with 
World Trade Organization accusations of unfair trade practices and 
multiple varieties of legislation (DISC, FSC, ETI, etc.) enacted in a 
conscientious effort to appease the WTO and yet encourage export 
activities, we have finally found a vehicle, the IC-DISC, which serves 
the purpose and is also apparently acceptable to the WTO. And what do 
we do? Potentially ``shoot ourselves in the foot'' by introducing the 
above referenced legislation!
    At $35 million of Sales (70% export) and 230 employees, LI-COR is 
not a major player in world economic markets. But I do believe 
companies our size and legions of even smaller companies do 
collectively comprise an extremely large constituency for whom export 
tax incentives DO make a difference. We established a DISC back in the 
early 1980's and have taken advantage of this legislation and 
successors since that time. It has meant hundreds of thousands of 
``incremental'' investment dollars available, by virtue of reduced 
taxes, that has financed the growth LI-COR has experienced and 
therefore has been plowed right back into our local and national 
economies. In the economic circle, this reinvestment of tax-saved 
dollars has, of course, resulted ultimately in substantially increased 
tax dollars coming back to numerous government units as a consequence 
of higher employment levels, goods and services purchased, etc. etc.
    There are a variety of legislative measures Congress could consider 
to continue encouraging export activities. I'm sure the appropriate 
legislative parties are aware of all of them and I am confident they 
will all be given due consideration. At the same time and particularly 
since the impetuous behind the above referenced legislation did not 
come from external sources (i.e. the WTO), it seems perfectly 
reasonable that current law remain in effect as is, including the 15% 
tax rate on IC-DISC dividend distributions.
    If this country is to remain competitive in the world marketplace, 
it is IMPERATIVE export incentives be preserved. And it is cumbersome 
and problematic in a variety of ways to us as ``the players'' to 
continually be changing the playing field. Fair and reasonable 
legislation needs to be in place and it needs to be consistent in 
application from year to year. Significant plans are built around 
existing tax legislation at any point in time, and it is one thing to 
``tweek' things but it is an entirely different matter to alter 
fundamental structure!
    Thank you for your consideration, and I urge you in the STRONGEST 
terms to reconsider the ramifications of Section 7. of H.R. 6264 and 
companion S. 4026 as it currently stands. Please remove this 
``correction'' from the Bill in its entirety so that the full 
ramifications of any potential changes can be properly and thoughtfully 
considered at a more appropriate and later date.
            Respectfully,
                                                   Gordon Quitmeyer
                                                          Treasurer

                                 

                  Statement of Real Estate Roundtable
Section by Section Analysis
1. Section 470(e)(1) and (4)(B)--General Exceptions and All-Or-Nothing 
        Tax-Exempt Use Property Rule
Bill Language
Section 470(e)(1)_
    ``(1) IN GENERAL.--In the case of any property which would (but for 
this subsection) be tax-exempt use property solely by reason of section 
168(h)(6), such property shall not be treated as tax-exempt use 
property for purposes of this section for any taxable year of the 
partnership if--
    (A) such property is not property of a character subject to the 
allowance for depreciation,
    (B) any credit is allowable under section 42 or 47 with respect to 
such property, or
    (C) except as provided in regulations prescribed by the Secretary 
under subsection (h)(4), the requirements of paragraphs (2) and (3) are 
met with respect to such property for such taxable year.''
Section 470(e)(4)_
    ``(B) by treating the entire property as tax-exempt use property if 
any portion of such property is treated as tax-exempt use property by 
reason of paragraph (6) thereof.''
Commentary
    We interpret revised section 470(e)(4)(B) to mean that, if a 
partnership's interests are owned even a de minimis amount by a tax-
exempt partner, then all partnership section 470 losses would be 
subject to 470 limits if the partnership cannot satisfy an applicable 
exception, not just the losses attributable to the tax-exempt partner's 
share. This fundamentally alters the application of section 168(h)(6), 
which otherwise limits losses based on the proportional interest of the 
tax-exempt partner. We believe strongly that this change does not 
constitute a technical correction. While Congress may not have fully 
appreciated the breadth of section 168(h)(6) when it incorporated those 
rules into section 470 in 2004, Congress did understand how section 
168(h)(6) operates--and would operate within the context of section 
470--particularly with regard to its more visible features such as the 
proportionate disallowance rule. Therefore, we respectfully submit that 
the change reflected in revised section 470(e)(4)(B) represents a 
substantive change to section 470 and that would be wholly 
inappropriate for inclusion in technical corrections legislation.
    We also believe that revised section 470(e)(4)(B) is ill-advised. 
The legislation goes well beyond what is necessary to defeat SILO 
transactions and any variants involving partnership structures. Given 
the series of technical--and, in many places, vague--rules that 
partnerships must satisfy under the legislation in order to maintain 
loss allowance, a foot fault under these rules does not justify 
complete loss disallowance, particularly where there might be only de 
minimis tax-exempt participation. We consider this an overreach 
inconsistent with section 168(h)(6) and the intent of Congress in 
enacting Section 470.
    This provision also may not be in the government's own interest. 
Section 470 operates by storing up deferred losses which are then 
released when the tax-exempt partner sells its interest to a taxable 
partner. The greater the amount of losses that are deferred, the 
greater the income sheltering potential upon sale.
    Also, one hallmark of a SILO transaction is the fact that the 
taxpayer/lessor is insulated from the economic risk associated with 
true ownership of the property. A SILO is nothing more than a title 
flipping arrangement between taxable and tax-exempt entities for 
purposes of transferring tax benefits. The taxable party's investment, 
plus a pre-determined rate of return, is virtually guaranteed by the 
terms of the lease and side agreement terms. The tax-exempt entity is 
economically compelled to re-purchase the property and sets aside the 
funds to ensure its ability to do so. The proposed language in section 
470(e)(2) and (3) addresses only the set aside part of the SILO 
arrangement. We believe the economic risk side of the arrangement is 
equally relevant and should also be used in testing whether a 
partnership should be subject to section 470. If the taxable partner 
has economic risk with respect to its interest, the partnership is not 
being used to replicate a SILO and should not be subject to the 
application of section 470. An exception based on the taxable partner 
having economic risk would be consistent with the objectives of section 
470(d) (i.e., the exception for ``legitimate'' leases).
    Further, a clear, objective, and easily administrable way to remove 
a segment of real estate partnerships that are not engaged in, or being 
used to replicate, SILOs from the inappropriate application of section 
470 is to define qualified allocations by reference to the ``fractions 
rule.'' A partnership that complies with the fractions rule cannot be 
used to replicate a SILO. Therefore, we strongly believe that using the 
fractions rule as the touchstone for determining if a partnership's 
allocations are qualified cannot have any impact on the revenue score 
associated with the proposal or with the proposal's classification as a 
technical correction. Further, a reference to the fractions rule could 
be ``updated'' to the extent any future legislation modifies that rule. 
Thus, although the fractions rule is not perfect, we are unaware of any 
tenable reason why it should not be used in defining qualified 
allocations, particularly given that the use of such rule would provide 
thousands of legitimate real estate partnerships with certainty that 
they are not subject to section 470.
    Finally, it is not clear whether the exception for non-depreciable 
property applies to non-amortizable property. While the bill language 
only refers to non-depreciable property, the Joint Committee on 
Taxation (``JCT'') description of the bill (JCX-48-06) refers to both 
non-depreciable and non-amortizable property as being covered by the 
exception. We see no reason why non-amortizable property should not be 
excluded as well from the application of section 470.
Recommendation
    (i) Apply Section 470 only to losses attributable to the tax-exempt 
partner(s) interest(s) in the partnership.
    (ii) Add an ``Economic Risk'' test as a fourth (mutually exclusive) 
exception. For example: ``(D) each taxable partner has economic risk 
with respect to its partnership interest, as evidenced by the 
investment having a meaningful probability that the after-tax internal 
rate of return to the taxable partner could vary by at least a pre-
defined and reasonable range.'' We have suggested in the prior meetings 
a range of 300 basis points of the projected partnership returns as 
represented by the partnership sponsor. We encourage that this, or a 
similar approach, be adopted.
    (iii) A carve-out is necessary for ``pure'' preferred interests. 
Such preferred interests often will not provide for significant 
economic risk evidenced by a projected variable return. At the same 
time, such interests will not present the opportunity for producing 
SILO-like results, since the interests will not provide for loss 
allocations, except in situations where the partnership has experienced 
losses at a level that have caused the elimination of the capital of 
all other partners.
    (iv) Clarify that non-amortizable assets are not subject to section 
470.
    (v) Provide that, for purposes of section 470, section 168(h)(6)(A) 
shall be applied by disregarding section 168(h)(6)(B) and instead 
treating an allocation as a ``qualified allocation'' if it satisfies 
the rules of section 514(c)(9)(E). All tax-exempt partners would 
qualify for this allocation treatment. The definition of ``qualified 
organization'' in section 514(c)(9)(C) would not apply for purposes of 
section 470. [See comments above].
2. Section 470(e)(2)(A) and (C)--The ``Arrangement and Set Aside'' 
        Requirement.
Bill Language
    Section 470(e)(2)(A) subjects to section 470 loss limits an 
arrangement or set aside:
    (i) to or for the benefit of any taxable partner of the partnership 
or any lender, or
    (ii) to or for the benefit of any tax-exempt partner to satisfy any 
obligation of the tax-exempt to the partnership, any taxable partner, 
or any lender.
    Section 470(e)(2)(C) provides that an arrangement includes a loan 
by a tax-exempt partner or the partnership to any taxable partner, the 
partnership, or any lender. (Technically, these concepts should be 
broken apart, as there cannot be a loan by the partnership to the 
partnership.)
Commentary
    While the comprehensive scope of the ``benefit of any lender'' rule 
may be appropriate for leasing transactions, we believe that it needs 
to be narrowed and tailored as applied to partnerships. Implicit in the 
existing rule for leases is the notion that such an arrangement or set 
aside is designed to eliminate or significantly mitigate the economic 
risk of the beneficiary of the arrangement or set aside. Because not 
all arrangements or set asides in the partnership context are intended 
to eliminate or reduce the economic risk of taxable partners, we 
believe that the rule for partnerships and their partners should be 
limited explicitly to arrangements or set asides that do, in fact, 
reduce or eliminate the economic risk of the beneficiaries (perhaps in 
lieu of our recommendation above regarding a fourth general exception 
from section 470 and/or the economic relationship test in the bill 
language discussed below).
    For example, without such a limitation the rule effectively would 
prevent partnerships from defeasing loans that may not be prepaid. Many 
commercial real estate loans are put into conduits, such as REMICs. 
These loans may not be pre-paid because doing so would frustrate the 
expected return to conduit investors. A partnership interested in 
selling the property subject to the conduit loan must defease the 
collateral with U.S. securities expected to provide a similar cash flow 
as the property. In this regard, the ``benefit of any lender'' language 
would put partnerships at a significant economic disadvantage vis-a-vis 
other entities.
    Also, loans by a tax-exempt partner to the partnership could be 
very common. If a partnership encounters economic difficulty, it is not 
at all unusual for partners to begin funding operations through debt 
rather than equity in order to preserve claims for repayment vis-a-vis 
other creditors. Letters of credit, etc. are used to support guarantee 
obligations of tax-exempt partners with respect to partnership debt. 
Credit support arrangements are used to fund capital calls. Also, 
partnerships sometimes borrow money relying on the credit of the tax-
exempt partner.
    More generally, advancing funds to a partnership through a 
combination of debt and equity is very common. In addition, loans by a 
partnership to taxable partners are quite common. Also, tax-exempts may 
loan money to employee/service providers to acquire interests in a 
partnership. As another example, management companies often lend money 
to managers to allow the managers to acquire interests as a means of 
incentive-based compensation.
    Partner to partner loans also come into play where there is a 
default on a capital contribution obligation. Where one partner fails 
to fund a capital call, another partner can contribute for that 
partner, with the operative documents considering the advance to be a 
loan between the partners. As is explained below, the proposed language 
appears to have ``zero tolerance'' for such an arrangement, even though 
the arrangement has nothing to do with a SILO.
    Finally, we would note that the application of section 470 would 
not be limited only to those taxable partners which are the 
beneficiaries of an arrangement or set aside, so we would be interested 
in better understanding how the Government anticipates applying section 
470 to a particular taxable partner on the basis of a loan among other 
partners--of which the taxable partner may not even be aware.
Recommendations
    (i) Problems created by the proposed language relative to partner 
loans causing legitimate arrangements to be covered could be alleviated 
to some extent by limiting the language to arrangements or set asides 
that reduce or eliminate economic risk of their beneficiaries or, 
similarly, by adopting the ``Economic Risk'' exception discussed above 
(and the other modifications discussed below).
    (ii) We understand that that lender arrangements and set asides are 
included as types of defeasance in section 470(d) primarily to prevent 
loans to lessors that will be either (1) forgiven or (2) satisfied 
through payment by the lessee to the lender. If this is correct, then 
the partnership rule for lender arrangements and set asides should be 
narrowed so as to only capture situations where the loan arrangement is 
intended to serve as a device to ensure the return of the taxable 
partner's investment in the partnership (e.g., repayment of a loan to a 
taxable partner is contingent upon the return of the partner's 
investment).
3. Section 470(e)(2)(B)--Allowable Partnership Amount.
Bill Language
    ``Allowable partnership amount'' is defined to be the greater of:
    (i) (a) the sum of 20 percent of the sum of the taxable partners' 
capital accounts, plus
    (b) 20 percent of the sum of the taxable partners' share of 
recourse liabilities of the partnership, or
    (ii) 20 percent of the aggregate debt of the partnership.
Commentary
    Given the breadth of arrangements and set asides that would be 
subject to section 470, the allowable partnership amount clearly should 
be higher than 20%, although it really is somewhat doubtful that any 
amount will be sufficient to adequately exempt non-abusive 
partnerships. The need for a higher allowable amount is particularly 
acute when a partnership is in the liquidation phase. In the 
liquidation phase, which can take a year or more depending on market 
conditions, the last sale or last few sales realistically may put a 
partnership over the 20% threshold (e.g., last asset is worth $100; 
sell it and hold proceeds for distribution; the $100 awaiting 
distribution is above the 20% threshold). This problem is made even 
more acute by the fact that, when in the liquidation phase, a 
partnership may not be able to take advantage of the 12-month rule 
(described below) due to the continuing sales and holding of cash.
    Furthermore, the 20% threshold by reference to taxable partners' 
capital accounts and recourse debt share may not give much help where a 
partnership has de minimis taxable partners participating, especially 
in light of the fact that revised section 470(e)(4)(B) (discussed 
above) would eliminate the section 168(h)(6) proportionate disallowance 
rule. A partnership with minimal participation by taxable partners is 
not an unusual arrangement. In numerous investment partnerships, the 
tax-exempt partner(s) provide(s) the overwhelming amount of the 
capital. They are the ``finance'' partners. The taxable partner is 
often the real estate company sponsor that is putting in some capital 
along side the tax-exempt but its primary contribution is its real 
estate management, development, and investment expertise.
    The alternative allowable amount of 20% of aggregate partnership 
debt also will not give much help where partnership is not highly 
leveraged. This is a particularly likely scenario in liquidation phase 
when debt is being paid off.
Recommendations
    (i) The allowable amount should be increased to at least 50 
percent. Most SILO arrangements had defeasance levels for taxable 
partners of nearly 100 percent. The 50 percent threshold further makes 
sense since section 470(d) already permits the Treasury Secretary to 
increase the threshold to 50% for leases under certain circumstances.
    (ii) Section 470 should not apply when a partnership is in the 
liquidation phase, perhaps pursuant to a plan of liquidation. There is 
little, if any, opportunity to transfer tax benefits and defease a 
taxable partner's risk in this relatively short period. Moreover, any 
deferred losses likely will be released in any case during liquidation 
upon disposition of the tax-exempt use property (see present-law 
section 470(e)(2)).
    (iii) Similarly, Section 470 should not apply to funds in escrow or 
otherwise held due to litigation.
    (iv) Another allowable amount standard should be the aggregate at 
risk amounts of the partners as determined under Section 465 since this 
represents the amount of economic risk the partners have invested. At-
risk amounts under Section 465 are cash, basis of property contributed, 
recourse debt and qualified non-recourse financing.
4. Section 470(e)(2)(B)(iii)--No Allowable Partnership Amount for 
        Arrangements Outside the Partnership.
Bill Language
    This section provides that the allowable partnership amount shall 
be zero with respect to any set aside or arrangement under which any of 
the funds referred to in subparagraph (A) are not partnership property.
Commentary
    Given the broad definition of arrangement, the absolute prohibition 
on arrangements and set asides outside the partnership will sweep many 
partnerships, not just the involved partners, into Section 470 with 
absolutely no means of relief. A common example of outside defeasance 
would be a situation in which an employer loans an employee money to 
buy a partnership interest in a fund sponsored by the employer and the 
employee puts up a letter of credit as part of the repayment terms.
    As another example, if a partner guarantees partnership debt, the 
lender often may require that partner to post collateral to secure the 
loan in a manner that constitutes an impermissible arrangement; given 
the absolute prohibition on defeasance outside the partnership, this 
legitimate arrangement would cause the partnership to fall outside the 
scope of the exception and to be subject to section 470 with respect to 
depreciable property. Further, as was mentioned above, legitimate loans 
among partners and between partners and partnerships also could cause 
partnerships to fall outside the scope of the exception.
    Again, since the application of section 470 would not be limited 
only to those taxable partners which are the beneficiaries of an 
arrangement or set aside, we would be interested in better 
understanding how the Government anticipates applying section 470 to a 
taxable partner on the basis of transactions among other partners--of 
which the taxable partner may not even be aware--particularly in light 
of the absolute prohibition against arrangements outside the 
partnership.
Recommendation
    Outside partnership defeasance should be allowed the same relief 
allowed inside partnership defeasance. We are not aware of any reason 
why outside partnership defeasance is more pernicious than inside 
partnership defeasance such that no allowable amount of defeasance 
should be permitted, particularly with the heightened potential that 
section 470 could apply to taxable partners who simply are unaware of 
arrangements that might exist among other partners and that are 
unrelated to the partnership.
5. Section 470(e)(2)(D)(i)--Exception for Short Term Funds
Bill Language
    This provision provides that funds which are set aside, or subject 
to any arrangement, for a period of less than 12 months shall not be 
taken into account under subparagraph (A). Except as provided by the 
Secretary, all related set asides and arrangements shall be treated as 
1 arrangement. The JCT description of the bill states that a series of 
multiple set asides or arrangements which combine to exceed the 12-
month threshold will not be eligible for the exception. It goes on to 
say that the exception should not be interpreted to permit taxpayers to 
effectively extend the 12-month threshold by use of separate and 
fungible set asides or arrangements.
Commentary
    While we welcome any safe harbor relief from the application of 
section 470, the exception for short-term funds raises several 
interpretive and operational questions that create doubts as to its 
usefulness to non-abusive partnerships. For instance, what does the 
term ``related'' mean in this context? Cash and certain types of 
securities are completely fungible. Would the following example be 
considered a related multiple set aside which combines to exceed the 12 
month threshold?
    Partnership sells a non-leveraged asset for $100 and holds the 
proceeds in the partnership's bank account for 90 days before 
distributing them. On day 60, the partnership sells another non-
leveraged asset for $200 and holds the proceeds in the same account 
until they are distributed 11 months later. It's clear that the sale 
proceeds from each of the two sales, if viewed completely separately, 
are distributed within the allotted 12 months. But, is the intention of 
this language such that the $100 of proceeds from the first sale 
actually is considered set aside for 13 months since there is at least 
$100 in the partnership bank account for that period?
    If this interpretation is correct, partnerships that are frequently 
selling property and distributing proceeds will be left to rely solely 
on the allowable amount for relief. When a partnership hits liquidation 
phase, the problem is exacerbated as properties will be sold on a 
continuous basis.
Recommendations
    (i) The term ``related'' needs to be clarified beyond the 
discussion in the JCT description of the bill.
    (ii) At a minimum, funds held by the partnership should be deemed 
not to be set aside once the partnership has adopted a plan of 
liquidation, with some reasonable period of time, such as two years, 
allowed for the partnership to carry out its liquidation.
6. Section 470(e)(2)(D)(ii)--Economic Relationship Test
Bill Language
    The provision provides an exception for funds subject to an 
arrangement, or set aside or expected to be set aside, that bear no 
connection to the economic relationships between and among the partners 
and that bear no connection to the economic relationships between the 
partners and the partnership. Any funds that bear a connection either 
to the economic relationship between two or more partners or to the 
economic relationship between the partnership and any partner do not 
meet the exception and must be taken into account.
Commentary
    Again, while we welcome any efforts to narrow the application of 
section 470 with regard to non-abusive partnerships, it is unclear what 
this provision means. We understand that this provision may have been 
included given that the bill does not designate who can (or cannot) set 
aside funds or be subject to an arrangement to or for the benefit of a 
partner, the partnership, or any lender. Nonetheless, the ``no 
connection'' language could be interpreted in a very restrictive manner 
such that it would not apply in certain common situations in which 
parties may have some relationships, but not of a nature that could 
give rise to SILO concerns.
    For example, a taxable and tax-exempt party may be partners in one 
partnership, with the tax-exempt partner lending funds to the taxable 
partner in a wholly different context. Although the loan has nothing to 
do with the joint investment of the parties in the partnership, the 
loan does bear a clear connection to the economic relationship of the 
taxable partner and tax-exempt partner.
Recommendation
    This provision is in need of elaboration, which we hope would 
clarify that it exempts from the application of section 470 
arrangements and set asides that do not, in a real and substantial way, 
affect the relationships of the relevant parties in a capacity that 
relates to the partnership being analyzed under section 470. Also, the 
provision needs to explain how lenders are taken into account--for 
example, by clarifying that arrangements or set asides with respect to 
lenders are only taken into account where such arrangements affect the 
economic relationships among the partners or among the partners and the 
partnership.
    We believe that the recommendation provided above (with regard to 
section 470(e)(2)(A) and (C)--the ``arrangement and set aside'' 
requirement) to limit the definition of defeasance to arrangements or 
set asides that reduce or eliminate the risk of loss for the 
beneficiaries of such arrangements or set asides would largely remove 
the need for the ``no economic connection'' exception. The 
recommendation also would provide a much clearer and more useful 
expression of the underlying principle of section 470 as it applies to 
partnerships.
7. Section 470(e)(2)(D)(iii)--Reasonable Person Standard
Proposed Language
    For purposes of subparagraph (A)(ii), funds shall be treated as set 
aside or expected to be set aside only if a reasonable person would 
conclude, based on the facts and circumstances, that such funds are set 
aside or expected to be set aside.
Commentary
    In a SILO transaction, any amount set aside would seem to be for 
the purpose of defeasing the taxable lessor. There are not many reasons 
in a lease arrangement to set aside cash other than to protect the 
economic interest of the lessor. In reality, the reasonable person test 
most likely was not envisioned by lawmakers to be applied in the lease 
context since Section 470 was designed as a deterrent to SILO 
transactions. In the partnership context, however, Section 470 is an 
operational statute. Further, given the nature of a partnership, all 
funds are held for the benefit of those with an economic stake in the 
venture, including lenders and partners. Presumably, the ``reasonable 
person'' standard was intended to identify only a subset of partnership 
funds that are segregated and are not available for general use in 
connection with the business of the partnership.
    Therefore, the reasonable person test needs definition so it can be 
applied with greater certainty. Further, consideration needs to be 
given as to how partnerships could establish with certainty the 
purposes for which funds are set aside in a manner that is not 
overwhelmingly administratively burdensome, given fungible money and 
tracing concerns.
Recommendation
    We recommend limiting the application of defeasance to ``set asides 
that a reasonable person would conclude, based on facts and 
circumstances, are made to provide distributions to the taxable 
partner, (or payment to a lender who has advanced funds in an 
arrangement designed to support return of the taxable partner's 
investment), so as to reduce the partner's economic risk of loss.'' 
This would tie in with the Economic Risk test discussed above. Further, 
given the subjectivity that always will be inherent in a ``no set 
aside'' requirement, using the fractions rule to measure whether 
allocations are qualified at least would provide an objective means by 
which real estate partnerships could be certain that section 470 is not 
applicable.
8. Section 470(e)(3)(A)--Option to Purchase.
Bill Language
    (A). In General. The requirement of this paragraph is met for any 
taxable year with respect to any property owned by the partnership if 
(at all times during such taxable year)--
    i. Each tax-exempt partner does not have an option to purchase (or 
compel distribution of) such property at other than fair market value.
    ii. Each tax-exempt does not have an option to purchase any direct 
or indirect interest in the partnership at other than fair market 
value.
    iii. Each taxable partner does not have an option to sell (or 
compel distribution of) such property to a tax-exempt partner at other 
than fair market value.
    iv. Each taxable partner does not have an option to sell a direct 
or indirect interest in the partnership to a tax-exempt partner at 
other than fair market value.
    v. The partnership does not have an option to sell (or compel 
distribution of) such property to a tax-exempt partner at other than 
fair market value.
    vi. The partnership does not have an option to sell a direct or 
indirect interest in the partnership to a tax-exempt partner at other 
than fair market value.
Commentary
    The bill language above is dissected into the transactions between 
the parties and properties described in this portion of the bill: We 
find the transaction described in (iii) to be confusing.
    With respect to (iii), the taxable partner does not own the 
property held by the partnership and thus seemingly could not be under 
any obligation to transfer such property to a tax-exempt partner. If 
there is a concern about a tax-exempt partner taking a distribution of 
property and then selling such property, that series of transactions 
should be specifically described.
    Regarding the tax-exempt partner's option to purchase property at 
fair market value, the statute only addresses fair market value with 
respect to the partnership property. Presumably, the Government also is 
concerned that the credit given to the tax-exempt partner for the 
interest that is redeemed reflects the fair market value of that 
interest. This raises the difficult issue of how one determines the 
fair market value of a partnership interest. Taxpayers and the 
Government have wrestled with this issue in the past. In the proposed 
regulations regarding ``partnership interests for services,'' the IRS 
decided to allow taxpayers to choose between liquidation value and a 
``willing buyer--willing seller'' approach.
    Also, would there be a difference in the measurement of fair market 
value with respect to the partnership interest where a partner is 
receiving a distribution of property from the partnership (i.e., the 
regulations under section 704(b) generally look for such distributions 
to be in accordance with positive capital accounts) as compared to when 
one partner is selling its interest to another partner (i.e., such 
transactions generally take into account factors such as control in 
management, liquidity of the investment, etc., and rarely focus on 
positive capital accounts in determining the purchase price)? Such a 
disparity in analysis seems difficult to justify, although something 
would have to be done to bridge the gap between these two situations.
    Non-fair market value options in the context of employee/service 
provider interests present another issue. Partnership agreements often 
allow the partnership to reacquire a partnership interest when a 
service provider partner leaves for the amount paid for the interest, 
book value, or some other amount that does not reflect fair market 
value. This is meant to establish a penalty element for leaving the 
employ of the sponsor. This is not addressed in the proposed language. 
An exception should be provided for these re-acquisitions.
    In general, note that it may not be economically feasible for 
partnerships to renegotiate existing option agreements with employees 
and option holders in order to ``satisfy'' the bill's exception, 
particularly given the leverage of the option holder and changes in 
economic circumstances since the option was put in place. This raises 
effective date concerns, discussed below.
9. Section 470(e)(3)(B)--Option For Determination of Fair Market Value
Bill Language
    Under regulations prescribed by the Secretary, a value of property 
determined on the basis of a formula shall be treated for purposes of 
subparagraph (A) as the fair market value of such property if such 
value is determined on the basis of objective criteria that are 
reasonably designed to approximate the fair market value of such 
property at the time of the purchase, sale, or distribution, as the 
case may be.
Commentary
    The statute appears to only grant regulatory authority. There are 
numerous purchase and sale options in partnerships based on formulas 
designed to approximate fair market value. These partnerships are 
operational now and cannot wait for regulations to be issued.
    Additionally, there are numerous types of arrangements designed to 
approximate fair market value that are not based on an objective 
criteria formula. An example of one such arrangement is where one 
partner can name a price to buy another partner's interest. The offeree 
can accept or has a right to buy the offering party out at the offered 
price. This method of determining sales price seemingly would 
approximate fair market value, but the interest is not being offered to 
the broader public, so one cannot be sure. The price determination is 
not made pursuant to a ``formula'', and it may not even meet the 
``objective criteria'' requirement since, it is a proffer, not a 
criterion. There clearly is substance though, given that the offering 
partner presumably is not going to offer to buy out the other partner 
for an amount that they are not willing to accept themselves.
    Finally, a right of first refusal arrangement at a named price is 
not really formula based, although it seemingly should achieve a fair 
market value price. No appraisal would be undertaken but you would have 
a willing buyer-seller situation.
Recommendations:
    (i) Statutory guidance should be provided, not merely regulatory 
authority.
    (ii) Statutory language and regulatory authority should provide for 
a formula or arrangement that is designed to approximate current fair 
market value at the time of option exercise. The language ``determined 
on the basis of objective criteria that are'' should be deleted since 
not every arrangement is, or must be, based on objective criteria in 
order to achieve fair market value
    (iii) Where the price for the interest or partnership property is 
determined by reference to a bona fide offer from an unrelated third 
party bargaining at arms' length or on the basis of adverse interests, 
such price should be conclusively presumed to represent fair market 
value.
10. Section 470(g)(5)--Tax-Exempt Partner Definition
Proposed Language
    The term `tax-exempt partner' means, with respect to any 
partnership, any partner of such partnership which is a tax-exempt 
entity within the meaning of section 168(h)(6).
Commentary
    The definition of tax-exempt entity under section 168(h)(6) 
provides in (F)(1) that a tax-exempt controlled entity shall be treated 
as a tax-exempt entity. As a result, a tax-exempt partner cannot 
relieve a partnership from section 470 by owning its interest through a 
taxable ``blocker'' corporation and thereby agreeing to fully subject 
itself to tax. A blocker corporation is often used to ensure that the 
tax-exempt does not incur UBTI.
    We believe that this is a substantive change to section 168(h)(6) 
and not a technical correction. Congress did not address, or express an 
intention to address, the operation of section 168(h)(6) when it 
enacted section 470.
Recommendation
    An exception should be included in the proposed definition of tax-
exempt entity to exclude tax-exempt controlled entities.
11. Section 470(h)(C)(3)--Tiered and Other Partnership Regulatory 
        Authority--
Proposed Language
    The language grants regulatory authority to ``provide for the 
application of this section to tiered and other related partnerships.''
Commentary
    A large number of partnerships are part of tiered structures. Clear 
and comprehensive tiered partnership rules are necessary given the 
broad reach of the proposed statute before section 470 is applied to 
defer losses of any partnership by reason of section 168(h)(6). 
Otherwise, it will be extremely difficult, if not impossible, to apply 
section 470 in the context of tiered partnerships or even to figure out 
whether or not section 470 applies to an entity in a tiered structure. 
Is it correct to presume that arrangements and set asides anywhere in 
the tiered structure will give rise to application of section 470? If 
not, will section 470 apply only to the partnership(s) in the tiered 
structure that have taxable and tax-exempt partners?
    How is the 20% allowable amount rule applied in a tiered 
arrangement? Is an arrangement or set aside in existence at any level 
other than the level at which property subject to section 470 is held 
treated as ``inside'' defeasance (with the 20% allowable amount rule 
available) or ``outside'' defeasance'' (with no allowable amount rule 
available)?
    Also, as discussed earlier, options moving property or partnership 
interests up one or more tiers may not be considered fair market value 
and thus could give rise to application of section 470. It seems like 
it would only be a problem if the property is moving in a way that tax-
exempt participation is increasing. But, how is this determination made 
if the ultimate make-up of the most upper-tier partners is unknown? How 
do lower-tier partnerships report out on K-1s when they do not know 
what is going on above them? Does this create the same situation that 
existed with respect to section 199 where every partnership arguably 
had to report relevant information for section 199 on the off-chance 
that a partner might want to take advantage of section 199?
Recommendation
    There are no easy answers to questions dealing with how to apply 
Section 470 in the context of tiered partnerships. Nonetheless, 
taxpayers are entitled to arrange their business affairs in a manner 
such that tax results accompanying such affairs are reasonably 
determinable. The tiered partnership rules would be of much less 
concern if an exception to section 470 were adopted which could be 
readily applied at the partnership level where the property that is 
subject to section 470 is held.
    We, along with numerous other groups representing a variety of 
industries, have previously endorsed a regime that would except 
property from section 470 so long as a tax-exempt partner does not use 
or have operational control with respect to property held by the 
partnership. We continue to believe that, in the vast majority of 
cases, this rule provides a sound indicator of partnerships that might 
engage in a SILO-like transaction. This rule also has the benefit of 
applying by reference to information that would be available at the 
level of the partnership that holds property subject to section 470. We 
respectfully urge reconsideration of this approach, even if the 
approach is utilized in the context of less than all property classes 
that might be held by a partnership.
10. Section 470(b)(C)(4)--Regulatory Catch All Authority
Proposed Language
    The proposed language grants regulatory authority to provide for 
the treatment of partnership property (other than property described in 
subsection (e)(1)(A)) as tax-exempt use property if such property is 
used in an arrangement which is inconsistent with the purposes of this 
section determined by taking into account one or more of the following 
factors:
    (A) A tax-exempt partner maintains physical possession or control 
or holds the benefits and burdens of ownership with respect to 
suchproperty.
    (B) There is insignificant equity investment in such property by 
any taxable partner.
    (C) The transfer of such property to the partnership does not 
result in a change in useof such property.
    (D) Such property is necessary for the provision of government 
services.
    (E) The deductions for depreciation with respect to such property 
are allocated disproportionately to one or more taxable partners 
relative to such partner's risk of loss with respect to such property 
or to such partner's allocation of other partnership items.
    (F) Such other factors as the Secretary may determine.
Commentary
    This grant of regulatory is unacceptably broad and vague. Further, 
only ``one or more'' of the factors may be all that is required. Items 
(B), the insignificant equity for taxable partners factor and (E), the 
disproportionate allocations of depreciation to taxable partners 
relative to risk of loss factor, are extremely troubling. Item (E), in 
particular, seems to be an indirect attempt to permit the Treasury 
Department to alter the operation of the section 465 at-risk rules with 
respect to a limited category of partnerships.
    Item (F) is also troubling given the lack of clear guidance as to 
what kinds of partnership arrangements Congress did, and did not, 
intend to be covered by section 470. This item resembles the broad 
grant of regulatory authority that was contained in the 
Administration's proposed SILO legislation but was soundly rejected by 
Congress on the grounds that it would have been an inappropriate 
delegation of legislative authority to the Treasury Department.
    Given the lack of clear definition as to what the purpose of the 
section is, this appears to grant very broad authority to the 
Government to address by regulation issues not within the statutory 
construction or Congressional intent of Section 470. This would be even 
more troubling if the regulations could be retroactive.
Recommendation
    This regulatory authority should be eliminated. At a very minimum, 
it should be clarified, narrowed significantly and made more neutral 
(e.g., include regulatory authority to exclude transactions from 
section 470 that do not exhibit one or more of these factors). Indeed, 
as we previously suggested, partnerships that do not qualify for any of 
the bill's exceptions should be provided a mechanism by which they can 
establish that they are not engaged in the kind of SILO-replication 
abuse that Congress intended to prevent in enacting section 470. These 
factors would seem to do the opposite.
13. Effective Date
Proposed Language
    The amendments made by this section shall take effect as if 
included in the provisions of the American Jobs Creation Act of 2004 to 
which they relate.
Commentary
    This language would sweep in losses for property acquired after 
March 12, 2004, with respect to taxable years beginning after 12/31/05. 
Given the moratoria provided in Notices 2005-29 and 2006-2, taxpayers 
and advisors have justifiably anticipated that section 470 would be 
narrowed in the partnership context so as to more effectively target 
SILO-like transactions. Partnerships never saw the particular 
requirements of the bill's exceptions (or the expansion of the amount 
disallowed) coming and should not be bound by the particular 
requirements and rules. It will not be possible to unwind many 
arrangements that will throw into section 470 partnerships that do not 
meet the ``set aside'' and ``option'' exception (i.e., defeasance with 
respect to loans that could not be prepaid; options that are an 
integral part of the partners' economic deal, etc.). Thus, partners 
often will not be able to use self-help to get out of section 470.
Recommendation
    Section 470 (in its current form and as amended) should not be 
applied to defer losses of any partnership with respect to property 
acquired before the date the Technical Corrections bill was introduced 
(or is re-introduced). Further, grandfather relief should be provided 
for options, set asides, and other arrangements put into place (or 
subject to a binding commitment) before such date. Providing such an 
effective date should not cause the bill to lose revenue or open the 
door to SILO abuses given that the enactment of section 470 in 2004 
should have deterred the promotion of partnerships as vehicles to 
circumvent the application of section 470. It also would be consistent 
with effective date relief provided in certain other sections of the 
bill.

                                 

                                           Rebar & Associates, PLLC
                                                   October 31, 2006
    I am writing to you to express my concerns with Section 7 of the 
Technical Corrections Act of 2006 and specifically with the changes 
proposed to the treatment of dividends paid by an IC DISC.
    We oppose the proposed changes to the treatment of dividends paid 
by an IC DISC. First, this change does not seem fitting as a 
``technical correction''. Rather it is a fundamental change in the 
treatment of dividends as paid by an IC DISC. We believe any such 
fundamental change in tax law should be addressed the same way in which 
any other fundamental changes in tax law are addressed, which is 
through the tax approval process and not as a technical correction.
    Second, the suddenness of the enactment date of the proposed change 
undermines basic business planning. We are a CPA firm who provides 
services to closely held businesses. These businesses for the most part 
are under $25mm in annual sales and owned by less than five people. All 
are US companies who provide US jobs and export their goods. These 
businesses plan annually and as a part of that planning take into 
consideration tax costs and benefits when making their decisions. Most 
all of the business that avail themselves of the treatment of IC DISC 
dividends make such payments at the end of the year. This is because 
most small businesses do not know where their profitability will come 
out until late in the year. To suddenly adversely change the tax law 
will have a very negative effect on many small business owners 
undermining solid business planning and harming the small business 
owner.
    I respectfully request you eliminate this provision from the 
technical corrections act leaving it to be addressed through the tax 
writing process. If it is the committee's belief that this major change 
in tax treatment of dividends is within the technical corrections 
process, I respectfully request that such enactment date be effective 
December 31, 2006 so as to not damage small businesses that have 
planned for and relied upon this area of tax law. The IC DISC rules 
were put in place to help small businesses who provide U.S. based 
employment and who export to foreign countries. This sudden change in 
the tax law late in the year will have the opposite effect.
            Respectfully submitted,
                                                    Robert J. Rebar
                                                    Managing Member

                                 

             New York State Society of Certified Public Accountants
                                           New York, New York 10016
                                                   October 31, 2006
House Ways and Means Committee
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Ladies and Gentlemen:

    The New York State Society of Certified Public Accountants, 
representing 30,000 CPAs in public practice, industry, government and 
education, submits the following comments to you regarding the 
technical corrections bill captioned above.
    The NYSSCPA thanks Ways and Means for the opportunity to comment on 
this proposed legislation.
    The NYSSCPA International Taxation Committee deliberated the bill 
and prepared the attached comments. If you would like to discuss the 
comments further with the Committee, please contact Cristina N. Wolff, 
CPA, Chair, International Taxation Division Committee at 212-682-1600 
or Ernest J. Markezin, CPA or William Lalli, CPA, NYSSCPA staff, at 
212-719-8300.
            Sincerely,
                                               Thomas E. Riley, CPA
                                                          President
TAX TECHNICAL CORRECTIONS ACT OF 2006 HR6264--SECTION 7, AMENDMENT 
        RELATED TO THE JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 
        2003 (REPEAL OF 15% IC-DISC)
Principal Drafter
Mitchell Sorkin, CPA
NYSSCPA 2006-2007 Board of Directors
    Thomas E. Riley, President
    David A. Lifson, President-elect
    Mark Ellis, Secretary
    Neville Grusd, Treasurer
    Sharon S. Fierstein, Vice President
    Richard E. Piluso, Vice President
    Robert E. Sohr, Vice President
    Louis Grumet, ex officio
    Edward L. Arcara
    Deborah L. Bailey-Browne
    Thomas P. Casey
    Debbie A. Cutler
    Anthony G. Duffy
    David Evangelista
    Joseph M. Falbo, Jr.
    Myrna L. Fischman, PhD.
    Daniel M. Fordham
    Phillip E. Goldstein
    Scott Hotalen
    Don A. Kiamie
    Lauren L. Kincaid
    Stephen F. Langowski
    John J. Lauchert
    Kevin Leifer
    Elliot A. Lesser
    Howard B. Lorch
    Beatrix G. McKane
    Mark L. Meinberg
    Ian M. Nelson
    Jason M. Palmer
    Robert A. Pryba Jr.
    Robert T. Quarte
    Judith I. Seidman
    C. Daniel Stubbs, Jr.
    Anthony J. Tanzi
    Edward J. Torres
    Liren Wei
    Ellen L. Williams
    Margaret A. Wood
    Richard Zerah
NYSSCPA 2006-2007 Tax Division Oversight Committee
    Susan R. Schoenfeld, Chair
    Scott M. Cheslowitz
    Robert L. Goldstein
    Richard L. Hecht
    Janice M. Johnson
    Alan D. Kahn
    Stephen A. Sacks
    David Sands
    Theodore J. Sarenski
    P. Gerard Sokolski
    Neil H. Tipograph
    Stephen P. Valenti
    Maryann M. Winters
    Cristina N. Wolff
NYSSCPA 2006-2007 International Taxation Committee
    Cristina N. Wolff, Chair
    Paul R. Allutto
    Nancy L. Berk
    William B. Blumenthal
    Ben J. Bogdanowicz
    James P. Booth
    Sheila Brandenberg
    Jerry K. Brockett
    Susan L. Brown
    Thomas A. Butera
    Ronald Carlen
    Peter G. Chen
    Jude Coard
    Itzhak Cohen
    Paul Dailey
    Steven Davis
    Alan R. Deutsch
    Thomas J. Flattery
    Alfred Floramo
    Melissa S. Gillespie
    Kadir R. Karabay
    Norman A. Levine
    Antonio Malavasi
    Richard W. Margaroli
    Richard D. Nichols
    Gerard P. O'Beirne
    Lawrence A. Pollack
    Monica A. Rannige
    Donald Reisinger
    Gentiana Shameti
    Stanley G. Sherwood
    Lawrence E. Shoenthal
    Mitchell Sorkin
    Jonathan Tierney
    Philip Van Schuyler
    Ann-Christine Westerlund
    Paul Zambito
General Comments
    The International Taxation Committee (the Committee) of the New 
York State Society of Certified Public Accountants has reviewed the 
above-referenced technical corrections bill and has the following 
comments:
    If this legislation is passed, it may force taxpayers who have 
established Interest Charge-Domestic International Sales Corporations 
(IC-DISCs) to open up facilities abroad to avoid increased taxes which 
will ultimately cost the United States in jobs and growth.
    As part of the Jobs and Growth Tax Relief Reconciliation Act of 
2003, Congress introduced the 15% long-term capital gains tax along 
with the 15% rate on qualified dividends. The purpose of this change 
was to reduce income tax on investment income and provide an incentive 
for investing in corporate America.
    The proposed section of the bill to exclude application of the 
lower 15% dividend rate to IC-DISC distributions appears not to be a 
technical correction, but rather a significant shift in policy with 
repercussions throughout the small and mid-sized business community, 
especially having a negative impact on the small domestic manufacturer 
who exports.
    Many domestic manufacturers who export their goods have a difficult 
time competing in world markets where wages and related production 
costs are less expensive than they are in the U.S. Congress tried to 
redress this business segment by passing the Extraterritorial Income 
Exclusion Act in 2000. As a result of pressure from the European Union, 
Congress was forced to repeal this law with a phase out, but retained 
some grandfathering provisions that have now also been repealed. 
Congress then decided to pass the Domestic Production Activity 
Deduction that would help U.S. manufacturers and qualified industries. 
However, this law falls short compared to the earlier Extraterritorial 
Income Exclusion.
    Many smaller companies have found some refuge in utilizing an IC-
DISC to reduce their costs and stay competitive by taking advantage of 
distributions received from IC-DISCs that are taxed at the 15% rate.
    Although the use of IC-DISCs was no longer beneficial to large 
American corporations due to the inability to defer the tax on the 
income attributed to sales in excess of the $10 million threshold (the 
gross income limitation) and the interest charge relating to the 
deferral below this threshold, many smaller manufacturers saw 
opportunities to reduce their operating costs and compete more 
effectively abroad when the 15% rate for dividends came into effect.
    Arguably, individuals, not necessarily businesses, were meant to be 
the primary beneficiaries of the 15% dividend rate. Nevertheless, a 15% 
rate for IC-DISC dividends is in correlation to that principle since 
IC-DISCs are utilized by small businesses that are owned by individuals 
or by pass through entities in which individuals are the stakeholders, 
as opposed to publicly traded companies.
    Under the present law, smaller exporting companies are able to 
receive distributions from their IC-DISCs, pay their applicable taxes 
and reinvest the after-tax proceeds into the economy. This translates 
into more jobs, more production, and ultimately more revenue for the 
Government.
    In summary, the Committee considers that this proposed section of 
the bill seems less a technical correction and more a policy shift, 
which might have an adverse impact on taxes, U.S. competitiveness, U.S. 
jobs and the U.S. economy, and, therefore, should not be included in 
the bill.

                                 

                                    Northwest Horticultural Council
                                          Yakima, Washington, 98901
                                                   October 27, 2006
The Honorable Bill Thomas, Chairman
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth Office Bldg.
Washington, DC 20515

Dear Chairman Thomas:

    We oppose a provision--Section 7--in the ``Tax Technical 
Corrections Act of 2006'' (TTCA) that if approved by Congress would 
counteract efforts ongoing for over two years in the Pacific 
Northwest's tree fruit industry to utilize an important tax savings 
tool created by the ``Jobs and Growth Tax Relief Reconciliation Act of 
2003'' (JGTRRA).
    The Northwest Horticultural Council is a trade association, located 
in Yakima, Washington, representing the policy interests of growers and 
shippers of such deciduous tree fruits as apples, pears, and cherries. 
Our membership covers the states of Idaho, Oregon, and Washington.
    Competing with foreign producers of fruits, such as fresh apples, 
in key export markets has been a difficult one in recent years for the 
small privately-held companies that comprise our industry. 
Determinations of the World Trade Organization have resulted in the 
repeal of two important tax incentives for these exporters: Foreign 
Sales Corporations (repealed in 2000 by P.L. 106-519) and 
Extraterritorial Income (repealed in 2004 by P.L. 108-357). As of 
January 1, 2007, Export DISCs will represent the sole remaining tax 
savings vehicle for small business exporters to utilize as a means of 
approaching parity with foreign trade competitors who enjoy a 
competitive advantage over U.S. producers due to direct government 
subsidization, lower production cost structures (especially wages), 
and, in the case of the People's Republic of China, these and soaring 
production increases. (China now grows more apples than any other 
country.) This lone remaining export incentive will be nearly useless 
to our industry if Congress approves Section 7 of the TTCA.
    Section 7 of the TTCA is a significant policy change 
inappropriately and unfairly characterized as a simple and routine 
corrective measure. It arbitrarily disqualifies dividends received from 
an Export DISC for the 15% tax rate established under Sec. 303 of the 
JGTRRA. Those harmed by this arbitrary change are not large 
corporations but shareholders of small companies fighting an uphill 
battle to compete in increasingly competitive export markets.
    Further contributing to the unfairness and arbitrary nature of 
Section 7 of H.R. 6264 and S. 4026 is the proposed date of the change. 
The repeals of Foreign Sales Corporations and Extraterritorial Income 
were accompanied by either multi-year transition periods or an 
immediate and effective successor benefit. This legislation establishes 
the effective date as the date the bill was introduced to Congress 
(September 29, 2006) and offers no successor proposal or remedy. The 
effective date as proposed pays no regard to the substantial 
investments made by our small business exporters to establish Export 
DISCs and comply with requirements of their administration for the 
current tax year. This is a very real expense that has been incurred in 
good faith.
    We respectfully ask that the Committee remove Section 7 of the 
TTCA. Its excision will not provide a permanent benefit--it will only 
maintain the current benefit through its scheduled expiration in 2010. 
Eliminating Section 7 will grant our small business exporters an 
appropriate amount of time to plan for the phase-out of the current tax 
benefit. At worst, the fate of Section 7 should be set aside for 
further hearings in the next Congress to give ample time for this 
serious policy proposal by the Committee to be thoroughly debated. This 
would allow for the possibility of a more targeted corrective action 
next year alleviating any actual problem (now unknown to us) with this 
particular tax provision.
    We would be happy to provide additional information on the impact 
of this legislation to our industry upon your request. Thank you for 
this opportunity to provide comment.
            Sincerely yours,
                                                  Christian Schlect
                                                          President

                                 

  Statement of Carol Schreckhise, Moore Fans, LLC, Marceline, Missouri
    We are a small business in Missouri and are writing to ask you to 
vote against HR6264 AND COMPANION S4026 that were introduced on 
September 29, 2006. These bills deal with the taxation of dividends 
from Domestic International Sales Corporatons (DISCs).
    According to the Jobs and Growth Tax Relief Reconciliation Act of 
2003, these dividends were taxed at the 15% Federal income tax rate in 
the same manner as capital gains. To be more competitive in the global 
marketplace, our company has undertaken to make use of this incentive 
at considerable time and expense.
    HR6264 AND COMPANION S4026, if approved, would make these dividends 
taxable at ordinary Federal income tax rates. This will raise the tax 
rates for the individuals who own shares in DISCs making them a less 
attractive investment and eventually costing Missouri jobs due to a 
decrease in products exported outside the United States.
    The use of DISCs will increase the volume of exports from Missouri. 
It is also the only export incentive that has not been attacked by the 
World Trade Organization.
    Not only do HR6264 AND COMPANION S4026 take away the tax benefit, 
they also backdate the date of the tax increase to the date the bill 
was introduced on September 29, 2006.
    Thank you for allowing us to express our concerns and we hope you 
will examine HR6264 AND COMPANION S4026 and decide not to vote in favor 
of their passage.
    If you wish to discuss this further, I can be reached at my work 
number or by E-Mail.

                                 

                       American Bar Association Section of Taxation
                                                   October 31, 2006
The Honorable Charles E. Grassley
Chairman
Senate Committee on Finance
219 Dirksen Senate Office Bldg.
Washington, DC 20510

The Honorable Max S. Baucus
Ranking Member
Senate Committee on Finance
219 Dirksen Senate Office Bldg.
Washington, DC 20510

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

The Honorable Charles B. Rangel
Ranking Member
House Committee on Ways and Means
1106 Longworth House Office Bldg.
Washington, DC 20515

Dear Gentlemen:

    Enclosed are comments on the proposals included in H.R. 6264 and 
S.4026 related to the application of Code section 470 to partnerships 
and proposed clarification of the term ``separate affiliated group'' in 
section 355(b)(3). These comments represent the views of the American 
Bar Association Section of Taxation. They have not been approved by the 
Board of Governors or the House of Delegates of the American Bar 
Association and should not be construed as representing the policy of 
the American Bar Association.
            Sincerely,
                                                    Susan P. Serota
                                         Chair, Section of Taxation
                                 ______
                                 
      
EXECUTIVE SUMMARY
I. Comments on Proposed Technical Corrections to Code Section 470
    The Tax Technical Corrections Act of 2006 (``Technical Corrections 
Act'') would amend section 470 \1\ to provide rules regarding the 
application of section 470 to partnerships. As is explained below, we 
commend the drafters of the Technical Corrections Act for excluding 
some legitimate partnerships that are not engaged in the abuses that 
Congress intended to prevent from the application of section 470. We 
also commend the drafters for recognizing the need to exclude non-
depreciable partnership property. Importantly, however, we believe that 
the legislation does not go far enough in excluding legitimate 
arrangements that have nothing to do with SILO transactions from being 
subject to the loss deferral regime. We also believe that the approach 
taken by the legislation will engender substantial uncertainty 
regarding whether and to what extent common business arrangements are 
subject to section 470, in contravention of sound tax policy. As is 
explained in more detail below:
---------------------------------------------------------------------------
    \1\ Except to the extent specified otherwise, all section 
references are to the Internal Revenue Code of 1986, as amended, or to 
the Treasury regulations promulgated thereunder.

      We believe that the legislation's retroactive expansion 
of the portion of a pass-thru entity's property that can be subject to 
the loss deferral rules is inappropriate and inconsistent with sound 
tax policy.
      The legislation provides an exception for partnerships 
that meet certain objective requirements (relating to funds not being 
set aside or subject to certain arrangements and to the lack of certain 
types of options). Because the economic arrangements that exist with 
respect to partnerships are so diverse, we believe that focusing on the 
economic relationship of the partners, partnership, and lenders in the 
manner specified will apply the loss deferral rules to far more 
partnerships than can be justified on policy grounds. Accordingly, we 
believe that, if this approach is pursued, an additional exception 
should be provided for property that is not subject to ``use'' or 
``control'' by a tax-exempt partner and that ``qualified allocations'' 
should be determined by reference to section 514(c)(9)(E), rather than 
section 168(h)(6)(B). We also believe that consideration should be 
given to a more general anti-abuse rule for the application of section 
470 to partnerships and to providing anexception when all taxable 
partners satisfy a threshold projected variance in their investment 
return with respect to the partnership. We also have highlighted 
significant problems with, and made suggestions regarding, the 
arrangement, set aside, and options rules.
      Numerous practical and technical issues exist that are 
fundamental to whether and how section 470 applies with regard to 
tiered partnerships. Given the large number of tiered arrangements, we 
believe it is inappropriate to leave resolution of these issues to 
regulations.
      We believe that the broad regulatory authority to expand 
the scope of section 470 with respect to partnerships should be 
narrowed significantly so as to potentially capture only those 
situations where the arrangement truly resembles a SILO.
      We believe that certain additional exceptions and 
definitions need to be provided.
      Given the inability of taxpayers to have predicted the 
details of the technical correction, we believe that consideration 
should be given to applying section 470 only to partnership property 
acquired after the date the Technical Corrections Act was introduced 
(in non-leasing situations) and to providing appropriate transition 
relief for arrangements entered into before the Technical Corrections 
Act was introduced that may be difficult or impossible to modify.

    If appropriate legislation cannot be enacted expeditiously, we 
strongly believe that the existing moratoria should be extended to 
taxable years beginning before January 1, 2007.
II. Comments on Proposed Technical Corrections to Code Section 355
    The Tax Increase Prevention and Reconciliation Act of 2005 amended 
the active trade or business requirement of section 355(b) by adding 
paragraph (3), providing that all members of a corporation's ``separate 
affiliated group'' (``SAG'') are treated as one corporation for 
purposes of the active trade or business requirement. In the Technical 
Corrections Act, Congress has proposed to clarify that the term SAG 
would not include any corporation that became an otherwise qualifying 
member of the SAG within the five-year period ending on the date of the 
distribution by reason of one or more transactions in which gain or 
loss was recognized in whole or in part.
    This proposed change would undermine the so-called ``expansion'' 
doctrine embodied in Treasury Regulation Sec. 1.355-3(b)(3)(ii) that 
permits a corporation to acquire a business in a taxable acquisition 
during the five-year period, provided that the business is an expansion 
of a pre-existing active business. The expansion doctrine is regularly 
relied upon by taxpayers to satisfy the active business requirement of 
section 355.
    We recommend that the proposed technical correction not be enacted 
without modification to make clear that any such change will not 
interfere with the law that has developed to allow an expansion of a 
historic business. This could be accomplished by making clear that the 
expansion doctrine will be applied on an affiliated group basis, 
without regard to the SAG membership and providing examples to 
illustrate the principle.
ABA SECTION OF TAXATION
COMMENTS ON H.R. 6264 AND S.4026: THE TAX TECHNICAL CORRECTIONS ACT OF 
        2006
I. Comments on Proposed Technical Corrections to Code Section 470
A. Introduction
    Section 6 of the Technical Corrections Act would amend the ``anti-
SILO'' rules of section 470 of the Internal Revenue Code to provide 
rules regarding the application of section 470 to partnerships. The 
amendment would expand the portion of a partnership's losses and 
deductions that could be deferred, but would provide new exceptions for 
(1) non-depreciable property and (2) certain property that meets two 
specific requirements that are based on certain leasing rules contained 
in section 470(d). The amendment also would provide the Treasury 
Department (``Treasury'') and the Internal Revenue Service (``IRS'') 
with extremely broad regulatory authority based on certain vague 
concepts to subject partnerships to section 470, even if those entities 
would otherwise be excepted from the application of section 470. The 
amendment would apply retroactively to property acquired after March 
12, 2004.
    The application of section 470 to pass-thru entities is a critical 
issue to thousands of taxpayers in a variety of industries, as well as 
to those practitioners who advise pass-thru entities and their owners 
regarding compliance with the tax laws. We commend the drafters of the 
Technical Corrections Act for their efforts in attempting to limit the 
application of section 470 in the context of partnerships that are not 
engaged in ``SILO'' transactions and for recognizing the need to 
exclude non-depreciable partnership property. As is explained in more 
detail below, however, we have significant concerns regarding both the 
general direction and the particular details of the amendment contained 
in the Technical Corrections Act.
    Very generally, we are concerned that, notwithstanding the 
provisions of the Technical Corrections Act, many partnerships will be 
subject to section 470 even though they are not engaged in, or being 
used to replicate, the kinds of transactions that Congress intended to 
subject to section 470. We also are concerned that the amendment will 
engender considerable uncertainty regarding how, whether, and to what 
extent section 470 applies to many common business arrangements. We 
also have concerns with respect to other compliance and policy issues, 
including effective date concerns.
    Before elaborating upon our concerns regarding the amendment, we 
believe it is useful to provide some brief background regarding current 
law and the comments we previously submitted regarding the application 
of section 470 to pass-thru entities.
B. Background Regarding Current Law
    Section 470 is a loss deferral provision that was enacted as part 
of the American Jobs Creation Act of 2004 (P.L. 108-357, the ``2004 
Act''). Section 470 was primarily designed to address concerns with 
certain SILO (i.e., sale-in, lease-out) transactions the Government 
considers abusive. These transactions typically involved a sale of 
property (such as a subway system) by a tax-exempt entity (such as a 
municipal transit authority) to a taxable entity that, in turn, leased 
the property back to the tax-exempt entity. The taxable entity 
benefited from the cost recovery deductions associated with the 
property, while the tax-exempt entity typically received an implicit 
fee for participating in the arrangement and continued to control the 
operation of the property.
    Section 470 suspends the deduction of losses related to ``tax-
exempt use property'' in excess of the income or gain from that 
property. Tax-exempt use property includes property that is leased to a 
tax-exempt entity. Importantly, however, as a result of the application 
of section 168(h)(6), tax-exempt use property also includes property 
(whether or not leased) owned by a partnership that (1) has as partners 
both taxable and tax-exempt entities (including foreign persons) and 
(2) makes allocations to the tax-exempt partners that are not 
``qualified.'' As a result, a partnership that has a combination of 
taxable and tax-exempt (including foreign) partners and that makes 
nonqualified allocations is potentially subject to section 470, even if 
the partnership does not lease any property and even if the partnership 
is not engaged in a SILO-like transaction.
    In the pass-thru context, section 470 applies to property acquired 
after March 12, 2004. The IRS and Treasury, however, have indicated 
that, for tax years beginning before January 1, 2006, the IRS will not 
apply section 470 to disallow losses associated with property that is 
treated as tax-exempt use property solely as a result of the 
application of section 168(h)(6).\2\
---------------------------------------------------------------------------
    \2\ See Notice 2006-2, 2006-2 I.R.B. 278, and Notice 2005-29, 2005-
1 C.B. 796.
---------------------------------------------------------------------------
C. Previous Submission by the Tax Section
    In June 7, 2005, the Tax Section of the American Bar Association 
submitted a letter to the distinguished Chairs and Ranking Members of 
the House Committee on Ways and Means and the Senate Finance Committee 
expressing concerns regarding the application of section 470 to pass-
thru entities.
    In our previous submission, we expressed our strong concern that 
section 470 applied in the partnership context far more broadly than 
necessary to achieve the Government's ``anti-SILO'' objective. Our 
previous submission provided support for why we did not believe 
Congress intended section 470 to apply so broadly, as well as examples 
of the kinds of common business arrangements that could be 
inappropriately subject to the loss deferral regime.
    In our previous submission, we made a number of recommendations 
that were intended both (1) to protect the Government's interest in 
preventing the ``next generation'' of SILO transactions through 
partnerships and (2) to allow taxable and tax-exempt parties to 
continue to undertake legitimate business transactions through 
partnerships without inappropriately being subject to the loss deferral 
rules of section 470. Although there were numerous aspects to the 
recommendations, the core recommendation focused on excluding 
partnerships from the application of section 470 where a tax-exempt 
partner did not ``use'' or ``control'' the property following 
acquisition of the property by the partnership. While we recognize that 
there are difficulties in applying the concepts of ``use'' and 
``control'' in the context of certain limited types of properties, we 
continue to believe that this basic approach is most effective in 
distinguishing legitimate arrangements from those that resemble SILOs. 
Further, from a tax policy perspective, it provides an objective 
standard that, in most cases, can easily be administered.
D. Section 6 of the Technical Corrections Act
    Section 6 of the Technical Corrections Act takes a different 
approach to addressing how section 470 applies to pass-thru entities 
that are not engaged in covered leasing transactions. This approach 
would exclude some legitimate business arrangements from the 
application of the loss deferral regime. In this regard, we commend the 
drafters for recognizing the need to narrow the application of section 
470. Nonetheless, we are very concerned that the Technical Corrections 
Act does not go far enough in excluding those entities that are not 
engaged in the kinds of SILO transactions Congress considers to be 
abusive. We also are concerned that the approach reflected in the 
Technical Corrections Act will engender tremendous uncertainty as to 
both the scope and operation of section 470 in the pass-thru context, 
in contravention of sound tax policy. Thus, we respectfully encourage 
the drafters to reconsider the suggested approach that we described in 
our previous submission.
    We appreciate, however, the interest in securing expeditiously a 
legislative solution to the problems associated with the application of 
section 470 to pass-thru entities. We also understand that the drafters 
of the Technical Corrections Act would like this solution to ``mirror'' 
the exceptions contained in section 470(d) for ``legitimate'' leases to 
the extent possible and are appreciative of the opportunity to provide 
comments on the Technical Corrections Act before it moves further in 
the legislative process. Thus, while the discussion below summarizes 
significant problems with the approach reflected in the Technical 
Corrections Act, it also contains suggestions as to how that approach 
could be modified so as to protect the Government's interests in 
deterring ``synthetic'' SILOs, while not inappropriately subjecting a 
large number of legitimate arrangements to the loss deferral rules.
1. Scope of Loss Deferral
    The Technical Corrections Act would amend section 470 to expand the 
portion of a pass-thru entity's property that can be subject to the 
loss deferral rules. Section 168(h)(6) treats only the tax-exempt 
entity's ``proportionate share'' of the entity's property as tax-exempt 
use property. The Technical Corrections Act would eliminate the 
``proportionate share'' rule and treat all property of a pass-thru 
entity (not otherwise excepted from section 470) as tax-exempt use 
property for purposes of section 470 if any portion is treated as tax-
exempt use property for purposes of section 168(h)(6). This approach 
has the practical effect of causing all of the losses with respect to a 
particular property to be deferred, even if the tax-exempt partner's 
share of partnership items with respect to such property is extremely 
small. This result is unduly harsh, particularly to the extent that 
section 470 continues to apply to many legitimate pass-thru entities 
that are not involved in SILO arrangements. Further, expanding the 
scope of the disallowance retroactively (as the Technical Corrections 
Act proposes to do) would be inconsistent with sound tax policy. Thus, 
we recommend that only the tax-exempt entity's share of property be 
treated as tax-exempt use property.
2. Exception for Non-Depreciable Property
    The Technical Corrections Act also provides two new exceptions to 
the definition of tax-exempt use property in situations in which 
property would otherwise be considered tax-exempt use property solely 
by reason of section 168(h)(6). One of these exceptions is for property 
that is not of a character subject to the allowance for depreciation. 
We strongly support this exception for the reasons set forth in our 
previous submission. We note, however, that the Joint Committee on 
Taxation's description of the Technical Corrections Act (JCX-48-06) 
(the ``JCT Description'') indicates that, to qualify for the exception, 
property must be both non-depreciable and non-amortizable. Presumably, 
the reference to property that is subject to amortization is intended 
to capture amortizable section 197 intangibles, which is consistent 
with the inclusion of such property in section 470(c)(2)(B)(ii). This 
reference, however, also raises questions with respect to other 
property that may be subject to amortization, such as bonds with 
amortizable bond premium under section 171. Bonds with amortizable bond 
premium generally are not thought to be of a character subject to the 
allowance for depreciation and should not be subject to section 470. 
For this reason, clarification as to the scope of the reference to 
``amortizable property'' in the JCT Description would be helpful.
3. Exception Based Upon the Economic Characteristics of the Partnership
    The second new exception (the ``Two-Part Exception'') is for 
partnerships that meet both of two fairly complex requirements--the 
``no set aside'' requirement and the ``no option to purchase at other 
than value'' requirement--with respect to the property for the taxable 
year. The Two-Part Exception is the exception upon which many thousands 
of legitimate pass-thru entities that hold depreciable property would 
have to rely in order to escape the application of the anti-SILO loss 
deferral rules.
a. General Concerns
    As is explained below, the Two-Part Exception focuses on the 
economic characteristics of the arrangements among partnerships, 
partners, lenders, and potentially others. As the Government has 
previously recognized in another context, ``[s]ubchapter K is intended 
to permit taxpayers to conduct joint business (including investment) 
activities through a flexible economic arrangement without incurring an 
entity-level tax.'' \3\ This statement gives explicit recognition to 
the flexibility of the partnership entity and the fact that taxpayers 
may engage in a myriad of diverse economic arrangements through 
partnerships. We cannot emphasize enough the difficulty in anticipating 
the economic terms that taxpayers may enter into, or may have entered 
into, in advancing legitimate business interests in connection with a 
partnership. Thus, any rule that focuses exclusively on the economic 
characteristics of partnership arrangements, such as the Two-Part 
Exception, will inevitably capture many legitimate partnerships that 
have nothing to do with SILOs. For this reason, we believe that, if 
such an approach is employed, it needs to be combined with a 
consideration of other characteristics of the arrangement. Otherwise, 
numerous legitimate taxpayers will be subject to loss deferral rules 
that Congress intended to apply only to abusive arrangements. We 
discuss alternative approaches and rules for consideration after the 
discussion of issues arising in connection with the Two-Part Exception.
---------------------------------------------------------------------------
    \3\ Treas. Reg. Sec. 1.701-2(a).
---------------------------------------------------------------------------
b. Particular Concerns Regarding the ``No Set Aside'' Requirement
    The ``no set aside'' requirement focuses on whether, at any time 
during a taxable year with respect to any property owned by the 
partnership, funds are (1) subject to certain arrangements (such as a 
defeasance arrangement, a letter of credit collateralized with cash or 
cash equivalents, or a loan by a tax-exempt partner or the partnership 
to any taxable partner, the partnership, or any lender, among others) 
or (2) set aside or expected to be set aside, to or for the benefit of 
a taxable partner or any lender, or to or for the benefit of any tax-
exempt partner to satisfy any obligation of the tax-exempt partner to 
the partnership, any taxable partner, or any lender. In the case of 
funds outside of the partnership (i.e., funds held by a party other 
than the partnership that are set aside to satisfy an obligation 
described in the prior sentence), the ``no set aside'' requirement 
requires that no amount be subject to an arrangement or set aside in 
this manner at any time during a taxable year. With respect to funds 
held by the partnership, it would be permissible for funds to be 
subject to an arrangement or set aside (or expected to be set aside) by 
the partnership to or for the benefit of a partner or lenderas of any 
date during the year in an amount equal to the greater of:
    (1) 20 percent of the ``aggregate debt of the partnership'' (which 
term is not defined); or
    (2) the sum of (a) 20 percent of the taxable partners' capital 
accounts determined under the rules of section 704(b) and (b) 20 
percent of the taxable partners' share of the recourse liabilities of 
the partnership determined under section 752.
    The Technical Corrections Act provides that funds that are set 
aside for less than 12 months would not be taken into account in 
determining whether the ``no set aside'' requirement is met. It further 
provides that funds would not be treated as ``set aside'' if such funds 
``(I) bear no connection to the economic relationships among the 
partners, and (II) bear no connection to the economic relationships 
among the partners and the partnership.''
    The ``no set aside'' requirement appears designed to mirror the 
``no defeasance'' rule set forth in section 470(d) with respect to 
leases. Section 470(d) provides that a lease that has certain 
characteristics is not subject to the loss deferral rules, presumably 
because those characteristics are inconsistent with SILO transactions. 
One of these characteristics is that the tax-exempt lessee has not 
monetized more than an allowable amount of its lease obligation 
(including any purchase option) pursuant to an arrangement, set aside, 
or expected set aside that is to or for the benefit of the taxpayer or 
any lender, or is to or for the benefit of the tax-exempt lessee. While 
looking to a lack of defeasance may make sense in distinguishing a 
``good'' leasing arrangement from a SILO leasing arrangement, such an 
approach is inherently difficult to apply in the partnership context 
and cannot be structured in such a manner so as to accurately separate 
legitimate pass-thru entities from those that might be structured in 
the future as synthetic SILOs.\4\ Specific concerns and suggestions 
with regard to this requirement include the following:
---------------------------------------------------------------------------
    \4\ As was indicated in our previous submission, we are not aware 
of any pass-thru entities that have been used to replicate the 
economics of a SILO transaction.

      The exception establishes a ``reasonable person'' 
standard for determining when funds are set aside or expected to be 
``set aside for the benefit'' of one of the relevant parties. In the 
context of leases, money set aside for the benefit of the lessor must 
be ``targeted'' towards the lessor in some way in order for a 
reasonable person to determine that the funds are impermissibly set 
aside. By contrast, all partnership funds are held for the eventual 
benefit of those with an economic stake in the partnership--including 
partners and lenders. Thus, in undertaking the required analysis for 
funds held by the partnership, the ``for the benefit of'' portion of 
the test does not meaningfully affect the inquiry. Instead, the primary 
question will relate to what it means for funds to be ``set aside.'' 
Given that partnerships may hold significant cash for many purposes, it 
is imperative that taxpayers have detailed guidance allowing them to 
determine when funds are considered to be set aside in a manner that 
violates the ``no set aside'' requirement. Presumably, the ``no set 
aside'' requirement, as applied to funds held by a partnership, is 
intended to capture only funds that have been isolated, such that they 
will not be available for use in connection with the business of the 
partnership, and that are earmarked either for distribution to partners 
or payment to creditors.\5\ Clarifying the meaning of the requirement 
would help both the taxpayers and the IRS apply this provision. In 
fact, given the stakes of loss deferral for all partners, pass-thru 
entities need immediate clarity as to how they can establish with 
certainty that funds are not considered to be set aside for an 
impermissible purpose.
---------------------------------------------------------------------------
    \5\ As is discussed below, we similarly believe that, if the 
reference to ``lenders'' is retained in section 470(e)(2), the statute 
should apply only with respect to ``arrangements'' and ``set asides'' 
where the loan serves to support repayment of the investment of the 
taxable partner. Also, sinking funds to redeem partners are common 
business structures used in many legitimate arrangements. Thus, the 
existence of a sinking fund should not necessarily be viewed as 
determinative of a SILO arrangement. Nonetheless, we understand that 
the presence of a sinking fund, in conjunction with other factors, 
could be troubling to the Government. This illustrates the problems 
with subjecting a partnership with depreciable property to section 470 
merely because it fails the ``no set aside'' requirement, without 
examining the totality of the arrangement.
---------------------------------------------------------------------------
      Establishing the purpose for which particular funds are 
set aside raises tracing and fungibility concerns and could impose 
tremendous administrative burdens on both taxpayers and the Government.
      The blanket inclusion of partnership lenders as parties 
for whom ``arrangements'' and ``set asides'' are prohibited sweeps in 
numerous legitimate partnership arrangements.

    We assume that lender arrangements are included to address two 
primary situations. In one situation, a taxable partner would 
contribute significant cash to the partnership and simultaneously would 
borrow a like amount of funds. The tax-exempt partner would bear the 
risk with respect to the debt, either by lending the funds directly to 
the taxable partner or by guaranteeing debt advanced to the taxable 
partner by a third-party lender. Repayment of the debt by the taxable 
partner would be contingent on the taxable partner receiving back its 
investment in the partnership.\6\ In a second situation, the taxable 
partner may advance minimal funds to a partnership, with the majority 
of the acquisition proceeds for the property being borrowed by the 
partnership from an unrelated lender. In order to accrue significant 
deductions in this situation, the taxable partner would be required to 
enter into a guarantee or some similar arrangement with respect to the 
debt. To counteract the risk associated with the guarantee, however, 
the partnership would set aside significant funds for repayment of the 
debt so as to ensure that the taxable partner is never called upon to 
satisfy its guarantee obligation.
---------------------------------------------------------------------------
    \6\ In the third-party lender situation, the tax-exempt partner 
would repay the debt pursuant to the guarantee.
---------------------------------------------------------------------------
    As an initial matter, we do not think that the second situation 
should create any concern for the Government. Treas. Reg. Sec. 1.752-
2(j)(3) provides that ``[a]n obligation of a partner to make a payment 
is not recognized if the facts and circumstances evidence a plan to 
circumvent or avoid the obligation.'' It is hard to see how a scenario 
that satisfies the ``set aside'' requirement in section 470(e)(2) would 
not run afoul of this provision.\7\
---------------------------------------------------------------------------
    \7\ As a result, the taxable partner would not have sufficient 
adjusted basis under section 705 to take into account significant 
losses, as section 704(d) would limit the allowance of such losses. 
Similarly, with minimal capital invested by the taxable partner, and 
presumably significant capital being contributed by the tax-exempt 
partner to provide for the funds that would be set aside and that would 
secure the partnership debt, it would not seem possible to allocate 
significant losses to that taxable partner under section 704(b). First, 
the taxable partner would not have contributed significant capital to 
justify the allocation of losses. Similarly, it would not seem possible 
to generate nonrecourse deductions under Treas. Reg. Sec. 1.704-2(c) 
that might be allocated to the taxable partner in this situation. If 
both the property and the funds secured the debt, the total basis (or 
book value) of all property securing the debt would not fall below the 
amount of the debt (i.e., because the funds would retain their basis 
(or book value)). Thus, no nonrecourse deductions would result from 
depreciation of the property. See Treas. Reg. Sec. 1.704-2(b)(2) 
(``partnership minimum gain'' is the amount by which a nonrecourse 
liability exceeds the adjusted basis (or book value) of partnership 
property that the debt encumbers); Treas. Reg. Sec. 1.704-2(c) 
(``nonrecourse deductions'' must be attributable to a net increase in 
partnership minimum gain during the year).
---------------------------------------------------------------------------
    We also believe that existing authority provides the Government 
with significant weapons to attack the first situation. Depending on 
the facts, the lending arrangement may be disregarded altogether, so 
that the tax-exempt party would be treated as the person contributing 
the funds.\8\ Of equal or greater significance, the regulations under 
section 704(b) would certainly take such an arrangement into account in 
determining the allocation of losses under the partnership agreement. 
We think it is highly unlikely that section 704(b) would permit a 
partner to be allocated losses where the partner is protected from loss 
as a result of a lender arrangement.\9\
---------------------------------------------------------------------------
    \8\ See Rev. Rul. 72-135, 1972-1 C.B. 200 (nonrecourse loan by 
general partner to limited partner for limited partner to purchase 
partnership interest recast as a contribution to capital by general 
partner). Cf. Knetsch v. U.S., 364 U.S. 361 (1960) (no valid 
indebtedness in deferred annuity savings investment where annual 
borrowings kept net cash value at a de minimis amount; lending was, in 
substance, a rebate of a substantial part of the interest payments); 
Bussing v. Commissioner, 88 T.C. 449 (1987) (loan disregarded in sham 
leasing arrangement where note payments and rental obligation offset 
each other), supplemental opinion, 89 T.C. 1050 (1987); HGA Cinema 
Trust v. Commissioner, 950 F.2d 1357 (7th Cir. 1991) (same), cert. 
denied, 505 U.S. 1205 (1992); Compare VanRoekel v. Commissioner, T.C. 
Memo 1989-74 (note in sale-leaseback transaction determined to be valid 
where debtor was unconditionally liable for payments and the form was 
respected in early years of the arrangement; court noted this was a 
``close case'').
    \9\ Treas. Reg. Sec. 1.704-1(b)(2)(ii)(f) states that, for purposes 
of section 704(b), the partnership agreement includes all agreements 
among the partners, or between one or more partners and the 
partnership, concerning the affairs of the partnership and 
responsibility of partners, whether oral or written, and whether or not 
embodied in a document referred to by the partners as the partnership 
agreement. Thus, in determining whether distributions are required in 
all cases to be made in accordance with the partners' positive capital 
account balances . . ., and in determining the extent to which a 
partner is obligated to restore a deficit balance in his capital 
account . . ., all arrangements among partners, or between one or more 
partners and the partnership relating to the partnership, direct and 
indirect, including puts, options and other buy-sell agreements, and 
any other `stop-loss' arrangement, are considered to be part of the 
partnership agreement. (Thus, for example, if one partner who assumes a 
liability of the partnership is indemnified by another partner for a 
portion of such liability, the indemnifying partner (depending on the 
particular facts) may be viewed as in effect having a partial deficit 
makeup obligation as a result of such indemnity agreement.)
    Under Treas Reg. Sec. 1.704-1(b)(2)(ii)(a), in order for an 
allocation to be respected as having economic effect, ``it must be 
consistent with the underlying economic arrangement of the partners.'' 
In other words, any economic benefit or economic burden that 
corresponds to an allocation must inure to the benefit or detriment of 
the partner to whom the allocation is made. If the lender arrangement 
is taken into account as part of the partnership agreement, so that the 
taxable partner is considered to be protected from loss with respect to 
its investment for purposes of analyzing allocations, the section 
704(b) regulations would not permit an allocation of losses to the 
taxable partner. We note that, in Van Roekel v. Commissioner, T.C. Memo 
1989-74 (discussed supra note 8), the court found that, although the 
indebtedness in that case would be respected for federal tax purposes, 
the taxpayer would be viewed as protected from loss with respect to 
such indebtedness.
---------------------------------------------------------------------------
    Given the means already available to the Government to deal with 
lender arrangements and set asides, the inclusion of such arrangements 
seems unnecessary. Further weighing against the inclusion of these 
lender arrangements and set asides is the multitude of legitimate 
lender arrangements that occur everyday in the partnership context 
which would unfairly subject a partnership to loss deferral under 
section 470. For instance, many loans that are subject to 
securitization may not be prepaid.\10\ The only way to effectively pre-
pay such a loan is to defease the obligation. It appears, however, that 
if a partnership utilizes ``in substance'' defeasance or ``legal'' 
defeasance, the partnership will fail section 470 unless it can satisfy 
one of the 20-percent safe harbors for ``inside'' defeasance.\11\ As 
another example, where a partner guarantees debt of a partnership, it 
is not at all unusual for the lender to require that the guarantor post 
some amount of collateral to secure its guarantee obligations. This 
often will take the form of a letter of credit or some other 
arrangement that would be impermissible under the terms of the 
amendment. Because this arrangement would relate to funds held outside 
the partnership, the 20-percent safe harbor would not be available. The 
universe of analogous arrangements that raise troubles in this regard 
is too numerous to catalogue.
---------------------------------------------------------------------------
    \10\ See B. Rubin, A. Whiteway, and J. Finkelstein, Tax Planning 
for Conduit Loan Defeasance Transactions, Including Like Kind 
Exchanges, 9 J. of Passthrough Entities 15 (2006).
    \11\ Significantly, even though the partnership would no longer be 
treated as the borrower for federal tax purposes with respect to debt 
that it legally defeases, section 470 may nevertheless be applicable. 
This is because the reference to ``lender'' in the amendment does not 
refer only to a lender of the partnership, as determined for federal 
tax purposes. Instead, the provision literally seems to apply where the 
partnership provides for the defeasance of an obligation of anyborrower 
to any lender. As is discussed below, proposed new section 
470(e)(2)(D)(ii) provides the only limitation on arrangements with 
respect to lenders; under this provision, such arrangements are ignored 
only if the funds bear no connection to the economic relationship (1) 
of the partners or (2) among the partners and the partnership. See 
infra text accompanying note 12.
---------------------------------------------------------------------------
    Because the references to ``lenders'' sweeps in numerous legitimate 
transactions in situations where the Government's interest already is 
significantly protected by existing rules and authority, we believe 
that the references to ``lenders'' in section 470(e)(2) should be 
eliminated. If these references are not eliminated, we believe that the 
situations in which lender arrangements are considered should be 
significantly limited so as to refer only to situations where the 
principle purpose of the loan is to support repayment, directly or 
indirectly, of the investment of the taxable partner.

      ``Arrangement'' includes a loan by a tax-exempt partner 
or the partnership to any taxable partner, the partnership, or any 
lender. These kinds of arrangements are very common. For example, if a 
partnership is having financial difficulty, partners often will fund 
operations through debt rather than equity so as to preserve claims for 
repayment in bankruptcy or other collection actions. Partners 
(including tax-exempt partners) also may lend funds to employees or 
service providers of a partnership in order to allow such persons to 
acquire interests in partnerships and thereby ``incentivize'' such 
persons to contribute to the success of the business. Loans by 
partnerships to partners also are extremely common. (Indeed, the 
Treasury regulations contain specific rules to address such loans.\12\ 
) Further, where one partner fails to fund a capital call, it is very 
common for another partner to contribute funds for that partner, with 
the operative documents treating the advance as a loan between the 
partners. Where the partner making the advance is a tax-exempt partner 
and the partner who failed to make the advance is taxable, presumably 
the arrangement would constitute impermissible ``outside'' defeasance, 
thereby subjecting the partnership to section 470. Consistent with our 
recommendation above, we believe that, if loans continue to be treated 
as ``arrangements,'' such treatment should follow only where the 
principal purpose of the loan is to support repayment, directly or 
indirectly, of the investment of the taxable partner.
---------------------------------------------------------------------------
    \12\ See, e.g., Treas. Reg. Sec. 1.752-2(c)(1) (partner generally 
bears ``economic risk of loss'' with respect to loans made by such 
partner or related person); Treas. Reg. Sec. 1.752-2(d) (de minimis 
exception applicable to loans made or guaranteed by a partner or 
related person); and Treas. Reg. Sec. 1.704-2(i) (providing that 
``partner nonrecourse deduction,'' i.e., deductions arising from 
otherwise nonrecourse loans made by partners or related persons, must 
be allocated to the partner that bears the economic risk of loss with 
respect to such loans).
---------------------------------------------------------------------------
      Where a partnership sells property and does not 
instantaneously distribute such amounts, the sales proceeds seemingly 
would be treated as set aside for the benefit of the partners 
(including taxable partners). The amendment includes a 12-month safe 
harbor rule to help alleviate this problem. This rule, however, may not 
apply when a partnership repeatedly sells assets. In this situation, 
the ``set aside'' amount may never fall to zero in a 12-month period 
because, by the time that the proceeds from one sale are distributed, 
the proceeds from the next sale have already been received.\13\ This is 
of particular concern where a partnership is in the process of winding 
up its affairs and liquidating. Thus, consideration should be given to 
deeming a partnership to satisfy the ``no set aside'' requirement if it 
has adopted a plan of liquidation and distributes all of its assets 
within a few years of adopting such plan.\14\ A partnership that is 
near the end of its life would not be an attractive vehicle for a SILO, 
given the limited period during which deductions would be generated. 
Nonetheless, even with such an exception, it is important to recognize 
that entities that frequently sell assets but that are not in the 
process of winding down still could be inappropriately subject to the 
loss deferral regime.
---------------------------------------------------------------------------
    \13\ In order to qualify for the safe harbor, funds cannot be set 
aside, or subject to an arrangement, for 12 months or more. Thus, 
questions are raised as to the availability of the safe harbor when a 
partnership sells multiple properties over a period of time; even 
though the partnership may distribute funds from each property sale 
within a relatively short period of time following the sale, it may 
have a positive amount ``set aside'' for a period of more than 12 
months.
    \14\ Cf. section 332(b)(3) (permitting a corporate shareholder to 
receive assets from a subsidiary corporation tax free in connection 
with the liquidation of the subsidiary if, among other things, the 
subsidiary distributes all of its assets within 3 years of the close of 
the taxable year during which the first liquidating distribution is 
made).
---------------------------------------------------------------------------
      At a minimum, the ``20-percent'' allowable partnership 
amount should be increased to a much higher percentage. Much larger 
amounts (approaching 100 percent) were ``defeased'' in the SILO 
transactions with which Congress was concerned in enacting section 470 
because substantial defeasance was necessary in order to make the 
transactions attractive. It is hard for us to point to a specific 
benchmark for what would be a reasonable allowable partnership amount. 
The fact that a partnership has a significant amount of liquid assets 
is in no way determinative that it is being used to replicate a SILO; 
indeed, many current joint ventures and other pass-thru entities have 
significant funds on hands for a variety of reasons, yet we are not 
aware of any such entities that have been used to replicate a SILO 
arrangement.

    Given the extremely broad parameters for what is caught by the 
amendment, we view the allowable partnership amount as a ``rough 
justice'' provision designed to give a chance to those innocent parties 
who, for legitimate reasons, enter into (or have entered into) an 
otherwise impermissible arrangement or set aside. Whether a situation 
falls below or above any allowable partnership amount necessarily will 
be ``luck of the draw,'' depending on the characteristics of the 
partners and the partnership.\15\ Given the extremely broad parameters 
of what constitutes an impermissible arrangement or set aside and the 
numerous legitimate partnerships that will fall within these 
parameters, we strongly urge the Government to consider how high this 
threshold could go before the Government's interests are realistically 
compromised. Similar thought should be given in the context of outside 
defeasance, as the provisions defining what constitutes outside 
defeasance also are so broad as to encompass many very common 
partnership arrangements. In many situations, the allowable partnership 
amount will serve as the only way for legitimate partnerships to avoid 
loss disallowance under section 470.
---------------------------------------------------------------------------
    \15\ Because, under one test, the ``allowable partnership amount'' 
is measured by reference to taxable partners' capital accounts and 
their share of recourse debt, the test may not assist legitimate 
partnerships from escaping the inappropriate application of section 470 
when there are insignificant taxable partners participating. Similarly, 
because, under the other test, the ``allowable partnership amount'' is 
measured by reference to partnership debt, partnerships that are not 
highly leveraged would have little leeway accorded by this test. 
Separately, defeasance of a loan relating to a single property in a 
large multi-property partnership may not create problems under the 20-
percent safe harbor, whereas defeasance of a loan relating to a single 
property in a single-property partnership is much more likely to give 
rise to an arrangement that falls outside of the 20-percent safe 
harbor.

      The meaning of the rule that provides that funds would 
not be treated as ``set aside'' if they bear no connection to the 
economic relationships among the partners or to the economic 
relationships among the partners and the partnership is unclear. We 
understand that this rule is viewed as necessary due to the lack of any 
designation as to who can hold funds pursuant to an arrangement or set 
aside for the benefit of (1) a taxable partner, the partnership, or any 
lender or (2) a tax-exempt partner to satisfy any obligation of such 
tax-exempt partner to the partnership, any taxable partner, or any 
lender. For example, without this rule, a partnership could become 
subject to section 470 by virtue of an unrelated third party taking out 
a letter of credit to secure a loan to a taxable partner of the 
partnership, even though the loan has absolutely nothing to do with the 
---------------------------------------------------------------------------
partnership.

    The ``no connection to economic relationships'' language obviously 
is very restrictive and seemingly would not apply in situations in 
which a party may have a very tangential connection to the economic 
relationship among the partners or the partners and the partnership. In 
addition, the language would not appear to apply to an arrangement or 
set aside that has a connection to the economic relationship among the 
partners, but in a context that is wholly unrelated to the partnership. 
In today's investment world, investors may come together in numerous 
transactions and in a multitude of circumstances. For example, a 
taxable party and a tax-exempt pension fund may come together as 
partners in one deal, while, in another deal, the taxable party (or an 
affiliate) may undertake syndicated financing for a project where the 
same tax-exempt pension fund participates as a lender. The loan has 
nothing to do with the joint investment of the parties in the 
partnership, but the loan does bear a clear connection to the economic 
relationship of the taxable party and tax-exempt pension fund. There 
are an endless number of similar scenarios that have nothing to do with 
SILOs.
    In order to prevent such arrangements from causing legitimate 
partnerships to be subject to loss deferral under section 470, it is 
necessary to more specifically define the arrangements and set asides 
that do not, in a real and substantial way, implicate the relationships 
among the relevant parties ``in a capacity'' that relates to the 
partnership.

      In addition, the rule relating to arrangements and set 
asides contemplates relationships with lenders, although the exclusion 
gives no indication as to how lenders are taken into account. 
Presumably, arrangements or set asides with respect to lenders are only 
taken into account where such arrangements affect the economic 
relationships among the partners or among the partners and the 
partnership.\16\ Nonetheless, the existing rule engenders significant 
uncertainty and confusion. For instance, suppose that a tax-exempt 
partner owes significant funds to a bank, and a taxable partner in the 
same partnership owns a small number of shares of that bank. The bank 
requires that collateral be set aside for the loan. The loan is of such 
a size that, if it were to become uncollectible, it could affect the 
price of the bank's stock, thereby indirectly affecting the economic 
well-being of the taxable partner. Without further guidance, this 
arrangement could be viewed as having some (albeit de minimis) effect 
on the economic relationship of the partners (assuming that the parties 
could even detect that this arrangement exists).
---------------------------------------------------------------------------
    \16\ See supra note 11.
---------------------------------------------------------------------------
      Finally, the amendment operates with respect to ``funds'' 
that are subject to an ``arrangement'' or that are ``set aside.'' We 
note, however, that the amendment does not define ``funds'' for 
purposes of this provision. While ``funds'' would seem to denote cash, 
we anticipate that the drafters may also intend that marketable 
securities fall within the definition of ``funds.'' The inclusion of 
marketable securities could create problems in a number of situations 
that in no way implicate the concerns present with respect to SILOs.

    One situation in particular exists with respect to REITs and their 
``umbrella'' partnerships (``UPREIT partnerships'').\17\ Most REITs 
hold their property through an UPREIT partnership that has unrelated 
third-party partners. The partners may be either taxable or tax-exempt. 
An outside investor in an UPREIT partnership generally is entitled to 
have its partnership interest redeemed either for cash or stock of the 
REIT that is equal to the fair market value of the partnership 
interest. The REIT generally will stand ready to issue stock to satisfy 
the redemption obligation. A REIT obviously has a virtually unlimited 
ability to issue its own stock, so it is quite easy to see how the 
Government might argue that the arrangement with respect to UPREIT 
partners gives rise to an impermissible ``set aside.'' Nonetheless, 
such arrangements in no way create concerns implicated by SILOs.\18\
---------------------------------------------------------------------------
    \17\ Also, analogous structures (typically referred to as ``Public 
LLCs'' or ``Pubco'' structures) have become increasingly commonplace in 
corporate America, with a number of companies having gone public in the 
last year using this structure.
    \18\ We note that there also could be significant problems 
presented where a partnership holds, along with property that is 
subject to an allowance for depreciation, stock in a corporation whose 
stock becomes publicly traded. If a partnership decides that it will 
not immediately distribute such publicly-traded stock to the partners 
(possibly because it is prohibited from doing so for regulatory 
reasons), but also determines that it will ultimately distribute, 
rather than sell, the stock, this action seemingly could create an 
impermissible ``set aside.''
---------------------------------------------------------------------------
c. Particular Concerns Regarding the ``No Option to Purchase at Other 
        Than Value'' Requirement
    In order to meet the ``no option to purchase at other than value'' 
requirement, no tax-exempt partner can have, at any time during a 
taxable year, an option to purchase (or to compel distribution of) 
partnership property or a direct or indirect interest in the 
partnership other than at the fair market value of such property or 
interest at the time of the purchase or distribution. In addition, the 
partnership and the taxable partners cannot have an option to sell (or 
to compel distribution of) partnership property or a partnership 
interest to any tax-exempt partner at any time other than at the fair 
market value of such property or interest as determined at the time of 
the sale or distribution. Treasury would have the authority to issue 
regulations allowing the fair market value of partnership property or a 
partnership interest to be determined by formula ``when the value is 
determined based on objective criteria that are reasonably designed to 
approximate the fair market value of such property at the time of the 
purchase, sale, or distribution.''
    The ``no option to purchase at other than value'' requirement 
appears to be based upon concerns that, in the typical SILO 
transaction, a tax-exempt lessee is assured that it can purchase the 
property it previously had sold for a predetermined amount at the end 
of the lease term. Although looking to a tax-exempt entity's ability to 
purchase property for an amount other than value may make sense in 
attempting to distinguish a ``good'' leasing arrangement from a SILO 
leasing arrangement, such an approach is more problematic in the pass-
thru entity context, given that pass-thru entities utilize different 
kinds of option arrangements for a variety of different business 
reasons. Further, it may be very difficult, if not impossible, for 
pass-thru entities to restructure existing options, puts, and other 
similar agreements, given that this involves renegotiating and 
modifying the economic agreement among the parties. Specific concerns 
and suggestions with regard to the ``no option to purchase other than 
at value'' requirement include the following:

      Many options determine the fair market value of property 
at the time of exercise based upon formulae. Further, there are many 
different kinds of formulae that are used. Although the Technical 
Corrections Act provides Treasury with authority to ``allow'' the use 
of formula options, it is unclear at this point what kinds of formulae 
will be acceptable. Clear rules as to what kinds of formula options 
satisfy the ``no option to purchase at other than value'' need to be 
provided before section 470 is applied to any pass-thru entity that is 
not engaged in a covered leasing transaction. Deferring resolution of 
this issue until such time as regulations may be issued will create 
considerable uncertainty as to what extent taxpayers are subject to 
section 470, will engender significant compliance concerns, and is 
inconsistent with the sound administration of the tax laws.
      The application of the fair market value analysis is 
unclear in many contexts relating to partnerships. The amendment makes 
reference to fair market value only in the context of the property 
being acquired from the partnership or the partnership interest being 
acquired from another partner. The analysis, however, in the 
partnership context is more complicated than this. Unlike in the 
leasing context, where the consideration that will be conveyed in 
exercising the option almost always will be cash, for partnerships, a 
partner often will transfer its partnership interest in exchange for 
property received in redemption. In this situation, the Government 
presumably will want to ensure that (1) the amount of property being 
distributed is determined by reference to fair market value, and (2) 
the credit given to the partner for the partnership interest being 
redeemed similarly is fair market value. Manipulation of either side of 
the equation could upset the protection that the Government is looking 
to obtain. This raises the very difficult question, however, as to how 
one determines the fair market value of a partnership interest. That 
is, does one look to what a willing buyer would pay to a willing seller 
when bargaining at arm's length, or does one instead look to the 
liquidation value of the interest that is being redeemed? The 
Government has previously struggled with this analysis, and, in one 
context, has given taxpayers the ability to choose either method.\19\ 
While ``liquidation value'' often (although not always) is used to 
measure economic entitlement in a liquidating distribution,\20\ this 
amount rarely will reflect the fair market value that parties would 
derive where a willing buyer and seller are negotiating for the sale of 
a partnership interest, as these parties will consider factors like 
voting control, liquidity of the investment, etc., and the Government 
has recognized this fact.\21\ Would this dichotomy result in taxpayers 
being required to undertake a different fair market value analysis for 
the partnership interest depending on how the interest is transferred? 
Such an analysis would seem to undercut the conclusion that taxpayers 
really can determine the ``fair market value'' of a partnership 
interest. Guidance with respect to this issue obviously would be of 
great importance in applying section 470.
---------------------------------------------------------------------------
    \19\ Prop. Reg. Sec. 1.83-3(l); Notice 2005-43, 2005-24 I.R.B. 
1221.
    \20\ In determining whether a partnership's allocations have 
economic effect, the regulations generally require that liquidating 
distributions with respect to a partner must be in accordance with that 
partners' positive capital accounts. Treas. Reg. Sec. 1.704-
1(b)(2)(ii)(b)(2). This requirement, however, is not violated if ``all 
or part of the partnership interest of one or more partners is 
purchased (other than in connection with the liquidation of the 
partnership) by the partnership or by one or more partners... pursuant 
to an agreement negotiated at arm's length by persons who at the time 
such agreement is entered into have materially adverse interests and if 
a principal purpose of such purchase and sale is not to avoid'' the 
principle that partners must receive the economic benefit and bear the 
economic burden relating to allocations. Treas. Reg. Sec. 1.704-
1(b)(2)(ii)(b) (flush language).
    \21\ See supra note 19.
---------------------------------------------------------------------------
      Problems also could arise in the context of preferred 
partnership interests that are not redeemable for a period of time 
without payment of a penalty. Suppose that a foreign (i.e., tax-exempt) 
partner is the general partner of a partnership. Taxable partners hold 
nine-percent cumulative preferred partnership interests that are 
mandatorily redeemable in ten years. The partnership, which is managed 
by the foreign general partner, may redeem the preferred interests 
earlier by paying a penalty equal to an additional one-percent percent 
cumulative return to the partners determined through the redemption 
date. Would the payment of the penalty cause the foreign partner to be 
treated as acquiring an indirect interest in the partnership at other 
than fair market value (i.e., the value of a nine percent preferred 
partnership interest) or is the penalty provision taken into account in 
determining the value of the partnership interest? One would hope that 
the answer is the latter, given that the penalty provision is an 
inherent feature of the partnership interest, but this answer is by no 
means clear under the statute.\22\
---------------------------------------------------------------------------
    \22\ Note that this question also raises issues that relate to the 
discussion immediately above. That is, from a willing buyer/willing 
seller valuation perspective, some discount for the penalty provision 
likely would be taken given the probability that the interest will not 
be redeemed prior to the end of ten years. Presumably, no such discount 
would be applied once it became clear that the redemption option would 
be exercised early, so that penalty provision clearly would apply. 
Issues such as this, however, create significant confusion.
---------------------------------------------------------------------------
      It is common for a partnership or partner promoting a 
partnership to reacquire a partnership interest from a service provider 
partner when the service provider ceases to provide services for the 
partnership. The acquisition price may be the amount the service 
provider paid for its interest, book value, or some other amount that 
does not reflect the fair market value of the interest. The service 
provider partner does not receive the full fair market value simply 
because the arrangement was structured so as to deter the service 
provider partner from terminating the employment relationship. Although 
this kind of arrangement does not present SILO concerns, it arguably 
violates the fair market value option requirement because a tax-exempt 
partner's indirect interest (or direct, where a tax-exempt partner 
acquires directly the interest) may be increased as a result of the 
exercise of the option to reacquire the partnership interest from the 
service provider.
      The fair market value option requirement also provides 
the potential for partners to use section 470 to their benefit. For 
instance, assume that two small partners, one taxable and one tax-
exempt, are bargaining to have their partnership interests redeemed. In 
order to inflate the redemption price, the taxable partner threatens to 
issue a non-fair market value option to the tax-exempt partner to 
acquire the taxable partner's interest. Such an option could cause the 
partnership to become subject to loss deferral under section 470, which 
would adversely affect all of the taxable partners. This possibility 
could force the partnership to succumb to the economic blackmail of the 
partners who are bargaining for redemption, such that the partnership 
would pay those partners an inflated amount for their partnership 
interests. This result obviously is not one that the tax system should 
encourage.
4. Issues Regarding Tiered Partnerships
    The amendment grants regulatory authority to ``provide for the 
application of [section 470] to tiered and other related 
partnerships.'' The issues regarding the application of section 470 in 
the tiered partnership context are so significant that we believe that 
the provision literally will be impossible to apply in many, if not 
most, situations involving partnerships with taxable and tax-exempt 
partners.
    A very significant portion of the universe of partnerships with 
taxable and tax-exempt partners involves investment partnerships where 
the tax-exempts are merely passive financial investors in a ``fund'' 
partnership that is managed by a third-party promoter. The ``fund'' 
partnership often will invest in the underlying property or business 
that is the subject of its investment through one or more tiers of 
partnerships.\23\ It is not unusual for one fund to joint venture with 
another fund with respect to a particular investment. This may occur 
from the inception of an investment or during the life of an 
investment, where the original fund wants to diversify its risk or 
capture part of its return with respect to the investment. Also, many 
times, one fund will actually invest as a partner in another fund. 
There often will be different properties and partners involved at each 
tier in the investment structure.
---------------------------------------------------------------------------
    \23\ The exception in the Technical Corrections Act for 
nondepreciable property will not remove the partnership from the 
application of section 470 to the extent (as is common) the fund 
invests in non-corporate entities that hold operating businesses or 
other property (such as real estate) that is subject to the allowance 
for depreciation.
---------------------------------------------------------------------------
    Numerous additional reasons exist for tiered partnerships, 
including a desire to isolate certain properties in a portfolio for 
partial investment by a different group of investors, structural, as 
opposed to legal, subordination in lending and equity arrangements, 
regulatory reasons, and state and foreign tax planning, just to name a 
few. Given the frequency with which taxable and tax-exempt partners 
join together in tiered partnership arrangements, it is absolutely 
imperative that parties have clear guidance in any enacted legislation 
as to how the rules of section 470 should apply in this context. Some 
of the problems arising in the tiered context--for both taxpayers and 
the Government--are as follows:

      It is not clear how a lower-tier partnership will obtain 
the information necessary to determine whether and how section 470 
applies. Under the amendment, section 470 applies on a property-by-
property basis, so the partnership that holds the direct interest in 
the property will have to determine the extent of loss disallowance. 
Often, this partnership will have no access to information regarding 
the ultimate partners, whether there is a non-fair market value option 
at any level in the tiered partnerships, whether an arrangement or set 
aside exists at any level in the tiered partnerships, and whether non-
qualified allocations exist at any level in the tiered partnerships. 
Lower-tier partnerships could take the conservative position that 
section 470 applies to all property and include information on the 
Schedule K-1s to this effect. This obviously would be a reporting 
nightmare. Similarly, if there are multiple chains of partnerships 
flowing from the ultimate properties, and section 470 applies because 
of a violation in one of the chains, how will partners in another chain 
know to apply section 470 where all parties in that chain have arranged 
their affairs so as to comply with section 470?
      It is not clear how the no ``arrangement'' or ``set 
aside'' requirements apply in a tiered partnership structure. For 
instance, is the 20-percent safe harbor available in a tiered 
arrangement where funds may be set aside for distribution or for the 
benefit of a lender in one or more upper-tier partnerships? The 20-
percent safe harbor is not available in ``outside defeasance 
arrangements'' where the funds set aside are not ``partnership 
property.'' Does ``partnership property'' refer only to funds held by 
the partnership where the property that potentially is subject to 470 
resides, or does it refer to property anywhere in the chain between the 
property and the ultimate partners? If the 20-percent safe harbor 
cannot apply in this situation, the safe harbor will be of very little 
use in escaping the inappropriate application of section 470, 
particularly where ``arrangements'' and ``set asides'' with respect to 
lenders must be considered. If the safe harbor can apply, how does one 
accomplish the 20-percent calculations where there is a different mix 
of partners, properties, and creditors at each tier in the structure?

    The Joint Committee Description contemplates that regulations ``may 
permit or require the aggregation of tiered or related partnerships for 
purposes of any or all determinations required under section 470.'' 
Obviously, one can reach very different results depending on whether 
aggregation applies. Until regulations are promulgated, are taxpayers 
left to apply section 470 on both an aggregate and tier-by-tier basis, 
taking the worst of the two results? Similarly, if aggregation applies, 
how would it apply where there are different properties at each tier? 
If one were allowed to aggregate all properties and partnerships, it is 
possible to see how a SILO-replicating arrangement could ``slip through 
the cracks.'' That is, suppose that a SILO-replicating arrangement is 
created between a taxable and tax-exempt partner in a lower-tier 
partnership, but the parties bring into that partnership for a small 
interest an upper-tier partnership that, itself, holds significant 
property and has significant taxable partners or debt. By bringing in 
the upper-tier partnership, the base against which the 20-percent safe 
harbor is applied would grow to a level that could permit complete 
defeasance of the taxable investor's investment at the lower-tier 
partnership.
    Assuming that more limited aggregation must apply to prevent such 
arrangements, how would it apply? In order to prevent parties from 
``growing the base'' against which the 20-percent safe harbor applies, 
would the parties have to apply the 20-percent safe harbor on a 
property-by-property basis? Seemingly, such an analysis would require 
that the parties determine the ultimate proportionate ownership of each 
property by each partner and then take a proportionate amount of each 
partner's section 704(b) capital account and recourse debt, allocating 
such debt and capital to such portion of the property. This amount then 
would be combined for every taxable partner with respect to every 
property. Obviously, with different partners at each tier, economic 
sharing ratios that vary for partners at each tier, and different loans 
in place at each tier, this analysis would be inordinately complex, 
even assuming that perfect information were available.
    Similarly complicated questions arise in trying to apply the ``20 
percent of partnership debt'' prong of the ``allowable partnership 
amount'' test, given that debt with respect to partnership property may 
be incurred at different levels in the structure. Presumably this 
analysis would require an analysis of the test again on a property-by-
property basis and would require liability tracing rules akin to those 
used for purposes of section 163 or 265.

      Similar complications arise with respect to options in 
tiered partnership arrangements. The options rules contained in the 
amendment essentially operate with respect to arrangements whereby the 
tax-exempt can purchase, or can be forced to purchase, partnership 
property or interests for an amount other than fair market value. 
Questions arise in determining how the rules apply where options exist 
between tiers of partnerships or between a partner and a middle-tier 
partnership. Apart from the issue as to how the lowest tier partnership 
would know that such options even exist, an issue arises as to how such 
options fit into the scheme of section 470. Such options are not 
actually putting a direct interest in the property or partnership 
interest in the hands of a tax-exempt partner. However, such options 
may be increasing one or more tax-exempt partners' indirect interests 
in partnership property. On the other hand, depending on the mix of 
partners in the various tiers, the options may operate so as to 
decrease indirect tax-exempt ownership in the property. Or, the 
calculus may change from year to year based upon transfers of 
partnership interests among taxable and tax-exempt partners in upper-
tier partnerships. Again, even with perfect information, making this 
determination would be extremely time consuming and difficult. It may 
be that the Government would decide that any option at other than fair 
market value anywhere within the tiers would give rise to loss deferral 
under section 470. Such a result, however, would unfairly subject many 
legitimate arrangements to a loss deferral regime that Congress 
intended to apply only to SILO-replicating partnership structures.
5. Need for Other Exceptions/Rules
    As was indicated above, we believe that, under the Technical 
Corrections Act, many legitimate pass-thru entities would not be able 
to consistently satisfy both parts of the Two-Part Test and would be 
subject to section 470, even though they are not engaged in the kinds 
of activities with which Congress was concerned in enacting that 
section. Therefore, we continue to believe, as stated in our prior 
submission, that section 470 should not apply to the pass-thru entity's 
property if no tax-exempt partner has significant operational control 
over the property or uses the property to a significant extent.\24\ In 
addition, as explained in our prior report, we believe that 
partnerships satisfying the allocation rules in section 514(c)(9)(E) 
(i.e., the ``fractions rule'') should be excluded from section 470. The 
``qualified allocation'' rules in section 168(h)(6) are so restrictive 
as to be virtually useless in sophisticated partnerships like those 
that typically have tax-exempt partners, and there would be no 
potential for undertaking a SILO-like arrangement where the 
partnership's allocations comply with section 514(c)(9)(E).\25\
---------------------------------------------------------------------------
    \24\ As was explained in depth in our previous submission, the tax-
exempt partner's continued control over, or use of, the property is a 
critical ingredient in a SILO transaction. Also, note that this 
approach has the added benefit in the tiered partnership context of 
being capable of analysis by the partnership that holds the property 
that could be subject to section 470. By permitting analysis with 
respect to the property itself, the partnership that is required to 
report under section 470 could more easily determine whether section 
470 applies to property that it holds.
    \25\ We recognize that the fractions rule has been criticized in 
the past and that there may be some hesitancy to reference a rule that 
ultimately may be modified. Nonetheless, if the fractions rule is 
modified in the future, consideration could be given at that time to 
whether and how such modification would (or would not) apply in the 
context of section 470.
---------------------------------------------------------------------------
    Alternatively, we believe that a more general anti-abuse rule for 
the application of section 470 to partnerships, which incorporates an 
analysis of taxpayer intent and the facts and circumstances taken as a 
whole, warrants consideration, in lieu of an approach that, in effect, 
broadly sweeps legitimate partnerships ``into'' section 470 and then 
relies on specific exceptions to attempt to remove legitimate 
arrangements. We generally have not favored such a subjective analysis, 
given the problems inherent in planning in the face of uncertain 
standards. Nonetheless, if the law (or legislative history) contains 
appropriate specificity regarding the characteristics of the SILO 
transactions with which Congress is concerned, we think that such an 
approach could distinguish abusive transactions from those that are 
legitimate business transactions in a manner that is more accurate than 
the standards contained in the Two-Part Exception.
    Nonetheless, if the drafters remain committed to an approach that 
relies primarily on identifying economic aspects of a partnership 
arrangement that bear some relationship to a SILO, we believe it 
imperative that an additional, mutually exclusive, economic factor be 
adopted that would allow many legitimate partnerships to escape loss 
deferral under section 470. As one option, a factor could be adopted 
that would except from section 470 partnerships where all taxable 
partners satisfy a threshold projected variance in their investment 
return with respect to the partnership. Given that one of the hallmarks 
of a SILO transaction is that the taxable purchaser of the property 
undertakes no meaningful risk and has no meaningful upside with respect 
to the property, it seems that the Government could safely assume that 
a partner whose return is projected to vary by some reasonable amount 
is not engaging in a SILO-like transaction. Taxable partners with pure 
preferred interests (i.e., interests that accrue only a fixed return 
and that are allocated losses only after partners of all other classes 
have depleted their capital) would have to be excluded from the 
analysis, but, being in a last-loss position, such partners would not 
represent candidates for replicating a SILO transaction.
    We do not believe that this factor is an ideal means of excluding 
legitimate partnerships from the reach of section 470, as there are 
difficult issues of proof in showing variability in projected returns, 
and issues relating to the exclusion of partners with pure preferred 
interests in tiered partnership arrangements would be difficult. 
Nonetheless, this exception would be generally consistent with the 
approach taken in the Two-Part Exception and would offer an additional 
way out of section 470 for the many legitimate partnerships that would 
be unable to satisfy the Two-Part Exception.
6. Concerns Regarding Regulatory Authority
    Even if a partnership's property falls outside the scope of section 
470 by virtue of the exceptions currently included in the Technical 
Corrections Act, the bill would provide the Government with broad 
authority to issue regulations treating partnership property as tax-
exempt use property ``if such property is used in an arrangement which 
is inconsistent with the purposes'' of section 470, determined by 
reference to certain factors. These factors include that:
    (1) a tax-exempt partner maintains physical possession or control, 
or holds the benefits and burdens of ownership, with respect to such 
property;
    (2) there is ``insignificant'' equity investment in such property 
by any taxable partner (with the term ``insignificant'' not being 
defined);
    (3) the transfer of property to the partnership does not result in 
a change in use of such property;
    (4) the deductions for depreciation with respect to such property 
are allocated disproportionately to one or more taxable partners 
relative to such partner's ``risk of loss'' with respect to such 
property or to such partner's allocation of other partnership items; 
and
    (5) such ``other factors as the Secretary may determine.''
    We are very concerned with this extremely broad grant of regulatory 
authority and the vagueness of certain of the factors described above, 
particularly given the possibility that the IRS might attempt to issue 
regulations with retroactive application. Although we agree that the 
IRS should have the authority to issue regulations to subject those 
pass-thru entities that truly are being utilized to replicate SILO 
arrangements to section 470, we are concerned that the IRS might 
utilize this regulatory authority to challenge allocations and other 
arrangements that have nothing to do with the SILO-concerns Congress 
was trying to address in enacting section 470. This is particularly 
likely given the vagueness of certain of the factors and the lack of 
clear definition, in the statute and the JCT Description, of the 
particular kind of transaction with which Congress was concerned in 
enacting section 470.
    Thus, we strongly recommend that this broad grant of regulatory 
authority be narrowed to delete factors 2, 4, and 5, above; that factor 
1 be modified so as to allow de minimisuse by a tax-exempt partner; and 
that the parameters of a SILO-transaction and the purposes of section 
470 be defined more objectively (in the legislative history if not in 
the statute).\26\ Such modifications would provide more certainty for 
both the Government and taxpayers as to whether various arrangements 
are subject to section 470, while ensuring that any regulations that 
ultimately may be issued are appropriately focused upon the abuses with 
which Congress was concerned in enacting section 470.
---------------------------------------------------------------------------
    \26\ Among other things, we note that, relying on factors 2 and 4, 
the IRS and Treasury seemingly could, in effect, eliminate the 
exception under section 465(b)(6) of the ``at risk'' rules for 
qualified nonrecourse financing without obtaining legislative approval. 
We respectfully question whether Congress intended such a result in 
enacting legislation aimed at eliminating SILO transactions.
---------------------------------------------------------------------------
    We also are very concerned that the Technical Corrections Act 
seemingly would not provide the IRS with authority to exclude from the 
scope of section 470 those partnerships that fail to qualify for one of 
the objective exceptions, but that are not being used to replicate SILO 
transactions. Although we believe that the drafters of the Technical 
Corrections Act can significantly reduce the number of legitimate 
arrangements that would be inappropriately subject to section 470 by 
adopting appropriate standards, there still likely will be some 
legitimate arrangements that fail to fall within an exception as a 
result of a ``foot-fault.'' Such regulatory authority is even more 
critical if the additional exceptions we suggested are not added, given 
that more legitimate arrangements will be exposed to the application of 
section 470.
7. Other Technical Issues
    The definition of ``tax-exempt partner'' in the Technical 
Corrections Act still encompasses tax-exempt controlled entities. For 
the reasons set forth in our previous submission, we believe that 
taxable corporations and foreign persons that are taxed adequately in 
foreign jurisdictions should not be treated as tax-exempt entities for 
purposes of section 470.
    Section 470 generally applies on a property-by-property basis. The 
JCT Description provides that regulations ``may permit or require the 
aggregation of partnership property.'' As was indicated in our previous 
submission, we believe the property-by-property application presents a 
host of problems. Thus, we support the ability to aggregate property in 
appropriate cases.
    For the reasons set forth in our previous submission, RICs, REITs, 
and S corporations are not suitable vehicles for SILOs. Therefore, we 
suggest that it be clarified that none of these entities is treated as 
a pass-thru entity for purposes of applying section 470.\27\
---------------------------------------------------------------------------
    \27\ See C. Kulish, J. Sowell, and P. Browne, Section 470 and Pass-
thru Entities: A Problem in Need of a Solution, 7 Bus. Entities 12, 25-
26 (2005) (discussing why a REIT should not be treated as pass-thru 
entity for purposes of section 470).
---------------------------------------------------------------------------
8. Concerns Regarding Effective Date
    Section 6 of the Technical Corrections Act appears to apply to 
property acquired after March 12, 2004. As was indicated above, the IRS 
and Treasury have indicated that the IRS will not apply section 470 to 
disallow losses associated with property that is treated as tax-exempt 
use property solely as a result of the application of section 168(h)(6) 
in tax years beginning before 2006. The JCT Description indicates that 
the technical correction is not intended to supersede the rules set 
forth in the two regulatory moratoria that previously have been issued. 
Nonetheless, this concept is not reflected in the bill language. In 
addition:

      Given that the Technical Corrections Act was introduced 
in October of 2006, pass-thru entities would not have been able to even 
attempt to comply with the Two-Part Test for their 2006 tax years.
      Taxpayers may not be able to restructure arrangements 
that were put in place after March 12, 2004, in order to comply with 
the Two-Part Test in future years.
      As was indicated above, we believe it is inappropriate 
for the Technical Corrections Act to expand the portion of property 
with respect to which losses are disallowed retroactively.

    To this end, we recommend that section 470 not be applied by reason 
of section 168(h)(6) to any property of a pass-thru entity acquired 
before the date the Technical Corrections Act was introduced. The 
amendments to section 470 similarly should apply only to property 
acquired on or after the date the Technical Corrections Act was 
introduced.\28\ Nonetheless, even this effective date will produce an 
inequitable result where property is acquired after such date by 
partnerships that have an existing ``arrangement'' or ``set aside'' or 
an option at other than fair market value that cannot be modified or 
eliminated. Thus, we respectfully submit that ``arrangements'' or ``set 
asides'' or options at other than fair market value that are in place 
as of the effective date should be grandfathered, such that they do not 
cause a partnership to fail the Two-Part Exception.
---------------------------------------------------------------------------
    \28\ We recognize that the effective date of a technical correction 
traditionally is the same as the effective date of the legislation to 
which the technical correction relates. We note, however, that section 
7 of the Technical Corrections Act, relating to dividends received by a 
corporation that is a DISC or former DISC, breaks from this tradition 
and applies only to dividends received on or after September 26, 2006 
(the date that the Technical Corrections Act was introduced), in 
taxable years ending after such date. We respectfully submit that the 
tax policy concerns justifying such a delayed effective date are 
extremely compelling in the context of section 470, such that the 
effective date of section 470 and the amendment thereto similarly 
should be adjusted.
---------------------------------------------------------------------------
    We do not believe that such modifications present an opportunity 
for abuse (or should cause the legislation to lose revenue) insofar as 
we are not aware of any partnerships that have been structured to 
replicate the economics of a SILO arrangement. Indeed, the enactment of 
section 470 in the 2004 Act should have deterred the promotion of any 
such partnership arrangements.
V. Extension of Moratorium
    As explained above, Congress intended for section 470 to apply only 
to those pass-thru entities that are engaged in, or being used to 
replicate, SILO transactions. As noted, we are not aware of any pass-
thru entities that, in fact, have been structured or utilized so as to 
replicate SILO transactions. Nonetheless, a large number of pass-thru 
entities in a variety of different industries are potentially subject 
to the loss deferral rules merely because of the characteristics of 
their partners and their allocations. While section 6 of the Technical 
Corrections Act is a step in the right direction, it does not go far 
enough in exempting from the application of section 470 those entities 
that are not engaged in the abuses Congress intended to prevent. 
Further, given the vagaries of the legislative process, it is unclear 
whether technical corrections legislation will be enacted this year.
    Therefore, if appropriate legislation is not enacted this year that 
removes legitimate arrangements from the application of section 470, we 
strongly encourage the Government to extend the moratorium on the 
application of section 470 to pass-thru entities that are not engaged 
in covered leasing transactions to tax years beginning before 2007. 
Failing to extend the moratorium in this situation not only would 
subject a large number of legitimate taxpayers to a loss deferral 
regime in contravention of Congressional intent, but also would create 
a compliance nightmare for both the Government and taxpayers given the 
lack of operating rules for the application of section 470 to 
partnerships. Further, extending the moratorium in late 2006 would not 
open the door for synthetic SILOs to be implemented in 2006 given both 
that most of 2006 already has transpired and that legislation is 
pending that would subject any synthetic SILOs structured in late 2006 
to the loss deferral rules.
II. Comments on Proposed Technical Corrections to Code Section 355
A. Current Law
    The Tax Increase Prevention and Reconciliation Act of 2005 amended 
the active trade or business requirement of section 355(b) by adding 
paragraph (3). Under section 355(b)(3), all members of a corporation's 
``separate affiliated group'' (determined under section 1504(a) and 
without regard to section 1504(b)) (``SAG'') are treated as one 
corporation for purposes of the active trade or business requirement. 
Section 355(b)(3) applies to distributions made after May 17, 2006, and 
on or before December 31, 2010.
B. Proposed Technical Correction
    In the Tax Technical Corrections Act of 2006 (the ``Act''), 
Congress has proposed to clarify that the term ``separate affiliated 
group'' in section 355(b)(3) would not include any corporation that 
became an otherwise qualifying member of the SAG (or of any SAG to 
which the active business rule of the provision applies for the same 
distribution) within the five-year period ending on the date of the 
distribution by reason of one or more transactions in which gain or 
loss was recognized in whole or in part. Additionally, the Act would 
provide that a business conducted by the corporation at the time it 
became a qualifying member will not be included. The Act also would 
clarify that Treasury shall prescribe regulations that provide for 
proper application of section 355(b)(2)(B), (C), and (D) to 
distributions to which section 355(b)(3) applies.
    The Joint Committee on Taxation's description of the Act 
illustrates the proposed amendment as follows: Distributing spins off 
Controlled. Within the five-year period ending on the date of the spin-
off, Distributing acquires, in a transaction in which gain or loss was 
recognized, stock ownership of Corporation such that Corporation would 
otherwise qualify as a member of Distributing's SAG. Corporation will 
not be considered a member of the SAG of Distributing if it is retained 
by Distributing in the spin-off. Moreover, if Distributing transfers 
the stock of Corporation to Controlled prior to the distribution, 
Corporation will not be considered a member of the SAG of Controlled. 
Likewise, a business conducted by Corporation will not be includable in 
either relevant SAG, regardless of whether such business is held by 
another corporation that otherwise is included in either relevant SAG.
C. Analysis of Proposed Technical Correction
    Historically, the requirements for section 355 treatment were based 
on the definition of ownership as provided in section 368(c) (at least 
80 percent of the voting stock and at least 80 percent of all other 
classes of stock). For example, section 355(b)(2)(D) provides that if 
control of a corporation, as defined in section 368(c), is acquired in 
a transaction in which gain or loss is recognized, the business of that 
corporation may not be relied upon to satisfy the active trade or 
business requirement of section 355(b). New section 355(b)(3), however, 
is based on the definition of ownership contained in section 1504(a) 
without regard to section 1504(b) (at least 80 percent of the voting 
power and value of all stock). Section 355(b)(3) as enacted by TIPRA 
did not address the interaction of the affiliated group test of section 
355(b)(3) and the control test of section 368(b)(2)(D), creating 
certain anomalies.
    In one such anomalous example, which may have been the impetus for 
the proposed technical correction, it seems possible to satisfy the 
section 355(b)(3) active trade or business requirement in contravention 
of the policy (but not the language) of section 355(b)(2)(D) by 
acquiring stock of a corporation that satisfies the section 1504 
ownership requirement, but not the section 368(c) ownership 
requirement. For example, if Distributing has an active business but 
Controlled does not, Controlled could purchase the common stock of 
Corporation, that represents 80 percent of the voting power and value 
of Corporation, but not acquire any of Corporation's non-voting 
preferred stock. As a technical matter, Controlled would satisfy the 
active business requirement of section 355(b)(3) because Corporation 
would be a member of Controlled's SAG. The proposed technical 
correction would provide that Corporation could not be treated as part 
of Controlled's SAG because it was purchased within the last five 
years. It seems appropriate to ensure that the principle of section 
355(b)(2)(D) should continue to apply to members of a corporation's SAG 
that were acquired in a transaction in which gain or loss was 
recognized.
    The proposed technical correction seems to go further, though. 
Excluding Corporation from the SAG seems to indicate that the 
``expansion'' doctrine would not apply to an acquisition of stock in a 
transaction in which gain or loss is recognized. Treasury Regulation 
Sec. 1.355-3(b)(3)(ii) permits a corporation to acquire a business in a 
taxable acquisition during the five-year period, provided that the 
business is an expansion of a pre-existing active business (i.e., a 
business that qualifies as an active business under section 355(b)(2)). 
An expansion requires that the acquired business is in the same line of 
business as the old-and-cold business. It is wholly consistent with the 
operation and policy of section 355(b)(3), providing that all members 
of a corporation's separate affiliated group are treated as one 
corporation, that a taxable acquisition of a business by any member of 
the separate affiliated group potentially could qualify as an expansion 
regardless of whether by stock or asset acquisition. In fact, even 
without the enactment of section 355(b)(3), the Internal Revenue 
Service had determined that it was possible to rely on the expansion 
doctrine for a business acquired in a taxable acquisition of stock.
D. Recommendation
    The American Bar Association Section on Taxation strongly 
recommends that the proposed technical correction not be enacted 
without modification to make clear that any such change will not 
interfere with the law that has developed to allow an expansion of a 
historic business. This could be accomplished by making clear that the 
expansion doctrine will be applied on an affiliated group basis, 
without regard to the SAG membership and providing examples to 
illustrate the principle.
    We note that there are other anomalies created by the disparate 
ownership definitions that could be addressed by modifications to 
section 355. For example, assume Controlled (with no business of its 
own) historically has owned all of the voting common stock of 
Corporation representing 80 percent of the value of Corporation, but 
does not own the nonvoting preferred stock, Corporation is part of 
Controlled's SAG and thus satisfies section 355(b)(3). If Controlled 
then purchases Corporation's nonvoting preferred stock prior to the 
spin-off, section 355(b)(2)(D) technically would apply. Presumably, 
Controlled should still be treated as satisfying the affiliated group 
test of section 355(b)(3), but it is unclear how to reconcile the two 
provisions and whether satisfying section 355(b)(3) would be dependent 
on arguing that the purchase is an expansion of a pre-existing business 
in Controlled or the Corporation itself (which does not seem sensible). 
Clarification on this interaction would be welcome.

                                 

                                            Williams & Jensen, P.C.
                                       on behalf of Church Alliance
                                                   October 27, 2006
Chairman William Thomas
Ranking Member Charles Rangel
Committee on Ways and Means
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Thomas and Ranking Member Rangel:

    On behalf of the Church Alliance, an organization representing the 
church benefits programs of a wide variety of denominations, I am 
submitting the attached proposed technical correction to the Pension 
Protection Act of 2006, for consideration to be included in the Tax 
Technical Corrections Act of 2006.
    Thank you for the opportunity to comment.
            Sincerely,
                                                        David Starr
                                                            Counsel
Technical Correction for PPA, Section 867
Providing Relief on Section 415 Percentage Limits for Lower Paid 
        Participants of Church Plans
    Certain defined benefit church plans provide benefit formulas that 
favor certain lower-paid employees/ministers. For example, some plans 
provide that benefits are calculated using a denomination's average 
wage for those who earn less than the average amount. These plans are 
finding that they are exceeding the tax law limitation under section 
415(b) that prohibits paying benefits that exceed the average of the 
highest three years of compensation. The Pension Protection Act of 2006 
(H.R. 4, P.L. 109-280) addresses this issue in section 867 for certain 
non-highly compensated participants in church plans. The enacted 
language of the law reads as follows:
    ``SEC. 867. CHURCH PLAN RULE.
    (a) In General--Paragraph (11) of section 415(b) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following:
    ``Subparagraph (B) of paragraph (1) shall not apply to a plan 
maintained by an organization described in section 3121(w)(3)(A) except 
with respect to highly compensated benefits. For purposes of this 
paragraph, the term highly compensated benefits' means any benefits 
accrued for an employee in any year on or after the first year in which 
such employee is a highly compensated employee (as defined in section 
414(q)) of the organization described in section 3121(w)(3)(A). For 
purposes of applying paragraph (1)(B) to highly compensated benefits, 
all benefits of the employee otherwise taken into account (without 
regard to this paragraph) shall be taken into account.''
    (b) Effective Date--The amendment made by this section shall apply 
to years beginning after December 31, 2006.'' [emphasis added]
    The JCT technical description of H.R. 4 (JCX-38-06) explains that 
``[t]he provision provides that the 100 percent of compensation limit 
does not apply to a plan maintained by a church or qualified church 
controlled organization defined in section 3121(w)(3)(A) except with 
respect to highly compensated benefits''' [emphasis added].
    The Church Alliance believes the Code citation that is highlighted 
in the text of the PPA is contrary to the JCT description and is a 
technical drafting error, for the following reasons:

    1.  The language in the bill does not reflect the description 
contained in the Joint Committee description. The description provides 
that Qualified Church Controlled Organizations (QCCOs) were intended to 
be covered under the provision. The actual citation to Code section 
3121(w)(3)(A) omits QCCOs.
    2.  The language creates a distinction between churches and certain 
Qualified Church Controlled Organizations (QCCOs) that exists nowhere 
else in the pension provisions of the Code to our knowledge. Non-QCCOs 
were intentionally excluded from the provision (for example, church 
controlled hospitals). Distinctions between churches and QCCOs on the 
one hand, and non-QCCOs on the other hand, have been made for church 
plans in several cases in the Code. However, there is no policy reason 
for protecting the pension benefits of lower-paid workers in a church, 
but not the pensions of lower-paid workers of a qualified church 
controlled organization (e.g., charity, church camp, mission, etc.).

    We believe that the source of the technical error was that in the 
final drafting process for H.R. 4, Congress used language originally 
included in H.R. 1776 (Portman-Cardin) as introduced in the 108th 
Congress. Section 906 of that bill included the Sec. 415 change, but 
mistakenly limited it only to churches as described in the Code section 
3121(w)(3)(A). That mistake was subsequently corrected when Rep. 
Portman reintroduced his next version of the bill in the 109th Congress 
(H.R. 1960, sec. 405). Moreover, the language was also correct in S. 
2193 introduced this year by Senator Hutchison.
    On behalf of the Church Alliance, we urge Congress to correct this 
technical error in the language of section 867.
Proposed Language:
    Section 867(a) of the Pension Protection Act of 2006 (P.L. 109-280) 
is amended by striking `section 3121(w)(3)(A)' wherever it appears and 
inserting `section 3121(w)(3)'.

                                 

                                                   October 31, 2006
The Honorable Bill Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

The Honorable Charles Grassley
Chairman
Committee on Finance
U.S. Senate
Washington, DC 20510

Chairman Thomas and Chairman Grassley:

    I am writing to convey the interests of small business advocacy 
organizations that have contacted me regarding H.R. 6264 and its Senate 
counterpart S. 2026, the Technical Corrections Act of 2006. 
Specifically, trade and membership organizations that represent small 
businesses have expressed concern with how Section 7 may impact their 
operations.
    Congress established the Office of Advocacy at the U.S. Small 
Business Administration (SBA) to represent the views of small 
businesses before Federal agencies and Congress. Public Law 94-305 
requires that the Office of Advocacy, ``determine the impact of the tax 
structure on small businesses and make legislative and other proposals 
for altering the tax structure to enable all small business to realize 
their potential for contributing to the improvement of the Nation's 
economic well-being.'' \1\
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec. 634(b)(4).
---------------------------------------------------------------------------
    The Office of Advocacy is an independent office within the U.S. 
Small Business Administration, so the views expressed in this letter do 
not necessarily reflect the views of the SBA or the Administration. 
This letter was not circulated to the Office of Management and Budget 
for comment prior to its submittal to Congress.
    First, I must commend the Committee for soliciting review and 
comment, for working in consultation with the Joint Committee on 
Taxation, and for working with the U.S. Department of the Treasury 
prior to finalizing technical corrections. The technical corrections 
legislation will be better written due to your inclusiveness and your 
commitment to make comments publicly available after the comment period 
has ended.
    I feel that it is my responsibility to convey that some small 
business groups have concerns with Section 7. The small business groups 
that have contacted me believe Section 7 will prevent Interest Charge 
Domestic International Sales Corporation (IC-DISC) dividends from being 
taxed at the lower 15-percent tax rate.
    I pointed out the positive impact that recent tax legislation has 
had on small business when I testified before the Small Business 
Committee in the House of Representatives in 2003.\2\ More recently, 
dynamic analysis conducted by the U.S. Department of Treasury, 
documents the economic benefits of lower tax rates on dividends for 
small business and the economy in general.\3\ The tax relief 
legislation drafted by your Committee and enacted in 2001 and 2003 
demonstrates an appreciation for how legislative changes to the tax 
code impact small business. I would like to work with the Committee to 
ensure that small business views are fully vetted prior to finalizing 
the Tax Technical Corrections Act of 2006 so that small business can 
continue to benefit from tax relief passed by the 108th and 109th 
Congresses.
---------------------------------------------------------------------------
    \2\ Testimony of Thomas M. Sullivan, Chief Counsel for Advocacy, 
U.S. Small Business Administration before the Committee on Small 
Business, U.S. House of Representatives, Assisting Small Business 
Through the Tax Code--Recent Gains and What Needs to be Done (July 23, 
2003), http://www.sba.gov/advo/laws/test03_0723.html
    \3\ U.S. Department of the Treasury, Office of Tax Analysis, A 
Dynamic Analysis of Permanent Extension of the President's Tax Relief 
(July 25, 2006), http://www.ustreas.gov/press/releases/ reports/
treasurydynamicanalysisreporjjuly252006.pdf
---------------------------------------------------------------------------
    If you have questions about the content of this letter, please do 
not hesitate to contact me or my office's tax counsel, Candace Ewell.
            Sincerely,
                                                 Thomas M. Sullivan
                                         Chief Counsel for Advocacy

                                 

                                                        NH Research
                                           Irvine, California 92606
                                                   October 31, 2006
The Honorable Bill Thomas
Chairman, Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Congressman Thomas,

    NH Research is a privately-owned, $8-million-per-year manufacturer 
of automated test equipment for electronic power supplies. 
Approximately 1/3 of our business is international. This percentage, 
however, is growing rapidly due to the mass exodus of domestic 
electronics manufacturing to lower-cost Asian countries. In order to 
compete for business abroad we must invest heavily in local sales and 
service offices. For example, we have had to established offices in 
Shenzhen and Suzhou, China, where 70% of the world's electronic power 
supplies are now manufactured.
    NH Research has only been able to accomplish this through the 
benefits afforded by the IC-DISC, which we have had in place since 
1986.
    To suddenly repeal this benefit is both unfair and hardship to our 
export sales efforts. In addition, it is disruptive to our 2006 year-
end tax planning. Small private companies like us need all help they 
can get to compete in the global marketplace.
    We urge you to delay enactment of this ``technical correction'' 
until more discussion is held about the unintended consequences on 
small manufacturers increasingly dependent on export sales.
    Thank you for considering our comments.
            Sincerely,
                                                       Peter Swartz
                                                          President

                                 

                                                 Stoughton Trailers
                                         Stoughton, Wisconsin 53589
                                                   October 30, 2006

Hon. Bill Thomas Chairman House Ways and Means Committee

    Dear Hon. Thomas and Committee:
    We are a truck trailer, container and chassis manufacturer 
employing 1,300 people in Stoughton Wisconsin, Evansville Wisconsin and 
Brodhead Wisconsin. This year, within a six-month period, the Chinese 
have put our Evansville facility out of business. The Evansville 
facility was dedicated to manufacturing domestic containers and 
chassis. We have employed approximately 300 people there since 1991. 
This year the Chinese have put U.S. manufacturers out of business, 
including Hyundai, Inc., a manufacturer of the same product in Tijuana, 
Mexico. The Chinese are importing both the chassis and the container to 
the West Coast cheaper than we can buy the materials for. Even Hyundai, 
Inc. of Tijuana, Mexico with their $7/hour labor fully burdened cannot 
compete. They are already making inroads into the U.S. over-the-road 
freight trailer market. I can foresee that within a few years they will 
import the bulk of truck trailers manufactured in this country. We also 
manufacture a large amount of trailers for export to Canada. I want to 
bring your attention to another pending disadvantage we will have if a 
Tax Technical Correction is enacted.
    This letter is to alert you to a pending tax law development that 
we believe will be very harmful to U.S. based small and mid-sized 
manufacturers. The proposed change will increase taxes on U.S. 
manufacturers, making it even harder to compete against manufacturers 
located in other countries that offer incentives (i.e. China 
manufacturing tax holidays or India software exportation holidays.)
    The Technical Corrections Bill introduces a Policy Change. Section 
7 of the Tax Technical Corrections Act of 2006 prevents dividends 
received form an IC-DISC from obtaining the same maximum 15% federal 
tax rate as qualifying dividends from other types of corporations. Such 
a substantial change in tax law would seem to merit open consideration 
by House members and the public.
    The One-Time Dividends Received Deduction Did Not Help Most 
Privately-Held Manufacturers. Various sources have quoted figures 
suggesting that small businesses represent the vast majority of new 
jobs created in the U.S. But, the one-time dividend received deduction 
available last year mostly benefited those U.S. multinationals who had 
already exported jobs and who had already built up significant foreign 
infrastructures. There was no corresponding reward for those U.S. 
enterprises that built and maintained their businesses at home.
    The Tax-Sophisticated Manufacturer Still Obtains Offshore Tax 
Benefits. The Technical Corrections Bill does not eliminate the 
availability of the 15% maximum federal rate on dividends from 
qualifying foreign corporations or qualifying corporations formed in 
possessions of the United States. Therefore, competitors who choose to 
locate operations outside of the U.S. can still benefit from the 15% 
tax rate after passage of the Technical Corrections Bill. This result 
seems unfair.
    The Foreign-Owned Manufacturer Still Obtains Export Benefits. The 
Technical Corrections Bill applies only to U.S. non-corporate 
taxpayers. It doesn't seem fair that Congress would enact a Technical 
Correction that appears to aid the foreign-owned U.S.-owned, U.S.-based 
manufacturer, both of whom are competing in the global marketplace.
    Thank you for your consideration of this letter. I appreciate your 
leadership on this important issue to U.S.-owned manufacturers.
            Very truly yours,
                                                   Donald D. Wahlin
                                                                CEO

                                 

                      Software and Information Industry Association
                                                   October 31, 2006
The Honorable Charles Grassley
Chairman
Committee on Finance
U.S. Senate
Washington, DC 20510

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

Dear Chairmen Thomas and Grassley,

    On behalf of the Software & Information Industry Association 
(SIIA), I appreciate the opportunity to provide feedback on the Tax 
Technical Corrections Act of 2006. As a representative of many small 
and medium-sized technology companies, I am concerned about the 
potential effects of the amendments related to dividends from IC-DISCs, 
specifically, the amendments to Sec. 302 of the Jobs and Growth Tax 
Relief Reconciliation Act of 2003 (JGTRRA).
    SIIA appreciates the efforts that you have taken in drafting the 
tax technical corrections legislation to ensure that the effects of 
Section 302 are not retroactive to the date of enactment of the JGTRRA. 
However, because a clear, simple reading of JGTRRA could have led many 
companies to utilize the IC-DISC for obvious reasons, we are concerned 
that any effective date of Section 302 other than a prospective date 
would present harmful consequences for many companies utilizing IC-
DISCS--consequences that we believe are unintended and unjustified by 
this legislation.
    Companies, in creating an IC-DISC, have a choice about when to 
structure the commission payment and resulting dividend. Some taxpayers 
choose to do this monthly, some quarterly, some semi-annually. Many 
choose to declare the commission and the dividend annually--at the end 
of the year--to minimize administration and financial charges that 
result from the transaction. As the amendment to Section 302 is 
proposed, these companies would be prohibited from engaging in an IC-
DISC transaction for calendar year 2006. Effectively, the retroactive 
nature of this proposed amendment punishes these taxpayers for creating 
a transaction that was perfectly lawful. Furthermore, the retroactive 
amendment treats similarly situation taxpayers differently for no other 
reason than the choice of administrative mechanics, and it does so 
without notice or a chance to make other decisions before the rules 
would be amended.
    In light of the unintended consequences of choosing September 29, 
2006 as the effective date, I respectfully request that the drafters 
change the effective date so that all similarly situated taxpayers are 
treated similarly. Thus, we would urge the drafters to choose tax years 
beginning after December 31, 2006 as a more equitable effective date.
            Sincerely,
                                                          Ken Wasch
                                                          President

                                 

                                                           KPMG LLC
                                                   October 25, 2006
Hon. Bill Thomas, Chairman
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman Thomas,

    This letter is being submitted in response to your September 29, 
2006 request for comments regarding the ``Tax Technical Corrections Act 
of 2006,'' introduced on September 29, 2006, in the House of 
Representatives as H.R. 6264 (the ``Act''). See Committee on Ways & 
Means, Press Release, September 29, 2006. In particular, this letter 
requests that the Committee expressly confirm the intent of the 
proposed clarification of the active trade or business definition of 
section 355 by section 2(b) of the Act, particularly as discussed in 
the related Joint Committee on Taxation report. See Joint Committee on 
Taxation, Description of the Tax Technical Corrections Act of 2006, p. 
3 (JCX-48-06), October 2, 2006 (the ``JCT Report'').
    As I understand it, the proposed clarification is intended to 
ensure that a taxable stock acquisition does not result in section 
355(b) being satisfied if it would not have resulted in section 355(b) 
being satisfied prior to the enactment of section 355(b)(3). It is my 
further understanding that the proposed clarification, however, is not 
intended to limit the Department of the Treasury or the Internal 
Revenue Service from interpreting the application of section 355(b)(2) 
in the context of stock acquisitions as they had prior to the 
legislative enactment of section 355(b)(3) or, as appropriate, from 
altering such interpretations.
    For example, the otherwise qualifying active trade or business 
conducted by a corporation acquired in a taxable stock acquisition from 
an affiliate within the five-year period prior to the distribution may 
continue to satisfy section 355(b)(2)(D) in circumstances in which the 
``purchase'' basis is eliminated. See Treas. Reg. Sec. 1.355-3(b)(4) 
(applicable to acquisitions prior to the Revenue Act of 1987 and 
Technical and Miscellaneous Revenue Act of 1988) and related private 
letter rulings; see also Treas. Reg. Sec. 1.355-6(b)(2)(iii)(A)-(C). 
Similarly, to the extent the ``business expansion'' doctrine, as 
reflected in Treas. Reg. Sec. 1.355-3(b)(3)(ii) and the related 
legislative history (see Conf. Rep. No. 2543, at 38 (1954)), sanctioned 
a taxable stock acquisition prior to the enactment of section 
355(b)(3), such acquisition may continue to be sanctioned. See PLR 
200545001 (March 10, 2005).
    If this understanding of the intent of Section 2(b) of the Act is 
correct, it is respectfully requested that the Committee include 
language confirming such understanding in any Committee Report that may 
accompany the Act's enactment. For that purpose, included below for 
your reference is proposed clarifying language for the JCT Report which 
is marked to show the proposed revisions (``Appendix A'').
            Respectfully submitted,
                                                   Thomas F. Wessel
                                                          Principal
                                 ______
                                 
          Appendix A_Proposed Clarifying Language Highlighted

        DESCRIPTION OF THE TAX TECHNICAL CORRECTIONS ACT OF 2006
                         Prepared by the Staff
                                 of the
                      JOINT COMMITTEE ON TAXATION
                            OCTOBER 2, 2006
                               JCX-48-06

                              INTRODUCTION

    This document,\1\ prepared by the staff of the Joint Committee on 
Taxation, provides a description of the Tax Technical Corrections Act 
of 2006, as introduced on September 29, 2006, in the House of 
Representatives as H.R. 6264, and in the Senate as S. 4026.
I. TAX TECHNICAL CORRECTIONS
    [p. 2] The bill includes technical corrections to recently enacted 
tax legislation. Except as otherwise provided, the amendments made by 
the technical corrections contained in the bill take effect as if 
included in the original legislation to which each amendment relates.
Amendments Related to the Tax Increase Prevention and Reconciliation 
        Act of 2005
    [. . .] [p. 3] Modification of active business definition under 
section 355 (Act sec. 202).--The provision clarifies that, for purposes 
of the special rule in section 355(b)(3) relating to the active 
business requirement, the term ``separate affiliated group'' does not 
include any corporation that became an otherwise qualifying member of 
such separate affiliated group (or of any other separate affiliated 
group to which the active business rule of the provision applies with 
respect to the same distribution) within the 5-year period ending on 
the date of the distribution by reason of one or more transactions in 
which gain or loss was recognized in whole or in part., or in part, if 
such transaction(s) would have precluded such corporation from 
qualifying as being engaged in the active conduct of a trade or 
business prior to the enactment of section 355(b)(3). Also, a business 
conducted by such a corporation at the time it became such an otherwise 
qualifying member shall not be included. Thus in determining the 
satisfaction of the active business requirement if, prior to the 
enactment of section 355(b)(3), it could not have been so included.
    Therefore, as one example, if a parent corporation spins off a 
subsidiary and, within the 5-year period ending on the date of the 
spin-off the parent corporation had acquired, in a transaction in which 
gain or loss was recognized, stock ownership of a third corporation 
such that the third corporation would otherwise qualify as a member of 
a separate affiliated group in the spin-off, then that third 
corporation shall not be considered a member of the separate affiliated 
group of the parent corporation if it is retained by the parent 
corporation in the spin-off. Also, that third corporation shall not be 
considered a member of the separate affiliated group of the spun-off 
subsidiary, even if the parent corporation has dropped the stock of 
that third corporation down to the subsidiary in a tax-free transaction 
prior to the spin-off. Similarly, a business conducted by the acquired 
third corporation at the time that corporation would otherwise have 
qualified as a member of a relevant separate affiliated group (but for 
the transaction in which gain or loss was recognized) also will not be 
includable in either relevant separate affiliated group, regardless of 
whether such business is held by another corporation that otherwise is 
included in either relevant separate affiliated group.
    The conclusions in the foregoing examples that the acquired 
corporation and its business are not included in the relevant separate 
affiliated group are based on an assumption that such corporation or 
business could not have been relied upon to satisfy section 355(b) 
prior to the enactment of section 355(b)(3). Thus, for example, no 
implication is intended as to whether section 355(b) is satisfied in 
the case of a corporation whose stock was acquired in a taxable 
transaction from (i) an affiliate after the Revenue Act of 1987 and the 
Miscellaneous Revenue Act of 1988 (see Treas. Reg. section 1.355-
3(b)(4)), or (ii) a non-affiliate where a direct taxable asset 
acquisition could satisfy such requirement under the ``business 
expansion'' doctrine.
    The provision also clarifies that the Treasury Department shall, as 
appropriate, prescribe regulations that or otherwise interpret section 
355(b)(3) to provide for the proper application of sections 
355(b)(2)(B), (C) and (D) to distributions to which the provision 
applies.
---------------------------------------------------------------------------
    \1\ This document may be cited as follows: Joint Committee on 
Taxation, Description of the Tax Technical Corrections Act of 2006 
(JCX-48-06), October 2, 2006.

---------------------------------------------------------------------------
                                 

Statement of Williams & Jensen PLLC, on behalf of Houston Firefighters' 
                       Relief and Retirement Fund
The Pension Protection Act, Section 828
SEC. 828. WAIVER OF 10 PERCENT EARLY WITHDRAWAL POENALTY TAX ON CERTAIN 
        DISTRIBUTIONS OF PENSION PLANS FOR PUBLIC SAFETY EMPLOYEES.
        (a) In General.--Section 72(t) of the Internal Revenue Code of 
1986 (relating to subsection not to apply to certain distributions) is 
amended by adding at the end the following new paragraph:
        ``(10) Distributions to qualified public safety employees in 
governmental plans.--
        ``(A) In general.--In the case of a distribution to a qualified 
public safety employee from a governmental plan (within the meaning of 
section 414(d)) which is a defined benefit plan, paragraph (2)(A)(v) 
shall be applied by substituting `age 50' for `age 55'.
        ``(B) Qualified public safety employee.--For purposes of this 
paragraph, the term qualified public safety employee' means any 
employee of a State or political subdivision of a State who provides 
police protection, fire-fighting services, or emergency medical 
services for any area within the jurisdiction of such State or 
political subdivision.''.
        (b) Effective Date.--The amendment made by this section shall 
apply to distributions after the date of the enactment of this Act.
Explanation of Section 828
    According to the Joint Committee on Taxation's Technical 
Explanation of the Pension Protection Act (JCX-38-06, p. 177), Section 
828 provides that ``the 10-percent early withdrawal tax does not apply 
to distributions from a governmental defined benefit pension plan to a 
qualified public safety employee when separated from service after age 
50.''
Questions Following Enactment
    (1) Whether the Section 72(t)(4) recapture tax would apply if a 
qualified public safety employee began a series of substantially equal 
periodic payments before or after enactment of Section 828 and then 
changed the series to utilize the new Section 828 exception?
    (2) Whether a qualified public safety employee who begins a series 
of substantially equal periodic payments before or after enactment of 
Section 828 is precluded from utilizing the new exception provided 
under Section 828?
Discussion of Questions
    Question 1--Prior to or following enactment of Section 828 some 
qualified public safety employees reached age 50, separated from 
service, and began taking a series of substantially equal periodic 
payments. These payments may have been necessitated by their children's 
education expenses or their own health expenses. Meanwhile, other 
public safety employees reached age 50, separated from service, but 
were in a financial situation that allowed them to defer distributions.
    While the latter group may begin taking penalty-free distributions 
following enactment of Section 828, the former group cannot change its 
series of substantially equal period payments without triggering the 
recapture tax under Section 72(t)(4). The former group finds itself 
disadvantaged under the revised statute.
    The final months or years of a public safety employee's life may be 
ones of catastrophic illness brought about by the on-the-job hazards 
they faced for years while protecting the public. Through enactment of 
Section 828 Congress demonstrated its belief that public safety 
employees who have reached age 50 should be given the flexibility to 
receive pension distributions without being penalized. Unfortunately, a 
small class of public safety employees stand to be denied this tax 
relief because they began a series of periodic payments.
    The first sentence of the proposed technical correction language 
below provides that those qualified public safety employees who find 
themselves caught between the recapture tax and the new Section 828 
exception will not be subject to the additional tax.
Question 2--A question has been raised within the governmental plan 
        community over whether a qualified public safety employee who 
        began a series of substantially equal periodic payments would 
        be precluded from taking advantage of the new Section 828. The 
        second sentence of the language below provides that commencing 
        a series of substantially equal periodic payments does not 
        preclude a qualified public safety employee from subsequently 
        taking a penalty-free distribution under Section 828.
Proposed Technical Correction Language
    Section 72(t)(10) is amended by adding a new subparagraph:
    ``(C) APPLICATION TO SERIES OF SUBSTANTIALLY EQUAL PERIODIC 
PAYMENTS.--Section 72(t)(4) shall not apply if a change in a series of 
substantially equal periodic payments is made after the date of 
enactment of this paragraph to a qualified public safety employee, 
provided the qualified public safety employee met the requirements of 
subparagraph (A) at the time the substantially equal periodic payments 
commenced. Additional tax under this section is waived as to 
distributions to which subparagraph (A) applies, regardless of whether 
prior distributions were made pursuant to section 72(t)(2)(A)(iv). ''

                                 
