[JPRT 110-1-00]
[From the U.S. Government Publishing Office]



                                                             JCS-1-00


                        [JOINT COMMITTEE PRINT]
 
                         GENERAL EXPLANATION OF
                            TAX LEGISLATION
                     ENACTED IN THE 109TH CONGRESS

                               ----------                              

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                            January 17, 2007

  GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 109TH CONGRESS

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                                                               JCS-1-00

                                     

                        [JOINT COMMITTEE PRINT]

                         GENERAL EXPLANATION OF

                            TAX LEGISLATION

                     ENACTED IN THE 109TH CONGRESS

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                            January 17, 2007

                      JOINT COMMITTEE ON TAXATION

                      109th Congress, 2nd Session
                                 ------                                
               SENATE                               HOUSE
CHARLES E. GRASSLEY, Iowa            WILLIAM M. THOMAS, California
  Chairman                             Vice Chairman
ORRIN G. HATCH, Utah                 E. CLAY SHAW, Jr., Florida
TRENT LOTT, Mississippi              NANCY L. JOHNSON, Connecticut
MAX BAUCUS, Montana                  CHARLES B. RANGEL, New York
JOHN D. ROCKEFELLER IV, West         FORTNEY PETE STARK, California
    Virginia
               Thomas A. Barthold, Acting Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff


                            SUMMARY CONTENTS

                              ----------                              
                                                                   Page
Part One: Tsunami Relief (Public Law 109-1)......................     4

Part Two: Extension of Leaking Underground Storage Tank Trust 
  Fund Financing Rate (Public Law 109-6).........................     5

Part Three: Tax Treatment of Certain Disaster Mitigation Payments 
  (Public Law 109-7).............................................     6

Part Four: Surface Transportation Extension Act of 2005, Parts I-
  VI (Public Laws 109-14, 109-20, 109-35, 109-37, 109-40, and 
  109-42)........................................................     8

Part Five: The Energy Policy Act of 2005 (Public Law 109-58).....    12

Part Six: Safe, Accountable, Flexible, Efficient Transportation 
  Equity Act: A Legacy for Users (Public Law 109-59).............    83

Part Seven: Katrina Emergency Tax Relief Act of 2005 (Public Law 
  109-73)........................................................   131

Part Eight: Sportfishing and Recreational Boating Safety 
  Amendments Act of 2005 (Public Law 109-74).....................   163

Part Nine: Gulf Opportunity Zone Act of 2005 (Public Law 109-135)   165

Part Ten: Extension of Parity in the Application of Certain 
  Limits to Mental Health Benefits (Public Law 109-151)..........   257

Part Eleven: Tax Increase Prevention and Reconciliation Act of 
  2005 (Public Law 109-222)......................................   259

Part Twelve: Heroes Earned Retirement Opportunities Act (Public 
  Law 109-227)...................................................   327

Part Thirteen: Pension Protection Act of 2006 (Public Law 109-
  280)...........................................................   329

Part Fourteen: Tax Relief and Health Care Act of 2006 (Public Law 
  109-432).......................................................   661

Part Fifteen: Fallen Firefighters Assistance Tax Clarification 
  Act of 2006 (Public Law 109-445)...............................   784

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 109th Congress.............................................   785

                            C O N T E N T S

                              ----------                              
                                                                   Page
Summary Contents.................................................   III

Introduction.....................................................     1

Part One: Tsunami Relief (Public Law 109-1)......................     4

          A. Acceleration of Income Tax Benefits for Charitable 
              Cash Contributions for Relief of Indian Ocean 
              Tsunami Victims (sec. 1 of the Act)................     4

Part Two: Extension of Leaking Underground Storage Tank Trust 
  Fund Financing Rate (Public Law 109-6).........................     5

          A. Extension of Leaking Underground Storage Tank Trust 
              Fund Financing Rate (sec. 1 of the Act)............     5

Part Three: Tax Treatment of Certain Disaster Mitigation Payments 
  (Public Law 109-7).............................................     6

          A. Tax Treatment of Certain Disaster Mitigation 
              Payments (sec. 1 of the Act and sec. 139 of the 
              Code)..............................................     6

Part Four: Surface Transportation Extension Act of 2005, Parts I-
  VI (Public Laws 109-14, 109-20, 109-35, 109-37, 109-40, and 
  109-42)........................................................     8

          A. Extensions of Surface Transportation Act............     8

Part Five: The Energy Policy Act of 2005 (Public Law 109-58).....    12

          A. Energy Tax Policy Incentives........................    12

              1. Extension and modification of renewable 
                  electricity production credit (secs. 1301 and 
                  1302 of the Act and sec. 45 of the Code).......    12
              2. Clean renewable energy bonds (sec. 1303 of the 
                  Act and new sec. 54 of the Code)...............    19
              3. Treatment of certain income of electric 
                  cooperatives (sec. 1304 of the Act and sec. 
                  501(c)(12) of the Code)........................    23
              4. Dispositions of transmission property to 
                  implement FERC restructuring policy (sec. 1305 
                  of the Act and sec. 451 of the Code)...........    27
              5. Credit for production from advanced nuclear 
                  power facilities (sec. 1306 of the Act and new 
                  sec. 45J of the Code)..........................    28
              6. Credit for investment in clean coal facilities 
                  (sec. 1307 of the Act and new secs. 48A and 48B 
                  of the Code)...................................    29
              7. Transmission property treated as fifteen-year 
                  property (sec. 1308 of the Act and sec. 168 of 
                  the Code)......................................    31
              8. Amortization of atmospheric pollution control 
                  facilities (sec. 1309 of the Act and sec. 169 
                  of the Code)...................................    31
              9. Modification to special rules for nuclear 
                  decommissioning costs (sec. 1310 of the Act and 
                  sec. 468A of the Code).........................    32
              10. Five-year carryback of net operating losses for 
                  certain electric utility companies (sec. 1311 
                  of the Act and sec. 172 of the Code)...........    35
              11. Modification of credit for producing fuel from 
                  a non-conventional source (secs. 1321 and 1322 
                  of the Act and sec. 29 and new sec. 45K of the 
                  Code)..........................................    37
              12. Temporary expensing for equipment used in the 
                  refining of liquid fuels (sec. 1323 of the Act 
                  and new sec. 179C of the Code).................    39
              13. Allow pass through to owners of deduction for 
                  capital costs incurred by small refiner 
                  cooperative in complying with environmental 
                  protection agency sulfur regulations (sec. 1324 
                  of the Act and sec. 179B of the Code)..........    41
              14. Natural gas distribution lines treated as 
                  fifteen-year property (sec. 1325 of the Act and 
                  sec. 168 of the Code)..........................    43
              15. Natural gas gathering lines treated as seven-
                  year property (sec. 1326 of the Act and sec. 
                  168 of the Code)...............................    43
              16. Arbitrage rules not to apply to prepayments for 
                  natural gas (sec. 1327 of the Act and sec. 148 
                  of the Code)...................................    44
              17. Determination of small refiner exception to oil 
                  depletion deduction (sec. 1328 of the Act and 
                  sec. 613A of the Code).........................    48
              18. Amortization of geological and geophysical 
                  expenditures (sec. 1329 of the Act and sec. 167 
                  of the Code)...................................    49
              19. Credit for energy efficient commercial 
                  buildings deduction (sec. 1331 of the Act and 
                  new sec. 179D of the Code).....................    52
              20. Credit for energy efficient new homes (sec. 
                  1332 of the Act and new sec. 45L of the Code)..    54
              21. Credit for certain nonbusiness energy property 
                  (sec. 1333 of the Act and new sec. 25C of the 
                  Code)..........................................    55
              22. Credit for energy efficient appliances (sec. 
                  1334 of the Act and new sec. 45M of the Code)..    57
              23. Credit for residential energy efficient 
                  property (sec. 1335 of the Act and new sec. 25D 
                  of the Code)...................................    58
              24. Credit for business installation of qualified 
                  fuel cells and stationary microturbine power 
                  plants (sec. 1336 of the Act and sec. 48 of the 
                  Code)..........................................    59
              25. Business solar investment tax credit (sec. 1337 
                  of the Act and sec. 48 of the Code)............    61
              26. Alternative technology vehicle credits (secs. 
                  1341 and 1348 of the Act, sec. 179A of the 
                  Code, and new sec. 30B of the Code)............    62
              27. Credit for installation of alternative fuel 
                  refueling property (sec. 1342 of the Act and 
                  new sec. 30C of the Code)......................    68
              28. Diesel-water fuel emulsion (sec. 1343 of the 
                  Act and sec. 4081 of the Code).................    69
              29. Extend excise tax provisions and income tax 
                  credit for biodiesel and create similar 
                  incentives for renewable diesel (secs. 1344 and 
                  1346 of the Act, and secs. 40A, 6426 and 6427 
                  of the Code)...................................    71
              30. Small agri-biodiesel producer credit (sec. 1345 
                  of the Act and sec. 40A of the Code)...........    73
              31. Modifications to small ethanol producer credit 
                  (sec. 1347 of the Act and sec. 40 of the Code).    75
              32. Modify research credit for research relating to 
                  energy (sec. 1351 of the Act and sec. 41 of the 
                  Code)..........................................    75
              33. National Academy of Sciences study (sec. 1352 
                  of the Act)....................................    77
              34. Recycling study (sec. 1353 of the Act).........    78
              35. Oil Spill Liability Trust Fund (sec. 1361 of 
                  the Act and sec. 4611 of the Code).............    78
              36. Leaking Underground Storage Tank Trust Fund 
                  (sec. 1362 of the Act and secs. 4041, 4081(d), 
                  4082, 9508, and new sec. 6430 of the Code).....    79
              37. Modify recapture of section 197 amortization 
                  (sec. 1363 of the Act and sec. 1245 of the 
                  Code)..........................................    80
              38. Clarification of tire excise tax (sec. 1364 of 
                  the Act and sec. 4072(e) of the Code)..........    81

Part Six: Safe, Accountable, Flexible, Efficient Transportation 
  Equity Act: A Legacy for Users (Public Law 109-59).............    83

TITLE XI--HIGHWAY REAUTHORIZATION AND EXCISE TAX SIMPLIFICATION..    83

  I. Trust Fund Reauthorization......................................83

          A. Extension of Highway Trust Fund and Aquatic 
              Resources Trust Fund Expenditure Authority and 
              Related Taxes (secs. 11101 and 11102 of the Act, 
              and secs. 4041, 4051, 4071, 4081, 4221, 4481, 4482, 
              4483, 6412, 9503, and 9504 of the Code)............    83

 II. Excise Tax Reform and Simplification............................89

          A. Highway Excise Taxes................................    89

              1. Modify gas guzzler tax (sec. 11111 of the Act 
                  and sec. 4064 of the Code).....................    89
              2. Exclusion for tractors weighing 19,500 pounds or 
                  less from excise tax on heavy trucks and 
                  trailers (sec. 11112 of the Act and sec. 4051 
                  of the Code)...................................    90
              3. Volumetric excise tax credit for alternative 
                  fuels (sec. 11113 of the Act and secs. 4041, 
                  4101, 6426, and 6427 of the Code)..............    91

          B. Aquatic Excise Taxes................................    93

              1. Eliminate Aquatic Resources Trust Fund and 
                  transform Sport Fish Restoration Account (sec. 
                  11115 of the Act and secs. 9503 and 9504 of the 
                  Code)..........................................    93
              2. Repeal of harbor maintenance tax on exports 
                  (sec. 11116 of the Act and sec. 4461 of the 
                  Code)..........................................    95
              3. Cap on excise tax on certain fishing equipment 
                  (sec. 11117 of the Act and sec. 4161 of the 
                  Code)..........................................    96

          C. Aerial Excise Taxes.................................    97

              1. Clarification of excise tax exemptions for 
                  agricultural aerial applicators and exemption 
                  for fixed-wing aircraft engaged in forestry 
                  operations (sec. 11121 of the Act and secs. 
                  4261 and 6420 of the Code).....................    97
              2. Modify the definition of rural airport (sec. 
                  11122 of the Act and sec. 4261 of the Code)....    99
              3. Exempt from ticket taxes transportation provided 
                  by seaplanes (sec. 11123 of the Act and secs. 
                  4261 and 4083 of the Code).....................    99
              4. Exempt certain sightseeing flights from taxes on 
                  air transportation (sec. 11124 of the Act and 
                  sec. 4281 of the Code).........................   100

          D. Taxes Relating to Alcohol...........................   101

              1. Repeal special occupational taxes on producers 
                  and marketers of alcoholic beverages (sec. 
                  11125 of the Act and secs. 5081, 5091, 5111, 
                  5112, 5113, 5117, 5121, 5122, 5123, 5125, 5131, 
                  5132, 5141, 5147, 5148, and 5276 of the Code)..   101
              2. Provide an income tax credit for cost of 
                  carrying tax-paid distilled spirits in 
                  wholesale inventories and in control State 
                  bailment warehouses (sec. 11126 of the Act and 
                  new sec. 5011 of the Code).....................   103
              3. Quarterly excise tax filing for small alcohol 
                  excise taxpayers (sec. 11127 of the Act and 
                  sec. 5061 of the Code).........................   105

          E. Sport Excise Taxes..................................   106

              1. Custom gunsmiths (sec. 11131 of the Act and sec. 
                  4182 of the Code)..............................   106

III. Miscellaneous Provisions.......................................108

          A. Motor Fuel Tax Enforcement Advisory Commission (sec. 
              11141 of the Act)..................................   108

          B. National Surface Transportation Infrastructure 
              Financing Commission (sec. 11142 of the Act).......   109

          C. Tax-Exempt Financing of Highway Projects and Rail-
              Truck Transfer Facilities (sec. 11143 of the Act 
              and sec. 142 of the Code)..........................   111

          D. Treasury Study of Highway Fuels Used by Trucks for 
              Non-Transportation Purposes (sec. 11144 of the Act)   112

          E. Diesel Fuel Tax Evasion Report (sec. 11145 of the 
              Act)...............................................   113

          F. Tax Treatment of State Ownership of Railroad Real 
              Estate Investment Trust (sec. 11146 of the Act and 
              secs. 103, 115, 336, and 337 of the Code)..........   114

          G. Leaking Underground Storage Tank Trust Fund (sec. 
              11147 of the Act)..................................   116

 IV. Preventing Fuel Fraud..........................................118

          A. Treatment of Kerosene for Use in Aviation (sec. 
              11161 of the Act and secs. 4041, 4081, 4082, 6427, 
              9502, and 9503 of the Code)........................   118

          B. Repeal of Ultimate Vendor Refund Claims with Respect 
              to Farming (sec. 11162 of the Act and sec. 6427(l) 
              of the Code).......................................   120

          C. Refunds of Excise Taxes on Exempt Sales of Taxable 
              Fuel by Credit Card (sec. 11163 of the Act and 
              secs. 6206, 6416, 6427, and 6675 of the Code)......   122

          D. Reregistration in Event of Change in Ownership (sec. 
              11164 of the Act and secs. 4101, 6719, 7232, and 
              7272 of the Code)..................................   124

          E. Reconciliation of On-Loaded Cargo to Entered Cargo 
              (sec. 11165 of the Act and sec. 343 of the Trade 
              Act of 2002).......................................   125

          F. Treatment of Deep-Draft Vessels (sec. 11166 of the 
              Act and secs. 4081 and 4101 of the Code)...........   126

          G. Impose Assessable Penalty on Dealers of Adulterated 
              Fuel (sec. 11167 of the Act and new sec. 6720A of 
              the Code)..........................................   127

  V. Fuels-Related Technical Corrections............................129

          A. Fuels-Related Technical Corrections to American Jobs 
              Creation Act of 2004 (``AJCA'')....................   129

              1. Volumetric ethanol excise tax credit (sec. 
                  11151(a) of the Act, sec. 301 of AJCA, and sec. 
                  6427 of the Code)..............................   129
              2. Aviation fuel (sec. 11151(b) of the Act, sec. 
                  853 of AJCA, and sec. 4081 of the Code)........   129

          B. Fuels-Related Technical Corrections to 
              Transportation Equity Act for the 21st Century 
              (``TEA 21'').......................................   129

              1. Coastal Wetlands sub-account (sec. 11151(c) and 
                  (d) of the Act, sec. 9005 of TEA 21, and sec. 
                  9504 of the Code)..............................   129

          C. Correction to the Energy Tax Incentives Act of 2005.   130

              1. Erroneous reference to highway reauthorization 
                  bill (sec. 11151(f) of the Act and sec. 38 of 
                  the Code)......................................   130

Part Seven: Katrina Emergency Tax Relief Act of 2005 (Public Law 
  109-73)........................................................   131

Definition of ``Hurricane Katrina Disaster Area'' and ``Core 
  Disaster Area'' (sec. 2 of the Act)............................   131

TITLE I--SPECIAL RULES FOR USE OF RETIREMENT FUNDS FOR RELIEF 
  RELATING TO HURRICANE KATRINA..................................   132

          A. Tax-Favored Withdrawals from Retirement Plans for 
              Relief Relating to Hurricane Katrina (sec. 101 of 
              the Act)...........................................   132

          B. Recontributions of Withdrawals for Home Purchases 
              Cancelled Due to Hurricane Katrina (sec. 102 of the 
              Act)...............................................   134

          C. Loans from Qualified Plans for Relief Relating to 
              Hurricane Katrina (sec. 103 of the Act)............   135

          D. Plan Amendments in Connection with Hurricane Katrina 
              (sec. 104 of the Act)..............................   136

TITLE II--EMPLOYMENT RELIEF......................................   138

          A. Work Opportunity Tax Credit for Hurricane Katrina 
              Employees (sec. 201 of the Act)....................   138

          B. Employee Retention Credit for Employers Affected by 
              Hurricane Katrina (sec. 202 of the Act)............   140

TITLE III--CHARITABLE GIVING INCENTIVES..........................   142

          A. Temporary Suspension of Limitations on Charitable 
              Contributions (sec. 301 of the Act)................   142

          B. Additional Personal Exemption for Housing Hurricane 
              Katrina Displaced Individuals (sec. 302 of the Act)   146

          C. Increase in Standard Mileage Rate for Charitable Use 
              of Vehicles (sec. 303 of the Act)..................   147

          D. Mileage Reimbursements to Charitable Volunteers 
              Excluded from Gross Income (sec. 304 of the Act)...   149

          E. Charitable Deduction for Contributions of Food 
              Inventory (sec. 305 of the Act and sec. 170 of the 
              Code)..............................................   151

          F. Charitable Deduction for Contributions of Book 
              Inventories to Public Schools (sec. 306 of the Act 
              and sec. 170 of the Code)..........................   152

TITLE IV--ADDITIONAL TAX RELIEF PROVISIONS.......................   154

          A. Exclusion for Certain Cancellations of Indebtedness 
              by Reason of Hurricane Katrina (sec. 401 of the 
              Act)...............................................   154

          B. Suspension of Certain Limitations on Personal 
              Casualty Losses (sec. 402 of the Act)..............   155

          C. Required Exercise of IRS Administrative Authority 
              (sec. 403 of the Act)..............................   156

          D. Special Rules for Mortgage Revenue Bonds (sec. 404 
              of the Act)........................................   158

          E. Extension of Replacement Period for Nonrecognition 
              of Gain (sec. 405 of the Act)......................   159

          F. Special Look-Back Rule for Determining Earned Income 
              Credit and Refundable Child Credit (sec. 406 of the 
              Act)...............................................   160

          G. Secretarial Authority to Make Adjustments Regarding 
              Taxpayer and Dependency Status for Taxpayers 
              Affected by Hurricane Katrina (sec. 407 of the Act)   161

Part Eight: Sportfishing and Recreational Boating Safety 
  Amendments Act of 2005 (Public Law 109-74).....................   163

          A. Sportfishing and Recreational Boating Safety 
              Amendments Act of 2005 (secs. 101 and 301 of the 
              Act and sec. 9504 of the Code).....................   163

Part Nine: Gulf Opportunity Zone Act of 2005 (Public Law 109-135)   165

TITLE I--ESTABLISHMENT OF GULF OPPORTUNITY ZONE..................   165

          A. Tax Benefits for Gulf Opportunity Zone..............   165

              1. Definitions of ``Gulf Opportunity Zone,'' ``Rita 
                  GO Zone,'' ``Wilma GO Zone,'' and other 
                  definitions (sec. 101 of the Act and new sec. 
                  1400M of the Code).............................   165
              2. Tax-exempt bond financing for the Gulf 
                  Opportunity Zone (sec. 101 of the Act and new 
                  sec. 1400N(a) of the Code).....................   166
              3. Advance refunding of certain tax-exempt bonds 
                  (sec. 101 of the Act and new sec. 1400N(b) of 
                  the Code)......................................   171
              4. Increase the low-income housing credit cap and 
                  make other modifications (sec. 101 of the Act 
                  and new sec. 1400N(c) of the Code).............   173
              5. Additional first-year depreciation for Gulf 
                  Opportunity Zone property (sec. 101 of the Act 
                  and new sec. 1400N(d) of the Code).............   177
              6. Increase in expensing for Gulf Opportunity Zone 
                  property (sec. 101 of the Act and new sec. 
                  1400N(e) of the Code)..........................   179
              7. Expensing for certain demolition and clean-up 
                  costs (sec. 101 of the Act and new sec. 
                  1400N(f) of the Code)..........................   181
              8. Extension and expansion of expensing for 
                  environmental remediation costs (sec. 101 of 
                  the Act and new sec. 1400N(g) of the Code).....   182
              9. Increase in rehabilitation tax credit with 
                  respect to certain buildings located in the 
                  Gulf Opportunity Zone (sec. 101 of the Act and 
                  new sec. 1400N(h) of the Code).................   184
              10. Increased expensing for reforestation 
                  expenditures of small timber producers (sec. 
                  101 of the Act and new sec. 1400N(i)(1) of the 
                  Code)..........................................   184
              11. Five-year NOL carryback of certain timber 
                  losses (sec. 101 of the Act and new sec. 
                  1400N(i)(2) of the Code).......................   186
              12. Special rule for Gulf Opportunity Zone public 
                  utility casualty losses (sec. 101 of the Act 
                  and new sec. 1400N(j) of the Code).............   188
              13. Five-year NOL carryback for certain amounts 
                  related to Hurricane Katrina or the Gulf 
                  Opportunity Zone (sec. 101 of the Act and new 
                  sec. 1400N(k) of the Code).....................   189
              14. Gulf tax credit bonds (sec. 101 of the Act and 
                  new sec. 1400N(l) of the Code).................   192
              15. Additional allocation of new markets tax credit 
                  for investments that serve the Gulf Opportunity 
                  Zone (sec. 101 of the Act and new sec. 1400N(m) 
                  of the Code)...................................   194
              16. Representations regarding income eligibility 
                  for purposes of qualified residential rental 
                  project requirements (sec. 101 of the Act and 
                  new sec. 1400N(n) of the Code).................   196
              17. Treatment of public utility property disaster 
                  losses (sec. 101 of the Act and new sec. 
                  1400N(o) of the Code)..........................   197
              18. Tax benefits not available with respect to 
                  certain property (sec. 101 of the Act and new 
                  sec. 1400N of the Code)........................   198
              19. Expansion of Hope Scholarship and Lifetime 
                  Learning Credit for students in the Gulf 
                  Opportunity Zone (sec. 102 of the Act and new 
                  sec. 1400O of the Code)........................   199
              20. Housing relief for individuals affected by 
                  Hurricane Katrina (sec. 103 of the Act and new 
                  sec. 1400P of the Code)........................   203
              21. Special rules for mortgage revenue bonds (sec. 
                  104 of the Act and sec. 404 of the Katrina 
                  Emergency Tax Relief Act of 2005)..............   204
              22. Treasury authority to grant bonus depreciation 
                  placed-in-service date relief (sec. 105 of the 
                  Act and sec. 168(k) of the Code)...............   205

TITLE II--TAX BENEFITS RELATED TO HURRICANES RITA AND WILMA......   208

          A. Special Rules for Use of Retirement Funds (sec. 201 
              of the Act and new sec. 1400Q of the Code).........   208

              1. Tax-favored withdrawals from retirement plans 
                  relating to Hurricanes Rita and Wilma..........   208
              2. Recontributions of withdrawals for home 
                  purchases cancelled due to Hurricanes Rita and 
                  Wilma..........................................   210
              3. Loans from qualified plans to individuals 
                  sustaining an economic loss due to Hurricane 
                  Rita or Wilma..................................   212
              4. Plan amendments relating to Hurricane Rita and 
                  Hurricane Wilma relief.........................   214

          B. Employee Retention Credit for Employers Affected by 
              Hurricanes Katrina, Rita, and Wilma (sec. 201 of 
              the Act and new sec. 1400R of the Code)............   215

          C. Temporary Suspension of Limitations on Charitable 
              Contributions (sec. 201 of the Act and new sec. 
              1400S(a) of the Code)..............................   216

          D. Suspension of Certain Limitations on Personal 
              Casualty Losses (sec. 201 of the Act and new 
              section 1400S(b) of the Code)......................   220

          E. Required Exercise of IRS Administrative Authority 
              (sec. 201 of the Act and new sec. 1400S(c) of the 
              Code)..............................................   221

          F. Special Look-Back Rule for Determining Earned Income 
              Credit and Refundable Child Credit (sec. 201 of the 
              Act and new sec. 1400S(d) of the Code).............   223

          G. Secretarial Authority to Make Adjustments Regarding 
              Taxpayer and Dependency Status (sec. 201 of the Act 
              and new sec. 1400S(e) of the Code).................   225

          H. Special Rules for Mortgage Revenue Bonds (sec. 201 
              of the Act and new sec. 1400T of the Code).........   226

TITLE III--OTHER PROVISIONS......................................   229

          A. Gulf Coast Recovery Bonds (sec. 301 of the Act).....   229

          B. Election to Treat Combat Pay as Earned Income for 
              Purposes of the Earned Income Credit (sec. 302 of 
              the Act and sec. 32 of the Code)...................   229

          C. Modifications of Suspension of Interest and 
              Penalties Where Internal Revenue Service Fails to 
              Contact Taxpayer (sec. 303 of the Act and sec. 
              6404(g) of the Code)...............................   230

          D. Authority for Undercover Operations (sec. 304 of the 
              Act and sec. 7608 of the Code).....................   231

          E. Disclosures of Certain Tax Return Information.......   232

              1. Disclosure of tax information to facilitate 
                  combined employment tax reporting (sec. 305 of 
                  the Act and sec. 6103(d)(5) of the Code).......   232
              2. Disclosure of return information regarding 
                  terrorist activities (sec. 305 of the Act and 
                  sec. 6103(i)(3) and (i)(7) of the Code)........   233
              3. Disclosure of return information to carry out 
                  income contingent repayment of student loans 
                  (sec. 305 of the Act and sec. 6103(l)(13) of 
                  the Code)......................................   236

TITLE IV--TAX TECHNICAL CORRECTIONS..............................   237

          A. Technical Corrections (secs. 401-412 of the Act)....   237

          B. Other Corrections (sec. 413 of the Act).............   255

Part Ten: Extension of Parity in the Application of Certain 
  Limits to Mental Health Benefits (Public Law 109-151)..........   257

          A. Extension of Parity in the Application of Certain 
              Limits to Mental Health Benefits (sec. 1 of the Act 
              and sec. 9812(f)(3) of the Code, sec. 712(f) of 
              ERISA and sec. 2705(f) of the PHSA)................   257

Part Eleven: Tax Increase Prevention and Reconciliation Act of 
  2005 (Public Law 109-222)......................................   259

TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS........   259

          A. Extension of Increased Expensing for Small Business 
              (sec. 101 of the Act and sec. 179 of the Code).....   259

          B. Reduced Rates for Capital Gains and Dividends of 
              Individuals (sec. 102 of the Act and sec. 1(h) of 
              the Code)..........................................   260

          C. Controlled Foreign Corporations.....................   264

              1. Subpart F exception for active financing income 
                  (sec. 103(a) of the Act and secs. 953 and 954 
                  of the Code)...................................   264
              2. Look-through treatment of payments between 
                  related controlled foreign corporations under 
                  foreign personal holding company income rules 
                  (sec. 103(b) of the Act and sec. 954(c) of the 
                  Code)..........................................   267

TITLE II--OTHER PROVISONS........................................   269

          A. Taxation of Certain Settlement Funds (sec. 201 of 
              the Act and sec. 468B of the Code).................   269

          B. Modifications to Rules Relating to Taxation of 
              Distributions of Stock and Securities of a 
              Controlled Corporation (secs. 202 and 507 of the 
              Act and sec. 355 of the Code)......................   270

          C. Qualified Veterans' Mortgage Bonds (sec. 203 of the 
              Act and sec. 143 of the Code)......................   274

          D. Capital Gains Treatment for Certain Self-Created 
              Musical Works (sec. 204 of the Act and sec. 1221 of 
              the Code)..........................................   276

          E. Decrease Minimum Vessel Tonnage Limit to 6,000 
              Deadweight Tons (sec. 205 of the Act and sec. 1355 
              of the Code).......................................   277

          F. Modification of Special Arbitrage Rule for Certain 
              Funds (sec. 206 of the Act)........................   279

          G. Amortization of Expenses Incurred in Creating or 
              Acquiring Music or Music Copyrights (sec. 207 of 
              the Act and sec. 167(g) of the Code)...............   280

          H. Capital Expenditure Limitation for Qualified Small 
              Issue Bonds (sec. 208 of the Act and sec. 144 of 
              the Code)..........................................   282

          I. Modification of Treatment of Loans to Qualified 
              Continuing Care Facilities (sec. 209 of the Act and 
              sec. 7872(g) of the Code)..........................   283

TITLE III--ALTERNATIVE MINIMUM TAX RELIEF........................   286

          A. Extend and Increase Alternative Minimum Tax 
              Exemption Amount for Individuals (sec. 301 of the 
              Act and sec. 55 of the Code).......................   286

          B. Allowance of Nonrefundable Personal Credits Against 
              Regular and Alternative Minimum Tax Liability (sec. 
              302 of the Act and sec. 26 of the Code)............   287

TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS.....................   289

          A. Modifications to Corporate Estimated Tax Payments 
              (sec. 401 of the Act)..............................   289

TITLE V--REVENUE OFFSET PROVISIONS...............................   290

          A. Application of Earnings Stripping Rules to Partners 
              Which are Corporations (sec. 501 of the Act and 
              sec. 163 of the Code)..............................   290

          B. Amend Information Reporting Requirements to Include 
              Interest on Tax-Exempt Bonds (sec. 502 of the Act 
              and sec. 6049 of the Code).........................   291

          C. Amortization of Geological and Geophysical 
              Expenditures (sec. 503 of the Act and sec. 167(h) 
              of the Code).......................................   292

          D. Application of Foreign Investment in Real Property 
              Tax Act (``FIRPTA'') to Regulated Investment 
              Companies (``RICs'') (sec. 504 of the Act and sec. 
              897(h)(4) of the Code).............................   293

          E. Treatment of REIT and RIC Distributions Attributable 
              to FIRPTA Gains (secs. 505 and 506 of the Act and 
              secs. 897, 852, and 871 of the Code)...............   296

          F. 355 Distributions Involving Disqualified Investment 
              Companies (sec. 507 of the Act and sec. 355 of the 
              Code)..............................................   301

          G. Impose Loan and Redemption Requirements on Pooled 
              Financing Bonds (sec. 508 of the Act and sec. 149 
              of the Code).......................................   302

          H. Partial Payments Required with Submissions of 
              Offers-in-Compromise (sec. 509 of the Act and sec. 
              7122 of the Code)..................................   305

          I. Increase in Age of Minor Children Whose Unearned 
              Income is Taxed as if Parent's Income (sec. 510 of 
              the Act and sec. 1(g) of the Code).................   306

          J. Imposition of Withholding on Certain Payments Made 
              by Government Entities (sec. 511 of the Act and 
              sec. 3402 of the Code).............................   309

          K. Eliminate Income Limitations on Roth IRA Conversions 
              (sec. 512 of the Act and sec. 408A of the Code)....   311

          L. Repeal of FSC/ETI Binding Contract Relief (sec. 513 
              of the Act)........................................   314

          M. Modification of Wage Limit for Purposes of Domestic 
              Production Activities Deduction (sec. 514 of the 
              Act and sec. 199 of the Code)......................   316

          N. Modification of Exclusion for Citizens Living Abroad 
              (sec. 515 of the Act and sec. 911 of the Code).....   317

          O. Tax Involvement of Accommodation Parties in Tax 
              Shelter Transactions (sec. 516 of the Act and secs. 
              6011, 6033, 6652, and new sec. 4965 of the Code)...   320

Part Twelve: Heroes Earned Retirement Opportunities Act (Public 
  Law 109-227)...................................................   327

          A. Combat Zone Compensation Taken into Account for 
              Purposes of Determining Limitation and 
              Deductibility of Contributions to Individual 
              Retirement Plans (sec. 2 of the Act and sec. 219(f) 
              of the Code).......................................   327

Part Thirteen: Pension Protection Act of 2006 (Public Law 109-
  280)...........................................................   329

TITLE I--REFORM OF FUNDING RULES FOR SINGLE-EMPLOYER DEFINED 
  BENEFIT PENSION PLANS..........................................   329

          A. Minimum Funding Standards for Single-Employer 
              Defined Benefit Pension Plans (secs. 101, 102, 107, 
              111, 112, 114, and 301 of the Act, secs. 302-308 of 
              ERISA, and sec. 412 and new sec. 430 of the Code)..   329

          B. Benefit Limitations Under Single-Employer Defined 
              Benefit Pension Plans (secs. 103 and 113 of the 
              Act, new secs. 101(j) and 206(g) of ERISA, and new 
              sec. 436 of the Code)..............................   350

          C. Special Rules for Multiple-Employer Plans of Certain 
              Cooperatives (sec. 104 of the Act).................   357

          D. Temporary Relief for Certain PBGC Settlement Plans 
              (sec. 105 of the Act)..............................   359

          E. Special Rules for Plans of Certain Government 
              Contractors (sec. 106 of the Act)..................   360

          F. Modification of Transition Rule to Pension Funding 
              Requirements for Interstate Bus Company (sec. 115 
              of the Act, and sec. 769(c) of the Retirement 
              Protection Act, as added by sec. 1508 of the 
              Taxpayer Relief Act of 1997).......................   361

          G. Restrictions on Funding of Nonqualified Deferred 
              Compensation Plans by Employers Maintaining 
              Underfunded or Terminated Single-Employer Plans 
              (sec. 116 of the Act and sec. 409A of the Code)....   363

TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS..   366

          A. Funding Rules for Multiemployer Defined Benefit 
              Plans (secs. 201 and 211 of the Act, new sec. 304 
              of ERISA, and new sec. 431 of the Code)............   366

          B. Additional Funding Rules for Multiemployer Plans in 
              Endangered or Critical Status (secs. 202, 212 and 
              221(c) of the Act, new sec. 305 of ERISA, and new 
              sec. 432 of the Code)..............................   372

          C. Measures to Forestall Insolvency of Multiemployer 
              Plans (secs. 203 and 213 of the Act, sec. 4245 of 
              ERISA, and sec. 418E of the Code)..................   386

          D. Withdrawal Liability Reforms (sec. 204 of the Act, 
              and secs. 4203, 4205, 4210, 4219, 4221 and 4225 of 
              ERISA).............................................   387

              1. Update of rules relating to limitation on 
                  withdrawal liability in certain cases..........   387
              2. Withdrawal liability continues if work 
                  contracted out.................................   388
              3. Application of forgiveness rule to plans 
                  primarily covering employees in building and 
                  construction...................................   389
              4. Procedures applicable to disputes involving 
                  withdrawal liability...........................   390

          E. Prohibition on Retaliation against Employers 
              Exercising their Rights to Petition the Federal 
              Government (sec. 205 of the Act and sec. 510 of 
              ERISA).............................................   392

          F. Special Rule for Certain Benefits Funded Under an 
              Agreement Approved by the PBGC (sec. 206 of the 
              Act)...............................................   393

          G. Exception from Excise Tax for Certain Multiemployer 
              Pension Plans (sec. 214 of the Act)................   393

          H. Sunset of Multiemployer Plan Funding Provisions 
              (sec. 221 of the Act)..............................   394

TITLE III--INTEREST RATE ASSUMPTIONS.............................   395

          A. Extension of Replacement of 30-Year Treasury Rates 
              (sec. 301 of the Act, secs. 302 and 4006 of ERISA, 
              and sec. 412 of the Code)..........................   395

          B. Interest Rate Assumption for Determination of Lump-
              Sum Distributions (sec. 302 of the Act, sec. 205(g) 
              of ERISA, and sec. 417(e) of the Code).............   395

          C. Interest Rate Assumption for Applying Benefit 
              Limitations to Lump-Sum Distributions (sec. 303 of 
              the Act and sec. 415(b) of the Code)...............   397

TITLE IV--PBGC GUARANTEE AND RELATED PROVISIONS..................   399

          A. PBGC Premiums (secs. 301 and 401 of the Act and sec. 
              4006 of ERISA).....................................   399

          B. Special Funding Rules for Plans Maintained by 
              Commercial Airlines (sec. 402 of the Act)..........   402

          C. Limitations on PBGC Guarantee of Shutdown and Other 
              Benefits (sec. 403 of the Act and sec. 4022 of 
              ERISA).............................................   409

          D. Rules Relating to Bankruptcy of the Employer (sec. 
              404 of the Act and secs. 4022 and 4044 of ERISA)...   410

          E. PBGC Variable Rate Premiums for Small Plans (sec. 
              405 of the Act and sec. 4006 of ERISA).............   412

          F. Authorization for PBGC to Pay Interest on Premium 
              Overpayment Refunds (sec. 406 of the Act and sec. 
              4007(b) of ERISA)..................................   413

          G. Rules for Substantial Owner Benefits in Terminated 
              Plans (sec. 407 of the Act and secs. 4021, 4022, 
              4043, and 4044 of ERISA)...........................   413

          H. Acceleration of PBGC Computation of Benefits 
              Attributable to Recoveries from Employers (sec. 408 
              of the Act and secs. 4022(c), 4044, and 4062(c) of 
              ERISA).............................................   414

          I. Treatment of Certain Plans Where There is a 
              Cessation or Change in Membership of a Controlled 
              Group (sec. 409 of the Act and sec. 4041(b) of 
              ERISA).............................................   415

          J. Missing Participants (sec. 410 of the Act and sec. 
              4050 of ERISA).....................................   417

          K. Director of the PBGC (sec. 411 of the Act and secs. 
              4002 and 4003 of ERISA)............................   418

          L. Inclusion of Information in the PBGC Annual Report 
              (sec. 412 of the Act and sec. 4008 of ERISA).......   419

TITLE V--DISCLOSURE..............................................   420

          A. Defined Benefit Plan Funding Notice (sec. 501 of the 
              Act and secs. 101(f) and 4011 of ERISA)............   420

          B. Access to Multiemployer Pension Plan Information 
              (sec. 502 of the Act, secs. 101, 204(h), and 502(c) 
              of ERISA, and sec. 4980F of the Code)..............   423

          C. Additional Annual Reporting Requirements and 
              Electronic Display of Annual Report Information 
              (secs. 503-504 of the Act and secs. 103 and 104 of 
              ERISA).............................................   425

          D. Section 4010 Filings with the PBGC (sec. 505 of the 
              Act and sec. 4010 of ERISA)........................   428

          E. Disclosure of Plan Termination Information to Plan 
              Participants (sec. 506 of the Act and secs. 4041 
              and 4042 of ERISA).................................   429

          F. Notice of Freedom to Divest Employer Securities 
              (sec. 507 of the Act and new sec. 101(m) and sec. 
              502(c) of ERISA)...................................   431

          G. Periodic Pension Benefit Statements (sec. 508 of the 
              Act and secs. 105(a) and 502(c) of ERISA)..........   433

          H. Notice to Participants or Beneficiaries of Blackout 
              Periods (sec. 509 of the Act and sec. 101(i) of 
              ERISA).............................................   435

TITLE VI--INVESTMENT ADVICE, PROHIBITED TRANSACTIONS, AND 
  FIDUCIARY RULES................................................   439

          A. Prohibited Transaction Exemption for Provision of 
              Investment Advice (sec. 601 of the Act, sec. 408 of 
              ERISA, and sec. 4975 of the Code)..................   439

          B. Prohibited Transaction Rules Relating to Financial 
              Investments (sec. 611 of the Act, secs. 408, 
              412(a), 502(i) and new sec. 3(42) of ERISA, and 
              sec. 4975 of the Code).............................   445

              1. Exemption for block trading.....................   445
              2. Bonding relief..................................   446
              3. Exemption for electronic communication network..   446
              4. Exemption for service providers.................   447
              5. Relief for foreign exchange transactions........   448
              6. Definition of plan asset vehicle................   449
              7. Exemption for cross trading.....................   450

          C. Correction Period for Certain Transactions Involving 
              Securities and Commodities (sec. 612 of the Act, 
              sec. 408 of ERISA, and sec. 4975 of the Code)......   452

          D. Inapplicability of Relief from Fiduciary Liability 
              During Suspension of Ability of Participant or 
              Beneficiary to Direct Investments (sec. 621 of the 
              Act and sec. 404(c) of ERISA)......................   454

          E. Increase in Maximum Bond Amount (sec. 622 of the Act 
              and sec. 412(a) of ERISA)..........................   457

          F. Increase in Penalties for Coercive Interference with 
              Exercise of ERISA Rights (sec. 623 of the Act and 
              sec. 511 of ERISA).................................   457

          G. Treatment of Investment of Assets By Plan Where 
              Participant Fails to Exercise Investment Election 
              (sec. 624 of the Act and sec. 404(c) of ERISA).....   458

          H. Clarification of Fiduciary Rules (sec. 625 of the 
              Act)...............................................   459

TITLE VII--BENEFIT ACCRUAL STANDARDS (SECS. 701-702 OF THE ACT, 
  SECS. 203, 204 AND 205 OF ERISA, SECS. 411 AND 417 OF THE CODE, 
  AND SEC. 4(I) OF ADEA).........................................   460

TITLE VIII--PENSION RELATED REVENUE PROVISIONS...................   469

          A. Deduction Limitations...............................   469

              1. Increase in deduction limits applicable to 
                  single-employer and multiemployer defined 
                  benefit pension plans (secs. 801 and 802 of the 
                  Act and sec. 404 of the Code)..................   469
              2. Updating deduction rules for combination of 
                  plans (sec. 803 of the Act and secs. 404(a)(7) 
                  and 4972 of the Code)..........................   472

          B. Certain Pension Provisions Made Permanent...........   473

              1. Permanency of EGTRRA pension and IRA provisions 
                  (sec. 811 of the Act and Title X of EGTRRA)....   473
              2. Saver's credit made permanent (sec. 812 of the 
                  Act and sec. 25B of the Code)..................   475

          C. Improvements in Portability, Distribution, and 
              Contribution Rules.................................   477

              1. Purchase of permissive service credit (sec. 821 
                  of the Act, and secs. 403(b)(13), 415(n)(3), 
                  and 457(e)(17) of the Code)....................   477
              2. Rollover of after-tax amounts in annuity 
                  contracts (sec. 822 of the Act and sec. 
                  402(c)(2) of the Code).........................   479
              3. Application of minimum distribution rules to 
                  governmental plans (sec. 823 of the Act).......   480
              4. Allow direct rollovers from retirement plans to 
                  Roth IRAs (sec. 824 of the Act and sec. 408A(e) 
                  of the Code)...................................   481
              5. Eligibility for participation in eligible 
                  deferred compensation plans (sec. 825 of the 
                  Act and sec. 457 of the Code)..................   483
              6. Modifications of rules governing hardships and 
                  unforeseen financial emergencies (sec. 826 of 
                  the Act).......................................   483
              7. Treatment of distributions to individuals called 
                  to active duty for at least 179 days (sec. 827 
                  of the Act and sec. 72(t) of the Code).........   484
              8. Inapplicability of 10-percent additional tax on 
                  early distributions of pension plans of public 
                  safety employees (sec. 828 of the Act and sec. 
                  72(t) of the Code).............................   485
              9. Rollovers by nonspouse beneficiaries (sec. 829 
                  of the Act and sec. 402 of the Code)...........   486
              10. Direct deposit of tax refunds in an IRA (sec. 
                  830 of the Act)................................   487
              11. Additional IRA contributions for certain 
                  employees (sec. 831 of the Act and secs. 25B 
                  and 219 of the Code)...........................   488
              12. Special rule for computing high-three average 
                  compensation for benefit limitation purposes 
                  (sec. 832 of the Act and sec. 415(b)(3) of the 
                  Code)..........................................   489
              13. Inflation indexing of gross income limitations 
                  on certain retirement savings incentives (sec. 
                  833 of the Act and secs. 25A and 219 of the 
                  Code)..........................................   489

          D. Health and Medical Benefits.........................   492

              1. Ability to use excess pension assets for future 
                  retiree health benefits and collectively 
                  bargained retiree health benefits (sec. 841 of 
                  the Act and sec. 420 of the Code)..............   492
              2. Transfer of excess pension assets to 
                  multiemployer health plans (sec. 842 of the Act 
                  and sec. 420 of the Code)......................   496
              3. Allowance of reserve for medical benefits of 
                  plans sponsored by bona fide associations (sec. 
                  843 of the Act and sec. 419A of the Code)......   498
              4. Tax treatment of combined annuity or life 
                  insurance contracts with a long-term care 
                  insurance feature (sec. 844 of the Act, secs. 
                  72, 1035 and 7702B and new sec. 6050U of the 
                  Code)..........................................   499
              5. Permit tax-free distributions from governmental 
                  retirement plans for premiums for health and 
                  long-term care insurance for public safety 
                  officers (sec. 845 of the Act and sec. 402 of 
                  the Code)......................................   504

          E. United States Tax Court Modernization...............   505

              1. Judges of the Tax Court (secs. 851, 852 and 853 
                  of the Act and secs. 7447, 7448 and 7472 of the 
                  Code)..........................................   505
              2. Special trial judges of the Tax Court (secs. 854 
                  and 856 of the Act, and sec. 7448 and new sec. 
                  7443C of the Code).............................   506
              3. Consolidate review of collection due process 
                  cases in the Tax Court (sec. 855 of the Act and 
                  sec. 6330(d) of the Code)......................   507
              4. Extend authority for special trial judges to 
                  hear and decide certain employment status cases 
                  (sec. 857 of the Act and sec. 7443A of the 
                  Code)..........................................   508
              5. Confirmation of Tax Court authority to apply 
                  equitable recoupment (sec. 858 of the Act and 
                  sec. 6214(b) of the Code)......................   508
              6. Tax Court filing fee (sec. 859 of the Act and 
                  sec. 7451 of the Code).........................   509
              7. Use of practitioner fee (sec. 860 of the Act and 
                  sec. 7475(b) of the Code)......................   510

          F. Other Provisions....................................   510

              1. Extension to all governmental plans of 
                  moratorium on application of certain 
                  nondiscrimination rules (sec. 861 of the Act, 
                  sec. 1505 of the Taxpayer Relief Act of 1997, 
                  and secs. 401(a) and 401(k) of the Code).......   510
              2. Eliminate aggregate limit for usage of excess 
                  funds from black lung disability trusts to pay 
                  for retiree health (sec. 862 of the Act and 
                  secs. 501(c)(21) and 9705 of the Code).........   511
              3. Tax treatment of death benefits from company-
                  owned life insurance (``COLI'') (sec. 863 of 
                  the Act and new secs. 101(j) and 6039I of the 
                  Code)..........................................   512
              4. Treatment of test room supervisors and proctors 
                  who assist in the administration of college 
                  entrance and placement exams (sec. 864 of the 
                  Act and sec. 530 of the Revenue Reconciliation 
                  Act of 1978)...................................   517
              5. Rule for church plans which self-annuitize (sec. 
                  865 of the Act and sec. 401(a)(9) of the Code).   518
              6. Exemption for income from leveraged real estate 
                  held by church plans (sec. 866 of the Act and 
                  sec. 514(c)(9) of the Code)....................   518
              7. Church plan rule for benefit limitations (sec. 
                  867 of the Act and sec. 415(b) of the Code)....   519
              8. Gratuitous transfers for the benefit of 
                  employees (sec. 868 of the Act and sec. 664 of 
                  the Code)......................................   520

TITLE IX: INCREASE IN PENSION PLAN DIVERSIFICATION AND 
  PARTICIPATION AND OTHER PENSION PROVISIONS.....................   521

          A. Defined Contribution Plans Required to Provide 
              Employees with Freedom to Invest Their Plan Assets 
              (sec. 901 of the Act, new sec. 401(a)(35) of the 
              Code, and new sec. 204(j) of ERISA)................   521

          B. Increase Participation Through Automatic Enrollment 
              Arrangements (sec. 902 of the Act, secs. 404(c) and 
              514 of ERISA, and secs. 401(k), 401(m), 414 and 
              4979 of the Code)..................................   527

          C. Treatment of Eligible Combined Defined Benefit Plans 
              and Qualified Cash or Deferred Arrangements (sec. 
              903 of the Act, new sec. 414(x) of the Code, and 
              new sec. 210(e) of ERISA)..........................   534

          D. Faster Vesting of Employer Nonelective Contributions 
              (sec. 904 of the Act, sec. 203 of ERISA, and sec. 
              411 of the Code)...................................   542

          E. Distributions During Working Retirement (sec. 905 of 
              the Act, sec. 3(2) of ERISA, and new sec. 
              401(a)(35) of the Code)............................   543

          F. Treatment of Plans Maintained by Indian Tribes (sec. 
              906 of the Act, sec. 414(d) of the Code, and sec. 
              3(32) of ERISA)....................................   544

TITLE X--SPOUSAL PENSION PROTECTION..............................   546

          A. Regulations on Time and Order of Issuance of 
              Domestic Relations Orders (sec. 1001 of the Act)...   546

          B. Benefits Under the Railroad Retirement System for 
              Former Spouses (secs. 1002 and 1003 of the Act, and 
              secs. 2 and 5 of the Railroad Retirement Act of 
              1974)..............................................   547

          C. Requirement for Additional Survivor Annuity Option 
              (sec. 1004 of the Act, sec. 417 of the Code, and 
              sec. 205 of ERISA).................................   548

TITLE XI--ADMINISTRATIVE PROVISIONS..............................   551

          A. Updating of Employee Plans Compliance Resolution 
              System (sec. 1101 of the Act)......................   551

          B. Notice and Consent Period Regarding Distributions 
              (sec. 1102 of the Act, sec. 417(a) of the Code, and 
              sec. 205(c) of ERISA)..............................   552

          C. Pension Plan Reporting Simplification (sec. 1103 of 
              the Act)...........................................   554

          D. Voluntary Early Retirement Incentive and Employment 
              Retention Plans Maintained by Local Educational 
              Agencies and Other Entities (sec. 1104 of the Act, 
              secs. 457(e)(11) and 457(f) of the Code, sec. 
              3(2)(B) of ERISA, and sec. 4(l)(1) of the ADEA)....   555

          E. No Reduction in Unemployment Compensation as a 
              Result of Pension Rollovers (sec. 1105 of the Act 
              and sec. 3304(a)(15) of the Code)..................   557

          F. Revocation of Election Relating to Treatment as 
              Multiemployer Plan (sec. 1106 of the Act, sec. 
              3(37) of ERISA, and sec. 414(f) of the Code).......   558

          G. Provisions Relating to Plan Amendments (sec. 1107 of 
              the Act)...........................................   559

TITLE XII--PROVISIONS RELATING TO EXEMPT ORGANIZATIONS...........   561

          A. Charitable Giving Incentives........................   561

              1. Tax-free distributions from individual 
                  retirement plans for charitable purposes (sec. 
                  1201 of the Act and secs. 408, 6034, 6104, and 
                  6652 of the Code)..............................   561
              2. Extension of modification of charitable 
                  deduction for contributions of food inventory 
                  (sec. 1202 of the Act and sec. 170 of the Code)   567
              3. Basis adjustment to stock of S corporation 
                  contributing property (sec. 1203 of the Act and 
                  sec. 1367 of the Code).........................   569
              4. Extension of modification of charitable 
                  deduction for contributions of book inventory 
                  (sec. 1204 of the Act and sec. 170 of the Code)   569
              5. Modification of tax treatment of certain 
                  payments under existing arrangements to 
                  controlling exempt organizations (sec. 1205 of 
                  the Act and secs. 512 and 6033 of the Code)....   571
              6. Encouragement of contributions of capital gain 
                  real property made for conservation purposes 
                  (sec. 1206 of the Act and sec. 170 of the Code)   572
              7. Excise taxes exemption for blood collector 
                  organizations (sec. 1207 of the Act and secs. 
                  4041, 4221, 4253, 4483, 6416, and 7701 of the 
                  Code)..........................................   575

          B. Reforming Exempt Organizations......................   580

              1. Require reporting on certain acquisitions of 
                  interests in insurance contracts in which 
                  certain exempt organizations hold an interest; 
                  require Treasury Study (sec. 1211 of the Act 
                  and new sec. 6050V of the Code)................   580
              2. Increase in penalty excise taxes relating to 
                  public charities, social welfare organizations, 
                  and private foundations (sec. 1212 of the Act 
                  and secs. 4941, 4942, 4943, 4944, 4945, and 
                  4958 of the Code)..............................   583
              3. Reform of charitable contributions of certain 
                  easements in registered historic districts and 
                  reduction of deduction for portion of qualified 
                  conservation contribution attributable to 
                  rehabilitation credit (sec. 1213 of the Act and 
                  sec. 170 of the Code)..........................   587
              4. Charitable contributions of taxidermy property 
                  (sec. 1214 of the Act and sec. 170 of the Code)   592
              5. Recapture of tax benefit for charitable 
                  contributions of exempt use property not used 
                  for an exempt use (sec. 1215 of the Act and 
                  secs. 170, 6050L, and new sec. 6720B of the 
                  Code)..........................................   594
              6. Limitation of deduction for charitable 
                  contributions of clothing and household items 
                  (sec. 1216 of the Act and sec. 170 of the Code)   597
              7. Modification of recordkeeping requirements for 
                  certain charitable contributions (sec. 1217 of 
                  the Act and sec. 170 of the Code)..............   600
              8. Contributions of fractional interests in 
                  tangible personal property (sec. 1218 of the 
                  Act and secs. 170, 2055, and 2522 of the Code).   601
              9. Provisions relating to substantial and gross 
                  overstatements of valuations (sec. 1219 of the 
                  Act and secs. 170, 6662, 6664, 6696 and new 
                  sec. 6695A of the Code)........................   603
              10. Additional exemption standards for credit 
                  counseling organizations (sec. 1220 of the Act 
                  and secs. 501 and 513 of the Code).............   607
              11. Expansion of the base of tax on private 
                  foundation net investment income (sec. 1221 of 
                  the Act and sec. 4940 of the Code).............   615
              12. Definition of convention or association of 
                  churches (sec. 1222 of the Act and sec. 7701 of 
                  the Code)......................................   619
              13. Notification requirement for entities not 
                  currently required to file an annual 
                  information return (sec. 1223 of the Act and 
                  secs. 6033, 6652, and 7428 of the Code)........   619
              14. Disclosure to State officials relating to 
                  exempt organizations (sec. 1224 of the Act and 
                  secs. 6103, 6104, 7213, 7213A, and 7431 of the 
                  Code)..........................................   621
              15. Public disclosure relating to unrelated 
                  business income tax returns (sec. 1225 of the 
                  Act and sec. 6104 of the Code).................   623
              16. Treasury study on donor advised funds and 
                  supporting organizations (sec. 1226 of the Act)   624
              17. Improved accountability of donor advised funds 
                  (secs. 1231-1235 of the Act and secs. 170, 508, 
                  2055, 2522, 4943, 4958, 6033, and new secs. 
                  4966 and 4967 of the Code).....................   628
              18. Improved accountability of supporting 
                  organizations (secs. 1241-1245 of the Act and 
                  secs. 509, 4942, 4943, 4945, 4958, and 6033 of 
                  the Code)......................................   644

TITLE XIII--OTHER PROVISIONS.....................................   656

          A. Exception from Local Furnishing Requirements for 
              Certain Alaska Hydroelectric Projects (sec. 1303 of 
              the Act)...........................................   656

          B. Extend Certain Tax Rules for Qualified Tuition 
              Programs (sec. 1304 of the Act and sec. 529 of the 
              Code)..............................................   657

Part Fourteen: Tax Relief and Health Care Act of 2006 (Public Law 
  109-432).......................................................   661

  I. Division A--Extension and Expansion of Certain Tax Provisions and 
     Other Provisions...............................................661

TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS........   661

              1. Above-the-line deduction for higher education 
                  expenses (sec. 101 of the Act and sec. 222 of 
                  the Code)......................................   661
              2. Extension and modification of the new markets 
                  tax credit (sec. 102 of the Act and sec. 45D of 
                  the Code)......................................   662
              3. Deduction of state and local general sales taxes 
                  (sec. 103 of the Act and sec. 164 of the Code).   664
              4. Extension and modification of the research 
                  credit (sec. 104 of the Act and sec. 41 of the 
                  Code)..........................................   665
              5. Work opportunity tax credit and welfare-to-work 
                  tax credit (sec. 105 of the Act and secs. 51 
                  and 51A of the Code)...........................   670
              6. Extend election to treat combat pay as earned 
                  income for purposes of the earned income credit 
                  (sec. 106 of the Act and sec. 32 of the Code)..   674
              7. Extension and modification of qualified zone 
                  academy bonds (sec. 107 of the Act and sec. 
                  1397E of the Code).............................   675
              8. Above-the-line deduction for certain expenses of 
                  elementary and secondary school teachers (sec. 
                  108 of the Act and sec. 62 of the Code)........   678
              9. Extension and expansion to petroleum products of 
                  expensing for environmental remediation costs 
                  (sec. 109 of the Act and sec. 198 of the Code).   679
              10. Tax incentives for investment in the District 
                  of Columbia (sec. 110 of the Act and secs. 
                  1400, 1400A, 1400B, and 1400C of the Code).....   681
              11. Indian employment tax credit (sec. 111 of the 
                  Act and sec. 45A of the Code)..................   683
              12. Accelerated depreciation for business property 
                  on Indian reservations (sec. 112 of the Act and 
                  sec. 168 of the Code)..........................   685
              13. Fifteen-year straight-line cost recovery for 
                  qualified leasehold improvements and qualified 
                  restaurant property (sec. 113 of the Act and 
                  sec. 168 of the Code)..........................   686
              14. Suspend limitation on rate of rum excise tax 
                  cover over to Puerto Rico and Virgin Islands 
                  (sec. 114 of the Act and sec. 7652 of the Code)   687
              15. Parity in the application of certain limits to 
                  mental health benefits (sec. 115 of the Act and 
                  sec. 9812(f)(3) of the Code, sec. 712(f) of 
                  ERISA, and sec. 2705(f) of the PHSA)...........   688
              16. Expand charitable contribution allowed for 
                  scientific property used for research and 
                  expand and extend the charitable contribution 
                  allowed computer technology and equipment (sec. 
                  116 of the Act and sec. 170 of the Code).......   689
              17. Availability of Archer medical savings accounts 
                  (sec. 117 of the Act and sec. 220 of the Code).   691
              18. Taxable income limit on percentage depletion 
                  for oil and natural gas produced from marginal 
                  properties (sec. 118 of the Act and sec. 613A 
                  of the Code)...................................   693
              19. Economic development credit for American Samoa 
                  (sec. 119 of the Act)..........................   694
              20. Extension of placed-in-service deadline for 
                  certain Gulf Opportunity Zone property (sec. 
                  120 of the Act and sec. 1400N of the Code).....   696
              21. Authority for undercover operations (sec. 121 
                  of the Act and sec. 7608 of the Code)..........   699
              22. Disclosures of certain tax return information 
                  (sec. 122 of the Act and sec. 6103 of the Code)   700
              23. Special rule for elections under expired 
                  provisions (sec. 123 of the Act)...............   704

TITLE II--ENERGY TAX PROVISIONS..................................   705

              1. Extension of placed-in-service date for tax 
                  credit for electricity produced at wind, 
                  closed-loop biomass, open-loop biomass, 
                  geothermal energy, small irrigation power, 
                  landfill gas, trash combustion, or qualified 
                  hydropower facilities (sec. 201 of the Act and 
                  sec. 45 of the Code)...........................   705
              2. Extension and expansion of clean renewable 
                  energy bonds (sec. 202 of the Act and sec. 54 
                  of the Code)...................................   712
              3. Modification of advanced coal credit with 
                  respect to subbituminous coal (sec. 203 of the 
                  Act and sec. 48A of the Code)..................   714
              4. Extension of energy efficient commercial 
                  buildings deduction (sec. 204 of the Act and 
                  sec. 179D of the Code).........................   715
              5. Extension of energy efficient new homes credit 
                  (sec. 205 of the Act and sec. 45L of the Code).   717
              6. Extension of credit for residential energy 
                  efficient property (sec. 206 of the Act and 
                  sec. 25D of the Code)..........................   718
              7. Extension of business solar and fuel cell energy 
                  credit (sec. 207 of the Act and sec. 48 of the 
                  Code)..........................................   719
              8. Special rule for qualified methanol and ethanol 
                  fuel produced from coal (sec. 208 of the Act 
                  and sec. 4041 of the Code).....................   720
              9. Special depreciation allowance for cellulosic 
                  biomass ethanol plant property (sec. 209 of the 
                  Act and new sec. 168(l) of the Code)...........   721
              10. Expenditures permitted from the Leaking 
                  Underground Storage Tank Trust Fund (sec. 210 
                  of the Act and sec. 9508 of the Code)..........   723
              11. Modification of credit for fuel from a non-
                  conventional source (sec. 211 of the Act and 
                  sec. 45K of the Code)..........................   726

TITLE III--HEALTH SAVINGS ACCOUNTS...............................   728

              1. Provisions relating to health savings accounts 
                  (sec. 301-307 of the Act and sec. 223 of the 
                  Code)..........................................   728

TITLE IV--OTHER TAX PROVISIONS...................................   738

              1. Deduction allowable with respect to income 
                  attributable to domestic production activities 
                  in Puerto Rico (sec. 401 of the Act and sec. 
                  199 of the Code)...............................   738
              2. Alternative minimum tax credit relief for 
                  individuals; returns required for certain 
                  options (secs. 402 and 403 of the Act and secs. 
                  53 and 6039 of the Code).......................   739
              3. Partial expensing for advanced mine safety 
                  equipment (sec. 404 of the Act and new sec. 
                  179E of the Code)..............................   742
              4. Mine rescue team training credit (sec. 405 of 
                  the Act and new sec. 45N of the Code)..........   743
              5. Whistleblower reforms (sec. 406 of the Act and 
                  sec. 7623 of the Code).........................   744
              6. Frivolous tax submissions (sec. 407 of the Act 
                  and sec. 6702 of the Code).....................   746
              7. Addition of meningococcal and human 
                  papillomavirus vaccines to the list of taxable 
                  vaccines (sec. 408 of the Act and sec. 4132 of 
                  the Code)......................................   747
              8. Make permanent the tax treatment of certain 
                  settlement funds (sec. 409 of the Act and sec. 
                  468B of the Code)..............................   747
              9. Make permanent the active business rules 
                  relating to taxation of distributions of stock 
                  and securities of a controlled corporation 
                  (sec. 410 of the Act and sec. 355 of the Code).   748
              10. Make permanent the modifications to qualified 
                  veterans' mortgage bonds (sec. 411 of the Act 
                  and sec. 143 of the Code)......................   750
              11. Make permanent the capital gains treatment for 
                  certain self-created musical works (sec. 412 of 
                  the Act and sec. 1221 of the Code).............   751
              12. Make permanent the decrease in minimum vessel 
                  tonnage limit to 6,000 deadweight tons (sec. 
                  413 of the Act and sec. 1355 of the Code)......   753
              13. Make permanent the modification of special 
                  arbitrage rule for certain funds (sec. 414 of 
                  the Act).......................................   754
              14. Great Lakes domestic shipping to not disqualify 
                  vessel from tonnage tax (sec. 415 of the Act 
                  and sec. 1355 of the Code).....................   755
              15. Expansion of the qualified mortgage bond 
                  program (sec. 416 of the Act and sec. 143 of 
                  the Code)......................................   758
              16. Exclusion of gain on sale of a principal 
                  residence by certain employees of the 
                  intelligence community (sec. 417 of the Act and 
                  sec. 121 of the Code)..........................   760
              17. Sale of property to comply with conflict-of 
                  interest requirements (sec. 418 of the Act and 
                  sec. 1043 of the Code).........................   761
              18. Establish deduction for private mortgage 
                  insurance (sec. 419 of the Act and sec. 163 of 
                  the Code)......................................   762
              19. Modification of refunds for kerosene used in 
                  aviation (sec. 420 of the Act and sec. 6427 of 
                  the Code)......................................   763
              20. Regional income tax agencies treated as States 
                  for purposes of confidentiality and disclosure 
                  requirements (sec. 421 of the Act and sec. 6103 
                  of the Code)...................................   766
              21. Semi-generic wine names (sec. 422 of the Act 
                  and sec. 5388 of the Code).....................   767
              22. Railroad track maintenance credit (sec. 423 of 
                  the Act and sec. 45G of the Code)..............   768
              23. Modify tax on unrelated business taxable income 
                  of charitable remainder trusts (sec. 424 of the 
                  Act and sec. 664 of the Code)..................   770
              24. Make permanent the special rule regarding 
                  treatment of loans to qualified continuing care 
                  facilities (sec. 425 of the Act and sec. 
                  7872(h) of the Code)...........................   771
              25. Tax technical corrections (sec. 426 of the Act)   773

 II. Division C--Other Provisions...................................775

TITLE II--SURFACE MINING CONTROL AND RECLAMATION ACT AMENDMENTS 
  OF 2006........................................................   775

              1. Coal Industry Retiree Health Benefit Act........   775

TITLE IV--OTHER PROVISIONS.......................................   778

              1. Clarification of prohibition of delivery sales 
                  of tobacco products (sec. 401 of the Act and 
                  sec. 5761 of the Code).........................   778
              2. Exclusion of 25 percent of capital gain for 
                  certain sales of mineral and oil leases for 
                  conservation purposes (sec. 403 of the Act)....   779
              3. Tax court review of requests for equitable 
                  relief from joint and several liability (sec. 
                  408 of the Act and sec. 6015 of the Code)......   781

Part Fifteen: Fallen Firefighters Assistance Tax Clarification 
  Act of 2006 (Public Law 109-445)...............................   784

          A. Payments by Certain Charitable Organizations for the 
              Benefit of Firefighters Who Died as a Result of the 
              Esperanza Fire Treated as Exempt Payments (sec. 2 
              of the Act)........................................   784

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 109th Congress.............................................   785


                              INTRODUCTION

    This document,\1\ prepared by the staff of the Joint 
Committee on Taxation in consultation with the staffs of the 
House Committee on Ways and Means and the Senate Committee on 
Finance, provides an explanation of tax legislation enacted in 
the 109th Congress. The explanation follows the chronological 
order of the tax legislation as signed into law.
---------------------------------------------------------------------------
    \1\ This document may be cited as follows: Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in the 109th 
Congress (JCS-1-07), January 17, 2007.
---------------------------------------------------------------------------
    For each provision, the document includes a description of 
present law, explanation of the provision, and effective date. 
Present law describes the law in effect immediately prior to 
enactment. It does not reflect changes to the law made by the 
provision or subsequent to the enactment of the provision. For 
many provisions, the reasons for change are also included. In 
some instances, provisions included in legislation enacted in 
the 109th Congress were not reported out of committee before 
enactment. For example, in some cases, the provisions enacted 
were included in bills that went directly to the House and 
Senate floors. As a result, the legislative history of such 
provisions does not include the reasons for change normally 
included in a committee report. In the case of such provisions, 
no reasons for change are included with the explanation of the 
provision in this document.
    In some cases, there is no legislative history for enacted 
provisions. For such provisions, this document includes a 
description of present law, explanation of the provision, and 
effective date, as prepared by the staff of the Joint Committee 
on Taxation. In some cases, contemporaneous technical 
explanations of certain bills were prepared and published by 
the staff of the Joint Committee. In those cases, this document 
follows the technical explanations.
    Part One of this document is an explanation of the 
provision relating to the acceleration of the income tax 
benefits for charitable cash contributions for the relief of 
victims of the Indian Ocean tsunami (Pub. L. No. 109-1).
    Part Two is an explanation of the provision relating to the 
extension of the Leaking Underground Storage Tank Trust Fund 
financing rate (Pub. L. No. 109-6).
    Part Three is an explanation of the provision relating to 
the tax treatment of certain disaster mitigation payments (Pub. 
L. No. 109-7).
    Part Four is an explanation of the provisions of the 
Surface Transportation Extension Act of 2005, Parts I--VI (Pub. 
L. Nos. 109-14, 109-20, 109-35, 109-37, 109-40, and 109-42), 
relating extensions of the Surface Transportation Act.
    Part Five is an explanation of the energy tax policy 
incentive provisions of the Energy Policy Act of 2005 (Pub. L. 
No. 109-58) relating to electricity infrastructure, domestic 
fossil fuel security, conservation and energy efficiency, and 
alternative motor vehicles and fuels incentives.
    Part Six is an explanation of the provisions of the Safe, 
Accountable, Flexible, Efficient Transportation Equity Act: A 
Legacy for All Users (Pub. L. No. 109-59) relating to highway 
trust fund reauthorization and excise tax reform and 
simplification.
    Part Seven is an explanation of the provisions of the 
Katrina Emergency Tax Relief Act of 2005 (Pub. L. No. 109-73) 
relating to special rules for use of retirement funds, 
employment relief, charitable giving incentives, and additional 
tax relief provisions relating to Hurricane Katrina.
    Part Eight is an explanation of the provision of the 
Sportfishing and Recreational Boating Safety Amendments Act of 
2005 (Pub. L. No. 109-74) relating to preserving law existing 
prior to the Sportfishing Act.
    Part Nine is an explanation of the provisions of the Gulf 
Opportunity Zone Act of 2005 (Pub. L. No. 109-135) relating to 
establishment of the Gulf Opportunity Zone, tax benefits 
related to Hurricanes Rita and Wilma, other tax provisions, and 
tax technical corrections.
    Part Ten is an explanation of the provision relating to the 
extension of parity in the application of certain limits to 
mental health benefits (Pub. L. No. 109-151).
    Part Eleven is an explanation of the provisions of the Tax 
Increase Prevention and Reconciliation Act of 2005 (Pub. L. No. 
109-222) relating to the extension and modification of certain 
tax provisions, alternative minimum tax relief, corporate 
estimated tax provisions, and revenue offset provisions.
    Part Twelve is an explanation of the provision of the 
heroes earned retirement opportunities act (Pub. L. No. 109-
227) relating to taking into account combat zone compensation 
for purposes of determining the limitations and deductibility 
of contributions to individual retirement plans.
    Part Thirteen is an explanation of the provisions of the 
Pension Protection Act of 2005 (Pub. L. No. 109-280) relating 
to the reform of funding rules for single-employer defined 
benefit pension plans, funding rules for multiemployer pension 
plans, the Pension Benefit Guarantee Corporation, disclosure, 
investment advice, prohibited transactions, and fiduciary 
rules, benefit accrual standards, pension related revenue 
provisions, increase in pension plan diversification and 
participation, spousal pension protection, administrative 
provisions, tax exempt organizations, and other provisions.
    Part Fourteen is an explanation of the provisions of the 
Tax Relief and Health Care Act of 2006 (Pub. L. No. 109-432) 
relating to the extension and expansion of certain tax 
provisions, energy tax provisions, health savings accounts, and 
other tax provisions.
    Part Fifteen is an explanation of the provision of the 
Fallen Firefighters Assistance Tax Clarification Act of 2006 
(Pub. L. No. 109-445) relating to charitable payments made on 
behalf of firefighters who died as the result of the October 
2006 Esperanza Incident fire in southern California.
    The Appendix provides the estimated budget effects of tax 
legislation enacted in the 109th Congress.
    The first footnote in each part gives the legislative 
history of each of the Acts of the 109th Congress discussed.

            PART ONE: TSUNAMI RELIEF (PUBLIC LAW 109-1) \2\

      A. Acceleration of Income Tax Benefits for Charitable Cash 
Contributions for Relief of Indian Ocean Tsunami Victims (sec. 1 of the 
                                  Act)

                              Present Law

    In general, under present law, taxpayers may claim an 
income tax deduction for charitable contributions. The 
charitable deduction generally is available for the taxable 
year in which the contribution is made. For taxpayers whose 
taxable year is the calendar year, the tax benefit of a 
charitable contribution made in January often is not realized 
until the following calendar year when the tax return is filed.
---------------------------------------------------------------------------
    \2\ H.R. 241. The House passed the bill without objection on 
January 6, 2005. The Senate passed the bill by unanimous consent on 
January 6, 2005. The President signed the bill on January 7, 2005.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision permits taxpayers to treat charitable 
contributions of cash made in January 2005, for the purpose of 
relief of victims of the Indian Ocean tsunami, as contributions 
made on December 31, 2004. Thus, the effect of the provision is 
to give calendar-year taxpayers who make tsunami-related 
charitable contributions of cash in January 2005 the 
opportunity to accelerate the tax benefit. Under the provision, 
such taxpayers may realize the tax benefit of such 
contributions by taking a deduction on their 2004 tax return.

                             Effective Date

    The provision is effective on the date of enactment 
(January 7, 2005).

  PART TWO: EXTENSION OF LEAKING UNDERGROUND STORAGE TANK TRUST FUND 
                 FINANCING RATE (PUBLIC LAW 109-6) \3\

 A. Extension of Leaking Underground Storage Tank Trust Fund Financing 
                        Rate (sec. 1 of the Act)

                              Present Law

    The Code imposes an excise tax, generally at a rate of 0.1 
cents per gallon, on gasoline, diesel, kerosene, special motor 
fuels (other than liquefied petroleum gas and liquefied natural 
gas) and inland waterway fuels to finance the Leaking 
Underground Storage Tank Trust Fund. The tax expires on April 
1, 2005.
---------------------------------------------------------------------------
    \3\ H.R. 1270. The House passed the bill on the suspension calendar 
on March 16, 2005. The Senate passed the bill by unanimous consent on 
March 17, 2005. The President signed the bill on March 31, 2005.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the Leaking Underground Storage Tank 
Trust Fund financing rate until October 1, 2005.\4\
---------------------------------------------------------------------------
    \4\ The tax was subsequently extended through September 30, 2011. 
See Part Five, A.36.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (March 
31, 2005).

   PART THREE: TAX TREATMENT OF CERTAIN DISASTER MITIGATION PAYMENTS 
                         (PUBLIC LAW 109-7) \5\

A. Tax Treatment of Certain Disaster Mitigation Payments (sec. 1 of the 
                     Act and sec. 139 of the Code)

                              Present Law

    Gross income includes all income from whatever source 
derived unless a specific exception applies.
---------------------------------------------------------------------------
    \5\ H.R. 1134. The House passed the bill on the suspension calendar 
on March 14, 2005. The Senate passed the bill with an amendment by 
unanimous consent on April 13, 2005. The House agreed to the Senate 
amendment without objection on April 14, 2005. The President signed the 
bill on April 15, 2005.
---------------------------------------------------------------------------
    Gross income does not include amounts received by 
individuals as qualified disaster relief payments under section 
139. Qualified disaster relief payments include amounts paid to 
an individual: (1) to reimburse or pay reasonable and necessary 
personal, family, living, or funeral expenses incurred as a 
result of a qualified disaster; (2) to reimburse or pay 
reasonable and necessary expenses incurred for the repair or 
rehabilitation of a personal residence or replacement of its 
contents to the extent that the need for such repair, 
rehabilitation, or replacement is attributable to a qualified 
disaster; (3) by a person engaged in the furnishing or sale of 
transportation by reason of death or personal injuries as a 
result of a qualified disaster; or (4) by a Federal, State, or 
local government, or agency or instrumentality thereof, in 
connection with a qualified disaster in order to promote the 
general welfare.
    In addition to providing grants in the aftermath of a 
natural disaster, pursuant to the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act and the National Flood 
Insurance Act, the Federal Emergency Management Agency 
(``FEMA'') of the Department of Homeland Security conducts 
disaster mitigation assistance programs to provide grants 
through State and local governments for businesses and 
individuals to mitigate potential damage from future natural 
disasters.
    There is no specific exclusion from gross income for 
amounts received pursuant to FEMA mitigation grants. FEMA 
provides these grants to mitigate potential damage from future 
hazards. The existing statutory exclusion under present law for 
qualified disaster relief payments only applies to certain 
amounts received by individuals as a result of a disaster that 
has occurred.
    If certain requirements are met, section 1033 of the Code 
provides that if property is compulsorily or involuntarily 
converted and replaced within a certain period (generally two 
years), there is deferral of gain recognized as a result of the 
conversion. In general, the basis in the replacement property 
is the same as the taxpayer's basis in the converted property 
(decreased by the amount of any loss or money received by the 
taxpayer and increased by the amount of any gain recognized on 
the conversion).
    In the case of the sale or exchange of a principal 
residence, present law allows an exclusion of up to $250,000 
($500,000 in the case of a joint return) if the property was 
used as the taxpayer's principal residence for two or more 
years during the five-year period ending on the date of the 
sale or exchange.

                        Explanation of Provision

    The provision provides an exclusion from gross income for 
amounts received as qualified disaster mitigation payments. 
Qualified disaster mitigation payments are amounts paid to or 
for the benefit of property owners for hazard mitigation 
pursuant to the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act or the National Flood Insurance Act 
(the ``Acts''). In particular, the provision provides 
exclusions for payments received from FEMA's Flood Mitigation 
Assistance Program, Pre-Disaster Mitigation Program, and Hazard 
Mitigation Grant Program. The exclusion applies to payments 
made pursuant to the Acts as in effect on the date of 
enactment.
    Amounts received for the sale or disposition of property 
for the purpose of hazard mitigation are not eligible for the 
income exclusion. However, the provision provides that if 
property is sold or disposed to implement hazard mitigation 
(pursuant to the Acts), such sale or disposition is treated as 
an involuntary conversion, as defined by section 1033 of the 
Code. Thus, if a taxpayer sells property through a FEMA 
disaster mitigation program and the taxpayer replaces the 
property within the period specified under present law in the 
case of an involuntary conversion (i.e., generally two years), 
instead of currently including the gain in gross income, the 
taxpayer's basis in the replacement property is the same as the 
taxpayer's basis in the converted property (decreased by the 
amount of any loss or money received by the taxpayer and 
increased by the amount of any gain recognized on the 
conversion).
    The provision provides that the basis of properties 
improved for the purpose of hazard mitigation is not increased 
by amounts received under FEMA mitigation grants that are 
excluded from gross income. The provision provides that no 
additional deduction or credit is allowed with respect to 
amounts excluded from income under the provision. The provision 
also applies this denial of double benefit rule to amounts 
received as qualified disaster relief payments under present 
law section 139 of the Code.

                             Effective Date

    The provision is effective for amounts received and sales 
or dispositions before, on, or after the date of enactment 
(April 15, 2005).

  PART FOUR: SURFACE TRANSPORTATION EXTENSION ACT OF 2005, PARTS I-VI 
 (PUBLIC LAWS 109-14,\6\ 109-20 \7\ 109-35,\8\ 109-37,\9\ 109-40,\10\ 
                            AND 109-42 \11\)

              A. Extensions of Surface Transportation Act

                              Present Law

Expenditure authority
    Under prior law, the Internal Revenue Code (sec. 9503) 
authorized expenditures (subject to appropriations) to be made 
from the Highway Trust Fund generally through May 31, 2005, for 
purposes provided in specified authorizing legislation as in 
effect on the date of enactment of the most recent authorizing 
Act (the Surface Transportation Extension Act of 2004, Part V).
---------------------------------------------------------------------------
    \6\ H.R. 2566. The House passed the bill on the suspension calendar 
on May 25, 2005. The Senate passed the bill by unanimous consent on May 
26, 2005. The President signed the bill on May 31, 2005.
    \7\ H.R. 3104. The House passed the bill without objection on June 
30, 2005. The Senate passed the bill by unanimous consent on June 30, 
2005. The President signed the bill on July 1, 2005.
    \8\ H.R. 3332. The House passed the bill without objection on July 
19, 2005. The Senate passed the bill by unanimous consent on July 19, 
2005. The President signed the bill on July 20, 2005.
    \9\ H.R. 3377. The House passed the bill without objection on July 
21, 2005. The Senate passed the bill by unanimous consent on July 21, 
2005. The President signed the bill on July 22, 2005.
    \10\ H.R. 3453. The House passed the bill without objection on July 
27, 2005. The Senate passed the bill by unanimous consent on July 27, 
2005. The President signed the bill on July 28, 2005.
    \11\ H.R. 3512. The House passed the bill without objection on July 
29, 2005. The Senate passed the bill by unanimous consent on July 29, 
2005. The President signed the bill on July 30, 2005.
---------------------------------------------------------------------------
    Under prior law, expenditures also were authorized from the 
Aquatic Resources Trust Fund through May 31, 2005.
    Highway Trust Fund spending is limited by anti-deficit 
provisions internal to the Highway Trust Fund, the so-called 
``Harry Byrd rule''. The rule requires the Treasury Department 
to determine, on a quarterly basis, the amount (if any) by 
which unfunded highway authorizations exceed projected net 
Highway Trust Fund tax receipts for the 24-month period 
beginning at the close of each fiscal year (sec. 9503(d)). 
Similar rules apply to unfunded Mass Transit Account 
authorizations. If unfunded authorizations exceed projected 24-
month receipts, apportionments to the States for specified 
programs funded by the relevant Trust Fund Account are to be 
reduced proportionately. Because of the Harry Byrd rule, taxes 
dedicated to the Highway Trust Fund typically are scheduled to 
expire at least two years after current authorizing Acts.
    The Surface Transportation Extension Act of 2003, created a 
temporary rule (through February 29, 2004) for purposes of the 
anti-deficit provisions of the Highway Trust Fund. For purposes 
of determining 24 months of projected revenues for the anti-
deficit provisions, the Secretary of the Treasury is instructed 
to treat each expiring provision relating to appropriations and 
transfers to the Highway Trust Fund to have been extended 
through the end of the 24-month period and to assume that the 
rate of tax during such 24-month period remains at the same 
rate in effect on the date of enactment of the provision. The 
Surface Transportation Extension Act of 2004 extended this rule 
through April 30, 2004. The Surface Transportation Extension 
Act of 2004, Part II, extended this rule through June 30, 2004. 
The Surface Transportation Extension Act of 2004, Part III, 
extended this rule through July 31, 2004. The Surface 
Transportation Extension Act of 2004, Part IV, extended this 
rule through September 30, 2004. The Surface Transportation 
Extension Act of 2004, Part V, extended this rule through May 
31, 2005.
Heavy vehicle use tax
    The Code imposes an annual use tax imposed on highway 
vehicles having a taxable gross weight of 55,000 pounds or more 
(sec. 4481). The maximum rate for this tax is $550 per year, 
imposed on vehicles having a taxable gross weight over 75,000 
pounds. The use tax is dedicated to the Highway Trust Fund and 
was to terminate on October 1, 2005. For a tax period that ends 
on September 30, 2005, the amount of the use tax will be 
determined by reducing the amount of tax due by 75 percent.

                        Explanation of Provision

Surface Transportation Act of 2005 (sec. 9)
            Expenditure authority
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through June 30, 
2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through June 30, 
2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through June 30, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.
            Heavy vehicle use tax
    The Act extends until October 1, 2006, the annual use tax 
on heavy vehicles and sets forth a special rule for the 
imposition of such tax when the taxable period ends on 
September 30, 2006. For a tax period that ends on September 30, 
2006, the amount of the use tax will be determined by reducing 
the amount of tax due by 75 percent.

Surface Transportation Act of 2005, Part II (sec. 9)

    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through July 19, 
2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through July 19, 
2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through July 19, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.

Surface Transportation Act of 2005, Part III (sec. 9)

    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through July 21, 
2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through July 21, 
2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through July 21, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.

Surface Transportation Act of 2005, Part IV (sec. 9)

    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through July 27, 
2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through July 27, 
2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through July 27, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.

Surface Transportation Act of 2005, Part V (sec. 9)

    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through July 30, 
2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through July 30, 
2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through July 30, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.

Surface Transportation Act of 2005, Part VI (sec. 7)

    The Act extends the authority to make expenditures (subject 
to appropriations) from the Highway Trust Fund through August 
14, 2005. The Act also updates the Highway Trust Fund cross-
references to authorizing legislation to include expenditure 
purposes in this Act as in effect on the date of enactment.
    For purposes of the anti-deficit provisions of the Highway 
Trust Fund, the Act extends the temporary rule through August 
14, 2005.
    The Act extends the authority to make expenditures (subject 
to appropriations) from the Aquatics Resources Trust Fund 
through August 14, 2005. The Act also updates the Aquatics 
Resources Trust Fund cross-references to authorizing 
legislation to include expenditure purposes as in effect on the 
date of enactment of this Act.

                             Effective Date

    The provisions are effective on the dates of enactment (in 
the case of Pub. L. No. 109-14, May 31, 2005; in the case of 
Part II, July 1, 2005; in the case of Part III, July 20, 2005; 
in the case of Part IV, July 22, 2005; in the case of Part V, 
July 28, 2005; and in the case of Part VI, July 30, 2005).

   PART FIVE: THE ENERGY POLICY ACT OF 2005 (PUBLIC LAW 109-58) \12\

                    A. Energy Tax Policy Incentives

1. Extension and modification of renewable electricity production 
        credit (secs. 1301 and 1302 of the Act and sec. 45 of the Code)

                              Present Law

In general
    An income tax credit is allowed for the production of 
electricity from qualified facilities sold by the taxpayer to 
an unrelated person (sec. 45). Qualified facilities comprise 
wind energy facilities, closed-loop biomass facilities, open-
loop biomass (including agricultural livestock waste nutrients) 
facilities, geothermal energy facilities, solar energy 
facilities, small irrigation power facilities, landfill gas 
facilities, and trash combustion facilities. In addition, an 
income tax credit is allowed for the production of refined 
coal.
---------------------------------------------------------------------------
    \12\ H.R. 6. The House Committee on Ways and Means reported H.R. 
1541 on April 18, 2005 (H.R. Rep. No. 109-45). The text of H.R. 1541 
was added to H.R. 6 as title XIII. The House passed H.R. 6 on April 21, 
2005. The Senate Committee on Finance ordered reported on June 16, 
2005, a bill the text of which as modified was added as title XV to 
H.R. 6. The Senate passed H.R. 6 with an amendment on June 28, 2005. 
The conference report was filed on July 27, 2005 (H.R. Rep. No. 109-
190) and was passed by the House on July 28, 2005, and the Senate on 
July 29, 2005. The President signed the bill on August 8, 2005. For a 
technical explanation of the bill prepared by the staff of the Joint 
Committee on Taxation, see Joint Committee on Taxation, Description and 
Technical Explanation of the Conference Agreement of H.R. 6, Title 
XIII, the ``Energy Tax Incentives Act of 2005'' (JCX-60-05), July 28, 
2005. For references to the technical explanation, see 151 Cong. Rec. H 
6953 (July 28, 2005) and 151 Cong. Rec. S 9117 (July 27, 2005).
---------------------------------------------------------------------------
Credit amounts and credit period
            In general
    The base amount of the credit is 1.5 cents per kilowatt-
hour (indexed for inflation) of electricity produced. The 
amount of the credit is 1.9 cents per kilowatt-hour for 2005. A 
taxpayer may claim credit for the 10-year period commencing 
with the date the qualified facility is placed in service. The 
credit is reduced for grants, tax-exempt bonds, subsidized 
energy financing, and other credits. The amount of credit a 
taxpayer may claim is phased out as the market price of 
electricity (or refined coal in the case of the refined coal 
production credit) exceeds certain threshold levels.
            Reduced credit amounts and credit periods
    In the case of open-loop biomass facilities (including 
agricultural livestock waste nutrient facilities), geothermal 
energy facilities, solar energy facilities, small irrigation 
power facilities, landfill gas facilities, and trash combustion 
facilities, the 10-year credit period is reduced to five years 
commencing on the date the facility is placed in service. In 
general, for eligible pre-existing facilities and other 
facilities placed in service prior to January 1, 2005, the 
credit period commences on January 1, 2005. In the case of a 
closed-loop biomass facility modified to co-fire with coal, to 
co-fire with other biomass, or to co-fire with coal and other 
biomass, the credit period begins no earlier than October 22, 
2004.
    In the case of open-loop biomass facilities (including 
agricultural livestock waste nutrient facilities), small 
irrigation power facilities, landfill gas facilities, and trash 
combustion facilities, the otherwise allowable credit amount is 
0.75 cent per kilowatt-hour, indexed for inflation measured 
after 1992 (currently 0.9 cents per kilowatt-hour for 2005).
            Credit applicable to refined coal
    The amount of the credit for refined coal is $4.375 per ton 
(also indexed for inflation after 1992 and equaling $5.481 per 
ton for 2005).
            Other limitations on credit claimants and credit amounts
    In general, in order to claim the credit, a taxpayer must 
own the qualified facility and sell the electricity produced by 
the facility (or refined coal in the case of the refined coal 
production credit) to an unrelated party. A lessee or operator 
may claim the credit in lieu of the owner of the qualifying 
facility in the case of qualifying open-loop biomass facilities 
originally placed in service on or before the date of enactment 
and in the case of a closed-loop biomass facilities modified to 
co-fire with coal, to co-fire with other biomass, or to co-fire 
with coal and other biomass. In the case of a poultry waste 
facility, the taxpayer may claim the credit as a lessee or 
operator of a facility owned by a governmental unit.
    For all qualifying facilities, other than closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
the amount of credit a taxpayer may claim is reduced by reason 
of grants, tax-exempt bonds, subsidized energy financing, and 
other credits, but the reduction cannot exceed 50 percent of 
the otherwise allowable credit. In the case of closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
there is no reduction in credit by reason of grants, tax-exempt 
bonds, subsidized energy financing, and other credits.
    The credit for electricity produced from renewable sources 
is a component of the general business credit (sec. 38(b)(8)). 
Generally, the general business credit for any taxable year may 
not exceed the amount by which the taxpayer's net income tax 
exceeds the greater of the tentative minimum tax or so much of 
the net regular tax liability as exceeds $25,000. Excess 
credits may be carried back one year and forward up to 20 
years.
    A taxpayer's tentative minimum tax is treated as being zero 
for purposes of determining the tax liability limitation with 
respect to the section 45 credit for electricity produced from 
a facility (placed in service after October 22, 2004) during 
the first four years of production beginning on the date the 
facility is placed in service.

Qualified facilities
            Wind energy facility
    A wind energy facility is a facility that uses wind to 
produce electricity. To be a qualified facility, a wind energy 
facility must be placed in service after December 31, 1993, and 
before January 1, 2006.
            Closed-loop biomass facility
    A closed-loop biomass facility is a facility that uses any 
organic material from a plant which is planted exclusively for 
the purpose of being used at a qualifying facility to produce 
electricity. In addition, a facility can be a closed-loop 
biomass facility if it is a facility that is modified to use 
closed-loop biomass to co-fire with coal, with other biomass, 
or with both coal and other biomass, but only if the 
modification is approved under the Biomass Power for Rural 
Development Programs or is part of a pilot project of the 
Commodity Credit Corporation.
    To be a qualified facility, a closed-loop biomass facility 
must be placed in service after December 31, 1992, and before 
January 1, 2006. In the case of a facility using closed-loop 
biomass but also co-firing the closed-loop biomass with coal, 
other biomass, or coal and other biomass, a qualified facility 
must be originally placed in service and modified to co-fire 
the closed-loop biomass at any time before January 1, 2006.
            Open-loop biomass (including agricultural livestock waste 
                    nutrients) facility
    An open-loop biomass facility is a facility using open-loop 
biomass to produce electricity. Open-loop biomass is defined as 
(1) any agricultural livestock waste nutrients, or (2) any 
solid, nonhazardous, cellulosic or lignin waste material which 
is segregated from other waste materials and which is derived 
from certain forest-related resources, solid wood waste 
materials, or agricultural sources. Eligible forest-related 
resources are mill residues, other than spent chemicals from 
pulp manufacturing, precommercial thinnings, slash, and brush. 
Solid wood waste materials include waste pallets, crates, 
dunnage, manufacturing and construction wood wastes (other than 
pressure-treated, chemically-treated, or painted wood wastes), 
and landscape or right-of-way tree trimmings. Agricultural 
sources include orchard tree crops, vineyard, grain, legumes, 
sugar, and other crop by-products or residues. However, 
qualifying open-loop biomass does not include municipal solid 
waste (garbage), gas derived from biodegradation of solid 
waste, or paper that is commonly recycled. In addition, open-
loop biomass does not include closed-loop biomass or any 
biomass burned in conjunction with fossil fuel (co-firing) 
beyond such fossil fuel required for start up and flame 
stabilization.
    Agricultural livestock waste nutrients are defined as 
agricultural livestock manure and litter, including bedding 
material for the disposition of manure.
    To be a qualified facility, an open-loop biomass facility 
must be placed in service after October 22, 2004 and before 
January 1, 2006, in the case of a facility using agricultural 
livestock waste nutrients and must be placed in service at any 
time prior to January 1, 2006 in the case of a facility using 
other open-loop biomass.
            Geothermal facility
    A geothermal facility is a facility that uses geothermal 
energy to produce electricity. Geothermal energy is energy 
derived from a geothermal deposit which is a geothermal 
reservoir consisting of natural heat which is stored in rocks 
or in an aqueous liquid or vapor (whether or not under 
pressure). To be a qualified facility, a geothermal facility 
must be placed in service after October 22, 2004 and before 
January 1, 2006.
            Solar facility
    A solar facility is a facility that uses solar energy to 
produce electricity. To be a qualified facility, a solar 
facility must be placed in service after October 22, 2004 and 
before January 1, 2006.
            Small irrigation facility
    A small irrigation power facility is a facility that 
generates electric power through an irrigation system canal or 
ditch without any dam or impoundment of water. The installed 
capacity of a qualified facility must be not less than 150 
kilowatts but less than five megawatts. To be a qualified 
facility, a small irrigation facility must be originally placed 
in service after October 22, 2004 and before January 1, 2006.
            Landfill gas facility
    A landfill gas facility is a facility that uses landfill 
gas to produce electricity. Landfill gas is defined as methane 
gas derived from the biodegradation of municipal solid waste. 
To be a qualified facility, a landfill gas facility must be 
placed in service after October 22, 2004 and before January 1, 
2006.
            Trash combustion facility
    Trash combustion facilities are facilities that burn 
municipal solid waste (garbage) to produce steam to drive a 
turbine for the production of electricity. To be a qualified 
facility, a trash combustion facility must be placed in service 
after October 22, 2004 and before January 1, 2006.
            Refined coal facility
    A qualifying refined coal facility is a facility producing 
refined coal that is placed in service after October 22, 2004 
and before January 1, 2009. Refined coal is a qualifying 
liquid, gaseous, or solid synthetic fuel produced from coal 
(including lignite) or high-carbon fly ash, including such fuel 
used as a feedstock. A qualifying fuel is a fuel that when 
burned emits 20 percent less nitrogen oxides and either SO2 or 
mercury than the burning of feedstock coal or comparable coal 
predominantly available in the marketplace as of January 1, 
2003, and if the fuel sells at prices at least 50 percent 
greater than the prices of the feedstock coal or comparable 
coal. In addition, to be qualified refined coal the fuel must 
be sold by the taxpayer with the reasonable expectation that it 
will be used for the primary purpose of producing steam.

       Summary of credit rate and credit period by facility type


  Table 1.--Summary of Section 45 Credit for Electricity Produced from Certain Renewable Resources and Refined
                                                      Coal
----------------------------------------------------------------------------------------------------------------
                                                                                                 Credit period
                                                                     Credit amount for 2005   (years from placed-
           Electricity produced from renewable resources              (cents per kilowatt-     in-service date)
                                                                     hour; dollars per ton)           \1\
----------------------------------------------------------------------------------------------------------------
Wind..............................................................                      1.9                  10
Closed-loop biomass...............................................                      1.9                  10
Open-loop biomass (including agricultural livestock waste nutrient                      0.9                   5
 facilities)......................................................
Geothermal........................................................                      1.9                   5
    Solar.........................................................                      1.9                   5
Small irrigation power............................................                      0.9                   5
Municipal solid waste (including landfill gas facilities and trash                      0.9                   5
 combustion facilities)...........................................
----------------------------------------------------------------------------------------------------------------
Refined Coal......................................................                    5.481                  10
----------------------------------------------------------------------------------------------------------------
\1\ For eligible pre-existing facilities and other facilities placed in service prior to January 1, 2005, the
  credit period commences on January 1, 2005. In the case of certain co-firing closed-loop facilities, the
  credit period begins no earlier than October 22, 2004.

Taxation of cooperatives and their patrons

    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception--the cooperative may exclude from its taxable 
income distributions of patronage dividends. Generally, 
cooperatives that are subject to the cooperative tax rules of 
subchapter T of the Code \13\ are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative.\14\ The 
availability of such deductions from taxable income has the 
effect of allowing the cooperative to be treated like a conduit 
with respect to profits derived from transactions with patrons 
who are members of the cooperative. Present law does not permit 
cooperatives to pass any portion of the income tax credit for 
electricity production through to their patrons.
---------------------------------------------------------------------------
    \13\ Sec. 1381, et seq.
    \14\ Sec. 1382.
---------------------------------------------------------------------------

                     Explanation of Provision \15\


Extension of placed-in-service date for qualifying facilities

    The provision extends the placed-in-service date by two 
years (through December 31, 2007) for the following qualifying 
facilities: wind facilities; closed-loop biomass facilities 
(including a facility co-firing the closed-loop biomass with 
coal, other biomass, or coal and other biomass); open-loop 
biomass facilities; geothermal facilities; small irrigation 
power facilities; landfill gas facilities; and trash combustion 
facilities. The provision does not alter the terminating 
placed-in-service date for solar facilities (December 31, 2005) 
or refined coal facilities (December 31, 2008).
---------------------------------------------------------------------------
    \15\ The provision was subsequently modified in Division A, section 
201 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------

New qualifying energy resources

            In general
    The provision adds two new qualifying energy resources: 
hydropower and Indian coal.
            Hydropower
    A qualifying hydropower facility is (1) a facility that 
produced hydroelectric power (a hydroelectric dam) prior to the 
date of enactment at which efficiency improvements or additions 
to capacity have been made after the date of enactment and 
before January 1, 2009, that enable the taxpayer to produce 
incremental hydropower or (2) a facility placed in service 
before the date of enactment that did not produce hydroelectric 
power (a nonhydroelectric dam) on the date of enactment and to 
which turbines or other electricity generating equipment have 
been added after the date of enactment and before January 1, 
2009.
    At an existing hydroelectric facility, the taxpayer may 
only claim credit for the production of incremental 
hydroelectric power. Incremental hydroelectric power for any 
taxable year is equal to the percentage of average annual 
hydroelectric power produced at the facility attributable to 
the efficiency improvement or additions of capacity determined 
by using the same water flow information used to determine an 
historic average annual hydroelectric power production baseline 
for that facility. The Federal Energy Regulatory Commission 
will certify the baseline power production of the facility and 
the percentage increase due to the efficiency and capacity 
improvements.
    At a nonhydroelectric dam, the facility must be licensed by 
the Federal Energy Regulatory Commission and meet all other 
applicable environmental, licensing, and regulatory 
requirements and the turbines or other generating devices are 
added to the facility after the date of enactment and before 
January 1, 2009. In addition there must not be any enlargement 
of the diversion structure, or construction or enlargement of a 
bypass channel, or the impoundment or any withholding of 
additional water from the natural stream channel.
    In the case of electricity generated from a qualifying 
hydropower facility, the taxpayer may claim a credit equal to 
one-half the otherwise allowable amount.
            Indian coal
    The provision adds Indian coal as a new energy source. The 
taxpayer may claim a credit for sales of coal to an unrelated 
third party from a qualified facility for the seven-year period 
beginning on January 1, 2006, and ending after December 31, 
2012. The value of the credit is $1.50 per ton for the first 
four years of the seven-year period and $2.00 per ton for the 
last three years of the seven-year period. The credit amounts 
are indexed for inflation. A qualified Indian coal facility is 
a facility that produces coal from reserves that on June 14, 
2005, were owned by a Federally recognized tribe of Indians or 
were held in trust by the United States for a tribe or its 
members.

Equalization of credit period for all qualifying renewable resources

    The provision extends the credit period from five years to 
10 years for electricity produced from qualifying open-loop 
biomass facilities (including agricultural livestock waste 
nutrient facilities), geothermal facilities, solar facilities, 
small irrigation power facilities, landfill gas facilities, and 
trash combustion facilities placed in service after the date of 
enactment. The provision also provides that for electricity 
produced from qualified hydropower the credit period is 10 
years. The provision provides a seven-year credit period for 
Indian coal facilities, as explained above.

Clarification of units added to pre-existing trash combustion 
        facilities

    The provision clarifies that a qualifying trash combustion 
facility includes a new unit, placed in service after October 
22, 2004, that increases electricity production capacity at an 
existing trash combustion facility. A new unit generally would 
include a new burner/boiler and turbine. The new unit may share 
certain common equipment, such as trash handling equipment, 
with other pre-existing units at the same facility. Electricity 
produced at a new unit of an existing facility qualifies for 
the production credit only to the extent of the increased 
amount of electricity produced at the entire facility.

Taxation of cooperatives and their patrons

    The provision allows eligible cooperatives to elect to pass 
any portion of the credit through to their patrons. An eligible 
cooperative is defined as a cooperative organization that is 
owned more than 50 percent by agricultural producers or 
entities owned by agricultural producers.
    Under the provision, the credit may be apportioned among 
patrons eligible to share in patronage dividends on the basis 
of the quantity or value of business done with or for such 
patrons for the taxable year. The election must be made on a 
timely filed return for the taxable year, and once made, is 
irrevocable for such taxable year.
    The amount of the credit apportioned to patrons is not 
included in the organization's credit for the taxable year of 
the organization. The amount of the credit apportioned to a 
patron is included in the first taxable year of such patron 
ending on or after the last day of the payment period (as 
defined in section 1382(d)) for the taxable year of the 
organization or, if earlier, for the taxable year of the patron 
ending on or after the date on which the patron receives notice 
from the cooperative of the apportionment. If the amount of the 
credit for any taxable year is less than the amount of the 
credit shown on the cooperative's return for such taxable year, 
an amount equal to the excess of the reduction in the credit 
over the amount not apportioned to patrons for the taxable year 
is treated as an increase in the cooperative's tax. The 
increase is not treated as tax imposed for purposes of 
determining the amount of any tax credit under Chapter 1 of the 
Code.

                             Effective Date

    The provision generally is effective on the date of 
enactment (August 8, 2005). With respect to the taxation of 
cooperatives and their patrons, the provision applies to 
taxable years ending after the date of enactment.

 2. Clean renewable energy bonds (sec. 1303 of the Act and new sec. 54 
                              of the Code)


                              Present law


Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units. Subject to certain 
restrictions, activities that can be financed with these tax-
exempt bonds include electric power facilities (i.e., 
generation, transmission, distribution, and retailing).
    Generally, interest on State or local government bonds to 
finance activities of private persons (``private activity 
bonds'') is taxable unless a specific exception is contained in 
the Code. The term ``private person'' generally includes the 
Federal Government and all other individuals and entities other 
than States or local governments. The Code includes exceptions 
permitting States or local governments to act as conduits 
providing tax-exempt financing for certain private activities. 
In most cases, the aggregate volume of these tax-exempt private 
activity bonds is restricted by annual aggregate volume limits 
imposed on bonds issued by issuers within each State. For 
calendar year 2005, the State volume cap is the greater of $80 
per resident or $239 million. The Code imposes several 
additional restrictions on tax-exempt private activity bonds 
that do not apply to bonds for governmental activities.
    The tax exemption for State and local bonds also does not 
apply to any arbitrage bond.\16\ An arbitrage bond is defined 
as any bond that is part of an issue if any proceeds of the 
issue are reasonably expected to be used (or intentionally are 
used) to acquire higher yielding investments or to replace 
funds that are used to acquire higher yielding investments.\17\ 
In general, arbitrage profits may be earned only during 
specified periods (e.g., defined ``temporary periods'') before 
funds are needed for the purpose of the borrowing or on 
specified types of investments (e.g., ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
investment profits that are earned during these periods or on 
such investments must be rebated to the Federal government.
---------------------------------------------------------------------------
    \16\ Secs. 103(a) and (b)(2).
    \17\ Sec. 148.
---------------------------------------------------------------------------
    An issuer must file with the IRS certain information in 
order for a bond issue to be tax-exempt.\18\ Generally, this 
information return is required to be filed no later the 15th 
day of the second month after the close of the calendar quarter 
in which the bonds were issued.
---------------------------------------------------------------------------
    \18\ Sec. 149(e).
---------------------------------------------------------------------------

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments may issue ``qualified zone academy 
bonds.'' \19\ ``Qualified zone academy bonds'' are defined as 
any bond issued by a State or local government if, among other 
requirements, (1) at least 95 percent of the proceeds are used 
for the purpose of renovating, providing equipment to, 
developing course materials for use at, or training teachers 
and other school personnel in a ``qualified zone academy'' and 
(2) private entities have promised to contribute to the 
qualified zone academy certain equipment, technical assistance 
or training, employee services, or other property or services 
with a value equal to at least 10 percent of the bond proceeds. 
A school is a ``qualified zone academy'' if (1) the school is a 
public school that provides education and training below the 
college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
enterprise community designated under the Code, or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.
---------------------------------------------------------------------------
    \19\ Sec. 1397E.
---------------------------------------------------------------------------
    Financial institutions that hold qualified zone academy 
bonds are entitled to a nonrefundable tax credit in an amount 
equal to a credit rate multiplied by the face amount of the 
bond. The Treasury Department sets the credit rate at a rate 
estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer. The 
credit is includable in gross income (as if it were a taxable 
interest payment on the bond), and may be claimed against 
regular income tax and alternative minimum tax liability. The 
maximum term of the bond is determined by the Treasury 
Department, so that the present value of the obligation to 
repay the bond is 50 percent of the face value of the bond.
    There is an annual limitation of $400 million on the amount 
of qualified zone academy bonds that may be issued in calendar 
years 1998 through 2005. The $400 million aggregate bond cap is 
allocated each year to the States according to their respective 
populations of individuals below the poverty line. Each State, 
in turn, allocates the credit authority to qualified zone 
academies within such State.

Tax credits for production of electricity from renewable sources

    An income tax credit is allowed for the production of 
electricity from qualified facilities sold by the taxpayer to 
an unrelated person.\20\ The base amount of the credit is 1.5 
cents per kilowatt-hour (indexed for inflation) of electricity 
produced. The amount of the credit is 1.9 cents per kilowatt-
hour for 2005. A taxpayer may claim a credit for the 10-year 
period commencing with the date the qualified facility is 
placed in service. The credit is reduced for grants, tax-exempt 
bonds, subsidized energy financing, and other credits. The 
amount of credit a taxpayer may claim is phased out as the 
market price of electricity (or refined coal in the case of or 
refined coal production credit) exceeds certain threshold 
levels.
---------------------------------------------------------------------------
    \20\ Sec. 45.
---------------------------------------------------------------------------
    Qualified facilities comprise wind energy facilities, 
closed-loop biomass facilities, open-loop biomass (including 
agricultural livestock waste nutrients) facilities, geothermal 
energy facilities, solar energy facilities, small irrigation 
power facilities, landfill gas facilities, and trash combustion 
facilities. In addition, an income tax credit is allowed for 
the production of refined coal.
    For purposes of the credit, qualified facilities must be 
placed in service by certain dates. However, with the exception 
of qualifying refined coal facilities, in no event may 
qualifying facilities be placed in service after December 31, 
2005.

                     Explanation of Provision \21\

    The provision creates a new category of tax credit bonds: 
Clean Renewable Energy Bonds (``CREBs''). CREBs are defined as 
any bond issued by a qualified issuer if, in addition to the 
requirements discussed below, 95 percent or more of the 
proceeds of such bonds are used to finance capital expenditures 
incurred by qualified borrowers for qualified projects. 
Qualified projects are any qualified facilities within the 
meaning of section 45 (without regard to the placed-in-service 
date requirements of that section), other than Indian coal 
production facilities.
---------------------------------------------------------------------------
    \21\ The provision was subsequently extended in Division A, section 
202 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    For purposes of the provision, ``qualified issuers'' 
include (1) governmental bodies (including Indian tribal 
governments); (2) mutual or cooperative electric companies 
(described in section 501(c)(12) or section 1381(a)(2)(C), or a 
not-for-profit electric utility which has received a loan or 
guarantee under the Rural Electrification Act); and (3) clean 
renewable energy bond lenders. A clean renewable energy bond 
lender means a cooperative which is owned by, or has 
outstanding loans to, 100 or more cooperative electric 
companies and is in existence on February 1, 2002. The term 
``qualified borrower'' includes a governmental body (including 
an Indian tribal government) and a mutual or cooperative 
electric company (described in section 501(c)(12) or section 
1381(a)(2)(C).
    Like qualified zone academy bonds, CREBs are not interest-
bearing obligations. Rather, the taxpayer holding CREBs on a 
credit allowance date is entitled to a tax credit. The amount 
of the credit is determined by multiplying the bond's credit 
rate by the face amount on the holder's bond. The credit rate 
on the bonds is determined by the Secretary and is to be a rate 
that permits issuance of CREBs without discount and interest 
cost to the qualified issuer. The credit accrues quarterly and 
is includible in gross income (as if it were an interest 
payment on the bond), and can be claimed against regular income 
tax liability and alternative minimum tax liability.
    The provision also imposes a maximum maturity limitation on 
any CREBs. The maximum maturity is the term which the Secretary 
estimates will result in the present value of the obligation to 
repay the principal on a bond that is part of an issue of CREBs 
being equal to 50 percent of the face amount of such a bond. 
Moreover, the provision requires level amortization of CREBs 
during the period such bonds are outstanding.
    Under the provision, CREBs are subject to the arbitrage 
requirements of section 148 that apply to traditional tax-
exempt bonds. Principles under section 148 and the regulations 
thereunder shall apply for purposes of determining the yield 
restriction and arbitrage rebate requirements applicable to 
CREBs. For example, for arbitrage purposes, the yield on an 
issue of CREBs is computed by taking into account all payments 
of interest, if any, on such bonds, i.e., whether the bonds are 
issued at par, premium, or discount. However, for purposes of 
determining yield, the amount of the credit allowed to a 
taxpayer holding CREBs is not treated as interest, although 
such credit amount is treated as interest income to the 
taxpayer.
    In addition, to qualify as CREBs, the qualified issuer must 
reasonably expect to and actually spend 95 percent or more of 
the proceeds of such bonds on qualified projects within the 
five-year period that begins on the date of issuance. To the 
extent less than 95 percent of the proceeds are used to finance 
qualified projects during the five-year spending period, bonds 
will continue to qualify as CREBs if unspent proceeds are used 
within 90 days from the end of such five-year period to redeem 
any ``nonqualified bonds.'' For these purposes, the amount of 
nonqualified bonds is to be determined in the same manner as 
provided in Treasury regulations under section 142.\22\ In 
addition, the provision provides that the five-year spending 
period may be extended by the Secretary upon the qualified 
issuer's request.
---------------------------------------------------------------------------
    \22\ Treas. Reg. sec. 1.142-2(e).
---------------------------------------------------------------------------
    Unlike qualified zone academy bonds, the provision requires 
issuers of CREBs to report issuance to the IRS in a manner 
similar to the information returns required for tax-exempt 
bonds. Under the provision, there is a national limitation of 
$800 million of CREBs that the Secretary may allocate, in the 
aggregate, to qualified projects. However, the Secretary shall 
not allocate more than $500 million of CREBs to finance 
qualified projects for qualified borrowers that are 
governmental bodies. The authority to issue CREBs expires 
December 31, 2007.

                             Effective Date

    The provision is effective for bonds issued after December 
31, 2005.

3. Treatment of certain income of electric cooperatives (sec. 1304 of 
        the Act and sec. 501(c)(12) of the Code)

                              Present Law


In general

    Under present law, an entity must be operated on a 
cooperative basis in order to be treated as a cooperative for 
Federal income tax purposes. Although not defined by statute or 
regulation, the two principal criteria for determining whether 
an entity is operating on a cooperative basis are: (1) 
ownership of the cooperative by persons who patronize the 
cooperative; and (2) return of earnings to patrons in 
proportion to their patronage. The Internal Revenue Service 
requires that cooperatives must operate under the following 
principles: (1) subordination of capital in control over the 
cooperative undertaking and in ownership of the financial 
benefits from ownership; (2) democratic control by the members 
of the cooperative; (3) vesting in and allocation among the 
members of all excess of operating revenues over the expenses 
incurred to generate revenues in proportion to their 
participation in the cooperative (patronage); and (4) operation 
at cost (not operating for profit or below cost).\23\
---------------------------------------------------------------------------
    \23\ Announcement 96-24, ``Proposed Examination Guidelines 
Regarding Rural Electric Cooperatives,'' 1996-16 I.R.B. 30.
---------------------------------------------------------------------------
    In general, cooperative members are those who participate 
in the management of the cooperative and who share in patronage 
capital. As described below, income from the sale of electric 
energy by an electric cooperative may be member or non-member 
income to the cooperative, depending on the membership status 
of the purchaser. A municipal corporation may be a member of a 
cooperative.
    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception-the cooperative may exclude from its taxable 
income distributions of patronage dividends. In general, 
patronage dividends are the profits of the cooperative that are 
rebated to its patrons pursuant to a pre-existing obligation of 
the cooperative to do so. The rebate must be made in some 
equitable fashion on the basis of the quantity or value of 
business done with the cooperative.
    Except for tax-exempt farmers' cooperatives, cooperatives 
that are subject to the cooperative tax rules of subchapter T 
of the Code \24\ are permitted a deduction for patronage 
dividends from their taxable income only to the extent of net 
income that is derived from transactions with patrons who are 
members of the cooperative.\25\ The availability of such 
deductions from taxable income has the effect of allowing the 
cooperative to be treated like a conduit with respect to 
profits derived from transactions with patrons who are members 
of the cooperative.
---------------------------------------------------------------------------
    \24\ Sec. 1381, et seq.
    \25\ Sec. 1382.
---------------------------------------------------------------------------
    Cooperatives that qualify as tax-exempt farmers' 
cooperatives are permitted to exclude patronage dividends from 
their taxable income to the extent of all net income, including 
net income that is derived from transactions with patrons who 
are not members of the cooperative, provided the value of 
transactions with patrons who are not members of the 
cooperative does not exceed the value of transactions with 
patrons who are members of the cooperative.\26\
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    \26\ Sec. 521.
---------------------------------------------------------------------------

Taxation of electric cooperatives exempt from subchapter T

    In general, the cooperative tax rules of subchapter T apply 
to any corporation operating on a cooperative basis (except 
mutual savings banks, insurance companies, other tax-exempt 
organizations, and certain utilities), including tax-exempt 
farmers' cooperatives (described in sec. 521(b)). However, 
subchapter T does not apply to an organization that is 
``engaged in furnishing electric energy, or providing telephone 
service, to persons in rural areas.'' \27\ Instead, electric 
cooperatives are taxed under rules that were generally 
applicable to cooperatives prior to the enactment of subchapter 
T in 1962. Under these rules, an electric cooperative can 
exclude patronage dividends from taxable income to the extent 
of all net income of the cooperative, including net income 
derived from transactions with patrons who are not members of 
the cooperative.\28\
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    \27\ Sec. 1381(a)(2)(C).
    \28\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
---------------------------------------------------------------------------

Tax exemption of rural electric cooperatives

            In general
    Section 501(c)(12) provides an income tax exemption for 
rural electric cooperatives if at least 85 percent of the 
cooperative's income consists of amounts collected from members 
for the sole purpose of meeting losses and expenses of 
providing service to its members. The IRS takes the position 
that rural electric cooperatives also must comply with the 
fundamental cooperative principles described above in order to 
qualify for tax exemption under section 501(c)(12).\29\ The 85-
percent test is determined without taking into account any 
income from: (1) qualified pole rentals; (2) open access 
electric energy transmission services; (3) open access electric 
energy distribution services; (4) any nuclear decommissioning 
transaction; (5) any asset exchange or conversion 
transaction.\30\
---------------------------------------------------------------------------
    \29\ Rev. Rul. 72-36, 1972-1 C.B. 151.
    \30\ Sec. 501(c)(12)(C).
---------------------------------------------------------------------------
            Income from open access transactions
    Income received or accrued by a rural electric cooperative 
(other than income received or accrued directly or indirectly 
from a member of the cooperative) from the provision or sale of 
electric energy transmission services or ancillary services on 
a nondiscriminatory open access basis under an open access 
transmission tariff approved or accepted by FERC or under an 
independent transmission provider agreement approved or 
accepted by FERC (including an agreement providing for the 
transfer of control-but not ownership-of transmission 
facilities) is excluded in determining whether a rural electric 
cooperative satisfies the 85-percent test for tax exemption 
under section 501(c)(12).
    In addition, income is excluded for purposes of the 85-
percent test if it is received or accrued by a rural electric 
cooperative (other than income received or accrued directly or 
indirectly from a member of the cooperative) from the provision 
or sale of electric energy distribution services or ancillary 
services, provided such services are provided on a 
nondiscriminatory open access basis to distribute electric 
energy not owned by the cooperative: (1) to end-users who are 
served by distribution facilities not owned by the cooperative 
or any of its members; or (2) generated by a generation 
facility that is not owned or leased by the cooperative or any 
of its members and that is directly connected to distribution 
facilities owned by the cooperative or any of its members.
    The exclusion for income from open access transactions does 
not apply to taxable years beginning after December 31, 2006.
            Income from nuclear decommissioning transactions
    Income received or accrued by a rural electric cooperative 
from any ``nuclear decommissioning transaction'' also is 
excluded in determining whether a rural electric cooperative 
satisfies the 85-percent test for tax exemption under section 
501(c)(12). The term ``nuclear decommissioning transaction'' is 
defined as--
          1. any transfer into a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs if 
        the transfer is in connection with the transfer of the 
        cooperative's interest in a nuclear powerplant or 
        nuclear powerplant unit;
          2. any distribution from a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs; 
        or
          3. any earnings from a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs.
    The exclusion for income from nuclear decommissioning 
transactions does not apply to taxable years beginning after 
December 31, 2006.
            Income from asset exchange or conversion transactions
    Gain realized by a tax-exempt rural electric cooperative 
from a voluntary exchange or involuntary conversion of certain 
property is excluded in determining whether a rural electric 
cooperative satisfies the 85-percent test for tax exemption 
under section 501(c)(12). This provision only applies to the 
extent that: (1) the gain would qualify for deferred 
recognition under section 1031 (relating to exchanges of 
property held for productive use or investment) or section 1033 
(relating to involuntary conversions); and (2) the replacement 
property that is acquired by the cooperative pursuant to 
section 1031 or section 1033 (as the case may be) constitutes 
property that is used, or to be used, for the purpose of 
generating, transmitting, distributing, or selling electricity 
or natural gas.
    The exclusion for income from asset exchange or conversion 
transactions does not apply to taxable years beginning after 
December 31, 2006.

Treatment of income from load loss transactions

            Tax-exempt rural electric cooperatives
    Under present law, income received or accrued by a tax-
exempt rural electric cooperative from a ``load loss 
transaction'' is treated under section 501(c)(12) as income 
collected from members for the sole purpose of meeting losses 
and expenses of providing service to its members.\31\ 
Therefore, income from load loss transactions is treated as 
member income in determining whether a rural electric 
cooperative satisfies the 85-percent test for tax exemption 
under section 501(c)(12). In addition, income from load loss 
transactions does not cause a tax- exempt electric cooperative 
to fail to be treated for Federal income tax purposes as a 
mutual or cooperative company under the fundamental cooperative 
principles described above.
---------------------------------------------------------------------------
    \31\ Sec. 501(c)(12)(H).
---------------------------------------------------------------------------
    The term ``load loss transaction'' is generally defined as 
any wholesale or retail sale of electric energy (other than to 
a member of the cooperative) to the extent that the aggregate 
amount of such sales during a seven-year period beginning with 
the ``start-up year'' does not exceed the reduction in the 
amount of sales of electric energy during such period by the 
cooperative to members. The ``start-up year'' is defined as the 
first year that the cooperative offers nondiscriminatory open 
access or, if later and at the election of the cooperative, 
2004.
    Present law also excludes income received or accrued by 
rural electric cooperatives from load loss transactions from 
the tax on unrelated trade or business income.
    The special rule for income received or accrued by a tax-
exempt rural electric cooperative from a load loss transaction 
does not apply to taxable years beginning after December 31, 
2006.
            Taxable electric cooperatives
    The receipt or accrual of income from load loss 
transactions by taxable electric cooperatives is treated as 
income from patrons who are members of the cooperative.\32\ 
Thus, income from a load loss transaction is excludible from 
the taxable income of a taxable electric cooperative if the 
cooperative distributes such income pursuant to a pre-existing 
contract to distribute the income to a patron who is not a 
member of the cooperative. In addition, income from load loss 
transactions does not cause a taxable electric cooperative to 
fail to be treated for Federal income tax purposes as a mutual 
or cooperative company under the fundamental cooperative 
principles described above.
---------------------------------------------------------------------------
    \32\ Sec. 501(c)(12)(H).
---------------------------------------------------------------------------
    The special rule for income received or accrued by a 
taxable electric cooperative from a load loss transaction does 
not apply to taxable years beginning after December 31, 2006.

                        Explanation of Provision

    The provision eliminates the sunset date for the rules 
excluding income received or accrued by tax-exempt rural 
electric cooperatives from open access electric energy 
transmission or distribution services, any nuclear 
decommissioning transaction, and any asset exchange or 
conversion transaction for purposes of the 85-percent test 
under section 501(c)(12). The provision also eliminates the 
sunset date for the rule that allows income from load loss 
transactions to be treated as member income in determining 
whether a rural electric cooperative satisfies the 85-percent 
test. In addition, the provision eliminates the sunset date for 
the rule that permits taxable electric cooperatives to treat 
the receipt or accrual of income from load loss transactions as 
income from patrons who are members of the cooperative.

                             Effective Date

    The provision is effective on the date of enactment (August 
8, 2005).

4. Dispositions of transmission property to implement FERC 
        restructuring policy (sec. 1305 of the Act and sec. 451 of the 
        Code)

                              Present Law

    Generally, a taxpayer selling property recognizes gain to 
the extent the sales price (and any other consideration 
received) exceeds the seller's basis in the property. The 
recognized gain is subject to current income tax unless the 
gain is deferred or not recognized under a special tax 
provision.
    One such special tax provision permits taxpayers to elect 
to recognize gain from qualifying electric transmission 
transactions ratably over an eight-year period beginning in the 
year of sale if the amount realized from such sale is used to 
purchase exempt utility property within the applicable period 
\33\ (the ``reinvestment property''). If the amount realized 
exceeds the amount used to purchase reinvestment property, any 
realized gain is recognized to the extent of such excess in the 
year of the qualifying electric transmission transaction.
---------------------------------------------------------------------------
    \33\ The applicable period for a taxpayer to reinvest the proceeds 
is four years after the close of the taxable year in which the 
qualifying electric transmission transaction occurs.
---------------------------------------------------------------------------
    A qualifying electric transmission transaction is the sale 
or other disposition of property used by the taxpayer in the 
trade or business of providing electric transmission services, 
or an ownership interest in such an entity, to an independent 
transmission company prior to January 1, 2007. In general, an 
independent transmission company is defined as: (1) an 
independent transmission provider \34\ approved by the FERC; 
(2) a person (i) who the FERC determines under section 203 of 
the Federal Power Act (or by declaratory order) is not a 
``market participant'' and (ii) whose transmission facilities 
are placed under the operational control of a FERC-approved 
independent transmission provider before the close of the 
period specified in such authorization, but not later than 
January 1, 2007; or (3) in the case of facilities subject to 
the jurisdiction of the Public Utility Commission of Texas, (i) 
a person which is approved by that Commission as consistent 
with Texas State law regarding an independent transmission 
organization, or (ii) a political subdivision, or affiliate 
thereof, whose transmission facilities are under the 
operational control of an organization described in (i).
---------------------------------------------------------------------------
    \34\ For example, a regional transmission organization, an 
independent system operator, or an independent transmission company.
---------------------------------------------------------------------------
    Exempt utility property is defined as: (1) property used in 
the trade or business of generating, transmitting, 
distributing, or selling electricity or producing, 
transmitting, distributing, or selling natural gas, or (2) 
stock in a controlled corporation whose principal trade or 
business consists of the activities described in (1).
    If a taxpayer is a member of an affiliated group of 
corporations filing a consolidated return, the reinvestment 
property may be purchased by any member of the affiliated group 
(in lieu of the taxpayer).

                        Explanation of Provision

    The Act extends the treatment under the present-law 
deferral provision to sales or dispositions to an independent 
transmission company prior to January 1, 2008. However, because 
the provision is an extension of a present law provision which 
expires on December 31, 2006, only transactions occurring after 
December 31, 2006, will be affected.

                             Effective Date

    The provision is effective for transactions occurring after 
the date of enactment (August 8, 2005).

5. Credit for production from advanced nuclear power facilities (sec. 
        1306 of the Act and new sec. 45J of the Code)

                              Present Law

    An income tax credit is allowed for production of 
electricity from qualified facilities sold by the taxpayer to 
an unrelated person (sec. 45). Qualified facilities comprise 
wind energy facilities, ``closed-loop'' biomass facilities, 
open-loop biomass (including agricultural livestock waste 
nutrients) facilities, geothermal energy facilities, solar 
energy facilities, small irrigation power facilities, landfill 
gas facilities, and trash combustion facilities. The base 
amount of the credit is 1.5 cents per kilowatt-hour (indexed 
for inflation) of electricity produced. The amount of the 
credit is 1.9 cents per kilowatt-hour for 2005. However, 
electricity produced at open-loop biomass, small irrigation 
power, and municipal solid waste facilities receives only 50 
percent of the credit, or 0.9 cents per kilowatt-hour for 2005. 
Generally, wind and closed-loop biomass facilities may claim 
this credit for 10 years from the placed-in-service date of the 
facility. Other qualified facilities may claim the credit for 
only five years from the placed-in-service date.
    Present law does not provide a credit for electricity 
produced at advanced nuclear power facilities.

                        Explanation of Provision

    The Act permits a taxpayer producing electricity at a 
qualifying advanced nuclear power facility to claim a credit 
equal to 1.8 cents per kilowatt-hour of electricity produced 
for the eight- year period starting when the facility is placed 
in service.\35\ The aggregate amount of credit that a taxpayer 
may claim in any year during the eight-year period is subject 
to limitation based on allocated capacity and an annual 
limitation as described below.
---------------------------------------------------------------------------
    \35\ The 1.8-cents credit amount is reduced, but not below zero, if 
the annual average contract price per kilowatt-hour of electricity 
generated from advanced nuclear power facilities in the preceding year 
exceeds eight cents per kilowatt-hour. The eight-cent price comparison 
level is indexed for inflation after 1992.
---------------------------------------------------------------------------
    A qualifying advanced nuclear facility is an advanced 
nuclear facility for which the taxpayer has received an 
allocation of megawatt capacity from the Secretary and is 
placed in service before January 1, 2021. The taxpayer may only 
claim credit for production of electricity equal to the ratio 
of the allocated capacity that the taxpayer receives from the 
Secretary to the rated nameplate capacity of the taxpayer's 
facility. For example, if the taxpayer receives an allocation 
of 750 megawatts of capacity from the Secretary and the 
taxpayer's facility has a rated nameplate capacity of 1,000 
megawatts, then the taxpayer may claim three-quarters of the 
otherwise allowable credit, or 1.35 cents per kilowatt-hour, 
for each kilowatt-hour of electricity produced at the facility 
(subject to the annual limitation described below). The 
Secretary may allocate up to 6,000 megawatts of capacity.
    A taxpayer operating a qualified facility may claim no more 
than $125 million in tax credits per 1,000 megawatts of 
allocated capacity in any one year of the eight-year credit 
period. If the taxpayer operates a 1,350 megawatt rated 
nameplate capacity system and has received an allocation from 
the Secretary for 1,350 megawatts of capacity eligible for the 
credit, the taxpayer's annual limitation on credits that may be 
claimed is equal to 1.35 times $125 million, or $168.75 
million. If the taxpayer operates a facility with a nameplate 
rated capacity of 1,350 megawatts, but has received an 
allocation from the Secretary for 750 megawatts of credit 
eligible capacity, then the two limitations apply such that the 
taxpayer may claim a credit equal to 1 cent per kilowatt-hour 
of electricity produced (as described above) subject to an 
annual credit limitation of $93.75 million in credits (three-
quarters of $125 million).
    An advanced nuclear facility is any nuclear facility for 
the production of electricity, the reactor design for which was 
approved after 1993 by the Nuclear Regulatory Commission. For 
this purpose, a qualifying advanced nuclear facility does not 
include any facility for which a substantially similar design 
for a facility of comparable capacity was approved before 1994.
    In addition, the credit allowable to the taxpayer is 
reduced by reason of grants, tax-exempt bonds, subsidized 
energy financing, and other credits, but such reduction cannot 
exceed 50 percent of the otherwise allowable credit. The credit 
is treated as part of the general business credit.

                             Effective Date

    The provision applies to electricity produced in taxable 
years beginning after the date of enactment (August 8, 2005).

6. Credit for investment in clean coal facilities (sec. 1307 of the Act 
        and new secs. 48A and 48B of the Code)

                              Present Law

    Present law does not provide an investment credit for 
electricity production facilities property that uses coal as a 
fuel or for the gasification of coal or other materials. 
However, a nonrefundable, 10-percent investment tax credit 
(``energy credit'') is allowed for the cost of new property 
that is equipment (1) that uses solar energy to generate 
electricity, to heat or cool a structure, or to provide solar 
process heat, or (2) that is used to produce, distribute, or 
use energy derived from a geothermal deposit, but only, in the 
case of electricity generated by geothermal power, up to the 
electric transmission stage (sec. 48). The energy credit is a 
component of the general business credit (sec. 38(b)(1)).

                     Explanation of Provision \36\

    The provision creates two new 20-percent investment tax 
credits. Both credits are available only to projects certified 
by the Secretary of Treasury, in consultation with the 
Secretary of Energy. Certifications are issued using a 
competitive bidding process.
---------------------------------------------------------------------------
    \36\ The provision was subsequently modified in Division A, section 
201 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    With respect to the first investment tax credit, the 
Secretary may allocate investment credits for projects using 
integrated gasification combined cycle (``IGCC'') and other 
advanced coal-based electricity generation technologies based 
on the amount invested. Qualified projects must be economically 
feasible and use the appropriate clean coal technologies. The 
Secretary may allocate $800 million of credits to IGCC projects 
and $500 million of credits to projects using other advanced 
coal-based technologies.
    In determining which projects to certify that use IGCC 
technology, the Secretary must allocate power generation 
capacity in relatively equal amounts to projects that use 
bituminous coal, subbituminous coal, and lignite as primary 
feedstock. In addition, the Secretary must give high priority 
to projects which include greenhouse gas capture capability, 
increased by-product utilization, and other benefits.
    Under the provision, the credit available to IGCC projects 
is 20 percent of qualified investments, and the credit for 
other advanced coal-based projects is 15 percent of qualified 
investments. With respect to IGCC projects, credit-eligible 
investments include only investments in property associated 
with the gasification of coal, including any coal handling and 
gas separation equipment. Thus, investments in equipment that 
could operate by drawing fuel directly from a natural gas 
pipeline do not qualify for the credit.
    With respect to the second investment tax credit, the 
provision authorizes certification of certain gasification 
projects. Qualified gasification projects convert coal, 
petroleum residue, biomass, or other materials recovered for 
their energy or feedstock value into a synthesis gas composed 
primarily of carbon monoxide and hydrogen for direct use or 
subsequent chemical or physical conversion. Under the 
provision, certified gasification projects are eligible for the 
new 20 percent investment tax credit.
    Under the provision, the total amount of gasification 
credits allocable by the Secretary is $350 million. In 
addition, a maximum of $650 million of credit-eligible 
investment may be allocated to any single gasification project. 
The provision specifies that only property which is part of a 
qualifying gasification project and necessary for the 
gasification technology of such project is eligible for the 
gasification credit.

                             Effective Date

    The credits apply to periods after the date of enactment 
(August 8, 2005), under rules similar to the rules of section 
48(m) (as in effect before its repeal).

7. Transmission property treated as fifteen-year property (sec. 1308 of 
        the Act and sec. 168 of the Code)

                              Present Law

    The applicable recovery period for assets placed in service 
under the Modified Accelerated Cost Recovery System is based on 
the ``class life of the property.'' The class lives of assets 
placed in service after 1986 are generally set forth in Revenue 
Procedure 87-56.\37\ Assets used in the transmission and 
distribution of electricity for sale and related land 
improvements are assigned a 20-year recovery period and a class 
life of 30 years.
---------------------------------------------------------------------------
    \37\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision establishes a statutory 15-year recovery 
period and a class life of 30 years for certain assets used in 
the transmission of electricity for sale and related land 
improvements. For purposes of the provision, section 1245 
property used in the transmission at 69 or more kilovolts of 
electricity for sale, the original use of which commences with 
the taxpayer after April 11, 2005, will qualify for the new 
recovery period.

                             Effective Date

    The provision is generally effective for property placed in 
service after April 11, 2005. However, the provision does not 
apply to property which is the subject of a binding contract on 
or before April 11, 2005.\38\
---------------------------------------------------------------------------
    \38\ In the case of self-constructed property, the provision does 
not apply to property under construction on or before April 11, 2005.
---------------------------------------------------------------------------

8. Amortization of atmospheric pollution control facilities (sec. 1309 
        of the Act and sec. 169 of the Code)

                              Present Law

    In general, a taxpayer may elect to recover the cost of any 
certified pollution control facility over a period of 60 
months.\39\ A certified pollution control facility is defined 
as a new, identifiable treatment facility which (1) is used in 
connection with a plant in operation before January 1, 1976, to 
abate or control water or atmospheric pollution or 
contamination by removing, altering, disposing, storing, or 
preventing the creation or emission of pollutants, 
contaminants, wastes or heat; and (2) does not lead to a 
significant increase in output or capacity, a significant 
extension of useful life, a significant reduction in total 
operating costs for such plant or other property (or any unit 
thereof), or a significant alteration in the nature of a 
manufacturing production process or facility. Certification is 
required by appropriate State and Federal authorities that the 
facility complies with appropriate standards.
---------------------------------------------------------------------------
    \39\ Sec. 169. For purposes of computing alternative minimum 
taxable income, the depreciation deduction is determined using the 
straight-line method over the applicable regular tax recovery period.
---------------------------------------------------------------------------
    For a pollution control facility with a useful life greater 
than 15 years, only the portion of the basis attributable to 
the first 15 years is eligible to be amortized over a 60-month 
period.\40\ In addition, a corporate taxpayer must reduce the 
amount of basis otherwise eligible for the 60-month recovery by 
20 percent.\41\ The amount of basis not eligible for 60-month 
amortization is depreciable under the regular tax rules for 
depreciation.
---------------------------------------------------------------------------
    \40\ The amount attributable to the first 15 years is equal to an 
amount which bears the same ratio to the portion of the adjusted basis 
of the facility, which would be eligible for amortization but for the 
application of this rule, as 15 bears to the number of years of useful 
life of the facility.
    \41\ Sec. 291(a)(5).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a certified air pollution control 
facility (but not a water pollution control facility) used in 
connection with an electric generation plant which is primarily 
coal fired will be eligible for 84-month amortization if the 
associated plant or other property was not in operation prior 
to January 1, 1976. The present-law 60-month amortization 
period remains in effect for any certified air pollution 
control facility used in connection with an electric generation 
plant which is primarily coal fired and which was in operation 
prior to January 1, 1976.
    In the case of a facility used in connection with a plant 
or other property not in operation before January 1, 1976, the 
facility must be property that either (i) the construction, 
reconstruction, or erection of which is completed by the 
taxpayer after April 11, 2005 (to the extent of the portion of 
the basis properly attributable to the construction, 
reconstruction, or erection after that date), or (ii) is 
acquired after April 11, 2005, if the original use of the 
property commences with the taxpayer after that date. The 
provision does not change the present-law rules relating to 
corporate taxpayers or to pollution control facilities with a 
useful life greater than 15 years, and the provision does not 
modify in any way the treatment of water pollution control 
facilities.

                             Effective Date

    The provision is effective for air pollution control 
facilities placed in service after April 11, 2005.

9. Modification to special rules for nuclear decommissioning costs 
        (sec. 1310 of the Act and sec. 468A of the Code)

                              Present Law


Overview

    Special rules dealing with nuclear decommissioning reserve 
funds were enacted in the Deficit Reduction Act of 1984 (``1984 
Act''), when tax issues regarding the time value of money were 
addressed generally. Under general tax accounting rules, a 
deduction for accrual basis taxpayers is deferred until there 
is economic performance for the item for which the deduction is 
claimed. However, the 1984 Act contains an exception under 
which a taxpayer responsible for nuclear powerplant 
decommissioning may elect to deduct contributions made to a 
qualified nuclear decommissioning fund for future 
decommissioning costs. Taxpayers who do not elect this 
provision are subject to general tax accounting rules.

Qualified nuclear decommissioning fund

    A qualified nuclear decommissioning fund (a ``qualified 
fund'') is a segregated fund established by a taxpayer that is 
used exclusively for the payment of decommissioning costs, 
taxes on fund income, management costs of the fund, and for 
making investments. The income of the fund is taxed at a 
reduced rate of 20 percent for taxable years beginning after 
December 31, 1995.\42\
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    \42\ As originally enacted in 1984, a qualified fund paid tax on 
its earnings at the top corporate rate and, as a result, there was no 
present-value tax benefit of making deductible contributions to a 
qualified fund. Also, as originally enacted, the funds in the trust 
could be invested only in certain low risk investments. Subsequent 
amendments to the provision have reduced the rate of tax on a qualified 
fund to 20 percent and removed the restrictions on the types of 
permitted investments that a qualified fund can make.
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    Contributions to a qualified fund are deductible in the 
year made to the extent that these amounts were collected as 
part of the cost of service to ratepayers (the ``cost of 
service requirement'').\43\ Funds withdrawn by the taxpayer to 
pay for decommissioning costs are included in the taxpayer's 
income, but the taxpayer also is entitled to a deduction for 
decommissioning costs as economic performance for such costs 
occurs.
---------------------------------------------------------------------------
    \43\ Taxpayers are required to include in gross income customer 
charges for decommissioning costs (sec. 88).
---------------------------------------------------------------------------
    Accumulations in a qualified fund are limited to the amount 
required to fund decommissioning costs of a nuclear powerplant 
for the period during which the qualified fund is in existence 
(generally post-1984 decommissioning costs of a nuclear 
powerplant). For this purpose, decommissioning costs are 
considered to accrue ratably over a nuclear powerplant's 
estimated useful life. In order to prevent accumulations of 
funds over the remaining life of a nuclear powerplant in excess 
of those required to pay future decommissioning costs of such 
nuclear powerplant and to ensure that contributions to a 
qualified fund are not deducted more rapidly than level funding 
(taking into account an appropriate discount rate), taxpayers 
must obtain a ruling from the IRS to establish the maximum 
annual contribution that may be made to a qualified fund (the 
``ruling amount''). In certain instances (e.g., change in 
estimates), a taxpayer is required to obtain a new ruling 
amount to reflect updated information.
    A qualified fund may be transferred in connection with the 
sale, exchange or other transfer of the nuclear powerplant to 
which it relates. If the transferee is a regulated public 
utility and meets certain other requirements, the transfer will 
be treated as a nontaxable transaction. No gain or loss will be 
recognized on the transfer of the qualified fund and the 
transferee will take the transferor's basis in the fund.\44\ 
The transferee is required to obtain a new ruling amount from 
the IRS or accept a discretionary determination by the IRS.\45\
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    \44\ Treas. Reg. sec. 1.468A-6.
    \45\ Treas. Reg. sec. 1.468A-6(f).
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               Nonqualified nuclear decommissioning funds

    Federal and State regulators may require utilities to set 
aside funds for nuclear decommissioning costs in excess of the 
amount allowed as a deductible contribution to a qualified 
fund. In addition, taxpayers may have set aside funds prior to 
the effective date of the qualified fund rules.\46\ The 
treatment of amounts set aside for decommissioning costs prior 
to 1984 varies. Some taxpayers may have received no tax benefit 
while others may have deducted such amounts or excluded such 
amounts from income. Since 1984, taxpayers have been required 
to include in gross income customer charges for decommissioning 
costs (sec. 88), and a deduction has not been allowed for 
amounts set aside to pay for decommissioning costs except 
through the use of a qualified fund. Income earned in a 
nonqualified fund is taxable to the fund's owner as it is 
earned.
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    \46\ These funds are generally referred to as ``nonqualified 
funds.''
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                        Explanation of Provision


Repeal of cost of service requirement

    The provision repeals the cost of service requirement for 
deductible contributions to a nuclear decommissioning fund. 
Thus, all taxpayers, including unregulated taxpayers, are 
allowed a deduction for amounts contributed to a qualified 
fund.

Permit contributions to a qualified fund for pre-1984 decommissioning 
        costs

    The provision also repeals the limitation that a qualified 
fund only accumulate an amount sufficient to pay for a nuclear 
powerplant's decommissioning costs incurred during the period 
that the qualified fund is in existence (generally post-1984 
decommissioning costs). Thus, any taxpayer is permitted to 
accumulate an amount sufficient to cover the present value of 
100 percent of a nuclear powerplant's estimated decommissioning 
costs in a qualified fund. The provision does not change the 
requirement that contributions to a qualified fund not be 
deducted more rapidly than level funding.

Exception to ruling amount for certain decommissioning costs

    The provision permits a taxpayer to make contributions to a 
qualified fund in excess of the ruling amount in one 
circumstance. Specifically, a taxpayer is permitted to 
contribute up to the present value of total nuclear 
decommissioning costs with respect to a nuclear powerplant 
previously excluded under section 468A(d)(2)(A).\47\ It is 
anticipated that an amount that is permitted to be contributed 
under this special rule shall be determined using the estimate 
of total decommissioning costs used for purposes of determining 
the taxpayer's most recent ruling amount. Any amount 
transferred to the qualified fund under this special rule is 
allowed as a deduction over the remaining useful life of the 
nuclear powerplant.\48\ If a qualified fund that has received 
amounts under this rule is transferred to another person, the 
transferor will be permitted a deduction for any remaining 
deductible amounts at the time of transfer.
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    \47\ For example, if $100 is the present value of the total 
decommissioning costs of a nuclear powerplant, and if under present law 
the qualified fund is only permitted to accumulate $75 of 
decommissioning costs over such plant's estimated useful life (because 
the qualified fund was not in existence during 25 percent of the 
estimated useful life of the nuclear powerplant), a taxpayer could 
contribute $25 to the qualified fund under this component of the 
provision.
    \48\ A taxpayer recognizes no gain or loss on the contribution of 
property to a qualified fund under this special rule. The qualified 
fund will take a transferred (carryover) basis in such property. 
Correspondingly, a taxpayer's deduction (over the estimated life of the 
nuclear powerplant) is to be based on the adjusted tax basis of the 
property contributed rather than the fair market value of such 
property.
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    The provision requires that a taxpayer apply for a new 
ruling amount with respect to a nuclear powerplant in any tax 
year in which the powerplant is granted a license renewal, 
extending its useful life.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

10. Five-year carryback of net operating losses for certain electric 
        utility companies (sec. 1311 of the Act and sec. 172 of the 
        Code)

                              Present Law

    A net operating loss (``NOL'') is, generally, the amount by 
which a taxpayer's allowable deductions exceed the taxpayer's 
gross income. A carryback of an NOL generally results in the 
refund of Federal income tax for the carryback year. A 
carryover of an NOL reduces Federal income tax for the 
carryover year.
    In general, an NOL may be carried back two years and 
carried over 20 years to offset taxable income in such 
years.\49\ Under present-law ordering rules, NOLs generally are 
first applied to the earliest of the taxable years to which the 
loss may be carried.\50\
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    \49\ Sec. 172.
    \50\ Sec. 172(b)(2).
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    Different rules apply with respect to NOLs arising in 
certain circumstances. For example, a three-year carryback 
applies with respect to NOLs (1) arising from casualty or theft 
losses of individuals, or (2) attributable to Presidentially 
declared disasters for taxpayers engaged in a farming business 
or a small business. A five-year carryback period applies to 
NOLs from a farming loss (regardless of whether the loss was 
incurred in a Presidentially declared disaster area). Special 
rules also apply to real estate investment trusts (no 
carryback), specified liability losses (10-year carryback), and 
excess interest losses (no carryback to any year preceding a 
corporate equity reduction transaction).
    Section 202 of the Job Creation and Worker Assistance Act 
of 2002 \51\ (``JCWAA'') provided a temporary extension of the 
general NOL carryback period to five years (from two years) for 
NOLs arising in taxable years ending in 2001 and 2002. In 
addition, the five-year carryback period applies to NOLs from 
these years that qualify under present law for a three- year 
carryback period (i.e., NOLs arising from casualty or theft 
losses of individuals or attributable to certain Presidentially 
declared disaster areas).
---------------------------------------------------------------------------
    \51\ Pub. L. No. 107-147.
---------------------------------------------------------------------------
    A taxpayer can elect to forgo the five-year carryback 
period. The election to forgo the five-year carryback period is 
made in the manner prescribed by the Secretary of the Treasury 
and must be made by the due date of the return (including 
extensions) for the year of the loss. The election is 
irrevocable. If a taxpayer elects to forgo the five-year 
carryback period, then the losses are subject to the rules that 
otherwise would apply under section 172 absent the provision.

                        Explanation of Provision

    The provision provides an election for certain electric 
utility companies to extend the carryback period to five years 
for a portion of NOLs arising in 2003, 2004, and 2005 (``loss 
years''). The election may be made during any taxable year 
ending after December 31, 2005, and before January 1, 2009 
(``election years''). An electing taxpayer must specify to 
which loss year the election applies.
    The portion of the loss year NOL to which the election may 
apply is limited to 20 percent of the amount of the taxpayer's 
qualifying investment in the taxable year prior to the year in 
which the election is made (the ``qualifying investment 
limitation''). Rules similar to those applicable to specified 
liability losses apply, and any remaining portion of the loss 
year NOL remains subject to the present law NOL carryover 
rules. Only one election may be made in any election year, and 
elections may not be made for more than one election year 
beginning in the same calendar year. Thus, for example, a 
taxpayer with two short taxable years beginning in calendar 
year 2006 is eligible to make an election under this provision 
in only one of those two short taxable years. Once an election 
has been made with respect to a loss year, no subsequent 
election is available with respect to that loss year.
    For purposes of calculating interest on overpayments, any 
overpayment resulting from a five-year NOL carryback elected 
under this provision is deemed not to have been made prior to 
the filing date for the taxable year in which the election is 
made. The statute of limitations for refund claims, and that 
for assessment of deficiencies, are also extended.
    An election under this provision is made in such manner as 
the Secretary may prescribe. However, Congress expects that the 
filing of a refund claim will be considered sufficient for 
making the election, provided that the taxpayer attaches to the 
refund claim a statement specifying the election year, the loss 
year, and the amount of qualifying investment in electric 
transmission property and pollution control facilities in the 
preceding taxable year.
    Under the provision, an investment in electric transmission 
property qualifies if it is a capital expenditure made by the 
taxpayer which is attributable to electric transmission 
property used by the taxpayer in the transmission at 69 or more 
kilovolts of electricity for sale. An investment in pollution 
control equipment qualifies if it is a capital expenditure, 
made by an electric utility company (as defined in the Public 
Utility Holding Company Act as in effect on the day before the 
date of enactment of the provision), which is attributable to a 
facility which will qualify as a certified pollution control 
facility, generally as defined under section 169(d)(1) but 
without regard to the requirements therein that the facility be 
new or that it be used in connection with a plant or other 
property in operation before January 1, 1976.
    The Congress recognizes that a significant amount of time 
may be required between the date of a capital expenditure for 
electric transmission property or pollution control equipment 
and the date the property is placed in service. Accordingly, 
there is no requirement that the transmission property or 
pollution control facilities be placed in service in the year 
in which the capital expenditures are incurred. However, it is 
intended that qualifying investment under the provision 
includes only capital expenditures to which the taxpayer is 
committed and with respect to property which the taxpayer 
intends to ultimately place in service in the taxpayer's trade 
or business. Under the provision, capital expenditures which, 
at the taxpayer's option, are refundable or subject to material 
modification in a manner which would not meet the requirements 
of the provision, may not be taken into account. For example, 
if a taxpayer makes a cash deposit with respect to a contract 
for the purchase of electric transmission property, and the 
contract contains an option (or there is otherwise an 
understanding) under which the taxpayer may subsequently apply 
the deposit to the purchase of equipment other than electric 
transmission property, the deposit is not included in the 
taxpayer's qualifying investment. This rule is intended as an 
anti-abuse rule and should be interpreted to prevent a taxpayer 
from taking into account capital expenditures to which the 
taxpayer is not permanently committed.

                             Effective Date

    The provision is effective for elections made in taxable 
years ending after December 31, 2005.

11. Modification of credit for producing fuel from a non-conventional 
        source (secs. 1321 and 1322 of the Act and sec. 29 and new sec. 
        45K of the Code)

                              Present Law

    Certain fuels produced from ``non-conventional sources'' 
and sold to unrelated parties are eligible for an income tax 
credit equal to $3 (generally adjusted for inflation) \52\ per 
barrel or Btu oil barrel equivalent (``section 29 credit''). 
Qualified fuels must be produced within the United States.
---------------------------------------------------------------------------
    \52\ The value of the credit in 2004 was $6.56 per barrel-of-oil 
equivalent produced, which is approximately $1.16 per thousand cubic 
feet of natural gas.
---------------------------------------------------------------------------
    Qualified fuels include:
           oil produced from shale and tar sands;
           gas produced from geopressured brine, 
        Devonian shale, coal seams, tight formations, or 
        biomass; and
           liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
    Generally, the section 29 credit has expired, except for 
certain biomass gas and synthetic fuels sold before January 1, 
2008, and produced at facilities placed in service after 
December 31, 1992, and before July 1, 1998.
    The section 29 credit may not exceed the excess of the 
regular tax liability over the tentative minimum tax. Unused 
section 29 credits may not be carried forward or carried back 
to other taxable years. However, to the extent the section 29 
credit is disallowed because of the tentative minimum tax, the 
minimum tax credit allowable in future years is increased by 
the amount so disallowed.
    Other business credits are included in the general business 
credit (sec. 38). Generally, the general business credit may 
not exceed the excess of the taxpayer's net income tax over the 
greater of the taxpayer's tentative minimum tax or 25 percent 
of so much of the taxpayer's net regular tax liability as 
exceeds $25,000. General business credits in excess of this 
limitation may be carried back one year and forward up to 20 
years. The section 29 credit is not part of the general 
business credit.
    The section 29 credit includes definitional cross-
references and a credit limitation relating to the Natural Gas 
Policy Act of 1978. The Natural Gas Policy Act of 1978 has been 
repealed.

                           Reasons for Change

    The Congress recognizes that the section 29 credit is not 
part of the general business credits and therefore no carryback 
or carryforward is available for the credit. The Congress 
believes that the carryback and carryforward rules should apply 
to the credit, and therefore believes it is appropriate to 
treat the credit as part of the general business credits.

                     Explanation of Provision \53\

    The provision makes the credit for producing fuel from a 
non-conventional source part of the general business credit. 
Thus, the credit for producing fuel from a non-conventional 
source will be subject to the limitations applicable to the 
general business credit. Any unused credits may be carried back 
one year and forward 20 years.
---------------------------------------------------------------------------
    \53\ The provision was subsequently modified in Division A, section 
211 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    In addition to making the section 29 credit part of the 
general business credit, the provision adds a production credit 
for qualified facilities that produce coke or coke gas. 
Qualified facilities must have been placed in service before 
January 1, 1993, or after June 30, 1998, and before January 1, 
2010. A single facility for the production of coke or coke gas 
is generally composed of multiple coke ovens or similar 
structures.
    The production credit may be claimed with respect to coke 
and coke gas produced and sold during the period beginning on 
the later of January 1, 2006, or the date such facility is 
placed in service and ending on the date which is four years 
after such period began. The amount of credit-eligible coke 
produced may not exceed an average barrel-of-oil equivalent of 
4,000 barrels per day. The $3.00 credit for coke or coke gas is 
indexed for inflation using 2004 as the base year instead of 
1979. A facility that has claimed a credit under Code section 
29(g) is not eligible to claim the new credit for producing 
coke or coke gas.
    The Congress understands that the Internal Revenue Service 
has stopped issuing private letter rulings and other taxpayer-
specific guidance regarding the section 29 credit. The Congress 
believes that the Internal Revenue Service should consider 
issuing such rulings and guidance on an expedited basis to 
those taxpayers who had pending ruling requests at the time the 
moratorium was implemented.
    The provision also makes certain clerical changes in cross-
references to the Natural Gas Policy Act of 1978, which has 
been repealed.

                             Effective Date

    The provision applies to credits determined for taxable 
years ending after December 31, 2005.\54\ The clerical changes 
are effective on the date of enactment.
---------------------------------------------------------------------------
    \54\ The credit may not be carried back to a taxable year ending 
before January 1, 2006 (sec. 39(d)).
---------------------------------------------------------------------------

12. Temporary expensing for equipment used in the refining of liquid 
        fuels (sec. 1323 of the Act and new sec. 179C of the Code)

                              Present Law


Depreciation of refinery assets

    Under present law, depreciation allowances for property 
used in a trade or business generally are determined under the 
Modified Accelerated Cost Recovery System (``MACRS'') of 
section 168 of the Internal Revenue Code. Under MACRS, 
petroleum refining assets are depreciated for regular tax 
purposes over a 10-year recovery period using the double 
declining balance method. Petroleum refining assets are assets 
used for distillation, fractionation, and catalytic cracking of 
crude petroleum into gasoline and its other components. Present 
law also provides a special expensing rule for small refiners 
for capital costs incurred in complying with Environmental 
Protection Agency sulfur regulations.

Taxation of cooperatives and their patrons

    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception--the cooperative may exclude from its taxable 
income distributions of patronage dividends. Generally, 
cooperatives that are subject to the cooperative tax rules of 
subchapter T of the Code \55\ are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative.\56\ The 
availability of such deductions from taxable income has the 
effect of allowing the cooperative to be treated like a conduit 
with respect to profits derived from transactions with patrons 
who are members of the cooperative.
---------------------------------------------------------------------------
    \55\ Sec. 1381, et seq.
    \56\ Sec. 1382.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides a temporary election to expense 50 
percent of qualified refinery property.\57\ The remaining 50 
percent is recovered as under present law. Qualified refinery 
property includes assets, located in the United States, used in 
the refining of liquid fuels: (1) with respect to the 
construction of which there is a binding construction contract 
before January 1, 2008; \58\ (2) which are placed in service 
before January 1, 2012; (3) which increase the capacity of an 
existing refinery by at least five percent \59\ or increase the 
percentage of total throughput \60\ attributable to qualified 
fuels (as defined in present law section 29(c), which is 
redesignated as section 45K(c) by section 1322(a)(1) of the 
Act) \61\ such that it equals or exceeds 25 percent; and (4) 
which meet all applicable environmental laws in effect when the 
property is placed in service.\62\
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    \57\ For purposes of the provision, the term ``refinery'' refers to 
facilities the primary purpose of which is the processing of crude oil 
(whether or not previously refined) or qualified fuels (as defined in 
present law section 29(c), which is redesignated as section 45K(c) 
under section 1322(a)(1) of the Act). The limitation of present law 
section 29(d) (redesignated as section 45K(d) under the Act) requiring 
domestic production of qualified fuels is not applicable with respect 
to the definition of refinery under this provision; thus, otherwise 
qualifying refinery property will be eligible for the provision even if 
the primary purpose of the refinery is the processing of oil produced 
from shale and tar sands outside the United States. The term refinery 
would include a facility which processes coal via gas into liquid fuel.
    \58\ This requirement also may be met by placing the property in 
service before January 1, 2008 or, in the case of self-constructed 
property, by beginning construction after June 14, 2005 and before 
January 1, 2008.
    \59\ The five percent capacity requirement refers to the output 
capacity of the refinery, as measured by the volume of finished 
products other than asphalt and lube oil, rather than input capacity, 
as measured by rated capacity.
    \60\ For purposes of the provision, the throughput of a refinery is 
measured on the basis of barrels per calendar day. Barrels per calendar 
day is the amount of fuels that a facility can process under usual 
operating conditions, expressed in terms of capacity during a 24-hour 
period and reduced to account for down time and other limitations.
    \61\ The limitation of present law section 29(d) (redesignated as 
section 45K(d) under section 1322(a)(1) of the Act) regarding domestic 
production is not applicable with respect to the definition of 
qualified fuels under this provision.
    \62\ The requirement to meet all applicable environmental laws 
applies specifically to the refinery or portion of a refinery placed in 
service after the date of enactment. A refinery's failure to meet 
applicable environmental laws with respect to a portion of the refinery 
which was in service prior to the effective date will not disqualify 
the taxpayer from making the election under the provision with respect 
to otherwise qualifying refinery property.
---------------------------------------------------------------------------
    The expensing election is not available with respect to 
identifiable refinery property built solely to comply with 
consent decrees or projects mandated by Federal, State, or 
local governments. For example, a taxpayer may not elect to 
expense the cost of a scrubber, even if the scrubber is 
installed as part of a larger project, if the scrubber does not 
increase throughput or increased capacity to accommodate 
qualified fuels and is necessary for the refinery to comply 
with the Clean Air Act. This exclusion applies regardless of 
whether the mandate or consent decree addresses environmental 
concerns with respect to the refinery itself or the refined 
fuels.
    The provision allows cooperative organizations to pass 
through to the owners of such organizations the expensing 
deduction for qualified refinery property. To the extent the 
deduction is passed through to owners, the cooperative is 
denied deductions it would otherwise be entitled with respect 
to qualified refinery property. Under the provision, a 
cooperative organization electing to pass the expensing 
deduction through to its owners must make such an election on 
the tax return for the taxable year to which the deduction 
relates. Once made, the election is irrevocable. Moreover, the 
organization making the election must provide cooperative 
owners receiving an allocation of the deduction written notice 
of the amount of such allocation.
    As a condition of eligibility for the expensing of 
equipment used in the refining of liquid fuels, the provision 
provides that a refinery must report to the IRS concerning its 
refinery operations (e.g. production and output).

                             Effective Date

    The provision is effective for property placed in service 
after the date of enactment (August 8, 2005), the original use 
of which begins with the taxpayer, provided the property was 
not subject to a binding contract for construction on or before 
June 14, 2005. An exception to the original use requirement is 
provided for property which would meet the requirement but for 
a sale-leaseback transaction within the first three months 
after the property is originally placed in service.

13. Allow pass through to owners of deduction for capital costs 
        incurred by small refiner cooperative in complying with 
        environmental protection agency sulfur regulations (sec. 1324 
        of the Act and sec. 179B of the Code)

                              Present Law


Expensing and credit for small refiners

    Taxpayers generally may recover the costs of investments in 
refinery property through annual depreciation deductions. In 
addition, the Code permits small business refiners to 
immediately deduct as an expense up to 75 percent of the costs 
paid or incurred for the purpose of complying with the Highway 
Diesel Fuel Sulfur Control Requirements of the Environmental 
Protection Agency (``EPA''). Costs qualifying for the deduction 
are those costs paid or incurred with respect to any facility 
of a small business refiner during the period beginning on 
January 1, 2003 and ending on the earlier of the date that is 
one year after the date on which the taxpayer must comply with 
the applicable EPA regulations or December 31, 2009.
    The Code also provides that a small business refiner may 
claim a credit equal to five cents per gallon for each gallon 
of low sulfur diesel fuel produced during the taxable year that 
is in compliance with the Highway Diesel Fuel Sulfur Control 
Requirements. The total production credit claimed by the 
taxpayer is limited to 25 percent of the capital costs incurred 
to come into compliance with the EPA diesel fuel requirements. 
As with the deduction permitted under present law, costs 
qualifying for the credit are those costs paid or incurred with 
respect to any facility of a small business refiner during the 
period beginning on January 1, 2003 and ending on the earlier 
of the date that is one year after the date on which the 
taxpayer must comply with the applicable EPA regulations or 
December 31, 2009. The taxpayer's basis in property with 
respect to which the credit applies is reduced by the amount of 
production credit claimed.
    For these purposes, a small business refiner is a taxpayer 
who is within the business of refining petroleum products, 
employs not more than 1,500 employees directly in refining, and 
has less than 205,000 barrels per day (average) of total 
refinery capacity. The deduction is reduced, pro rata, for 
taxpayers with capacity in excess of 155,000 barrels per day.
    In the case of a qualifying small business refiner that is 
owned by a cooperative, the cooperative is allowed to elect to 
pass any production credits to patrons of the organization. 
Present law does not permit cooperatives to pass through to 
members the deduction permitted for the costs paid or incurred 
for the purpose of complying with the Highway Diesel Fuel 
Sulfur Control Requirements.

Taxation of cooperatives and their patrons

    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception--the cooperative may exclude from its taxable 
income distributions of patronage dividends. In general, 
patronage dividends are the profits of the cooperative that are 
rebated to its patrons pursuant to a pre-existing obligation of 
the cooperative to do so. The rebate must be made in some 
equitable fashion on the basis of the quantity or value of 
business done with the cooperative.
    Except for tax-exempt farmers' cooperatives, cooperatives 
that are subject to the cooperative tax rules of subchapter T 
of the Code \63\ are permitted a deduction for patronage 
dividends from their taxable income only to the extent of net 
income that is derived from transactions with patrons who are 
members of the cooperative. \64\ The availability of such 
deductions from taxable income has the effect of allowing the 
cooperative to be treated like a conduit with respect to 
profits derived from transactions with patrons who are members 
of the cooperative.
---------------------------------------------------------------------------
    \63\ Sec. 1381, et seq.
    \64\ Sec. 1382.
---------------------------------------------------------------------------
    Cooperatives that qualify as tax-exempt farmers' 
cooperatives are permitted to exclude patronage dividends from 
their taxable income to the extent of all net income, including 
net income that is derived from transactions with patrons who 
are not members of the cooperative, provided the value of 
transactions with patrons who are not members of the 
cooperative does not exceed the value of transactions with 
patrons who are members of the cooperative. \65\
---------------------------------------------------------------------------
    \65\ Sec. 521.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows cooperatives to elect to pass through 
to their owners the deduction permitted for costs paid or 
incurred for the purpose of complying with the Highway Diesel 
Fuel Sulfur Control Requirements. The election must be made on 
the tax return of the organization for the taxable year to 
which the deduction relates. Once made, the election is 
irrevocable. In addition, the organization making such an 
election must provide cooperative owners receiving an 
allocation of the deduction written notice of the amount of 
such allocation. The written notice must be provided by the due 
date for the tax return on which the election is made. Finally, 
to the extent the deduction is passed through to owners, the 
cooperative is denied deductions it would otherwise be entitled 
with respect to costs attributable to complying with the 
Highway Diesel Fuel Sulfur Control Requirements.

                             Effective Date

    The provision is effective as if included in the amendments 
made by section 338(a) of the American Jobs Creation Act of 
2004 (effective for expenses paid or incurred after December 
31, 2002, in taxable years ending after such date). \66\
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    \66\ Pub. L. No. 108-357.
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14. Natural gas distribution lines treated as fifteen-year property 
        (sec. 1325 of the Act and sec. 168 of the Code)

                              Present Law

    The applicable recovery period for assets placed in service 
under the Modified Accelerated Cost Recovery System is based on 
the ``class life of the property.'' The class lives of assets 
placed in service after 1986 are generally set forth in Revenue 
Procedure 87-56. \67\ Natural gas distribution pipelines are 
assigned a 20-year recovery period and a class life of 35 
years.
---------------------------------------------------------------------------
    \67\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision establishes a statutory 15-year recovery 
period and a class life of 35 years for natural gas 
distribution lines.

                             Effective Date

    The provision is effective for property, the original use 
of which begins with the taxpayer after April 11, 2005, which 
is placed in service after April 11, 2005 and before January 1, 
2011. The provision does not apply to property subject to a 
binding contract on or before April 11, 2005. \68\
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    \68\ In the case of self-constructed property, the provision does 
not apply to property under construction on or before April 11, 2005.
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15. Natural gas gathering lines treated as seven-year property (sec. 
        1326 of the Act and sec. 168 of the Code)

                              Present Law

    The applicable recovery period for assets placed in service 
under the Modified Accelerated Cost Recovery System is based on 
the ``class life of the property.'' The class lives of assets 
placed in service after 1986 are generally set forth in Revenue 
Procedure 87-56. \69\ Revenue Procedure 87-56 includes two 
asset classes either of which could describe natural gas 
gathering lines owned by nonproducers of natural gas. Asset 
class 46.0, describing pipeline transportation, provides a 
class life of 22 years and a recovery period of 15 years. Asset 
class 13.2, describing assets used in the exploration for and 
production of petroleum and natural gas deposits, provides a 
class life of 14 years and a depreciation recovery period of 
seven years. The uncertainty regarding the appropriate recovery 
period of natural gas gathering lines has resulted in 
litigation between taxpayers and the IRS. In each of three 
recent cases, appellate courts have held that natural gas 
gathering lines owned by nonproducers fall within the scope of 
Asset class 13.2 (i.e., seven-year recovery period). \70\ The 
appellate court in each case reversed a lower court holding 
that natural gas gathering lines owned by nonproducers fall 
within the scope of Asset class 46.0 (i.e., 15-year recovery 
period). The IRS issued a non-acquiesence in Duke Energy, in 
IRS Action on Decision 1999-17 (November 22, 1999). The IRS has 
not yet indicated whether it acquiesces in the result in the 
two other appellate decisions.
---------------------------------------------------------------------------
    \69\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
    \70\ Clajon Gas Co, L.P. v. Commissioner, 354 F.3d 786 (8th Cir. 
2004), rev'g 119 T.C. 197 (2002); Saginaw Bay Pipeline Co. v. United 
States, 338 F.3d 600 (6th Cir. 2003), rev'g 88 A.F.T.R.2d 2001-6019 
(E.D. Mich. 2001); Duke Energy v. Commissioner, 172 F.3d 1255 (10th 
Cir. 1999), rev'g 109 T.C. 416 (1997).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision establishes a statutory seven-year recovery 
period and a class life of 14 years for natural gas gathering 
lines. In addition, no adjustment will be made to the allowable 
amount of depreciation with respect to this property for 
purposes of computing a taxpayer's alternative minimum taxable 
income. A natural gas gathering line is defined to include any 
pipe, equipment, and appurtenance that is (1) determined to be 
a gathering line by the Federal Energy Regulatory Commission, 
or (2) used to deliver natural gas from the wellhead or a 
common point to the point at which such gas first reaches (a) a 
gas processing plant, (b) an interconnection with an interstate 
transmission line, (c) an interconnection with an intrastate 
transmission line, or (d) a direct interconnection with a local 
distribution company, a gas storage facility, or an industrial 
consumer.

                             Effective Date

    The provision is effective for property, the original use 
of which begins with the taxpayer, which was placed in service 
after April 11, 2005. The provision does not apply to property 
with respect to which the taxpayer (or a related party) had a 
binding acquisition contract on or before April 11, 2005. No 
inference is intended as to the proper treatment of natural gas 
gathering lines placed in service on or before April 11, 2005.

16. Arbitrage rules not to apply to prepayments for natural gas (sec. 
        1327 of the Act and sec. 148 of the Code)

                              Present Law


Arbitrage restrictions

    Interest on bonds issued by States or local governments to 
finance activities carried out or paid for by those entities 
generally is exempt from income tax. Restrictions are imposed 
on the ability of States or local governments to invest the 
proceeds of these bonds for profit (the ``arbitrage 
restrictions''). \71\ One such restriction limits the use of 
bond proceeds to acquire ``investment-type property.'' The term 
investment-type property includes the acquisition of property 
in a transaction involving a prepayment if a principal purpose 
of the prepayment is to receive an investment return from the 
time the prepayment is made until the time payment otherwise 
would be made. A prepayment can produce prohibited arbitrage 
profits when the discount received for prepaying the costs 
exceeds the yield on the tax-exempt bonds. In general, 
prohibited prepayments include all prepayments that are not 
customary in an industry by both beneficiaries of tax-exempt 
bonds and other persons using taxable financing for the same 
transaction.
---------------------------------------------------------------------------
    \71\ Sec. 148.
---------------------------------------------------------------------------
    On August 4, 2003, the Treasury Department issued final 
regulations deeming to be customary, and not in violation of 
the arbitrage rules, certain prepayments for natural gas and 
electricity. \72\ Generally, a qualified prepayment under the 
regulations requires that 90 percent of the natural gas or 
electricity purchased with the prepayment be used for a 
qualifying use. Generally, natural gas is used for a qualifying 
use if it is to be (1) furnished to retail gas customers of the 
issuing municipal utility who are located in the natural gas 
service area of the issuing municipal utility, however, gas 
used to produce electricity for sale is not included under this 
provision (2) used by the issuing municipal utility to produce 
electricity that will be furnished to retail electric service 
area customers of the issuing utility, (3) used by the issuing 
municipal utility to produce electricity that will be sold to a 
utility owned by a governmental person and furnished to the 
service area retail electric customers of the purchaser, (4) 
sold to a utility that is owned by a governmental person if the 
requirements of (1), (2) or (3) are satisfied by the purchasing 
utility (treating the purchaser as the issuing utility) or (5) 
used to fuel the pipeline transportation of the prepaid gas 
supply. Electricity is used for a qualifying use if it is to be 
(1) furnished to retail service area electric customers of the 
issuing municipal utility or (2) sold to a municipal utility 
and furnished to retail electric customers of the purchaser who 
are located in the electricity service area of the purchaser.
---------------------------------------------------------------------------
    \72\ Treas. Reg. sec. 1.148-1(e)(2)(iii).
---------------------------------------------------------------------------

Private activity bond tests

    State and local bonds may be classified as either 
governmental bonds or private activity bonds. Governmental 
bonds are bonds the proceeds of which are primarily used to 
finance governmental functions or which are primarily repaid 
with governmental funds. Private activity bonds are bonds where 
the State or local government serves as a conduit providing 
financing to private businesses or individuals. A bond will be 
treated as a private activity bond if more than five percent of 
the proceeds of the bond issue, or, if less, more than 
$5,000,000 is used (directly or indirectly) to make or finance 
loans to persons other than governmental units (the ``private 
loan financing test'') or if it meets the requirements of a 
two-part private business test. \73\
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    \73\ Sec. 141(b) and (c). Under the private business test, a bond 
is a private activity bond if it is part of an issue in which: (1) more 
than 10 percent of the proceeds of the issue (including use of the 
bond-financed property) are to be used in the trade or business of any 
person other than a governmental unit (``private business use''); and 
(2) more than 10 percent of the payment of principal or interest on the 
issue is, directly or indirectly, secured by (a) property used or to be 
used for a private business use or (b) to be derived from payments in 
respect of property, or borrowed money, used or to be used for a 
private business use (``private payment test'').
---------------------------------------------------------------------------
    The exclusion from income for State and local bonds does 
not apply to private activity bonds, unless the bonds are 
issued for certain purposes permitted by the Code. Section 
141(d) of the Code provides that the term ``private activity 
bond'' includes any bond issued as part of an issue if the 
amount of the proceeds of the issue which are to be used 
(directly or indirectly) for the acquisition by a governmental 
unit of nongovernmental output property exceeds the lesser of 
five percent of such proceeds or $5 million. ``Nongovernmental 
output property'' generally means any property (or interest 
therein) which before such acquisition was used (or held for 
use) by a person other than a governmental unit in connection 
with an output facility (other than a facility for the 
furnishing of water). An exception applies to output property 
which is to be used in connection with an output facility 95 
percent or more of the output of which will be consumed in (1) 
a qualified service area of the governmental unit acquiring the 
property, or (2) a qualified annexed area of such unit.

                           Reasons for Change

    The Congress determined that it was appropriate to 
complement the Treasury regulations with a safe harbor that 
provides certainty on the date of issuance that prepayments for 
natural gas within the safe harbor will not violate the 
arbitrage rules. This provision will ensure adequate supplies 
of natural gas at predictable prices for natural gas utility 
customers without sacrificing to a great degree the appropriate 
present-law limitations regarding tax-exempt bond issuance for 
the purchase of investment property. The Congress believes that 
this proposal strikes an appropriate balance between these two 
competing policies. The creation of this safe harbor is not 
intended to limit the Secretary's regulatory authority to 
identify other situations in which prepayments do not give rise 
to investment type property.

                        Explanation of Provision


In general

    The provision creates a safe harbor exception to the 
general rule that tax-exempt bond-financed prepayments violate 
the arbitrage restrictions. The term ``investment type 
property'' does not include a prepayment under a qualified 
natural gas supply contract. The provision also provides that 
such prepayments are not treated as private loans for purposes 
of the private business tests.
    Under the provision, a prepayment financed with tax-exempt 
bond proceeds for the purpose of obtaining a supply of natural 
gas for service area customers of a governmental utility is not 
treated as the acquisition of investment-type property. A 
contract is a qualified natural gas contract if the volume of 
natural gas secured for any year covered by the prepayment does 
not exceed the sum of (1) the average annual natural gas 
purchased (other than for resale) by customers of the utility 
within the service area of the utility (``retail natural gas 
consumption'') during the testing period, and (2) the amount of 
natural gas that is needed to fuel transportation of the 
natural gas to the governmental utility. The testing period is 
the 5-calendar-year period immediately preceding the calendar 
year in which the bonds are issued. A retail customer is one 
who does not purchase natural gas for resale. Natural gas used 
to generate electricity by a utility owned by a governmental 
unit is counted as retail natural gas consumption if the 
electricity was sold to retail customers within the service 
area of the governmental electric utility.

Adjustments

    The volume of gas permitted by the general rule is reduced 
by natural gas otherwise available on the date of issuance. 
Specifically, the amount of natural gas permitted to be 
acquired under a qualified natural gas contract for any period 
is to be reduced by the applicable share of natural gas held by 
the utility on the date of issuance of the bonds and natural 
gas that the utility has a right to acquire for the prepayment 
period (determined as of the date of issuance). For purposes of 
the preceding sentence, ``applicable share'' means, with 
respect to any period, the natural gas allocable to such period 
if the gas were allocated ratably over the period to which the 
prepayment relates.
    For purposes of the safe harbor, if after the close of the 
testing period and before the issue date of the bonds (1) the 
government utility enters into a contract to supply natural gas 
(other than for resale) for a commercial person for use at a 
property within the service area of such utility and (2) the 
gas consumption for such property was not included in the 
testing period or the ratable amount of natural gas to be 
supplied under the contract is significantly greater than the 
ratable amount of gas supplied to such property during the 
testing period, then the amount of gas permitted to be 
purchased may be increased to accommodate the contract.
    The calculation of average annual retail natural gas 
consumption for purposes of the safe harbor, however, is not to 
exceed the annual amount of natural gas reasonably expected to 
be purchased (other than for resale) by persons who are located 
within the service area of such utility and who, as of the date 
of issuance of the issue, are customers of such utility.

Intentional acts

    The safe harbor does not apply if the utility engages in 
intentional acts to render (1) the volume of natural gas 
covered by the prepayment to be in excess of that needed for 
retail natural gas consumption, and (2) the amount of natural 
gas that is needed to fuel transportation of the natural gas to 
the governmental utility.

Definition of service area

    Service area is defined as (1) any area throughout which 
the governmental utility provided (at all times during the 
testing period) in the case of a natural gas utility, natural 
gas transmission or distribution services, or in the case of an 
electric utility, electricity distribution services; (2) 
limited areas contiguous to such areas, and (3) any area 
recognized as the service area of the governmental utility 
under State or Federal law. Contiguous areas are limited to any 
area within a county contiguous to the area described in (1) in 
which retail customers of the utility are located if such area 
is not also served by another utility providing the same 
service.

Ruling request for higher prepayment amounts

    Upon written request, the Secretary may allow an issuer to 
prepay for an amount of gas greater than that allowed by the 
safe harbor based on objective evidence of growth in gas 
consumption or population that demonstrates that the amount 
permitted by the exception is insufficient.

Nongovernmental output property restrictions

    A qualified natural gas supply contract as defined in the 
provision is not nongovernmental output property for purposes 
of subsection (d) of section 141. Subsection (d) of section 141 
does not apply to prepayment contracts for natural gas or 
electricity that either under the Treasury regulations or 
statutory safe harbor are not investment-type property for 
purposes of the arbitrage rules under section 148. No inference 
is intended regarding the application of subsection 141(d) to 
prepayment contracts not covered by the statutory safe harbor 
or Treasury regulations.

Application to joint action agencies

    In a number of States, joint action agencies serve as 
purchasing agents for their member municipal gas utilities. The 
provision is intended to allow municipal utilities in a State 
to participate in such buying arrangements as established under 
State law, subject to the same limitations that would apply if 
an individual utility were to purchase gas directly. When 
acting on behalf of its municipal gas utility members, the 
total amount of gas that can be purchased by a joint action 
agency under the provision's exception to the arbitrage rules 
is the aggregate of what each such member could purchase for 
itself on a direct basis. Thus, with respect to qualified 
natural gas supply contracts entered into by joint action 
agencies for or on behalf of one or more member municipal 
utilities, the requirements of the safe harbor are tested at 
the individual municipal utility level based on the amount of 
gas that would be allocated to such member during any year 
covered by the contract.

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (August 8, 2005).

17. Determination of small refiner exception to oil depletion deduction 
        (sec. 1328 of the Act and sec. 613A of the Code)

                              Present Law

    Present law classifies oil and gas producers as independent 
producers or integrated companies. The Code provides special 
tax rules for operations by independent producers. One such 
rule allows independent producers to claim percentage depletion 
deductions rather than deducting the costs of their asset, a 
producing well, based on actual production from the well (i.e., 
cost depletion).
    A producer is an independent producer only if its refining 
and retail operations are relatively small. For example, an 
independent producer may not have refining operations the runs 
from which exceed 50,000 barrels on any day in the taxable year 
during which independent producer status is claimed.\74\ A 
refinery run is the volume of inputs of crude oil (excluding 
any product derived from oil) into the refining stream.\75\
---------------------------------------------------------------------------
    \74\ Sec. 613A(d)(4).
    \75\ Treas. Reg. sec. 1.613A-7(s).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress notes that technological advances have 
permitted a number of small refineries to refine more petroleum 
without expanding their facilities. The Congress believes that 
the goal of present law, to identify producers without 
significant refining capacity, can be achieved while permitting 
more flexibility to refinery operations.

                        Explanation of Provision

    The Act increases the current 50,000-barrel-per-day 
limitation to 75,000. In addition, the Act changes the refinery 
limitation on claiming independent producer status from a limit 
based on actual daily production to a limit based on average 
daily production for the taxable year. Accordingly, the average 
daily refinery runs for the taxable year may not exceed 75,000 
barrels. For this purpose, the taxpayer calculates average 
daily refinery runs by dividing total refinery runs for the 
taxable year by the total number of days in the taxable year.

                             Effective Date

    The provision is effective for taxable years ending after 
date of enactment (August 8, 2005).

18. Amortization of geological and geophysical expenditures (sec. 1329 
        of the Act and sec. 167 of the Code)

                              Present Law


In general

    Geological and geophysical expenditures (``G&G costs'') are 
costs incurred by a taxpayer for the purpose of obtaining and 
accumulating data that will serve as the basis for the 
acquisition and retention of mineral properties by taxpayers 
exploring for minerals. A key issue with respect to the tax 
treatment of such expenditures is whether or not they are 
capital in nature. Capital expenditures are not currently 
deductible as ordinary and necessary business expenses, but are 
allocated to the cost of the property.\76\
---------------------------------------------------------------------------
    \76\ Under section 263, capital expenditures are defined generally 
as any amount paid for new buildings or for permanent improvements or 
betterments made to increase the value of any property or estate. 
Treasury regulations define capital expenditures to include amounts 
paid or incurred (1) to add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer or (2) to adapt property 
to a new or different use. Treas. Reg. sec. 1.263(a)-1(b).
---------------------------------------------------------------------------
    Courts have held that G&G costs are capital, and therefore 
are allocable to the cost of the property \77\ acquired or 
retained. The costs attributable to such exploration are 
allocable to the cost of the property acquired or retained.\78\ 
As described further below, IRS administrative rulings have 
provided further guidance regarding the definition and proper 
tax treatment of G&G costs.
---------------------------------------------------------------------------
    \77\ ``Property'' means an interest in a property as defined in 
section 614 of the Code, and includes an economic interest in a tract 
or parcel of land notwithstanding that a mineral deposit has not been 
established or proved at the time the costs are incurred.
    \78\ See, e.g., Schermerhorn Oil Corporation v. Commissioner, 46 
B.T.A. 151 (1942). By contrast, section 617 of the Code permits a 
taxpayer to elect to deduct certain expenditures incurred for the 
purpose of ascertaining the existence, location, extent, or quality of 
any deposit of ore or other mineral (but not oil and gas). These 
deductions are subject to recapture if the mine with respect to which 
the expenditures were incurred reaches the producing stage.
---------------------------------------------------------------------------

Revenue Ruling 77-188

    In Revenue Ruling 77-188 \79\ (hereinafter referred to as 
the ``1977 ruling''), the IRS provided guidance regarding the 
proper tax treatment of G&G costs. The ruling describes a 
typical geological and geophysical exploration program as 
containing the following elements:
---------------------------------------------------------------------------
    \79\ 1977-1 C.B. 76.
---------------------------------------------------------------------------
           It is customary in the search for mineral 
        producing properties for a taxpayer to conduct an 
        exploration program in one or more identifiable project 
        areas. Each project area encompasses a territory that 
        the taxpayer determines can be explored advantageously 
        in a single integrated operation. This determination is 
        made after analyzing certain variables such as (1) the 
        size and topography of the project area to be explored, 
        (2) the existing information available with respect to 
        the project area and nearby areas, and (3) the quantity 
        of equipment, the number of personnel, and the amount 
        of money available to conduct a reasonable exploration 
        program over the project area.
           The taxpayer selects a specific project area 
        from which geological and geophysical data are desired 
        and conducts a reconnaissance-type survey utilizing 
        various geological and geophysical exploration 
        techniques. These techniques are designed to yield data 
        that will afford a basis for identifying specific 
        geological features with sufficient mineral potential 
        to merit further exploration.
           Each separable, noncontiguous portion of the 
        original project area in which such a specific 
        geological feature is identified is a separate ``area 
        of interest.'' The original project area is subdivided 
        into as many small projects as there are areas of 
        interest located and identified within the original 
        project area. If the circumstances permit a detailed 
        exploratory survey to be conducted without an initial 
        reconnaissance-type survey, the project area and the 
        area of interest will be coextensive.
           The taxpayer seeks to further define the 
        geological features identified by the prior 
        reconnaissance-type surveys by additional, more 
        detailed, exploratory surveys conducted with respect to 
        each area of interest. For this purpose, the taxpayer 
        engages in more intensive geological and geophysical 
        exploration employing methods that are designed to 
        yield sufficiently accurate sub-surface data to afford 
        a basis for a decision to acquire or retain properties 
        within or adjacent to a particular area of interest or 
        to abandon the entire area of interest as unworthy of 
        development by mine or well.
    The 1977 ruling provides that if, on the basis of data 
obtained from the preliminary geological and geophysical 
exploration operations, only one area of interest is located 
and identified within the original project area, then the 
entire expenditure for those exploratory operations is to be 
allocated to that one area of interest and thus capitalized 
into the depletable basis of that area of interest. On the 
other hand, if two or more areas of interest are located and 
identified within the original project area, the entire 
expenditure for the exploratory operations is to be allocated 
equally among the various areas of interest.
    If no areas of interest are located and identified by the 
taxpayer within the original project area, then the 1977 ruling 
states that the entire amount of the G&G costs related to the 
exploration is deductible as a loss under section 165. The loss 
is claimed in the taxable year in which that particular project 
area is abandoned as a potential source of mineral production.
    A taxpayer may acquire or retain a property within or 
adjacent to an area of interest, based on data obtained from a 
detailed survey that does not relate exclusively to any 
discrete property within a particular area of interest. 
Generally, under the 1977 ruling, the taxpayer allocates the 
entire amount of G&G costs to the acquired or retained property 
as a capital cost under section 263(a). If more than one 
property is acquired, it is proper to determine the amount of 
the G&G costs allocable to each such property by allocating the 
entire amount of the costs among the properties on the basis of 
comparative acreage.
    If, however, no property is acquired or retained within or 
adjacent to that area of interest, the entire amount of the G&G 
costs allocable to the area of interest is deductible as a loss 
under section 165 for the taxable year in which such area of 
interest is abandoned as a potential source of mineral 
production.
    In 1983, the IRS issued Revenue Ruling 83-105,\80\ which 
elaborates on the positions set forth in the 1977 ruling by 
setting forth seven factual situations and applying the 
principles of the 1977 ruling to those situations. In addition, 
Revenue Ruling 83-105 explains what constitutes ``abandonment 
as a potential source of mineral production.''
---------------------------------------------------------------------------
    \80\ 1983-2 C.B. 51.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that substantial simplification for 
taxpayers, significant gains in taxpayer compliance, and 
reductions in administrative cost can be obtained by 
establishing a clear rule that all geological and geophysical 
costs may be amortized over two years, including the basis of 
abandoned property.
    The Congress recognizes that, on average, a two-year 
amortization period accelerates recovery of geological and 
geophysical expenses. The Congress believes that more rapid 
recovery of such expenses will foster increased exploration for 
new sources of supply.

                     Explanation of Provision \81\

    The Act allows geological and geophysical amounts incurred 
in connection with oil and gas exploration in the United States 
to be amortized over two years. In the case of abandoned 
property, remaining basis may no longer be recovered in the 
year of abandonment of a property as all basis is recovered 
over the two-year amortization period.
---------------------------------------------------------------------------
    \81\ The provision was subsequently modified in section 503 of the 
Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 
109-222, described in Part Eleven.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for geological and geophysical 
costs paid or incurred in taxable years beginning after the 
date of enactment (August 8, 2005). No inference is intended 
from the prospective effective date of this provision as to the 
proper treatment of pre-effective date geological and 
geophysical costs.

19. Credit for energy efficient commercial buildings deduction (sec. 
        1331 of the Act and new sec. 179D of the Code)

                              Present Law

    No special deduction is provided for expenses incurred for 
energy-efficient commercial building property.

                     Explanation of Provision \82\

---------------------------------------------------------------------------
    \82\ The provision was subsequently extended in Division A, section 
204 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------

In general

    The provision provides a deduction for 2006 and 2007 equal 
to energy-efficient commercial building property expenditures 
made by the taxpayer. Energy-efficient commercial building 
property expenditures is defined as property (1) which is 
installed on or in any building located in the United States 
that is within the scope of Standard 90.1-2001 of the American 
Society of Heating, Refrigerating, and Air Conditioning 
Engineers and the Illuminating Engineering Society of North 
America (``ASHRAE/IESNA''), (2) which is installed as part of 
(i) the interior lighting systems, (ii) the heating, cooling, 
ventilation, and hot water systems, or (iii) the building 
envelope, and (3) which is certified as being installed as part 
of a plan designed to reduce the total annual energy and power 
costs with respect to the interior lighting systems, heating, 
cooling, ventilation, and hot water systems of the building by 
50 percent or more in comparison to a reference building which 
meets the minimum requirements of Standard 90.1-2001 (as in 
effect on April 2, 2003). The deduction is limited to an amount 
equal to $1.80 per square foot of the property for which such 
expenditures are made. The deduction is allowed in the year in 
which the property is placed in service and is available only 
for property placed in service after December 31, 2005 and 
prior to January 1, 2008.
    Certain certification requirements must be met in order to 
qualify for the deduction. The Secretary, in consultation with 
the Secretary of Energy, will promulgate regulations that 
describe methods of calculating and verifying energy and power 
costs using qualified computer software based on the provisions 
of the 2005 California Nonresidential Alternative Calculation 
Method Approval Manual or, in the case of residential property, 
the 2005 California Residential Alternative Calculation Method 
Approval Manual.
    The Congress intends that the methods for calculation be 
fuel neutral, such that the same energy efficiency features 
qualify a building for the deduction under this provision 
regardless of whether the heating source is a gas or oil 
furnace or boiler or an electric heat pump. The Congress also 
intends that the calculation methods provide appropriate 
calculated energy savings for design methods and technologies 
not otherwise credited in either Standard 90.1-2001 or in the 
2005 California Nonresidential Alternative Calculation Method 
Approval Manual, including the following: (i) Natural 
ventilation (ii) Evaporative cooling (iii) Automatic lighting 
controls such as occupancy sensors, photocells, and timeclocks( 
iv) Daylighting (v) Designs utilizing semi-conditioned spaces 
which maintain adequate comfort conditions without air 
conditioning or without heating (vi) Improved fan system 
efficiency, including reductions in static pressure (vii) 
Advanced unloading mechanisms for mechanical cooling, such as 
multiple or variable speed compressors (viii) On-site 
generation of electricity, including combined heat and power 
systems, fuel cells, and renewable energy generation such as 
solar energy (ix) Wiring with lower energy losses than wiring 
satisfying Standard 90.1-2001 requirements for building power 
distribution systems. The calculation methods may take into 
account the extent of commissioning in the building, and allow 
the taxpayer to take into account measured performance which 
exceeds typical performance.
    The Secretary shall prescribe procedures for the inspection 
and testing for compliance of buildings that are comparable, 
given the difference between commercial and residential 
buildings, to the requirements in the Mortgage Industry 
National Accreditation Procedures for Home Energy Rating 
Systems. Individuals qualified to determine compliance shall 
only be those recognized by one or more organizations certified 
by the Secretary for such purposes.
    For energy-efficient commercial building property 
expenditures made by a public entity, such as public schools, 
the Secretary shall promulgate regulations that allow the 
deduction to be allocated to the person primarily responsible 
for designing the property in lieu of the public entity.
    If a deduction is allowed under this section, the basis of 
the property shall be reduced by the amount of the deduction.

Partial allowance of deduction

    In the case of a building that does not meet the overall 
building requirement of a 50-percent energy savings, a partial 
deduction is allowed with respect to each separate building 
system that comprises energy efficient property and which is 
certified by a qualified professional as meeting or exceeding 
the applicable system-specific savings targets established by 
the Secretary of the Treasury. The applicable system-specific 
savings targets to be established by the Secretary are those 
that would result in a total annual energy savings with respect 
to the whole building of 50 percent, if each of the separate 
systems met the system specific target. The separate building 
systems are (1) the interior lighting system, (2) the heating, 
cooling, ventilation and hot water systems, and (3) the 
building envelope. The maximum allowable deduction is $0.60 per 
square foot for each separate system.
    In the case of system-specific partial deductions, in 
general no deduction is allowed until the Secretary establishes 
system-specific targets. However, in the case of lighting 
system retrofits, until such time as the Secretary issues final 
regulations, the system-specific energy savings target for the 
lighting system is deemed to be met by a reduction in Lighting 
Power Density of 40 percent (50 percent in the case of a 
warehouse) of the minimum requirements in Table 9.3.1.1 or 
Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-2001. Also, in the 
case of a lighting system that reduces lighting power density 
by 25 percent, a partial deduction of 37.5 cents per square 
foot is allowed. A pro-rated partial deduction is allowed in 
the case of a lighting system that reduces lighting power 
density between 25 percent and 40 percent. Certain lighting 
level and lighting control requirements must also be met in 
order to qualify for the partial lighting deductions.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2005.

20. Credit for energy efficient new homes (sec. 1332 of the Act and new 
        sec. 45L of the Code)

                              Present Law

    There is no present-law credit for the construction of new 
energy-efficient homes.

                     Explanation of Provision \83\

    The provision provides a credit for 2006 and 2007 to an 
eligible contractor for the construction of a qualified new 
energy-efficient home whose construction is substantially 
completed after December 31, 2005, and which is purchased after 
December 31, 2005 and prior to January 1, 2008. To qualify as 
an energy-efficient new home, the home must be: (1) a dwelling 
located in the United States, (2) substantially completed after 
the date of enactment, and (3) certified in accordance with 
guidance prescribed by the Secretary to have a projected level 
of annual heating and cooling energy consumption that meets the 
standards for either a 30-percent or 50-percent reduction in 
energy usage, compared to a comparable dwelling constructed in 
accordance with the standards of chapter 4 of the 2003 
International Energy Conservation Code as in effect (including 
supplements) on the date of enactment (August 8, 2005), and any 
applicable Federal minimum efficiency standards for equipment. 
With respect to homes that meet the 30-percent standard, one-
third of such 30 percent savings must come from the building 
envelope, and with respect to homes that meet the 50-percent 
standard, one-fifth of such 50 percent savings must come from 
the building envelope.
---------------------------------------------------------------------------
    \83\ The provision was subsequently extended in Division A, section 
205 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    The credit equals $1,000 in the case of a new home that 
meets the 30 percent standard and $2,000 in the case of a new 
home that meets the 50 percent standard. Only manufactured 
homes are eligible for the $1,000 credit.
    The eligible contractor is the person who constructed the 
home, or in the case of a manufactured home, the producer of 
such home. The Congress intends that the building envelope 
component means insulation materials or system specifically and 
primarily designed to reduce heat loss or gain, exterior 
windows (including skylights), doors, and any duct sealing and 
infiltration reduction measures.
    Manufactured homes that conform to federal manufactured 
home construction and safety standards are eligible for the 
credit provided all the criteria for the credit are met. 
Manufactured homes certified by a method prescribed by the 
Administrator of the Environmental Protection Agency under the 
Energy Star Labeled Homes program are eligible for the $1,000 
credit provided criteria (1) and (2), above, are met.
    The credit is part of the general business credit. No 
credits attributable to energy efficient homes can be carried 
back to any taxable year ending on or before the effective date 
of the credit.

                             Effective Date

    The credit applies to homes whose construction is 
substantially completed after December 31, 2005, and which are 
purchased after December 31, 2005.

21. Credit for certain nonbusiness energy property (sec. 1333 of the 
        Act and new sec. 25C of the Code)

                              Present Law

    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means any installation or modification primarily 
designed to reduce consumption of electricity or natural gas or 
to improve the management of energy demand with respect to a 
dwelling unit (sec. 136).
    There is no present law credit for energy efficiency 
improvements to existing homes.

                           Reasons for Change

    The Congress recognizes that residential energy use for 
heating and cooling represents a large share of national energy 
consumption, and accordingly believes that measures to reduce 
heating and cooling energy requirements have the potential to 
substantially reduce national energy consumption. The Congress 
further recognizes that many existing homes are inadequately 
insulated. Accordingly, the Congress believes that a tax credit 
for certain energy-efficiency improvements related to a home's 
envelope (exterior windows (including skylights) and doors, 
insulation, and certain roofing systems) will encourage 
homeowners to improve the insulation of their homes, which in 
turn will reduce national energy consumption.

                        Explanation of Provision

    The provision provides a 10-percent credit for the purchase 
of qualified energy efficiency improvements to existing homes 
for 2006 and 2007. The credit applies to property placed in 
service after December 31, 2005 and prior to January 1, 2008. A 
qualified energy efficiency improvement is any energy 
efficiency building envelope component that meets or exceeds 
the prescriptive criteria for such a component established by 
the 2000 International Energy Conservation Code as supplemented 
and as in effect on the date of enactment (August 8, 2005) (or, 
in the case of metal roofs with appropriate pigmented coatings, 
meets the Energy Star program requirements), and (1) that is 
installed in or on a dwelling located in the United States; (2) 
owned and used by the taxpayer as the taxpayer's principal 
residence; (3) the original use of which commences with the 
taxpayer; and (4) such component reasonably can be expected to 
remain in use for at least five years. The credit is 
nonrefundable.
    Building envelope components are: (1) insulation materials 
or systems which are specifically and primarily designed to 
reduce the heat loss or gain for a dwelling; (2) exterior 
windows (including skylights)and doors; and (3) metal roofs 
with appropriate pigmented coatings which are specifically and 
primarily designed to reduce the heat loss or gain for a 
dwelling.
    Additionally, the provision provides specified credits for 
the purchase of specific energy efficient property. The 
allowable credit for the purchase of certain property is (1) 
$50 for each advanced main air circulating fan, (2) $150 for 
each qualified natural gas, propane, or oil furnace or hot 
water boiler, and (3) $300 for each item of qualified energy 
efficient property.
    An advanced main air circulating fan is a fan used in a 
natural gas, propane, or oil furnace originally placed in 
service by the taxpayer during the taxable year, and which has 
an annual electricity use of no more than two percent of the 
total annual energy use of the furnace (as determined in the 
standard Department of Energy test procedures).
    A qualified natural gas, propane, or oil furnace or hot 
water boiler is a natural gas, propane, or oil furnace or hot 
water boiler with an annual fuel utilization efficiency rate of 
at least 95.
    Qualified energy-efficient property is: (1) an electric 
heat pump water heater which yields an energy factor of at 
least 2.0 in the standard Department of Energy test procedure, 
(2) an electric heat pump which has a heating seasonal 
performance factor (HSPF) of at least 9, a seasonal energy 
efficiency ratio (SEER) of at least 15, and an energy 
efficiency ratio (EER) of at least 13, (3) a geothermal heat 
pump which (i) in the case of a closed loop product, has an 
energy efficiency ratio (EER) of at least 14.1 and a heating 
coefficient of performance (COP) of at least 3.3, (ii) in the 
case of an open loop product, has an energy efficiency ratio 
(EER) of at least 16.2 and a heating coefficient of performance 
(COP) of at least 3.6, and (iii) in the case of a direct 
expansion (DX) product, has an energy efficiency ratio (EER) of 
at least 15 and a heating coefficient of performance (COP) of 
at least 3.5, (4) a central air conditioner with energy 
efficiency of at least the highest efficiency tier established 
by the Consortium for Energy Efficiency as in effect on Jan. 1, 
2006, and (5) a natural gas, propane, or oil water heater which 
has an energy factor of at least 0.80.
    The maximum credit for a taxpayer with respect to the same 
dwelling for all taxable years is $500, and no more than $200 
of such credit may be attributable to expenditures on windows.
    The taxpayer's basis in the property is reduced by the 
amount of the credit. Special rules apply in the case of 
condominiums and tenant-stockholders in cooperative housing 
corporations.

                             Effective Date

    The credit applies to property placed in service after 
December 31, 2005.

22. Credit for energy efficient appliances (sec. 1334 of the Act and 
        new sec. 45M of the Code)

                              Present Law

    There is no present-law credit for the manufacture of 
energy-efficient appliances.

                        Explanation of Provision

    The provision provides a credit for 2006 and 2007 for the 
eligible production of certain energy-efficient dishwashers, 
clothes washers and refrigerators. The credit applies to 
appliances produced after December 31, 2005 and prior to 
January 1, 2008.
    The credit for dishwashers applies to dishwashers produced 
in 2006 and 2007 that meet the Energy Star standards for 2007. 
The credit amount equals $3 multiplied by the percentage by 
which the efficiency of the 2007 standards exceeds that of the 
2005 standards. The credit may not exceed $100 per dishwasher.
    The credit for clothes washers equals $100 for clothes 
washers manufactured in 2006 or 2007 that meet the requirements 
of the Energy Star program which are in effect for clothes 
washers in 2007.
    The credit for refrigerators is based on energy savings and 
year of manufacture. The energy savings are determined relative 
to the energy conservation standards promulgated by the 
Department of Energy that took effect on July 1, 2001. 
Refrigerators manufactured in 2006 or 2007 (1) receive a $75 
credit if they achieve a 15 to 20 percent energy saving, (2) 
receive a $125 credit if they achieve a 20 to 25 percent energy 
saving, or (3) receive a $175 credit if they achieve at least a 
25 percent energy saving.
    Appliances eligible for the credit include only those that 
exceed the average amount of production from the 3 prior 
calendar years for each category of appliance. In the case of 
refrigerators, eligible production is production that exceeds 
110 percent of the average amount of production from the 3 
prior calendar years. A dishwasher is any a residential 
dishwasher subject to the energy conservation standards 
established by the Department of Energy. A refrigerator must be 
an automatic defrost refrigerator-freezer with an internal 
volume of at least 16.5 cubic feet to qualify for the credit. A 
clothes washer is any residential clothes washer, including a 
residential style coin operated washer, that satisfies the 
relevant efficiency standard.
    The taxpayer may not claim credits in excess of $75 million 
for all taxable years, and may not claim credits in excess of 
$20 million with respect to refrigerators eligible for the $75 
credit. Additionally, the credit allowed in a taxable year for 
all appliances may not exceed two percent of the average annual 
gross receipts of the taxpayer for the three taxable years 
preceding the taxable year in which the credit is determined.
    The credit is part of the general business credit.

                             Effective Date

    The credit applies to appliances produced after December 
31, 2005.

23. Credit for residential energy efficient property (sec. 1335 of the 
        Act and new sec. 25D of the Code)

                              Present Law

    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means any installation or modification primarily 
designed to reduce consumption of electricity or natural gas or 
to improve the management of energy demand with respect to a 
dwelling unit (sec. 136).
    There is no present-law credit for residential solar hot 
water, photovoltaic, or fuel cell property.

                           Reasons for Change

    The Congress recognizes that residential energy use 
represents a large share of national energy consumption, and 
accordingly believes that measures to encourage alternative 
energy sources for residential use have the potential to 
substantially reduce national reliance on traditional energy 
sources. The Congress believes that a tax credit for 
investments in solar energy sources and fuel cell power plants 
will help to achieve that goal. Furthermore, the Congress 
believes that the on-site generation of electricity will reduce 
the burden on the United States' electricity grid and on 
natural gas pipelines.

                     Explanation of Provision \84\

    The provision provides a personal tax credit for 2006 and 
2007 for the purchase of qualified photovoltaic property and 
qualified solar water heating property that is used exclusively 
for purposes other than heating swimming pools and hot tubs. 
The credit applies to property placed in service after December 
31, 2005 and prior to January 1, 2008. The credit is equal to 
30 percent of qualifying expenditures, with a maximum credit 
for each of these systems of property of $2,000. The provision 
also provides a 30 percent credit for the purchase of qualified 
fuel cell power plants. The credit for any fuel cell may not 
exceed $500 for each 0.5 kilowatt of capacity.
---------------------------------------------------------------------------
     \84\ The provision was subsequently extended and modified in 
Division A, section 206 of the Tax Relief and Health Care Act of 2006, 
Pub. L. No. 109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    Qualifying solar water heating property means an 
expenditure for property to heat water for use in a dwelling 
unit located in the United States and used as a residence if at 
least half of the energy used by such property for such purpose 
is derived from the sun. Qualified photovoltaic property is 
property that uses solar energy to generate electricity for use 
in a dwelling unit. A qualified fuel cell power plant is an 
integrated system comprised of a fuel cell stack assembly and 
associated balance of plant components that (1) converts a fuel 
into electricity using electrochemical means, (2) has an 
electricity-only generation efficiency of greater than 30 
percent, and (3) generates at least 0.5 kilowatts of 
electricity. The qualified fuel cell power plant must be 
installed on or in connection with a dwelling unit located in 
the United States and used by the taxpayer as a principal 
residence.
    The credit is nonrefundable, and the depreciable basis of 
the property is reduced by the amount of the credit. 
Expenditures for labor costs allocable to onsite preparation, 
assembly, or original installation of property eligible for the 
credit are eligible expenditures.
    Special proration rules apply in the case of jointly owned 
property, condominiums, and tenant-stockholders in cooperative 
housing corporations. If less than 80 percent of the property 
is used for nonbusiness purposes, only that portion of 
expenditures that is used for nonbusiness purposes is taken 
into account.

                             Effective Date

    The credit applies to property placed in service after 
December 31, 2005.

24. Credit for business installation of qualified fuel cells and 
        stationary microturbine power plants (sec. 1336 of the Act and 
        sec. 48 of the Code)

                              Present Law

    A 10-percent business energy investment tax credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy investment tax credit is a component of 
the general business credit. The general business credit 
generally may not exceed the excess of the taxpayer's net 
income tax over the greater of (1) the tentative minimum tax or 
(2) 25 percent of net regular tax liability in excess of 
$25,000. A general business credit in excess of the tax 
limitation generally may be carried back one year and carried 
forward up to 20 years.
    There is no present-law credit for fuel cell or 
microturbine power plant property.

                           Reasons for Change

    The Congress believes that investments in qualified fuel 
cell power plants represent a promising means to produce 
electricity through non-polluting means and from 
nonconventional energy sources. Furthermore, the on-site 
generation of electricity provided by fuel cell power plants 
will reduce reliance on the United States' electricity grid. 
The Congress believes that providing a tax credit for 
investment in qualified fuel cell power plants will encourage 
investments in such systems.

                     Explanation of Provision \85\

    The provision provides a 30 percent business energy credit 
for the purchase of qualified fuel cell power plants for 
businesses for 2006 and 2007. A qualified fuel cell power plant 
is an integrated system composed of a fuel cell stack assembly 
and associated balance of plant components that (1) converts a 
fuel into electricity using electrochemical means, (2) has an 
electricity-only generation efficiency of greater than 30 
percent, and (3) generates at least 0.5 kilowatts of 
electricity. The credit for any fuel cell may not exceed $500 
for each 0.5 kilowatts of capacity.
---------------------------------------------------------------------------
    \85\ The provision was subsequently extended in Division A, section 
207 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    Additionally, the provision provides a 10 percent credit 
for the purchase of qualifying stationary microturbine power 
plants. A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components that 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency and power factors. Such system must have an 
electricity-only generation efficiency of not less that 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts. The credit is limited to 
the lesser of 10 percent of the basis of the property or $200 
for each kilowatt of capacity.
    Additionally, for purposes of the fuel cell and 
microturbine credits, and only in the case of 
telecommunications companies, the provision removes the 
present-law section 48 restriction that would prevent 
telecommunication companies from claiming the new credit due to 
their status as public utilities.
    The credit is nonrefundable. The taxpayer's basis in the 
property is reduced by the amount of the credit claimed.

                             Effective Date

    The credit applies to periods after December 31, 2005, for 
property placed in service in taxable years ending after 
December 31, 2005, under rules similar to rules of section 
48(m) of the Internal Revenue Code of 1986 (as in effect on the 
day before the date of enactment of the Revenue Reconciliation 
Act of 1990).

25. Business solar investment tax credit (sec. 1337 of the Act and sec. 
        48 of the Code)

                              Present Law

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of so much of the net regular tax 
liability as exceeds $25,000 or (2) the tentative minimum tax. 
An unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).

                     Explanation of Provision \86\

    The provision increases the 10-percent credit to 30 percent 
in the case of solar energy property. Additionally, the 
provision provides that equipment that uses fiber-optic 
distributed sunlight to illuminate the inside of a structure is 
solar energy property eligible for the 30-percent credit. These 
two provisions apply for 2006 and 2007. The provision provides 
that property used to generate energy for the purposes of 
heating a swimming pool is not eligible solar energy property.
---------------------------------------------------------------------------
    \86\ The provision was subsequently extended in Division A, section 
207 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------

                             Effective Date

    The provision with respect to the heating of swimming pools 
applies to periods after December 31, 2005. The increase in the 
credit rate and the provision related to fiber-optic 
distributed sunlight applies to periods after December 31, 
2005, for property placed in service in taxable years ending 
after December 31, 2005, under rules similar to rules of 
section 48(m) of the Internal Revenue Code of 1986 (as in 
effect on the day before the date of enactment of the Revenue 
Reconciliation Act of 1990).

26. Alternative technology vehicle credits (secs. 1341 and 1348 of the 
        Act, sec. 179A of the Code, and new sec. 30B of the Code)

                              Present Law

    Certain costs of qualified clean-fuel vehicle property may 
be expensed and deducted when such property is placed in 
service (sec. 179A). Qualified clean-fuel vehicle property 
includes motor vehicles that use certain clean-burning fuels 
(natural gas, liquefied natural gas, liquefied petroleum gas, 
hydrogen, electricity and any other fuel at least 85 percent of 
which is methanol, ethanol, any other alcohol or ether).\87\ 
The maximum amount of the deduction is $50,000 for a truck or 
van with a gross vehicle weight over 26,000 pounds or a bus 
with seating capacities of at least 20 adults; $5,000 in the 
case of a truck or van with a gross vehicle weight between 
10,000 and 26,000 pounds; and $2,000 in the case of any other 
motor vehicle. Qualified electric vehicles do not qualify for 
the clean-fuel vehicle deduction. The deduction is reduced to 
25 percent of the otherwise allowable deduction in 2006 and is 
unavailable for purchases after December 31, 2006.
---------------------------------------------------------------------------
    \87\ A hybrid-electric vehicle may qualify as a clean-fuel vehicle 
under present law. Seven different automobile makes (multiple model 
years for some makes of automobile) qualify for the present-law 
deduction.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that automobile transportation in the 
United States in the 21st century can, and should, be less 
polluting of the air and more fuel efficient. The Congress 
recognizes that various technological solutions may lead to 
this result. The Congress observes that consumer demand is 
increasing for those hybrid motor vehicles already available in 
the marketplace. The Congress believes that tax benefits to 
lower the cost of certain other new automotive technology 
alternatives can help lower consumer resistance to these 
technologies and speed the nation's advancement down the 
highway to cleaner, more efficient, automobiles. The Congress 
observes that certain diesel technologies offering fuel and 
environmental benefits are already available in Europe and 
believes it is important for this technology to be developed 
for the North American marketplace.

                        Explanation of Provision


In general

    The provision provides a credit for each new qualified fuel 
cell vehicle, each new qualified advanced lean burn technology 
motor vehicle, each new qualified hybrid motor vehicle, and 
each new qualified alternative fuel motor vehicle placed in 
service by the taxpayer during the taxable year. The credit is 
available to vehicles placed in service after December 31, 
2005, and, in the case of qualified fuel cell motor vehicles, 
before January 1, 2015; in the case of qualified hybrid motor 
vehicles that are automobiles and light trucks and in the case 
of advanced lean-burn technology vehicles, before January 1, 
2011; in the case of qualified hybrid motor vehicles that 
medium and heavy trucks, before January 1, 2010; and in the 
case of qualified alternative fuel motor vehicles, before 
January 1, 2011.
    In general, the credit is allowed to the vehicle owner, 
including the lessor of a vehicle subject to a lease. If the 
use of the vehicle is described in paragraphs (3) or (4) of 
section 50(b) (relating to use by tax-exempts, governments, and 
foreign persons) and is not subject to a lease, the seller of 
the vehicle may claim the credit so long as the seller clearly 
discloses to the user in a document the amount that is 
allowable as a credit. A vehicle must be used predominantly in 
the United States to qualify for the credit.

Fuel cell vehicles

    A qualifying fuel cell vehicle is a motor vehicle that is 
propelled by power derived from one or more cells which convert 
chemical energy directly into electricity by combining oxygen 
with hydrogen fuel which is stored on board the vehicle and may 
or may not require reformation prior to use. A qualifying fuel 
cell vehicle must be purchased before January 1, 2015. The 
amount of credit for the purchase of a fuel cell vehicle is 
determined by a base credit amount that depends upon the weight 
class of the vehicle and, in the case of automobiles or light 
trucks, an additional credit amount that depends upon the rated 
fuel economy of the vehicle compared to a base fuel economy. 
For these purposes the base fuel economy is the 2002 model year 
city fuel economy rating for vehicles of various weight classes 
(see below). Table 2, below, shows the proposed base credit 
amounts.

           Table 2.--Base Credit Amount for Fuel Cell Vehicles
------------------------------------------------------------------------
                                                               Credit
           Vehicle gross weight rating in pounds               amount
------------------------------------------------------------------------
Vehicle  8,500............................................       $8,000
8,500 < vehicle  14,000...................................      $10,000
14,000 < vehicle  26,000..................................      $20,000
26,000 < vehicle..........................................      $40,000
------------------------------------------------------------------------

    In the case of a fuel cell vehicle weighing less than 8,500 
pounds and placed in service after December 31, 2009, the 
$8,000 amount in Table 2, above is reduced to $4,000.
    Table 3, below, shows the additional credits for passenger 
automobiles or light trucks.

           Table 3.--Credit for Qualifying Fuel Cell Vehicles
------------------------------------------------------------------------
                                     If fuel economy of the fuel cell
                                                vehicle is:
             Credit              ---------------------------------------
                                       At least          but less than
------------------------------------------------------------------------
$1,000..........................  150% of base fuel   175% of base fuel
                                   economy.            economy
$1,500..........................  175% of base fuel   200% of base fuel
                                   economy.            economy
$2,000..........................  200% of base fuel   225% of base fuel
                                   economy.            economy
$2,500..........................  225% of base fuel   250% of base fuel
                                   economy.            economy
$3,000..........................  250% of base fuel   275% of base fuel
                                   economy.            economy
$3,500..........................  275% of base fuel   300% of base fuel
                                   economy.            economy
$4,000..........................         300% of base fuel economy
------------------------------------------------------------------------

Hybrid vehicles and advanced lean-burn technology vehicles

            Qualifying hybrid vehicle
    A qualifying hybrid vehicle is a motor vehicle that draws 
propulsion energy from on- board sources of stored energy which 
include both an internal combustion engine or heat engine using 
combustible fuel and a rechargeable energy storage system 
(e.g., batteries). A qualifying hybrid motor vehicle must be 
placed in service before January 1, 2011 (January 1, 2010 in 
the case of a hybrid motor vehicle weighing more than 8,500 
pounds).

Hybrid vehicles that are automobiles and light trucks

    In the case of an automobile or light truck (vehicles 
weighing 8,500 pounds or less), the amount of credit for the 
purchase of a hybrid vehicle is the sum of two components: a 
fuel economy credit amount that varies with the rated fuel 
economy of the vehicle compared to a 2002 model year standard 
and a conservation credit based on the estimated lifetime fuel 
savings of a qualifying vehicle compared to a comparable 2002 
model year vehicle. A qualifying hybrid automobile or light 
truck must have a maximum available power from the rechargeable 
energy storage system of at least four percent. In addition, 
the vehicle must meet or exceed certain EPA emissions 
standards. For a vehicle with a gross vehicle weight rating of 
6,000 pounds or less the applicable emissions standards are the 
Bin 5 Tier II emissions standards. For a vehicle with a gross 
vehicle weight rating greater than 6,000 pounds and less than 
or equal to 8,500 pounds, the applicable emissions standards 
are the Bin 8 Tier II emissions standards.
    Table 4, below, shows the fuel economy credit available to 
a hybrid passenger automobile or light truck whose fuel economy 
(on a gasoline gallon equivalent basis) exceeds that of a base 
fuel economy.

                      Table 4.--Fuel Economy Credit
------------------------------------------------------------------------
                           If fuel economy of the hybrid vehicle is:
                     ---------------------------------------------------
                              at least                but less than
------------------------------------------------------------------------
$400................  125% of base fuel         150% of base fuel
                       economy.                  economy
$800................  150% of base fuel         175% of base fuel
                       economy.                  economy
$1,200..............  175% of base fuel         200% of base fuel
                       economy.                  economy
$1,600..............  200% of base fuel         225% of base fuel
                       economy.                  economy
$2,000..............  225% of base fuel         250% of base fuel
                       economy.                  economy
$2,400..............  250% of base fuel
                       economy.
------------------------------------------------------------------------

    Table 5, below, shows the conservation credit.

                      Table 5.--Conservation Credit
------------------------------------------------------------------------
                                                            Conservation
              Estimated lifetime fuel savings                  amount
------------------------------------------------------------------------
At least 1,200 but less than 1,800........................         $250
At least 1,800 but less than 2,400........................         $500
At least 2,400 but less than 3,000........................         $750
At least 3,000............................................       $1,000
------------------------------------------------------------------------

            Advanced lean-burn technology motor vehicles
    The amount of credit for the purchase of an advanced lean 
burn technology motor vehicle is the sum of two components: a 
fuel economy credit amount that varies with the rated fuel 
economy of the vehicle compared to a 2002 model year standard 
as described in Table 4, above, and a conservation credit based 
on the estimated lifetime fuel savings of a qualifying vehicle 
compared to a comparable 2002 model year vehicle as described 
in Table 5, above. The amounts of the credits are determined 
after an adjustment is made to account for the different BTU 
content of gasoline and the fuel utilized by the lean-burn 
technology motor vehicle.
    A qualifying advanced lean burn technology motor vehicle is 
a passenger automobile or a light truck that incorporates 
direct injection, achieves at least 125 percent of the 2002 
model year city fuel economy, and for 2004 and later model 
vehicles meets or exceeds certain Environmental Protection 
Agency emissions standards. For a vehicle with a gross vehicle 
weight rating of 6,000 pounds or less the applicable emissions 
standards are the Bin 5 Tier II emissions standards. For a 
vehicle with a gross vehicle weight rating greater than 6,000 
pounds and less than or equal to 8,500 pounds, the applicable 
emissions standards are the Bin 8 Tier II emissions standards. 
A qualifying advanced lean burn technology motor vehicle must 
be placed in service before January 1, 2011.
            Limitation on number of qualified hybrid and advanced lean-
                    burn technology motor vehicles eligible for the 
                    credit
    There is a limitation on the number of qualified hybrid 
motor vehicles and advanced lean-burn technology motor vehicles 
sold by each manufacturer of such vehicles that are eligible 
for the credit. Taxpayers may claim the full amount of the 
allowable credit up to the end of the first calendar quarter 
after the quarter in which the manufacturer records the 
60,000th hybrid and advanced lean-burn technology motor vehicle 
sale occurring after December 31, 2005. Taxpayers may claim one 
half of the otherwise allowable credit during the two calendar 
quarters subsequent to the first quarter after the manufacturer 
has recorded its 60,000th such sale. In the third and fourth 
calendar quarters subsequent to the first quarter after the 
manufacturer has recorded its 60,000th such sale, the taxpayer 
may claim one quarter of the otherwise allowable credit.
    Thus, for example, summing the sales of qualifying hybrid 
motor vehicles of all weight classes and all sales of 
qualifying advanced lean-burn technology motor vehicles, if a 
manufacturer records the sale of its 60,000th qualified vehicle 
in February of 2007, taxpayers purchasing such vehicles from 
the manufacturer may claim the full amount of the credit on 
their purchases of qualifying vehicles through June 30, 2007. 
For the period July 1, 2007, through December 31, 2007, 
taxpayers may claim one half of the otherwise allowable credit 
on purchases of qualifying vehicles of the manufacturer. For 
the period January 1, 2008, through June 30, 2008, taxpayers 
may claim one quarter of the otherwise allowable credit on the 
purchases of qualifying vehicles of the manufacturer. After 
June 30, 2008, no credit may be claimed for purchases of hybrid 
motor vehicles or advanced lean-burn technology motor vehicles 
sold by the manufacturer.
            Hybrid vehicles that are medium and heavy trucks
    In the case of a qualifying hybrid motor vehicle weighing 
more than 8,500 pounds, the amount of credit is determined by 
the estimated increase in fuel economy and the incremental cost 
of the hybrid vehicle compared to a comparable vehicle powered 
solely by a gasoline or diesel internal combustion engine and 
that is comparable in weight, size, and use of the vehicle. For 
a vehicle that achieves a fuel economy increase of at least 30 
percent but less than 40 percent, the credit is equal to 20 
percent of the incremental cost of the hybrid vehicle. For a 
vehicle that achieves a fuel economy increase of at least 40 
percent but less than 50 percent, the credit is equal to 30 
percent of the incremental cost of the hybrid vehicle. For a 
vehicle that achieves a fuel economy increase of 50 percent or 
more, the credit is equal to 40 percent of the incremental cost 
of the hybrid vehicle.
    The credit is subject to certain maximum applicable 
incremental cost amounts. For a qualifying hybrid motor vehicle 
weighing more than 8,500 pounds but not more than 14,000 
pounds, the maximum allowable incremental cost amount is 
$7,500. For a qualifying hybrid motor vehicle weighing more 
than 14,000 pounds but not more than 26,000 pounds, the maximum 
allowable incremental cost amount is $15,000. For a qualifying 
hybrid motor vehicle weighing more than 26,000 pounds, the 
maximum allowable incremental cost amount is $30,000.
    A qualifying hybrid motor vehicle weighing more than 8,500 
pounds but not more than 14,000 pounds must have a maximum 
available power from the rechargeable energy storage system of 
at least 10 percent. A qualifying hybrid vehicle weighing more 
than 14,000 pounds must have a maximum available power from the 
rechargeable energy storage system of at least 15 percent.\88\
---------------------------------------------------------------------------
    \88\ In the case of such heavy-duty hybrid motor vehicles, the 
percentage of maximum available power is computed by dividing the 
maximum power available from the rechargeable energy storage system 
during a standard 10-second pulse power test, divided by the vehicle's 
total traction power. A vehicle's total traction power is the sum of 
the peak power from the rechargeable energy storage system and the heat 
(e.g., internal combustion or diesel) engine's peak power. If the 
rechargeable energy storage system is the sole means by which the 
vehicle can be driven, then the total traction power is the peak power 
of the rechargeable energy storage system.
---------------------------------------------------------------------------

Alternative fuel vehicle

    The credit for the purchase of a new alternative fuel 
vehicle is 50 percent of the incremental cost of such vehicle, 
plus an additional 30 percent if the vehicle meets certain 
emissions standards, but not more than between $4,000 and 
$32,000 depending upon the weight of the vehicle. To be 
eligible for the credit, a qualifying alternative fuel vehicle 
must be purchased before January 1, 2011. Table 6, below, shows 
the maximum permitted incremental cost for the purpose of 
calculating the credit for alternative fuel vehicles by vehicle 
weight class.

     Table 6.--Maximum Allowable Incremental Cost for Calculation of
                     Alternative Fuel Vehicle Credit
------------------------------------------------------------------------
                                                       Maximum allowable
        Vehicle gross weight rating in pounds           incremental cost
------------------------------------------------------------------------
Vehicle  8,500.......................................             $5,000
8,500 < vehicle  14,000..............................            $10,000
14,000 < vehicle  26,000.............................            $25,000
26,000 < vehicle.....................................            $40,000
------------------------------------------------------------------------

    Alternative fuels comprise compressed natural gas, 
liquefied natural gas, liquefied petroleum gas, hydrogen, and 
any liquid fuel that is at least 85 percent methanol. 
Qualifying alternative fuel motor vehicles are vehicles that 
operate only on qualifying alternative fuels and are incapable 
of operating on gasoline or diesel (except in the extent 
gasoline or diesel fuel is part of a qualified mixed fuel, 
described below).
    Certain mixed fuel vehicles, that is vehicles that use a 
combination of an alternative fuel and a petroleum-based fuel, 
are eligible for a reduced credit. If the vehicle operates on a 
mixed fuel that is at least 75 percent alternative fuel, the 
vehicle is eligible for 70 percent of the otherwise allowable 
alternative fuel vehicle credit. If the vehicle operates on a 
mixed fuel that is at least 90 percent alternative fuel, the 
vehicle is eligible for 90 percent of the otherwise allowable 
alternative fuel vehicle credit.

Base fuel economy

    The base fuel economy is the 2002 model year city fuel 
economy for vehicles by inertia weight class by vehicle type. 
The ``vehicle inertia weight class'' is that defined in 
regulations prescribed by the Environmental Protection Agency 
for purposes of Title II of the Clean Air Act. Table 7, below, 
shows the 2002 model year city fuel economy for vehicles by 
type and by inertia weight class.

               Table 7.--2002 Model Year City Fuel Economy
------------------------------------------------------------------------
                                                Passenger
                                               automobile    Light truck
     Vehicle inertia weight class pounds       (miles per    (miles per
                                                 gallon)       gallon)
------------------------------------------------------------------------
1,500.......................................         45.2          39.4
1,750.......................................         45.2          39.4
2,000.......................................         39.6          35.2
2,250.......................................         35.2          31.8
2,500.......................................         31.7          29.0
2,750.......................................         28.8          26.8
3,000.......................................         26.4          24.9
3,500.......................................         22.6          21.8
4,000.......................................         19.8          19.4
4,500.......................................         17.6          17.6
5,000.......................................         15.9          16.1
5,500.......................................         14.4          14.8
6,000.......................................         13.2          13.7
6,500.......................................         12.2          12.8
7,000.......................................         11.3          12.1
8,500.......................................         11.3          12.1
------------------------------------------------------------------------

Other rules

    The portion of the credit attributable to vehicles of a 
character subject to an allowance for depreciation is treated 
as a portion of the general business credit; the remainder of 
the credit is allowable to the extent of the excess of the 
regular tax (reduced by certain other credits) over the 
alternative minimum tax for the taxable year.

Termination of Code section 179A

    The provision provides that section 179A sunsets after 
December 31, 2005.

                             Effective Date

    The provision applies to vehicles placed in service after 
December 31, 2005,

27. Credit for installation of alternative fuel refueling property 
        (sec. 1342 of the Act and new sec. 30C of the Code)

                              Present Law

    Clean-fuel vehicle refueling property may be expensed and 
deducted when such property is placed in service (sec. 179A). 
Clean-fuel vehicle refueling property comprises property for 
the storage or dispensing of a clean-burning fuel, if the 
storage or dispensing is the point at which the fuel is 
delivered into the fuel tank of a motor vehicle. Clean-fuel 
vehicle refueling property also includes property for the 
recharging of electric vehicles, but only if the property is 
located at a point where the electric vehicle is recharged. Up 
to $100,000 of such property at each location owned by the 
taxpayer may be expensed with respect to that location. The 
deduction is unavailable for costs incurred after December 31, 
2006.
    For the purpose of sec. 179A clean fuels comprise natural 
gas, liquefied natural gas, liquefied petroleum gas, hydrogen, 
electricity, and any other fuel at least 85 percent of which is 
methanol, ethanol, or any other alcohol or ether.

                        Explanation of Provision

    The provision permits taxpayers to claim a 30-percent 
credit for the cost of installing clean-fuel vehicle refueling 
property to be used in a trade or business of the taxpayer or 
installed at the principal residence of the taxpayer. In the 
case of retail clean-fuel vehicle refueling property the 
allowable credit may not exceed $30,000. In the case of 
residential clean-fuel vehicle refueling property the allowable 
credit may not exceed $1,000. The credit is available for non-
hydrogen refueling property from 2006 through 2009 and for 
hydrogen refueling property from 2006 through 2014.
    Under the provision clean fuels are any fuel at least 85 
percent of the volume of which consists of ethanol, natural 
gas, compressed natural gas, liquefied natural gas, liquefied 
petroleum gas, and hydrogen and any mixture of diesel fuel and 
biodiesel containing at least 20 percent biodiesel.
    The taxpayer's basis in the property is reduced by the 
amount of the credit and the taxpayer may not claim deductions 
under section 179A with respect to property for which the 
credit is claimed. In the case of refueling property installed 
on property owned or used by a tax-exempt person, the taxpayer 
that installs the property may claim the credit. To be eligible 
for the credit, the property must be placed in service before 
January 1, 2010, in the case non-hydrogen refueling property 
and January 1, 2015, in the case of hydrogen refueling 
property.
    The portion of the credit attributable to property of a 
character subject to an allowance for depreciation is treated 
as a portion of the general business credit; the remainder of 
the credit is allowable to the extent of the excess of the 
regular tax (reduced by certain other credits) over the 
alternative minimum tax for the taxable year.

                             Effective Date

    The provision is effective for property placed in service 
December 31, 2005.

28. Diesel-water fuel emulsion (sec. 1343 of the Act and sec. 4081 of 
        the Code)

                              Present Law

    A 24.3-cents-per-gallon excise tax is imposed on diesel 
fuel to finance the Highway Trust Fund.\89\ Gasoline and most 
special motor fuels are subject to tax at 18.3 cents per gallon 
for the Trust Fund.\90\
---------------------------------------------------------------------------
    \89\ Sec. 4081(a)(2)(A)(iii).
    \90\ Secs. 4081(a)(2)(A)(i) and 4041(a)(2)(B)(i).
---------------------------------------------------------------------------
    The tax rate for certain special motor fuels is determined, 
on an energy equivalent basis, as follows: \91\
---------------------------------------------------------------------------
    \91\ See sec. 4041(a)(2)(B)(ii) and (iii), sec. 4041(a)(3) and sec. 
4041(m)(1)(A).




Liquefied petroleum gas (propane)....  13.6 cents per gallon.
Liquefied natural gas................  11.9 cents per gallon.
Methanol derived from natural gas....  9.15 cents per gallon.
Compressed natural gas...............  48.54 cents per MCF.


    No special tax rate is provided for diesel fuel blended 
with water to form a diesel-water fuel emulsion.

                           Reasons for Change

    Because diesel-water emulsion fuels have fewer British 
thermal units (``Btu'') per gallon, larger quantities must be 
purchased to travel the same number of miles as regular diesel 
fuel. A Btu-based tax rate better correlates highway use and 
tax paid. The Congress further understands that the diesel-
water emulsion fuel may reduce emissions of air pollutants 
relative to regular diesel fuel and believes that the Btu-based 
rate, by removing a tax disadvantage to use of the fuel, will 
be beneficial to the environment.

                        Explanation of Provision

    A special tax rate of 19.7 cents per gallon is provided for 
diesel fuel blended with water into a diesel-water fuel 
emulsion to reflect the reduced Btu content per gallon 
resulting from the water. Emulsion fuels eligible for the 
special rate must consist of not more than 86 percent diesel 
(and other minor chemical additives to enhance combustion) and 
at least 14 percent water. The emulsion addition must be 
registered by a United States manufacturer with the 
Environmental Protection Agency pursuant to section 211 of the 
Clean Air Act (as in effect on March 31, 2003). In addition, 
the person claiming entitlement to the special rate of tax must 
be registered with the Secretary. A refund of the difference 
between the regular rate (24.3 cents per gallon) and the 
incentive rate (19.7 cents per gallon) is available to the 
extent tax-paid diesel is used to produce a qualifying emulsion 
diesel fuel. The provision clarifies that claims for refund 
based on the incentive rate may be filed quarterly if such 
person can claim at least $750. If the person cannot claim at 
least $750 at the end of quarter, the amount can be carried 
over to the next quarter to determine if the person can claim 
at least $750. If the person cannot claim at least $750 at the 
end of the taxable year, the person must claim a credit on the 
person's income tax return.
    Anyone who separates the diesel fuel from the diesel-water 
fuel emulsion on which a reduced rate of tax was imposed is 
treated as a refiner of the fuel and is liable for the 
difference between the amount of tax on the latest removal of 
the separated fuel and the amount of tax that was imposed upon 
the pre-mixture removal.

                             Effective Date

    The provision is effective on January 1, 2006.

29. Extend excise tax provisions and income tax credit for biodiesel 
        and create similar incentives for renewable diesel (secs. 1344 
        and 1346 of the Act, and secs. 40A, 6426 and 6427 of the Code)

                              Present Law


Biodiesel income tax credit

            Overview
    The Code provides an income tax credit for biodiesel and 
qualified biodiesel mixtures, the biodiesel fuels credit.\92\ 
The biodiesel fuels credit is the sum of the biodiesel mixture 
credit plus the biodiesel credit and is treated as a general 
business credit. The amount of the biodiesel fuels credit is 
includable in gross income. The biodiesel fuels credit is 
coordinated to take into account benefits from the biodiesel 
excise tax credit and payment provisions discussed below. The 
credit may not be carried back to a taxable year ending before 
or on December 31, 2004. The provision does not apply to fuel 
sold or used after December 31, 2006.
---------------------------------------------------------------------------
    \92\ Sec. 40A.
---------------------------------------------------------------------------
    Biodiesel is monoalkyl esters of long chain fatty acids 
derived from plant or animal matter that meet (1) the 
registration requirements established by the Environmental 
Protection Agency under section 211 of the Clean Air Act and 
(2) the requirements of the American Society of Testing and 
Materials D6751. Agri-biodiesel is biodiesel derived solely 
from virgin oils including oils from corn, soybeans, sunflower 
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, 
flaxseeds, rice bran, mustard seeds, or animal fats.
    Biodiesel may be taken into account for purposes of the 
credit only if the taxpayer obtains a certification (in such 
form and manner as prescribed by the Secretary) from the 
producer or importer of the biodiesel which identifies the 
product produced and the percentage of the biodiesel and agri-
biodiesel in the product.
            Biodiesel mixture credit
    The biodiesel mixture credit is 50 cents for each gallon of 
biodiesel used by the taxpayer in the production of a qualified 
biodiesel mixture. For agri-biodiesel, the credit is $1.00 per 
gallon. A qualified biodiesel mixture is a mixture of biodiesel 
and diesel fuel that is (1) sold by the taxpayer producing such 
mixture to any person for use as a fuel, or (2) is used as a 
fuel by the taxpayer producing such mixture. The sale or use 
must be in the trade or business of the taxpayer and is to be 
taken into account for the taxable year in which such sale or 
use occurs. No credit is allowed with respect to any casual 
off-farm production of a qualified biodiesel mixture.
            Biodiesel credit
    The biodiesel credit is 50 cents for each gallon of 
biodiesel which is not in a mixture with diesel fuel (100 
percent biodiesel or B-100) and which during the taxable year 
is (1) used by the taxpayer as a fuel in a trade or business or 
(2) sold by the taxpayer at retail to a person and placed in 
the fuel tank of such person's vehicle. For agri-biodiesel, the 
credit is $1.00 per gallon.

Biodiesel mixture excise tax credit

    The Code also provides an excise tax credit for biodiesel 
mixtures.\93\ The credit is 50 cents for each gallon of 
biodiesel used by the taxpayer in producing a biodiesel mixture 
for sale or use in a trade or business of the taxpayer. In the 
case of agri-biodiesel, the credit is $1.00 per gallon. A 
biodiesel mixture is a mixture of biodiesel and diesel fuel 
that (1) is sold by the taxpayer producing such mixture to any 
person for use as a fuel, or (2) is used as a fuel by the 
taxpayer producing such mixture. No credit is allowed unless 
the taxpayer obtains a certification (in such form and manner 
as prescribed by the Secretary) from the producer of the 
biodiesel that identifies the product produced and the 
percentage of biodiesel and agri-biodiesel in the product.\94\
---------------------------------------------------------------------------
    \93\ Sec. 6426(c).
    \94\ Sec. 6426(c)(4).
---------------------------------------------------------------------------
    The credit is not available for any sale or use for any 
period after December 31, 2006. This excise tax credit is 
coordinated with the income tax credit for biodiesel such that 
credit for the same biodiesel cannot be claimed for both income 
and excise tax purposes.

Payments with respect to biodiesel fuel mixtures

    If any person produces a biodiesel fuel mixture in such 
person's trade or business, the Secretary is to pay such person 
an amount equal to the biodiesel mixture credit.\95\ To the 
extent the biodiesel fuel mixture credit exceeds the section 
4081 liability of a person, the Secretary is to pay such person 
an amount equal to the biodiesel fuel mixture credit with 
respect to such mixture.\96\ Thus, if the person has no section 
4081 liability, the credit is refundable. The payment provision 
does not apply with respect to biodiesel fuel mixtures sold or 
used after December 31, 2006.
---------------------------------------------------------------------------
    \95\ Sec. 6427(e).
    \96\ Sec. 6427(e)(1) and 6327(e)(2). See also, Internal Revenue 
Service, Notice 2005-4, 2005-2 I.R.B. 289 (December 15, 2004).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the income tax credit, excise tax 
credit, and payment provisions through December 31, 2008.
    The provision also creates a similar income tax credit, 
excise tax credit and payment system for renewable diesel; 
however, there is no credit for small producers of renewable 
diesel. Renewable diesel means diesel fuel derived from biomass 
(as defined in section 29(c)(3), thus excluding petroleum oil, 
natural gas, coal, or any product thereof) using a thermal 
depolymerization process.\97\ Renewable diesel must meet the 
requirements of the American Society of Testing and Materials 
D975 or D396, and meet the registration requirements for fuels 
and fuel additives established by the Environmental Protection 
Agency under section 211 of the Clean Air Act (42 USC 7545). 
The amount of the credit for renewable diesel is $1.00 per 
gallon. In addition, all producers of renewable diesel must be 
registered with the Secretary.
---------------------------------------------------------------------------
    \97\ Thermal depolymerization is a process for the reduction of 
complex organic materials (such as turkey offal) into light crude oil. 
The process uses pressure and heat to decompose long chain polymers of 
hydrogen, oxygen, and carbon into short-chain petroleum hydrocarbons 
with a maximum length of around 18 carbons.
---------------------------------------------------------------------------

                             Effective Date

    The extension of incentives is effective on the date of 
enactment. The renewable diesel provisions are effective for 
fuel sold or used after December 31, 2005.

30. Small agri-biodiesel producer credit (sec. 1345 of the Act and sec. 
        40A of the Code)

                              Present Law


Biodiesel income tax credit

    The Code provides an income tax credit for biodiesel and 
qualified biodiesel mixtures, the biodiesel fuels credit. The 
biodiesel fuels credit is the sum of the biodiesel mixture 
credit plus the biodiesel credit and is treated as a general 
business credit. The amount of the biodiesel fuels credit is 
includable in gross income. The biodiesel fuels credit is 
coordinated to take into account benefits from the biodiesel 
excise tax credit and payment provisions created by the Act. 
The credit may not be carried back to a taxable year ending 
before or on December 31, 2004. The provision does not apply to 
fuel sold or used after December 31, 2006.
    Biodiesel is monoalkyl esters of long chain fatty acids 
derived from plant or animal matter that meet (1) the 
registration requirements established by the Environmental 
Protection Agency under section 211 of the Clean Air Act and 
(2) the requirements of the American Society of Testing and 
Materials D6751. Agri-biodiesel is biodiesel derived solely 
from virgin oils including oils from corn, soybeans, sunflower 
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, 
flaxseeds, rice bran, mustard seeds, or animal fats.
    Biodiesel may be taken into account for purposes of the 
credit only if the taxpayer obtains a certification (in such 
form and manner as prescribed by the Secretary) from the 
producer or importer of the biodiesel which identifies the 
product produced and the percentage of the biodiesel and agri-
biodiesel in the product.
    The biodiesel income tax credit does not contain any 
incentives for small producers.

Small ethanol producer credit

    Present law provides several tax benefits for ethanol and 
methanol produced from renewable sources that are used as a 
motor fuel or that are blended with other fuels (e.g., 
gasoline) for such a use. In the case of ethanol, a separate 
10-cents-per-gallon credit for up to 15 million gallons per 
year for small producers, defined generally as persons whose 
production does not exceed 15 million gallons per year and 
whose production capacity does not exceed 30 million gallons 
per year. The ethanol must (1) be sold by such producer to 
another person (a) for use by such other person in the 
production of al qualified alcohol fuel mixture in such 
person's trade or business (other than casual off-farm 
production), (b) for use by such other person as a fuel in a 
trade or business, or, (c) who sells such ethanol at retail to 
another person and places such ethanol in the fuel tank of such 
other person; or (2) used by the producer for any purpose 
described in (a), (b), or (c). A cooperative may pass through 
the small ethanol producer credit to its patrons. The alcohol 
fuels tax credits are includible in income. This credit may be 
used to offset alternative minimum tax liability. The credit is 
a treated as a general business credit, subject to the ordering 
rules and carryforward/carryback rules that apply to business 
credits generally. The alcohol fuels tax credit is scheduled to 
expire after December 31, 2010.

                        Explanation of Provision

    The provision adds to the biodiesel fuels credit a small 
agri-biodiesel producer credit for taxable years ending after 
date of enactment. The credit is a 10-cents-per-gallon credit 
for up to 15 million gallons of agri-biodiesel produced by 
small producers, defined generally as persons whose agri-
biodiesel production capacity does not exceed 60 million 
gallons per year. The agri-biodiesel must (1) be sold by such 
producer to another person (a) for use by such other person in 
the production of a qualified biodiesel mixture in such 
person's trade or business (other than casual off-farm 
production), (b) for use by such other person as a fuel in a 
trade or business, or, (c) who sells such agri-biodiesel at 
retail to another person and places such ethanol in the fuel 
tank of such other person; or (2) used by the producer for any 
purpose described in (a), (b), or (c).
    Like the small ethanol producer credit, cooperatives may 
elect to pass through any portion of the small agri-biodiesel 
producer credit to its patrons. The credit is apportioned pro 
rata among patrons of the cooperative on the basis of the 
quantity or value of the business done with or for such patrons 
for the taxable year. An election to pass through the credit is 
made on a timely filed return for the taxable year and, once 
made, is irrevocable for such taxable year.
    The amount of the credit not apportioned to patrons is 
included in the organization's credit for the taxable year of 
the organization. The amount of the credit apportioned to 
patrons is to be included in the patron's credit for the first 
taxable year of each patron ending on or after the last day of 
the payment period for the taxable year of the organization, 
or, if earlier, for the taxable year of each patron ending on 
or after the date on which the patron receives notice from the 
cooperative of the apportionment.
    If the amount of the cooperative's credit for a taxable 
year is less than the amount of the credit shown on the 
organization's tax return for such taxable year, an amount 
equal to the excess of the reduction in the credit over the 
amount not apportioned to patrons for the taxable year is 
treated as an increase in the cooperative's tax. The increase 
is not treated as tax imposed for purposes of determining the 
amount of any tax credit or for purposes of the alternative 
minimum tax.
    The small producer credit sunsets after December 31, 2008, 
along with the other biodiesel incentives.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment (August 8, 2005).

31. Modifications to small ethanol producer credit (sec. 1347 of the 
        Act and sec. 40 of the Code)

                              Present Law

    Present law provides several tax benefits for ethanol and 
methanol that are used as a fuel or that are blended with other 
fuels (e.g., gasoline) for such a use. For example, the Code 
provides an income tax credit for alcohol and alcohol-blended 
fuels. In the case of ethanol, the Code provides an additional 
10-cents-per-gallon credit for small producers, defined 
generally as persons whose production capacity does not exceed 
30 million gallons per year.\98\
---------------------------------------------------------------------------
    \98\ Sec. 40(b)(4) and (g)(1). The alcohol fuels tax credit (which 
is comprised of the small ethanol producer credit, the alcohol mixture 
credit, and the alcohol credit) is scheduled to expire after December 
31, 2010 (sec. 40(e)(1)).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the limit on production capacity 
for small ethanol producers from 30 million gallons to 60 
million gallons per year.
    The provision also provides that an election to pass the 
small ethanol producer credit through to cooperative patrons is 
not valid unless the cooperative provides patrons timely 
written notice of the apportionment of the credit. Under the 
provision, notice is timely if mailed to patrons during the 
payment period described in section 1382(d) of the Code.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment (August 8, 2005).

32. Modify research credit for research relating to energy (sec. 1351 
        of the Act and sec. 41 of the Code)

                              Present Law


General rule

    Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenses for a taxable year exceed its base amount for that 
year. The research tax credit is scheduled to expire and 
generally will not apply to amounts paid or incurred after 
December 31, 2005.
    A 20-percent research tax credit also applies to the excess 
of (1) 100 percent of corporate cash expenses (including grants 
or contributions) paid for basic research conducted by 
universities (and certain nonprofit scientific research 
organizations) over (2) the sum of (a) the greater of two 
minimum basic research floors plus (b) an amount reflecting any 
decrease in nonresearch giving to universities by the 
corporation as compared to such giving during a fixed- base 
period, as adjusted for inflation. This separate credit 
computation is commonly referred to as the university basic 
research credit (see sec. 41(e)).

Alternative incremental research credit regime

    Taxpayers are allowed to elect an alternative incremental 
research credit regime. If a taxpayer elects to be subject to 
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base 
percentage otherwise applicable under present law) and the 
credit rate likewise is reduced. Under the alternative credit 
regime, a credit rate of 2.65 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of one percent 
(i.e., the base amount equals one percent of the taxpayer's 
average gross receipts for the four preceding years) but do not 
exceed a base amount computed by using a fixed-base percentage 
of 1.5 percent. A credit rate of 3.2 percent applies to the 
extent that a taxpayer's current-year research expenses exceed 
a base amount computed by using a fixed-base percentage of 1.5 
percent but do not exceed a base amount computed by using a 
fixed-base percentage of two percent. A credit rate of 3.75 
percent applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of two percent. An election to be subject 
to this alternative incremental credit regime may be made for 
any taxable year beginning after June 30, 1996, and such an 
election applies to that taxable year and all subsequent years 
unless revoked with the consent of the Secretary of the 
Treasury.

Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consist of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses). In the case of amounts paid to a research 
consortium, 75 percent of amounts paid for qualified research 
is treated as qualified research expenses eligible for the 
research credit (rather than 65 percent under the general rule) 
if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such 
qualified research is conducted by the consortium on behalf of 
the taxpayer and one or more persons not related to the 
taxpayer.
    To be eligible for the credit, the research must not only 
satisfy the requirements of present-law section 174 for the 
deduction for research expenses, but must be undertaken for the 
purpose of discovering information that is technological in 
nature, the application of which is intended to be useful in 
the development of a new or improved business component of the 
taxpayer, and substantially all of the activities of which must 
constitute elements of a process of experimentation for 
functional aspects, performance, reliability, or quality of a 
business component.

                     Explanation of Provision \99\

---------------------------------------------------------------------------
    \99\ The provision was subsequently modified in Division A, section 
104 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    The provision modifies the present-law research credit as 
it applies to qualified energy research. In particular, the 
provision provides that the taxpayer may claim a credit equal 
to 20 percent of the taxpayer's expenditures on qualified 
energy research undertaken by an energy research consortium. 
The amount of credit claimed is determined only by regard to 
such expenditures by the taxpayer within the taxable year. 
Unlike the general rule for the research credit, the 20-percent 
credit for research by an energy research consortium applies to 
all such expenditures, not only those in excess of a base 
amount however determined. An energy research consortium is a 
qualified research consortium as under present law that also is 
organized and operated primarily to conduct energy research and 
development in the public interest and to which at least five 
unrelated persons paid, or incurred amounts, to such 
organization within the calendar year. In addition, to be a 
qualified energy research consortium no single person shall pay 
or incur more than 50 percent of the total amounts received by 
the research consortium during the calendar year.
    The provision also provides that 100 percent of amounts 
paid or incurred by the taxpayer to eligible small businesses, 
universities, and Federal laboratories for qualified energy 
research would constitute qualified research expenses as 
contract research expenses, rather than 65 percent of qualified 
research expenditures allowed under present law. An eligible 
small business for this purpose is a business in which the 
taxpayer does not own a 50 percent or greater interest and the 
business has employed, on average, 500 or fewer employees in 
the two preceding calendar years.
    Qualified energy research expenditures are expenditures 
that would otherwise qualify for the research credit under 
present law and relate to the production, supply, and 
conservation of energy, including otherwise qualifying research 
expenditures related to alternative energy sources or the use 
of alternative energy sources. For example, research relating 
to hydrogen fuel cell vehicles would qualify under this 
provision, if the research expenditures otherwise satisfy the 
criteria of present-law sec. 41. Likewise, otherwise qualifying 
research undertaken to improve the energy-efficiency of 
lighting would qualify under this provision.

                             Effective Date

    The provision is effective for amounts paid or incurred 
after the date of enactment in taxable years ending after such 
date.

33. National Academy of Sciences study (sec. 1352 of the Act)

                              Present Law

    Present law does not provide for a study of the health, 
environmental, security, and infrastructure external costs that 
may be associated with the use and production of energy.

                        Explanation of Provision

    The provision requires the Secretary of Treasury to enter 
into an agreement, within 60 days, with the National Academy of 
Sciences to conduct a study to define and evaluate the health, 
environmental, security, and infrastructure external costs and 
benefits associated with production and consumption of energy 
that are not or may not be fully incorporated into the price of 
such activities, or into the Federal tax or fee or other 
applicable revenue measure related to such activities. The 
results of the study are to be submitted to Congress within two 
years of the agreement.

                             Effective Date

    The provision is effective on the date of enactment (August 
8, 2005).

34. Recycling study (sec. 1353 of the Act)

                              Present Law

    Present law does not provide for a study to determine and 
quantify the energy savings achieved through the recycling of 
glass, paper, plastic, steel, aluminum, and electronic devices, 
not to identify tax incentives which would encourage recycling 
of such material.

                        Explanation of Provision

    The provision directs the Secretary of the Treasury, in 
consultation with the Secretary of Energy, to conduct a study 
to determine and quantify the energy savings achieved through 
the recycling of glass, paper, plastic, steel, aluminum, and 
electronic devices, and to identify tax incentives that would 
encourage recycling of such material. The study is to be 
submitted to Congress within one year of the date of enactment 
(August 8, 2005).

                             Effective Date

    The provision is effective on the date of enactment (August 
8, 2005).

35. Oil Spill Liability Trust Fund (sec. 1361 of the Act and sec. 4611 
        of the Code)

                              Present Law

    Between December 31, 1989, and January 1, 1995, a five-
cent-per-barrel tax was imposed on crude oil received at a 
United States refinery and imported petroleum products received 
for consumption, use, or warehousing, and any domestically 
produced crude oil that is exported from the United States if, 
before exportation, no taxes were imposed on the crude oil. The 
tax was effective only if the unobligated balance in the Fund 
was less than $1 billion. Taxes received were credited to the 
Oil Spill Liability Trust Fund. The Oil Spill Liability Trust 
Fund is used for several purposes, including the payment of 
costs for responding to and removing oil spills.\100\
---------------------------------------------------------------------------
    \100\ Sec. 9509(c)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reinstates the Oil Spill Liability Trust Fund 
tax. The tax applies on April 1, 2006, or if later, the last 
day of any calendar quarter for which the Secretary estimates 
that, as of the close of that quarter, the unobligated balance 
in the Oil Spill Liability Trust Fund is less than $2 billion.
    The tax will be suspended during a calendar quarter if the 
Secretary estimates that, as of the close of the preceding 
calendar quarter, the unobligated balance in the Oil Spill 
Liability Trust Fund exceeds $2.7 billion. The tax terminates 
after December 31, 2014.

                             Effective Date

    The provision is effective on the date of enactment (August 
8, 2005).

36. Leaking Underground Storage Tank Trust Fund (sec. 1362 of the Act 
        and secs. 4041, 4081(d), 4082, 9508, and new sec. 6430 of the 
        Code)

                              Present Law

    The Code imposes an excise tax, generally at a rate of 0.1 
cents per gallon, on gasoline, diesel, kerosene, and special 
motor fuels (other than liquefied petroleum gas and liquefied 
natural gas).\101\ The taxes are deposited in the Leaking 
Underground Storage Tank (``LUST'') Trust Fund. The tax expires 
on October 1, 2005.
---------------------------------------------------------------------------
    \101\ For qualified methanol and ethanol fuel the rate is 0.05 
cents per gallon (sec. 4041(b)(2)(A)(ii)). Qualified methanol or 
ethanol fuel is any liquid at least 85 percent of which consists of 
methanol, ethanol or other alcohol produced from coal (including peat) 
(sec. 4041(b)(2)(B)).
---------------------------------------------------------------------------
    Diesel fuel and kerosene that is to be used for a 
nontaxable purpose will not be taxed upon removal from the 
terminal if it is dyed to indicate its nontaxable purpose.
    The Code requires the LUST Trust Fund to reimburse the 
General Fund for certain refund and credit claims related to 
the nontaxable use of fuel (only to the extent attributable to 
the LUST Trust fund financing rate).\102\
---------------------------------------------------------------------------
    \102\ Specifically, section 9508(c)(2) requires the LUST Trust Fund 
to reimburse the General Fund from time to time for claims paid 
pursuant to sections 6420 (relating to amounts paid in respect of 
gasoline used on farms), section 6421 (relating to amounts paid in 
respect of gasoline used for certain nonhighway purposes or by local 
transit systems), and section 6427 (relating to fuels not used for 
taxable purposes) and income tax credits allowed under section 34 for 
the purposes previously mentioned. No income tax credit is allowed for 
any amount payable under section 6421 or 6427 if a claim for such 
amount is timely filed and is payable under such section (sec. 34(b)).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the LUST Trust Fund tax is extended at 
the current rate through September 30, 2011. Further, all fuel, 
including dyed fuel, is subject to the LUST tax and no refund 
or claim for payment in the case of otherwise nontaxable use 
(other than exports) is permitted for such fuel. Under the Act, 
the LUST Trust Fund is no longer required to reimburse the 
General Fund for claims and credits related to the nontaxable 
use of fuel.

                             Effective Date

    The provision is generally effective for fuel entered, 
removed or sold after September 30, 2005. The extension of the 
trust fund tax is effective October 1, 2005.

37. Modify recapture of section 197 amortization (sec. 1363 of the Act 
        and sec. 1245 of the Code)

                              Present Law

    Taxpayers are entitled to recover the cost of amortizable 
section 197 intangibles using the straight-line method of 
amortization over a uniform life of fifteen years.\103\ With 
certain exceptions, amortizable section 197 intangibles 
generally are purchased intangibles held by a taxpayer in the 
conduct of a business.\104\
---------------------------------------------------------------------------
    \103\ Sec. 197(a)
    \104\ Sec. 197(c)
---------------------------------------------------------------------------
    Gain on the sale of depreciable property must be recaptured 
as ordinary income to the extent of depreciation deductions 
previously claimed,\105\ and the recapture amount is computed 
separately for each item of property. Section 197 intangibles, 
because they are treated as property of a character subject to 
the allowance for depreciation,\106\ are subject to these 
recapture rules.
---------------------------------------------------------------------------
    \105\ Sec. 1245.
    \106\ Sec. 197(f)(7).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, if multiple section 197 intangibles 
are sold (or otherwise disposed of) in a single transaction or 
series of transactions, the seller must calculate recapture as 
if all of the section 197 intangibles were a single asset. 
Thus, any gain on the sale (or other disposition) of the 
intangibles is recaptured as ordinary income to the extent of 
ordinary depreciation deductions previously claimed on any of 
the section 197 intangibles.
    The following example illustrates present law and the 
provision:
    Example.--In year 1, a taxpayer acquires two section 197 
intangible assets for a total of $45. Asset A is assigned a 
cost basis of $15 and asset B is assigned a cost basis of $30. 
The allocation is irrelevant for amortization purposes, as the 
taxpayer will be entitled to a total of $3 per year ($45 
divided by 15 years).
    In year 6, the basis of A is $10 and the basis of B is $20. 
Taxpayer sells the assets for an aggregate sale price of $45, 
resulting in gain of $15. The character of this gain depends on 
the recapture amount, which depends in turn on the relative 
sales prices of the individual assets. Taxpayer has claimed $5 
of amortization, and therefore has $5 of recapture potential, 
with respect to A. Taxpayer has claimed $10 of amortization, 
and therefore has $10 of recapture potential, with respect to 
B.
    Under present law, if the sale proceeds are allocated $15 
to A and $30 to B, the gain on assets A and B will be $5 and 
$10, respectively. These amounts match the recapture potential 
for each asset, so the full amount of the gain will be 
recaptured as ordinary income. However, if the sale proceeds 
instead are allocated $25 to A and $20 to B, the full $15 gain 
will be recognized with respect to A, and only $5 (full 
recapture potential with respect to A) will be recaptured as 
ordinary income. The remaining $10 of gain attributable to A 
will be treated as capital gain. No gain (and thus no 
recapture) will be recognized with respect to Asset B, and only 
$5 of the $15 recapture potential is recognized.
    Under the Act, the taxpayer calculates recapture as if 
assets A and B were a single asset. For purposes of the 
calculation, the proceeds are $45 and the gain is $15. Because 
a total of $15 of amortization has been claimed with respect to 
assets A and B, the full $15 gain is recaptured as ordinary 
income.

                             Effective Date

    The provision is effective for dispositions of property 
after the date of enactment (August 8, 2005).

38. Clarification of tire excise tax (sec. 1364 of the Act and sec. 
        4072(e) of the Code)

                              Present Law

    The Code imposes an excise tax on highway tires with a 
rated load capacity exceeding 3,500 pounds, generally at a rate 
of 9.45 cents per 10 pounds of excess. Biasply tires and super 
single tires are taxed at a rate of 4.725 cents for each 10 
pounds of rated load capacity exceeding 3,500 pounds. A super 
single tire is a single tire greater than 13 inches in cross 
section width designed to replace two tires in a dual fitment.

                        Explanation of Provision

    The provision clarifies that the definition of super single 
tire does not include tires designed to serve as steering 
tires. It is understood that steering axles are not equipped 
with a dual fitment. Therefore, tires classified as steering 
tires are not ``designed to replace two tires in a dual 
fitment.'' To the extent there is any perceived ambiguity in 
the present law definition, the provision clarifies that 
steering tires are not included within the definition of super 
single tire eligible for the special rate of tax. Under the 
provision, a ``super single tire'' is a single tire greater 
than 13 inches in cross section width designed to replace two 
tires in a dual fitment, but such term does not include any 
tire designed for steering.
    With respect to the one-year period beginning on January 1, 
2006, the IRS is required to report to the Congress on the 
amount of tax collected during such period for each class of 
taxable tire (e.g. biasply, super single, or other) and the 
number of tires in each such class on which tax is imposed 
during such period. The report must be submitted no later than 
July 1, 2007. The IRS is directed to revise the Form 720, 
Quarterly Federal Excise Tax Return, to collect the information 
necessary to prepare the report. The report is also to include 
total tire tax collections for an equivalent one-year period 
preceding the date of enactment of the American Jobs Creation 
Act of 2004.

                             Effective Date

    The provision regarding the definition of a super single 
tire is effective as if included in section 869 of the American 
Jobs Creation Act of 2004. The study requirement is effective 
on the date of enactment (August 8, 2005).

PART SIX: SAFE, ACCOUNTABLE, FLEXIBLE, EFFICIENT TRANSPORTATION EQUITY 
           ACT: A LEGACY FOR USERS (PUBLIC LAW 109-59) \107\

    TITLE XI--HIGHWAY REAUTHORIZATION AND EXCISE TAX SIMPLIFICATION

                     I. TRUST FUND REAUTHORIZATION

  A. Extension of Highway Trust Fund and Aquatic Resources Trust Fund 
 Expenditure Authority and Related Taxes (secs. 11101 and 11102 of the 
 Act, and secs. 4041, 4051, 4071, 4081, 4221, 4481, 4482, 4483, 6412, 
                      9503, and 9504 of the Code)

              Present-Law Highway Trust Fund Excise Taxes

In general
    Six separate excise taxes are imposed to finance the 
Federal Highway Trust Fund program. Three of these taxes are 
imposed on highway motor fuels. Historically, fuel taxes have 
accounted for 90 percent of Highway Trust Fund receipts. The 
remaining three are a retail sales tax on heavy highway 
vehicles, a manufacturers' excise tax on heavy vehicle tires, 
and an annual use tax on heavy vehicles. The six taxes are 
summarized below. Except for 4.3 cents per gallon of the 
Highway Trust Fund fuels tax rates, and a portion of the tax on 
certain special motor fuels, all of these taxes, with the 
exception of the heavy vehicle use tax, are scheduled to expire 
after September 30, 2005.\108\ The 4.3-cents-per-gallon portion 
of the fuels tax rates is permanent.\109\ The six taxes are 
summarized below.
---------------------------------------------------------------------------
    \107\ H.R. 3. The House Committee on Ways and Means reported H.R. 
996 on March 8, 2005 (H.R. Rep. No. 109-13). The text of H.R. 996 was 
added to H.R. 3 at title X. The House passed H.R. 3 on March 10, 2005. 
The Senate Committee on Finance reported S. 1230 on June 14, 2005 (S. 
Rep. No. 109-82). The text of that bill as modified was added as title 
V of H.R. 3. The Senate passed H.R. 3 with an amendment on May 17, 
2005. The conference report was filed on July 28, 2005 (H.R. Rep. No. 
109-203) and was passed by the House on July 29, 2005, and the Senate 
on July 29, 2005. The President signed the bill on August 10, 2005.
    \108\ The heavy vehicle use tax expires after September 30, 2006. 
Sec. 4481(f).
    \109\ This portion of the tax rates was enacted as a deficit 
reduction measure in 1993. Receipts from it were retained in the 
General Fund until 1997 legislation provided for their transfer to the 
Highway Trust Fund.
---------------------------------------------------------------------------
Highway motor fuels taxes
    The Highway Trust Fund motor fuels tax rates are as 
follows: \110\
---------------------------------------------------------------------------
    \110\ These fuels also are subject to an additional 0.1-cent-per-
gallon excise tax to fund the Leaking Underground Storage Tank 
(``LUST'') Trust Fund (secs. 4041(d) and 4081(a)(2)(B)).

Gasoline..................................  18.3 cents per gallon.
Diesel fuel (including transmix) and        24.3 cents per gallon.
 kerosene.................................
Special motor fuels.......................  18.3 cents per gallon,
                                             generally.\111\


            Exemptions
    Present law includes numerous exemptions (including partial 
exemptions) for specified uses of taxable fuels or for 
specified fuels. Because the gasoline and diesel fuel taxes 
generally are imposed before the end use of the fuel is known, 
many exemptions are realized through refunds to end users of 
tax paid by a taxpayer earlier in the distribution chain. 
Exempt uses and fuels include:

    \111\ The statutory rate for certain special motor fuels is 
determined on an energy equivalent basis, as follows:
    Liquefied petroleum gas (propane): 13.6 cents per gallon. (3.2 
cents after September 30, 2005).
    Liquefied natural gas: 11.9 cents per gallon. (2.8 cents after 
September 30, 2005).
    Methanol derived from natural gas: 9.15 cents per gallon. (2.15 
cents after September 30, 2005).
    Compressed natural gas: 48.54 cents per MCF.
    See secs. 4041(a)(2), 4041(a)(3) and 4041(m).
    The compressed natural gas tax rate is equivalent only to 4.3 cents 
per gallon of the rate imposed on gasoline and other special motor 
fuels rather than the full 18.3-cents-per-gallon rate. The tax rate for 
the other special motor fuels is equivalent to the full 18.3-cents-per-
gallon gasoline and special motor fuels tax rate.
---------------------------------------------------------------------------
           use in State and local government and 
        nonprofit educational organization highway vehicles;
           use in buses engaged in transporting 
        students and employees of schools;
           use in local mass transit buses having a 
        seating capacity of at least 20 adults (not including 
        the driver) when the buses operate under contract with 
        (or are subsidized by) a State or local governmental 
        unit to furnish the transportation; and
           use in intercity buses serving the general 
        public along scheduled routes. (Such use is totally 
        exempt from the gasoline excise tax and is exempt from 
        17 cents per gallon of the diesel fuel tax.)
    In addition, fuels used in off-highway business use or on a 
farm for farming purposes generally are exempt from these motor 
fuels taxes.\112\ The Highway Trust Fund does not receive 
excise taxes imposed on fuel used in off-highway activities. 
Rather, when tax is imposed on off-highway use fuel 
consumption, it is used to finance other Trust Funds (e.g., 
motorboat gasoline and special motor fuel taxes from non-
business off-highway use dedicated to the Aquatic Resources 
Trust Fund) or is retained in the General Fund (e.g., tax on 
diesel fuel used in trains).
---------------------------------------------------------------------------
    \112\ Diesel fuel is the same fuel (#2 fuel oil) as that commonly 
used as home heating oil. Fuel oil used as heating oil is not subject 
to the Federal excise tax.
---------------------------------------------------------------------------
Non-fuel Highway Trust Fund excise taxes
    In addition to the highway motor fuels excise tax revenues, 
the Highway Trust Fund receives revenues produced by three 
excise taxes imposed exclusively on heavy highway vehicles or 
tires. These taxes are:
           12-percent excise tax imposed on the first 
        retail sale of heavy highway vehicles, tractors, and 
        trailers (generally, trucks having a gross vehicle 
        weight in excess of 33,000 pounds and trailers having 
        such a weight in excess of 26,000 pounds) (sec. 4051);
           an excise tax imposed on highway tires with 
        a rated load capacity exceeding 3,500 pounds, generally 
        at a rate of 9.45 cents per 10 pounds of excess (sec. 
        4071(a)); and
           an annual use tax imposed on highway 
        vehicles having a taxable gross weight of 55,000 pounds 
        or more (sec. 4481). (The maximum rate for this tax is 
        $550 per year, imposed on vehicles having a taxable 
        gross weight over 75,000 pounds.)

         Present-Law Highway Trust Fund Expenditure Provisions

In general
    Dedication of excise tax revenues to the Highway Trust Fund 
and expenditures from the Highway Trust Fund are governed by 
provisions of the Code.\113\ The Code authorizes expenditures 
(subject to appropriations) from the Highway Trust Fund through 
July 30, 2005, for the purposes provided in authorizing 
legislation, as in effect on the date of enactment of the 
Surface Transportation Extension Act of 2005, Part V.\114\
---------------------------------------------------------------------------
    \113\ Sec. 9503. The Highway Trust Fund statutory provisions were 
placed in the Internal Revenue Code in 1982.
    \114\ The expenditure authority was later extended by Pub. L. No. 
109-42, the ``Surface Transportation Extension Act of 2005, Part VI'', 
signed into law by the President on July 30, 2005.
---------------------------------------------------------------------------
    Under present law, revenues from the highway excise taxes 
generally are dedicated to the Highway Trust Fund. However, 
under section 9503(c)(2), certain transfers are made from the 
Highway Trust Fund into the General Fund, relating to amounts 
paid in respect of gasoline used on farms, amounts paid in 
respect of gasoline used for certain nonhighway purposes or by 
local transit systems, amounts relating to fuels not used for 
taxable purposes, and income tax credits for certain uses of 
fuels.

Highway Trust Fund expenditure purposes

    The Highway Trust Fund has a subaccount for Mass Transit. 
Both the Trust Fund and its sub-account are funding sources for 
specific programs. Neither the Highway Trust Fund nor its Mass 
Transit sub-account receive interest on unexpended balances. 
The Highway Fund's Mass Transit sub-account receives 2.86 cents 
per gallon of highway motor fuels excise taxes.
    Highway Trust Fund expenditure purposes have been revised 
with each authorization Act enacted since establishment of the 
Highway Trust Fund in 1956. In general, expenditures authorized 
under those Acts (as the Acts were in effect on the date of 
enactment of the most recent such authorizing Act) are approved 
by the Code as Highway Trust Fund expenditure purposes.\115\ 
Thus, no Highway Trust Fund monies may be spent for a purpose 
not approved by the tax-writing committees of Congress. The 
Code provides that authority to make expenditures from the 
Highway Trust Fund expires after July 30, 2005. Thus, no 
Highway Trust Fund expenditures may occur after July 30, 
2005.\116\
---------------------------------------------------------------------------
    \115\ The authorizing Acts which currently are referenced in the 
Highway Trust Fund provisions of the Code are: the Highway Revenue Act 
of 1956; Titles I and II of the Surface Transportation Assistance Act 
of 1982; the Surface Transportation and Uniform Relocation Act of 1987; 
the Intermodal Surface Transportation Efficiency Act of 1991; and the 
Transportation Equity Act for the 21st Century; the Surface 
Transportation Extension Act of 2003; the Surface Transportation 
Extension Act of 2004; the Surface Transportation Extension Act of 2004 
Part II; the Surface Transportation Extension Act of 2004, Part III; 
the Surface Transportation Extension Act of 2004, Part IV; the Surface 
Transportation Extension Act of 2004, Part V; the Surface 
Transportation Extension Act of 2005; the Surface Transportation 
Extension Act of 2005, Part II; the Surface Transportation Extension 
Act of 2005, Part III; the Surface Transportation Extension Act of 
2005, Part IV; and the Surface Transportation Extension Act of 2005, 
Part V.
    \116\ The expenditure authority was later extended by Pub. L. No. 
109-42, the ``Surface Transportation Extension Act of 2005, Part VI'', 
signed into law by the President on July 30, 2005.
---------------------------------------------------------------------------

Anti-deficit provisions (the ``Harry Byrd rule'')

    Highway projects can take multiple years to complete. As a 
result, the Highway Trust Fund carries positive unexpended 
balances, a large portion of which are reserved to cover 
existing obligations.\117\ Highway Trust Fund spending is 
limited by anti-deficit provisions internal to the Highway 
Trust Fund, the so-called ``Harry Byrd rule.'' Generally, the 
Harry Byrd rule prevents the further obligation of Federal 
highway funds if the current and expected balances of the 
Highway Trust Fund fall below a certain level. The rule 
requires the Treasury Department to determine, on a quarterly 
basis, the amount (if any) by which unfunded highway 
authorizations exceed projected net Highway Trust Fund tax 
receipts for the 24-month period beginning at the close of each 
fiscal year.\118\ Similar rules apply to unfunded Mass Transit 
Account authorizations. If unfunded authorizations exceed 
projected 24-month receipts, apportionments to the States for 
specified programs funded by the relevant Trust Fund Account 
are to be reduced proportionately. Because of the Harry Byrd 
rule, taxes dedicated to the Highway Trust Fund typically are 
scheduled to expire at least 24 months after current 
authorizing Acts.
---------------------------------------------------------------------------
    \117\ Congressional Research Service, RL 32226, Highway and Transit 
Program Reauthorization Legislation in the 2nd Session, 108th Congress 
(December 15, 2004) at CRS-12.
    \118\ Sec. 9503(d).
---------------------------------------------------------------------------
    The Surface Transportation Extension Act of 2003, created a 
temporary rule (through February 29, 2004) for purposes of the 
anti-deficit provisions of the Highway Trust Fund. For purposes 
of determining 24 months of projected revenues for the anti-
deficit provisions, the Secretary of the Treasury is instructed 
to treat each expiring provision relating to appropriations and 
transfers to the Highway Trust Fund to have been extended 
through the end of the 24-month period and to assume that the 
rate of tax during such 24-month period remains at the same 
rate in effect on the date of enactment of the provision. The 
temporary rule has been continuously extended since February 
29, 2004.\119\
---------------------------------------------------------------------------
    \119\ See, Part Four: Surface Transportation Act of 2005, Parts I-
VI, supra.
---------------------------------------------------------------------------

Limitations on transfers to the Highway Trust Fund

    The Code also contains a special enforcement provision to 
prevent expenditure of Highway Trust Fund monies for purposes 
not authorized in section 9503.\120\ Should such unapproved 
expenditures occur, no further excise tax receipts will be 
transferred to the Highway Trust Fund. Rather, the taxes will 
continue to be imposed with receipts being retained in the 
General Fund. This enforcement provision provides specifically 
that it applies not only to unauthorized expenditures under the 
current Code provisions, but also to expenditures pursuant to 
future legislation that does not amend section 9503's 
expenditure authorization provisions or otherwise authorize the 
expenditure as part of a revenue Act.
---------------------------------------------------------------------------
    \120\ Sec. 9503(b)(6).
---------------------------------------------------------------------------

Interrelationship of the Highway Trust Fund and the Aquatic Resources 
        Trust Fund

    The Aquatic Resources Trust Fund is funded by a portion of 
the receipts from the excise taxes imposed on motorboat 
gasoline and special motor fuels and on gasoline used as a fuel 
in the nonbusiness use of small-engine outdoor power equipment. 
A portion of these taxes are transferred into the Highway Trust 
Fund and then retransferred into the Aquatic Resources Trust 
Fund. As a result, transfers to the Aquatic Resources Trust 
Fund are governed in part by Highway Trust Fund 
provisions.\121\
---------------------------------------------------------------------------
    \121\ Secs. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
    A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats and on 
gasoline used as a fuel in the nonbusiness use of small-engine 
outdoor power equipment. Of this rate, 0.1 cent per gallon is 
dedicated to the Leaking Underground Storage Tank Trust Fund. 
Of the remaining 18.3 cents per gallon, 4.8 cents per gallon 
are retained in the General Fund. The balance of 13.5 cents per 
gallon is transferred to the Highway Trust Fund and then 
retransferred to the Aquatic Resources Trust Fund and the Land 
and Water Conservation Fund, as follows.
    The Aquatic Resources Trust Fund is comprised of two 
accounts, the Boat Safety Account and the Sport Fish 
Restoration Account. Motorboat fuel taxes, not exceeding $70 
million per year, are transferred to the Boat Safety Account. 
In addition, these transfers are subject to an overall annual 
limit equal to an amount that will not cause the Boat Safety 
Account to have an unobligated balance in excess of $70 
million. To the extent there are excess motorboat fuel taxes, 
the next $1 million per year of motorboat fuel taxes is 
transferred from the Highway Trust Fund to the Land and Water 
Conservation Fund provided for in Title I of the Land and Water 
Conservation Fund Act of 1965. The balance of the motorboat 
fuel taxes in the Highway Trust Fund is transferred to the 
Sport Fish Restoration Account.
    The Sport Fish Restoration Account also receives 13.5 cents 
per gallon of the small-engine fuel taxes from the Highway 
Trust Fund. This Account is also funded with receipts from an 
ad valorem manufacturers' excise tax on sport fishing 
equipment.
    The retention in the General Fund of 4.8 cents per gallon 
of taxes on fuel used in motorboats and in the nonbusiness use 
of small-engine outdoor power equipment expires with respect to 
taxes imposed after September 30, 2005.
    The expenditure authority for the Aquatic Resources Trust 
Fund expires after July 30, 2005.\122\
---------------------------------------------------------------------------
    \122\ The expenditure authority was later extended by Pub. L. No. 
109-42, the ``Surface Transportation Extension Act of 2005, Part VI'', 
signed into law by the President on July 30, 2005.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that highway and transit spending 
sustains and creates jobs, providing valuable new opportunities 
in communities where the availability of jobs is declining. In 
addition, a long-term reauthorization provides stability for 
State transportation programs dependent on Federal funds. Thus, 
the Congress believes it is appropriate to reauthorize Highway 
Trust Fund expenditures through September 30, 2009 in 
coordination with new transportation legislation and to extend 
current Federal taxes payable to the Highway Trust Fund through 
September 30, 2011.
    The Congress also believes that the full amount of excise 
taxes imposed on fuel used in motorboats and in the nonbusiness 
use of small-engine outdoor power equipment should not be 
retained in the General Fund and should instead be credited to 
the trust fund dedicated to the users who primarily bear such 
taxes. Fuel taxes imposed with respect to other uses are 
currently either dedicated to an appropriate fund or are being 
phased out. Therefore, the Congress believes that allowing the 
present-law General Fund retention of such taxes to expire as 
scheduled is consistent with the treatment of other fuel taxes.
    The provision modifies the Harry Byrd rule to require that 
Highway Account and Mass Transit Account (each separately) 
unpaid authorizations at the end of a fiscal year be less than 
or equal to the cash balance of the account at the end of the 
year plus the projected receipts for the next 48 months, rather 
than 24 months. Most highway projects are capital projects on 
which money is spent over a number of years. Given that highway 
projects, and therefore contract payments, may extend longer 
than 24 months, the Congress believes it is appropriate to 
extend the testing period to 48 months to better reflect that 
some existing obligations will be satisfied by using future tax 
receipts.

                        Explanation of Provision

    The expenditure authority for the Highway Trust Fund and 
Aquatic Resources Trust Fund is extended through September 29, 
2009 (after September 30, 2009, in the case of expenditures for 
administrative purposes, and expenditures from the Mass Transit 
Account).
    The Code provisions governing the purposes for which monies 
in the Highway Trust Fund may be spent are modified to include 
the new transportation legislation (Pub. L. 109-59). The 
provision also extends the motor fuel taxes and all three non-
fuel excise taxes at their current rates through September 30, 
2011.
    The provision also changes the Harry Byrd rule from a 24-
month to a 48-month receipt rule. Under the provision, the 
Harry Byrd rule is not triggered unless unfunded highway 
authorizations exceed projected net Highway Trust Fund tax 
receipts for the 48-month period beginning at the close of each 
fiscal year. For purposes of the 48-month rule, taxes are 
assumed extended beyond their expiration date.
    The provision does not extend the General Fund retention of 
taxes on fuel used in motorboats and in the nonbusiness use of 
small-engine outdoor power equipment.

                             Effective Date

    The provisions are effective on the date of enactment 
(August 10, 2005).

                II. EXCISE TAX REFORM AND SIMPLIFICATION

                        A. Highway Excise Taxes

1. Modify gas guzzler tax (sec. 11111 of the Act and sec. 4064 of the 
        Code)

                              Present Law

    Under present law, the Code imposes a tax (``the gas 
guzzler tax'') on automobiles that are manufactured primarily 
for use on public streets, roads, and highways and that are 
rated at 6,000 pounds unloaded gross vehicle weight or 
less.\123\ The tax applies to limousines without regard to the 
weight requirement. The tax is imposed on the sale by the 
manufacturer of each automobile of a model type with a fuel 
economy of 22.5 miles per gallon or less. The tax range begins 
at $1,000 and increases to $7,700 for models with a fuel 
economy less than 12.5 miles per gallon.
---------------------------------------------------------------------------
    \123\ Sec. 4064.
---------------------------------------------------------------------------
    Emergency vehicles and non-passenger automobiles are exempt 
from the tax. The Secretary of Transportation determines which 
vehicles are ``non-passenger'' automobiles, thereby exempting 
these vehicles from the gas guzzler tax based on regulations in 
effect on the date of enactment of the gas guzzler tax.\124\ 
Hence, vehicles defined in Title 49 C.F.R. sec. 523.5 (relating 
to light trucks) are exempt. These vehicles include those 
designed to transport property on an open bed (e.g., pick-up 
trucks) or provide greater cargo-carrying than passenger 
carrying volume including the expanded cargo-carrying space 
created through the removal of readily detachable seats (e.g., 
pick-up trucks, vans, and most minivans, sports utility 
vehicles and station wagons). Additional vehicles that meet the 
``non-passenger'' requirements are those with at least four of 
the following characteristics: (1) an angle of approach of not 
less than 28 degrees; (2) a breakover angle of not less than 14 
degrees; (3) a departure angle of not less than 20 degrees; (4) 
a running clearance of not less than 20 centimeters; and (5) 
front and rear axle clearances of not less than 18 centimeters 
each. These vehicles would include many sports utility 
vehicles.
---------------------------------------------------------------------------
    \124\ Sec. 4064(b)(1)(B).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress observes that limousines are the only class of 
vehicles weighing in excess of 6,000 pounds subject to the gas 
guzzler tax. The Congress believes that, as equipment essential 
to a commercial enterprise, the present-law application of the 
gas guzzler tax to such limousines is inappropriate.

                        Explanation of Provision

    The provision repeals the tax as it applies to limousines 
rated at greater than 6,000 pounds unloaded gross vehicle 
weight.

                             Effective Date

    The provision is effective on October 1, 2005.
2. Exclusion for tractors weighing 19,500 pounds or less from excise 
        tax on heavy trucks and trailers (sec. 11112 of the Act and 
        sec. 4051 of the Code)

                              Present Law

    A 12-percent excise tax is imposed on the first retail sale 
of automobile truck chassis and bodies, truck trailer and 
semitrailer chassis and bodies, and tractors of the kind 
chiefly used for highway transportation in combination with a 
trailer or semitrailer.\125\ The tax does not apply to 
automobile truck chassis and bodies suitable for use with a 
vehicle which has a gross vehicle weight of 33,000 pounds or 
less.\126\ The tax also does not apply to truck trailer and 
semitrailer chassis and bodies suitable for use with a trailer 
or semitrailer which has a gross vehicle weight of 26,000 
pounds or less.\127\ In general, tractors are subject to tax 
regardless of their gross vehicle weight.
---------------------------------------------------------------------------
    \125\ Sec. 4051(a)(1).
    \126\ Sec. 4051(a)(2).
    \127\ Sec. 4051(a)(3).
---------------------------------------------------------------------------
    Temporary Treasury regulations provide that ``tractor'' 
means a highway vehicle which is primarily designed to tow a 
vehicle, such as a trailer or semitrailer, but which does not 
carry cargo on the same chassis as the engine. The regulations 
presume that a vehicle equipped with air brakes and/or towing 
package is primarily designed as a tractor.\128\ The 
regulations further require an incomplete chassis cab to be 
treated as a tractor if it is equipped with any of the safety 
devices listed in the regulations, and require that it be 
treated as a truck if it is not equipped with any of the listed 
safety devices and the purchaser certifies in writing that the 
vehicle will not be equipped for use as a tractor.\129\
---------------------------------------------------------------------------
    \128\ Temp. Treas. Reg. sec. 145.4051-1(e)(1)(i)
    \129\ Temp. Treas. Reg. sec. 145.4051-1(e)(1)(ii).
---------------------------------------------------------------------------
    In Freightliner of Grand Rapids, Inc. v. U.S., the district 
court held that certain vehicles primarily designed to tow 
large RV trailers but which had some cargo carrying capacity on 
their chassis are properly characterized as tractors.\130\ The 
court also held that incomplete chassis cabs that do not 
include any of the listed safety devices are to be treated as 
tractors unless the purchaser certifies in writing that it will 
not equip the vehicles for use as tractors. Under the holding 
of this case, these types of vehicles are subject to tax 
regardless of their gross vehicle weight.
---------------------------------------------------------------------------
    \130\ 351 F.Supp.2d 718 (W.D. Mich. 2004).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision excludes from tax tractors that meet both of 
the following requirements. The tractor must have a gross 
vehicle weight of 19,500 pounds or less, and the gross combined 
weight (as determined by the Secretary) of the tractor if 
combined with a towed vehicle (such as trailer or semi-trailer) 
would not exceed 33,000 pounds. No inference is intended from 
this provision regarding the proper classification of vehicles 
as tractors or trucks.

                             Effective Date

    The provision is effective for sales after September 30, 
2005.
3. Volumetric excise tax credit for alternative fuels (sec. 11113 of 
        the Act and secs. 4041, 4101, 6426, and 6427 of the Code)

                              Present Law

    Under section 4081 of the Code, an excise tax is imposed 
upon (1) the removal of any taxable fuel from a refinery or 
terminal, (2) the entry of any taxable fuel into the United 
States, or (3) the sale of any taxable fuel to any person who 
is not registered with the IRS to receive untaxed fuel, unless 
there was a prior taxable removal or entry.\131\ The tax does 
not apply to any removal or entry of taxable fuel transferred 
in bulk by pipeline or vessel to a terminal or refinery if the 
person removing or entering the taxable fuel, the operator of 
such pipeline or vessel, and the operator of such terminal or 
refinery are registered with the Secretary.\132\ Section 4081 
also imposes an excise tax on taxable fuel removed or sold by 
the blender of the fuels.\133\ However, the blender is entitled 
to a credit on any tax previous paid if that person establishes 
the amount of such tax.\134\ A ``taxable fuel'' is gasoline, 
diesel fuel (including any liquid, other than gasoline, which 
is suitable for use as a fuel in a diesel-powered highway 
vehicle or train), and kerosene.\135\
---------------------------------------------------------------------------
    \131\ Sec. 4081(a)(1).
    \132\ Sec. 4081(a)(1)(B).
    \133\ Sec. 4081(b)(1). Blended taxable fuel is a taxable fuel that 
is produced outside the bulk transfer/terminal system by mixing 
taxpayer fuel with respect to which tax has been imposed under section 
4041(a)(1) or 4081(a) (other than taxable fuel for which a credit or 
payment has been allowed); and any other liquid on which tax has not 
been imposed under section 4081. Treas. Reg. sec. 48.4081-1(c)(i).
    \134\ Sec. 4081(b)(2).
    \135\ Sec. 4083(a).
---------------------------------------------------------------------------
    Diesel fuel and kerosene generally are taxed at 24.3 cents 
per gallon excise (aviation-grade kerosene at 21.8 cents per 
gallon). Gasoline is taxed at 18.3 cents per gallon and 
aviation gasoline is taxed at 19.3 cents per gallon.
    The Code imposes a backup retail tax for diesel fuel and 
kerosene not taxed under section 4081, and for special motor 
fuels.\136\ Under section 4041, tax is imposed on special motor 
fuels (any liquid other than gas oil, fuel oil or any product 
taxable under section 4081) when there is a taxable sale by any 
person to an owner, lessee or other operator of a motor vehicle 
or motorboat, for use as fuel in the motor vehicle or motorboat 
or used by any person as a fuel in a motor vehicle or motorboat 
unless there was a prior taxable sale.\137\
---------------------------------------------------------------------------
    \136\ Sec. 4041.
    \137\ Sec. 4041(a)(2).
---------------------------------------------------------------------------
    Most special motor fuels are subject to tax at 18.3 cents 
per gallon, however, certain special motor fuels and compressed 
natural gas are determined on an energy equivalent basis, as 
follows:

Liquefied petroleum gas (propane)....  13.6 cents per gallon.
Liquefied natural gas................  11.9 cents per gallon.
Methanol derived from petroleum or     9.15 cents per gallon.
 natural gas.
Compressed natural gas...............  48.54 cents per MCF.


    Liquid hydrogen is a special motor fuel for purposes of the 
tax on special motor fuels and is subject to a tax of 18.3 
cents per gallon.\138\ Compressed hydrogen gas used or sold as 
a fuel is not subject to tax.
---------------------------------------------------------------------------
    \138\ An additional 0.1 cent per gallon is imposed by section 
4041(d) for the Leaking Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
    Prior to the American Jobs Creation Act of 2004, gasohol 
and gasoline to be blended into gasohol was taxed at a reduced 
rate based on the amount of ethanol contained in the mixture 
(e.g., 10 percent, 7.7 percent or 5.5 percent alcohol in the 
mixture). The Act eliminated reduced rates of excise tax for 
most alcohol-blended fuels. In place of the reduced rates, the 
Act amended the Code to create two new excise tax credits: the 
alcohol fuel mixture credit and the biodiesel mixture 
credit.\139\ The sum of these credits may be taken against the 
tax imposed on taxable fuels (by section 4081). A person may 
also file a claim for payment equal to the amount of these 
credits for biodiesel or alcohol used to produce an eligible 
mixture.\140\ The credits and payments are paid out of the 
General Fund. If the alcohol is ethanol with a proof of 190 or 
greater, the credit or payment amount is 51 cents per gallon. 
For agri-biodiesel, the credit or payment amount is $1.00 per 
gallon; for biodiesel other than agri-biodiesel, the credit or 
payment amount is 50 cents per gallon. Under the Code's 
coordination rules, a claim may be taken only once with respect 
to any particular gallon of alcohol or biodiesel.
---------------------------------------------------------------------------
    \139\ Sec. 6426. The American Jobs Creation Act of 2004 also 
created an income tax credit for biodiesel and biodiesel mixtures. Sec. 
40A.
    \140\ Sec. 6427(e).
---------------------------------------------------------------------------
    No excise tax credit is available for the blending or sale 
of special motor fuels.

                        Explanation of Provision

    Under the provision, liquefied petroleum gas and P Series 
fuels (as defined by the Secretary of Energy under 42 U.S.C. 
sec. 13211(2)) are taxed at 18.3 cents per gallon under section 
4041. Compressed natural gas is taxed at 18.3 cents per energy 
equivalent of a gallon of gasoline. Liquefied natural gas, any 
liquid fuel derived from coal (other than ethanol or methanol) 
and liquid hydrocarbons derived from biomass are taxed at 24.3 
cents per gallon under section 4041. The Act does not change 
the tax treatment of hydrogen, liquefied hydrogen remains 
subject to the tax imposed by section 4041.
    In addition, the provision creates two new excise tax 
credits, the alternative fuel credit, and the alternative fuel 
mixture credit. For this purpose, the term ``alternative fuel'' 
means liquefied petroleum gas, P Series fuels (as defined by 
the Secretary of Energy under 42 U.S.C. sec. 13211(2)), 
compressed or liquefied natural gas, liquefied hydrogen, liquid 
fuel derived from coal through the Fisher-Tropsch process, and 
liquid hydrocarbons derived from biomass. Such term does not 
include ethanol, methanol, or biodiesel.
    The alternative fuel credit is allowed against section 4041 
liability and the alternative fuel mixture credit is allowed 
against section 4081 liability. Neither credit is allowed 
unless the taxpayer is registered with the Secretary. The 
alternative fuel credit is 50 cents per gallon of alternative 
fuel or gasoline gallon equivalents \141\ of nonliquid 
alternative fuel sold by the taxpayer for use as a motor fuel 
in a motor vehicle or motorboat, or so used by the taxpayer.
---------------------------------------------------------------------------
    \141\ ``Gasoline gallon equivalent'' means, with respect to any 
nonliquid alternative fuel, the amount of such fuel having a Btu 
content of 124,800 (higher heating value).
---------------------------------------------------------------------------
    The alternative fuel mixture credit is 50 cents per gallon 
of alternative fuel used in producing an alternative fuel 
mixture for sale or use in a trade or business of the taxpayer. 
The mixture must be sold by the taxpayer producing such mixture 
to any person for use as a fuel or used by the taxpayer for use 
as a fuel.\142\ The credits generally expire after September 
30, 2009. The provision also allows persons to file a claim for 
payment equal to the amount of the alternative fuel credit and 
alternative fuel mixture credits. These payment provisions 
generally also expire after September 30, 2009. With respect to 
liquefied hydrogen, the credit and payment provisions expire 
after September 30, 2014. Both credits and payments are made 
out of the General Fund. Under coordination rules, a claim for 
payment or credit may only be taken once with respect to any 
particular gallon or gasoline-gallon equivalent of alternative 
fuel.
---------------------------------------------------------------------------
    \142\ For example, the taxpayer produces fish oil in its trade or 
business. The taxpayer uses this fish oil to make a blend of 50 percent 
fish oil and 50 percent diesel fuel to run in a generator that is part 
of the taxpayer's trade or business. This use of the fish oil-diesel 
blend made by the taxpayer qualifies as use of an alternative fuel 
mixture for purposes of the requirement that the fuel be used in the 
blender's trade or business.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for any sale or use for any 
period after September 30, 2006.

                        B. Aquatic Excise Taxes


1. Eliminate Aquatic Resources Trust Fund and transform Sport Fish 
        Restoration Account (sec. 11115 of the Act and secs. 9503 and 
        9504 of the Code)

                              Present Law

    A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats, and on 
gasoline used as a fuel in the nonbusiness use of small-engine 
outdoor power equipment.\143\ Of this rate, 0.1 cent per gallon 
is dedicated to the Leaking Underground Storage Tank Trust 
Fund. Of the remaining 18.3 cents per gallon, tax collected in 
excess of 13.5 cents per gallon (i.e., 4.8 cents per gallon) is 
retained in the General Fund of the Treasury.\144\ The balance 
is transferred to the Highway Trust Fund, and retransferred 
(except with respect to amounts transferred to the fund for 
land and water conservation, as described below) to the Aquatic 
Resources Trust Fund.\145\ The taxes on gasoline and special 
motor fuels used in motorboats and the taxes on gasoline used 
as a fuel in the nonbusiness use of small-engine outdoor power 
equipment are collected under the same rules as apply to the 
Highway Trust Fund collections generally.
---------------------------------------------------------------------------
    \143\ Sec. 4081(a)(2).
    \144\ The retention in the General Fund of the 4.8 cents a gallon 
of motorboat fuel taxes and taxes on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment expires after 
September 30, 2005.
    \145\ Sec. 9503(c)(4). Between October 1, 2001 and September 30, 
2003, the amount transferred to the Highway Trust Fund was 13 cents per 
gallon. Prior to October 1, 2001, the amount transferred was 11.5 cents 
per gallon. Sec. 9503(b)(4)(D). The transfers from the Highway Trust 
Fund to the Aquatic Resources Trust Fund of amounts of taxes received 
on gasoline used as a fuel in the nonbusiness use of small-engine 
outdoor power equipment expires after September 30, 2005. Sec. 
9503(c)(5).
---------------------------------------------------------------------------
    The Aquatic Resources Trust Fund is comprised of two 
accounts.\146\ First, the Boat Safety Account is funded by a 
portion of the receipts from the excise tax imposed on 
motorboat gasoline and special motor fuels. Transfers to the 
Boat Safety Account are limited to amounts not exceeding $70 
million per year. In addition, these transfers are subject to 
an overall annual limit equal to an amount that will not cause 
the Boat Safety Account to have an unobligated balance in 
excess of $70 million.\147\
---------------------------------------------------------------------------
    \146\ Sec. 9504(a).
    \147\ Sec. 9503(c)(4)(A). Funding of the Boat Safety Account is 
scheduled to expire after September 30, 2005.
---------------------------------------------------------------------------
    Second, the Sport Fish Restoration Account receives the 
balance of the motorboat gasoline and special motor fuels 
receipts that are transferred to the Aquatic Resources Trust 
Fund.\148\ The Sport Fish Restoration Account also is funded 
with receipts from an excise tax on sport fishing equipment 
sold by the manufacturer, producer or importer. The excise tax 
rate on sport fishing equipment is 10 percent of the sales 
price; the rate is reduced to 3 percent for electric outboard 
motors and fishing tackle boxes.\149\ Examples of the items of 
sport fishing equipment subject to the 10-percent rate include 
fishing rods and poles, fishing reels, fly fishing lines and 
certain other fishing lines, fishing spears, spear guns, spear 
tips, items of terminal tackle, containers designed to hold 
fish, fishing vests, landing nets, and portable bait 
containers.\150\ In addition, import duties on certain fishing 
tackle, yachts and pleasure craft are transferred into the 
Sport Fish Restoration Account.
---------------------------------------------------------------------------
    \148\ After funding of the Boat Safety Account, remaining motorboat 
fuel taxes, not exceeding $1,000,000 during any fiscal year, are 
transferred from the Highway Trust Fund into the land and water 
conservation fund provided in Title I of the Land and Water 
Conservation Fund Act of 1965. Sec. 9503(c)(4)(B). After the transfer 
to the land and water conservation fund, motorboat fuel taxes remaining 
in the Highway Trust Fund are transferred to the Sport Fish Restoration 
Account. Sec. 9503(c)(4)(C).
    \149\ Sec. 4161(a)(2) and 4161(a)(c)(3).
    \150\ Items of ``sport fishing equipment'' are enumerated in 
section 4162(a).
---------------------------------------------------------------------------
    The amounts of taxes on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment that 
are transferred to the Highway Trust Fund and retransferred to 
the Aquatic Resources Trust Fund are directed to a separate 
sub-account of the Sport Fish Restoration Account, the Coastal 
Wetlands Sub-Account.
    Expenditures from the Boat Safety Account are subject to 
annual appropriations. Amounts transferred, paid, or credited 
to the Sport Fish Restoration Account (including the Coastal 
Wetlands Sub-Account) are authorized to be appropriated for the 
uses authorized in the expenditure provisions.\151\
---------------------------------------------------------------------------
    \151\ Act of August 9, 1950, 64 Stat. 430 (codified at 16 U.S.C. 
sec. 777 et seq.) (``An Act to provide that the United States shall aid 
the States in fish restoration and management projects, and for other 
purposes,'' commonly referred to as the Dingell-Johnson Sport Fish 
Restoration Act.).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that the current Boat Safety Account 
is fully funded and that expenditures for boating safety 
relating to newly collected funds would be facilitated by 
treating these collections in the same manner as those 
currently required for the Sport Fish Restoration Account. The 
Congress further believes that combining the Boat Safety 
Account and Sport Fish Restoration Account will facilitate such 
uniform treatment in the future and better coordinate 
expenditures for sport fishing and boating safety.

                        Explanation of Provision

    The provision eliminates the Aquatic Resources Trust Fund 
and future transfers to the Boat Safety Account and transforms 
the Sport Fish Restoration Account into the Sport Fish 
Restoration and Boating Trust Fund. After funding of the land 
and water conservation fund as under present law, the balance 
of the taxes on motorboat fuels is transferred from the Highway 
Trust Fund into the Sport Fish Restoration and Boating Trust 
Fund. In addition, the transfers from the Highway Trust Fund to 
the Sport Fish Restoration and Boating Trust Fund of amounts of 
taxes on gasoline used as a fuel in the nonbusiness use of 
small-engine outdoor power equipment are extended through 
September 30, 2011.
    Existing amounts in the Boat Safety Account, plus interest 
accrued on interest-bearing obligations of such account, are 
made available as provided under expenditure provisions.\152\ 
The expenditure provisions also authorize the appropriation of 
amounts in the Sport Fish Restoration and Boating Trust Fund, 
including for boating safety, for the uses authorized in the 
expenditure provisions.
---------------------------------------------------------------------------
    \152\ The expenditure provisions are codified at 16 U.S.C. sec. 777 
et seq., as may be amended by the Sportfishing and Recreational Boating 
Safety Act of 2005.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective October 1, 2005.

2. Repeal of harbor maintenance tax on exports (sec. 11116 of the Act 
        and sec. 4461 of the Code)

                              Present Law

    The Code contains provisions imposing a 0.125-percent 
excise tax on the value of most commercial cargo loaded or 
unloaded at U.S. ports (other than ports included in the Inland 
Waterway Trust Fund system). The tax also applies to amounts 
paid for passenger transportation using these U.S. ports. 
Exemptions are provided for (1) cargo donated for overseas use, 
(2) cargo shipped between the U.S. mainland and Alaska (except 
for crude oil), Hawaii, and/or U.S. possessions and (3) cargo 
shipped between Alaska, Hawaii, and/or U.S. possessions. 
Receipts from this tax are deposited in the Harbor Maintenance 
Trust Fund.
    The U.S. Supreme Court has held that the harbor maintenance 
excise tax is unconstitutional as applied to exported cargo 
because it violates the ``Export Clause'' of the U.S. 
Constitution.\153\ The tax remains in effect for imported 
cargo. Imposition of the tax on passenger transportation with 
respect to passengers on cruises that originate, stop, or 
terminate, at U.S. ports has been upheld.
---------------------------------------------------------------------------
    \153\ United States Shoe Corp. v. United States, 523 U.S. 360, 118 
S. Ct. 1290, 140 L. Ed. 2d 453 (1998).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes the Internal Revenue Code should 
conform to the law of the land as interpreted by the Supreme 
Court and, thus, believes the harbor maintenance excise tax as 
applied to exported cargo should be repealed as deadwood.

                        Explanation of Provision

    The provision conforms the Code to the Supreme Court 
decision and exempts exported commercial cargo from the harbor 
maintenance tax.

                             Effective Date

    The provision is effective before, on, and after the date 
of enactment (August 10, 2005).

3. Cap on excise tax on certain fishing equipment (sec. 11117 of the 
        Act and sec. 4161 of the Code)

                              Present Law

    In general, the Code imposes a 10-percent tax on the sale 
by the manufacturer, producer, or importer of specified sport 
fishing equipment.\154\ A three-percent rate, however, applies 
to the sale of electric outboard motors and fishing tackle 
boxes.\155\ Sport fishing equipment subject to the 10-percent 
tax includes fishing rods and poles, fishing reels, fly fishing 
lines, and other fishing lines not over 130 pounds test, 
fishing spears, spear guns, and spear tips, and tackle items 
including leaders, artificial lures, artificial baits, 
artificial flies, fishing hooks, bobbers, sinkers, snaps, 
drayles, and swivels. In addition the following fishing 
supplies and accessories are subject to the 10-percent tax: 
fish stringers; creels; bags, baskets, and other containers 
designed to hold fish; portable bait containers; fishing vests; 
landing nets; gaff hooks; fishing hook disgorgers; dressing for 
fishing lines and artificial flies; fishing tip-ups and tilts; 
fishing rod belts, fishing rodholders; fishing harnesses; fish 
fighting chairs; and fishing outriggers and downriggers.
---------------------------------------------------------------------------
    \154\ Sec. 4161(a)(1).
    \155\ Sec. 4161(a)(2) and 4161(a)(3).
---------------------------------------------------------------------------
    Revenues from the excise tax on sport fishing equipment are 
deposited in the Sport Fish Restoration Account of the Aquatic 
Resources Trust Fund. Monies in the fund are spent, subject to 
an existing permanent appropriation, to support Federal-State 
sport fish enhancement and safety programs.

                           Reasons for Change

    The Congress understands that as a tax on the manufacturer, 
the 10-percent ad valorem tax rate generally is imposed at the 
time a rod is sold to a wholesaler or retailer and thus the tax 
as a percentage of the ultimate retail price paid by the 
consumer is less than 10 percent. However, the Congress 
understands that most rods priced in excess of $100 are custom 
rods produced by businesses that are both the ``manufacturer'' 
and the retailer. In this circumstance the 10-percent tax rate 
would apply to the retail price. The Congress therefore 
believes that present-law tax does not provide for neutral 
taxation of different segments of the fishing rod market. The 
Congress concludes that the tax on rods and poles the 
manufacturer's price of which exceeds $100 should be limited to 
$10.00.

                        Explanation of Provision

    The provision provides that the tax applicable to a fishing 
rod or fishing pole is the lesser of 10 percent or $10.00.

                             Effective Date

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after September 30, 2005.

                         C. Aerial Excise Taxes


1. Clarification of excise tax exemptions for agricultural aerial 
        applicators and exemption for fixed-wing aircraft engaged in 
        forestry operations (sec. 11121 of the Act and secs. 4261 and 
        6420 of the Code)

                              Present Law

    Excise taxes are imposed on aviation gasoline (19.4 cents 
per gallon) and jet fuel (21.9 cents per gallon).\156\ All but 
0.1 cent per gallon of the revenues from these taxes are 
dedicated to the Airport and Airway Trust Fund. The remaining 
0.1 cent per gallon rate is imposed for the Leaking Underground 
Storage Tank Trust Fund.
---------------------------------------------------------------------------
    \156\ Sec. 4081.
---------------------------------------------------------------------------
    Fuel used on a farm for farming purposes is a nontaxable 
use. Aerial applicators (crop dusters) are allowed to claim a 
refund instead of farm owners and operators in the case of 
aviation gasoline if the owners or operators give written 
consent to the aerial applicators.\157\ This provision applies 
only to fuel consumed in the airplane while operating over the 
farm, i.e., fuel consumed traveling to and from the farm is not 
exempt.
---------------------------------------------------------------------------
    \157\ Sec. 6420(c)(4)).
---------------------------------------------------------------------------
    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 (for 2005) 
per domestic flight segment.\158\ The tax on transportation by 
air does not apply to air transportation by helicopter if the 
helicopter is used for (1) the exploration, or the development 
or removal of oil, gas, or hard minerals exploration, or (2) 
certain timber operations (planting, cultivating, cutting, 
transporting, or caring for trees, including logging 
operations).\159\ The exemption applies only when the 
helicopters are not using the Federally funded airport and 
airway services. Helicopters and fixed-wing aircraft providing 
emergency medical services also are exempt from the air 
passenger tax regardless of the type of airport and airway 
services used.\160\
---------------------------------------------------------------------------
    \158\ Sec. 4261(a) and 4261(b).
    \159\ Sec. 4261(f).
    \160\ Sec. 4261(g).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes significant simplification and 
reduction of administrative burden will be achieved by 
eliminating the requirements that aerial applicators obtain 
written consent from the farm owner for exempt fuel use and by 
allowing exempt fuel use to extend to fuel consumed when flying 
between the farms where chemicals are applied and the airport 
where the airplane takes off and lands. In addition, the 
Congress notes that the purpose of the aviation excise taxes is 
to generate revenue for the Airport Improvement program, which 
builds new and retrofits and expands existing public airports. 
The Congress believes it is appropriate to extend the current 
exemption for helicopters engaged in timber operations to fixed 
wing aircraft when such aircraft are not using the Federally 
funded airport and airway services.

                        Explanation of Provision

    With regard to the exemption for aerial applicators, 
written consent from the farm owner or operator is no longer 
needed for the aerial applicator to claim exemption for 
aviation gasoline. The exemption also is expanded to include 
fuels consumed when flying between the farms where chemicals 
are applied and the airport where the airplane takes off and 
lands. The present exemption for helicopters engaged in timber 
operations is expanded to include fixed-wing aircraft if such 
aircraft are not using the Federally funded airport and airway 
services.

                             Effective Date

    The provision is effective for fuel use or air 
transportation after September 30, 2005.

2. Modify the definition of rural airport (sec. 11122 of the Act and 
        sec. 4261 of the Code)

                              Present Law

    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 (in 2005) 
per domestic flight segment.\161\ The $3.20 tax on flight 
segments does not apply to a domestic segment beginning or 
ending at a rural airport.
---------------------------------------------------------------------------
    \161\ Sec. 4261(a) and 4261(b).
---------------------------------------------------------------------------
    With respect to any calendar year, a rural airport is an 
airport that had fewer than 100,000 passengers departing by air 
during the second preceding calendar year for such airport and 
such airport either (1) is not located within 75 miles of a 
larger airport (one that had at least 100,000 passengers 
departing in the second preceding calendar year), or (2) was 
receiving essential air service subsidy payments as of August 
5, 1997.

                           Reasons for Change

    The Congress notes that the present-law definition of 
``rural airports'' generally encompasses those airports that do 
not offer potential customers a viable alternative to a larger 
airport from which a ticket would subject the purchaser to the 
flight segment tax in addition to the ad valorem tax. The 
Congress observes that airports located on islands with no 
direct access by road from the mainland also would not offer 
potential customers a viable alternative to a larger airport, 
even if the island airport is within 75 miles of the larger 
airport.

                        Explanation of Provision

    The provision expands the definition of qualified rural 
airport to include an airport that (1) is not connected by 
paved roads to another airport and (2) had fewer than 100,000 
commercial passengers departing by air on flight segments of at 
least 100 miles during the second preceding calendar year.

                             Effective Date

    The provision is effective on October 1, 2005.

3. Exempt from ticket taxes transportation provided by seaplanes (sec. 
        11123 of the Act and secs. 4261 and 4083 of the Code)

                              Present Law

    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 (in 2005) 
per domestic flight segment (``air passenger tax'').\162\ A 
6.25-percent tax is imposed on amounts paid for transportation 
of property by air (``air cargo tax'').\163\ The air cargo tax 
applies only to amounts paid to persons engaged in the business 
of transporting property by air for hire. The air passenger tax 
and air cargo tax do not apply to amounts paid for the 
transportation if furnished on an aircraft having a maximum 
certificated takeoff weight of 6,000 pounds or less unless the 
aircraft is operated on an established line.\164\
---------------------------------------------------------------------------
    \162\ Sec. 4261(a) and 4261(b).
    \163\ Sec. 4271.
    \164\ Sec. 4281.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress observes that seaplanes do not make as full 
utilization of Federal Aviation Administration services as do 
planes that offer passenger service out of traditional 
airports. The Congress, therefore, believes it is appropriate 
to exempt such service from the air transportation excise taxes 
and instead impose only the fuels excise taxes.

                        Explanation of Provision

    The provision provides that the air passenger tax and the 
air cargo tax do not apply to transportation by a seaplane with 
respect to any segment consisting of a takeoff from, and a 
landing on, water, but only if the places at which such takeoff 
and landing occur have not received and are not receiving 
financial assistance from the Airport and Airway Trust Fund. 
For purposes of the fuel taxes, transportation by seaplane is 
treated as noncommercial aviation.

                             Effective Date

    The provision is effective for transportation beginning 
after September 30, 2005.

4. Exempt certain sightseeing flights from taxes on air transportation 
           (sec. 11124 of the Act and sec. 4281 of the Code)


                              Present Law

    Under present law, taxable aviation transportation is 
subject to a 7.5-percent excise tax on the price of an airline 
ticket plus $3.20 (in 2005) per domestic flight segment. An 
exception to these taxes is provided for transportation by an 
aircraft having a maximum certificated takeoff weight of 6,000 
pounds or less except when the aircraft is operated on an 
established line. Under the Treasury regulations to be 
``operated on an established line'' means to be operated with 
``some degree of regularity between definite points. The term 
implies that the air carrier maintains control over the 
direction, routes, time, number of passengers carried, etc.'' 
\165\ Treasury regulations provide that transportation need not 
be between two definite points to be taxable: a payment for 
continuous transportation beginning and ending at the same 
point is subject to the tax.\166\ The IRS position is that the 
words ``between definite points'' do not require two separate 
points for purposes of determining whether an aircraft is 
operated on an established line. At least one court has 
agreed.\167\
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    \165\ Treas. Reg. sec. 49.4263-5(c).
    \166\ Treas. Reg. sec. 49.4261-1(c).
    \167\ Lake Mead Air Inc. v. United States, 991 F. Supp. 1209 (D. 
Nev. 1997) (the court determined that aircraft flights providing scenic 
tours of the Grand Canyon were operated on an established line).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes it is appropriate to exempt certain 
sightseeing flights from the taxes on air transportation. 
Examples of sightseeing flights include flights of short 
duration that overlook a glacier, volcano, the Grand Canyon, or 
other similar attraction and for which the air tour begins and 
ends at the same point. By short duration, the Congress intends 
that the tour occur within a calendar day, irrespective of 
intermittent stops to view the attraction. In addition, all 
passengers from the initial point of departure must return with 
the aircraft at the conclusion of the tour. The Congress 
believes that such flights are primarily for entertainment 
rather than for transportation from one place to another and so 
should be treated as noncommercial aviation.

                        Explanation of Provision

    For purposes of the exemption for small aircraft operated 
on nonestablished lines, an aircraft operated on a flight, the 
sole purpose of which is sightseeing, will not be considered as 
operated on an established line.

                             Effective Date

    The provision is effective with respect to transportation 
beginning after September 30, 2005, but does not apply to any 
amount paid before such date for such transportation.

                      D. Taxes Relating to Alcohol


1. Repeal special occupational taxes on producers and marketers of 
        alcoholic beverages (sec. 11125 of the Act and secs. 5081, 
        5091, 5111, 5112, 5113, 5117, 5121, 5122, 5123, 5125, 5131, 
        5132, 5141, 5147, 5148, and 5276 of the Code)

                              Present Law

    Under the law in effect prior to July 1, 2005, special 
occupational taxes are imposed on producers and others engaged 
in the marketing of distilled spirits, wine, and beer. These 
excise taxes are imposed as part of a broader Federal tax and 
regulatory structure governing the production and marketing of 
alcoholic beverages. The special occupational taxes are payable 
annually, on July 1 of each year. The tax rates in effect prior 
to July 1, 2005 are as follows:




Producers: \168\
    Distilled spirits and wines    $1,000 per year, per premise
      (sec. 5081) \169\..........
    Brewers (sec. 5091)..........  $1,000 per year, per premise
Wholesale dealers (sec. 5111):
    Liquors, wines, or beer......  $500 per year
Retail dealers (sec. 5121):
    Liquors, wines, or beer......  $250 per year
Nonbeverage use of distilled       $500 per year
 spirits
  (sec. 5131)....................
Industrial use of distilled        $250 per year
 spirits (sec. 5276).


    Section 246(a) of the American Jobs Creation Act of 2004 
suspends the special occupational tax for the period beginning 
July 1, 2005 and ending June 30, 2008.\170\
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    \168\ A reduced rate of tax in the amount of $500.00 is imposed on 
small proprietors (as defined in the Code) (secs. 5081(b) and 5091(b)).
    \169\ Proprietors of plants producing distilled spirits exclusively 
for fuel use, with annual production not exceeding 10,000 proof 
gallons, are exempt. Secs. 5081(c) and 5181(c)(4).
    \170\ See sec. 5148.
---------------------------------------------------------------------------
    Every person engaged in a trade or business on which a 
special occupational tax is imposed is required to register 
with the Secretary.\171\ In addition, every dealer in liquors, 
wine or beer is required to keep records of their 
transactions.\172\ A dealer is any person who sells, or offers 
for sale, distilled spirits, wine, or beer.\173\ A delegate of 
the Secretary of the Treasury is authorized to inspect the 
records of any dealer during business hours.\174\ There are 
penalties for failing to comply with the recordkeeping 
requirements.\175\ There are also registration and regulation 
requirements for the nonbeverage use of distilled spirits, and 
permit and recordkeeping requirements for the industrial use of 
distilled spirits.\176\
---------------------------------------------------------------------------
    \171\ Secs. 5141 and 7011. The registration is of such person's 
name or style, place of residence, trade or business, and the place 
where such trade or business is to be carried on.
    \172\ Secs. 5114 and 5124.
    \173\ Sec. 5112(a). Such definition includes producers and, in 
general, proprietors of warehouses.
    \174\ Sec. 5146.
    \175\ Sec. 5603.
    \176\ Secs. 5132 and 5275.
---------------------------------------------------------------------------
    The Code limits the persons from whom dealers may purchase 
their liquor stock intended for resale. A dealer may only 
purchase from:
          1. a wholesale dealer in liquors who has paid the 
        special occupational tax as such dealer to cover the 
        place where such purchase is made; or
          2. a wholesale dealer in liquors who is exempt, at 
        the place where such purchase is made, from payment of 
        such tax under any provision of chapter 51 of the Code; 
        or
          3. a person who is not required to pay special 
        occupational tax as a wholesale dealer in liquors.\177\
---------------------------------------------------------------------------
    \177\ Sec. 5117. For example, purchases from a proprietor of a 
distilled spirits plant at his principal business office would be 
covered under item (2) since such a proprietor is not subject to the 
special occupational tax on account of sales at his principal business 
office (sec. 5113(a)). Purchases from a State-operated liquor store 
would be covered under item (3) (sec. 5113(b)).
---------------------------------------------------------------------------
    Violation of this restriction in punishable by $1,000 fine, 
imprisonment of one year, or both.\178\ A violation also 
subjects the alcohol to seizure and forfeiture.\179\
---------------------------------------------------------------------------
    \178\ Sec. 5687.
    \179\ Sec. 7302.
---------------------------------------------------------------------------

                           Reasons for Change

    The special occupational tax is not a tax on alcoholic 
products but rather operates as a license fee on businesses. 
The Congress believes that this tax places an unfair burden on 
business owners. However, the Congress recognizes that the 
registration and recordkeeping requirements applicable to 
wholesalers and retailers engaged in such businesses are 
necessary enforcement tools to ensure the protection of the 
revenue arising from the excise taxes on these products. Thus, 
the Congress believes it appropriate to repeal the tax, while 
retaining present-law recordkeeping requirements.

                        Explanation of Provision

    The provision repeals the special occupational taxes on 
producers and marketers of alcoholic beverages and on the 
nonbeverage or industrial use of distilled spirits. The 
registration, recordkeeping and inspection rules applicable to 
wholesale and retail dealers are retained.\180\ For purposes of 
the recordkeeping requirements for wholesale and retail liquor 
dealers, the Act provides a rebuttable presumption that a 
person who sells, or offers for sale, distilled spirits, wine, 
or beer, in quantities of 20 wine gallons or more to the same 
person at the same time is engaged in the business of a 
wholesale dealer in liquors or a wholesale dealer in beer. In 
addition, the Act retains the present-law rules that make it 
unlawful for any liquor dealer to purchase distilled spirits 
for resale from any person other than a wholesale liquor dealer 
subject to the recordkeeping requirements, or a proprietor of a 
distilled spirits plant subject to recordkeeping 
requirements.\181\ Existing general criminal penalties relating 
to records and reports apply to wholesalers and retailers who 
fail to comply with these requirements.
---------------------------------------------------------------------------
    \180\ The provision also retains the present-law registration and 
regulation requirements for the nonbeverage use of distilled spirits, 
and the permit and recordkeeping requirements for the industrial use of 
distilled spirits.
    \181\ Proprietors of distilled spirits plants remain subject to 
present law recordkeeping requirements under section 5207. Under 
present law, a limited retail dealer in liquors (such as a charitable 
organization selling liquor at a picnic) may lawfully purchase 
distilled spirits for resale from a retail dealer in distilled spirits. 
The provision retains this rule.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on July 1, 2008. The provision 
does not affect liability for taxes imposed with respect to 
periods before July 1, 2008.

2. Provide an income tax credit for cost of carrying tax-paid distilled 
        spirits in wholesale inventories and in control State bailment 
        warehouses (sec. 11126 of the Act and new sec. 5011 of the 
        Code)

                              Present Law

    As is true of most major Federal excise taxes, the excise 
tax on distilled spirits is imposed at a point in the chain of 
distribution before the product reaches the retail (consumer) 
level. The excise tax on distilled spirits produced in the 
United States is imposed when the distilled spirits are removed 
from the distilled spirits plant where they are produced. 
Distilled spirits that are bottled before importation into the 
United States are taxed on removal from the first U.S. customs 
bonded warehouse to which they are landed (including a 
warehouse located in a foreign trade zone). Distilled spirits 
imported in bulk containers for bottling in the United States 
may be transferred to a domestic distilled spirits plant 
without payment of tax; subsequently, these distilled spirits 
are taxed in the same way as domestically produced distilled 
spirits.
    No tax credits are allowed under present law for business 
costs associated with having tax-paid products in inventory. 
Rather, excise tax that is included in the purchase price of a 
product is treated the same as the other components of the 
product cost, i.e., deductible as a cost of goods sold.

                           Reasons for Change

    Under current law, wholesale importers of distilled spirits 
are not required to pay the Federal excise tax on imported 
spirits until after the product is removed from a bonded 
warehouse for sale to a retailer. In contrast, the tax on 
domestically produced spirits is included as part of the 
purchase price and passed on from the supplier to wholesaler. 
It is the Congress's understanding that in some instances, 
wholesalers can carry this tax-paid inventory for an average of 
60 days before selling it to a retailer. The Congress believes 
it is appropriate to provide an income tax credit to 
approximate the interest charge--more commonly referred to as 
float--that results from carrying tax-paid distilled spirits in 
inventory.

                        Explanation of Provision

    The provision creates a new income tax credit for eligible 
wholesalers, distillers, and importers, of distilled spirits. 
The credit is in addition to present-law rules allowing tax 
included in inventory costs to be deducted as a cost of goods 
sold, and is treated as part of the general business credits.
    The credit is calculated by multiplying the number of cases 
of bottled distilled spirits by the average tax-financing cost 
per case for the most recent calendar year ending before the 
beginning of such taxable year. A case is 12 80-proof 750-
milliliter bottles. The average tax-financing cost per case is 
the amount of interest that would accrue at corporate 
overpayment rates during an assumed 60-day holding period on an 
assumed tax rate of $25.68 per case of 12 80-proof 750-
milliliter bottles.
    The wholesaler credit only applies to domestically bottled 
distilled spirits \182\ purchased directly from the bottler of 
such spirits. An eligible wholesaler is any person that holds a 
permit under the Federal Alcohol Administration Act as a 
wholesaler of distilled spirits that is not a State, or agency 
or political subdivision thereof.
---------------------------------------------------------------------------
    \182\ Distilled spirits that are imported in bulk and then bottled 
domestically qualify as domestically bottled distilled spirits.
---------------------------------------------------------------------------
    For distillers and importers that are not eligible 
wholesalers, the credit is limited to bottled inventory in a 
warehouse owned and operated by, or on behalf of, a State or 
political subdivision thereof, when title to such inventory has 
not passed unconditionally. The credit for distillers and 
importers applies to distilled spirits bottled both 
domestically and abroad.

                             Effective Date

    The provision is effective for taxable years beginning 
after September 30, 2005.

3. Quarterly excise tax filing for small alcohol excise taxpayers (sec. 
        11127 of the Act and sec. 5061 of the Code)

                              Present Law

    In general, excise taxes on distilled spirits, wines, and 
beers are collected on the basis of returns filed in accordance 
with rules prescribed by the Secretary of the Treasury.\183\ In 
the case of distilled spirits, beer, and wine withdrawn under 
bond for deferred payment of tax (``deferred payment bond''), 
domestic producers are generally required to pay alcohol excise 
taxes within 14 days after the last day of the semi-monthly 
period during which the article is withdrawn.\184\ In the case 
of distilled spirits, wines, and beer which are imported into 
the United States (other than in bulk containers), the importer 
is generally required to pay alcohol excise taxes within 14 
days after the last day of the semi-monthly period during which 
the article is entered into the customs territory of the United 
States.\185\ In the case of imported articles entered for 
warehousing, the taxes are generally due within 14 days after 
the last day of the semi-monthly period during which the 
article is removed from the first such warehouse.\186\ Treasury 
regulations also permit certain very small wine producers to 
file and pay on an annual basis.\187\
---------------------------------------------------------------------------
    \183\ Sec. 5061(a).
    \184\ Sec. 5061(d)(1).
    \185\ Sec. 5061(d)(2)(A).
    \186\ Sec. 5061(d)(2)(B).
    \187\ Annual filing and payment is permitted to a wine producer who 
has not given a deferred payment bond, and who either paid wine excise 
taxes in an amount less than $1,000 during the previous calendar year 
or is a proprietor of a new bonded wine premise and expects to pay less 
than $1,000 in wine excise taxes before the end of the calendar year. 
27 CFR sec. 24.273(a).
---------------------------------------------------------------------------
    Special rules apply to accelerate payments made with 
respect to taxes allocable to the second half of the month of 
September.\188\
---------------------------------------------------------------------------
    \188\ Sec. 5061(d)(4).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that the payment of alcohol excise 
taxes and filing of the related tax returns on a semi-monthly 
basis are a heavy burden for small businesses engaged in the 
production and importation of distilled spirits, wines and 
beers. The Congress wishes to lighten the paperwork load on 
these taxpayers by permitting filing and payment on a quarterly 
basis.

                        Explanation of Provision

    Under the provision, domestic producers and importers of 
distilled spirits, wine, and beer with excise tax liability of 
$50,000 or less attributable to such articles in the preceding 
calendar year may file returns and pay taxes within 14 days 
after the end of the calendar quarter instead of semi-monthly. 
In order to qualify, the taxpayer's liability for such taxes 
during the immediately preceding year must have been $50,000 or 
less, and, as of the beginning of the current calendar year, 
the taxpayer must reasonably expect to pay less than $50,000 in 
such taxes for that year. The provision does not apply to a 
taxpayer for any portion of the calendar year following the 
first date on which the aggregate amount of tax due for that 
year exceeds the $50,000 threshold.
    The special rules accelerating payments for taxes allocable 
to the second half of September do not apply to quarterly 
filers under the provision.
    The quarterly filing and payment applies only to 
withdrawals, removals, and entries (and articles brought into 
the United States from Puerto Rico) under deferred payment 
bonds. Transactions that are not made under deferred payment 
bonds do not qualify for quarterly filing and payment, but do 
count toward determining whether the $50,000 threshold has been 
reached. However, very small wine producers who have not given 
deferred payment bonds may still file and pay on an annual 
basis as under present law.

                             Effective Date

    The provision is effective for quarterly periods beginning 
on and after January 1, 2006.

                         E. Sport Excise Taxes


1. Custom gunsmiths (sec. 11131 of the Act and sec. 4182 of the Code)

                              Present Law

    The Code imposes an excise tax upon the sale by the 
manufacturer, producer or importer of certain firearms and 
ammunition.\189\ Pistols and revolvers are taxable at 10 
percent. Firearms (other than pistols and revolvers), shells, 
and cartridges are taxable at 11 percent. The excise tax for 
firearms imposed on manufacturers, producers, and importers 
does not apply to machine guns and short barreled firearms. 
Sales to the Defense Department of firearms, pistols, 
revolvers, shells and cartridges also are exempt from the tax.
---------------------------------------------------------------------------
    \189\ Sec. 4181.
---------------------------------------------------------------------------

                           Reasons for Change

    Many custom gunsmiths do not actually make new guns, rather 
they remodel or refurbish existing firearms. The provision 
establishes an exemption from the excise tax for manufacturers 
of fewer than 50 firearms per year. The Congress believes two 
objectives are accomplished under the provisions. First, this 
provision eliminates the imposition of the excise tax on custom 
gunmakers, and second, it eliminates an administrative burden 
placed on small businesses.

                        Explanation of Provision

    The provision exempts from the firearms excise tax 
firearms, pistols, and revolvers manufactured, produced, or 
imported by a person who manufactures, produces, and imports 
less than 50 of such articles during the calendar year. 
Controlled groups are treated as a single person for 
determining the 50-article limit.

                             Effective Date

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after September 30, 2005. 
No inference is intended from the prospective effective date of 
this provision as to the proper treatment of pre-effective date 
sales.

                     III. MISCELLANEOUS PROVISIONS

 A. Motor Fuel Tax Enforcement Advisory Commission (sec. 11141 of the 
                                  Act)

                              Present Law

    Present law does not require that there be an advisory 
commission on motor tax fuel enforcement.

                           Reasons for Change

    The Congress believes that motor fuel tax administration 
can be improved through the cooperation and shared experiences 
of the various stakeholders in motor fuel tax enforcement. 
Therefore, the Congress believes it appropriate to create an 
advisory commission for motor fuel tax enforcement consisting 
of both Government and private sector members.

                        Explanation of Provision

    The provision establishes a ``Motor Fuel Tax Enforcement 
Advisory Commission'' (the ``Commission''). The purpose of the 
Commission is to: (1) review motor fuel revenue collections, 
historical and current; (2) review the progress of 
investigations with respect to motor fuel taxes; (3) develop 
and review legislative proposals with respect to motor fuel 
taxes; (4) monitor the progress of administrative regulation 
projects relating to motor fuel taxes; (5) review the results 
Federal and State agency cooperative efforts regarding motor 
fuel taxes; and (6) review the results of Federal interagency 
cooperative efforts regarding motor fuel taxes. The Commission 
also is to evaluate and make recommendations regarding: (1) the 
effectiveness of existing Federal enforcement programs 
regarding motor fuel taxes; (2) enforcement personnel 
allocation; and (3) proposals for regulatory projects, 
legislation, and funding.
    The Commission is to be composed of the following:
           At least one representative from each of the 
        following Federal entities: the Department of Homeland 
        Security, the Department of Transportation--Office of 
        Inspector General, the Federal Highway Administration, 
        the Department of Defense, and the Department of 
        Justice;
           At least one representative from the 
        Federation of State Tax Administrators;
           At least one representative from any State 
        Department of Transportation;
           Two representatives from the highway 
        construction industry;
           Six representatives from industries relating 
        to fuel distribution: refiners (two representatives), 
        distributors (one representative), pipelines (one 
        representative), terminal operators (two 
        representatives);
           One representative from the retail fuel 
        industry; and
           Two representatives each from the staff of 
        the Senate Committee on Finance and the House Committee 
        on Ways and Means.
    Members of the Commission are to be appointed by the 
Chairmen and Ranking Members of the Senate Committee on Finance 
and the House Committee on Ways and Means. Representatives from 
the Department of Treasury and the IRS shall be available to 
consult with the Commission upon request.
    The Commission may secure directly from any department or 
agency of the United States, information (other than 
information required by law to be kept confidential by such 
department or agency) necessary for the Commission to carry out 
its duties. Upon request of the Commission, the head of that 
department or agency shall furnish such nonconfidential 
information to the Commission. The Commission also shall gather 
evidence through such means as it may deem appropriate, 
including through holding hearings and soliciting comments by 
means of Federal register notices.
    The Commission is to terminate after September 30, 2009.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

B. National Surface Transportation Infrastructure Financing Commission 
                        (sec. 11142 of the Act)


                              Present Law

    Present law does not provide for any advisory commissions 
related Federal highway or mass transit funding.

                           Reasons for Change

    The Congress observes that, as the fuel economy of the 
nation's vehicular fleet improves, receipts flowing to the 
Highway Trust Fund will not grow commensurately with highway 
use. At the same time, the Congress recognizes that the 
nation's need for transportation infrastructure improvements is 
great. The Congress believes now is the time to engage in a 
review of the nation's long-term transportation infrastructure 
needs and a thoughtful reassessment of how to finance those 
needs.

                        Explanation of Provision

    The provision establishes a ``National Surface 
Transportation Infrastructure Financing Commission'' (the 
``Financing Commission''). The Financing Commission is to be 
composed of 15 members drawn from among individuals 
knowledgeable in the fields of public transportation finance or 
highway and transit programs, policy, and needs. Financing 
Commission members may include representatives of State and 
local governments or other public transportation agencies, 
representatives of the transportation construction industry, 
providers of transportation, persons knowledgeable in finance, 
and users of highway and transit systems.
    The Financing Commission will make an investigation and 
study of revenues flowing into the Highway Trust Fund under 
present law. The Financing Commission will consider whether the 
amount of such revenues is likely to increase, decline or 
remain unchanged absent changes in the law. The Financing 
Commission will consider alternative approaches to generating 
revenues for the Highway Trust Fund, and the level of revenues 
that such alternatives would yield. The Financing Commission 
will consider highway and transit needs and whether additional 
revenues into the Highway Trust Fund, or other Federal revenues 
dedicated to highway and transit infrastructure, would be 
required in order to meet such needs.
    The Commission also must consider a program that would 
exempt all or a portion of gasoline or other motor fuels used 
in a State from the Federal excise tax on such gasoline or 
other motor fuels if such State elects not to receive all or a 
portion of Federal transportation funding, including: (1) 
whether such State should be required to increase State 
gasoline or other motor fuels taxes by the amount of the 
decrease in the Federal excise tax on such gasoline or other 
motor fuels; (2) whether any Federal transportation funding 
should not be reduced or eliminated for States participating in 
such program; (3) whether there are any compliance problems 
related to enforcement of Federal transportation-related excise 
taxes; and (4) study such other matters closely related to the 
subjects described in the preceding subparagraphs as it may 
deem appropriate.
    The Financing Commission will develop a final report, with 
recommendations and the bases for those recommendations. The 
Financing Commission's recommendations will address: (1) what 
levels of revenue are required by the Highway Trust Fund in 
order for it to meet needs to maintain and improve the 
condition and performance of the nation's highway and transit 
systems; (2) what levels of revenue are required by the Highway 
Trust Fund in order to ensure that Federal levels of investment 
in highways and transit do not decline in real terms; and (3) 
the extent, if any, to which the Highway Trust Fund should be 
augmented by other mechanisms or funds as a Federal means of 
financing highway and transit infrastructure investments.
    The Financing Commission will submit its report and 
recommendations within two years of the date of its first 
meeting to the Secretary of Transportation, the Secretary of 
the Treasury, the House Committee on Ways and Means, Senate 
Committee on Finance, the House Committee on Transportation and 
Infrastructure, the Senate Committee on Environment and Public 
Works, and Senate Committee on Banking, Housing, and Urban 
Affairs.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

  C. Tax-Exempt Financing of Highway Projects and Rail-Truck Transfer 
      Facilities (sec. 11143 of the Act and sec. 142 of the Code)


                              Present law


Tax-exempt bonds

            In general
    Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of the bonds are used to finance 
direct activities of these governmental units or if the bonds 
are repaid with revenues of the governmental units. Interest on 
State or local bonds to finance activities of private persons 
(``private activity bonds'') is taxable unless a specific 
exception is contained in the Code (or in a non-Code provision 
of a revenue Act). The term ``private person'' generally 
includes the Federal government and all other individuals and 
entities other than States or local governments.
            Qualified private activity bonds
    Private activity bonds are eligible for tax-exemption if 
issued for certain purposes permitted by the Code (``qualified 
private activity bonds''). The definition of a qualified 
private activity bond includes an exempt facility bond, or 
qualified mortgage, veterans' mortgage, small issue, 
redevelopment, 501(c)(3), or student loan bond.\190\ The 
definition of exempt facility bond includes bonds issued to 
finance certain transportation facilities (airports, ports, 
mass commuting, and high-speed intercity rail facilities); low-
income residential rental property; privately owned and/or 
operated utility facilities (sewage, water, solid waste 
disposal, and local district heating and cooling facilities, 
certain private electric and gas facilities, and hydroelectric 
dam enhancements); public/private educational facilities; and, 
qualified green building/sustainable design projects.\191\
---------------------------------------------------------------------------
    \190\ Sec. 141(e).
    \191\ Sec. 142(a).
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    Issuance of most qualified private activity bonds is 
subject (in whole or in part) to annual State volume 
limitations.\192\ Exceptions are provided for bonds for certain 
governmentally owned facilities (airports, ports, high-speed 
intercity rail, and solid waste disposal) and bonds which are 
subject to separate local, State, or national volume limits 
(public/private educational facilities, enterprise zone 
facility bonds, and qualified green building/sustainable design 
projects).
---------------------------------------------------------------------------
    \192\ Sec. 146.
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                        Explanation of Provision

    The provision establishes a new category of exempt facility 
bonds to finance qualified highway or surface freight transfer 
facilities (``qualified highway or surface freight transfer 
facility bonds''). A qualified highway facility or surface 
freight transfer facility is any surface transportation or 
international bridge or tunnel project (for which an 
international entity authorized under Federal or State law is 
responsible) which receives Federal assistance under title 23 
of the United States Code or any facility for the transfer of 
freight from truck to rail or rail to truck which receives 
Federal assistance under title 23 or title 49 of the United 
States Code.
    Under the provision, qualified highway or surface freight 
transfer facility bonds are not subject to the State volume 
limitations. Rather, the Secretary of Transportation is 
authorized to allocate a total of $15 billion of issuance 
authority to qualified highway or surface freight transfer 
facilities in such manner as the Secretary determines 
appropriate. Bonds are not treated as qualified highway or 
surface freight transfer facility bonds if the aggregate amount 
of bonds issued with respect to qualified facilities exceeds 
the amount of issuance authority allocated to such facilities 
by the Secretary of Transportation. The aggregate limitation on 
bonds that may be issued does not apply to the ``current 
refunding'' of qualified highway or surface freight transfer 
facility bonds. Bonds are treated as a current refunding for 
this purpose if: (1) the average maturity date of the refunding 
bond is not later than the average maturity date of the 
refunded bonds; (2) the amount of the refunding bond does not 
exceed the outstanding amount of the refunded bond, and (3) the 
refunded bond is redeemed not later than 90 days after the date 
of the issuance of the refunding bond.
    Under the provision, the proceeds of qualified highway or 
surface freight transfer facility bonds must be spent on 
qualified projects within five years from the date of issuance 
of such bonds. Proceeds that remain unspent after five years 
must be used to redeem outstanding bonds. The provision 
authorizes the Secretary of the Treasury (or his delegate) to 
extend the five-year period if the issuer establishes that the 
need for the extension is appropriate and due to circumstances 
not within the control of the issuer.
    Finally, the provision is not intended to expand the scope 
of any Federal requirement beyond its application under present 
law and does not broaden the application of any Federal 
requirement under present law in Title 49.

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment (August 10, 2005).

       D. Treasury Study of Highway Fuels Used by Trucks for Non-
            Transportation Purposes (sec. 11144 of the Act)


                              Present Law

    Present law does not provide for a study of fuel use by 
trucks.

                        Explanation of Provision

    The provision directs the Secretary of the Treasury to 
study the use by trucks of highway motor fuel that is not used 
for the propulsion of the vehicle, both in the case of vehicles 
carrying equipment that is unrelated to the transportation 
function of the vehicle and in the case where non-
transportation equipment is run by a separate motor. In 
addition, the Secretary is to estimate the amount of fuel 
consumed and pollutants emitted by trucks due to the long-term 
idling of diesel engines, and report on the cost of reducing 
long-term idling through various technologies. The Secretary is 
to propose implementing exemptions from tax for fuel used in 
non-transportation uses, but only if the Secretary determines 
such exemptions are administratively feasible, for the 
following: (1) mobile machinery whose nonpropulsive fuel use 
exceeds 50 percent and (2) any highway vehicle that consumes 
fuel for both transportation- and non-transportation-related 
equipment, using a single motor. With respect to item (2), it 
is intended that the Secretary take into consideration such 
factors as whether the fuel use for non-transportation 
equipment by the vehicle operator is significant both relative 
to transportation-related fuel consumption of the vehicle and 
relative to the vehicle operator's business. There may be 
significant non-transportation use of taxed fuel even if such 
use is small relative to the vehicle's transportation use, if 
the vehicle is used extensively. Also with respect to item (2), 
it is intended that the Secretary take into account variations 
in fuel use among the different types of vehicles, such as 
concrete mixers, refuse collection vehicles, tow trucks, mobile 
drills, and other vehicles that the Secretary identifies.
    Not later than January 1, 2007, the Secretary of the 
Treasury is to report the findings of the study to the Senate 
Committee on Finance and the House Committee on Ways and Means.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

       E. Diesel Fuel Tax Evasion Report (sec. 11145 of the Act)


                              Present Law

    An excise tax is imposed upon (1) the removal of any 
taxable fuel from a refinery or terminal, (2) the entry of any 
taxable fuel into the United States, or (3) the sale of any 
taxable fuel to any person who is not registered with the IRS 
to receive untaxed fuel, unless there was a prior taxable 
removal or entry.\193\ The tax does not apply to any removal or 
entry of taxable fuel transferred in bulk by pipeline or vessel 
to a terminal or refinery if the person removing or entering 
the taxable fuel, the operator of such pipeline or vessel, and 
the operator of such terminal or refinery are registered with 
the Secretary.\194\
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    \193\ Sec. 4081(a)(1).
    \194\ Sec. 4081(a)(1)(B).
---------------------------------------------------------------------------
    Diesel fuel and kerosene that is to be used for a 
nontaxable purpose will not be taxed upon removal from the 
terminal if it is dyed to indicate its nontaxable purpose.\195\ 
In addition to requirement that fuel be dyed, the Secretary has 
the authority to prescribe marking requirements for diesel fuel 
and kerosene destined for a nontaxable use.\196\ The Secretary 
has not prescribed any marking requirements.
---------------------------------------------------------------------------
    \195\ Sec. 4082(a)(1) and (2).
    \196\ Sec. 4082(a)(3).
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                        Explanation of Provision

    The provision requires the Commissioner of the IRS to 
report on the availability of new technologies that can be 
employed to enhance the collections of the excise tax on diesel 
fuel and the plans of the IRS to employ such technologies. The 
report is to cover the availability of forensic or chemical 
molecular markers, in addition to other technologies, to 
enhance collections of the excise tax on diesel fuel and the 
plans of the Internal Revenue Service to employ such 
technologies. The report must also cover the design of three 
tests: (1) the design of a test to place forensic or chemical 
molecular markers in any excluded liquid as that term is 
defined in Treasury regulations; (2) the design of a test, in 
consultation with the Department of Defense, to place forensic 
or chemical molecular markers in all nonstrategic bulk fuel 
deliveries of diesel fuel to the military, and (3) the design 
of a test to place forensic or chemical molecular markers in 
all diesel fuel bound for export utilizing the Gulf of Mexico.
    The report is to be submitted within 360 days from the date 
of enactment to the Senate Committees on Finance and 
Environment and Public Works, and the House Committees on Ways 
and Means and Transportation and Infrastructure.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

F. Tax Treatment of State Ownership of Railroad Real Estate Investment 
 Trust (sec. 11146 of the Act and secs. 103, 115, 336, and 337 of the 
                                 Code)


                              Present Law

    A real estate investment trust (``REIT'') is an electing 
entity that is engaged primarily in passive real estate 
activities (as specifically defined) and that, among other 
requirements, must have at least 100 shareholders. If a 
qualified entity elects REIT status, it can pay little or no 
corporate level tax, since a REIT is allowed a deduction for 
amounts distributed to its shareholders and is required to 
distribute at least 90 percent of its income to shareholders 
annually.
    If an entity does not qualify to be treated as a REIT, it 
would generally be treated as a regular corporation subject to 
corporate level tax on its income under subchapter C and 
section 11 of the Code. Such a corporation can elect to be 
taxed as a partnership or disregarded entity under Treasury 
regulations. However, if it made such an election, the 
corporation would be treated as if it had liquidated and 
distributed its assets to shareholders, generally resulting in 
corporate-level tax on the excess of the fair market value over 
the basis of corporate assets.\197\ A corporation that itself 
becomes a tax-exempt entity also must pay corporate tax on the 
excess of the fair market value over the basis of its 
assets.\198\
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    \197\ Sec. 336. An exception to this gain recognition applies to 
certain liquidations into a corporation that owns 80 percent of the 
liquidating entity and that is not itself tax-exempt. Sec. 337.
    \198\ Treas. Reg. sec. 1.337(d)-4(a)(2).
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    A State or local government is not subject to Federal 
income tax on income that accrues to the State or any political 
subdivision thereof and that is derived from any public utility 
or the exercise of any activity that is an essential 
governmental function.\199\
---------------------------------------------------------------------------
    \199\ Sec. 115.
---------------------------------------------------------------------------
    Interest on State and local bonds is excluded from gross 
income, with certain exceptions.\200\ State and local bonds can 
be classified by the type of entity using the proceeds as 
either governmental or private activity bonds. In general, 
bonds are governmental bonds if the proceeds of the bonds are 
used to finance direct activities of governmental entities or 
if the bonds are repaid with revenues of governmental entities. 
Private activity bonds are bonds with respect to which a State 
or local government serves as a conduit providing financing to 
private businesses or individuals. The exclusion from income 
for State and local bonds does not apply to private activity 
bonds unless the bonds are issued for certain purposes 
permitted by the Code. In addition, both governmental and 
private activity bonds must satisfy applicable rules provided 
for in the Code as a condition of tax exemption.\201\
---------------------------------------------------------------------------
    \200\ Sec. 103.
    \201\ Secs. 141-150.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the income of a qualified corporation 
that is derived from its railroad transportation and economic 
development activities, that constitute substantially all of 
its activities (as described below), is treated as accruing to 
the State for purposes of section 115, to the extent such 
activities are of a type which are an essential governmental 
function under section 115 of present law. For purposes of the 
provision, a qualified corporation is a corporation which is a 
REIT on the date of enactment (August 10, 2005) and which is a 
non-operating Class III railroad that becomes 100 percent owned 
by a State after December 31, 2003 and before December 31, 
2006. Moreover, substantially all activities of the corporation 
must consist of the ownership, leasing, and operation by such 
corporation of facilities, equipment, and other property used 
by the corporation or other persons for railroad transportation 
and for economic development for the benefit of the State and 
its citizens.
    Under the provision, no gain or loss shall be recognized 
from the deemed conversion of such a REIT to such a qualified 
corporation and no change in the basis of the property of the 
entity shall occur.
    Also, any obligation issued by a qualified corporation 
described above is treated as an obligation of a State for 
purposes of applying the tax exempt bond provisions if 95 
percent of the net proceeds of such obligation are to be used 
to provide for the acquisition, construction, or improvement of 
railroad transportation infrastructure (including railroad 
terminal facilities). In addition, such an obligation shall not 
be treated as a private activity bond solely by reason of the 
ownership or use of such railroad transportation infrastructure 
by the corporation. All other present-law provisions relating 
to tax exempt bonds continue to apply to and govern bonds 
issued by the corporation. For example, the use by a private 
business of railroad property financed with the proceeds of 
bonds issued by a qualified corporation may cause such bonds to 
be taxable private activity bonds.

                             Effective Date

    The provision applies on and after the date a State becomes 
the owner of all the outstanding stock of a qualified 
corporation through action of such corporation's board of 
directors, provided that the State becomes the owner of all the 
voting stock of the corporation on or before December 31, 2003 
and becomes the owner of all the outstanding stock of the 
corporation on or before December 31, 2006.

 G. Leaking Underground Storage Tank Trust Fund (sec. 11147 of the Act)


                              Present Law


Leaking Underground Storage Tank Trust Fund

    The Code imposes an excise tax, generally at a rate of 0.1 
cents per gallon, on gasoline, diesel, kerosene, and special 
motor fuels (other than liquefied petroleum gas and liquefied 
natural gas).\202\ The taxes are deposited in the Leaking 
Underground Storage Tank (``LUST'') Trust Fund.
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    \202\ For qualified methanol and ethanol fuel the rate is 0.05 
cents per gallon (sec. 4041(b)(2)(A)(ii). Qualified methanol or ethanol 
fuel is any liquid at least 85 percent of which consists of methanol, 
ethanol or other alcohol produced from coal (including peat) (sec. 
4041(b)(2)(B)).
---------------------------------------------------------------------------
    Amounts in the LUST Trust Fund are available, subject to 
appropriation, only for purposes of making expenditures to 
carry out section 9003(h) of the Solid Waste Disposal Act as in 
effect on the date of enactment of the Superfund Amendments and 
Reauthorization Act of 1986.\203\
---------------------------------------------------------------------------
    \203\ Sec. 9508(c). The expenditures purposes of the LUST Trust 
Fund as set forth in the Code were subsequently amended by Division A, 
section 210 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------

Highway Trust Fund

    The Highway Trust Fund provisions of the Code contain a 
special enforcement provision to prevent expenditure of Highway 
Trust Fund monies for purposes not authorized in section 9503 
or a revenue Act.\204\ If such unapproved expenditures occur, 
no further excise tax receipts will be transferred to the 
Highway Trust Fund. Rather, the taxes will continue to be 
imposed with receipts being retained in the General Fund. This 
enforcement provision provides specifically that it applies not 
only to unauthorized expenditures under the current Code 
provisions, but also to expenditures pursuant to future 
legislation that does not amend section 9503's expenditure 
authorization provisions or otherwise authorize the expenditure 
as part of a revenue Act.
---------------------------------------------------------------------------
    \204\ Sec. 9503(b)(6).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision adds to the Code's LUST Trust Fund provisions 
a special enforcement provision similar to that applicable to 
the Highway Trust Fund to prevent expenditure of LUST Trust 
Fund monies for purposes not authorized by the Code or in a 
revenue Act.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

                       IV. PREVENTING FUEL FRAUD

A. Treatment of Kerosene for Use in Aviation (sec. 11161 of the Act and 
       secs. 4041, 4081, 4082, 6427, 9502, and 9503 of the Code)

                              Present Law

    In general, aviation-grade kerosene is taxed at a rate of 
21.8 cents per gallon upon removal of such fuel from a refinery 
or terminal (or entry into the United States) and on the sale 
of such fuel to any unregistered person unless there was a 
prior taxable removal or entry of such fuel.\205\ Aviation-
grade kerosene may be removed at a reduced rate, either 4.3 or 
zero cents per gallon, if the aviation fuel is removed directly 
into the fuel tank of an aircraft for use in commercial 
aviation \206\ or for a use that is exempt from the tax imposed 
by section 4041(c) (other than by reason of a prior imposition 
of tax),\207\ or is removed or entered as part of an exempt 
bulk transfer.\208\ These taxes are credited to the Airport and 
Airway Trust Fund.\209\ If taxed aviation-grade kerosene is 
used for a nontaxable use, a claim for credit or refund may be 
made.\210\ Such claims are paid from the Airport and Airway 
Trust Fund to the general fund of the Treasury.\211\ All other 
removals and entries of kerosene used for surface 
transportation are taxed at the diesel tax rate of 24.3 cents 
per gallon,\212\ and these taxes are credited to the Highway 
Trust Fund.\213\ If aviation-grade kerosene is taxed upon 
removal or entry but fraudulently diverted for surface 
transportation, the taxes remain in the Airport and Airway 
Trust Fund, and the Highway Trust Fund is not credited for the 
taxes on such fuel.
---------------------------------------------------------------------------
    \205\ Sec. 4081(a)(2)(A)(iv). An additional 0.1 cent is imposed on 
aviation-grade kerosene and credited to the Leaking Underground Storage 
Tank (``LUST'') Trust Fund (sec. 4081(a)(2)(B)).
    \206\ Sec. 4081(a)(2)(C).
    \207\ Sec. 4082(e). Exempt uses include use in commercial aviation 
as supplies for vessels or aircraft, which includes use by certain 
foreign air carriers and for the international flights of domestic 
carriers, secs. 4082(e), 6427(l)(2), and 4221(d)(3).
    \208\ Sec. 4081(a)(1)(B).
    \209\ Sec. 9502(b)(1)(C).
    \210\ Sec. 6427(l)(1) and 6427(l)(4). Nontaxable uses include: (1) 
use other than as fuel in an aircraft (such as use in heating oil); (2) 
use on a farm for farming purposes; (3) use in a military aircraft 
owned by the United States or a foreign country; (4) use in a domestic 
air carrier engaged in foreign trade or trade between the United States 
and any of its possessions; (5) use in a foreign air carrier engaged in 
foreign trade or trade between the United States and any of its 
possessions (but only if the foreign carrier's country of registration 
provides similar privileges to United States carriers); (6) exclusive 
use of a State or local government; (7) sales for export, or shipment 
to a United States possession; (8) exclusive use by a nonprofit 
educational organization; (9) use by an aircraft museum exclusively for 
the procurement, care, or exhibition of aircraft of the type used for 
combat or transport in World War II, and (10) use as a fuel in a 
helicopter or a fixed-wing aircraft for purposes of providing 
transportation with respect to which certain requirements are met. 
Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 6427(l)(2)(B)(i).
     \211\ Sec. 9502(d)(2).
     \212\ Sec. 4081(a)(2)(iii).
     \213\ Sec. 9503(b)(1)(D).
---------------------------------------------------------------------------
    A special rule of present law addresses whether a removal 
from a refueler truck, tanker, or tank wagon may be treated as 
a removal from a terminal for purposes of determining whether 
aviation-grade kerosene is removed directly into the wing of an 
aircraft for use in commercial aviation, and so eligible for 
the 4.3 cents per gallon rate.\214\ For the special rule to 
apply, a qualifying truck, tanker, or tank wagon must be loaded 
with aviation-grade kerosene from a terminal: (1) that is 
located within a secured area of an airport, and (2) from which 
no vehicle licensed for highway use is loaded with aviation 
fuel, except in exigent circumstances identified by the 
Secretary in regulations. In order to qualify for the special 
rule, a refueler truck, tanker, or tank wagon must: (1) be 
loaded with fuel for delivery only into aircraft at the airport 
where the terminal is located; (2) have storage tanks, hose, 
and coupling equipment designed and used for the purposes of 
fueling aircraft; (3) not be registered for highway use; and 
(4) be operated by the terminal operator (who operates the 
terminal rack from which the fuel is unloaded) or by a person 
that makes a daily accounting to such terminal operator of each 
delivery of fuel from such truck, tanker, or tank wagon.
---------------------------------------------------------------------------
    \214\ Sec. 4081(a)(3).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision imposes the kerosene tax rate of 24.3 cents 
per gallon upon the entry or removal of aviation-grade kerosene 
and on the sale of such fuel to any unregistered person unless 
there was a prior taxable removal or entry of the fuel. The 
present law reduced rates for removals of aviation-grade 
kerosene directly into the fuel tank of an aircraft apply,\215\ 
except that in addition, under the provision, if kerosene is 
removed directly into the fuel tank of an aircraft for use in 
aviation other than commercial aviation, the rate of tax is 
21.8 cents per gallon. In addition, the rate of tax is 21.8 
cents per gallon if the kerosene is removed from refueler 
trucks, tankers, and tank wagons that are loaded with fuel from 
a terminal that is located in an airport, without regard to 
whether the terminal is located in a secured area of the 
airport, as long as all the other requirements of the present 
law special rule related to such trucks, tankers, and wagons 
are met. The rate of tax upon removal of kerosene is zero if 
the removal is from a refueler truck, tanker, or tank wagon 
that meets all of the requirements of present law, including 
the security requirement, the kerosene is delivered directly 
into the fuel tank of an aircraft, and the kerosene is exempt 
from the tax imposed by section 4041(c) (other than by prior 
imposition of tax).
---------------------------------------------------------------------------
    \215\ For example, for kerosene removed directly into the fuel tank 
of an aircraft for use in commercial aviation by a person registered 
for such use, the rate of tax is 4.3 cents per gallon. Kerosene removed 
directly into the fuel tank of an aircraft for an exempt use is not 
taxed. For purposes of these reduced rates, it is intended that the 
following airports be included on the Secretary's list of airports that 
include a secured area in which a terminal is located. The airports are 
listed by airport name, and the terminal with respect to the airport is 
identified by terminal control number: Los Angeles International 
Airport (T-95-CA-4812) and Federal Express Corporation Memphis Airport 
(T-62-TN-2220).
---------------------------------------------------------------------------
    The provision provides that amounts may be claimed as 
credits or refunds for kerosene that is taxed at the 24.3 cents 
per gallon rate and used for aviation purposes. If kerosene is 
used for noncommercial aviation, the amount is 2.5 cents; if 
kerosene is used for commercial aviation, the amount is 20 
cents; if kerosene is used for a use that is exempt from tax 
(as determined under present law), the amount is 24.3 cents. 
Present law rules with respect to claims apply, except for 
claims with respect to kerosene used in noncommercial aviation, 
which may be claimed by the ultimate vendor only.\216\ To be 
eligible to receive a payment, a vendor must be registered and 
must show either that the price of the fuel did not include the 
tax and the tax was not collected from the purchaser, the 
amount of tax was repaid to the ultimate purchaser, or the 
written consent of the purchaser to the making of the claim was 
filed with the Secretary.
---------------------------------------------------------------------------
    \216\ These rules were subsequently clarified in Division A, 
section 420 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    Under the provision, all taxes collected at the 24.3 cents 
per gallon rate (under section 4081) initially are credited to 
the Highway Trust Fund. The provision requires the Secretary to 
transfer monthly from the Highway Trust Fund to the Airport and 
Airway Trust Fund amounts equivalent to 21.8 cents per gallon 
for claims made with respect to kerosene used for noncommercial 
aviation purposes, 4.3 cents per gallon for claims made with 
respect to kerosene used for commercial aviation purposes, and 
the amounts attributable to taxes received with respect to 
amounts allowed as a credit under section 34 for kerosene used 
for aviation purposes. The provision requires that transfers be 
made on the basis of estimates by the Secretary, with proper 
adjustments to be made subsequently to the extent prior 
estimates were in excess of or less than the amounts required 
to be transferred. The provision provides that the Airport and 
Airway Trust Fund does not reimburse the General Fund for 
claims with respect to kerosene that is taxed at the 24.3 cents 
per gallon rate and used for aviation purposes, or with respect 
to credits allowed under section 34 to the extent the Highway 
Trust Fund is credited initially with the amount of tax with 
respect to which the credit is claimed. Transfers are required 
to be made with respect to taxes received on or after October 
1, 2005, and before October 1, 2011.

                             Effective Date

    The provision is effective for fuels or liquids removed, 
entered, or sold after September 30, 2005.

  B. Repeal of Ultimate Vendor Refund Claims with Respect to Farming 
          (sec. 11162 of the Act and sec. 6427(l) of the Code)


                              Present Law


In general_ultimate purchaser refunds for nontaxable uses

    In general, the Code provides that if diesel fuel or 
kerosene on which tax has been imposed is used by any person in 
a nontaxable use, the Secretary is to refund (without interest) 
to the ultimate purchaser the amount of tax imposed.\217\ The 
refund is made to the ultimate purchaser of the taxed fuel by 
either income tax credit or refund payment.\218\ Not more than 
one claim may be filed by any person with respect to fuel used 
during its taxable year. However, there are exceptions to this 
rule.
---------------------------------------------------------------------------
    \217\ Sec. 6427(l)(1).
    \218\ Generally, refund payments are only made to governmental 
units and tax-exempt organizations. Sec. 6427(k). The quarterly payment 
claim rules for ultimate purchasers are an exception to this rule.
---------------------------------------------------------------------------
    An ultimate purchaser may make a claim for a refund payment 
for any quarter of a taxable year for which the purchaser can 
claim at least $750.\219\ If the purchaser cannot claim at 
least $750 at the end of quarter, the amount can be carried 
over to the next quarter to determine if the purchaser can 
claim at least $750. If the purchaser cannot claim at least 
$750 at the end of the taxable year, the purchaser must claim a 
credit on the person's income tax return.
---------------------------------------------------------------------------
    \219\ Sec. 6427(i)(2).
---------------------------------------------------------------------------
    As discussed below, these ultimate purchaser refund rules 
do not apply to diesel fuel or kerosene used on a farm. The 
Code precludes the ultimate purchaser from claiming a refund 
for such use. Instead, the refund claims are made by registered 
vendors as described below.

Special vendor rule for use on a farm for farming purposes

    In the case of diesel fuel or kerosene used on a farm for 
farming purposes refund payments are paid to the ultimate, 
registered vendors (``registered ultimate vendor'') of such 
fuels. Thus a registered ultimate vendor that sells undyed 
diesel fuel or undyed kerosene to any of the following may make 
a claim for refund: (1) the owner, tenant, operator of a farm 
for use by that person on a farm for farming purposes; and (2) 
a person other than the owner, tenant, or operator of a farm 
for use by that person on a farm in connection with 
cultivating, raising or harvesting. The registered ultimate 
vendor is the only person who may make the claim with respect 
to diesel fuel or kerosene used on a farm for farming purposes. 
The purchaser of the fuel cannot make the claim for refund.
    Registered ultimate vendors may make weekly claims if the 
claim is at least $200 ($100 or more in the case of 
kerosene).\220\ If not paid within 45 days (20 days for an 
electronic claim), the Secretary is to pay interest on the 
claim.
---------------------------------------------------------------------------
    \220\ See 6427(i)(4)(A).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision repeals ultimate vendor refund claims in the 
case of diesel fuel or kerosene used on a farm for farming 
purposes. Thus, refunds for taxed diesel fuel or kerosene used 
on a farm for farming purposes would be paid to the ultimate 
purchaser under the rules applicable to nontaxable uses of 
diesel fuel or kerosene.

                             Effective Date

    The provision is effective for sales after September 30, 
2005.

 C. Refunds of Excise Taxes on Exempt Sales of Taxable Fuel by Credit 
Card (sec. 11163 of the Act and secs. 6206, 6416, 6427, and 6675 of the 
                                 Code)


                              Present Law

    Under the rules in effect prior to 2005, in the case of 
gasoline on which tax had been paid and sold to a State or 
local government, to a nonprofit educational organization, for 
supplies for vessels or aircraft, for export, or for the 
production of special fuels, the wholesale distributor that 
sold such gasoline was treated as the only person who paid the 
tax and thereby was the proper claimant for a credit or refund 
of the tax paid. A ``wholesale distributor'' included any 
person, other than an importer or producer, who sold gasoline 
to producers, retailers, or to users who purchased in bulk 
quantities and accepted delivery into bulk storage tanks. A 
wholesale distributor also included any person who made retail 
sales of gasoline at 10 or more retail motor fuel outlets.
    Under a special administrative exception to these rules, a 
sale of gasoline charged on an oil company credit card issued 
to an exempt person described above is not considered a direct 
sale by the person actually selling the gasoline to the 
ultimate purchaser if the seller receives a reimbursement of 
the tax from the oil company (or indirectly through an 
intermediate vendor). Thus, the person that actually paid the 
tax, in most cases the oil company, is treated as the only 
person eligible to make the refund claim.\221\
---------------------------------------------------------------------------
    \221\ Notice 89-29, 1989-1 C.B. 669.
---------------------------------------------------------------------------
    The American Jobs Creation Act of 2004 (``AJCA'') \222\ 
modified the pre-existing statutory rules with respect to 
certain sales. Under AJCA, if a registered ultimate vendor 
purchases any gasoline on which tax has been paid and sells 
such gasoline to a State or local government or to a nonprofit 
educational organization, for its exclusive use, such ultimate 
vendor is treated as the only person who paid the tax and 
thereby is the proper claimant for a credit or refund of the 
tax paid.\223\ However, AJCA did not change the special 
administrative oil company credit card rule described 
above.\224\
---------------------------------------------------------------------------
    \222\ Pub. L. No. 108-357.
    \223\ AJCA, sec. 865(a), effective January 1, 2005. See Code sec. 
6416(a)(4)(A).
    \224\ In Notice 2005-4, 2005-2 I.R.B. 289, the Treasury Department 
confirmed that it would continue to apply the oil company credit card 
rule until March 1, 2005. On February 28, 2005, the Treasury Department 
issued Notice 2005-24, 2005-12 I.R.B. 1, modifying Notice 2005-4. 
Notice 2005-24 stated that the oil company credit card rule will remain 
in effect until it is modified by a statutory change or by future 
guidance.
---------------------------------------------------------------------------
    In addition, under AJCA, refund claims made by such an 
ultimate vendor may be filed for any period of at least one 
week for which $200 or more is payable. Any such claim must be 
filed on or before the last day of the first quarter following 
the earliest quarter included in the claim. The Secretary must 
pay interest on refunds unpaid after 45 days. If the refund 
claim was filed by electronic means, and the ultimate vendor 
has certified to the Secretary for the most recent quarter of 
the taxable year that all ultimate purchasers of the vendor are 
certified for highway exempt use as a State or local government 
or a nonprofit educational organization, refunds unpaid after 
20 days must be paid with interest.\225\
---------------------------------------------------------------------------
    \225\ Sec. 6416(a)(4)(B).
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    In the case of diesel fuel or kerosene used in a nontaxable 
use, the ultimate purchaser is generally the only person 
entitled to claim a refund of excise tax.\226\ However, in the 
case of diesel fuel or kerosene used on a farm for farming 
purposes or by a State or local government, aviation-grade 
kerosene, and certain nonaviation-grade kerosene, an ultimate 
vendor may claim the refund if the ultimate vendor is 
registered and bears the tax (or receives the written consent 
of the ultimate purchaser to claim the refund).\227\
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    \226\ Sec. 6427(l)(1).
    \227\ See. sec. 6427(l)(4)(B), and (l)(5)(B), and (l)(5)(C), and 
sec. 6416(a)(1)(A), (B), and (D).
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                        Explanation of Provision

    The provision replaces the oil company credit card rule 
with a new set of rules applicable to certain credit card 
sales. The new rules apply to all taxable fuels. Under the 
provision, if a purchase of taxable fuel is made by means of a 
credit card issued to an ultimate purchaser that is either a 
State or local government or, in the case of gasoline, a 
nonprofit educational organization, for its exclusive use, a 
credit card issuer who is registered and who extends such 
credit to the ultimate purchaser with respect to such purchase 
shall be the only person entitled to apply for a credit or 
refund if the following two conditions are met: (1) such 
registered person has not collected the amount of the tax from 
the purchaser, or has obtained the written consent of the 
ultimate purchaser to the allowance of the credit or refund; 
and (2) such registered person has either repaid or agreed to 
repay the amount of the tax to the ultimate vendor, has 
obtained the written consent of the ultimate vendor to the 
allowance of the credit or refund, or has otherwise made 
arrangements that directly or indirectly provide the ultimate 
vendor with reimbursement of such tax. It is anticipated that 
such indirect arrangements may consist of the contractual 
undertaking of the relevant oil company to the credit card 
issuer that it will pay the amount of the tax to the ultimate 
vendor, and the corresponding contractual undertaking of the 
oil company to the ultimate vendor.
    A credit card issuer entitled to claim a refund under the 
provision is responsible for collecting and supplying all the 
appropriate documentation currently required from ultimate 
vendors. The present-law refund amount and timing rules 
applicable to ultimate vendors, including the special rules for 
electronic claims, apply to refunds to credit card issuers 
under the provision.\228\
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    \228\ See sec. 6416(a)(4)(B). Present law would continue to apply 
to the timing of ultimate purchaser claims. Under present law, claims 
by an ultimate purchaser are generally made on an annual basis. 
However, claims aggregating over $750 may be made quarterly. See secs. 
6421(d) and 6427(i)(2).
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    Under the provision, if a credit card issuer is not 
registered, or if either condition (1) or (2) described above 
is not met (or if the ultimate purchaser is not exempt), then 
the credit card issuer is required to collect an amount equal 
to the tax from the ultimate purchaser and only an (exempt) 
ultimate purchaser may claim a credit or payment from the 
IRS.\229\ Congress intends that tax-paid fuel shall not be sold 
tax free to an exempt entity by means of a credit card unless 
the credit card issuer is registered. An unregistered credit 
card issuer that does not collect an amount equal to the tax 
from the exempt entity is liable for present-law penalties for 
failure to register.\230\ The present-law regulatory authority 
of the Secretary to prescribe the form, manner, terms, 
conditions of registration, and conditions of use of 
registration extends to registration under this provision.\231\ 
Such authority may include rules that preclude persons which 
are registered credit card issuers from issuing nonregistered 
credit cards.\232\ Congress also intends that the IRS will 
review the registration of a registered credit card issuer that 
has engaged in multiple or flagrant violations of the 
requirements of the provision.
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    \229\ See sec. 6421(c).
    \230\ See secs. 6719, 7232, and 7272.
    \231\ Sec. 4101(a)(1).
    \232\ Because registration occurs at the ``person'' (legal entity) 
level, it is anticipated that a credit card issuer will use a separate 
(registered) entity for the issuance of credit cards entitled to the 
benefits of this provision.
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    The provision also conforms present-law penalty provisions 
to the new rules.
    The provision does not change the present-law rules 
applicable to non-credit card purchases.

                             Effective Date

    The provision is effective for sales after December 31, 
2005.

 D. Reregistration in Event of Change in Ownership (sec. 11164 of the 
         Act and secs. 4101, 6719, 7232, and 7272 of the Code)


                              Present Law

    Blenders, enterers, pipeline operators, position holders, 
refiners, terminal operators, and vessel operators are required 
to register with the Secretary with respect to fuels taxes 
imposed by sections 4041(a)(1) and 4081.\233\ An assessable 
penalty for failure to register is $10,000 for each initial 
failure, plus $1,000 per day that the failure continues.\234\ A 
nonassessable penalty for failure to register is $10,000.\235\ 
A criminal penalty of $10,000, or imprisonment of not more than 
five years, or both, together with the costs of prosecution 
also applies to a failure to register and to certain false 
statements made in connection with a registration 
application.\236\ Treasury regulations require that a 
registrant notify the Secretary of any change (such as a change 
in ownership) in the information a registrant submitted in 
connection with its application for registration within 10 days 
of the change.\237\ The Secretary has the discretion to revoke 
the registration of a noncompliant registrant.
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    \233\ Sec. 4101; Treas. Reg. secs. 48.4101-1(a) and 48.4101-
1(c)(1).
    \234\ Sec. 6719.
    \235\ Sec. 7272(a).
    \236\ Sec. 7232.
    \237\ Treas. Reg. sec. 48.4101-1(h)(1)(v).
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                        Explanation of Provision

    The provision requires that upon a change in ownership of a 
registrant, the registrant must reregister with the Secretary, 
as provided by the Secretary. A change in ownership means that 
after a transaction (or series of related transactions), more 
than 50 percent of the ownership interests in, or assets of, a 
registrant are held by persons other than persons (or persons 
related thereto) who held more than 50 percent of such 
interests or assets before the transaction (or series of 
related transactions). The provision does not apply to 
companies, the stock of which is regularly traded on an 
established securities market. There is an assessable penalty 
for failure to reregister of $10,000 for each initial failure, 
plus $1,000 per day that the failure continues, a nonassessable 
penalty for failure to reregister of $10,000, and a criminal 
penalty for failure to reregister of $10,000, or imprisonment 
of not more than five years, or both, together with the costs 
of prosecution. The provision applies to changes in ownership 
occurring prior to, on, or after the date of enactment.

                             Effective Date

    The provision is effective for actions or failures to act 
after the date of enactment (August 10, 2005).

 E. Reconciliation of On-Loaded Cargo to Entered Cargo (sec. 11165 of 
             the Act and sec. 343 of the Trade Act of 2002)


                              Present Law

    The Trade Act of 2002 directed the Secretary to promulgate 
regulations pertaining to the electronic transmission to the 
Bureau of Customs and Border Patrol (``Customs'') of 
information pertaining to cargo destined for importation into 
the United States or exportation from the United States, prior 
to such importation or exportation.\238\ The Department of the 
Treasury issued final regulations on October 31, 2002. The 
regulations require the advance and accurate presentation of 
certain manifest information prior to lading at the foreign 
port and encourage the presentation of this information 
electronically. Customs must receive from the carrier the 
vessel's Cargo Declaration (Customs Form 1302) or the 
electronic equivalent within 24 hours before such cargo is 
laden aboard the vessel at the foreign port.\239\
---------------------------------------------------------------------------
    \238\ Sec. 343(a) of Pub. L. No. 107-210 (2002).
    \239\ 19 CFR sec. 4.7(b)(2).
---------------------------------------------------------------------------
    Certain carriers of bulk cargo, however, are exempt from 
these filing requirements. Such bulk cargo includes that 
composed of free flowing articles such as oil, grain, coal, ore 
and the like, which can be pumped or run through a chute or 
handled by dumping.\240\ Thus, taxable fuels are not required 
to file the Cargo Declaration within 24 hours before such cargo 
is laden aboard the vessel at the foreign port. Instead the 
Cargo Declaration must be filed within 24 hours prior arrival 
in the United States.
---------------------------------------------------------------------------
    \240\ 19 CFR sec. 4.7(b)(4)(i)(A).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that not later than one year after 
the date of enactment of this paragraph, the Secretary of 
Homeland Security, together with the Secretary of the Treasury, 
is to establish an electronic data interchange system through 
which Customs shall transmit to the Internal Revenue Service 
information pertaining to cargoes of taxable fuels (as defined 
in section 4083) that Customs has obtained electronically under 
its regulations adopted to carry out the Trade Act of 2002 
requirement. For this purpose, not later than one year after 
the date of enactment, all filers of required cargo information 
for such taxable fuels, as defined, must provide such 
information to Customs through its approved electronic data 
interchange system.

                             Effective Date

    The provision is effective upon date of enactment (August 
10, 2005).

  F. Treatment of Deep-Draft Vessels (sec. 11166 of the Act and secs. 
                       4081 and 4101 of the Code)


                              Present Law

    Blenders, enterers, pipeline operators, position holders, 
refiners, terminal operators, and vessel operators are required 
to register with the Secretary with respect to fuels taxes 
imposed by sections 4041(a)(1) and 4081.\241\ Treasury 
regulations define a vessel operator as any person that 
operates a vessel within the bulk transfer/terminal system, 
excluding deep-draft ocean-going vessels.\242\ Accordingly, 
operators of deep-draft ocean-going vessels are not required to 
register. A deep-draft ocean-going vessel is a vessel that is 
designed primarily for use on the high seas that has a draft of 
more than 12 feet.\243\
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    \241\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and 48.4101-1(c)(1).
    \242\ Treas. Reg. sec. 48.4101-1(b)(8).
    \243\ Sec. 4042(c)(1).
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    An assessable penalty for failure to register is $10,000 
for each initial failure, plus $1,000 per day that the failure 
continues.\244\ A nonassessable penalty for failure to register 
is $10,000.\245\ A criminal penalty of $10,000, or imprisonment 
of not more than five years, or both, together with the costs 
of prosecution also applies to a failure to register and to 
certain false statements made in connection with a registration 
application.\246\
---------------------------------------------------------------------------
    \244\ Sec. 6719.
    \245\ Sec. 7272(a).
    \246\ Sec. 7232.
---------------------------------------------------------------------------
    In general, gasoline, diesel fuel, and kerosene (``taxable 
fuel'') are taxed upon removal from a refinery or a 
terminal.\247\ Tax also is imposed on the entry into the United 
States of any taxable fuel for consumption, use, or 
warehousing. The tax does not apply to any removal or entry of 
a taxable fuel transferred in bulk (a ``bulk transfer'') by 
pipeline or vessel to a terminal or refinery if the person 
removing or entering the taxable fuel, the operator of such 
pipeline or vessel, and the operator of such terminal or 
refinery are registered with the Secretary as required by 
section 4101.\248\ Transfer to an unregistered party subjects 
the transfer to tax.
---------------------------------------------------------------------------
    \247\ Sec. 4081(a)(1)(A).
    \248\ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an 
unregistered person prior to a taxable removal or entry of the fuel is 
subject to tax. Sec. 4081(a)(1)(A).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that the Secretary of the Treasury 
shall require the registration of every operator of a deep-
draft ocean going vessel, unless such operator uses such vessel 
exclusively for purposes of the entry of the taxable fuel. 
Under the provision, if a deep-draft ocean-going vessel is used 
as part of a bulk transfer of taxable fuel (other than for 
entry), the transfer is subject to tax unless the operator of 
such vessel is registered.

                             Effective Date

    The provision is effective on the date of enactment (August 
10, 2005).

G. Impose Assessable Penalty on Dealers of Adulterated Fuel (sec. 11167 
               of the Act and new sec. 6720A of the Code)


                              Present Law

    Diesel fuel, gasoline, and kerosene are taxable fuels. 
Diesel fuel is defined as (1) any liquid (other than gasoline) 
which is suitable for use as a fuel in a diesel-powered highway 
vehicle or a diesel powered train, (2) transmix, and (3) diesel 
fuel blend stocks identified by the Secretary.\249\ As a 
defense to Federal and State excise tax liability, some 
taxpayers have contended that certain diesel fuel mixtures or 
additives do not meet the requirements of (1) above because 
they are not approved as additives or mixtures by the EPA. In 
addition, under present law, untaxed fuel additives, including 
certain contaminants, may displace taxed diesel fuel in a 
mixture.
---------------------------------------------------------------------------
    \249\ Sec. 4083(a)(3)(A).
---------------------------------------------------------------------------
    The Code provides that any person who, in connection with a 
sale or lease (or offer for sale or lease) of an article, 
knowingly makes any false statement ascribing a particular part 
of the price of the article to a tax imposed by the United 
States, or intended to lead any person to believe that any part 
of the price consists of such a tax, is guilty of a 
misdemeanor.\250\ Another Code provision provides that any 
person who has in his custody or possession any article on 
which taxes are imposed by law, for the purpose of selling the 
article in fraud of the internal revenue laws or with design to 
avoid payment of the taxes thereon, is liable for ``a penalty 
of $500 or not less than double the amount of taxes 
fraudulently attempted to be evaded.'' \251\
---------------------------------------------------------------------------
    \250\ Sec. 7211. Such a violation is punishable by a fine not to 
exceed $1,000, or by imprisonment for not more than one year, or both.
    \251\ Sec. 7268.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision adds a new assessable penalty. Any person 
other than a retailer who knowingly transfers for resale, sells 
for resale, or holds out for resale for use in a diesel-powered 
highway vehicle (or train) any liquid that does not meet 
applicable EPA regulations (as defined in section 45H(c)(3) 
\252\ is subject to a penalty of $10,000 for each such 
transfer, sale or holding out for resale, in addition to the 
tax on such liquid, if any. Any retailer who knowingly holds 
out for sale (other than for resale) any such liquid, is 
subject to a $10,000 penalty for each such holding out for 
sale, in addition to the tax on such liquid, if any.
---------------------------------------------------------------------------
    \252\ Section 45H(c)(3) refers to ``the Highway Diesel Fuel Sulfur 
Control Requirements of the Environmental Protection Agency.''
---------------------------------------------------------------------------
    The penalty is dedicated to the Highway Trust Fund.

                             Effective Date

    The provision is effective for any transfer, sale, or 
holding out for sale or resale occurring after the date of 
enactment (August 10, 2005).

                 V. FUELS-RELATED TECHNICAL CORRECTIONS

A. Fuels-Related Technical Corrections to American Jobs Creation Act of 
                            2004 (``AJCA'')

    The provision includes technical corrections to AJCA. Such 
technical corrections take effect as if included in the section 
of AJCA to which the correction relates.
1. Volumetric ethanol excise tax credit (sec. 11151(a) of the Act, sec. 
        301 of AJCA, and sec. 6427 of the Code)
    AJCA repealed the reduced tax rates for alcohol fuels and 
taxable fuels to be blended with alcohol. The technical 
correction makes a conforming amendment to eliminate the refund 
provisions based on those reduced rates (secs. 6427(f) and 
6427(o)).
2. Aviation fuel (sec. 11151(b) of the Act, sec. 853 of AJCA, and sec. 
        4081 of the Code)
    Section 853 of AJCA moved the taxation of jet fuel 
(aviation-grade kerosene) from section 4091 to section 4081 of 
the Code and repealed section 4091. The termination date for 
the 21.8 cent per gallon rate for noncommercial aviation jet 
fuel was inadvertently omitted from the Act. The technical 
correction clarifies that after September 30, 2007, the rate 
for jet fuel used in noncommercial aviation will be 4.3 cents 
per gallon (sec. 4081(a)(2)(C)).
    An additional technical correction clarifies that users of 
aviation fuel in commercial aviation are required to be 
registered with the IRS in order for the 4.3-cents-per-gallon 
rate to apply (including for purposes of the self-assessment of 
tax by commercial aircraft operators). The provision also 
corrects cross-references in section 6421(f)(2) to the 
definition of noncommercial aviation to reflect changes made by 
the AJCA change in the tax treatment of fuel used in aviation.

B. Fuels-Related Technical Corrections to Transportation Equity Act for 
                     the 21st Century (``TEA 21'')

    The provision includes a technical correction to TEA 21. 
The amendment made by the technical correction takes effect as 
if included in the section of TEA 21 to which it relates.
1. Coastal Wetlands sub-account (sec. 11151(c) and (d) of the Act, sec. 
        9005 of TEA 21, and sec. 9504 of the Code)
    Section 9005(b)(3) of TEA 21 redesignated Code section 
9504(b)(2)(B), referring to the purposes of the Coastal 
Wetlands Planning, Protection and Restoration Act, as 
9504(b)(2)(C), but did not cross reference the limitation for 
such purposes of taxes on gasoline used in the nonbusiness use 
of small-engine outdoor power equipment. The technical 
correction makes a conforming cross-reference amendment (sec. 
9504(b)(2)).

         C. Correction to the Energy Tax Incentives Act of 2005

    The provision includes a technical correction to the Energy 
Tax Incentives Act (``ETIA'') of 2005. The amendment made by 
the technical correction takes effect as if included in the 
section of the ETIA to which it relates.
1. Erroneous reference to highway reauthorization bill (sec. 11151(f) 
        of the Act and sec. 38 of the Code)
    The provision corrects an erroneous reference to the 
highway reauthorization bill in section 38 as added by the 
Energy Policy Act of 2005.

 PART SEVEN: KATRINA EMERGENCY TAX RELIEF ACT OF 2005 (PUBLIC LAW 109-
                               73) \253\

 DEFINITION OF ``HURRICANE KATRINA DISASTER AREA'' AND ``CORE DISASTER 
                       AREA'' (sec. 2 of the Act)

                          General Definitions

    For purposes of the Act the following definitions apply. 
The term ``Hurricane Katrina disaster area'' means an area with 
respect to which a major disaster has been declared by the 
President before September 14, 2005, under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
by reason of Hurricane Katrina. The States for which such a 
disaster has been declared are Alabama, Florida, Louisiana, and 
Mississippi. The term ``core disaster area'' means that portion 
of the Hurricane Katrina disaster area determined by the 
President to warrant individual or individual and public 
assistance from the Federal Government under such Act.
---------------------------------------------------------------------------
    \253\ H.R. 3768. The House passed the bill on the suspension 
calendar on September 15, 2005. The Senate passed the bill with an 
amendment by unanimous consent on September 15, 2005. The House agreed 
to the Senate amendment with an amendment on September 21, 2005. The 
Senate agreed to the House amendment by unanimous consent on September 
21, 2005. The President signed the bill on September 23, 2005. For a 
technical explanation of the bill prepared by the staff of the Joint 
Committee on Taxation, see Joint Committee on Taxation, Technical 
Explanation of H.R. 3768, the ``Katrina Emergency Tax Relief Act of 
2005'' as Passed by the House and the Senate on September 21, 2005 
(JCX-69-05), September 22, 2005.

TITLE I--SPECIAL RULES FOR USE OF RETIREMENT FUNDS FOR RELIEF RELATING 
                          TO HURRICANE KATRINA

A. Tax-Favored Withdrawals from Retirement Plans for Relief Relating to 
                Hurricane Katrina (sec. 101 of the Act)

                              Present Law

    Under present law, a distribution from a qualified 
retirement plan, a tax-sheltered annuity (a ``403(b) 
annuity''), an eligible deferred compensation plan maintained 
by a State or local government (a ``governmental 457 plan''), 
or an individual retirement arrangement (an ``IRA'') generally 
is included in income for the year distributed (secs. 402(a), 
403(b), 408(d), 457(a)). (These plans are referred to 
collectively as ``eligible retirement plans''.) In addition, a 
distribution from a qualified retirement plan, a 403(b) 
annuity, or an IRA received before age 59\1/2\, death, or 
disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception applies (sec. 72(t)).
    An eligible rollover distribution from a qualified 
retirement plan, a 403(b) annuity, or a governmental 457 plan, 
or a distribution from an IRA, generally can be rolled over 
within 60 days to another plan, annuity, or IRA. The IRS has 
the authority to waive the 60-day requirement if failure to 
waive the requirement would be against equity or good 
conscience, including cases of casualty, disaster, or other 
events beyond the reasonable control of the individual. Any 
amount rolled over is not includible in income (and thus also 
not subject to the 10-percent early withdrawal tax).
    Distributions from a qualified retirement plan, 403(b) 
annuity, a governmental 457 plan, or an IRA are generally 
subject to income tax withholding unless the recipient elects 
otherwise. An eligible rollover distribution from a qualified 
retirement plan, 403(b) annuity, or governmental 457 plan is 
subject to income tax withholding at a 20-percent rate unless 
the distribution is rolled over to another plan, annuity or IRA 
by means of a direct transfer.
    Certain amounts held in a qualified retirement plan that 
includes a qualified cash-or-deferred arrangement (a ``401(k) 
plan'') or in a 403(b) annuity may not be distributed before 
severance from employment, age 59\1/2\, death, disability, or 
financial hardship of the employee. Amounts deferred under a 
governmental 457 plan may not be distributed before severance 
from employment, age 70\1/2\, or an unforeseeable emergency of 
the employee.

                        Explanation of Provision

    The provision provides an exception to the 10-percent early 
withdrawal tax in the case of a qualified Hurricane Katrina 
distribution from a qualified retirement plan, a 403(b) 
annuity, or an IRA. In addition, as discussed more fully below, 
income attributable to a qualified Hurricane Katrina 
distribution may be included in income ratably over three 
years, and the amount of a qualified Hurricane Katrina 
distribution may be recontributed to an eligible retirement 
plan within three years.
    A qualified Hurricane Katrina distribution is a 
distribution from an eligible retirement plan made on or after 
August 25, 2005, and before January 1, 2007, to an individual 
whose principal place of abode on August 28, 2005, is located 
in the Hurricane Katrina disaster area and who has sustained an 
economic loss by reason of Hurricane Katrina. The total amount 
of qualified Hurricane Katrina distributions that an individual 
can receive from all plans, annuities, or IRAs is $100,000. 
Thus, any distributions in excess of $100,000 during the 
applicable period are not qualified Hurricane Katrina 
distributions.
    Any amount required to be included in income as a result of 
a qualified Hurricane Katrina distribution is included in 
income ratably over the three-year period beginning with the 
year of distribution unless the individual elects not to have 
ratable inclusion apply. Certain rules apply for purposes of 
the ratable inclusion provision. For example, the amount 
required to be included in income for any taxable year in the 
three-year period cannot exceed the total amount to be included 
in income with respect to the qualified Hurricane Katrina 
distribution, reduced by amounts included in income for 
preceding years in the period.
    Under the provision, any portion of a qualified Hurricane 
Katrina distribution may, at any time during the three-year 
period beginning the day after the date on which the 
distribution was received, be recontributed to an eligible 
retirement plan to which a rollover can be made. Any amount 
recontributed within the three-year period is treated as a 
rollover and thus is not includible in income. For example, if 
an individual receives a qualified Hurricane Katrina 
distribution in 2005, that amount is included in income, 
generally ratably over the year of the distribution and the 
following two years, but is not subject to the 10-percent early 
withdrawal tax. If, in 2007, the amount of the qualified 
Hurricane Katrina distribution is recontributed to an eligible 
retirement plan, the individual may file an amended return (or 
returns) to claim a refund of the tax attributable to the 
amount previously included in income. In addition, if, under 
the ratable inclusion provision, a portion of the distribution 
has not yet been included in income at the time of the 
contribution, the remaining amount is not includible in income.
    A qualified Hurricane Katrina distribution is a permissible 
distribution from a 401(k) plan, 403(b) annuity, or 
governmental 457 plan, regardless of whether a distribution 
would otherwise be permissible. A plan is not treated as 
violating any Code requirement merely because it treats a 
distribution as a qualified Hurricane Katrina distribution, 
provided that the aggregate amount of such distributions from 
plans maintained by the employer and members of the employer's 
controlled group does not exceed $100,000. Thus, a plan is not 
treated as violating any Code requirement merely because an 
individual might receive total distributions in excess of 
$100,000, taking into account distributions from plans of other 
employers or IRAs.
    Under the provision, qualified Hurricane Katrina 
distributions are subject to the income tax withholding rules 
applicable to distributions other than eligible rollover 
distributions. Thus, 20-percent mandatory withholding does not 
apply.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

 B. Recontributions of Withdrawals for Home Purchases Cancelled Due to 
                Hurricane Katrina (sec. 102 of the Act)

                              Present Law

    Under present law, a distribution from a qualified 
retirement plan, a tax-sheltered annuity (a ``403(b) 
annuity''), or an individual retirement arrangement (an 
``IRA'') generally is included in income for the year 
distributed (secs. 402(a), 403(b), and 408(d)). In addition, a 
distribution from a qualified retirement plan, a 403(b) 
annuity, or an IRA received before age 59\1/2\, death, or 
disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception applies (sec. 72(t)). An exception to the 10-percent 
tax applies in the case of a qualified first-time homebuyer 
distribution from an IRA, i.e., a distribution (not to exceed 
$10,000) used within 120 days for the purchase or construction 
of a principal residence of a first-time homebuyer.
    An eligible rollover distribution from a qualified 
retirement plan or a 403(b) annuity or a distribution from an 
IRA generally can be rolled over within 60 days to another 
plan, annuity, or IRA. The IRS has the authority to waive the 
60-day requirement if failure to waive the requirement would be 
against equity or good conscience, including cases of casualty, 
disaster, or other events beyond the reasonable control of the 
individual. Any amount rolled over is not includible in income 
(and thus also not subject to the 10-percent early withdrawal 
tax).
    Certain amounts held in a qualified retirement plan that 
includes a qualified cash-or- deferred arrangement (a ``401(k) 
plan'') or a 403(b) annuity may not be distributed before 
severance from employment, age 59\1/2\, death, disability, or 
financial hardship of the employee. For this purpose, subject 
to certain conditions, distributions for costs directly related 
to the purchase of a principal residence by an employee 
(excluding mortgage payments) are deemed to be distributions on 
account of financial hardship.

                        Explanation of Provision

    In general, under the provision, a distribution received 
from a 401(k) plan, 403(b) annuity, or IRA in order to purchase 
a home in the Hurricane Katrina disaster area may be 
recontributed to such a plan, annuity, or IRA in certain 
circumstances.
    The provision applies to an individual who receives a 
qualified distribution. A qualified distribution is a hardship 
distribution from a 401(k) plan or 403(b) annuity, or a 
qualified first- time homebuyer distribution from an IRA: (1) 
that is received after February 28, 2005, and before August 29, 
2005; and (2) that was to be used to purchase or construct a 
principal residence in the Hurricane Katrina disaster area, but 
the residence is not purchased or constructed on account of 
Hurricane Katrina.
    Under the provision, any portion of a qualified 
distribution may, during the period beginning on August 25, 
2005, and ending on February 28, 2006, be recontributed to a 
plan, annuity or IRA to which a rollover is permitted. Any 
amount recontributed is treated as a rollover. Thus, that 
portion of the qualified distribution is not includible in 
income (and also is not subject to the 10-percent early 
withdrawal tax).

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

C. Loans from Qualified Plans for Relief Relating to Hurricane Katrina 
                         (sec. 103 of the Act)


                              Present Law

    An individual is permitted to borrow from a qualified plan 
in which the individual participates (and to use his or her 
accrued benefit as security for the loan) provided the loan 
bears a reasonable rate of interest, is adequately secured, 
provides a reasonable repayment schedule, and is not made 
available on a basis that discriminates in favor of employees 
who are officers, shareholders, or highly compensated.
    Subject to certain exceptions, a loan from a qualified 
employer plan to a plan participant is treated as a taxable 
distribution of plan benefits. A qualified employer plan 
includes a qualified retirement plan under section 401(a), a 
tax-deferred annuity under section 403(a) or section 403(b), 
and any plan that was (or was determined to be) a qualified 
employer plan or a governmental plan.
    An exception to this general rule of income inclusion is 
provided to the extent that the loan (when added to the 
outstanding balance of all other loans to the participant from 
all plans maintained by the employer) does not exceed the 
lesser of (1) $50,000 reduced by the excess of the highest 
outstanding balance of loans from such plans during the one-
year period ending on the day before the date the loan is made 
over the outstanding balance of loans from the plan on the date 
the loan is made or (2) the greater of $10,000 or one half of 
the participant's accrued benefit under the plan. This 
exception applies only if the loan is required, by its terms, 
to be repaid within five years. An extended repayment period is 
permitted for the purchase of the principal residence of the 
participant. Plan loan repayments (principal and interest) must 
be amortized in level payments and made not less frequently 
than quarterly, over the term of the loan.

                        Explanation of Provision

    The provision provides special rules in the case of a loan 
from a qualified employer plan to a qualified individual made 
after the date of enactment and before January 1, 2007. A 
qualified individual is an individual whose principal place of 
abode on August 28, 2005, is located in the Hurricane Katrina 
disaster area and who has sustained an economic loss by reason 
of Hurricane Katrina.
    Under the provision, the exception to the general rule of 
income inclusion is provided to the extent that the loan (when 
added to the outstanding balance of all other loans to the 
participant from all plans maintained by the employer) does not 
exceed the lesser of (1) $100,000 reduced by the excess of the 
highest outstanding balance of loans from such plans during the 
one-year period ending on the day before the date the loan is 
made over the outstanding balance of loans from the plan on the 
date the loan is made or (2) the greater of $10,000 or the 
participant's accrued benefit under the plan.
    Under the provision, in the case of a qualified individual 
with an outstanding loan on or after August 25, 2005, from a 
qualified employer plan, if the due date for any repayment with 
respect to such loan occurs during the period beginning on 
August 25, 2005, and ending on December 31, 2006, such due date 
is delayed for one year. Any subsequent repayments with respect 
to such loan shall be appropriately adjusted to reflect the 
delay in the due date and any interest accruing during such 
delay. The period during which required repayment is delayed is 
disregarded in complying with the requirements that the loan be 
repaid within five years and that level amortization payments 
be made.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

 D. Plan Amendments in Connection with Hurricane Katrina (sec. 104 of 
                                the Act)


                              Present Law

    Present law provides a remedial amendment period during 
which, under certain circumstances, a qualified plan may be 
amended retroactively in order to comply with the qualification 
requirements (sec. 401(b)). In general, plan amendments to 
reflect changes in the law generally must be made by the time 
prescribed by law for filing the income tax return of the 
employer for the employer's taxable year in which the change in 
law occurs. The Secretary of the Treasury may extend the time 
by which plan amendments need to be made.

                        Explanation of Provision

    The provision permits certain plan amendments made pursuant 
to the changes made by the provisions of Title I of the Act, or 
regulations issued thereunder, to be retroactively effective. 
If the plan amendment meets the requirements of the provision, 
then the plan will be treated as being operated in accordance 
with its terms. In order for this treatment to apply, the plan 
amendment is required to be made on or before the last day of 
the first plan year beginning on or after January 1, 2007, or 
such later date as provided by the Secretary of the Treasury. 
Governmental plans are given an additional two years in which 
to make required plan amendments. If the amendment is required 
to be made to retain qualified status as a result of the 
changes made by Title I of the Act (or regulations), the 
amendment is required to be made retroactively effective as of 
the date on which the change became effective with respect to 
the plan, and the plan is required to be operated in compliance 
until the amendment is made. Amendments that are not required 
to retain qualified status but that are made pursuant to the 
changes made by Title I of the Act (or regulations) may be made 
retroactively effective as of the first day the plan is 
operated in accordance with the amendment. A plan amendment 
will not be considered to be pursuant to changes made by Title 
I of the Act (or regulations) if it has an effective date 
before the effective date of the provision under the Act (or 
regulations) to which it relates.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

                      TITLE II--EMPLOYMENT RELIEF

 A. Work Opportunity Tax Credit for Hurricane Katrina Employees (sec. 
                            201 of the Act)

                              Present Law

Targeted groups eligible for the credit
    The work opportunity tax credit is available on an elective 
basis for employers hiring individuals from one or more of 
eight targeted groups. The eight targeted groups are: (1) 
certain families eligible to receive benefits under the 
Temporary Assistance for Needy Families Program; (2) high-risk 
youth; (3) qualified ex-felons; (4) vocational rehabilitation 
referrals; (5) qualified summer youth employees; (6) qualified 
veterans; (7) families receiving food stamps; and (8) persons 
receiving certain Supplemental Security Income (``SSI'') 
benefits.
Qualified wages
    Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
Calculation of the credit
    The credit equals 40 percent (25 percent for employment of 
400 hours or less) of qualified first-year wages. Generally, 
qualified first-year wages are qualified wages (not in excess 
of $6,000) attributable to service rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual began work for the employer. Therefore, the 
maximum credit per employee is $2,400 (40 percent of the first 
$6,000 of qualified first-year wages). With respect to 
qualified summer youth employees, the maximum credit is $1,200 
(40 percent of the first $3,000 of qualified first-year wages).
Minimum employment period
    No credit is allowed for qualified wages paid to employees 
who work less than 120 hours in the first year of employment.
Certification requirement
    In general, an individual is not treated as a member of a 
targeted group unless (1) on or before the day on which such 
individual begins work for the employer, the employer has 
received a certification from a designated local agency that 
such individual is a member of a targeted group or (2) on or 
before the day the individual is offered employment with the 
employer, a pre-screening notice is completed by the employer 
with respect to such individual and not later than the twenty-
first day after the individual begins work for the employer, 
the employer submits such notice, signed by the employer and 
the individual under the penalties of perjury, to the 
designated local agency as part of a written request for such a 
certification from such agency.

Qualifying rehires

    No credit is available for any individual if, prior to the 
hiring date of such individual, such individual had been 
employed by the employer at any time.

Coordination of the work opportunity tax credit and the welfare-to-work 
        tax credit

    An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee for which the employer 
claims the welfare-to-work tax credit.

Other rules

    The work opportunity tax credit is not allowed for wages 
paid to a relative or dependent of the taxpayer. Similarly, 
wages paid to replacement workers during a strike or lockout 
are not eligible for the work opportunity tax credit. Wages 
paid to any employee during any period for which the employer 
received on-the-job training program payments with respect to 
that employee are not eligible for the work opportunity tax 
credit. The work opportunity tax credit generally is not 
allowed for wages paid to individuals who had previously been 
employed by the employer. In addition, many other technical 
rules apply.

Expiration date

    The work opportunity tax credit is effective for wages paid 
or incurred to a qualified individual who begins work for an 
employer before January 1, 2006.

                        Explanation of Provision

    The provision provides that a Hurricane Katrina employee is 
treated as a member of a targeted group for purposes of the 
work opportunity tax credit. A Hurricane Katrina employee is: 
(1) an individual who on August 28, 2005, had a principal place 
of abode in the core disaster area and is hired during the two-
year period beginning on such date for a position, the 
principal place of employment of which is located in the core 
disaster area; and (2) an individual who on August 28, 2005, 
had a principal place of abode in the core disaster area, who 
was displaced from such abode by reason of Hurricane Katrina 
and is hired during the period beginning on such date and 
ending on December 31, 2005 without regard to whether the new 
principal place of employment is in the core disaster area.
    The present-law WOTC certification requirement is waived 
for such individuals. In lieu of the certification requirement, 
an individual may provide to the employer reasonable evidence 
that the individual is a Hurricane Katrina employee.
    The present-law rule that denies the credit with respect to 
wages of employees who had been previously employed by the 
employer is waived for the first hire of such employee as a 
Hurricane Katrina employee unless such employee was an employee 
of the employer on August 28, 2005.
    The present-law work opportunity tax credit expiration date 
is waived for purposes of Hurricane Katrina employee employees.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

   B. Employee Retention Credit for Employers Affected by Hurricane 
                     Katrina (sec. 202 of the Act)


                              Present Law

    There is no employer tax credit for wages paid solely by 
reason of such wages being paid by employers in connection with 
a disaster area.

                        Explanation of Provision

    The provision provides a credit of 40 percent of the 
qualified wages (up to a maximum of $6000 in qualified wages 
per employee) paid by an eligible employer to an eligible 
employee.
    An eligible employer is any employer (1) that conducted an 
active trade or business on August 28, 2005, in the core 
disaster area and (2) with respect to which the trade or 
business described in (1) is inoperable on any day after August 
28, 2005, and before January 1, 2006, as a result of damage 
sustained by reason of Hurricane Katrina. An eligible employer 
shall not include any trade or business for any taxable year if 
such trade or business employed an average of more than 200 
employees on business days during the taxable year.
    An eligible employee is, with respect to an eligible 
employer, an employee whose principal place of employment on 
August 28, 2005, with such eligible employer was in a core 
disaster area. An employee may not be treated as an eligible 
employee for any period with respect to an employer if such 
employer is allowed a credit under section 51 with respect to 
the employee for the period.
    Qualified wages are wages (as defined in section 51(c)(1) 
of the Code, but without regard to section 3306(b)(2)(B) of the 
Code) paid or incurred by an eligible employer with respect to 
an eligible employee on any day after August 28, 2005, and 
before January 1, 2006, during the period (1) beginning on the 
date on which the trade or business first became inoperable at 
the principal place of employment of the employee immediately 
before Hurricane Katrina, and (2) ending on the date on which 
such trade or business has resumed significant operations at 
such principal place of employment. Qualified wages include 
wages paid without regard to whether the employee performs no 
services, performs services at a different place of employment 
than such principal place of employment, or performs services 
at such principal place of employment before significant 
operations have resumed.
    The credit is a part of the current year business credit 
under section 38(b) and therefore is subject to the tax 
liability limitations of section 38(c). Rules similar to 
sections 280C(a), 51(i)(1) and 52 apply to the credit.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

                TITLE III--CHARITABLE GIVING INCENTIVES

  A. Temporary Suspension of Limitations on Charitable Contributions 
                         (sec. 301 of the Act)

                              Present Law

In general
    In general, an income tax deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization (sec. 170).
    Charitable contributions of cash are deductible in the 
amount contributed. In general, contributions of capital gain 
property to a qualified charity are deductible at fair market 
value with certain exceptions. Capital gain property means any 
capital asset or property used in the taxpayer's trade or 
business the sale of which at its fair market value, at the 
time of contribution, would have resulted in gain that would 
have been long-term capital gain. Contributions of other 
appreciated property generally are deductible at the donor's 
basis in the property. Contributions of depreciated property 
generally are deductible at the fair market value of the 
property.
Percentage limitations
            Contributions by individuals
    For individuals, in any taxable year, the amount deductible 
as a charitable contribution is limited to a percentage of the 
taxpayer's contribution base. The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. The contribution base is 
defined as the taxpayer's adjusted gross income computed 
without regard to any net operating loss carryback.
    Contributions by an individual taxpayer of property (other 
than appreciated capital gain property) to a charitable 
organization described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) may not exceed 50 
percent of the taxpayer's contribution base. Contributions of 
this type of property to nonoperating private foundations and 
certain other organizations generally may be deducted up to 30 
percent of the taxpayer's contribution base.
    Contributions of appreciated capital gain property to 
charitable organizations described in section 170(b)(1)(A) 
generally are deductible up to 30 percent of the taxpayer's 
contribution base. An individual may elect, however, to bring 
all these contributions of appreciated capital gain property 
for a taxable year within the 50-percent limitation category by 
reducing the amount of the contribution deduction by the amount 
of the appreciation in the capital gain property. Contributions 
of appreciated capital gain property to charitable 
organizations described in section 170(b)(1)(B) (e.g., private 
nonoperating foundations) are deductible up to 20 percent of 
the taxpayer's contribution base.
            Contributions by corporations
    For corporations, in any taxable year, charitable 
contributions are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating loss or capital 
loss carrybacks.
    For purposes of determining whether a corporation's 
aggregate charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions.
            Carryforward of excess contributions
    Charitable contributions that exceed the applicable 
percentage limitation may be carried forward for up to five 
years (sec. 170(d)). The amount that may be carried forward 
from a taxable year (``contribution year'') to a succeeding 
taxable year may not exceed the applicable percentage of the 
contribution base for the succeeding taxable year less the sum 
of contributions made in the succeeding taxable year plus 
contributions made in taxable years prior to the contribution 
year and treated as paid in the succeeding taxable year.

Overall limitation on itemized deductions (``Pease'' limitation)

    Under present law, the total amount of otherwise allowable 
itemized deductions (other than medical expenses, investment 
interest, and casualty, theft, or wagering losses) is reduced 
by three percent of the amount of the taxpayer's adjusted gross 
income in excess of a certain threshold. The otherwise 
allowable itemized deductions may not be reduced by more than 
80 percent. For 2005, the adjusted gross income threshold is 
$145,950 ($72,975 for a married taxpayer filing a joint 
return). These dollar amounts are adjusted for inflation.
    The otherwise applicable overall limitation on itemized 
deductions is reduced by one-third in taxable years beginning 
in 2006 and 2007, and by two-thirds in taxable years beginning 
in 2008 and 2009. The overall limitation is repealed for 
taxable years beginning after December 31, 2009, and reinstated 
for taxable years beginning after December 31, 2010.

                        Explanation of Provision


Suspension of percentage limitations

    Under the provision, in the case of an individual, the 
deduction for qualified contributions is allowed up to the 
amount by which the taxpayer's contribution base exceeds the 
deduction for other charitable contributions. Contributions in 
excess of this amount are carried over to succeeding taxable 
years as contributions described in section 170(b)(1)(A), 
subject to the limitations of section 170(d)(1)(A)(i) and (ii).
    In the case of a corporation, the deduction for qualified 
contributions is allowed up to the amount by which the 
corporation's taxable income (as computed under section 
170(b)(2)) exceeds the deduction for other charitable 
contributions. Contributions in excess of this amount are 
carried over to succeeding taxable years, subject to the 
limitations of section 170(d)(2).
    In applying subsections (b) and (d) of section 170 to 
determine the deduction for other contributions, qualified 
contributions are not taken into account (except to the extent 
qualified contributions are carried over to succeeding taxable 
years under the rules described above).
    Qualified contributions are cash contributions made during 
the period beginning on August 28, 2005, and ending on December 
31, 2005, to a charitable organization described in section 
170(b)(1)(A) (other than a supporting organization described in 
section 509(a)(3)). Contributions of noncash property, such as 
securities, are not qualified contributions. Under the 
provision, qualified contributions must be to an organization 
described in section 170(b)(1)(A); thus, contributions to, for 
example, a charitable remainder trust generally are not 
qualified contributions, unless the charitable remainder 
interest is paid in cash to an eligible charity during the 
applicable time period. In the case of a corporation, qualified 
contributions must be for relief efforts related to Hurricane 
Katrina. Corporate taxpayers must substantiate that the 
contribution is made for this purpose. A taxpayer must elect to 
have the contributions treated as qualified contributions.
    Qualified contributions do not include a contribution if 
the contribution is for establishment of a new, or maintenance 
in an existing, segregated fund or account with respect to 
which the donor (or any person appointed or designated by such 
donor) has, or reasonably expects to have, advisory privileges 
with respect to distributions or investments by reason of the 
donor's status as a donor. For example, a segregated fund or 
account exists if a donor makes a charitable contribution and 
the donee separately identifies the donor's contribution on its 
books by reference to the donor. The donor has advisory 
privileges with respect to such segregated fund or account if 
the donor, by written agreement or otherwise, is permitted to 
provide advice to the donee as to the investment or 
distribution of amounts from such fund or account. In addition, 
a segregated fund or account also includes, but is not limited 
to, a separate bank account or trust established or maintained 
by a donee; however, in order for a contribution to such 
account or fund necessarily to be not a qualified contribution, 
the donor (or a person appointed or designated by the donor) 
must have or reasonably expect to have advisory privileges as 
to the investment or distribution of amounts in such account or 
fund. For instance, a donor reasonably expects to have advisory 
privileges with respect to contributions made by the donor if 
the donor understands that the donee will consider advice 
provided by the donor (or a person appointed or designated by 
the donor) in making investments or distributions. It is 
intended that a person shall not be treated as having advisory 
privileges by virtue of having a legal or contractual right or 
obligation, or a fiduciary duty, with respect to a segregated 
fund or account. If a donor makes a contribution for 
establishment of a new, or maintenance in an existing, 
segregated account or fund, and the donor also provides advice 
with respect to amounts in such account or fund by reason of 
the donor's position as an officer, employee, or director of 
the donee, and not by reason of the donor's status as a donor, 
then, under the provision, the donor is not treated as having 
or reasonably expecting to have advisory privileges with 
respect to such fund or account. However, if by reason of a 
donor's charitable contribution to a segregated account or 
fund, the donor secured, for example, an appointment on a 
committee of the donee organization that advised how to 
distribute or invest amounts in such account or fund, the 
contribution would not be a qualified contribution 
notwithstanding that the donor is an officer, employee, or 
director of the donee organization.
    Below are examples illustrating the operation of the 
provision. (The examples assume the taxpayer makes an election 
to have the provision apply.)
    Example 1.--Assume individual A's contribution base for 
2005 is $100,000; aggregate qualified contributions are 
$70,000; and other charitable contributions to organizations 
described in section 170(b)(1)(A) are $60,000. Under the 
provision, A is allowed a deduction of $100,000 for 2005 
($50,000 determined without regard to qualified contributions 
plus $50,000 for the qualified contributions). $30,000 is 
treated as a contribution described in section 170(b)(1)(A) 
paid in each of the five succeeding taxable years (subject to 
the limitations of section 170(d)(1)(A)(i) and (ii)). $30,000 
is the sum of the $10,000 excess referred to in section 
170(d)(1)(A) (the excess of $60,000 over $50,000) and the 
$20,000 excess referred to in section 301(b)(1)(B) of the Act 
(the excess of $70,000 over $50,000).
    Example 2.--For calendar year 2005, B, an individual, has a 
contribution base of $100,000. On January 10, 2005, B makes a 
$7,000 cash contribution to an organization described in 
section 170(b)(1)(A) and a $65,000 cash charitable contribution 
to an organization not so described. On October 10, 2005, B 
makes a $70,000 qualified contribution. In 2004, B made 
charitable contributions to organizations described in section 
170(b)(1)(A) that exceeded 50% of the contribution base by 
$5,000.
    First, subsections (b) and (d) of section 170 are applied 
by disregarding the qualified contribution. For 2005, a $12,000 
deduction is allowed under section 170(b)(1)(A)--the $7,000 
current year contribution and the $5,000 carryover from 2004. 
For 2005, a $30,000 deduction for the contribution to the 
organization not described in section 170(b)(1)(A) also is 
allowed. This amount is the lesser of (i) $38,000 ($50,000 (50% 
of B's contribution base) less the $12,000 allowed under 
section 170(b)(1)(A)) or (ii) $30,000 (30 percent of B's 
contribution base). The remaining contribution amount of 
$35,000 is carried over as a contribution to an organization 
which is not described in section 170(b)(1)(A). Thus, without 
regard to the qualified contribution, B is allowed a total 
contribution deduction of $42,000 in 2005.
    In addition, B may deduct $58,000 of the qualified 
contribution in 2005 (the lesser of (i) the $70,000 amount of 
the qualified contribution or (ii) the $58,000 excess of B's 
$100,000 contribution base over the $42,000 amount otherwise 
deductible). $12,000 is treated as a contribution described in 
section 170(b)(1)(A) paid in each of the five succeeding 
taxable years (subject to the limitations of section 
170(d)(1)(A)(i) and (ii)).
    In summary, B's deduction for 2005 is $100,000; $12,000 may 
be carried over as a contribution to an organization described 
in section 170(b)(1)(A) (subject to the limitations of section 
170(d)(1)(A)(i) and (ii)); and $35,000 may be carried over as a 
contribution to an organization not so described (subject to 
similar limitations).
    Example 3.--Assume corporation X's taxable income (as 
defined in section 170(b)(2)) for 2005 is $100,000; aggregate 
qualified contributions (which, in the case of a corporation, 
must be related to Hurricane Katrina relief efforts) are 
$100,000; and other charitable contributions are $20,000. Under 
the provision, X is allowed a deduction of $100,000 for 2005 
($10,000 determined without regard to qualified contributions 
plus $90,000 for the qualified contributions). $20,000 is 
deductible in each of the five succeeding taxable years 
(subject to the limitations of section 170(d)(2)(A)(i) and 
(ii)). $20,000 is the sum of the $10,000 excess referred to in 
section 170(d)(2)(A) (the excess of $20,000 over $10,000) and 
the $10,000 excess referred to in section 301(b)(2)(B) of the 
Act (the excess of $100,000 over $90,000).

Limitation on overall itemized deductions

    Under the provision, the charitable contribution deduction 
up to the amount of qualified contributions (as defined above) 
paid during the year is not treated as an itemized deduction 
for purposes of the overall limitation on itemized deductions.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

    B. Additional Personal Exemption for Housing Hurricane Katrina 
              Displaced Individuals (sec. 302 of the Act)


                              Present Law

    In order to determine taxable income, an individual reduces 
adjusted gross income (``AGI'') by any personal exemptions and 
either the standard deduction or itemized deductions. Personal 
exemptions generally are allowed for the taxpayer, his or her 
spouse if filing jointly, and any dependents (as defined in 
sec. 151). Personal exemptions are not allowed for purposes of 
determining a taxpayer's alternative minimum taxable income.
    For 2005, the amount deductible for each personal exemption 
is $3,200. This amount is indexed annually for inflation. The 
deduction for personal exemptions is phased out ratably for 
taxpayers with AGI over certain thresholds. These thresholds 
are indexed annually for inflation. Specifically, the total 
amount of exemptions that may be claimed by a taxpayer is 
reduced by two percent for each $2,500 (or portion thereof) by 
which the taxpayer's AGI exceeds the applicable threshold. (The 
phaseout rate is two percent for each $1,250 for married 
taxpayers filing separate returns.) Thus, the personal 
exemptions claimed are phased out over a $122,500 range (which 
is not indexed for inflation), beginning at the applicable 
threshold. The applicable thresholds for 2005 are $145,900 for 
single individuals, $218,950 for married individuals filing a 
joint return, $182,450 for heads of households, and $109,475 
for married individuals filing separate returns. For 2005, the 
point at which a taxpayer's personal exemptions are completely 
phased out is $268,450 for single individuals, $341,450 for 
married individuals filing a joint return, $304,950 for heads 
of households, and $170,725 for married individuals filing 
separate returns.

                        Explanation of Provision

    The provision provides an additional exemption of $500 for 
each Hurricane Katrina displaced individual of the taxpayer. 
The taxpayer may claim the additional exemption for no more 
than four individuals. Thus, the maximum additional exemption 
amount is $2,000. The provision applies only for taxable years 
beginning in 2005 and 2006; however, the exemption with respect 
to any Hurricane Katrina displaced individual may be claimed 
only one time for all taxable years.
    A Hurricane Katrina displaced individual is a person (1) 
whose principal place of abode on August 28, 2005 was in the 
Hurricane Katrina disaster area, (2) who is displaced from such 
abode, and (3) who is provided housing free of charge in the 
taxpayer's principal residence for a period of 60 consecutive 
days which ends in the taxable year in which the exemption is 
claimed. Additionally, in the case of a person whose principal 
place of abode on August 28, 2005 was located outside of the 
core disaster area, in order to qualify as a displaced 
individual such person's abode must have been damaged by 
Hurricane Katrina or such person must have been evacuated from 
such abode by reason of Hurricane Katrina. A Hurricane Katrina 
displaced individual may not be the spouse or any dependent of 
the taxpayer. In order to claim the additional exemption, the 
taxpayer must provide the taxpayer identification number of the 
displaced individual. Additionally, the exemption is not 
allowed if the taxpayer receives any rent or other amount from 
any source in connection with the providing of housing for a 
displaced individual.
    The additional exemption is not subject to the income-based 
phaseouts applicable to personal exemptions, and is allowed as 
a deduction in computing alternative minimum taxable income.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

  C. Increase in Standard Mileage Rate for Charitable Use of Vehicles 
                         (sec. 303 of the Act)


                              Present Law

    In general, an itemized deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization. Unreimbursed out-of-pocket expenditures 
made incident to providing donated services to a qualified 
charitable organization--such as out-of-pocket transportation 
expenses necessarily incurred in performing donated services--
may qualify as a charitable contribution (Treasury Regulation 
sec. 1.170A-1(g)). No charitable contribution deduction is 
allowed for traveling expenses (including expenses for meals 
and lodging) while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel (sec. 
170(j)).
    In determining the amount treated as a charitable 
contribution where a taxpayer operates a vehicle in providing 
donated services to a charity, the taxpayer either may deduct 
actual out-of-pocket expenditures or, in the case of a 
passenger automobile, may use the charitable standard mileage 
rate. The charitable standard mileage rate is set by statute at 
14 cents per mile (sec. 170(i)). The taxpayer may also deduct 
(under either computation method), any parking fees and tolls 
incurred in rendering the services, but may not deduct any 
amount (regardless of the computation method used) for general 
repair or maintenance expenses, depreciation, insurance, 
registration fees, etc. Regardless of the computation method 
used, the taxpayer must keep reliable written records of 
expenses incurred. For example, where a taxpayer uses the 
charitable standard mileage rate to determine a deduction, the 
IRS has stated that the taxpayer generally must maintain 
records of miles driven, time, place (or use), and purpose of 
the mileage. If the charitable standard mileage rate is not 
used to determine the deduction, the taxpayer generally must 
maintain reliable written records of actual expenses incurred.
    In lieu of actual operating expenses, an optional standard 
mileage rate may be used in computing the deductible costs of 
business use of an automobile. The business standard mileage 
rate is determined by the IRS and updated periodically. For 
expenses incurred on or after January 1, 2005, and before 
September 1, 2005, the business standard mileage rate specified 
by the IRS is 40.5 cents per mile. For expenses incurred on or 
after September 1, 2005, and before January 1, 2006, the 
business standard mileage rate specified by the IRS is 48.5 
cents per mile (IRS Announcement 2005-99 (September 9, 2005)).
    The standard mileage rate for charitable purposes is lower 
than the standard business rate because the charitable rate 
covers only the out-of-pocket operating expenses (including 
gasoline and oil) directly related to the use of the automobile 
in performing the donated services that a taxpayer may deduct 
as a charitable contribution. The charitable rate does not 
include costs that are not deductible as a charitable 
contribution such as general repair or maintenance expenses, 
depreciation, insurance, and registration fees. Such costs are, 
however, included in computing the business standard mileage 
rate.

                        Explanation of Provision

    The provision allows a taxpayer who uses a vehicle in 
providing donated services to charity solely for the provision 
of relief related to Hurricane Katrina to compute the 
taxpayer's charitable mileage deduction using a rate (rounded 
to the next highest cent) equal to 70 percent of the business 
mileage rate in effect on the date of the contribution, rather 
than the charitable standard mileage rate generally in effect 
under section 170(i) (14 cents per mile). For purposes of this 
provision, the term vehicle includes any vehicle described in 
section 170(f)(12)(E)(i) (i.e., a motor vehicle manufactured 
primarily for use on the public streets, roads, and highways). 
As an alternative to determining the amount of the deduction 
using the mileage rate described in the provision, a taxpayer 
may determine the amount of the deduction using actual out-of-
pocket expenditures.
    It is intended that in addition to the present law 
substantiation requirements for use of the statutory mileage 
rate, a taxpayer must substantiate that expenses are incurred 
in providing relief related to Hurricane Katrina. The present-
law statutory rate applies if a taxpayer fails to substantiate 
that the expenses are incurred for the provision of relief 
related to Hurricane Katrina, assuming all other present-law 
requirements are met.
    The provision applies for purposes of contributions made 
during the period beginning on August 25, 2005, and ending on 
December 31, 2006.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

D. Mileage Reimbursements to Charitable Volunteers Excluded From Gross 
                      Income (sec. 304 of the Act)


                              Present Law

    In general, an itemized deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization. Unreimbursed out-of-pocket expenditures 
made incident to providing donated services to a qualified 
charitable organization--such as out-of-pocket transportation 
expenses necessarily incurred in performing donated services--
may qualify as a charitable contribution (Treasury Regulation 
sec. 1.170A-1(g)). No charitable contribution deduction is 
allowed for traveling expenses (including expenses for meals 
and lodging) while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel (sec. 
170(j)).
    In determining the amount treated as a charitable 
contribution where a taxpayer operates a vehicle in providing 
donated services to a charity, the taxpayer either may deduct 
actual out-of-pocket expenditures or, in the case of a 
passenger automobile, may use the charitable standard mileage 
rate. The charitable standard mileage rate is set by statute at 
14 cents per mile (sec. 170(i)). The taxpayer may also deduct 
(under either computation method), any parking fees and tolls 
incurred in rendering the services, but may not deduct any 
amount (regardless of the computation method used) for general 
repair or maintenance expenses, depreciation, insurance, 
registration fees, etc. Regardless of the computation method 
used, the taxpayer must keep reliable written records of 
expenses incurred. For example, where a taxpayer uses the 
charitable standard mileage rate to determine a deduction, the 
IRS has stated that the taxpayer generally must maintain 
records of miles driven, time, place (or use), and purpose of 
the mileage. If the charitable standard mileage rate is not 
used to determine the deduction, the taxpayer generally must 
maintain reliable written records of actual expenses incurred.
    In lieu of actual operating expenses, an optional standard 
mileage rate may be used in computing the deductible costs of 
business use of an automobile. The business standard mileage 
rate is determined by the IRS and updated periodically. For 
expenses incurred on or after January 1, 2005, and before 
September 1, 2005, the business standard mileage rate specified 
by the IRS is 40.5 cents per mile. For expenses incurred on or 
after September 1, 2005, and before January 1, 2006, the 
business standard mileage rate specified by the IRS is 48.5 
cents per mile (IRS Announcement 2005-99 (September 9, 2005)).
    The standard mileage rate for charitable purposes is lower 
than the standard business rate because the charitable rate 
covers only the out-of-pocket operating expenses (including 
gasoline and oil) directly related to the use of the automobile 
in performing the donated services that a taxpayer may deduct 
as a charitable contribution. The charitable rate does not 
include costs that are not deductible as a charitable 
contribution such as general repair or maintenance expenses, 
depreciation, insurance, and registration fees. Such costs are, 
however, included in computing the business standard mileage 
rate.
    Volunteer drivers who are reimbursed for mileage expenses 
have taxable income to the extent the reimbursement exceeds 
deductible travel expenses. Employees who are reimbursed for 
mileage expenses under a qualified arrangement that pays a 
mileage allowance in lieu of reimbursing actual expenses 
generally have taxable income to the extent the reimbursement 
exceeds the amount of the business standard mileage rate 
multiplied by the actual business miles.

                        Explanation of Provision

    Under the provision, reimbursement by an organization 
described in section 170(c) (including public charities and 
private foundations) to a volunteer for the costs of using a 
passenger automobile in providing donated services to charity 
solely for the provision of relief related to Hurricane Katrina 
is excludable from the gross income of the volunteer up to an 
amount that does not exceed the amount that would be computed 
using the business standard mileage rate (as periodically 
adjusted), provided that recordkeeping requirements applicable 
to deductible business expenses are satisfied. The provision 
does not permit a volunteer to claim a deduction or credit with 
respect to amounts excluded under the provision.
    The provision applies for purposes of use of a passenger 
automobile during the period beginning on August 25, 2005, and 
ending on December 31, 2006.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

 E. Charitable Deduction for Contributions of Food Inventory (sec. 305 
                  of the Act and sec. 170 of the Code)


                              Present Law

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis (sec. 170(e)(3)). In general, a C corporation's 
charitable contribution deductions for a year may not exceed 10 
percent of the corporation's taxable income (sec. 170(b)(2)). 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer, 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.

                     Explanation of Provision \254\

    Under the provision, any taxpayer, whether or not a C 
corporation, engaged in a trade or business is eligible to 
claim the enhanced deduction for donations of food inventory. 
For taxpayers other than C corporations, the total deduction 
for donations of food inventory in a taxable year generally may 
not exceed 10 percent of the taxpayer's net income for such 
taxable year from all sole proprietorships, S corporations, or 
partnerships (or other entity that is not a C corporation) from 
which contributions of apparently wholesome food are made. For 
example, if a taxpayer is a sole proprietor, a shareholder in 
an S corporation, and a partner in a partnership, and each 
business makes charitable contributions of food inventory, the 
taxpayer's deduction for donations of food inventory is limited 
to 10 percent of the taxpayer's net income from the sole 
proprietorship and the taxpayer's interests in the S 
corporation and partnership. However, if only the sole 
proprietorship and the S corporation made charitable 
contributions of food inventory, the taxpayer's deduction would 
be limited to 10 percent of the net income from the trade or 
business of the sole proprietorship and the taxpayer's interest 
in the S corporation, but not the taxpayer's interest in the 
partnership.
---------------------------------------------------------------------------
    \254\ The provision was subsequently extended in section 1202 of 
the Pension Protection Act of 2006, Pub. L. No. 109-280, described in 
Part Thirteen.
---------------------------------------------------------------------------
    Under the provision, the enhanced deduction is available 
only for food that qualifies as ``apparently wholesome food.'' 
``Apparently wholesome food'' is defined as food intended for 
human consumption that meets all quality and labeling standards 
imposed by Federal, State, and local laws and regulations even 
though the food may not be readily marketable due to 
appearance, age, freshness, grade, size, surplus, or other 
conditions.
    The provision does not apply to contributions made after 
December 31, 2005.

                             Effective Date

    The provision is effective for contributions made on or 
after August 28, 2005, in taxable years ending after such date.

F. Charitable Deduction for Contributions of Book Inventories to Public 
         Schools (sec. 306 of the Act and sec. 170 of the Code)


                              Present Law

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis (sec. 170(e)(3)). To be eligible for the enhanced 
deduction, the contributed property generally must be inventory 
of the taxpayer, contributed to a charitable organization 
described in section 501(c)(3) (except for private nonoperating 
foundations), and the donee must: (1) use the property 
consistent with the donee's exempt purpose solely for the care 
of the ill, the needy, or infants, (2) not transfer the 
property in exchange for money, other property, or services, 
and (3) provide the taxpayer a written statement that the 
donee's use of the property will be consistent with such 
requirements.
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.

                     Explanation of Provision \255\

    The provision extends the present-law enhanced deduction 
for C corporations to qualified book contributions. A qualified 
book contribution means a charitable contribution of books to a 
public school that provides elementary education or secondary 
education (kindergarten through grade 12) and that is an 
educational organization that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of pupils or students in attendance at the place where its 
educational activities are regularly carried on. The enhanced 
deduction is not allowed unless the donee organization 
certifies in writing that the contributed books are suitable, 
in terms of currency, content, and quantity, for use in the 
donee's educational programs and that the donee will use the 
books in such educational programs.
---------------------------------------------------------------------------
    \255\ The provision was subsequently extended in section 1204 of 
the Pension Protection Act of 2006, Pub. L. No. 109-280, described in 
Part Thirteen.
---------------------------------------------------------------------------
    The provision does not apply to contributions made after 
December 31, 2005.

                             Effective Date

    The provision is effective for contributions made on or 
after August 28, 2005, in taxable years ending after such date.

               TITLE IV--ADDITIONAL TAX RELIEF PROVISIONS

  A. Exclusion for Certain Cancellations of Indebtedness by Reason of 
                Hurricane Katrina (sec. 401 of the Act)

                              Present Law

    Gross income includes income that is realized by a debtor 
from the discharge of indebtedness, subject to certain 
exceptions for debtors in Title 11 bankruptcy cases, insolvent 
debtors, certain farm indebtedness, and certain real property 
business indebtedness (secs. 61(a)(12) and 108). In cases 
involving discharges of indebtedness that are excluded from 
gross income (except for discharges of real property business 
indebtedness), taxpayers generally exclude discharge of 
indebtedness from income but reduce tax attributes by the 
amount of the discharge of indebtedness. The amount of 
discharge of indebtedness excluded from income by an insolvent 
debtor not in a Title 11 bankruptcy case cannot exceed the 
amount by which the debtor is insolvent. For all taxpayers, the 
amount of discharge of indebtedness generally is equal to the 
difference between the adjusted issue price of the debt being 
cancelled and the amount used to satisfy the debt. These rules 
generally apply to the exchange of an old obligation for a new 
obligation, including a modification of indebtedness that is 
treated as an exchange (a debt- for-debt exchange).
    Present law generally requires ``applicable entities'' to 
file information returns with the IRS regarding any discharge 
of indebtedness in the amount of $600 or more (sec. 6050P). 
This requirement applies without regard to whether the debtor 
is subject to tax on the discharged indebtedness. The term 
``applicable entities'' (as defined in sec. 6050P(c)(1) 
includes: (1) any financial institution (as described in 
section 581 (relating to banks) or section 591(a) (relating to 
savings institutions)); (2) any credit union; (3) any 
corporation that is a direct or indirect subsidiary of an 
entity described in (1) or (2) which, by virtue of being 
affiliated with such entity, is subject to supervision and 
examination by a Federal or State agency regulating such 
entities; (4) the Federal Deposit Insurance Corporation, the 
Resolution Trust Corporation, the National Credit Union 
Administration, certain other Federal executive agencies, and 
any successor or subunit of any of them; (5) an executive, 
judicial, or legislative agency (as defined in 31 U.S.C. 
section 3701(a)(4)); and (6) any other organization a 
significant trade or business of which is the lending of money. 
Failures to file correct information returns with the IRS or to 
furnish statements to taxpayers with respect to these 
discharges of indebtedness are subject to the same general 
penalty that is imposed with respect to failures to provide 
other types of information returns. Accordingly, the penalty 
for failure to furnish statements to taxpayers generally is $50 
per failure, subject to a maximum of $100,000 for any calendar 
year. These penalties are not applicable if the failure is due 
to reasonable cause and not to willful neglect.

                        Explanation of Provision

    The provision provides that gross income of a qualified 
individual does not include any amount which would otherwise be 
includible in gross income by reason of a discharge (in whole 
or in part) of nonbusiness debt if the indebtedness is 
discharged by an applicable entity. For these purposes, 
nonbusiness debt is any indebtedness other than indebtedness 
incurred in connection with a trade or business. The discharge 
of indebtedness relief allowed under this provision does not 
apply to any indebtedness to the extent that real property 
constituting security for such indebtedness is located outside 
the Hurricane Katrina disaster area. As under the present-law 
rules, the amount excluded from gross income under this 
provision reduces the tax attributes of the taxpayer.
    A qualified individual is any natural person if the 
principal place of abode of such person on August 25, 2005 was 
located: (1) in the core disaster area; or (2) in the Hurricane 
Katrina disaster area and such person suffered economic loss by 
reason of Hurricane Katrina. An applicable entity is defined as 
under present-law section 6050P(c)(1).
    The provision does not apply to discharges made after 
December 31, 2006.

                             Effective Date

    The provision applies to discharges made on or after August 
25, 2005.

B. Suspension of Certain Limitations on Personal Casualty Losses (sec. 
                            402 of the Act)

                              Present Law

    Under present law, a taxpayer may generally claim a 
deduction for any loss sustained during the taxable year and 
not compensated by insurance or otherwise (sec. 165). For 
individual taxpayers, deductible losses must be incurred in a 
trade or business or other profit-seeking activity or consist 
of property losses arising from fire, storm, shipwreck, or 
other casualty, or from theft. Personal casualty or theft 
losses are deductible only if they exceed $100 per casualty or 
theft. In addition, aggregate net casualty and theft losses are 
deductible only to the extent they exceed 10 percent of an 
individual taxpayer's adjusted gross income.

                        Explanation of Provision

    The provision removes two limitations on personal casualty 
or theft losses to the extent those losses arise in the 
Hurricane Katrina disaster area on or after August 25, 2005, 
and are attributable to Hurricane Katrina. First, personal 
casualty or theft losses meeting the above requirements need 
not exceed $100 per casualty or theft. Second, such losses are 
deductible without regard to whether aggregate net losses 
exceed 10 percent of a taxpayer's adjusted gross income. For 
purposes of applying the 10 percent threshold to other personal 
casualty or theft losses, losses deductible under this 
provision are disregarded. Thus, the provision has the effect 
of treating personal casualty or theft losses from Hurricane 
Katrina as a deduction separate from all other casualty losses.

                             Effective Date

    The provision is effective for losses arising on or after 
August 25, 2005.

 C. Required Exercise of IRS Administrative Authority (sec. 403 of the 
                                  Act)


                                Present


General time limits for filing tax returns

    Individuals generally must file their Federal income tax 
returns by April 15 of the year following the close of a 
taxable year. The Secretary may grant reasonable extensions of 
time for filing such returns. Treasury regulations provide an 
additional automatic two-month extension (until June 15 for 
calendar-year individuals) for United States citizens and 
residents in military or naval service on duty on April 15 of 
the following year (the otherwise applicable due date of the 
return) outside the United States. No action is necessary to 
apply for this extension, but taxpayers must indicate on their 
returns (when filed) that they are claiming this extension. 
Unlike most extensions of time to file, this extension applies 
to both filing returns and paying the tax due.
    Treasury regulations also provide, upon application on the 
proper form, an automatic four-month extension (until August 15 
for calendar-year individuals) for any individual timely filing 
that form and paying the amount of tax estimated to be due.
    In general, individuals must make quarterly estimated tax 
payments by April 15, June 15, September 15, and January 15 of 
the following taxable year. Wage withholding is considered to 
be a payment of estimated taxes.

Suspension of time periods

    In general, the period of time for performing various acts 
under the Code, such as filing tax returns, paying taxes, or 
filing a claim for credit or refund of tax, is suspended for 
any individual serving in the Armed Forces of the United States 
in an area designated as a ``combat zone'' or when deployed 
outside the United States away from the individual's permanent 
duty station while participating in an operation designated by 
the Secretary of Defense as a ``contingency operation'' or that 
becomes a contingency operation. The suspension of time also 
applies to an individual serving in support of such Armed 
Forces in the combat zone or contingency operation, such as Red 
Cross personnel, accredited correspondents, and civilian 
personnel acting under the direction of the Armed Forces in 
support of those Forces. The designation of a combat zone must 
be made by the President in an Executive Order. A contingency 
operation is defined as a military operation that is designated 
by the Secretary of Defense as an operation in which members of 
the Armed Forces are or may become involved in military 
actions, operations, or hostilities against an enemy of the 
United States or against an opposing military force, or results 
in the call or order to (or retention of) active duty of 
members of the uniformed services during a war or a national 
emergency declared by the President or Congress.
    The suspension of time encompasses the period of service in 
the combat zone during the period of combatant activities in 
the zone or while participating in a contingency operation, as 
well as (1) any time of continuous qualified hospitalization 
resulting from injury received in the combat zone or 
contingency operation or (2) time in missing in action status, 
plus the next 180 days.
    The suspension of time applies to the following acts:
          1. Filing any return of income, estate, or gift tax 
        (except employment and withholding taxes);
          2. Payment of any income, estate, or gift tax (except 
        employment and withholding taxes);
          3. Filing a petition with the Tax Court for 
        redetermination of a deficiency, or for review of a 
        decision rendered by the Tax Court;
          4. Allowance of a credit or refund of any tax;
          5. Filing a claim for credit or refund of any tax;
          6. Bringing suit upon any such claim for credit or 
        refund;
          7. Assessment of any tax;
          8. Giving or making any notice or demand for the 
        payment of any tax, or with respect to any liability to 
        the United States in respect of any tax;
          9. Collection of the amount of any liability in 
        respect of any tax;
          10. Bringing suit by the United States in respect of 
        any liability in respect of any tax; and
          11. Any other act required or permitted under the 
        internal revenue laws specified by the Secretary of the 
        Treasury.
    In the case of a Presidentially declared disaster or a 
terroristic or military action, the Secretary of the Treasury 
also has authority to prescribe a period of up to one year that 
may be disregarded for performing any of the acts listed above. 
The Secretary also may suspend the accrual of any interest, 
penalty, additional amount, or addition to tax for taxpayers in 
the affected areas.

                        Explanation of Provision

    The provision clarifies the scope of the Secretary's 
authority to suspend the time period for certain acts. The 
provision also adds employment and excise taxes to those items 
for which the Secretary may suspend filing and payment 
requirements for taxpayers serving in combat zones or 
contingency operations, as well as taxpayers affected by 
Presidentially declared disasters or terroristic or military 
actions.
    In the case of taxpayers determined to be affected by the 
Presidentially declared disaster relating to Hurricane Katrina, 
any administrative relief from required acts, such as filing 
tax returns, paying taxes, or filing a claim for credit or 
refund of tax, shall be for a period ending not earlier than 
February 28, 2006. The provision also clarifies that any 
administrative relief provided to taxpayers affected by 
Hurricane Katrina prior to the date of enactment shall be 
treated as applying to the filing of returns relating to, and 
the payment of, employment and excise taxes.

                             Effective Date

    The provision extending IRS administrative relief relating 
to Hurricane Katrina until at least February 28, 2006, is 
effective on the date of enactment (September 23, 2005). The 
amendments adding employment and excise taxes to those items 
for which the Secretary may suspend filing and payment 
requirements are effective for any period for performing an act 
which has not expired before August 25, 2005.

   D. Special Rules for Mortgage Revenue Bonds (sec. 404 of the Act)


                              Present Law


In general

    Under present law, gross income does not include interest 
on State or local bonds (sec. 103). State and local bonds are 
classified generally as either governmental bonds or private 
activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or which are 
repaid with governmental funds. Private activity bonds are 
bonds with respect to which the State or local government 
serves as a conduit providing financing to nongovernmental 
persons (e.g., private businesses or individuals). The 
exclusion from income for State and local bonds does not apply 
to private activity bonds, unless the bonds are issued for 
certain permitted purposes (``qualified private activity 
bonds'') (secs. 103(b)(1) and 141).

Qualified mortgage bonds

    The definition of a qualified private activity bond 
includes a qualified mortgage bond (sec. 143). Qualified 
mortgage bonds are issued to make mortgage loans to qualified 
mortgagors for the purchase, improvement, or rehabilitation of 
owner-occupied residences. The Code imposes several limitations 
on qualified mortgage bonds, including income limitations for 
homebuyers and purchase price limitations for the home financed 
with bond proceeds. In addition to these limitations, qualified 
mortgage bonds generally cannot be used to finance a mortgage 
for a homebuyer who had an ownership interest in a principal 
residence in the three years preceding the execution of the 
mortgage (the ``first-time homebuyer'' requirement). The first-
time homebuyer requirement does not apply to targeted area 
residences. A targeted area residence is one located in either 
(1) a census tract in which at least 70 percent of the families 
have an income which is 80 percent or less of the state-wide 
median income or (2) an area of chronic economic distress.
    Qualified mortgage bonds also may be used to finance 
qualified home-improvement loans. Qualified home-improvement 
loans are defined as loans to finance alterations, repairs, and 
improvements on an existing residence, but only if such 
alterations, repairs, and improvements substantially protect or 
improve the basic livability or energy efficiency of the 
property. Under present law, qualified home-improvement loans 
may not exceed $15,000.
    A temporary provision waived the first-time homebuyer 
requirement for residences located in certain Presidentially 
declared disaster areas (sec. 143(k)(11)). In addition, 
residences located in such areas were treated as targeted area 
residences for purposes of the income and purchase price 
limitations. The special rule for residences located in 
Presidentially declared disaster areas does not apply to bonds 
issued after January 1, 1999.

                     Explanation of Provision \256\

---------------------------------------------------------------------------
    \256\ The provision was subsequently extended in section 104 of the 
Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, described in 
Part Nine.
---------------------------------------------------------------------------
    The provision waives the first-time homebuyer requirement 
for qualified Hurricane Katrina recovery residences by treating 
such residences as if they were targeted area residences. A 
qualified Hurricane Katrina recovery residence is defined as 
(1) any residence located in the core disaster area and (2) any 
other residence if, on August 28, 2005, the mortgagor of such 
residence owned a principal residence in the Hurricane Katrina 
disaster area that was rendered uninhabitable by reason of 
Hurricane Katrina and the residence being financed is located 
in the same State as the prior principal residence. The 
provision applies to residences financed before January 1, 
2008.
    The provision also increases from $15,000 to $150,000 the 
permitted amount of a qualified home-improvement loan with 
respect to residences located in the Hurricane Katrina disaster 
area to the extent such loan is for the repair of damage caused 
by Hurricane Katrina.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

E. Extension of Replacement Period for Nonrecognition of Gain (sec. 405 
                              of the Act)


                              Present Law

    Generally, a taxpayer realizes gain to the extent the sales 
price (and any other consideration received) exceeds the 
taxpayer's basis in the property. The realized gain is subject 
to current income tax unless the gain is deferred or not 
recognized under a special tax provision.
    Under section 1033, gain realized by a taxpayer from an 
involuntary conversion of property is deferred to the extent 
the taxpayer purchases property similar or related in service 
or use to the converted property within the applicable period. 
The taxpayer's basis in the replacement property generally is 
the cost of such property, reduced by the amount of gain not 
recognized.
    The applicable period for the taxpayer to replace the 
converted property begins with the date of the disposition of 
the converted property (or if earlier, the earliest date of the 
threat or imminence of requisition or condemnation of the 
converted property) and ends two years after the close of the 
first taxable year in which any part of the gain upon 
conversion is realized (the ``replacement period'').
    Special rules extend the replacement period for certain 
real property and principal residences damaged by a 
Presidentially declared disaster to three years and four years, 
respectively, after the close of the first taxable year in 
which gain is realized. Similarly, the replacement period for 
livestock sold on account of drought, flood, or other weather-
related conditions is extended from two years to four years 
after the close of the first taxable year in which any part of 
the gain on conversion is realized. In the case of property 
compulsorily or involuntarily converted as a result of the 
terrorist attacks on September 11, 2001, in the New York 
Liberty Zone, the replacement period is extended from two years 
to five years, but only if substantially all of the use of the 
replacement property is in the city of New York (sec. 
1400L(g)).

                        Explanation of Provision

    The provision extends from two to five years the 
replacement period in which a taxpayer may replace converted 
property, in the case of property that is in the Hurricane 
Katrina disaster area and that is compulsorily or involuntarily 
converted on or after August 25, 2005, by reason of Hurricane 
Katrina. Substantially all of the use of the replacement 
property must be in this area.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

  F. Special Look-Back Rule for Determining Earned Income Credit and 
             Refundable Child Credit (sec. 406 of the Act)


                              Present Law

    Present law provides eligible taxpayers with an earned 
income credit and a child credit. In general, the earned income 
credit is a refundable credit for low-income workers (sec. 32). 
The amount of the credit depends on the earned income of the 
taxpayer and whether the taxpayer has one, more than one, or no 
qualifying children. Earned income generally includes wages, 
salaries, tips, and other employee compensation, plus net 
earnings from self-employment.
    Taxpayers with incomes below certain threshold amounts are 
eligible for a $1,000 credit for each qualifying child (sec. 
24). The child credit is refundable to the extent of 15 percent 
of the taxpayer's earned income in excess of $10,000. (The 
$10,000 income threshold is indexed for inflation and is 
currently $11,000 for 2005.) Families with three or more 
children are allowed a refundable credit for the amount by 
which the taxpayer's social security taxes exceed the 
taxpayer's earned income credit, if that amount is greater than 
the refundable credit based on the taxpayer's earned income in 
excess of $10,000 (indexed for inflation).

                        Explanation of Provision

    The provision permits qualified individuals to elect to 
calculate their earned income credit and refundable child 
credit for the taxable year which includes August 25, 2005, 
using their earned income from the prior taxable year. 
Qualified individuals are permitted to make the election only 
if their earned income for the taxable year which includes 
August 25, 2005, is less than their earned income for the 
preceding taxable year. Qualified individuals are (1) 
individuals who on August 25, 2005, had their principal place 
of abode in the core disaster area or (2) individuals who on 
such date were not in the core disaster area but lived in the 
Hurricane Katrina disaster area and were displaced from their 
homes.
    For purposes of the provision, in the case of a joint 
return for a taxable year which includes August 25, 2005, the 
provision applies if either spouse is a qualified individual. 
In such cases, the earned income which is attributable to the 
taxpayer for the preceding taxable year is the sum of the 
earned income which is attributable to each spouse for such 
preceding taxable year.
    Any election to use the prior year's earned income under 
the provision applies with respect to both the earned income 
credit and refundable child credit. For administrative 
purposes, the incorrect use on a return of earned income 
pursuant to an election under this provision is treated as a 
mathematical or clerical error. An election under the provision 
is disregarded for purposes of calculating gross income in the 
election year.

                             Effective Date

    The provision is effective for the taxable year of a 
qualified individual that includes August 25, 2005.

  G. Secretarial Authority to Make Adjustments Regarding Taxpayer and 
Dependency Status for Taxpayers Affected by Hurricane Katrina (sec. 407 
                              of the Act)


                              Present Law

    In order to determine taxable income, an individual reduces 
adjusted gross income (``AGI'') by any personal exemptions and 
either the standard deduction or itemized deductions. Personal 
exemptions generally are allowed for the taxpayer, his or her 
spouse, and any dependents (as defined in sec. 151). Personal 
exemptions are not allowed for purposes of determining a 
taxpayer's alternative minimum taxable income.
    For 2005, the amount deductible for each personal exemption 
is $3,200. This amount is indexed annually for inflation. The 
deduction for personal exemptions is phased out ratably for 
taxpayers with AGI over certain thresholds. These thresholds 
are indexed annually for inflation. Specifically, the total 
amount of exemptions that may be claimed by a taxpayer is 
reduced by two percent for each $2,500 (or portion thereof) by 
which the taxpayer's AGI exceeds the applicable threshold. (The 
phaseout rate is two percent for each $1,250 for married 
taxpayers filing separate returns.) Thus, the personal 
exemptions claimed are phased out over a $122,500 range (which 
is not indexed for inflation), beginning at the applicable 
threshold. The applicable thresholds for 2005 are $145,900 for 
single individuals, $218,950 for married individuals filing a 
joint return, $182,450 for heads of households, and $109,475 
for married individuals filing separate returns. For 2005, the 
point at which a taxpayer's personal exemptions are completely 
phased out is $268,450 for single individuals, $341,450 for 
married individuals filing a joint return, $304,950 for heads 
of households, and $170,725 for married individuals filing 
separate returns.
    Present law provides eligible taxpayers with an earned 
income credit and a child credit. In general, the earned income 
credit is a refundable credit for low-income workers. The 
amount of the credit depends on the earned income of the 
taxpayer and whether the taxpayer has one, more than one, or no 
qualifying children. Earned income generally includes wages, 
salaries, tips, and other employee compensation, plus net 
earnings from self-employment.
    Taxpayers with incomes below certain threshold amounts are 
eligible for a $1,000 credit for each qualifying child. The 
child credit is refundable to the extent of 15 percent of the 
taxpayer's earned income in excess of $10,000. (The $10,000 
income threshold is indexed for inflation and is currently 
$11,000 for 2005.) Families with three or more children are 
allowed a refundable credit for the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit, if that amount is greater than the refundable 
credit based on the taxpayer's earned income in excess of 
$10,000 (indexed for inflation).

                        Explanation of Provision

    The provision authorizes the Secretary to make such 
adjustments in the application of the Federal tax laws as may 
be necessary to ensure that taxpayers do not lose any deduction 
or credit or experience a change of filing status by reason of 
temporary relocations caused by Hurricane Katrina. Such 
adjustments may include, for example, addressing the 
application of the residency requirements relating to 
dependency exemptions in the case of relocations due to 
Hurricane Katrina. Any adjustments made under this provision 
must insure that an individual is not taken into account by 
more than one taxpayer with respect to the same tax benefit.
    The provision applies only for taxable years beginning in 
2005 or 2006.

                             Effective Date

    The provision is effective on the date of enactment 
(September 23, 2005).

PART EIGHT: SPORTFISHING AND RECREATIONAL BOATING SAFETY AMENDMENTS ACT 
                   OF 2005 (PUBLIC LAW 109-74) \257\
---------------------------------------------------------------------------

    \257\ H.R. 3649. The House passed the bill on the suspension 
calendar on September 13, 2005. The Senate passed the bill by unanimous 
consent on September 15, 2005. The President signed the bill on 
September 29, 2005.
---------------------------------------------------------------------------

A. Sportfishing and Recreational Boating Safety Amendments Act of 2005 
        (secs. 101 and 301 of the Act and sec. 9504 of the Code)

                              Present Law

    Prior to October 1, 2005, the effective date of the 
Sportfishing and Recreational Boating Safety Act of 2005 (the 
``Sportfishing Act''),\258\ section 9504(c) provided that 
amounts in the Boat Safety Account of the Aquatic Resources 
Trust Fund would be available for making expenditures before 
August 15, 2005, to carry out the purposes of the applicable 
expenditure provisions.\259\ The Sportfishing Act eliminated 
the Aquatic Resources Trust Fund and future transfers to the 
Boat Safety Account and transformed the Sport Fish Restoration 
Account of the Aquatic Resources Trust Fund into the Sport Fish 
Restoration and Boating Trust Fund. Under the Sportfishing Act, 
existing amounts in the Boat Safety Account, plus interest 
accrued on interest-bearing obligations of such account, are 
made available after September 30, 2005 as provided under 
expenditure provisions.\260\ The expenditure provisions also 
authorize the appropriation of amounts into the Sport Fish 
Restoration and Boating Trust Fund for the uses authorized in 
the expenditure provisions, including for boating safety. 
However, the Sportfishing Act does not provide that amounts in 
the Boat Safety Account would be available for making 
expenditures after August 14, 2005 and before October 1, 2005.
---------------------------------------------------------------------------
    \258\ Pub. L. No. 109-59, secs. 10101-10143, enacted August 10, 
2005.
    \259\ Expenditures from the Boat Safety Account are subject to 
annual appropriations.
    \260\ The expenditure provisions are codified at 16 U.S.C. sec. 777 
et seq., as amended by the Sportfishing and Recreational Boating Safety 
Act of 2005.
---------------------------------------------------------------------------

                        Explanation of Provision

    Except for specific expenditures stated in the Act, the 
provision temporarily preserves the provisions of law existing 
prior to the enactment of the Sportfishing Act,\261\ during the 
period from the date of enactment of the Sportfishing Act 
through September 30, 2005.
---------------------------------------------------------------------------
    \261\ These rules are generally found in the Act of August 9, 1950, 
64 Stat. 430 (codified at 16 U.S.C. sec. 777 et seq.) (``An Act to 
provide that the United States shall aid the States in fish restoration 
and management projects, and for other purposes,'' commonly referred to 
as the Dingell-Johnson Sport Fish Restoration Act.).
---------------------------------------------------------------------------

                             Effective Date

    The provisions are effective on the date of enactment 
(September 29, 2005).

PART NINE: GULF OPPORTUNITY ZONE ACT OF 2005 (PUBLIC LAW 109-135) \262\

            TITLE I--ESTABLISHMENT OF GULF OPPORTUNITY ZONE

               A. Tax Benefits for Gulf Opportunity Zone

1. Definitions of ``Gulf Opportunity Zone,'' ``Rita GO Zone,'' ``Wilma 
        GO Zone,'' and other definitions (sec. 101 of the Act and new 
        sec. 1400M of the Code)

                          General Definitions

Gulf Opportunity Zone
    For purposes of the Act, the ``Gulf Opportunity Zone'' is 
defined as that portion of the Hurricane Katrina Disaster Area 
determined by the President to warrant individual or individual 
and public assistance from the Federal Government under the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
by reason of Hurricane Katrina.
---------------------------------------------------------------------------
    \262\ H.R. 4440. The House passed the bill on the suspension 
calendar on December 7, 2005. The Senate passed the bill with an 
amendment by unanimous consent on December 16, 2005. The House agreed 
to the Senate amendment without objection on December 16, 2005. The 
President signed the bill on December 22, 2005. For a technical 
explanation of the bill prepared by the staff of the Joint Committee on 
Taxation, see Joint Committee on Taxation, Technical Explanation of the 
Revenue Provisions of H.R. 4440, the ``Gulf Opportunity Zone Act of 
2005'' as Passed by the House of Representatives and the Senate (JCX-
88-05), December 16, 2005. For references to the technical explanation, 
see 151 Cong. Rec. H 11940 (December 16, 2005) and 151 Cong. Rec. S 
14028 (December 19, 2005).
---------------------------------------------------------------------------
Hurricane Katrina disaster area
    The term ``Hurricane Katrina disaster area'' means an area 
with respect to which a major disaster has been declared by the 
President before September 14, 2005, under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
by reason of Hurricane Katrina.
Rita GO Zone
    The term ``Rita GO Zone'' means that portion of the 
Hurricane Rita disaster area determined by the President to 
warrant individual or individual and public assistance from the 
Federal Government under section 401 of the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act by reason of 
Hurricane Rita.
Hurricane Rita disaster area
    The term ``Hurricane Rita disaster area'' means an area 
with respect to which a major disaster has been declared by the 
President before October 6, 2005, under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance 
Act, by reason of Hurricane Rita.
Wilma GO Zone
    The term ``Wilma GO Zone'' means that portion of the 
Hurricane Wilma disaster area determined by the President to 
warrant individual or individual and public assistance from the 
Federal Government under section 401 of the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act by reason of 
Hurricane Wilma.
Hurricane Wilma disaster area
    The term ``Hurricane Wilma disaster area'' means an area 
with respect to which a major disaster has been declared by the 
President before November 14, 2005, under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance 
Act, by reason of Hurricane Wilma.
2. Tax-exempt bond financing for the Gulf Opportunity Zone (sec. 101 of 
        the Act and new sec. 1400N(a) of the Code)

                              Present Law

Rules governing issuance of tax-exempt bonds
            In general
    Under present law, gross income generally does not include 
interest on State or local bonds (sec. 103). State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or are repaid 
with governmental funds. Private activity bonds are bonds with 
respect to which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain permitted 
purposes (``qualified private activity bonds'').
            Private activities eligible for financing with tax-exempt 
                    bonds
    The definition of qualified private activity bonds includes 
an exempt facility bond, or qualified mortgage, veterans' 
mortgage, small issue, redevelopment, 501(c)(3), or student 
loan bond (sec. 141(e)). The definition of exempt facility bond 
includes bonds issued to finance certain transportation 
facilities (airports, ports, mass commuting, and high-speed 
intercity rail facilities); qualified residential rental 
projects; privately owned and/or operated utility facilities 
(sewage, water, solid waste disposal, and local district 
heating and cooling facilities, certain private electric and 
gas facilities, and hydroelectric dam enhancements); public/
private educational facilities; qualified green building and 
sustainable design projects; and qualified highway or surface 
freight transfer facilities (sec. 142(a)).
    As noted above, subject to certain requirements, qualified 
private activity bonds may be issued to finance residential 
rental property or owner-occupied housing. Residential rental 
property may be financed with exempt facility bonds if the 
financed project is a ``qualified residential rental project.'' 
A project is a qualified residential rental project if 20 
percent or more of the residential units in such project are 
occupied by individuals whose income is 50 percent or less of 
area median gross income (the ``20-50 test''). Alternatively, a 
project is a qualified residential rental project if 40 percent 
or more of the residential units in such project are occupied 
by individuals whose income is 60 percent or less of area 
median gross income (the ``40-60 test'').
    Owner-occupied housing may be financed with qualified 
mortgage bonds. Qualified mortgage bonds are bonds issued to 
make mortgage loans to qualified mortgagors for the purchase, 
improvement, or rehabilitation of owner-occupied residences. 
The Code imposes several limitations on qualified mortgage 
bonds, including income limitations for homebuyers and purchase 
price limitations for the home financed with bond proceeds. The 
income limitations are satisfied if all financing provided by 
an issue is provided for mortgagors whose family income does 
not exceed 115 percent of the median family income for the 
metropolitan area or State, whichever is greater, in which the 
financed residences are located. The purchase price limitations 
provide that a residence financed with qualified mortgage bonds 
may not have a purchase price in excess of 90 percent of the 
average area purchase price for that residence. In addition to 
these limitations, qualified mortgage bonds generally cannot be 
used to finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).
    Special income and purchase price limitations apply to 
targeted area residences. A targeted area residence is one 
located in either (1) a census tract in which at least 70 
percent of the families have an income which is 80 percent or 
less of the state-wide median income or (2) an area of chronic 
economic distress. For targeted area residences, the income 
limitation is satisfied when no more than one-third of the 
mortgages are made without regard to any income limits and the 
remainder of the mortgages are made to mortgagors whose family 
income is 140 percent or less of the applicable median family 
income. The purchase price limitation is raised from 90 percent 
to 110 percent of the average area purchase price for targeted 
area residences. In addition, the first-time homebuyer 
requirement does not apply to targeted area residences.
    Qualified mortgage bonds also may be used to finance 
qualified home-improvement loans. Qualified home-improvement 
loans are defined as loans to finance alterations, repairs, and 
improvements on an existing residence, but only if such 
alterations, repairs, and improvements substantially protect or 
improve the basic livability or energy efficiency of the 
property. Under present law, qualified home-improvement loans 
may not exceed $15,000.
    Issuance of most qualified private activity bonds is 
subject (in whole or in part) to annual State volume 
limitations (sec. 146)). Exceptions are provided for bonds for 
certain governmentally owned facilities (e.g., airports, ports, 
high-speed intercity rail, and solid waste disposal) and bonds 
which are subject to separate local, State, or national volume 
limits (e.g., public/private educational facility bonds, 
enterprise zone facility bonds, qualified green building bonds, 
and qualified highway or surface freight transfer facility 
bonds).
    In addition, qualified private activity bonds generally are 
subject to restrictions on the use of proceeds for the 
acquisition of land and existing property, use of proceeds to 
finance certain specified facilities (e.g., airplanes, 
skyboxes, other luxury boxes, health club facilities, gambling 
facilities, and liquor stores), and use of proceeds to pay 
costs of issuance (e.g., bond counsel and underwriter fees). 
Small issue and redevelopment bonds also are subject to 
additional restrictions on the use of proceeds for certain 
facilities (e.g., golf courses and massage parlors).
    Moreover, the term of qualified private activity bonds 
generally may not exceed 120 percent of the economic life of 
the property being financed and certain public approval 
requirements (similar to requirements that typically apply 
under State law to issuance of governmental debt) apply under 
Federal law to issuance of private activity bonds.
            Liberty Zone Bonds
    Present law permits an aggregate of $8 billion in exempt 
facility bonds for the purpose of financing the construction 
and rehabilitation of nonresidential real property and 
residential rental real property in a designated ``Liberty 
Zone'' (the ``Zone'') of New York City (``Liberty Zone 
bonds''). The Zone consists of all business addresses located 
on or south of Canal Street, East Broadway (east of its 
intersection with Canal Street), or Grand Street (east of its 
intersection with East Broadway) in the Borough of Manhattan. 
No more than $800 million of the authorized bond amount may be 
used to finance property used for retail sales of tangible 
property (e.g., department stores, restaurants, etc.) and 
functionally related and subordinate property. The $800 million 
limit is divided equally between the Mayor of New York City and 
the Governor of New York State. In addition, no more than $1.6 
billion of the authorized bond amount may be used to finance 
residential rental property. The $1.6 billion limit also is 
divided equally between the Mayor of New York City and the 
Governor of New York State. Liberty Zone Bonds must be issued 
before January 1, 2010.
    Property eligible for financing with these bonds includes 
buildings and their structural components, fixed tenant 
improvements, and public utility property (e.g., gas, water, 
electric and telecommunication lines). Fixtures and equipment 
that could be removed from the designated zone for use 
elsewhere are not eligible for financing with these bonds. 
Issuance of these bonds is limited to projects approved by the 
Mayor of New York City or the Governor of New York State, each 
of whom may designate up to $4 billion of the aggregate bond 
authority.
            Arbitrage restrictions on tax-exempt bonds
    To prevent States and local governments from issuing more 
tax-exempt bonds than necessary for the activity being financed 
or from issuing such bonds earlier than needed for the purpose 
of the borrowing, the Code includes arbitrage restrictions 
limiting the ability to profit from investment of tax-exempt 
bond proceeds. In general, arbitrage profits may be earned only 
during specified periods (e.g., defined ``temporary periods'' 
before funds are needed for the purpose of the borrowing) or on 
specified types of investments (e.g., ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government. 
Governmental bonds are subject to less restrictive arbitrage 
rules than most private activity bonds.

                        Explanation of Provision

Gulf Opportunity Zone Bonds
    The provision authorizes the issuance of qualified private 
activity bonds to finance the construction and rehabilitation 
of residential and nonresidential property located in the Gulf 
Opportunity Zone (``Gulf Opportunity Zone Bonds''). Gulf 
Opportunity Zone Bonds must be issued after the date of 
enactment and before January 1, 2011.
    Gulf Opportunity Zone Bonds may be issued by the State of 
Alabama, Louisiana, or Mississippi, or any political 
subdivision thereof. Issuance of bonds authorized under the 
provision is limited to projects approved by the Governor of 
the State (or the State bond commission in the case of a bond 
which is required under State law to be approved by such 
commission) in which the financed project shall be located. The 
maximum aggregate face amount of Gulf Opportunity Zone Bonds 
that may be issued in any State is limited to $2,500 multiplied 
by the population of the respective State within the Gulf 
Opportunity Zone. Current refundings of outstanding bonds 
issued under the provision do not count against the aggregate 
volume limit to the extent that the principal amount of the 
refunding bonds does not exceed the outstanding principal 
amount of the bonds being refunded. Gulf Opportunity Zone Bonds 
may not be advance refunded.
    Depending on the purpose for which such bonds are issued, 
Gulf Opportunity Zone Bonds are treated as either exempt 
facility bonds or qualified mortgage bonds. Gulf Opportunity 
Zone Bonds are treated as exempt facility bonds if 95 percent 
or more of the net proceeds of such bonds are to be used for 
qualified project costs located in the Gulf Opportunity Zone. 
Qualified project costs include the cost of acquisition, 
construction, reconstruction, and renovation of nonresidential 
real property (including buildings and their structural 
components and fixed improvements associated with such 
property), qualified residential rental projects (as defined in 
section 142(d) with certain modifications), and public utility 
property. For purposes of the provision, costs associated with 
improving a facility (e.g., installing equipment that enhances 
the pollution control of a manufacturing facility) may be 
permitted project costs if such costs are chargeable to the 
capital account of the facility or would be so chargeable 
either with a proper election by a taxpayer or but for a proper 
election by a taxpayer to deduct the costs.
    Bond proceeds may not be used to finance movable fixtures 
and equipment. The purpose of this limitation is to ensure that 
property financed with the bonds will remain in the Gulf 
Opportunity Zone. ``Movable fixtures and equipment'' does not 
include components that are assembled to construct an 
industrial plant. Such term also does not include consumer 
appliances installed in owner-occupied residences and 
residential rental property financed with the proceeds of Gulf 
Opportunity Zone Bonds.
    Rather than applying the 20-50 and 40-60 test under present 
law, a project is a qualified residential rental project under 
the provision if 20 percent or more of the residential units in 
such project are occupied by individuals whose income is 60 
percent or less of area median gross income or if 40 percent or 
more of the residential units in such project are occupied by 
individuals whose income is 70 percent or less of area median 
gross income.
    Gulf Opportunity Zone Bonds are treated as qualified 
mortgage bonds if the bonds of such issue meet the requirements 
of a qualified mortgage issue (as defined in section 143 and 
modified by this provision) and the residences financed with 
such bonds are located in the Gulf Opportunity Zone. For these 
purposes, residences located in the Gulf Opportunity Zone are 
treated as targeted area residences. Thus, the first-time 
homebuyer rule is waived and purchase and income rules for 
targeted area residences apply to residences financed with 
bonds issued under the provision. Under the provision, 100 
percent of the mortgages must be made to mortgagors whose 
family income is 140 percent or less of the applicable median 
family income. Thus, the present law rule allowing one-third of 
the mortgages to be made without regard to any income limits 
does not apply. In addition, the provision increases from 
$15,000 to $150,000 the amount of a qualified home-improvement 
loan that may be financed with bond proceeds.
    Subject to the following exceptions and modifications, 
issuance of Gulf Opportunity Zone Bonds is subject to the 
general rules applicable to issuance of qualified private 
activity bonds:
          (1) Except as otherwise permitted for a qualified 
        mortgage issue, repayments of bond-financed loans may 
        not be used to make additional loans;
          (2) Issuance of the bonds is not subject to the 
        aggregate annual State private activity bond volume 
        limits (sec. 146);
          (3) The restriction on acquisition of existing 
        property is applied using a minimum requirement of 50 
        percent of the cost of acquiring the building being 
        devoted to rehabilitation (sec. 147(d));
          (4) The special arbitrage expenditure rules for 
        certain construction bond proceeds apply to available 
        construction proceeds of Gulf Opportunity Zone Bonds 
        issued to finance qualified project costs, treating 
        such bonds as a construction issue (sec. 148(f)(4)(C));
          (5) Interest on the bonds is not a preference item 
        for purposes of the alternative minimum tax preference 
        for private activity bond interest (sec. 57(a)(5)); and
          (6) No portion of the proceeds of the bonds may be 
        used to provide any property described in section 
        144(c)(6)(B) (i.e., any private or commercial golf 
        course, country club, massage parlor, hot tub facility, 
        suntan facility, racetrack or other facility used for 
        gambling, or any store the principal purpose of which 
        is the sale alcoholic beverages for consumption off 
        premises).

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (December 22, 2005).
3. Advance refunding of certain tax-exempt bonds (sec. 101 of the Act 
        and new sec. 1400N(b) of the Code)

                              Present Law

In general
    Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of the bonds are used to finance 
direct activities of these governmental units or if the bonds 
are repaid with revenues of the governmental units 
(``governmental bonds''). Interest on State or local bonds to 
finance activities of private persons (``private activity 
bonds'') is taxable unless a specific exception applies. Bonds 
issued to finance the activities of charitable organizations 
described in section 501(c)(3) (``qualified 501(c)(3) bonds'') 
are one type of tax-exempt private activity bonds (``qualified 
private activity bonds''). Qualified private activity bonds 
also include exempt facility bonds. The definition of exempt 
facility bonds includes bonds issued to finance certain 
transportation facilities (e.g., airports, docks, and wharves).
    Generally, qualified private activity bonds are subject to 
restrictions on the use of proceeds for the acquisition of land 
and existing property, use of proceeds to finance certain 
specified facilities (e.g., airplanes, skyboxes, other luxury 
boxes, health club facilities, gambling facilities, and liquor 
stores), and use of proceeds to pay costs of issuance (e.g., 
bond counsel and underwriter fees). Certain types of qualified 
private activity bonds (e.g., small issue and redevelopment 
bonds) also are subject to additional restrictions on the use 
of proceeds for certain facilities (e.g., golf courses and 
massage parlors). Moreover, the term of qualified private 
activity bonds generally may not exceed 120 percent of the 
economic life of the property being financed and certain public 
approval requirements (similar to requirements that typically 
apply under State law to issuance of governmental debt) apply 
under Federal law to issuance of private activity bonds.
Limitations on advance refundings
    A refunding bond is defined as any bond used to pay 
principal, interest, or redemption price on a prior bond issue 
(the refunded bond). The Code contains different rules for 
``current'' as opposed to ``advance'' refunding bonds. A 
current refunding occurs when the refunded bond is redeemed 
within 90 days of issuance of the refunding bonds. Conversely, 
a bond is classified as an advance refunding bond if it is 
issued more than 90 days before the redemption of the refunded 
bond (sec. 149(d)(5)). Proceeds of advance refunding bonds are 
generally invested in an escrow account and held until a future 
date when the refunded bond may be redeemed. Thus, after 
issuance of an advance refunding bond, there is a period of 
time when both the refunding bonds and the refunded bonds 
remain outstanding.
    There is no statutory limitation on the number of times 
that tax-exempt bonds may be currently refunded. However, the 
Code limits the number of advance refundings with tax-exempt 
bonds. Generally, governmental bonds and qualified 501(c)(3) 
bonds may be advance refunded one time (sec. 149(d)(3)). 
Private activity bonds, other than qualified 501(c)(3) bonds, 
may not be advance refunded.
    Under present law, certain bonds used to fund facilities 
located in New York City are permitted one additional advance 
refunding if issued before January 1, 2006. In addition to 
satisfying other requirements, the bond refunded must be (1) a 
State or local bond that is a general obligation of New York 
City, (2) a State or local bond issued by the New York 
Municipal Water Finance Authority or Metropolitan 
Transportation Authority of New York City, or (3) a qualified 
501(c)(3) bond which is a qualified hospital bond issued by or 
on behalf of the State of New York or New York City. The 
maximum amount of additional advance refunding bonds that may 
be issued is $9 billion.

Arbitrage restrictions on tax-exempt bonds

    To prevent States and local governments from issuing more 
tax-exempt bonds than is necessary for the activity being 
financed or from issuing such bonds earlier than needed for the 
purpose of the borrowing, the Code includes arbitrage 
restrictions limiting the ability to profit from investment of 
tax-exempt bond proceeds. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'' before funds are needed for the purpose of the 
borrowing) or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, profits that are earned during these 
periods or on such investments must be rebated to the Federal 
Government. Governmental bonds are subject to less restrictive 
arbitrage rules than most private activity bonds.

                        Explanation of Provision

    The provision permits an additional advance refunding of 
certain governmental and qualified 501(c)(3) bonds issued by 
the State of Alabama, Louisiana, or Mississippi, or any 
political subdivision thereof. The provision also permits one 
advance refunding of certain exempt facility bonds for 
airports, docks, or wharves issued by the State of Alabama, 
Louisiana, or Mississippi, or any political subdivision 
thereof, notwithstanding the general prohibition on the advance 
refunding of such bonds. The provision is effective for advance 
refunding bonds issued after the date of enactment and before 
January 1, 2011.
    The advance refunding authority under this provision only 
applies to bonds issued by the State of Alabama, Louisiana, or 
Mississippi, or any political subdivision thereof, which were 
outstanding on August 28, 2005, and could not be advance 
refunded under Code restrictions in effect on that date. 
(Although section 1400L(e)(4)(A) refers to restrictions on 
advance refundings under ``any provision of law,'' rather than 
under the ``Code,'' no inference should be drawn from the use 
of different terms). Further, to be eligible for the additional 
advance refunding, the advance refunding bond must be the only 
other outstanding bond with respect to the refunded bond. Thus, 
at no time after the advance refunding authorized under the 
provision occurs may there be more than two bond issues 
outstanding.
    The maximum amount of advance refunding bonds that may be 
issued pursuant to this provision is $4.5 billion in the case 
of Louisiana, $2.250 billion in the case of Mississippi, and 
$1.125 billion in the case of Alabama. Eligible advance 
refunding bonds must be designated as such by the governor of 
the respective State. Advance refunding bonds issued under the 
provision must satisfy present-law arbitrage restrictions and 
all requirements otherwise applicable to advance refunding 
issues (e.g., redemption requirements and prohibition on 
abusive transactions). Moreover, bonds may not be advance 
refunded under this provision if any portion of the proceeds of 
such bonds was used to provide any property described in 
section 144(c)(6)(B) (i.e., any private or commercial golf 
course, country club, massage parlor, hot tub facility, suntan 
facility, racetrack or other facility used for gambling, or any 
store the principal purpose of which is the sale alcoholic 
beverages for consumption off premises).

                             Effective Date

    The provision is effective for advance refunding bonds 
issued after the date of enactment (December 22, 2005).

4. Increase the low-income housing credit cap and make other 
        modifications (sec. 101 of the Act and new sec. 1400N(c) of the 
        Code)

                              Present Law


In general

    The low-income housing credit may be claimed over a 10-year 
period for the cost of rental housing occupied by tenants 
having incomes below specified levels. The amount of the credit 
for any taxable year in the credit period is the applicable 
percentage of the qualified basis of each qualified low-income 
building. The qualified basis of any qualified low-income 
building for any taxable year equals the applicable fraction of 
the eligible basis of the building.
    The credit percentage for newly constructed or 
substantially rehabilitated housing that is not Federally 
subsidized is adjusted monthly by the Internal Revenue Service 
so that the 10 annual installments have a present value of 70 
percent of the total qualified basis. The credit percentage for 
newly constructed or substantially rehabilitated housing that 
is Federally subsidized and for existing housing that is 
substantially rehabilitated is calculated to have a present 
value of 30 percent of qualified basis. These are referred to 
as the 70-percent credit and 30-percent credit, respectively.

Income targeting

    In order to be eligible for the low-income housing credit, 
a qualified low-income building must be part of a qualified 
low-income housing project. In general, a qualified low-income 
housing project is defined as a project which satisfies one of 
two tests at the election of the taxpayer. The first test is 
met if 20 percent or more of the residential units in the 
project are both rent-restricted and occupied by individuals 
whose income is 50 percent or less of area median gross income 
(the ``20-50 test''). The second test is met if 40 percent or 
more of the residential units in such project are both rent-
restricted and occupied by individuals whose income is 60 
percent or less of area median gross income (the ``40-60 
test'').

Credit cap

    Generally, the aggregate credit authority provided annually 
to each State for calendar year 2006 is $1.90 per resident with 
a minimum annual cap of $2,180,000 for certain small population 
States. These amounts are indexed for inflation. These limits 
do not apply in the case of projects that also receive 
financing with proceeds of tax-exempt bonds issued subject to 
the private activity bond volume limit.

Basis of building eligible for the credit

    Buildings located in high cost areas (i.e., qualified 
census tracts and difficult development areas) are eligible for 
an enhanced credit. Under the enhanced credit, the 70-percent 
and 30-percent credit is increased to a 91-percent and 39-
percent credit, respectively. The mechanism for this increase 
is an increase from 100 to 130 percent of the otherwise 
applicable eligible basis of a new building or the 
rehabilitation expenditures of an existing building. A further 
requirement for the enhanced credit is that no more than 20 
percent of the population of each metropolitan statistical area 
or nonmetropolitan statistical area may be a difficult to 
develop area.

Stacking rule

    Authority to allocate credits remains at the State (as 
opposed to local) government level unless State law provides 
otherwise. Generally, credits may be allocated only from volume 
authority arising during the calendar year in which the 
building is placed in service, except in the case of: (1) 
credits claimed on additions to qualified basis; (2) credits 
allocated in a later year pursuant to an earlier binding 
commitment made no later than the year in which the building is 
placed in service; and (3) carryover allocations.
    Each State annually receives low-income housing credit 
authority equal to $1.90 per State resident for allocation to 
qualified low-income projects. In addition to this $1.90 per 
resident amount, each State's ``housing credit ceiling'' 
includes the following amounts: (1) the unused State housing 
credit ceiling (if any) of such State for the preceding 
calendar year; (2) the amount of the State housing credit 
ceiling (if any) returned in the calendar year; and (3) the 
amount of the national pool (if any) allocated to such State by 
the Treasury Department.
    The national pool consists of States' unused housing credit 
carryovers. For each State, the unused housing credit carryover 
for a calendar year consists of the excess (if any) of the 
unused State housing credit ceiling for such year over the 
excess (if any) of the aggregate housing credit dollar amount 
allocated for such year over the sum of $1.90 per resident and 
the credit returns for such year. The amounts in the national 
pool are allocated only to States that allocated their entire 
housing credit ceiling for the preceding calendar year and 
requested a share in the national pool not later than May 1 of 
the calendar year. The national pool allocation to qualified 
States is made on a pro rata basis equivalent to the fraction 
that a State's population enjoys relative to the total 
population of all qualified States for that year.
    The present-law stacking rule provides that each State is 
treated as using its allocation of the unused State housing 
credit ceiling (if any) from the preceding calendar before the 
current year's allocation of credit (including any credits 
returned to the State) and then finally any national pool 
allocations.

                        Explanation of Provision


Income targeting

    In the case of property placed in service during 2006, 
2007, and 2008 in a nonmetropolitan area within the Gulf 
Opportunity Zone, the income targeting rules of the low- income 
housing credit are applied by replacing the area median gross 
income standard with a national nonmetropolitan median gross 
income standard. These new income targeting rules apply to all 
such buildings in the Gulf Opportunity Zone regardless of 
whether the building receives its credit allocation under the 
otherwise applicable low-income housing credit cap or the 
additional credit cap (described below). The income targeting 
rules are not changed for buildings in metropolitan areas in 
the Gulf Opportunity Zone.

Credit cap

    Under the provision, the otherwise applicable housing 
credit ceiling amount is increased for each of the States 
within the Gulf Opportunity Zone. This increase applies to 
calendar years 2006, 2007, and 2008. The additional credit cap 
for each of the affected States equals $18.00 times the number 
of such State's residents within the Gulf Opportunity Zone. 
This amount is not adjusted for inflation. For purposes of this 
additional credit cap amount, the determination of population 
for any calendar year is made on the basis of the most recent 
census estimate of the resident population of the State in the 
Gulf Opportunity Zone released by the Bureau of the Census 
before August 28, 2005.
    In addition, the otherwise applicable housing credit 
ceiling amount is increased for Florida and Texas by $3,500,000 
per State. This increase only applies to calendar year 2006.

Basis of building eligible for the credit

    Under the provision, the Gulf Opportunity Zone, the Rita Go 
Zone, and the Wilma Go Zone are treated as high-cost areas for 
purposes of the low income housing credit for property placed-
in-service in calendar years 2006, 2007, and 2008. Therefore, 
buildings located in the Gulf Opportunity Zone, the Rita Go 
Zone, and the Wilma Go Zone are eligible for the enhanced 
credit. Under the enhanced credit, the 70-percent and 30-
percent credits are increased to 91-percent and 39-percent 
credits, respectively. The 20-percent of population restriction 
is waived for this purpose. This enhanced credit applies 
regardless of whether the building receives its credit 
allocation under the otherwise applicable low-income housing 
credit cap or the additional credit cap.

Carryover

    The additional credit cap available for States within the 
Gulf Opportunity Zone for calendar years 2006, 2007 and 2008 
may not be carried forward from any year to any other year. The 
present-law rules apply for purposes of the Rita Go Zone and 
the Wilma Go Zone.

Stacking rule

    Within each calendar year (2006, 2007, and 2008), each 
applicable State within the GO Zone must treat the additional 
credit cap allocable under the provision to that State as 
allocated before any other credit cap amounts. Therefore, under 
the provision each applicable State within the GO Zone is 
treated as using credits in the following order: (1) the 
additional credit cap (including any such credits returned to 
the State) under the Gulf Opportunity Zone, then (2) its 
allocation of the unused State housing credit ceiling (if any) 
from the preceding calendar, then (3) the current year's 
allocation of present-law credit (including any credits 
returned to the State) and then (4) any national pool 
allocations. This generally maximizes the total amount of 
credit (under both otherwise applicable low income housing 
credit cap and the additional credit cap for the Gulf 
Opportunity Zone) which may be carried forward.
    The present-law rules apply for purposes of the Rita Go 
Zone and the Wilma Go Zone.

                             Effective Date

    The provisions relating to the increased credit cap, 
carryover and stacking rule applicable to the GO Zone are 
generally effective for calendar years beginning after 2005.
    The provision relating to the increased credit cap 
applicable to Florida and Texas is generally effective for 
calendar years beginning after 2005.
    The provision to treat the Gulf Opportunity Zone, Rita Go 
Zone and the Wilma Go Zone as a high-cost area is generally 
effective for calendar years beginning after 2005 and before 
2009, and buildings placed-in-service during such period in the 
case of projects that also receive financing with the proceeds 
of tax-exempt bonds subject to the private activity bond volume 
limit which are issued during that period.
    The income targeting provision is effective for property 
placed in service during 2006, 2007 and 2008. This provision 
applies to property which receives a credit allocation in any 
of those three years or a prior year. It also applies in the 
case of credit projects that receive tax-exempt bond financing 
subject to the private activity bond volume limit.

5. Additional first-year depreciation for Gulf Opportunity Zone 
        property (sec. 101 of the Act and new sec. 1400N(d) of the 
        Code)

                              Present Law

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from 3 to 25 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.
    Section 280F limits the annual depreciation deductions with 
respect to passenger automobiles to specified dollar amounts, 
indexed for inflation.
    Section 167(f)(1) provides that capitalized computer 
software costs, other than computer software to which section 
197 applies, are recovered ratably over 36 months.
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment generally may elect to deduct 
the cost of qualifying property placed in service for the 
taxable year. (Sec. 179). In general, qualifying property is 
defined as depreciable tangible personal property that is 
purchased for use in the active conduct of a trade or business.

                     Explanation of Provision \263\

---------------------------------------------------------------------------
    \263\ The provision was subsequently extended with respect to 
specified Gulf Opportunity Zone extension property in section 120 of 
the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
---------------------------------------------------------------------------
    The provision allows an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified Gulf Opportunity Zone property. In order to qualify, 
property generally must be placed in service on or before 
December 31, 2007 (December 31, 2008 in the case of 
nonresidential real property and residential rental property).
    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes for 
the taxable year in which the property is placed in service. 
The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or 
section 263A. The basis of the property and the depreciation 
allowances in the year of purchase and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction. In addition, the provision provides 
that there is no adjustment to the allowable amount of 
depreciation for purposes of computing a taxpayer's alternative 
minimum taxable income with respect to property to which the 
provision applies. A taxpayer is allowed to elect out of the 
additional first-year depreciation for any class of property 
for any taxable year.
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet all of the following 
requirements. First, the property must be property to which the 
general rules of the Modified Accelerated Cost Recovery System 
(``MACRS'') apply with (1) an applicable recovery period of 20 
years or less, (2) computer software other than computer 
software covered by section 197, (3) water utility property (as 
defined in section 168(e)(5)), (4) certain leasehold 
improvement property, or (5) certain nonresidential real 
property and residential rental property. Second, substantially 
all of the use of such property must be in the Gulf Opportunity 
Zone and in the active conduct of a trade or business by the 
taxpayer in the Gulf Opportunity Zone. Third, the original use 
of the property in the Gulf Opportunity Zone must commence with 
the taxpayer on or after August 28, 2005. (Thus, used property 
may constitute qualified property so long as it has not 
previously been used within the Gulf Opportunity Zone. In 
addition, it is intended that additional capital expenditures 
incurred to recondition or rebuild property the original use of 
which in the Gulf Opportunity Zone began with the taxpayer 
would satisfy the ``original use'' requirement. See Treasury 
Regulation sec. 1.48-2 Example 5.) Finally, the property must 
be acquired by purchase (as defined under section 179(d)) by 
the taxpayer on or after August 28, 2005 and placed in service 
on or before December 31, 2007. For qualifying nonresidential 
real property and residential rental property, the property 
must be placed in service on or before December 31, 2008, in 
lieu of December 31, 2007. Property does not qualify if a 
binding written contract for the acquisition of such property 
was in effect before August 28, 2005. However, property is not 
precluded from qualifying for the additional first-year 
depreciation merely because a binding written contract to 
acquire a component of the property is in effect prior to 
August 28, 2005.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies if the taxpayer 
begins the manufacture, construction, or production of the 
property on or after August 28, 2005, and the property is 
placed in service on or before December 31, 2007 (and all other 
requirements are met). In the case of qualified nonresidential 
real property and residential rental property, the property 
must be placed in service on or before December 31, 2008. 
Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a contract that is entered 
into prior to the manufacture, construction, or production of 
the property is considered to be manufactured, constructed, or 
produced by the taxpayer.
    Under a special rule, property any portion of which is 
financed with the proceeds of a tax-exempt obligation under 
section 103 is not eligible for the additional first-year 
depreciation deduction. Recapture rules apply under the 
provision if the property ceases to be qualified Gulf 
Opportunity Zone property.

                             Effective Date

    The provision applies to property placed in service on or 
after August 28, 2005, in taxable years ending on or after such 
date.

6. Increase in expensing for Gulf Opportunity Zone property (sec. 101 
        of the Act and new sec. 1400N(e) of the Code)

                              Present Law

    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs. Present law provides that the maximum 
amount a taxpayer may expense, for taxable years beginning in 
2003 through 2007, is $100,000 of the cost of qualifying 
property placed in service for the taxable year. Additional 
section 179 incentives are provided with respect to a qualified 
property used by a business in the New York Liberty Zone (sec. 
1400L(f)), an empowerment zone (sec. 1397A), or a renewal 
community (sec. 1400J). In general, qualifying property is 
defined as depreciable tangible personal property that is 
purchased for use in the active conduct of a trade or business. 
Off-the-shelf computer software placed in service in taxable 
years beginning before 2008 is treated as qualifying property. 
The $100,000 amount is reduced (but not below zero) by the 
amount by which the cost of qualifying property placed in 
service during the taxable year exceeds $400,000. The $100,000 
and $400,000 amounts are indexed for inflation for taxable 
years beginning after 2003 and before 2008.
    For taxable years beginning in 2008 and thereafter, a 
taxpayer with a sufficiently small amount of annual investment 
may elect to deduct up to $25,000 of the cost of qualifying 
property placed in service for the taxable year. The $25,000 
amount is reduced (but not below zero) by the amount by which 
the cost of qualifying property placed in service during the 
taxable year exceeds $200,000.
    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.
    An expensing election is made under rules prescribed by the 
Secretary (sec. 179(c)(1)). Under Treas. Reg. sec. 179-5, 
applicable to property placed in service in taxable years 
beginning after 2002 and before 2008, a taxpayer is permitted 
to make or revoke an election under section 179 without the 
consent of the Commissioner on an amended Federal tax return 
for that taxable year. This amended return must be filed within 
the time prescribed by law for filing an amended return for the 
taxable year. For taxable years beginning in 2008 and 
thereafter, an expensing election may be revoked only with 
consent of the Commissioner (sec. 179(c)(2)).

                        Explanation of Provision

    Under the provision, the $100,000 maximum amount that a 
taxpayer may elect to deduct under section 179 is increased by 
the lesser of $100,000 or the cost of qualified section 179 
Gulf Opportunity Zone property for the taxable year. The 
provision applies with respect to qualified section 179 Gulf 
Opportunity Zone property acquired on or after August 28, 2005, 
and placed in service on or before December 31, 2007. Thus, in 
addition to the $100,000 maximum cost of any section 179 
property (including property that also meets the definition of 
qualified section 179 Gulf Opportunity Zone property) that may 
be deducted under present law, a taxpayer may elect to deduct a 
maximum $100,000 additional amount of the taxpayer's cost of 
qualified section 179 Gulf Opportunity Zone property, resulting 
in a maximum deductible amount of $200,000 of qualified section 
179 Gulf Opportunity Zone property. (The $100,000 present-law 
portion of this amount is indexed for taxable years beginning 
after 2003 and before 2008, so the total may be higher than 
$200,000 after taking indexation of this portion into account.) 
The $100,000 additional amount for the cost of qualified 
section 179 Gulf Opportunity Zone property is not indexed.
    The provision provides a special rule for the reduction in 
the $200,000 maximum deduction for the cost of qualified 
section 179 Gulf Opportunity Zone property. Under this rule, 
the $200,000 amount is reduced (but not below zero) by the 
amount by which the cost of qualified section 179 Gulf 
Opportunity Zone property placed in service during the taxable 
year exceeds a dollar cap of up to $1 million. (The $400,000 
present-law portion of this amount is indexed for taxable years 
beginning after 2003 and before 2008, so the total may be 
higher than $1 million after taking indexation of this portion 
into account.) The dollar cap is computed by increasing the 
$400,000 present-law amount by the lesser of (1) $600,000, or 
(2) the cost of qualified section 179 Gulf Opportunity Zone 
property placed in service during the taxable year. The 
$600,000 amount is not indexed.
    The operation of the reduction may be illustrated as 
follows. In each of the following examples, assume that the 
taxable income limitation of section 179(b)(3)(A) does not 
cause a reduction in the amount that may be expensed for the 
taxable year. For example, assume that in the taxable year, a 
taxpayer's cost of section 179 property that is qualified Gulf 
Opportunity Zone property is $800,000, and in that year the 
taxpayer acquires no other section 179 property. Under the 
provision, the taxpayer's deductible amount is increased by 
$100,000 to $200,000 (the lesser of $100,000 and cost of the 
taxpayer's qualified section 179 Gulf Opportunity Zone 
property). Under the provision, the $400,000 phase-out amount 
in section 179(b)(2) is increased by $600,000 (i.e., the lesser 
of $600,000 or the $800,000 cost of qualified section 179 Gulf 
Opportunity Zone property), so that the phase-out amount is $1 
million. The taxpayer's cost of section 179 property is 
$800,000 in total (less than the $1 million phase-out amount), 
so no reduction is made in the $200,000 amount of qualified 
Gulf Opportunity Zone property that may be deducted under 
section 179 for the taxable year. As another example, assume 
for the taxable year that a taxpayer's cost of section 179 
property that is qualified Gulf Opportunity Zone property is 
$200,000, and its cost of other section 179 property is 
$450,000. Under the provision, the $400,000 phase-out amount in 
section 179(b)(2) is increased to $600,000 by the $200,000 cost 
of qualified section 179 Gulf Opportunity Zone property. The 
taxpayer had a total $650,000 cost of section 179 property for 
the taxable year. The taxpayer's section 179 deduction is 
reduced by the $50,000 difference between $650,000 and 
$600,000. Thus, under the provision, the taxpayer may deduct 
$150,000 ($200,000 less $50,000) under section 179 for the 
taxable year.
    Qualified section 179 Gulf Opportunity Zone property means 
section 179 property (as defined in section 179(d) of present 
law) that also meets the requirements to qualify for Gulf 
Opportunity Zone bonus depreciation. Specifically, for section 
179 purposes, qualified Gulf Opportunity Zone property is 
property (1) described in section 168(k)(2)(A)(i), (2) 
substantially all of the use of which is in the Gulf 
Opportunity Zone and is in the active conduct of a trade or 
business by the taxpayer in that Zone, (3) the original use of 
which commences with the taxpayer on or after August 28, 2005, 
(4) which is acquired by the taxpayer by purchase on or after 
August 28, 2005, but only if no written binding contract for 
the acquisition was in effect before August 28, 2005, and (5) 
which is placed in service by the taxpayer on or before 
December 31, 2007. Such property does not include alternative 
depreciation property, tax-exempt bond-financed property, or 
qualified revitalization buildings.
    The provision includes rules coordinating increased section 
179 amounts provided under the Act with present-law expensing 
rules with respect to enterprise zone businesses in empowerment 
zones and with respect to renewal communities. For purposes of 
those rules, qualified section 179 Gulf Opportunity Zone 
property is not treated as qualified zone property or qualified 
renewal property, unless the taxpayer elects not to take such 
qualified section 179 Gulf Opportunity Zone property into 
account for purposes of this provision. Thus, a taxpayer 
acquiring property that could qualify as either qualified 
section 179 Gulf Opportunity Zone property, or qualified zone 
property or qualified renewal property, may elect the 
additional expensing provided either under this provision, or 
under the empowerment zone or renewal community rules, but not 
both, with respect to the property.
    Recapture rules apply under the provision if recapture 
applies under section 179(d)(10) or if the property ceases to 
be qualified section 179 Gulf Opportunity Zone property.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005, for qualified section 179 Gulf 
Opportunity Zone property acquired after August 27, 2005.

7. Expensing for certain demolition and clean-up costs (sec. 101 of the 
        Act and new sec. 1400N(f) of the Code)

                              Present Law

    Under present law, the cost of demolition of a structure is 
capitalized into the taxpayer's basis in the land on which the 
structure is located. (Sec. 280B). Land is not subject to an 
allowance for depreciation or amortization.
    The treatment of the cost of debris removal depends on the 
nature of the costs incurred. For example, the cost of debris 
removal after a storm may in some cases constitute an ordinary 
and necessary business expense which is deductible in the year 
paid or incurred. In other cases, debris removal costs may be 
in the nature of replacement of part of the property that was 
damaged. In such cases, the costs are capitalized and added to 
the taxpayer's basis in the property. For example, Revenue 
Ruling 71-161, 1971-1 C.B. 76, permits the use of clean-up 
costs as a measure of casualty loss but requires that such 
costs be added to the post-casualty basis of the property.

                        Explanation of Provision

    Under the provision, a taxpayer is permitted a deduction 
for 50 percent of any qualified Gulf Opportunity Zone clean-up 
cost paid or incurred on or after August 28, 2005, and before 
January 1, 2008. The remaining 50 percent is capitalized as 
under present law.
    A qualified Gulf Opportunity Zone clean-up cost is an 
amount paid or incurred for the removal of debris from, or the 
demolition of structures on, real property located in the Gulf 
Opportunity Zone to the extent that the amount would otherwise 
be capitalized. In order to qualify, the property must be held 
for use in a trade or business, for the production of income, 
or as inventory.

                             Effective Date

    The provision applies to costs paid or incurred on or after 
August 28, 2005, in taxable years ending on or after such date.

8. Extension and expansion of expensing for environmental remediation 
        costs (sec. 101 of the Act and new sec. 1400N(g) of the Code)

                              Present Law

    Taxpayers may elect to deduct (or ``expense'') certain 
environmental remediation expenditures that would otherwise be 
chargeable to capital account, in the year paid or incurred 
(sec. 198). The deduction applies for both regular and 
alternative minimum tax purposes. The expenditure must be 
incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site.
    A ``qualified contaminated site'' generally is any property 
that (1) is held for use in a trade or business, for the 
production of income, or as inventory and (2) is at a site on 
which there has been a release (or threat of release) or 
disposal of certain hazardous substances as certified by the 
appropriate State environmental agency (so-called 
``brownfields'').
    Section 198(d)(1) defines a ``hazardous substance'' as a 
substance which is so defined in section 101(14) of the 
Comprehensive Environmental Response, Compensation, and 
Liability Act of 1980 (``CERCLA''), and any substance which is 
administratively designated as a hazardous substance under 
section 102 of CERCLA. Under section 198(d)(2), however, the 
term ``hazardous substance'' does not include any substance 
with respect to which a removal or remediation is not permitted 
under section 104 of CERCLA by reason of subsection (a)(3) 
thereof, which exempts from the scope of such provision ``the 
release or threat of release (A) of a naturally occurring 
substance in its unaltered form, or altered solely through 
naturally occurring processes or phenomena, from a location 
where it is naturally found; (B) from products which are part 
of the structure of, and result in exposure within, residential 
buildings or business or community structures; or (C) into 
public or private drinking water supplies due to deterioration 
of the system through ordinary use.'' However, sites which are 
identified on the national priorities list under CERCLA cannot 
qualify for expensing under section 198.
    Petroleum products generally are not regarded as hazardous 
substances for purposes of section 198. Section 101(14) of 
CERCLA specifically excludes ``petroleum, including crude oil 
or any fraction thereof which is not otherwise specifically 
listed or designated as a hazardous substance under 
subparagraphs (A) through (F) of this paragraph,'' from the 
definition of ``hazardous substance.''
    Under present law, eligible expenditures are those paid or 
incurred before January 1, 2006.

                        Explanation of Provision

    The provision extends the present-law expensing provision 
for two years (through December 31, 2007) for qualified 
contaminated sites located in the Gulf Opportunity Zone.
    In addition, under the provision, petroleum products are 
treated as hazardous substances for purposes of applying the 
expensing provision (as extended) within the Gulf Opportunity 
Zone. Petroleum products are defined by reference to section 
4612(a)(3), and include crude oil, crude oil condensates and 
natural gasoline. Thus, for example, the release of crude oil 
upon property held for use in a trade or business in the Gulf 
Opportunity Zone results in such property being treated as a 
qualified contaminated site. The present law exceptions for 
sites on the national priorities list under CERCLA, and for 
substances with respect to which a removal or remediation is 
not permitted under section 104 of CERCLA by reason of 
subsection (a)(3) thereof, would continue to apply to all 
hazardous substances (including petroleum products).
    Expenditures paid or incurred to abate the contamination on 
or after August 28, 2005 and before December 31, 2007, would be 
eligible for expensing.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005.

9. Increase in rehabilitation tax credit with respect to certain 
        buildings located in the Gulf Opportunity Zone (sec. 101 of the 
        Act and new sec. 1400N(h) of the Code)

                              Present Law

    Present law provides a two-tier tax credit for 
rehabilitation expenditures.
    A 20-percent credit is provided for qualified 
rehabilitation expenditures with respect to a certified 
historic structure. For this purpose, a certified historic 
structure means any building that is listed in the National 
Register, or that is located in a registered historic district 
and is certified by the Secretary of the Interior to the 
Secretary of the Treasury as being of historic significance to 
the district.
    A 10-percent credit is provided for qualified 
rehabilitation expenditures with respect to a qualified 
rehabilitated building, which generally means a building that 
was first placed in service before 1936. The pre-1936 building 
must meet requirements with respect to retention of existing 
external walls and internal structural framework of the 
building in order for expenditures with respect to it to 
qualify for the 10-percent credit. A building is treated as 
having met the substantial rehabilitation requirement under the 
10-percent credit only if the rehabilitation expenditures 
during the 24-month period selected by the taxpayer and ending 
within the taxable year exceed the greater of (1) the adjusted 
basis of the building (and its structural components), or (2) 
$5,000.
    The provision requires the use of straight-line 
depreciation or the alternative depreciation system in order 
for rehabilitation expenditures to be treated as qualified 
under the provision.

                        Explanation of Provision

    The provision increases from 20 to 26 percent, and from 10 
to 13 percent, respectively, the credit under section 47 with 
respect to any certified historic structure or qualified 
rehabilitated building located in the Gulf Opportunity Zone, 
provided the qualified rehabilitation expenditures with respect 
to such buildings or structures are incurred on or after August 
28, 2005, and before January 1, 2009.

                             Effective Date

    The provision is effective for expenditures incurred on or 
after August 28, 2005, for taxable years ending on or after 
August 28, 2005.

10. Increased expensing for reforestation expenditures of small timber 
        producers (sec. 101 of the Act and new sec. 1400N(i)(1) of the 
        Code)

                              Present Law

    Present law permits a taxpayer to elect to deduct (or 
``expense'') a limited amount of certain reforestation 
expenditures that would otherwise be required to be 
capitalized, in the year paid or incurred (sec. 194(b)). No 
more than $10,000 of reforestation expenditures made by a 
taxpayer in any year can qualify for expensing with respect to 
each qualified timber property. The limit is reduced to $5,000 
per qualified timber property for married taxpayers filing 
separate returns.
    All members of a controlled group of corporations are 
treated as a single taxpayer for purposes of the $10,000 limit. 
A controlled group of corporations for purposes of section 194 
is defined as under section 1563(a), except that the 80-percent 
ownership requirement is reduced to a more than 50-percent 
requirement. If a partnership or S corporation incurs 
reforestation expenditures, the $10,000 limit applies 
separately to the partnership or S corporation and to each 
partner or shareholder. For an estate with reforestation 
expenditures, the $10,000 limit is apportioned between the 
estate and its beneficiaries. Section 194(b) does not apply to 
trusts.
    Reforestation expenditures include direct costs incurred in 
connection with forestation or reforestation by planting or 
artificial or natural seeding, including costs for site 
preparation, seeds and seeding, labor and tools, and 
depreciation on equipment used in planting or seeding. 
Qualified timber property means a woodlot or other site located 
in the United States which will contain trees in significant 
commercial quantities and which is held by the taxpayer for the 
planting, cultivating, caring for, and cutting of trees for 
sale or use in the commercial production of timber products 
(sec. 194(c)(1)).
    If a taxpayer's otherwise qualifying reforestation 
expenditures exceed the amount permitted to be expensed under 
section 194, the remaining expenditures are amortized, and the 
taxpayer is entitled to a deduction with respect to the 
amortization of the amortizable basis (sec. 194(a)). 
Reforestation expenditures qualifying for amortization are 
deducted in 84 equal monthly installments starting with the 
seventh month of the taxable year during which the expenditures 
are paid or incurred. Only reforestation expenditures that 
would otherwise be included in the basis of qualified timber 
property qualify for expensing and, with respect to amounts in 
excess of the $10,000 limit, for amortization (however, costs 
that could be deducted in the absence of section 194 are not 
required to be amortized).

                        Explanation of Provision

    The provision doubles, for certain taxpayers, the present-
law expensing limit for reforestation expenditures paid or 
incurred by such taxpayers (i) during the period on or after 
August 28, 2005, and before January 1, 2008, with respect to 
qualified timber property any portion of which is located in 
the Gulf Opportunity Zone, (ii) during the period on or after 
September 23, 2005, and before January 1, 2008, with respect to 
qualified timber property any portion of which is located in 
the Rita Zone and no portion of which is located in the Gulf 
Opportunity Zone, and (iii) during the period on or after 
October 23, 2005, and before January 1, 2008, with respect to 
qualified timber property any portion of which is located in 
the Wilma Zone. The amount by which the expensing limit is 
increased, however, is limited to the amount of reforestation 
expenditures paid or incurred during the relevant portion of 
the taxable year.
    For example, suppose an otherwise eligible calendar-year 
taxpayer incurred $20,000 of reforestation expenditures in 
June, 2005 (i.e., prior to the relevant period), and incurs an 
additional $5,000 of reforestation expenditures in October, 
2005, in the Gulf Opportunity Zone; the taxpayer would be 
permitted to expense $15,000 of the expenditures (because the 
increase in the expensing limit is limited to the $5,000 of 
expenditures paid or incurred during the relevant period within 
the taxable year) and could amortize the remaining $10,000 
under section 194(a). By contrast, if the taxpayer had incurred 
$5,000 of reforestation expenditures in June, 2005, and incurs 
an additional $20,000 of reforestation expenditures in October, 
2005, then the taxpayer would be permitted to expense $20,000 
of the expenditures, and could amortize the remaining $5,000 
under section 194(a).
    The provision applies to taxpayers with aggregate holdings 
of qualified timber property which do not exceed 500 acres at 
any time during the taxable year. ``Qualified timber property'' 
is defined by section 194(c)(1) as ``a woodlot or other site 
located in the United States which will contain trees in 
significant commercial quantities and which is held by the 
taxpayer for the planting, cultivating, caring for, and cutting 
of trees for sale or use in the commercial production of timber 
products.''
    The provision does not apply to any taxpayer which is a 
corporation the stock of which is publicly traded on an 
established securities market, or which is a real estate 
investment trust.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005.

11. Five-year NOL carryback of certain timber losses (sec. 101 of the 
        Act and new sec. 1400N(i)(2) of the Code)

                              Present Law

    A net operating loss (``NOL'') is, generally, the amount by 
which a taxpayer's business deductions exceed the taxpayer's 
gross income. In general, an NOL may be carried back two years 
and carried over 20 years to offset taxable income in these 
years (sec. 172). NOLs generally are first applied to the 
earliest of the taxable years to which the loss may be carried 
(sec. 172(b)(2)).
    In the case of an NOL arising from a farming loss, the NOL 
can be carried back five years. A ``farming loss'' is defined 
as the amount of any net operating loss attributable to a 
farming business as defined in section 263A(e)(4). Under 
section 263A(e)(4), a farming business includes the trade or 
business of farming, as well as the trade or business of 
operating a nursery or sod farm, or the raising or harvesting 
of trees bearing fruit, nuts, or other crops, or ornamental 
trees. It does not include the planting, cultivating, caring 
for, holding or cutting of trees for sale or use in the 
commercial production of timber products.
    A farming loss cannot exceed the taxpayer's NOL for the 
taxable year. In calculating the amount of a taxpayer's NOL 
carrybacks, the portion of the NOL that is attributable to a 
farming loss is treated as a separate NOL and is taken into 
account after the remaining portion of the NOL for the taxable 
year.

                        Explanation of Provision

    Under the provision, for purposes of determining the 
farming loss (if any) of certain taxpayers, income and loss is 
treated as attributable to a farming business if such income 
and loss is attributable to qualified timber property any 
portion of which is located in the Gulf Opportunity Zone or in 
the Rita GO Zone, and if such income and loss is allocable to 
that portion of the taxpayer's taxable year which is (i) on or 
after August 28, 2005 (for qualified timber property any 
portion of which is located in the Gulf Opportunity Zone), on 
or after September 23, 2005 (for qualified timber property any 
portion of which is located in the Rita GO Zone and no portion 
of which is located in the Gulf Opportunity Zone), or on or 
after October 23, 2005 (for qualified timber property any 
portion of which is located in the Wilma Zone) and (ii) before 
January 1, 2007. ``Qualified timber property'' is defined by 
section 194(c)(1) as ``a woodlot or other site located in the 
United States which will contain trees in significant 
commercial quantities and which is held by the taxpayer for the 
planting, cultivating, caring for, and cutting of trees for 
sale or use in the commercial production of timber products.''
    The provision applies to taxpayers with aggregate holdings 
of qualified timber property which do not exceed 500 acres at 
any time during the taxable year. Further, the provision only 
applies (i) with respect to qualified timber property any 
portion of which is located in the Gulf Opportunity Zone, if 
the taxpayer held such property on August 28, 2005, (ii) with 
respect to qualified timber property any portion of which is 
located in the Rita GO Zone and no portion of which is located 
in the Gulf Opportunity Zone, if the taxpayer held such 
property on September 23, 2005, and (iii) with respect to 
qualified timber property any portion of which is located in 
the Wilma Zone, if the taxpayer held such property on October 
23, 2005.
    The provision does not apply to any taxpayer which is a 
corporation the stock of which is publicly traded on an 
established securities market, or which is a real estate 
investment trust.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005, with respect to income and loss which is 
allocable to that portion of the taxpayer's taxable year which 
is on or after August 28, 2005 (for qualified timber property 
any portion of which is located in the Gulf Opportunity Zone), 
on or after September 23, 2005 (for qualified timber property 
any portion of which is located in the Rita Zone and no portion 
of which is located in the Gulf Opportunity Zone), or on or 
after October 23, 2005 (for qualified timber property any 
portion of which is located in the Wilma Zone).

12. Special rule for Gulf Opportunity Zone public utility casualty 
        losses (sec. 101 of the Act and new sec. 1400N(j) of the Code)

                              Present Law


In general

    A net operating loss (``NOL'') is, generally, the amount by 
which a taxpayer's allowable deductions exceed the taxpayer's 
gross income. A carryback of an NOL generally results in the 
refund of Federal income tax for the carryback year. A 
carryover of an NOL reduces Federal income tax for the 
carryover year.
    In general, an NOL may be carried back two years and 
carried over 20 years to offset taxable income in such years. 
NOLs generally are first applied to the earliest of the taxable 
years to which the loss may be carried.

Exceptions to the general rule

    Different rules apply with respect to NOLs arising in 
certain circumstances. For example, a three-year carryback 
applies with respect to NOLs (1) arising from casualty or theft 
losses of individuals, or (2) attributable to Presidentially 
declared disasters for taxpayers engaged in a farming business 
or a small business. A five-year carryback period applies to 
NOLs from a farming loss (regardless of whether the loss was 
incurred in a Presidentially declared disaster area). Special 
rules also apply to real estate investment trusts (no 
carryback), specified liability losses (10-year carryback), and 
excess interest losses (no carryback to any year preceding a 
corporate equity reduction transaction).

Specified liability losses

    The specified liability loss rules generally apply to 
certain product liability losses and other liability losses. 
The amount of the specified liability loss cannot exceed the 
taxpayer's NOL for the taxable year. A specified liability loss 
is treated as a separate NOL for the taxable year which is 
eligible for a 10-year carryback period. Any remaining portion 
of the taxpayer's NOL is subject to the general two-year 
carryback period.

                        Explanation of Provision

    The provision provides an election for taxpayers to treat 
any Gulf Opportunity Zone public utility casualty loss as a 
specified liability loss to which the present-law 10-year 
carryback period applies. A Gulf Opportunity Zone public 
utility casualty loss is any casualty loss of public utility 
property by reason of Hurricane Katrina which is allowed as a 
deduction under section 165. The amount of the casualty loss is 
reduced by the amount of any gain recognized by the taxpayer 
from involuntary conversions of public utility property located 
in the Gulf Opportunity Zone caused by Hurricane Katrina. The 
total amount of specified liability loss, including any amount 
of public utility casualty loss treated as such, is limited to 
the amount of the taxpayer's overall NOL for the taxable year 
as under present law. Taxpayers who elect the applicability of 
the proposed provision with respect to any loss are not 
eligible to also treat the loss as having occurred in any prior 
taxable year under section 165(i), nor may they include the 
casualty loss as part of the five-year NOL carryback provided 
under another provision of the Act.
    For purposes of the proposed provision, public utility 
property is defined as in section 168(i)(10) to mean, 
generally, property used predominantly in a rate-regulated 
trade or business of the furnishing or sale of electrical 
energy, water, or sewage disposal services; gas or steam 
through a local distribution system; telephone services or 
certain other communication services; or transportation of gas 
or steam by pipeline.

                             Effective Date

    The provision is effective for losses arising in taxable 
years ending on or after August 28, 2005.

13. Five-year NOL carryback for certain amounts related to Hurricane 
        Katrina or the Gulf Opportunity Zone (sec. 101 of the Act and 
        new sec. 1400N(k) of the Code)

                              Present Law


In general

    A net operating loss (``NOL'') is, generally, the amount by 
which a taxpayer's allowable deductions exceed the taxpayer's 
gross income. A carryback of an NOL generally results in the 
refund of Federal income tax for the carryback year. A 
carryover of an NOL reduces Federal income tax for the 
carryover year.
    In general, an NOL may be carried back two years and 
carried over 20 years to offset taxable income in such years. 
NOLs generally are first applied to the earliest of the taxable 
years to which the loss may be carried.
    Different rules apply with respect to NOLs arising in 
certain circumstances. For example, a three-year carryback 
applies with respect to NOLs (1) arising from casualty or theft 
losses of individuals, or (2) attributable to Presidentially 
declared disasters for taxpayers engaged in a farming business 
or a small business. A five-year carryback period applies to 
NOLs from a farming loss (regardless of whether the loss was 
incurred in a Presidentially declared disaster area). Special 
rules also apply to real estate investment trusts (no 
carryback), specified liability losses (10-year carryback), and 
excess interest losses (no carryback to any year preceding a 
corporate equity reduction transaction).
    Separately, under section 165(i), a taxpayer who incurs a 
loss attributable to a Presidentially declared disaster may 
elect to take such loss into account for the taxable year 
immediately preceding the taxable year in which the disaster 
occurred. This rule applies regardless of whether the taxpayer 
has an overall net operating loss for the relevant taxable 
years.
    The alternative minimum tax rules provide that a taxpayer's 
NOL deduction cannot reduce the taxpayer's alternative minimum 
taxable income (``AMTI'') by more than 90 percent of the AMTI. 
However, an NOL deduction attributable to NOL carrybacks 
arising in taxable years ending in 2001 and 2002, as well as 
NOL carryforwards to these taxable years, offset 100 percent of 
a taxpayer's AMTI.

                        Explanation of Provision


In general

    The provision provides a special five-year carryback period 
for NOLs to the extent of certain specified amounts related to 
Hurricane Katrina or the Gulf Opportunity Zone. The amount of 
the NOL which is eligible for the five year carryback 
(``eligible NOL'') is limited to the aggregate amount of the 
following deductions: (i) qualified Gulf Opportunity Zone 
casualty losses; (ii) certain moving expenses; (iii) certain 
temporary housing expenses; (iv) depreciation deductions with 
respect to qualified Gulf Opportunity Zone property for the 
taxable year the property is placed in service; and (v) 
deductions for certain repair expenses resulting from Hurricane 
Katrina. The provision applies for losses paid or incurred 
after August 27, 2005, and before January 1, 2008; however, an 
irrevocable election not to apply the five-year carryback under 
the provision may be made with respect to any taxable year.

Qualified Gulf Opportunity Zone casualty losses

    The amount of qualified Gulf Opportunity Zone casualty 
losses which may be included in the eligible NOL is the amount 
of the taxpayer's casualty losses with respect to (1) property 
used in a trade or business, and (2) capital assets held for 
more than one year in connection with either a trade or 
business or a transaction entered into for profit. In order for 
a casualty loss to qualify, the property must be located in the 
Gulf Opportunity Zone and the loss must be attributable to 
Hurricane Katrina. As under present law, the amount of any 
casualty loss includes only the amount not compensated for by 
insurance or otherwise. In addition, the total amount of the 
casualty loss which may be included in the eligible NOL is 
reduced by the amount of any gain recognized by the taxpayer 
from involuntary conversions of property located in the Gulf 
Opportunity Zone caused by Hurricane Katrina.
    To the extent that a casualty loss is included in the 
eligible NOL and carried back under the provision, the taxpayer 
is not eligible to also treat the loss as having occurred in 
the prior taxable year under section 165(i). Similarly, the 
five year carryback under the provision does not apply to any 
loss taken into account for purposes of the ten-year carryback 
of public utility casualty losses which is provided under 
another provision in the Act.

Moving expenses

    Certain employee moving expenses of an employer may be 
included in the eligible NOL. In order to qualify, an amount 
must be paid or incurred after August 27, 2005, and before 
January 1, 2008 with respect to an employee who (i) lived in 
the Gulf Opportunity Zone before August 28, 2005, (ii) was 
displaced from their home either temporarily or permanently as 
a result of Hurricane Katrina, and (iii) is employed in the 
Gulf Opportunity Zone by the taxpayer after the expense is paid 
or incurred.
    For this purpose, moving expenses are defined as under 
present law to include only the reasonable expenses of moving 
household goods and personal effects from the former residence 
to the new residence, and of traveling (including lodging) from 
the former residence to the new place of residence. However, 
for purposes of the provision, the former residence and the new 
residence may be the same residence if the employee initially 
vacated the residence as a result of Hurricane Katrina. It is 
not necessary for the individual with respect to whom the 
moving expenses are incurred to have been an employee of the 
taxpayer at the time the expenses were incurred. Thus, assuming 
the other requirements are met, a taxpayer who pays the moving 
expenses of a prospective employee and subsequently employs the 
individual in the Gulf Opportunity Zone may include such 
expenses in the eligible NOL.

Temporary housing expenses

    Any deduction for expenses of an employer to temporarily 
house employees who are employed in the Gulf Opportunity Zone 
may be included in the eligible NOL. It is not necessary for 
the temporary housing to be located in the Gulf Opportunity 
Zone in order for such expenses to be included in the eligible 
NOL; however, the employee's principal place of employment with 
the taxpayer must be in Gulf Opportunity Zone. So, for example, 
if a taxpayer temporarily houses an employee at a location 
outside of the Gulf Opportunity Zone, and the employee commutes 
into the Gulf Opportunity Zone to the employee's principal 
place of employment, such temporary housing costs will be 
included in the eligible NOL (assuming all other requirements 
are met).

Depreciation of Gulf Opportunity Zone property

    The eligible NOL includes the depreciation deduction (or 
amortization deduction in lieu of depreciation) with respect to 
qualified Gulf Opportunity Zone property placed in service 
during the year. The special carryback period applies to the 
entire allowable depreciation deduction for such property for 
the year in which it is placed in service, including both the 
regular depreciation deduction and the additional first-year 
depreciation deduction, if any. An election out of the 
additional first-year depreciation deduction for Gulf 
Opportunity Zone property does not preclude eligibility for the 
five-year carryback.

Repair expenses

    The eligible NOL includes deductions for repair expenses 
(including the cost of removal of debris) with respect to 
damage caused by Hurricane Katrina. For example, expenses 
relating to the removal of mold and other contaminants from 
property located in the Gulf Opportunity Zone will be included 
in the eligible NOL. In order to qualify, the amount must be 
paid or incurred after August 27, 2005 and before January 1, 
2008, and the property must be located in the Gulf Opportunity 
Zone.

Other rules

    The amount of the NOL to which the five-year carryback 
period applies is limited to the amount of the corporation's 
overall NOL for the taxable year. Any remaining portion of the 
taxpayer's NOL is subject to the general two-year carryback 
period. Ordering rules similar to those for specified liability 
losses apply to losses carried back under the provision.
    In addition, the general rule which limits a taxpayer's NOL 
deduction to 90 percent of AMTI will not apply to any NOL to 
which the five-year carryback period applies under the 
provision. Instead, a taxpayer may apply such NOL carrybacks to 
offset up to 100 percent of AMTI.

                             Effective Date

    The provision is effective for losses arising in taxable 
years ending on or after August 28, 2005.

14. Gulf tax credit bonds (sec. 101 of the Act and new sec. 1400N(l) of 
        the Code)

                              Present Law


In general

    Under present law, gross income generally does not include 
interest on State or local bonds (sec. 103). State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or are repaid 
with governmental funds. Private activity bonds are bonds with 
respect to which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain permitted 
purposes (``qualified private activity bonds'').
    Generally, qualified private activity bonds are subject to 
restrictions on the use of proceeds for the acquisition of land 
and existing property, use of proceeds to finance certain 
specified facilities (e.g., airplanes, skyboxes, other luxury 
boxes, health club facilities, gambling facilities, and liquor 
stores), and use of proceeds to pay costs of issuance (e.g., 
bond counsel and underwriter fees). Certain types of qualified 
private activity bonds (e.g., small issue and redevelopment 
bonds) also are subject to additional restrictions on the use 
of proceeds for certain facilities (e.g., golf courses and 
massage parlors). Moreover, the term of qualified private 
activity bonds generally may not exceed 120 percent of the 
economic life of the property being financed and certain public 
approval requirements (similar to requirements that typically 
apply under State law to issuance of governmental debt) apply 
under Federal law to issuance of private activity bonds.

Tax-credit bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments may issue tax-credit bonds for limited 
purposes. Rather than receiving interest payments, a taxpayer 
holding a tax-credit bond on an allowance date is entitled to a 
credit. Generally, the credit amount is includible in gross 
income (as if it were a taxable interest payment on the bond), 
and the credit may be claimed against regular income tax and 
alternative minimum tax liability. Two types of tax-credit 
bonds may be issued under present law, ``qualified zone academy 
bonds,'' which are bonds issued for the purpose of renovating, 
providing equipment to, developing course materials for use at, 
or training teachers and other personnel at certain school 
facilities, and ``clean renewable energy bonds,'' which are 
bonds issued to finance facilities that would qualify for the 
tax credit under section 45 without regard to the placed in 
service date requirements of that section.

Arbitrage restrictions on tax-exempt bonds

    To prevent States and local governments from issuing more 
tax-exempt bonds than is necessary for the activity being 
financed or from issuing such bonds earlier than needed for the 
purpose of the borrowing, the Code includes arbitrage 
restrictions limiting the ability to profit from investment of 
tax-exempt bond proceeds. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'' before funds are needed for the purpose of the 
borrowing) or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, profits that are earned during these 
periods or on such investments must be rebated to the Federal 
Government. Governmental bonds are subject to less restrictive 
arbitrage rules than most private activity bonds.

                        Explanation of Provision

    The provision creates a new category of tax-credit bonds 
that may be issued in calendar year 2006 by the States of 
Louisiana, Mississippi, and Alabama (``Gulf Tax Credit 
Bonds''). As with present law tax-credit bonds, the taxpayer 
holding Gulf Tax Credit Bonds on the allowance date would be 
entitled to a tax credit. The amount of the credit would be 
determined by multiplying the bond's credit rate by the face 
amount on the holder's bond. The credit would be includible in 
gross income (as if it were an interest payment on the bond) 
and could be claimed against regular income tax liability and 
alternative minimum tax liability.
    Under the provision, 95 percent or more of the proceeds of 
Gulf Tax Credit Bonds must be used to (i) pay principal, 
interest, or premium on a bond (other than a private activity 
bond) that was outstanding on August 28, 2005, and was issued 
by the State issuing the Gulf Tax Credit Bonds, or any 
political subdivision thereof, or (ii) make a loan to any 
political subdivision of such State to pay principal, interest, 
or premium on a bond (other than a private activity bond) 
issued by such political subdivision. In addition, the issuer 
of Gulf Tax Credit Bonds must provide additional funds to pay 
principal, interest, or premium on outstanding bonds equal to 
the amount of Gulf Tax Credit Bonds issued to repay such 
outstanding bonds. Gulf Tax Credit Bonds must be a general 
obligation of the issuing State and must be designated by the 
Governor of such issuing State. The maximum maturity on Gulf 
Tax Credit Bonds is two years. In addition, present-law 
arbitrage rules that restrict the ability of State and local 
governments to invest bond proceeds apply to Gulf Tax Credit 
Bonds.
    The maximum amount of Gulf Tax Credit Bonds that may be 
issued pursuant to this provision is $200 million in the case 
of Louisiana, $100 million in the case of Mississippi, and $50 
million in the case of Alabama. Gulf Tax Credit Bonds may not 
be used to pay principal, interest, or premium on any bond with 
respect to which there is any outstanding refunded or refunding 
bond. Moreover, Gulf Tax Credit Bonds may not be used to pay 
principal, interest, or premium on any prior bond if the 
proceeds of such prior bond were used to provide any property 
described in section 144(c)(6)(B) (i.e., any private or 
commercial golf course, country club, massage parlor, hot tub 
facility, suntan facility, racetrack or other facility used for 
gambling, or any store the principal purpose of which is the 
sale alcoholic beverages for consumption off premises).

                             Effective Date

    The provision is effective for bonds issued after December 
31, 2005.

15. Additional allocation of new markets tax credit for investments 
        that serve the Gulf Opportunity Zone (sec. 101 of the Act and 
        new sec. 1400N(m) of the Code)

                              Present Law

    Section 45D provides a new markets tax credit for qualified 
equity investments made to acquire stock in a corporation, or a 
capital interest in a partnership, that is a qualified 
community development entity (``CDE''). The amount of the 
credit allowable to the investor (either the original purchaser 
or a subsequent holder) is (1) a five-percent credit for the 
year in which the equity interest is purchased from the CDE and 
for each of the following two years, and (2) a six-percent 
credit for each of the following four years. The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available for a taxable year to the 
taxpayer who holds the qualified equity investment on the date 
of the initial investment or on the respective anniversary date 
that occurs during the taxable year. The credit is recaptured 
if at any time during the seven-year period that begins on the 
date of the original issue of the investment the entity ceases 
to be a qualified CDE, the proceeds of the investment cease to 
be used as required, or the equity investment is redeemed.
    A qualified CDE is any domestic corporation or partnership: 
(1) whose primary mission is serving or providing investment 
capital for low-income communities or low-income persons; (2) 
that maintains accountability to residents of low-income 
communities by their representation on any governing board of 
or any advisory board to the CDE; and (3) that is certified by 
the Secretary as being a qualified CDE. A qualified equity 
investment means stock (other than nonqualified preferred 
stock) in a corporation or a capital interest in a partnership 
that is acquired directly from a CDE for cash, and includes an 
investment of a subsequent purchaser if such investment was a 
qualified equity investment in the hands of the prior holder. 
Substantially all of the investment proceeds must be used by 
the CDE to make qualified low-income community investments. For 
this purpose, qualified low-income community investments 
include: (1) capital or equity investments in, or loans to, 
qualified active low-income community businesses; (2) certain 
financial counseling and other services to businesses and 
residents in low-income communities; (3) the purchase from 
another CDE of any loan made by such entity that is a qualified 
low-income community investment; or (4) an equity investment 
in, or loan to, another CDE.
    A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (rather than 80 percent) of statewide median family 
income. For this purpose, a high migration rural county is any 
county that, during the 20-year period ending with the year in 
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent 
of the population of the county at the beginning of such 
period.
    The Secretary has the authority to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit. For this purpose, a ``targeted population'' 
is defined by reference to section 103(20) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 
(12 U.S.C. 4702(20)) to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who (A) are 
low-income persons; or (B) otherwise lack adequate access to 
loans or equity investments. Under such Act, ``low- income'' 
means (1) for a targeted population within a metropolitan area, 
less than 80 percent of the area median family income; and (2) 
for a targeted population within a non-metropolitan area, less 
than the greater of 80 percent of the area median family income 
or 80 percent of the statewide non-metropolitan area median 
family income (12 U.S.C. 4702(17)). Under such Act, a targeted 
population is not required to be within any census tract. In 
addition, a population census tract with a population of less 
than 2,000 is treated as a low-income community for purposes of 
the credit if such tract is within an empowerment zone, the 
designation of which is in effect under section 1391, and is 
contiguous to one or more low-income communities.
    A qualified active low-income community business is defined 
as a business that satisfies, with respect to a taxable year, 
the following requirements: (1) at least 50 percent of the 
total gross income of the business is derived from the active 
conduct of trade or business activities in any low-income 
community; (2) a substantial portion of the tangible property 
of such business is used in a low-income community; (3) a 
substantial portion of the services performed for such business 
by its employees is performed in a low-income community; and 
(4) less than five percent of the average of the aggregate 
unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
    The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006 and 
2007.

                        Explanation of Provision

    The provision allows an additional allocation of the new 
markets tax credit in an amount equal to $300,000,000 for 2005 
and 2006, and $400,000,000 for 2007, to be allocated among 
qualified CDEs to make qualified low-income community 
investments within the Gulf Opportunity Zone. To qualify for 
any such allocation, a qualified CDE must have as a significant 
mission the recovery and redevelopment of the Gulf Opportunity 
Zone. The carryover of any unused additional allocation is 
applied separately from the carryover with respect to 
allocations made under present law.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

16. Representations regarding income eligibility for purposes of 
        qualified residential rental project requirements (sec. 101 of 
        the Act and new sec. 1400N(n) of the Code)

                              Present Law


In general

    Under present law, gross income generally does not include 
interest on State or local bonds (sec. 103). State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or are repaid 
with governmental funds. Private activity bonds are bonds with 
respect to which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain permitted 
purposes (``qualified private activity bonds'').

Qualified private activity bonds

    The definition of a qualified private activity bond 
includes an exempt facility bond, or qualified mortgage, 
veterans' mortgage, small issue, redevelopment, 501(c)(3), or 
student loan bond. The definition of exempt facility bond 
includes bonds issued to finance certain transportation 
facilities (airports, ports, mass commuting, and high-speed 
intercity rail facilities); qualified residential rental 
projects; privately owned and/or operated utility facilities 
(sewage, water, solid waste disposal, and local district 
heating and cooling facilities, certain private electric and 
gas facilities, and hydroelectric dam enhancements); public/
private educational facilities; qualified green building and 
sustainable design projects; and qualified highway or surface 
freight transfer facilities.
    Subject to certain requirements, qualified private activity 
bonds may be issued to finance residential rental property or 
owner-occupied housing. Residential rental property may be 
financed with exempt facility bonds if the financed project is 
a ``qualified residential rental project.'' A project is a 
qualified residential rental project if 20 percent or more of 
the residential units in such project are occupied by 
individuals whose income is 50 percent or less of area median 
gross income (the ``20-50 test''). Alternatively, a project is 
a qualified residential rental project if 40 percent or more of 
the residential units in such project are occupied by 
individuals whose income is 60 percent or less of area median 
gross income (the ``40-60 test''). The issuer must elect to 
apply either the 20-50 test or the 40-60 test. Operators of 
qualified residential rental projects must annually certify 
that such project meets the requirements for qualification, 
including meeting the 20-50 test or the 40-60 test.

                        Explanation of Provision

    Under the provision, the operator of a qualified 
residential rental project may rely on the representations of 
prospective tenants displaced by reason of Hurricane Katrina 
for purposes of determining whether such individual satisfies 
the income limitations for qualified residential rental 
projects and, thus, the project is in compliance with the 20-50 
test or the 40-60 test. (For a description of modifications to 
the 20-50 test and the 40-60 test for qualified residential 
rental projects financed in the GO Zone, see I.A.2. Tax-exempt 
financing for the Gulf Opportunity Zone, above).
    This rule only applies if the individual's tenancy begins 
during the six-month period beginning on the date when such 
individual was displaced by Hurricane Katrina.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

17. Treatment of public utility property disaster losses (sec. 101 of 
        the Act and new sec. 1400N(o) of the Code)

                              Present Law

    Under section 165(i), certain losses attributable to a 
disaster occurring in a Presidentially declared disaster area 
may, at the election of the taxpayer, be taken into account for 
the taxable year immediately preceding the taxable year in 
which the disaster occurred.
    Section 6411 provides a procedure under which taxpayers may 
apply for tentative carryback and refund adjustments with 
respect to net operating losses, net capital losses, and unused 
business credits.

                        Explanation of Provision

    The provision provides an election for taxpayers who 
incurred casualty losses attributable to Hurricane Katrina with 
respect to public utility property located in the Gulf 
Opportunity Zone. Under the election, such losses may be taken 
into account in the fifth taxable year (rather than the 1st 
taxable year) immediately preceding the taxable year in which 
the loss occurred. If the application of this provision results 
in the creation or increase of a net operating loss for the 
year in which the casualty loss is taken into account, the net 
operating loss may be carried back or carried over as under 
present law applicable to net operating losses for such year.
    For this purpose, public utility property is property used 
predominantly in the trade or business of the furnishing or 
sale of electrical energy, water, or sewage disposal services; 
gas or steam through a local distribution system; telephone 
services, or other communication services if furnished or sold 
by the Communications Satellite Corporation for purposes 
authorized by the Communications Satellite Act of 1962; or 
transportation of gas or steam by pipeline. Such property is 
eligible regardless of whether the taxpayer's rates are 
established or approved by any regulatory body.
    A taxpayer making the election under the provision is 
eligible to file an application for a tentative carryback 
adjustment of the tax for any prior taxable year affected by 
the election. As under present law with respect to tentative 
carryback and refund adjustments, the IRS generally has 90 days 
to act on the refund claim. Under the provision, the statute of 
limitations with respect to such a claim can not expire earlier 
than one year after the date of enactment. Also, a taxpayer 
making the election with respect to a loss is not entitled to 
interest with respect to any overpayment attributable to the 
loss.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005.

18. Tax benefits not available with respect to certain property (sec. 
        101 of the Act and new sec. 1400N of the Code)

                              Present Law

    Under present law, specific tax benefits do not apply with 
respect to certain types of property. For example, private 
activity bonds are subject to restrictions on the use of 
proceeds for the acquisition of land and existing property, use 
of proceeds to finance certain specified facilities (e.g., 
airplanes, skyboxes, other luxury boxes, health club 
facilities, gambling facilities, and liquor stores), and use of 
proceeds to pay costs of issuance (e.g., bond counsel and 
underwriter fees). Small issue and redevelopment bonds also are 
subject to additional restrictions on the use of proceeds for 
certain facilities (e.g., golf courses and massage parlors).

                        Explanation of Provision

    The provisions relating to additional first-year 
depreciation, increased expensing under section 179, and the 
five-year carryback of NOLs attributable to casualty losses, 
depreciation, or amortization otherwise provided under new Code 
section 1400N do not apply with respect to certain property. 
Specifically, the provisions do not apply with respect to any 
private or commercial golf course, country club, massage 
parlor, hot tub facility, suntan facility, or any store the 
principal business of which is the sale of alcoholic beverages 
for consumption off premises. The provisions also do not apply 
with respect to any gambling or animal racing property.
    For this purpose, gambling or animal racing property 
includes certain personal property and certain real property. 
Personal property treated as gambling or animal racing property 
is any equipment, furniture, software, or other property used 
directly in connection with gambling, the racing of animals, or 
the on-site (i.e., at the racetrack) viewing of such racing. 
Real property treated as gambling or animal racing property is 
the portion of any real property (determined by square footage) 
that is dedicated to gambling, the racing of animals, or the 
on-site viewing of such racing (except if the portion so 
dedicated is less than 100 square feet). For example, the 
additional first-year depreciation for a building which is used 
as both a casino and a hotel (and which otherwise qualifies for 
additional first-year depreciation under the Act) is determined 
without regard to the portion of the building's basis which 
bears the same percentage to the total basis as the percentage 
of square footage dedicated to gambling (i.e., the casino 
floor) bears to total square footage of the building.
    No apportionment calculation is required with respect to 
real property which meets the 100-square-foot de minimis 
exception. Thus, for example, no apportionment calculation is 
required in the case of a retail store that sells lottery 
tickets in a less-than-100-square-foot area, nor in the case of 
an establishment that, while not a casino, contains a small 
number of gaming machines and devices in an area or areas whose 
aggregate size is less than 100 square feet.

                             Effective Date

    The provision is effective for taxable years ending on or 
after August 28, 2005, except that the inapplicability of the 
five-year carryback of NOLs attributable to casualty losses, 
depreciation, or amortization, is effective for losses arising 
in such years.

19. Expansion of Hope Scholarship and Lifetime Learning Credit for 
        students in the Gulf Opportunity Zone (sec. 102 of the Act and 
        new sec. 1400O of the Code)

                              Present Law


Hope credit

    The Hope credit (sec. 25A) is a nonrefundable credit of up 
to $1,500 per student per year for qualified tuition and 
related expenses paid for the first two years of the student's 
post-secondary education in a degree or certificate program. 
The Hope credit rate is 100 percent on the first $1,000 of 
qualified tuition and related expenses, and 50 percent on the 
next $1,000 of qualified tuition and related expenses. The Hope 
credit that a taxpayer may otherwise claim is phased out 
ratably for taxpayers with modified adjusted gross income 
between $43,000 and $53,000 ($87,000 and $107,000 for married 
taxpayers filing a joint return) for 2005. These adjusted gross 
income phase-out ranges are indexed for inflation. Also, each 
of the $1,000 amounts of qualified tuition and related expenses 
to which the 100-percent credit rate and 50 percent credit rate 
apply are indexed for inflation, with the amount rounded down 
to the next lowest multiple of $100. The first adjustment to 
these qualified expense amounts as a result of inflation is 
expected in 2006. The Hope credit generally may not be claimed 
against a taxpayer's alternative minimum tax liability. 
However, the credit may be claimed against a taxpayer's 
alternative minimum tax liability for taxable years beginning 
prior to January 1, 2006.
    The qualified tuition and related expenses must be incurred 
on behalf of the taxpayer, the taxpayer's spouse, or a 
dependent of the taxpayer. The Hope credit is available with 
respect to an individual student for two taxable years, 
provided that the student has not completed the first two years 
of post-secondary education before the beginning of the second 
taxable year.
    In addition, for each taxable year, a taxpayer may elect 
either the Hope credit, the Lifetime Learning credit (described 
below), or the deduction for qualified tuition and related 
expenses (sec. 222) with respect to an eligible student.
    The Hope credit is available for ``qualified tuition and 
related expenses,'' which include tuition and fees (excluding 
nonacademic fees) required to be paid to an eligible 
educational institution as a condition of enrollment or 
attendance of an eligible student at the institution. Charges 
and fees associated with meals, lodging, insurance, 
transportation, and similar personal, living, or family 
expenses are not eligible for the credit. The expenses of 
education involving sports, games, or hobbies are not qualified 
tuition and related expenses unless this education is part of 
the student's degree program. Total qualified tuition and 
related expenses are reduced by any scholarship or fellowship 
grants excludable from gross income under section 117 and any 
other tax-free educational benefits received by the student (or 
the taxpayer claiming the credit) during the taxable year. The 
Hope credit is not allowed with respect to any education 
expense for which a deduction is claimed under section 162 or 
any other section of the Code.
    An eligible student for purposes of the Hope credit is an 
individual who is enrolled in a degree, certificate, or other 
program (including a program of study abroad approved for 
credit by the institution at which such student is enrolled) 
leading to a recognized educational credential at an eligible 
educational institution. The student must pursue a course of 
study on at least a half-time basis. A student is considered to 
pursue a course of study on at least a half-time basis if the 
student carries at least one half the normal full-time work 
load for the course of study the student is pursuing for at 
least one academic period that begins during the taxable year. 
To be eligible for the Hope credit, a student must not have 
been convicted of a Federal or State felony consisting of the 
possession or distribution of a controlled substance.
    For taxable years beginning in 2004 and 2005, the Hope 
credit offsets the alternative minimum tax. For taxable years 
thereafter, the Hope credit does not offset the alternative 
minimum tax.
    Effective for taxable years beginning after December 31, 
2010, the changes to the Hope credit made by EGTRRA no longer 
apply. The EGTRRA change scheduled to expire is the change that 
permitted a taxpayer to claim a Hope credit in the same year 
that he or she claimed an exclusion from an education savings 
account. Thus, after 2010, a taxpayer cannot claim a Hope 
credit in the same year he or she claims an exclusion from an 
education savings account.

Lifetime Learning credit

    Individual taxpayers are allowed to claim a nonrefundable 
credit, the Lifetime Learning credit, equal to 20 percent of 
qualified tuition and related expenses incurred during the 
taxable year on behalf of the taxpayer, the taxpayer's spouse, 
or any dependents (Sec. 25A). Up to $10,000 of qualified 
tuition and related expenses per taxpayer return are eligible 
for the Lifetime Learning credit (i.e., the maximum credit per 
taxpayer return is $2,000). In contrast with the Hope credit, 
the maximum credit amount is not indexed for inflation. The 
Lifetime Learning credit generally may not be claimed against a 
taxpayer's alternative minimum tax liability. However, the 
credit may be claimed against a taxpayer's alternative minimum 
tax liability for taxable years beginning prior to January 1, 
2006.
    In contrast to the Hope credit, a taxpayer may claim the 
Lifetime Learning credit for an unlimited number of taxable 
years. Also in contrast to the Hope credit, the maximum amount 
of the Lifetime Learning credit that may be claimed on a 
taxpayer's return will not vary based on the number of students 
in the taxpayer's family--that is, the Hope credit is computed 
on a per student basis, while the Lifetime Learning credit is 
computed on a family-wide basis. The Lifetime Learning credit 
amount that a taxpayer may otherwise claim is phased out 
ratably for taxpayers with modified adjusted gross income 
between $43,000 and $53,000 ($87,000 and $107,000 for married 
taxpayers filing a joint return) for 2005. These phaseout 
ranges are the same as those for the Hope credit, and are 
similarly indexed for inflation.
    A taxpayer may claim the Lifetime Learning credit for a 
taxable year with respect to one or more students, even though 
the taxpayer also claims a Hope credit for that same taxable 
year with respect to other students. If, for a taxable year, a 
taxpayer claims a Hope credit with respect to a student, then 
the Lifetime Learning credit is not available with respect to 
that same student for that year (although the Lifetime Learning 
credit may be available with respect to that same student for 
other taxable years). As with the Hope credit, a taxpayer may 
not claim the Lifetime Learning credit and also claim the 
section 222 deduction for qualified tuition and related 
expenses (described below).
    As with the Hope credit, the Lifetime Learning credit is 
available for ``qualified tuition and related expenses,'' which 
include tuition and fees (excluding nonacademic fees) required 
to be paid to an eligible educational institution as a 
condition of enrollment or attendance of a student at the 
institution. Eligible higher education institutions are defined 
in the same manner for purposes of both the Hope and Lifetime 
Learning credits. Charges and fees associated with meals, 
lodging, insurance, transportation, and similar personal, 
living or family expenses are not eligible for the credit. The 
expenses of education involving sports, games, or hobbies are 
not qualified tuition expenses unless this education is part of 
the student's degree program, or the education is undertaken to 
acquire or improve the job skills of the student.
    In contrast to the Hope credit, qualified tuition and 
related expenses for purposes of the Lifetime Learning credit 
include tuition and fees incurred with respect to undergraduate 
or graduate-level courses (as explained above, the Hope credit 
is available only with respect to the first two years of a 
student's undergraduate education). Additionally, in contrast 
to the Hope credit, the eligibility of a student for the 
Lifetime Learning credit does not depend on whether the student 
has been convicted of a Federal or State felony consisting of 
the possession or distribution of a controlled substance.
    As under the Hope credit, total qualified tuition and fees 
are reduced by any scholarship or fellowship grants excludable 
from gross income under section 117 and any other tax-free 
educational benefits received by the student during the taxable 
year (such as employer-provided educational assistance 
excludable under section 127). The Lifetime Learning credit is 
not allowed with respect to any education expense for which a 
deduction is claimed under section 162 or any other section of 
the Code.
    For taxable years beginning in 2004 and 2005, the Lifetime 
Learning credit offsets the alternative minimum tax. For 
taxable years thereafter, the credit does not offset the 
alternative minimum tax.
    Effective for taxable years beginning after December 31, 
2010, the changes to the Lifetime Learning credit made by 
EGTRRA no longer apply. The EGTRRA change scheduled to expire 
is the change that permitted a taxpayer to claim a Lifetime 
Learning credit in the same year that he or she claimed an 
exclusion from an education savings account. Thus, after 2010, 
taxpayers cannot claim a Lifetime Learning credit in the same 
year he or she claims an exclusion from an education savings 
account.

Definition of qualified higher education expenses for purposes of 
        qualified tuition programs

    Present law provides favorable tax treatment for qualified 
tuition programs that meet the requirements of section 529 of 
the Code. For purposes of the rules relating to qualified 
tuition programs, ``qualified higher education expenses'' means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance at an eligible educational institution 
and expenses for special needs services in the case of a 
special needs beneficiary which are incurred in connection with 
such enrollment or attendance. In addition, in the case of at 
least half-time students, qualified higher education expenses 
include certain room and board expenses.

                        Explanation of Provision

    The provision temporarily expands the Hope and Lifetime 
Learning credits for students attending (i.e., enrolled and 
paying tuition at) an eligible education institution located in 
the Gulf Opportunity Zone.
    Under the provision, the Hope credit is increased to 100 
percent of the first $2,000 in qualified tuition and related 
expenses and 50 percent of the next $2,000 of qualified tuition 
and related expenses for a maximum credit of $3,000 per 
student. The Lifetime Learning credit rate is increased from 20 
percent to 40 percent. The provision expands the definition of 
qualified expenses to mean qualified higher education expenses 
as defined under the rules relating to qualified tuition 
programs, including certain room and board expenses for at 
least half-time students.
    The provision applies to taxable years beginning in 2005 or 
2006.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

20. Housing relief for individuals affected by Hurricane Katrina (sec. 
        103 of the Act and new sec. 1400P of the Code)

                              Present Law

    Under present law, employer-provided housing is generally 
includible in income as compensation and is wages for purposes 
of social security and Medicare taxes and unemployment tax 
(secs. 61, 3121(a), 3306(b)). Present law provides an income 
and wage exclusion for the value of lodging furnished to an 
employee, the employee's spouse, or the employee's dependents 
by or on behalf of the employee's employer, but generally only 
if the employee is required to accept the lodging on the 
business premises of the employer as a condition of employment 
(secs. 119, 3121(a)(19), and 3306(b)(14)). Reasonable expenses 
for employee compensation are deductible by the employer (sec. 
162(a)).

                        Explanation of Provision

    The provision provides a temporary income exclusion for the 
value of in-kind lodging provided for a month to a qualified 
employee (and the employee's spouse or dependents) by or on 
behalf of a qualified employer. The amount of the exclusion for 
any month for which lodging is furnished cannot exceed $600. 
The exclusion does not apply for purposes of social security 
and Medicare taxes or unemployment tax.
    The provision also provides a temporary credit to a 
qualified employer of 30 percent of the value of lodging 
excluded from the income of a qualified employee under the 
provision. The amount taken as a credit is not deductible by 
the employer.
    Qualified employee means, with respect to a month, an 
individual who: (1) on August 28, 2005, had a principal 
residence in the Gulf Opportunity (``GO'') Zone; and (2) 
performs substantially all of his or her employment services in 
the GO Zone for the qualified employer furnishing the lodging. 
Qualified employer means any employer with a trade or business 
located in the GO Zone.

                             Effective Date

    The provision applies to lodging provided during the period 
beginning on the first day of the first month beginning after 
the date of enactment (December 22, 2005) and ending on the 
date that is six months after such first day.

21. Special rules for mortgage revenue bonds (sec. 104 of the Act and 
        sec. 404 of the Katrina Emergency Tax Relief Act of 2005)

                              Present Law


In general

    Under present law, gross income generally does not include 
interest on State or local bonds (sec. 103). State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or are repaid 
with governmental funds. Private activity bonds are bonds with 
respect to which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain permitted 
purposes (``qualified private activity bonds'') (secs. 
103(b)(1) and 141).

Qualified mortgage bonds

    The definition of a qualified private activity bond 
includes a qualified mortgage bond (sec. 143). Qualified 
mortgage bonds are issued to make mortgage loans to qualified 
mortgagors for the purchase, improvement, or rehabilitation of 
owner-occupied residences. The Code imposes several limitations 
on qualified mortgage bonds, including income limitations for 
eligible mortgagors, purchase price limitations on the home 
financed with bond proceeds, and a ``first-time homebuyer'' 
requirement. The income limitations are satisfied if all 
financing provided by an issue is provided for mortgagors whose 
family income does not exceed 115 percent of the median family 
income for the metropolitan area or State, whichever is 
greater, in which the financed residences are located. The 
purchase price limitations provide that a residence financed 
with qualified mortgage bonds may not have a purchase price in 
excess of 90 percent of the average area purchase price for 
that residence. The first-time homebuyer requirement provides 
qualified mortgage bonds generally cannot be used to finance a 
mortgage for a homebuyer who had an ownership interest in a 
principal residence in the three years preceding the execution 
of the mortgage (the ``first-time homebuyer'' requirement).
    Special income and purchase price limitations apply to 
targeted area residences. A targeted area residence is one 
located in either (1) a census tract in which at least 70 
percent of the families have an income which is 80 percent or 
less of the state-wide median income or (2) an area of chronic 
economic distress. For targeted area residences, the income 
limitation is satisfied when no more than one-third of the 
mortgages are made without regard to any income limits and the 
remainder of the mortgages are made to mortgagors whose family 
income is 140 percent or less of the applicable median family 
income. The purchase price limitation is raised from 90 percent 
to 110 percent of the average area purchase price for targeted 
area residences. In addition, the first-time homebuyer 
requirement does not apply to targeted area residences.
    Qualified mortgage bonds also may be used to finance 
qualified home-improvement loans. Qualified home-improvement 
loans are defined as loans to finance alterations, repairs, and 
improvements on an existing residence, but only if such 
alterations, repairs, and improvements substantially protect or 
improve the basic livability or energy efficiency of the 
property. Qualified home-improvement loans may not exceed 
$15,000.
    A temporary provision waived the first-time homebuyer 
requirement for residences located in certain Presidentially 
declared disaster areas (sec. 143(k)(11)). In addition, 
residences located in such areas were treated as targeted area 
residences for purposes of the income and purchase price 
limitations. The special rule for residences located in 
Presidentially declared disaster areas does not apply to bonds 
issued after January 1, 1999.
    The Katrina Emergency Tax Relief Act (``KETRA'') waives the 
first-time homebuyer requirement with respect to certain 
residences located in an area with respect to which a major 
disaster has been declared by the President before September 
14, 2005, under section 401 of the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act by reason of Hurricane 
Katrina (see sec. 404 of Pub. L. No. 109-73). The waiver of the 
first-time homebuyer requirement does not apply to financing 
provided after December 31, 2007. KETRA also increases to 
$150,000 the permitted amount of a qualified home-improvement 
loans with respect to residences located in the Hurricane 
Katrina disaster area to the extent such loan is for the repair 
of damage caused by Hurricane Katrina.

                        Explanation of Provision

    The provision extends the waiver of the first-time 
homebuyer requirement provided by KETRA to financing provided 
through December 31, 2010.
    (For a description of additional mortgage revenue bond 
rules applicable to the GO Zone, the Rita GO Zone and the Wilma 
GO Zone, see II.H--Special Rules for Mortgage Revenue Bonds, 
below)

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

22. Treasury authority to grant bonus depreciation placed-in-service 
        date relief (sec. 105 of the Act and sec. 168(k) of the Code)

                              Present Law


In general

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property range from three 
to 25 years. The depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized.

Additional first year depreciation deduction

    Sec. 168(k) allows an additional first-year depreciation 
deduction equal to 30 percent or 50 percent of the adjusted 
basis of qualified property. In order for property to qualify 
for the additional first-year depreciation deduction, it must 
meet all of the following requirements. First, the property 
must be (1) property to which MACRS applies with an applicable 
recovery period of 20 years or less, (2) water utility property 
(as defined in section 168(e)(5)), (3) computer software other 
than computer software covered by section 197, or (4) qualified 
leasehold improvement property (as defined in section 
168(k)(3)). Second, the original use (the first use to which 
the property is put, whether or not such use corresponds to the 
use of such property by the taxpayer) of the property must 
commence with the taxpayer on or after September 11, 2001. 
Third, the taxpayer must acquire the property within the 
applicable time period. Finally, the property must be placed in 
service before January 1, 2005.
    An extension of the placed-in-service date of one year 
(i.e., January 1, 2006) is provided for certain property with a 
recovery period of ten years or longer and certain 
transportation property. In order for property to qualify for 
the extended placed-in-service date, the property must be 
subject to section 263A and have an estimated production period 
exceeding two years or an estimated production period exceeding 
one year and a cost exceeding $1 million. Transportation 
property is defined as tangible personal property used in the 
trade or business of transporting persons or property.
    The applicable time period for acquired property is (1) 
after September 10, 2001 and before January 1, 2005, but only 
if no binding written contract for the acquisition is in effect 
before September 11, 2001, or (2) pursuant to a binding written 
contract which was entered into after September 10, 2001, and 
before January 1, 2005. With respect to property that is 
manufactured, constructed, or produced by the taxpayer for use 
by the taxpayer, the taxpayer must begin the manufacture, 
construction, or production of the property after September 10, 
2001. For property eligible for the extended placed-in-service 
date, a special rule limits the amount of costs eligible for 
the additional first year depreciation. With respect to such 
property, only the portion of the basis that is properly 
attributable to the costs incurred before January 1, 2005 
(``progress expenditures'') is eligible for the additional 
first-year depreciation. For purposes of determining the amount 
of eligible progress expenditures, rules similar to sec. 
46(d)(3) as in effect prior to the Tax Reform Act of 1986 
apply.
    In addition, certain non-commercial aircraft can qualify 
for the extended placed-in-service date. Qualifying aircraft 
are eligible for the additional first-year depreciation 
deduction if placed in service before January 1, 2006. In order 
to qualify, the aircraft must:
          1. be acquired by the taxpayer during the applicable 
        time period as under present law;
          2. meet the appropriate placed-in-service date 
        requirements;
          3. not be tangible personal property used in the 
        trade or business of transporting persons or property 
        (except for agricultural or firefighting purposes);
          4. be purchased by a purchaser who, at the time of 
        the contract for purchase, has made a nonrefundable 
        deposit of the lesser of ten percent of the cost or 
        $100,000; and
          5. have an estimated production period exceeding four 
        months and a cost exceeding $200,000.
    Aircraft qualifying under these rules are not subject to 
the progress expenditures limitation.

                        Explanation of Provision

    The provision provides the Secretary with authority to 
further extend the placed-in-service date (beyond December 31, 
2005), on a case-by-case basis, for certain property eligible 
for the December 31, 2005 placed-in-service date under present 
law. The authority extends only to property placed in service 
or manufactured in the Gulf Opportunity Zone, the Rita GO Zone, 
or the Wilma GO Zone. In addition, the authority extends only 
to circumstances in which the taxpayer was unable to meet the 
December 31, 2005 deadline as a result of Hurricanes Katrina, 
Rita, and/or Wilma. The extension should be only for such 
additional time as is required as a result of the hurricane(s) 
and in no case should extend the deadline beyond December 31, 
2006.

                             Effective Date

    The provision applies to property placed in service on or 
after August 28, 2005, in taxable years ending on or after such 
date.

      TITLE II--TAX BENEFITS RELATED TO HURRICANES RITA AND WILMA

 A. Special Rules for Use of Retirement Funds (sec. 201 of the Act and 
                      new sec. 1400Q of the Code)

1. Tax-favored withdrawals from retirement plans relating to Hurricanes 
        Rita and Wilma

                              Present Law

In general
    Under present law, a distribution from a qualified 
retirement plan under section 401(a), a qualified annuity plan 
under section 403(a), a tax-sheltered annuity under section 
403(b) (a ``403(b) annuity''), an eligible deferred 
compensation plan maintained by a State or local government 
under section 457 (a ``governmental 457 plan''), or an 
individual retirement arrangement under section 408 (an 
``IRA'') generally is included in income for the year 
distributed (secs. 402(a), 403(a), 403(b), 408(d), and 457(a)). 
(These plans are referred to collectively as ``eligible 
retirement plans''.) In addition, a distribution from a 
qualified retirement or annuity plan, a 403(b) annuity, or an 
IRA received before age 59\1/2\, death, or disability generally 
is subject to a 10-percent early withdrawal tax on the amount 
includible in income, unless an exception applies (sec. 72(t)).
    An eligible rollover distribution from a qualified 
retirement or annuity plan, a 403(b) annuity, or a governmental 
457 plan, or a distribution from an IRA, generally can be 
rolled over within 60 days to another plan, annuity, or IRA. 
The IRS has the authority to waive the 60-day requirement if 
failure to waive the requirement would be against equity or 
good conscience, including cases of casualty, disaster, or 
other events beyond the reasonable control of the individual. 
Any amount rolled over is not includible in income (and thus 
also not subject to the 10-percent early withdrawal tax).
    Distributions from a qualified retirement or annuity plan, 
403(b) annuity, a governmental 457 plan, or an IRA are 
generally subject to income tax withholding unless the 
recipient elects otherwise. An eligible rollover distribution 
from a qualified retirement or annuity plan, 403(b) annuity, or 
governmental 457 plan is subject to income tax withholding at a 
20-percent rate unless the distribution is rolled over to 
another plan, annuity or IRA by means of a direct transfer.
    Certain amounts held in a qualified retirement plan that 
includes a qualified cash-or-deferred arrangement (a ``401(k) 
plan'') or in a 403(b) annuity may not be distributed before 
severance from employment, age 59\1/2\, death, disability, or 
financial hardship of the employee. Amounts deferred under a 
governmental 457 plan may not be distributed before severance 
from employment, age 70\1/2\, or an unforeseeable emergency of 
the employee.
Katrina Emergency Tax Relief Act of 2005
    The Katrina Emergency Tax Relief Act of 2005 (Public Law 
109-73) provides an exception to the 10-percent early 
withdrawal tax in the case of a qualified Hurricane Katrina 
distribution from a qualified retirement or annuity plan, a 
403(b) annuity, or an IRA. In addition, as discussed more fully 
below, income attributable to a qualified Hurricane Katrina 
distribution may be included in income ratably over three 
years, and the amount of a qualified Hurricane Katrina 
distribution may be recontributed to an eligible retirement 
plan within three years.
    A qualified Hurricane Katrina distribution is a 
distribution from an eligible retirement plan made on or after 
August 25, 2005, and before January 1, 2007, to an individual 
whose principal place of abode on August 28, 2005, is located 
in the Hurricane Katrina disaster area and who has sustained an 
economic loss by reason of Hurricane Katrina. The total amount 
of qualified Hurricane Katrina distributions that an individual 
can receive from all plans, annuities, or IRAs is $100,000. 
Thus, any distributions in excess of $100,000 during the 
applicable period are not qualified Hurricane Katrina 
distributions.
    Any amount required to be included in income as a result of 
a qualified Hurricane Katrina distribution is included in 
income ratably over the three-year period beginning with the 
year of distribution unless the individual elects not to have 
ratable inclusion apply. Certain rules apply for purposes of 
the ratable inclusion provision. For example, the amount 
required to be included in income for any taxable year in the 
three-year period cannot exceed the total amount to be included 
in income with respect to the qualified Hurricane Katrina 
distribution, reduced by amounts included in income for 
preceding years in the period.
    Any portion of a qualified Hurricane Katrina distribution 
may, at any time during the three-year period beginning the day 
after the date on which the distribution was received, be 
recontributed to an eligible retirement plan to which a 
rollover can be made. Any amount recontributed within the 
three-year period is treated as a rollover and thus is not 
includible in income. For example, if an individual receives a 
qualified Hurricane Katrina distribution in 2005, that amount 
is included in income, generally ratably over the year of the 
distribution and the following two years, but is not subject to 
the 10-percent early withdrawal tax. If, in 2007, the amount of 
the qualified Hurricane Katrina distribution is recontributed 
to an eligible retirement plan, the individual may file an 
amended return (or returns) to claim a refund of the tax 
attributable to the amount previously included in income. In 
addition, if, under the ratable inclusion provision, a portion 
of the distribution has not yet been included in income at the 
time of the contribution, the remaining amount is not 
includible in income.
    A qualified Hurricane Katrina distribution is a permissible 
distribution from a 401(k) plan, 403(b) annuity, or 
governmental 457 plan, regardless of whether a distribution 
would otherwise be permissible. A plan is not treated as 
violating any Code requirement merely because it treats a 
distribution as a qualified Hurricane Katrina distribution, 
provided that the aggregate amount of such distributions from 
plans maintained by the employer and members of the employer's 
controlled group does not exceed $100,000. Thus, a plan is not 
treated as violating any Code requirement merely because an 
individual might receive total distributions in excess of 
$100,000, taking into account distributions from plans of other 
employers or IRAs.
    Qualified Hurricane Katrina distributions are subject to 
the income tax withholding rules applicable to distributions 
other than eligible rollover distributions. Thus, 20-percent 
mandatory withholding does not apply.

                        Explanation of Provision

    The provision codifies and expands the relief provided 
under the Katrina Emergency Tax Relief Act of 2005 in the case 
of qualified Hurricane Katrina distributions to any ``qualified 
hurricane distribution,'' which is defined to include 
distributions relating to Hurricanes Rita and Wilma. Under the 
provision, a qualified hurricane distribution includes 
distributions that meet the definition of qualified Hurricane 
Katrina distribution under the Katrina Emergency Tax Relief Act 
of 2005, as well as any other distribution from an eligible 
retirement plan made on or after September 23, 2005, and before 
January 1, 2007, to an individual whose principal place of 
abode on September 23, 2005, is located in the Hurricane Rita 
disaster area and who has sustained an economic loss by reason 
of Hurricane Rita. A qualified hurricane distribution also 
includes a distribution from an eligible retirement plan made 
on or after October 23, 2005, and before January 1, 2007, to an 
individual whose principal place of abode on October 23, 2005, 
is located in the Hurricane Wilma disaster area and who has 
sustained an economic loss by reason of Hurricane Wilma.
    The total amount of qualified hurricane distributions that 
an individual can receive from all plans, annuities, or IRAs is 
$100,000.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).
2. Recontributions of withdrawals for home purchases cancelled due to 
        Hurricanes Rita and Wilma

                              Present Law

In general
    Under present law, a distribution from a qualified 
retirement plan, a tax-sheltered annuity (a ``403(b) 
annuity''), or an individual retirement arrangement (an 
``IRA'') generally is included in income for the year 
distributed (secs. 402(a), 403(b), and 408(d)). In addition, a 
distribution from a qualified retirement plan, a 403(b) 
annuity, or an IRA received before age 59\1/2\, death, or 
disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception applies (sec. 72(t)). An exception to the 10-percent 
tax applies in the case of a qualified first-time homebuyer 
distribution from an IRA, i.e., a distribution (not to exceed 
$10,000) used within 120 days for the purchase or construction 
of a principal residence of a first-time homebuyer.
    An eligible rollover distribution from a qualified 
retirement plan or a 403(b) annuity or a distribution from an 
IRA generally can be rolled over within 60 days to another 
plan, annuity, or IRA. The IRS has the authority to waive the 
60-day requirement if failure to waive the requirement would be 
against equity or good conscience, including cases of casualty, 
disaster, or other events beyond the reasonable control of the 
individual. Any amount rolled over is not includible in income 
(and thus also not subject to the 10-percent early withdrawal 
tax).
    Certain amounts held in a qualified retirement plan that 
includes a qualified cash-or-deferred arrangement (a ``401(k) 
plan'') or a 403(b) annuity may not be distributed before 
severance from employment, age 59\1/2\, death, disability, or 
financial hardship of the employee. For this purpose, subject 
to certain conditions, distributions for costs directly related 
to the purchase of a principal residence by an employee 
(excluding mortgage payments) are deemed to be distributions on 
account of financial hardship.

Katrina Emergency Tax Relief Act of 2005

    The Katrina Emergency Tax Relief Act of 2005 generally 
provides that a distribution received from a 401(k) plan, 
403(b) annuity, or IRA in order to purchase a home in the 
Hurricane Katrina disaster area may be recontributed to such a 
plan, annuity, or IRA in certain circumstances.
    The ability to recontribute applies to an individual who 
receives a qualified distribution. A qualified distribution is 
a hardship distribution from a 401(k) plan or 403(b) annuity, 
or a qualified first-time homebuyer distribution from an IRA: 
(1) that is received after February 28, 2005, and before August 
29, 2005; and (2) that was to be used to purchase or construct 
a principal residence in the Hurricane Katrina disaster area, 
but the residence is not purchased or constructed on account of 
Hurricane Katrina.
    Any portion of a qualified distribution may, during the 
period beginning on August 25, 2005, and ending on February 28, 
2006, be recontributed to a plan, annuity or IRA to which a 
rollover is permitted. Any amount recontributed is treated as a 
rollover. Thus, that portion of the qualified distribution is 
not includible in income (and also is not subject to the 10-
percent early withdrawal tax).

                        Explanation of Provision

    The provision codifies and expands the provision under the 
Katrina Emergency Tax Relief Act of 2005 allowing 
recontribution of certain distributions from a 401(k) plan, 
403(b) annuity, or IRA to qualified Hurricane Rita 
distributions and to qualified Hurricane Wilma distributions.
    A qualified Hurricane Rita distribution is a hardship 
distribution from a 401(k) plan or 403(b) annuity, or a 
qualified first-time homebuyer distribution from an IRA: (1) 
that is received after February 28, 2005, and before September 
24, 2005; and (2) that was to be used to purchase or construct 
a principal residence in the Hurricane Rita disaster area, but 
the residence is not purchased or constructed on account of 
Hurricane Rita. Any portion of a qualified Hurricane Rita 
distribution may, during the period beginning on September 23, 
2005, and ending on February 28, 2006, be recontributed to a 
plan, annuity or IRA to which a rollover is permitted.
    A qualified Hurricane Wilma distribution is a hardship 
distribution from a 401(k) plan or 403(b) annuity, or a 
qualified first-time homebuyer distribution from an IRA: (1) 
that is received after February 28, 2005, and before October 
24, 2005; and (2) that was to be used to purchase or construct 
a principal residence in the Hurricane Wilma disaster area, but 
the residence is not purchased or constructed on account of 
Hurricane Wilma. Any portion of a qualified Hurricane Wilma 
distribution may, during the period beginning on October 23, 
2005, and ending on February 28, 2006, be recontributed to a 
plan, annuity or IRA to which a rollover is permitted.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

3. Loans from qualified plans to individuals sustaining an economic 
        loss due to Hurricane Rita or Wilma

                              Present Law


In general

    An individual is permitted to borrow from a qualified plan 
in which the individual participates (and to use his or her 
accrued benefit as security for the loan) provided the loan 
bears a reasonable rate of interest, is adequately secured, 
provides a reasonable repayment schedule, and is not made 
available on a basis that discriminates in favor of employees 
who are officers, shareholders, or highly compensated.
    Subject to certain exceptions, a loan from a qualified 
employer plan to a plan participant is treated as a taxable 
distribution of plan benefits. A qualified employer plan 
includes a qualified retirement plan under section 401(a), a 
qualified annuity plan under section 403(a), a tax-deferred 
annuity under section 403(b), and any plan that was (or was 
determined to be) a qualified employer plan or a governmental 
plan.
    An exception to this general rule of income inclusion is 
provided to the extent that the loan (when added to the 
outstanding balance of all other loans to the participant from 
all plans maintained by the employer) does not exceed the 
lesser of (1) $50,000 reduced by the excess of the highest 
outstanding balance of loans from such plans during the one-
year period ending on the day before the date the loan is made 
over the outstanding balance of loans from the plan on the date 
the loan is made or (2) the greater of $10,000 or one half of 
the participant's accrued benefit under the plan (sec. 72(p)). 
This exception applies only if the loan is required, by its 
terms, to be repaid within five years. An extended repayment 
period is permitted for the purchase of the principal residence 
of the participant. Plan loan repayments (principal and 
interest) must be amortized in level payments and made not less 
frequently than quarterly, over the term of the loan.

Katrina Emergency Tax Relief Act of 2005

    The Katrina Emergency Tax Relief Act of 2005 provides 
special rules in the case of a loan from a qualified employer 
plan to a qualified individual made after September 23, 2005, 
and before January 1, 2007. A qualified individual is an 
individual whose principal place of abode on August 28, 2005, 
is located in the Hurricane Katrina disaster area and who has 
sustained an economic loss by reason of Hurricane Katrina.
    The exception to the general rule of income inclusion is 
provided to the extent that the loan (when added to the 
outstanding balance of all other loans to the participant from 
all plans maintained by the employer) does not exceed the 
lesser of (1) $100,000 reduced by the excess of the highest 
outstanding balance of loans from such plans during the one-
year period ending on the day before the date the loan is made 
over the outstanding balance of loans from the plan on the date 
the loan is made or (2) the greater of $10,000 or the 
participant's accrued benefit under the plan.
    In the case of a qualified individual with an outstanding 
loan on or after August 25, 2005, from a qualified employer 
plan, if the due date for any repayment with respect to such 
loan occurs during the period beginning on August 25, 2005, and 
ending on December 31, 2006, such due date is delayed for one 
year. Any subsequent repayments with respect to such loan shall 
be appropriately adjusted to reflect the delay in the due date 
and any interest accruing during such delay. The period during 
which required repayment is delayed is disregarded in complying 
with the requirements that the loan be repaid within five years 
and that level amortization payments be made.

                        Explanation of Provision

    The provision codifies and expands the special rules for 
loans from a qualified employer plan provided under the Katrina 
Emergency Tax Relief Act of 2005 to loans from a qualified 
employer plan to a qualified Hurricane Rita or Hurricane Wilma 
individual made on or after the date of enactment and before 
January 1, 2007.
    A qualified Hurricane Rita individual includes an 
individual whose principal place of abode on September 23, 
2005, is located in a Hurricane Rita disaster area and who has 
sustained an economic loss by reason of Hurricane Rita. In the 
case of a qualified Hurricane Rita individual with an 
outstanding loan on or after September 23, 2005, from a 
qualified employer plan, if the due date for any repayment with 
respect to such loan occurs during the period beginning on 
September 23, 2005, and ending on December 31, 2006, such due 
date is delayed for one year.
    A qualified Hurricane Wilma individual includes an 
individual whose principal place of abode on October 23, 2005, 
is located in a Hurricane Wilma disaster area and who has 
sustained an economic loss by reason of Hurricane Wilma. In the 
case of a qualified Hurricane Wilma individual with an 
outstanding loan on or after October 23, 2005, from a qualified 
employer plan, if the due date for any repayment with respect 
to such loan occurs during the period beginning on October 23, 
2005, and ending on December 31, 2006, such due date is delayed 
for one year.
    An individual cannot be a qualified individual with respect 
to more than one hurricane.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

4. Plan amendments relating to Hurricane Rita and Hurricane Wilma 
        relief

                              Present Law


In general

    Present law provides a remedial amendment period during 
which, under certain circumstances, a plan may be amended 
retroactively in order to comply with the qualification 
requirements (sec. 401(b)). In general, plan amendments to 
reflect changes in the law generally must be made by the time 
prescribed by law for filing the income tax return of the 
employer for the employer's taxable year in which the change in 
law occurs. The Secretary of the Treasury may extend the time 
by which plan amendments need to be made.

Katrina Emergency Tax Relief Act of 2005

    The Katrina Emergency Tax Relief Act of 2005 permits 
certain plan amendments made pursuant to the changes made by 
the provisions of Title I of the Act, or regulations issued 
thereunder, to be retroactively effective. If the plan 
amendment meets the requirements of the Act, then the plan will 
be treated as being operated in accordance with its terms. In 
order for this treatment to apply, the plan amendment is 
required to be made on or before the last day of the first plan 
year beginning on or after January 1, 2007, or such later date 
as provided by the Secretary of the Treasury. Governmental 
plans are given an additional two years in which to make 
required plan amendments. If the amendment is required to be 
made to retain qualified status as a result of the changes made 
by Title I of the Act (or regulations), the amendment is 
required to be made retroactively effective as of the date on 
which the change became effective with respect to the plan, and 
the plan is required to be operated in compliance until the 
amendment is made. Amendments that are not required to retain 
qualified status but that are made pursuant to the changes made 
by Title I of the Act (or regulations) may be made 
retroactively effective as of the first day the plan is 
operated in accordance with the amendment. A plan amendment 
will not be considered to be pursuant to changes made by Title 
I of the Act (or regulations) if it has an effective date 
before the effective date of the provision under the Act (or 
regulations) to which it relates.

                        Explanation of Provision

    The provision codifies and expands the ability to make 
retroactive plan amendments under the Katrina Emergency Tax 
Relief Act of 2005 to apply to changes made pursuant to new 
section 1400Q of the Code, or regulations issued thereunder.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

   B. Employee Retention Credit for Employers Affected by Hurricanes 
Katrina, Rita, and Wilma (sec. 201 of the Act and new sec. 1400R of the 
                                 Code)


                              Present Law

    The Katrina Emergency Tax Relief Act of 2005 provides a 
credit of 40 percent of the qualified wages (up to a maximum of 
$6,000 in qualified wages per employee) paid by an eligible 
employer to an eligible employee.
    An eligible employer is any employer (1) that conducted an 
active trade or business on August 28, 2005, in the core 
disaster area and (2) with respect to which the trade or 
business described in (1) is inoperable on any day after August 
28, 2005, and before January 1, 2006, as a result of damage 
sustained by reason of Hurricane Katrina. An eligible employer 
shall not include any trade or business for any taxable year if 
such trade or business employed an average of more than 200 
employees on business days during the taxable year.
    The term ``core disaster area'' means that portion of the 
Hurricane Katrina disaster area determined by the President to 
warrant individual or individual and public assistance from the 
Federal Government under such Act. The term ``Hurricane Katrina 
disaster area'' means an area with respect to which a major 
disaster has been declared by the President before September 
14, 2005, under section 401 of the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act by reason of Hurricane 
Katrina.
    An eligible employee is, with respect to an eligible 
employer, an employee whose principal place of employment on 
August 28, 2005, with such eligible employer was in a core 
disaster area. An employee may not be treated as an eligible 
employee for any period with respect to an employer if such 
employer is allowed a credit under section 51 with respect to 
the employee for the period.
    Qualified wages are wages (as defined in section 51(c)(1) 
of the Code, but without regard to section 3306(b)(2)(B) of the 
Code) paid or incurred by an eligible employer with respect to 
an eligible employee on any day after August 28, 2005, and 
before January 1, 2006, during the period (1) beginning on the 
date on which the trade or business first became inoperable at 
the principal place of employment of the employee immediately 
before Hurricane Katrina, and (2) ending on the date on which 
such trade or business has resumed significant operations at 
such principal place of employment. Qualified wages include 
wages paid without regard to whether the employee performs no 
services, performs services at a different place of employment 
than such principal place of employment, or performs services 
at such principal place of employment before significant 
operations have resumed.
    The credit is a part of the current year business credit 
under section 38(b) and therefore is subject to the tax 
liability limitations of section 38(c). Rules similar to 
sections 280C(a), 51(i)(1) and 52 apply to the credit.

                        Explanation of Provision

    The provision codifies the employee retention credit 
provisions that were enacted in the Katrina Emergency Tax 
Relief Act of 2005, and eliminates the provision that 
restricted the credit to employers of not more than 200 
employees.
    The provision extends the retention credit, as modified to 
eliminate the employer size limitation, to employers affected 
by Hurricanes Rita and Wilma and located in the Rita GO Zone 
and Wilma GO Zone, respectively. The reference dates for 
employers affected by Hurricane Rita and Hurricane Wilma, 
comparable to the August 28, 2005 date of present law for 
employers affected by Hurricane Katrina, are September 23, 
2005, and October 23, 2005, respectively.

                             Effective Date

    The codification of the provision in the Katrina Emergency 
Tax Relief Act of 2005 takes effect on the date of enactment 
(December 22, 2005). The provision that repeals the employer 
size limitation is, with respect to the Hurricane Katrina 
retention credit, effective as if included in the Katrina 
Emergency Tax Relief Act of 2005. The retention credit is 
effective for wages paid after September 23, 2005, in the case 
of Hurricane Rita and after October 23, 2005, in the case of 
Hurricane Wilma.

  C. Temporary Suspension of Limitations on Charitable Contributions 
        (sec. 201 of the Act and new sec. 1400S(a) of the Code)


                              Present Law


In general

    In general, an income tax deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization (sec. 170).
    Charitable contributions of cash are deductible in the 
amount contributed. In general, contributions of capital gain 
property to a qualified charity are deductible at fair market 
value with certain exceptions. Capital gain property means any 
capital asset or property used in the taxpayer's trade or 
business the sale of which at its fair market value, at the 
time of contribution, would have resulted in gain that would 
have been long-term capital gain. Contributions of other 
appreciated property generally are deductible at the donor's 
basis in the property. Contributions of depreciated property 
generally are deductible at the fair market value of the 
property.

Percentage limitations

            Contributions by individuals
    For individuals, in any taxable year, the amount deductible 
as a charitable contribution is limited to a percentage of the 
taxpayer's contribution base. The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. The contribution base is 
defined as the taxpayer's adjusted gross income computed 
without regard to any net operating loss carryback.
    Contributions by an individual taxpayer of property (other 
than appreciated capital gain property) to a charitable 
organization described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) may not exceed 50 
percent of the taxpayer's contribution base. Contributions of 
this type of property to nonoperating private foundations and 
certain other organizations generally may be deducted up to 30 
percent of the taxpayer's contribution base.
    Contributions of appreciated capital gain property to 
charitable organizations described in section 170(b)(1)(A) 
generally are deductible up to 30 percent of the taxpayer's 
contribution base. An individual may elect, however, to bring 
all these contributions of appreciated capital gain property 
for a taxable year within the 50-percent limitation category by 
reducing the amount of the contribution deduction by the amount 
of the appreciation in the capital gain property. Contributions 
of appreciated capital gain property to charitable 
organizations described in section 170(b)(1)(B) (e.g., private 
nonoperating foundations) are deductible up to 20 percent of 
the taxpayer's contribution base.
            Contributions by corporations
    For corporations, in any taxable year, charitable 
contributions are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating loss or capital 
loss carrybacks.
    For purposes of determining whether a corporation's 
aggregate charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions.
            Carryforward of excess contributions
    Charitable contributions that exceed the applicable 
percentage limitation may be carried forward for up to five 
years (sec. 170(d)). The amount that may be carried forward 
from a taxable year (``contribution year'') to a succeeding 
taxable year may not exceed the applicable percentage of the 
contribution base for the succeeding taxable year less the sum 
of contributions made in the succeeding taxable year plus 
contributions made in taxable years prior to the contribution 
year and treated as paid in the succeeding taxable year.

Overall limitation on itemized deductions (``Pease'' limitation)

    Under present law, the total amount of otherwise allowable 
itemized deductions (other than medical expenses, investment 
interest, and casualty, theft, or wagering losses) is reduced 
by three percent of the amount of the taxpayer's adjusted gross 
income in excess of a certain threshold. The otherwise 
allowable itemized deductions may not be reduced by more than 
80 percent. For 2005, the adjusted gross income threshold is 
$145,950 ($72,975 for a married taxpayer filing a joint 
return). These dollar amounts are adjusted for inflation.
    The otherwise applicable overall limitation on itemized 
deductions is reduced by one-third in taxable years beginning 
in 2006 and 2007, and by two-thirds in taxable years beginning 
in 2008 and 2009. The overall limitation is repealed for 
taxable years beginning after December 31, 2009, and reinstated 
for taxable years beginning after December 31, 2010.

Katrina Emergency Tax Relief Act of 2005_Increase in percentage 
        limitations

    Under section 301 of the Katrina Emergency Tax Relief Act 
of 2005, in the case of an individual, the deduction for 
qualified contributions is allowed up to the amount by which 
the taxpayer's contribution base exceeds the deduction for 
other charitable contributions. Contributions in excess of this 
amount are carried over to succeeding taxable years as 
contributions described in section 170(b)(1)(A), subject to the 
limitations of section 170(d)(1)(A)(i) and (ii).
    In the case of a corporation, the deduction for qualified 
contributions is allowed up to the amount by which the 
corporation's taxable income (as computed under section 
170(b)(2)) exceeds the deduction for other charitable 
contributions. Contributions in excess of this amount are 
carried over to succeeding taxable years, subject to the 
limitations of section 170(d)(2).
    In applying subsections (b) and (d) of section 170 to 
determine the deduction for other contributions, qualified 
contributions are not taken into account (except to the extent 
qualified contributions are carried over to succeeding taxable 
years under the rules described above).
    Qualified contributions are cash contributions made during 
the period beginning on August 28, 2005, and ending on December 
31, 2005, to a charitable organization described in section 
170(b)(1)(A) (other than a supporting organization described in 
section 509(a)(3)). Contributions of noncash property, such as 
securities, are not qualified contributions. Under the 
provision, qualified contributions must be to an organization 
described in section 170(b)(1)(A); thus, contributions to, for 
example, a charitable remainder trust generally are not 
qualified contributions, unless the charitable remainder 
interest is paid in cash to an eligible charity during the 
applicable time period. In the case of a corporation, qualified 
contributions must be for relief efforts related to Hurricane 
Katrina. A taxpayer must elect to have the contributions 
treated as qualified contributions.
    Qualified contributions do not include a contribution if 
the contribution is for establishment of a new, or maintenance 
in an existing, segregated fund or account with respect to 
which the donor (or any person appointed or designated by such 
donor) has, or reasonably expects to have, advisory privileges 
with respect to distributions or investments by reason of the 
donor's status as a donor. For example, a segregated fund or 
account exists if a donor makes a charitable contribution and 
the donee separately identifies the donor's contribution on its 
books. The donor has advisory privileges with respect to such 
segregated fund or account if the donor, by written agreement 
or otherwise, reasonably expects to provide advice to the donee 
as to the investment or distribution of amounts from such fund 
or account. In addition, a segregated fund or account also 
includes, but is not limited to, a separate bank account or 
trust established or maintained by a donee; however, in order 
for a contribution to such account or fund necessarily to be 
not a qualified contribution, the donor (or a person appointed 
or designated by the donor) must have or reasonably expect to 
have advisory privileges as to the investment or distribution 
of amounts in such account or fund. For instance, a donor 
reasonably expects to have advisory privileges with respect to 
contributions made by the donor if the donor understands that 
the donee will consider advice provided by the donor (or a 
person appointed or designated by the donor) in making 
investments or distributions. It is intended that a person 
shall not be treated as having advisory privileges by virtue of 
having a legal or contractual right or obligation, or a 
fiduciary duty, with respect to a segregated fund or account. 
If a donor makes a contribution for establishment of a new, or 
maintenance in an existing segregated account or fund, and the 
donor also provides advice with respect to amounts in such 
account or fund by reason of the donor's position as an 
officer, employee, or director of the donee, and not by reason 
of the donor's status as a donor, then, under the provision, 
the donor is not treated as having or reasonably expecting to 
have advisory privileges with respect to such fund or account. 
However, if by reason of a donor's charitable contribution to a 
segregated account or fund, the donor secured an appointment on 
a committee of the donee organization that advised how to 
distribute or invest amounts in such account or fund, the 
contribution would not be a qualified contribution 
notwithstanding that the donor is an officer, employee, or 
director of the donee organization.
    The Act requires that qualified contributions by a 
corporation be made for relief efforts related to Hurricane 
Katrina. Corporate taxpayers must substantiate that the 
contribution is made for this purpose.

Limitation on overall itemized deductions

    Under the Katrina Emergency Tax Relief Act of 2005, the 
charitable contribution deduction up to the amount of qualified 
contributions (as defined above) paid during the year is not 
treated as an itemized deduction for purposes of the overall 
limitation on itemized deductions.

                        Explanation of Provision

    The provision codifies the provisions in the Katrina 
Emergency Tax Relief Act of 2005, and extends the definition of 
qualified contributions (as described above), in the case of 
corporations, to include contributions for relief efforts 
related to Hurricane Rita and Hurricane Wilma.

                             Effective Date

    The codification of the provision in the Katrina Emergency 
Tax Relief Act of 2005 takes effect on date of enactment 
(December 22, 2005). The expansion of the provision applies to 
contributions made on or after September 23, 2005.

D. Suspension of Certain Limitations on Personal Casualty Losses (sec. 
          201 of the Act and new section 1400S(b) of the Code)


                              Present Law


In general

    Under present law, a taxpayer may generally claim a 
deduction for any loss sustained during the taxable year and 
not compensated by insurance or otherwise (sec. 165). For 
individual taxpayers, deductible losses must be incurred in a 
trade or business or other profit- seeking activity or consist 
of property losses arising from fire, storm, shipwreck, or 
other casualty, or from theft. Personal casualty or theft 
losses are deductible only if they exceed $100 per casualty or 
theft. In addition, aggregate net casualty and theft losses are 
deductible only to the extent they exceed 10 percent of an 
individual taxpayer's adjusted gross income.

Hurricane Katrina

    Under the Katrina Emergency Tax Relief Act of 2005, the two 
limitations on personal casualty or theft losses do not apply 
to the extent those losses arise in the Hurricane Katrina 
disaster area on or after August 25, 2005, and are attributable 
to Hurricane Katrina (``Katrina casualty losses''). 
Specifically, Katrina casualty losses meeting the above 
requirements need not exceed $100 per casualty or theft. In 
addition, such losses are deductible without regard to whether 
aggregate net losses exceed 10 percent of a taxpayer's adjusted 
gross income. For purposes of applying the 10 percent threshold 
to other personal casualty or theft losses, Katrina casualty 
losses are disregarded. Thus, such losses are effectively 
treated as a deduction separate from all other casualty losses.
    For purposes of determining whether a loss is a Katrina 
casualty loss, the term ``Hurricane Katrina disaster area'' 
means an area with respect to which a major disaster had been 
declared by the President before September 14, 2005, under 
section 401 of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act by reason of Hurricane Katrina. The 
States for which such a disaster had been declared are Alabama, 
Florida, Louisiana, and Mississippi.

                        Explanation of Provision

    The provision codifies the Katrina Emergency Tax Relief Act 
of 2005 rule for Katrina casualty losses and expands it to 
include losses that arise in the Hurricane Rita disaster area 
and are attributable to Hurricane Rita and losses that arise in 
the Hurricane Wilma disaster area and are attributable to 
Hurricane Wilma.

                             Effective Date

    The codification of the provision in the Katrina Emergency 
Tax Relief Act of 2005 takes effect on date of enactment 
(December 22, 2005). The expansion of the provision applies to 
losses related to Hurricane Rita arising on or after September 
23, 2005, and to losses related to Hurricane Wilma arising on 
or after October 23, 2005.

 E. Required Exercise of IRS Administrative Authority (sec. 201 of the 
                 Act and new sec. 1400S(c) of the Code)


                              Present Law


General time limits for filing tax returns

    Individuals generally must file their Federal income tax 
returns by April 15 of the year following the close of a 
taxable year. The Secretary may grant reasonable extensions of 
time for filing such returns. Treasury regulations provide an 
additional automatic two-month extension (until June 15 for 
calendar-year individuals) for United States citizens and 
residents in military or naval service on duty on April 15 of 
the following year (the otherwise applicable due date of the 
return) outside the United States. No action is necessary to 
apply for this extension, but taxpayers must indicate on their 
returns (when filed) that they are claiming this extension. 
Unlike most extensions of time to file, this extension applies 
to both filing returns and paying the tax due.
    Treasury regulations also provide, upon application on the 
proper form, an automatic four-month extension (until August 15 
for calendar-year individuals) for any individual timely filing 
that form and paying the amount of tax estimated to be due.
    In general, individuals must make quarterly estimated tax 
payments by April 15, June 15, September 15, and January 15 of 
the following taxable year. Wage withholding is considered to 
be a payment of estimated taxes.

Suspension of time periods

    In general, the period of time for performing various acts 
under the Code, such as filing tax returns, paying taxes, or 
filing a claim for credit or refund of tax, is suspended for 
any individual serving in the Armed Forces of the United States 
in an area designated as a ``combat zone'' or when deployed 
outside the United States away from the individual's permanent 
duty station while participating in an operation designated by 
the Secretary of Defense as a ``contingency operation'' or that 
becomes a contingency operation. The suspension of time also 
applies to an individual serving in support of such Armed 
Forces in the combat zone or contingency operation, such as Red 
Cross personnel, accredited correspondents, and civilian 
personnel acting under the direction of the Armed Forces in 
support of those Forces. The designation of a combat zone must 
be made by the President in an Executive Order. A contingency 
operation is defined as a military operation that is designated 
by the Secretary of Defense as an operation in which members of 
the Armed Forces are or may become involved in military 
actions, operations, or hostilities against an enemy of the 
United States or against an opposing military force, or results 
in the call or order to (or retention of) active duty of 
members of the uniformed services during a war or a national 
emergency declared by the President or Congress.
    The suspension of time encompasses the period of service in 
the combat zone during the period of combatant activities in 
the zone or while participating in a contingency operation, as 
well as (1) any time of continuous qualified hospitalization 
resulting from injury received in the combat zone or 
contingency operation or (2) time in missing in action status, 
plus the next 180 days.
    The suspension of time applies to the following acts:
          1. Filing any return of income, estate, gift, 
        employment or excise taxes;
          2. Payment of any income, estate, gift, employment or 
        excise taxes;
          3. Filing a petition with the Tax Court for 
        redetermination of a deficiency, or for review of a 
        decision rendered by the Tax Court;
          4. Allowance of a credit or refund of any tax;
          5. Filing a claim for credit or refund of any tax;
          6. Bringing suit upon any such claim for credit or 
        refund;
          7. Assessment of any tax;
          8. Giving or making any notice or demand for the 
        payment of any tax, or with respect to any liability to 
        the United States in respect of any tax;
          9. Collection of the amount of any liability in 
        respect of any tax;
          10. Bringing suit by the United States in respect of 
        any liability in respect of any tax; and
          11. Any other act required or permitted under the 
        internal revenue laws specified by the Secretary of the 
        Treasury.
    In the case of a Presidentially declared disaster or a 
terroristic or military action, the Secretary of the Treasury 
also has authority to prescribe a period of up to one year that 
may be disregarded for performing any of the acts listed above. 
The Secretary also may suspend the accrual of any interest, 
penalty, additional amount, or addition to tax for taxpayers in 
the affected areas.

                        Explanation of Provision

    Under the provision, any administrative relief from 
required acts (e.g., filing tax returns, paying taxes, or 
filing a claim for credit or refund of tax) provided to 
taxpayers determined to be affected by the Presidentially 
declared disaster relating to Hurricanes Katrina, Rita, and 
Wilma shall be for a period ending not earlier than February 
28, 2006.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

  F. Special Look-Back Rule for Determining Earned Income Credit and 
 Refundable Child Credit (sec. 201 of the Act and new sec. 1400S(d) of 
                               the Code)


                              Present Law


In general

    Present law provides eligible taxpayers with an earned 
income credit and a child credit. In general, the earned income 
credit is a refundable credit for low-income workers (sec. 32). 
The amount of the credit depends on the earned income of the 
taxpayer and whether the taxpayer has one, more than one, or no 
qualifying children. Earned income generally includes wages, 
salaries, tips, and other employee compensation, plus net 
earnings from self-employment.
    Taxpayers with incomes below certain threshold amounts are 
eligible for a $1,000 credit for each qualifying child (sec. 
24). The child credit is refundable to the extent of 15 percent 
of the taxpayer's earned income in excess of $10,000. (The 
$10,000 income threshold is indexed for inflation and is 
currently $11,000 for 2005.) Families with three or more 
children are allowed a refundable credit for the amount by 
which the taxpayer's social security taxes exceed the 
taxpayer's earned income credit, if that amount is greater than 
the refundable credit based on the taxpayer's earned income in 
excess of $10,000 (indexed for inflation).

Hurricane Katrina

    Certain qualified individuals affected by Hurricane Katrina 
may elect to calculate their earned income credit and 
refundable child credit for the taxable year which includes 
August 25, 2005, using their earned income from the prior 
taxable year (a ``Katrina election''). Such qualified 
individuals are permitted to make the election only if their 
earned income for the taxable year which includes August 25, 
2005, is less than their earned income for the preceding 
taxable year.
    Individuals qualified to make a Katrina election are (1) 
individuals who on August 25, 2005, had their principal place 
of abode in the Hurricane Katrina ``core disaster area'' or (2) 
individuals who on such date were not in the core disaster area 
but lived in the Hurricane Katrina disaster area and were 
displaced from their homes. For purposes of this election, the 
term ``core disaster area'' means that portion of the Hurricane 
Katrina disaster area determined by the President to warrant 
individual or individual and public assistance from the Federal 
Government under such Act. The term ``Hurricane Katrina 
disaster area'' means an area with respect to which a major 
disaster had been declared by the President before September 
14, 2005, under section 401 of the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act by reason of Hurricane 
Katrina. The States for which such a disaster had been declared 
are Alabama, Florida, Louisiana, and Mississippi.
    In the case of a joint return for a taxable year which 
includes August 25, 2005, a Katrina election may be made if 
either spouse is a qualified individual. In such cases, the 
earned income for the preceding taxable year which is 
attributable to the taxpayer filing the joint return is the sum 
of the earned income which is attributable to each spouse for 
such preceding taxable year.
    Any Katrina election applies with respect to both the 
earned income credit and refundable child credit. For 
administrative purposes, the incorrect use on a return of 
earned income pursuant to a Katrina election is treated as a 
mathematical or clerical error. A Katrina election is 
disregarded for purposes of calculating gross income in the 
election year.

                        Explanation of Provision

    The provision codifies the Katrina election. It also 
expands the rule governing Katrina elections to permit certain 
qualified individuals affected by Hurricane Rita and Hurricane 
Wilma to make similar elections.
    In the case of Hurricane Rita certain qualified individuals 
may elect to calculate their earned income credit and 
refundable child credit for the taxable year which includes 
September 23, 2005, using their earned income from the prior 
taxable year (a ``Rita election''). Qualified individuals for 
purposes of a Rita election are (1) individuals who on 
September 23, 2005, had their principal place of abode in the 
Rita GO Zone or (2) individuals who on such date had their 
principal place of abode in the Hurricane Rita disaster area 
but outside the Rita GO Zone and were displaced from that 
residence.
    In the case of Hurricane Wilma certain qualified 
individuals may elect to calculate their earned income credit 
and refundable child credit for the taxable year which includes 
October 23, 2005, using their earned income from the prior 
taxable year (a ``Wilma election''). Qualified individuals for 
purposes of a Wilma election are (1) individuals who on October 
23, 2005, had their principal place of abode in the Wilma GO 
Zone or (2) individuals who on such date had their principal 
place of abode in the Hurricane Wilma disaster area but outside 
the Wilma GO Zone and were displaced from that residence.
    Qualified individuals are permitted to make a Rita election 
or Wilma election only if their earned income for the taxable 
year which includes September 23, 2005 or October 23, 2005, 
respectively, is less than their earned income for the 
preceding taxable year.
    In other respects, a Rita election or Wilma election is the 
same as a Katrina election under present law, except that the 
reference dates are September 23, 2005 for Rita and October 23, 
2005 for Wilma and not August 25, 2005.

                             Effective Date

    The codification of the provision in the Katrina Emergency 
Tax Relief Act of 2005 takes effect on date of enactment 
(December 22, 2005). The expansion of the provision applies to 
taxable years that include September 23, 2005, in the case of 
Hurricane Rita and October 23, 2005, in the case of Hurricane 
Wilma.

  G. Secretarial Authority to Make Adjustments Regarding Taxpayer and 
  Dependency Status (sec. 201 of the Act and new sec. 1400S(e) of the 
                                 Code)


                              Present Law


In general

    In order to determine taxable income, an individual reduces 
adjusted gross income (``AGI'') by any personal exemptions and 
either the standard deduction or itemized deductions. Personal 
exemptions generally are allowed for the taxpayer, his or her 
spouse, and any dependents (as defined in sec. 151). Personal 
exemptions are not allowed for purposes of determining a 
taxpayer's alternative minimum taxable income.
    For 2005, the amount deductible for each personal exemption 
is $3,200. This amount is indexed annually for inflation. The 
deduction for personal exemptions is phased out ratably for 
taxpayers with AGI over certain thresholds. These thresholds 
are indexed annually for inflation. Specifically, the total 
amount of exemptions that may be claimed by a taxpayer is 
reduced by two percent for each $2,500 (or portion thereof) by 
which the taxpayer's AGI exceeds the applicable threshold. (The 
phaseout rate is two percent for each $1,250 for married 
taxpayers filing separate returns.) Thus, the personal 
exemptions claimed are phased out over a $122,500 range (which 
is not indexed for inflation), beginning at the applicable 
threshold. The applicable thresholds for 2005 are $145,900 for 
single individuals, $218,950 for married individuals filing a 
joint return, $182,450 for heads of households, and $109,475 
for married individuals filing separate returns. For 2005, the 
point at which a taxpayer's personal exemptions are completely 
phased out is $268,450 for single individuals, $341,450 for 
married individuals filing a joint return, $304,950 for heads 
of households, and $170,725 for married individuals filing 
separate returns.
    Present law provides eligible taxpayers with an earned 
income credit and a child credit. In general, the earned income 
credit is a refundable credit for low-income workers. The 
amount of the credit depends on the earned income of the 
taxpayer and whether the taxpayer has one, more than one, or no 
qualifying children. Earned income generally includes wages, 
salaries, tips, and other employee compensation, plus net 
earnings from self-employment.
    Taxpayers with incomes below certain threshold amounts are 
eligible for a $1,000 credit for each qualifying child. The 
child credit is refundable to the extent of 15 percent of the 
taxpayer's earned income in excess of $10,000. (The $10,000 
income threshold is indexed for inflation and is currently 
$11,000 for 2005.) Families with three or more children are 
allowed a refundable credit for the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit, if that amount is greater than the refundable 
credit based on the taxpayer's earned income in excess of 
$10,000 (indexed for inflation).

Hurricane Katrina

    With respect to taxable years beginning in 2005 and 2006, 
the Secretary has authority to make such adjustments in the 
application of the Federal tax laws as may be necessary to 
ensure that taxpayers do not lose any deduction or credit or 
experience a change of filing status by reason of temporary 
relocations caused by Hurricane Katrina. Such adjustments may 
include, for example, addressing the application of the 
residency requirements relating to dependency exemptions in the 
case of relocations due to Hurricane Katrina. Any adjustments 
made using this authority must insure that an individual is not 
taken into account by more than one taxpayer with respect to 
the same tax benefit.

                        Explanation of Provision

    The provision codifies the Secretarial authority with 
respect to Hurricane Katrina. The provision also expands the 
Secretary's authority to make adjustments in the application of 
the Federal tax laws with respect to Hurricane Katrina to 
include taxpayers affected by Hurricane Rita and Hurricane 
Wilma. The provision applies with respect to taxable years 
beginning in 2005 or 2006.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

 H. Special Rules for Mortgage Revenue Bonds (sec. 201 of the Act and 
                      new sec. 1400T of the Code)


                              Present Law


In general

    Under present law, gross income generally does not include 
interest on State or local bonds (sec. 103). State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or are repaid 
with governmental funds. Private activity bonds are bonds with 
respect to which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain permitted 
purposes (``qualified private activity bonds'') (secs. 
103(b)(1) and 141).

Qualified mortgage bonds

    The definition of a qualified private activity bond 
includes a qualified mortgage bond (sec. 143). Qualified 
mortgage bonds are issued to make mortgage loans to qualified 
mortgagors for the purchase, improvement, or rehabilitation of 
owner-occupied residences. The Code imposes several limitations 
on qualified mortgage bonds, including income limitations for 
eligible mortgagors, purchase price limitations on the home 
financed with bond proceeds, and a ``first-time homebuyer'' 
requirement. The income limitations are satisfied if all 
financing provided by an issue is provided for mortgagors whose 
family income does not exceed 115 percent of the median family 
income for the metropolitan area or State, whichever is 
greater, in which the financed residences are located. The 
purchase price limitations provide that a residence financed 
with qualified mortgage bonds may not have a purchase price in 
excess of 90 percent of the average area purchase price for 
that residence. The first-time homebuyer requirement provides 
qualified mortgage bonds generally cannot be used to finance a 
mortgage for a homebuyer who had an ownership interest in a 
principal residence in the three years preceding the execution 
of the mortgage (the ``first-time homebuyer'' requirement).
    Special income and purchase price limitations apply to 
targeted area residences. A targeted area residence is one 
located in either (1) a census tract in which at least 70 
percent of the families have an income which is 80 percent or 
less of the state-wide median income or (2) an area of chronic 
economic distress. For targeted area residences, the income 
limitation is satisfied when no more than one-third of the 
mortgages are made without regard to any income limits and the 
remainder of the mortgages are made to mortgagors whose family 
income is 140 percent or less of the applicable median family 
income. The purchase price limitation is raised from 90 percent 
to 110 percent of the average area purchase price for targeted 
area residences. In addition, the first-time homebuyer 
requirement does not apply to targeted area residences.
    Qualified mortgage bonds also may be used to finance 
qualified home-improvement loans. Qualified home-improvement 
loans are defined as loans to finance alterations, repairs, and 
improvements on an existing residence, but only if such 
alterations, repairs, and improvements substantially protect or 
improve the basic livability or energy efficiency of the 
property. Qualified home-improvement loans may not exceed 
$15,000.
    A temporary provision waived the first-time homebuyer 
requirement for residences located in certain Presidentially 
declared disaster areas (sec. 143(k)(11)). In addition, 
residences located in such areas were treated as targeted area 
residences for purposes of the income and purchase price 
limitations. The special rule for residences located in 
Presidentially declared disaster areas does not apply to bonds 
issued after January 1, 1999.
    The Katrina Emergency Tax Relief Act (``KETRA'') waives the 
first-time homebuyer requirement with respect to certain 
residences located in an area with respect to which a major 
disaster has been declared by the President before September 
14, 2005, under section 401 of the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act by reason of Hurricane 
Katrina (see sec. 404 of Pub. L. 109-73). KETRA also increases 
to $150,000 the permitted amount of a qualified home-
improvement loans with respect to residences located in the 
Hurricane Katrina disaster area to the extent such loan is for 
the repair of damage caused by Hurricane Katrina.

                        Explanation of Provision

    Under the provision, residences located in the GO Zone, the 
Rita GO Zone, or the Wilma GO Zone are treated as targeted area 
residences for purposes of section 143, with the modifications 
described below. Thus, the first-time homebuyer rule is waived 
and purchase and income rules for targeted area residences 
apply to residences located in the specified areas that are 
financed with qualified mortgage bonds. For these purposes, 100 
percent of the mortgages must be made to mortgagors whose 
family income is 140 percent or less of the applicable median 
family income. Thus, the present law rule allowing one-third of 
the mortgages to be made without regard to any income limits 
does not apply. In addition, the proposal increases from 
$15,000 to $150,000 the amount of a qualified home-improvement 
loan with respect to residences located in the specified 
disaster areas.
    The provision applies to residences financed before January 
1, 2011.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

                      TITLE III--OTHER PROVISIONS

           A. Gulf Coast Recovery Bonds (sec. 301 of the Act)

                              Present Law

    Under Title 31, the Secretary, with the approval of the 
President, may issue savings bonds and savings certificates of 
the United States Government (31 U.S.C. sec. 3105). Proceeds 
from the bonds and certificates are used for expenditures 
authorized by law. Savings bonds and certificates may be issued 
on an interest-bearing basis, on a discount basis, or on an 
interest-bearing and discount basis. The difference between the 
price paid and the amount received on redeeming a savings bond 
or certificate is interest under the Code.

                        Explanation of Provision

    The provision expresses the sense of Congress that the 
Secretary designate one or more series of obligations issued 
under Title 31 as ``Gulf Coast Recovery Bonds'' in response to 
Hurricanes Katrina, Rita, and Wilma.

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

 B. Election to Treat Combat Pay as Earned Income for Purposes of the 
   Earned Income Credit (sec. 302 of the Act and sec. 32 of the Code)

                              Present Law

Child credit
    Combat pay that is otherwise excluded from gross income 
under section 112 is treated as earned income which is taken 
into account in computing taxable income for purposes of 
calculating the refundable portion of the child credit.
Earned income credit
    Any taxpayer may elect to treat combat pay that is 
otherwise excluded from gross income under section 112 as 
earned income for purposes of the earned income credit. This 
election is available with respect to any taxable year ending 
after the date of enactment and before January 1, 2006.

                     Explanation of Provision \264\

    The provision extends the present-law rule relating to the 
earned income credit for one year (through December 31, 2006).
---------------------------------------------------------------------------
    \264\ The provision was subsequently extended in Division A, 
section 106 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

C. Modifications of Suspension of Interest and Penalties Where Internal 
Revenue Service Fails to Contact Taxpayer (sec. 303 of the Act and sec. 
                          6404(g) of the Code)


                              Present Law

    In general, interest and penalties accrue during periods 
for which taxes were unpaid without regard to whether the 
taxpayer was aware that there was tax due. The Code suspends 
the accrual of certain penalties and interest starting 18 
months after the filing of the tax return if the IRS has not 
sent the taxpayer a notice specifically stating the taxpayer's 
liability and the basis for the liability within the specified 
period. If the return is filed before the due date, for this 
purpose it is considered to have been filed on the due date. 
Interest and penalties resume 21 days after the IRS sends the 
required notice to the taxpayer. The provision is applied 
separately with respect to each item or adjustment. The 
provision does not apply where a taxpayer has self-assessed the 
tax. The suspension only applies to taxpayers who file a timely 
tax return. The provision applies only to individuals and does 
not apply to the failure to pay penalty, in the case of fraud, 
or with respect to criminal penalties.
    The suspension of interest does not apply to interest 
accruing after October 3, 2004 with respect to underpayments 
resulting from listed transactions or undisclosed reportable 
transactions.
    On October 27, 2005, the IRS announced a settlement 
initiative for 21 identified transactions. (See Internal 
Revenue Service Announcement 2005-80.) Under the terms of the 
settlement initiative, participants will be required to pay 100 
percent of the taxes owed, interest and, depending on the 
transaction, either a quarter or a half of the penalty the IRS 
will otherwise seek. The IRS will grant penalty relief for 
transactions disclosed to the IRS or where the taxpayer got a 
tax opinion from an independent tax advisor. Transaction costs 
paid by the taxpayer, including professional and promoter fees, 
will be allowed. The application deadline for the settlement 
initiative is January 23, 2006.

                        Explanation of Provision

    Under the provision, the exception for listed transactions 
and undisclosed reportable transactions also applies to 
interest accruing on or before October 3, 2004. However, 
taxpayers remain eligible for the present-law suspension of 
interest if the year in which the underpayment occurred is 
barred by the statute of limitations (or a closing agreement) 
as of December 14, 2005. Taxpayers may also remain eligible 
with respect to a transactions if the Secretary determines that 
the taxpayers has acted reasonably and in good faith with 
respect to that transactions.
    In addition, under a special rule, taxpayers may remain 
eligible for the present-law suspension of interest by 
participating in the IRS settlement initiative described above 
with respect to that transaction. In order to be eligible under 
the special rule, the taxpayer must be participating in the 
settlement initiative (or have entered into a settlement 
agreement pursuant to the initiative) as of January 23, 2006. 
Furthermore, a taxpayer's eligibility under the special rule is 
revoked if the taxpayer ceases to participate in the settlement 
initiative or the Treasury determines that a settlement 
agreement will not be reached within a reasonable period of 
time.
    The special rule applies on a transaction-by-transaction 
basis. Thus, participation in the settlement initiative with 
respect to an individual transaction qualifies the taxpayer for 
the present-law suspension of interest only with respect to 
interest and penalties on underpayments resulting from that 
transaction. If the taxpayer has entered into other listed or 
nondisclosed reportable transactions and is not participating 
in the settlement initiative with respect to those 
transactions, the special rule does not apply to interest and 
penalties resulting from those transactions.
    The provision also provides that, if a taxpayer files an 
amended return or other signed written document showing that 
the taxpayer owes an additional amount of tax for the taxable 
year, the relevant 18-month period is measured from the latest 
date on which such documents were provided.

                             Effective Date

    The provision is effective as if included in the provisions 
of the American Jobs Creation Act of 2004 to which it relates, 
except that the rule relating to the restart of the 18-month 
period is effective for documents provided on or after the date 
of enactment (December 22, 2005).

 D. Authority for Undercover Operations (sec. 304 of the Act and sec. 
                           7608 of the Code)


                              Present Law

    IRS undercover operations are exempt from the otherwise 
applicable statutory restrictions controlling the use of 
Government funds (which generally provide that all receipts 
must be deposited in the general fund of the Treasury and all 
expenses paid out of appropriated funds). In general, the 
exemption permits the IRS to use proceeds from an undercover 
operation to pay additional expenses incurred in the undercover 
operation. The IRS is required to conduct a detailed financial 
audit of large undercover operations in which the IRS is using 
proceeds from such operations and to provide an annual audit 
report to the Congress on all such large undercover operations.
    The provision was originally enacted in The Anti-Drug Abuse 
Act of 1988. The exemption originally expired on December 31, 
1989, and was extended by the Comprehensive Crime Control Act 
of 1990 to December 31, 1991. There followed a gap of 
approximately four and a half years during which the provision 
had lapsed. In the Taxpayer Bill of Rights II, the authority to 
use proceeds from undercover operations was extended for five 
years, through 2000. The Community Renewal Tax Relief Act of 
2000 extended the authority of the IRS to use proceeds from 
undercover operations for an additional five years, through 
2005.

                     Explanation of Provision \265\

---------------------------------------------------------------------------
    \265\ The provision was subsequently extended in Division A, 
section 121 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision extends for one year the present-law 
authority of the IRS to use proceeds from undercover operations 
to pay additional expenses incurred in conducting undercover 
operations (through December 31, 2006).

                             Effective Date

    The provision is effective on the date of enactment 
(December 22, 2005).

            E. Disclosures of Certain Tax Return Information


1. Disclosure of tax information to facilitate combined employment tax 
        reporting (sec. 305 of the Act and sec. 6103(d)(5) of the Code)

                              Present Law

    Traditionally, Federal tax forms are filed with the Federal 
government and State tax forms are filed with individual 
States. This necessitates duplication of items common to both 
returns. The Code permits the IRS to disclose taxpayer identity 
information and signatures to any agency, body, or commission 
of any State for the purpose of carrying out with such agency, 
body or commission a combined Federal and State employment tax 
reporting program approved by the Secretary. The Federal 
disclosure restrictions, safeguard requirements, and criminal 
penalties for unauthorized disclosure and unauthorized 
inspection do not apply with respect to disclosures or 
inspections made pursuant to this authority.
    The authority for this program expires December 31, 2005.
    Under section 6103(c), the IRS may disclose a taxpayer's 
return or return information to such person or persons as the 
taxpayer may designate in a request for or consent to such 
disclosure. Pursuant to Treasury regulations, a taxpayer's 
participation in a combined return filing program between the 
IRS and a State agency, body or commission constitutes a 
consent to the disclosure by the IRS to the State agency of 
taxpayer identity information, signature and items of common 
data contained on the return. No disclosures may be made under 
this authority unless there are provisions of State law 
protecting the confidentiality of such items of common data.

                     Explanation of Provision \266\

---------------------------------------------------------------------------
    \266\ The provision was subsequently extended in Division A, 
section 122 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision extends for one year the present-law 
authority for the combined employment tax reporting program 
(through December 31, 2006).

                             Effective Date

    The provision applies to disclosures after December 31, 
2005.

2. Disclosure of return information regarding terrorist activities 
        (sec. 305 of the Act and sec. 6103(i)(3) and (i)(7) of the 
        Code)

                              Present Law


In general

    Section 6103 provides that returns and return information 
may not be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to the information 
except as provided in the Internal Revenue Code. Section 6103 
contains a number of exceptions to this general rule of 
nondisclosure that authorize disclosure in specifically 
identified circumstances (including nontax criminal 
investigations) when certain conditions are satisfied.
    Among the disclosures permitted under the Code is 
disclosure of returns and return information for purposes of 
investigating terrorist incidents, threats, or activities, and 
for analyzing intelligence concerning terrorist incidents, 
threats, or activities. The term ``terrorist incident, threat, 
or activity'' is statutorily defined to mean an incident, 
threat, or activity involving an act of domestic terrorism or 
international terrorism, as both of those terms are defined in 
the USA PATRIOT Act (see sec. 6103(b)(11) and 18 U.S.C. secs. 
2331(1) and 2331(5)). In general, returns and taxpayer return 
information must be obtained pursuant to an ex parte court 
order. Return information, other than taxpayer return 
information, generally is available upon a written request 
meeting specific requirements. The IRS also is permitted to 
make limited disclosures of such information on its own 
initiative to the appropriate Federal law enforcement agency.
    No disclosures may be made under these provisions after 
December 31, 2005.

Disclosure of returns and return information_by ex parte court order

            Ex parte court orders sought by Federal law enforcement and 
                    Federal intelligence agencies
    The Code permits, pursuant to an ex parte court order, the 
disclosure of returns and return information (including 
taxpayer return information) to certain officers and employees 
of a Federal law enforcement agency or Federal intelligence 
agency. These officers and employees are required to be 
personally and directly engaged in any investigation of, 
response to, or analysis of intelligence and 
counterintelligence information concerning any terrorist 
incident, threat, or activity. These officers and employees are 
permitted to use this information solely for their use in the 
investigation, response, or analysis, and in any judicial, 
administrative, or grand jury proceeding, pertaining to any 
such terrorist incident, threat, or activity.
    The Attorney General, Deputy Attorney General, Associate 
Attorney General, an Assistant Attorney General, or a United 
States attorney, may authorize the application for the ex parte 
court order to be submitted to a Federal district court judge 
or magistrate. The Federal district court judge or magistrate 
would grant the order if based on the facts submitted he or she 
determines that: (1) there is reasonable cause to believe, 
based upon information believed to be reliable, that the return 
or return information may be relevant to a matter relating to 
such terrorist incident, threat, or activity; and (2) the 
return or return information is sought exclusively for the use 
in a Federal investigation, analysis, or proceeding concerning 
any terrorist incident, threat, or activity.
            Special rule for ex parte court ordered disclosure 
                    initiated by the IRS
    If the Secretary of the Treasury (or his delegate) 
possesses returns or return information that may be related to 
a terrorist incident, threat, or activity, the Secretary may, 
on his own initiative, authorize an application for an ex parte 
court order to permit disclosure to Federal law enforcement. In 
order to grant the order, the Federal district court judge or 
magistrate must determine that there is reasonable cause to 
believe, based upon information believed to be reliable, that 
the return or return information may be relevant to a matter 
relating to such terrorist incident, threat, or activity. The 
information may be disclosed only to the extent necessary to 
apprise the appropriate Federal law enforcement agency 
responsible for investigating or responding to a terrorist 
incident, threat, or activity and for officers and employees of 
that agency to investigate or respond to such terrorist 
incident, threat, or activity. Further, use of the information 
is limited to use in a Federal investigation, analysis, or 
proceeding concerning a terrorist incident, threat, or 
activity. Because the Department of Justice represents the 
Secretary in Federal district court, the Secretary is permitted 
to disclose returns and return information to the Department of 
Justice as necessary and solely for the purpose of obtaining 
the special IRS ex parte court order.

Disclosure of return information other than by ex parte court order

            Disclosure by the IRS without a request
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, related to a terrorist 
incident, threat, or activity to the extent necessary to 
apprise the head of the appropriate Federal law enforcement 
agency responsible for investigating or responding to such 
terrorist incident, threat, or activity. The IRS on its own 
initiative and without a written request may make this 
disclosure. The head of the Federal law enforcement agency may 
disclose information to officers and employees of such agency 
to the extent necessary to investigate or respond to such 
terrorist incident, threat, or activity. A taxpayer's identity 
is not treated as return information supplied by the taxpayer 
or his or her representative.
            Disclosure upon written request of a Federal law 
                    enforcement agency
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, to officers and 
employees of Federal law enforcement upon a written request 
satisfying certain requirements. The request must: (1) be made 
by the head of the Federal law enforcement agency (or his 
delegate) involved in the response to or investigation of 
terrorist incidents, threats, or activities, and (2) set forth 
the specific reason or reasons why such disclosure may be 
relevant to a terrorist incident, threat, or activity. The 
information is to be disclosed to officers and employees of the 
Federal law enforcement agency who would be personally and 
directly involved in the response to or investigation of 
terrorist incidents, threats, or activities. The information is 
to be used by such officers and employees solely for such 
response or investigation.
    The Code permits the redisclosure by a Federal law 
enforcement agency to officers and employees of State and local 
law enforcement personally and directly engaged in the response 
to or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.
            Disclosure upon request from the Departments of Justice or 
                    the Treasury for intelligence analysis of terrorist 
                    activity
    Upon written request satisfying certain requirements 
discussed below, the IRS is to disclose return information 
(other than taxpayer return information) to officers and 
employees of the Department of Justice, Department of the 
Treasury, and other Federal intelligence agencies, who are 
personally and directly engaged in the collection or analysis 
of intelligence and counterintelligence or investigation 
concerning terrorist incidents, threats, or activities. Use of 
the information is limited to use by such officers and 
employees in such investigation, collection, or analysis.
    The written request is to set forth the specific reasons 
why the information to be disclosed is relevant to a terrorist 
incident, threat, or activity. The request is to be made by an 
individual who is: (1) an officer or employee of the Department 
of Justice or the Department of the Treasury, (2) appointed by 
the President with the advice and consent of the Senate, and 
(3) responsible for the collection, and analysis of 
intelligence and counterintelligence information concerning 
terrorist incidents, threats, or activities. The Director of 
the United States Secret Service also is an authorized 
requester under the Act.

                     Explanation of Provision \267\

    The provision extends for one year the present-law 
terrorist activity disclosure provisions (through December 31, 
2006).
---------------------------------------------------------------------------
    \267\ The provision was subsequently extended in Division A, 
section 122 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to disclosures after December 31, 
2005.

  3. Disclosure of return information to carry out income contingent 
repayment of student loans (sec. 305 of the Act and sec. 6103(l)(13) of 
                               the Code)


                              Present Law

    Present law prohibits the disclosure of returns and return 
information, except to the extent specifically authorized by 
the Code. An exception is provided for disclosure to the 
Department of Education (but not to contractors thereof) of a 
taxpayer's filing status, adjusted gross income and identity 
information (i.e., name, mailing address, taxpayer identifying 
number) to establish an appropriate repayment amount for an 
applicable student loan. The disclosure authority for the 
income-contingent loan repayment program is scheduled to expire 
after December 31, 2005.
    The Department of Education utilizes contractors for the 
income-contingent loan verification program. The specific 
disclosure exception for the program does not permit disclosure 
of return information to contractors. As a result, the 
Department of Education obtains return information from the 
Internal Revenue Service by taxpayer consent (under section 
6103(c)), rather than under the specific exception for the 
income-contingent loan verification program (sec. 6103(l)(13)).

                     Explanation of Provision \268\

    The provision extends for one year the present law 
authority to disclose return information for purposes of the 
income-contingent loan repayment program (through December 31, 
2006).
---------------------------------------------------------------------------
    \268\ The provision was subsequently extended in Division A, 
section 122 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to requests made after December 31, 
2005.

                  TITLE IV--TAX TECHNICAL CORRECTIONS

    The Act includes technical corrections and other 
corrections to recently enacted tax legislation. Except as 
otherwise provided, the amendments made by the technical 
corrections and other corrections contained in the Act take 
effect as if included in the original legislation to which each 
amendment relates.

          A. Technical Corrections (secs. 401-412 of the Act)

Amendments related to the Energy Policy Act of 2005
    Repeal of the Public Utility Holding Company Act of 1935 
(Act sec. 1263).--The provision repeals sections 1081-1083 of 
the Code (relating to exchanges in obedience to SEC orders) to 
conform to the repeal of the Public Utility Holding Company Act 
of 1935. The repeal does not apply to any exchange, 
expenditure, investment, distribution, or sale made in 
obedience to an order of the Securities and Exchange 
Commission.
    Extension and modification of renewable electricity 
production credit (Act sec. 1301).--The provision makes a 
technical amendment to Code section 45(c)(3)(A)(ii) to change 
the wording of the reference to ``nonhazardous lignin waste 
material'' to ``lignin material'' so as not to infer that 
lignin is hazardous or waste.
    Clean renewable energy bonds (Act sec. 1303).--Section 
54(l)(5) treats the credits received by a holder of clean 
renewable energy bonds as payments of estimated tax for 
purposes of sections 6654 and 6655. Under the provision, 
section 54(l)(5) is repealed, as it may provide a double 
benefit when computing the estimated tax penalty in the manner 
prescribed under sections 6654(f) and 6655(g). The conforming 
amendments to the Act section are made for taxable years 
beginning after 2005.
    Credit for production from advanced nuclear power 
facilities (Act sec. 1306).--The provision clarifies the 
production credit for advanced nuclear power (sec. 45J) to 
carry out the intent that the phase-out is indexed for 
inflation but the credit rate is not. Specifically, it is not 
intended that the inflation adjustment rule referred to in 
section 45J(e) be interpreted to apply to the credit rate in 
section 45J(a)(1) as well as the phase-out referred to in 
section 45J(c)(2). The provision clarifies that the phase-out 
is indexed but the credit rate is not.
    Expansion of amortization for certain atmospheric pollution 
control facilities in connection with plants first placed in 
service after 1975 (Act sec. 1309).--The provision clarifies 
that the 84-month amortization period only applies to 
facilities used in connection with a plant or other property 
placed in service after December 31, 1975.
    Five-year net operating loss carryover for certain losses 
(Act sec. 1311).--A number of clerical amendments are made to 
section 172(b)(1)(I).
    Modification of credit for producing fuel from a 
nonconventional source (Act sec. 1322).--The provision 
clarifies that the credit is allowable without the requirement 
to make an election.
    Energy efficient commercial buildings deduction (Act sec. 
1331).--The provision repeals as deadwood certain language in 
section 1250.
    Credit for residential energy efficient property (Act sec. 
1335).--The provision clarifies that the dollar limitations are 
applied without regard to carryovers of the credit from prior 
taxable years.
    Under the provision, the joint occupancy rule is redrafted 
to apply to expenditures with respect to a dwelling unit rather 
than the credit allowed with respect to the unit.
    The rules relating to the carryover of unused personal 
credits (including the new credit for residential energy 
efficient property) are redrafted so as to include in the Code 
rules for both the taxable years in which the credits are 
allowed against the alternative minimum tax, and the taxable 
years in which the credits are not so allowed. The provision is 
effective for taxable years beginning after 2005.
    Alternative motor vehicle credit and credit for 
installation of alternative fueling stations (Act secs. 1341 
and 1342).--Sections 30B(h)(6) and 30C(e)(2) separate business 
and personal credits for purposes of applying limitations on 
the credits. Credit property is treated as subject to the 
business credit limitations if it is depreciable property. Each 
of these rules provides that the seller of property to a tax-
exempt entity can claim the credit. The provision provides that 
the credits for property sold to a tax-exempt entity are 
subject to the business credit limitations.
    Expansion of research credit (Act sec. 1351).--The research 
credit has an explicit rule preventing amounts from being taken 
into account more than once under the credit (i.e., preventing 
double benefits). The provision clarifies that the rule 
preventing amounts from being taken into account more than once 
also applies to the provisions of the research credit relating 
to energy research consortia.
    The provision clarifies that qualified research with 
respect to energy research consortia must be conducted in the 
United States or Puerto Rico. This conforms the treatment of 
such qualified research to the treatment of other qualified 
research under the research credit in this respect.

Amendments related to the American Jobs Creation Act of 2004

    Deduction relating to income attributable to domestic 
production activities (manufacturing deduction) (Act sec. 
102).--With respect to the W-2 wage limitation on the allowable 
amount of the domestic production activities deduction, the Act 
does not require Forms W-2 actually to be filed, and does not 
specify whether the employees must be the common law employees 
of the taxpayer. The provision clarifies that a taxpayer may 
take into account only wages that are paid to the common law 
employees of the taxpayer and that are reported on a Form W-2 
filed with the Social Security Administration no later than 60 
days after the extended due date for the Form W-2. Thus, the 
taxpayer may not take into account wages that were not actually 
reported. The provision also addresses situations in which the 
employer uses an agent to report its wages.
    The provision clarifies that, in computing qualified 
production activities income, the domestic production 
activities deduction itself is not an allocable deduction. The 
provision also clarifies that no inference is intended with 
regard to the interpretive relationship between the cost 
allocation rules provided with respect to the domestic 
production activities deduction and the cost allocation rules 
provided with respect to provisions elsewhere in the Act (e.g., 
incentives to reinvest foreign earnings in the United States). 
The provision also corrects a reference to ``income 
attributable to domestic production activities'' to refer to 
the defined term ``qualified production activities income.''
    With regard to the definition of ``domestic production 
gross receipts'' as it relates to construction performed in the 
United States and engineering or architectural services 
performed in the United States for construction projects in the 
United States, the provision clarifies that the term refers 
only to gross receipts derived from the construction of real 
property by a taxpayer engaged in the active conduct of a 
construction trade or business, or from engineering or 
architectural services performed with respect to real property 
by a taxpayer engaged in the active conduct of an engineering 
or architectural services trade or business.
    The provision clarifies that the term does not include 
gross receipts derived from the lease, rental, license, sale, 
exchange or other disposition of land.
    The provision provides that gross receipts derived from 
certain contracts (or subcontracts) to manufacture or produce 
property for the Federal government are derived from the sale 
of such property and, therefore, are domestic production gross 
receipts. (Another section of the provision clarifies the 
authority of the Secretary to prescribe rules to prevent the 
domestic production activities deduction from being claimed by 
more than one taxpayer with respect to the same economic 
activity described in section 199(c)(4)(A)(i).)
    The provision provides that, for purposes of determining 
the domestic production gross receipts of a partnership and its 
partners, provided all of the interests in the capital and 
profits of the partnership are owned by members of the same 
expanded affiliated group at all times during the taxable year 
of the partnership, then the partnership and all members of 
that expanded affiliated group are treated as a single taxpayer 
during such period. Thus, for example, assume such a 
partnership engages in an activity with respect to property 
manufactured by the partners that are members of the same 
expanded affiliated group, and the activity would be treated as 
a manufacturing activity, but for the fact that the partnership 
(rather than the partner) conducts the activity. Under this 
provision, then, the gross receipts derived from the activity 
are treated as domestic production gross receipts of the 
partnership for such taxable year. Once the partnership has 
determined its domestic production gross receipts in this 
manner, such receipts and the expenses, losses or deductions 
that are properly allocable to such receipts, and any other 
items that are allocated to partners, are allocated among the 
partners in accordance with the requirements of section 
199(d)(1) (as amended). Similarly, if a partner engages in such 
an activity with respect to property manufactured by the 
partnership, then the gross receipts derived from the activity 
are treated as domestic production gross receipts of the 
partner. The treatment of the partners and the partnership as a 
single taxpayer under this rule is only for the purpose of 
determining domestic production gross receipts.
    The provision clarifies that, with respect to the domestic 
production activities of a partnership or S corporation, the 
deduction under the Act is determined at the partner or 
shareholder level. In performing the calculation, each partner 
or shareholder generally will take into account such person's 
allocable share of the components of the calculation (including 
domestic production gross receipts; the cost of goods sold 
allocable to such receipts; and other expenses, losses, or 
deductions allocable to such receipts) from the partnership or 
S corporation as well as any items relating to the partner or 
shareholder's own qualified production activities, if any.
    The provision clarifies the treatment provided under the 
Act of cooperatives and patrons with respect to the deduction 
under section 199. The provision clarifies that a patron who 
receives certain payments from an agricultural or horticultural 
cooperative that are attributable to qualified production 
activities income is allowed a deduction equal to the portion 
of the deduction allowed to the cooperative that is 
attributable to such income. The provision also clarifies that 
the patron's deduction is allowed in the year that the payment 
attributable to qualified production activities income is 
received. The cooperative's taxable income is not reduced under 
section 1382 by the portion of the payment that does not exceed 
the portion so deductible by the patron. For purposes of the 
deduction under section 199, the provision clarifies that 
agricultural or horticultural marketing cooperatives are 
treated as having manufactured, produced, grown, or extracted 
any qualifying production property marketed by the organization 
which its patrons have so manufactured, produced, grown, or 
extracted. For purposes of the deduction under section 199, an 
agricultural or horticultural cooperative is a cooperative 
engaged in the manufacturing, production, growth, or extraction 
in whole or significant part of any agricultural or 
horticultural products, or in the marketing of agricultural or 
horticultural products.
    The provision clarifies the definition of an expanded 
affiliated group, so that a corporation eligible for the 
deduction with respect to income of a subsidiary must own more 
than 50 percent, rather than 50 percent or more, of the 
subsidiary's stock by vote and value.
    The provision rewrites the rule that the deduction under 
section 199 in computing alternative minimum taxable income 
(``AMTI'') is the same as in computing the regular tax, except 
that, in the case of a corporation, the taxable income 
limitation is the corporation's AMTI.
    The provision clarifies that unrelated business taxable 
income, rather than taxable income, applies for purposes of 
section 199(a)(1)(B) in computing the unrelated business income 
tax under section 511. (In computing AMTI of an organization 
which is a corporation subject to tax under section 511(a), 
AMTI applies for purposes of section 199(a)(1)(B). In computing 
AMTI of an organization other than a corporation, the section 
199 deduction is the same as for the regular tax. See sec. 
199(d)(6).)
    The provision clarifies that the manufacturing deduction is 
not taken into account in computing any net operating loss or 
the amount of any net operating loss carryback or carryover. 
Thus, the deduction under section 199 cannot create, or 
increase, the amount of a net operating loss deduction.
    The provision clarifies the authority of the Secretary to 
prescribe rules to prevent the domestic production activities 
deduction from being claimed by more than one taxpayer with 
respect to the same economic activity described in section 
199(c)(4)(A)(i).
    The provision clarifies that the manufacturing deduction is 
not taken into account in determining the amount of the 
alternative tax net operating loss deduction. For example, 
assume that for the calendar year 2005, a corporation has AMTI 
(before the NOL deduction and before the manufacturing 
deduction) and qualified production activities income of $1 
million, and has an alternative tax net operating loss 
(``ATNOL'') carryover to 2005 of $5 million. Assume that the 
taxpayer has sufficient W-2 wages so as not to be limited under 
that rule. The ATNOL deduction for 2005 is $900,000 (90 percent 
of $1 million), reducing AMTI to $100,000. The taxpayer must 
then further reduce the AMTI by a manufacturing deduction of 
$3,000 (three percent of the lesser of $1 million or $100,000) 
to $97,000. The ATNOL carryover to 2006 is $4,100,000.
    The provision coordinates the computation of adjusted 
taxable income of a corporation for purposes of computing a 
corporation's limitation on the deduction for interest on 
certain indebtedness with the deduction under section 199. The 
provision also coordinates the computation of taxable income 
for purposes of computing a corporation's charitable 
contribution deduction and a taxpayer's deduction for 
percentage depletion with respect to oil and gas wells with the 
deduction under section 199.
    The provision clarifies that, in applying the effective 
date of the deduction under section 199, items arising from a 
taxable year of a partnership, S corporation, estate, or trust 
beginning before 2005 are not taken into account for purposes 
of the rules providing that the deduction is determined at the 
shareholder, partner or similar level and the application of 
the wage limitation with respect to such entities.
    Family members treated as one shareholder of an S 
corporation election (Act sec. 231).--The provision repeals the 
requirement that a family must elect to be treated as one 
shareholder for purposes of determining the number of 
shareholders for purposes of subchapter S. The provision also 
provides that the determination of whether a common ancestor is 
more that six generations removed from the youngest generation 
of shareholders is made at the latest of (i) the date the 
subchapter S election is made; (ii) the date a family member 
first holds stock in the S corporation; or (iii) October 22, 
2004.
    The provision treats the estate of a family member as a 
member of the family for purposes of determining the number of 
shareholders.
    The provision also conforms the provision relating to 
certain adopted individuals and foster children with the 
amendments made by title II of the Working Families Tax Relief 
Act of 2004.
    Transfer of suspended losses incident to divorce (Act sec. 
235).--The effective date of section 235 of the Act is 
corrected to provide that it is effective for transfers after 
December 31, 2004.
    REIT provisions (Act sec. 243).--The provision clarifies 
that a REIT may cure de minimis failures of asset requirements 
(other than the requirement that the REIT may not hold more 
than 10 percent (five percent for certain prior years) of the 
value of securities of a single issuer, for which failure-
specific procedures are provided) by using the same procedures 
as the REIT may use for larger failures of asset tests.
    The provision clarifies that the new rules that permit the 
curing of certain REIT failures apply to failures with respect 
to which the requirements of the new rules are satisfied in 
taxable years of the REIT beginning after the date of 
enactment. Similarly, the provision clarifies that the new 
rules governing deficiency dividends that allow the taxpayer to 
make a determination by filing a statement with the IRS apply 
to statements filed in taxable years of the REIT beginning 
after the date of enactment.
    It is intended that the provisions of the Act that allow a 
REIT to correct failures of REIT qualification without losing 
its REIT status apply to corrections of failures for which the 
requirements for correction are satisfied after the date of 
enactment, regardless of whether such failures occurred in 
taxable years beginning on, before, or after the date of 
enactment. Similarly, it is intended that the provisions of the 
Act that allow deficiency dividends under section 860 to 
correct distribution failures, provided the deficiency is 
identified in a statement filed after the date of enactment in 
accordance with the provisions of the Act, apply to failures 
occurring in taxable years beginning on, before, or after the 
date of enactment.
    The provision clarifies that the new hedging rules apply to 
transactions entered into in taxable years beginning after the 
date of enactment.
    The provision clarifies that securities of a partnership 
held by a REIT prior to the date of enactment of the Act, that 
would have qualified as straight debt securities if the Act had 
never been enacted by virtue of the prior law requirement that 
the REIT hold at least 20 percent of the partnership equity, 
will continue to qualify (regardless of whether they were 
disposed of before the date of enactment or whether the REIT 
has disposed of its interest in the partnership equity to the 
1-percent-or-less interest required by the Act) while held by 
the REIT (or its successor) until the earlier of the 
disposition or the original maturity date of such securities.
    Expensing of certain films and television production costs 
(Act sec. 244).--The provision clarifies that the $15 million 
production cost limitation and the 75 percent qualified 
compensation requirement are determined on an episode-by-
episode basis (not an aggregate basis).
    The provision adds rules for recapture as ordinary income 
of the deduction for expensing of certain films and television 
production costs in a manner similar to the recapture rules 
applicable to expensing under Code section 179.
    Railroad track maintenance credit (Act sec. 245).--For 
purposes of the rule that prevents the claiming of the credit 
by more than one eligible taxpayer with respect to the same 
mile of track, the provision clarifies that Class II and Class 
III railroads that operate track under a lease are not required 
to obtain assignment from the track owner in order to utilize 
or assign the credit. Under the provision, the credit is 
limited in respect of the total number of miles of track 1(1) 
owned or leased by the Class II or Class III railroad and (2) 
assigned by the Class II or Class III railroad for purposes of 
the credit.
    The provision clarifies that a Class I railroad is not 
treated as a Class II or III railroad for purposes of the 
credit (and it is not eligible to claim the credit with respect 
to track it owns) by reason of performing track maintenance 
services (on the same or different track) for a Class II or III 
railroad.
    The provision also clarifies the rules governing the 
assignment of track by Class II or III railroads. A track mile 
may be assigned only once per tax year, effective at the close 
of the tax year, and any track mile assigned may not also be 
taken into account by the assignor taxpayer for the tax year. 
An assigned track mile is taken into account by the assignee in 
the tax year which includes the effective date of the 
assignment.
    Election to determine corporate tax on certain 
international shipping activities using per ton rate (Act sec. 
248).--The provision strikes as deadwood the rule added by the 
Act regarding the operation of a qualifying vessel by a non-
electing corporation that is a member of an electing group.
    The provision clarifies section 1354(b) to provide that an 
election to determine income tax on certain international 
shipping activities using a per ton rate is timely if made on 
or before the due date (including extensions) for filing the 
tax return for the relevant taxable year.
    The provision clarifies the treatment of operating 
agreements under the tonnage tax rules. An operating agreement 
is not a charter, but is instead an agreement with an owner or 
charterer of a qualifying vessel to provide operating or 
management services in respect of a qualifying vessel, for 
example, crew, technical, or commercial services. The provision 
makes clear that a person providing services for a vessel under 
an operating agreement is treated as operating the vessel and 
may elect tonnage tax treatment, assuming the other 
requirements for such treatment are met. However, a 
subcontractor to a person providing services under an operating 
agreement is neither treated as providing services under an 
operating agreement nor as operating a vessel for purposes of 
the tonnage tax. The provision of equipment, tools, provisions, 
or supplies would not be considered an operating agreement or 
part of an operating agreement unless such equipment, tools, 
provisions, or supplies are provided by the person providing 
the services under the operating agreement, and such equipment, 
tools, provisions, or supplies are provided in connection with 
such services.
    Present law provides that in order to elect tonnage tax 
treatment, a person must meet a shipping activity requirement 
as well as ``operate'' a qualifying vessel. In general, the 
shipping activity requirement is met for a taxable year if, on 
average during such year, at least 25 percent of the aggregate 
tonnage of qualifying vessels ``used'' by the corporation (or 
controlled group) are owned by such corporation (or controlled 
group) or are chartered to such corporation (or controlled 
group) on bareboat charter terms. It is intended that a person 
providing services under an operating agreement is deemed to be 
``using'' tonnage of qualifying vessels, and the appropriate 
amount of such tonnage is taken into account for purposes of 
this test. For example, if a corporation (not a member of a 
controlled group) meets the shipping activity requirement by 
owning or bareboat chartering sufficient tonnage of other 
qualifying vessels, it will qualify for the tonnage tax 
provisions in respect of any qualifying vessel that it is 
treated as operating by reason of providing services under an 
operating agreement.
    The provision clarifies that interests in operating 
agreements are taken into account for purposes of allocating 
the notional shipping income from the operation of qualifying 
vessels among respective ownership, charter, and operating 
agreement interests. In addition, in the case of a partnership 
operating a vessel, the extent of a partner's ownership, 
charter, or operating agreement interest is determined on the 
basis of the partner's interest in the partnership.
    The provision makes a clerical amendment by eliminating 
subparagraph (B) of section 1355(c)(3) of the Code, because the 
rule of subparagraph (B) is encompassed in subparagraph (A).
    Computation of foreign tax credit in determining 
alternative minimum tax by farmers and fisherman using income 
averaging (Act sec. 314).--The provision clarifies that in 
computing the regular tax for purposes of determining the 
alternative minimum tax of a farmer or fisherman using income 
averaging, the foreign tax credit does not need to be 
recomputed.
    Reforestation expensing recapture (Act sec. 322).--The 
provision clarifies that the amortization provision applies to 
trusts and estates, but the deduction applies to estates (and 
not to trusts).
    The provision provides that Code section 1245 is expanded 
to provide recapture rules for the new expensing provisions of 
Code section 194(b) (reforestation).
    Depreciation allowance for aircraft (Act sec. 336).--
Present-law rules for additional first-year depreciation 
provide criteria under which certain noncommercial aircraft, 
and certain property having longer production periods (as 
described in Code section 168(k)(2)(B)), can qualify for the 
extended placed-in-service date. The provision clarifies that 
either noncommercial aircraft or property having a longer 
production period can qualify.
    Recharacterization of overall domestic loss (Act sec. 
402).--The provision clarifies that, in a case in which an 
overall domestic loss is used as a carryback, the requirement 
in Code section 904(g)(2) that the taxpayer have elected the 
benefits of the foreign tax credit applies to the taxable year 
in which the loss is used.
    Look-through rules to apply to dividends from noncontrolled 
section 902 corporations (Act sec. 403).--The provision adds a 
transition rule under which a taxpayer may elect not to apply 
the Act's look-through rules to taxable years beginning before 
January 1, 2005.
    Look-through treatment for sales of partnership interests 
(Act sec. 412).--The provision clarifies that constructive 
ownership is taken into account in determining whether a 
controlled foreign corporation is a 25-percent owner of a 
partnership for purposes of the rule treating a sale of a 
partnership interest as a sale of a proportionate share of the 
assets of the partnership. This provision conforms the 
statutory language to the legislative history of the Act.
    Repeal of foreign personal holding company rules and 
foreign investment company rules (Act sec. 413).--The provision 
repeals as deadwood Code section 532(b)(2), which coordinated 
the foreign personal holding company and accumulated earnings 
tax regimes, and instead provides that in computing a 
corporation's accumulated taxable income, a deduction is 
allowed in the amount of any income of the corporation that 
resulted in an inclusion for a U.S. shareholder under Code 
section 951(a). In the case of a corporation that is otherwise 
subject to the accumulated earnings tax on a gross basis (under 
Treas. Reg. sec. 1.535-1(b)), appropriate adjustments are made 
to this deductible amount to take into account deductions that 
may have reduced the inclusion under Code section 951(a), but 
which would not otherwise have been allowable in computing 
accumulated taxable income. For example, in the case of a 
corporation that is generally subject to the accumulated 
earnings tax on a gross basis, if Code section 954(b)(5) has 
had the effect of reducing the amount of a subpart F inclusion, 
it would be appropriate to reduce accumulated taxable income by 
the amount that would have been included under Code section 
951(a) without applying Code section 954(b)(5).
    The provision also repeals as deadwood Code section 6683, 
which addresses the failure of a foreign corporation to file a 
required personal holding company return, a rule that is no 
longer needed in light of the provision of the Act exempting 
foreign corporations from the personal holding company rules.
    Modifications to treatment of aircraft leasing and shipping 
(Act. sec. 415).--The provision clarifies that, for purposes of 
the foreign tax credit limitation as in effect for taxable 
years beginning before January 1, 2007, shipping income was 
defined to include income that meets the definition of foreign 
base company shipping income as in effect before the definition 
was repealed under section 415 of the Act. The repeal is 
effective for taxable years of foreign corporations beginning 
after December 31, 2004, and taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.
    Application of FIRPTA to distributions from REITS (Act sec. 
418).--The provision clarifies that the new rules providing an 
exception from FIRPTA do not apply to regulated investment 
companies (``RICs''), but only to real estate investment trusts 
(``REITs'').
    The provision clarifies that the period of time during 
which a foreign shareholder may not have held more than five 
percent of the class of stock with respect to which the 
distribution is made is the one-year period ending on the date 
of the distribution.
    The provision clarifies that the new rules apply to any 
distribution of a REIT that is treated as a deduction for a 
taxable year of the REIT beginning after the date of enactment.
    The provision clarifies that the new rules also apply to 
deficiency dividends under section 860 that are paid after the 
date of enactment but that are treated as deductible in taxable 
years beginning on or prior to the date of enactment. Such 
dividends qualify for the exclusion from FIRPTA treatment under 
the Act if the other requirements of the Act are met.
    Incentives to reinvest foreign earnings in the United 
States (Act sec. 422).--The provision amends Code section 
965(a)(2)(B) to clarify that distributions made indirectly 
through tiers of controlled foreign corporations are eligible 
for the benefits of Code section 965 only if they originate 
with a dividend received by one controlled foreign corporation 
from another controlled foreign corporation in the same chain 
of ownership described in Code section 958(a). Thus, the first 
dividend in the sequence cannot be a portfolio dividend 
received by a controlled foreign corporation, for example.
    The provision clarifies that for purposes of determining 
the amount of excess dividends eligible for the deduction, only 
cash dividends received during the elected taxable year are 
taken into account under Code section 965(b)(2)(A). (The base-
period amounts described in Code section 965(b)(2)(B) include 
non-cash dividends, as well as cash dividends and certain other 
amounts.)
    The provision also provides the Treasury Secretary with 
explicit regulatory authority to prevent the avoidance of the 
purposes of Code section 965(b)(3), which reduces the amount of 
eligible dividends in certain cases in which an increase in 
related-party indebtedness has occurred after October 3, 2004. 
Regulations issued pursuant to this authority may include rules 
to provide that cash dividends are not taken into account under 
Code section 965(a) to the extent attributable to the direct or 
indirect transfer of cash or other property from a related 
person to a controlled foreign corporation (including through 
the use of intervening entities or capital contributions). It 
is expected that this authority, which supplements existing 
principles relating to the treatment of circular flows of cash, 
would be used to prevent the application of the deduction in 
the case of a dividend that is effectively funded by the U.S. 
shareholder or its affiliates that are not controlled foreign 
corporations. It is anticipated that dividends would be treated 
as attributable to a related-party transfer of cash or other 
property under this authority only in cases in which the 
transfer is part of an arrangement undertaken with a principal 
purpose of avoiding the purposes of the related-party debt rule 
of Code section 965(b)(3).
    For example, if a U.S. shareholder, as part of a plan to 
avoid the purposes of Code section 965(b)(3), contributes cash 
or other property to a controlled foreign corporation and then 
has the controlled foreign corporation pay a dividend to the 
U.S. shareholder (either to meet the base period repatriation 
level or as a dividend described in Code section 965(a)), or 
has the controlled foreign corporation lend the cash or other 
property to another controlled foreign corporation which then 
pays a dividend to the U.S. shareholder, regulations issued 
under this authority may require the U.S. shareholder to reduce 
its Code section 965(a) qualifying dividends by the amount of 
cash or other property contributed. In addition, if as part of 
a plan to avoid the purposes of Code section 965(b)(3), a U.S. 
shareholder makes a loan to a controlled foreign corporation 
after October 3, 2004, such controlled foreign corporation pays 
a dividend to the U.S. shareholder, and then the U.S. 
shareholder disposes of the stock of the controlled foreign 
corporation, such that the U.S. shareholder is not related to 
the controlled foreign corporation on the last day of the U.S. 
shareholder's election year, regulations issued under this 
authority may require the U.S. shareholder to reduce its Code 
section 965(a) qualifying dividends by the amount of the loan.
    It is anticipated that many other transfers of cash or 
other property will not be regarded as effectively funding 
dividend repatriations for purposes of this regulatory 
authority. For example, if a U.S. shareholder, in the ordinary 
course of its trade or business, transfers cash or other 
property to a controlled foreign corporation in exchange for 
property or the provision of services, such a transfer will not 
be considered to have a principal purpose of avoiding the 
purposes of Code section 965(b)(3). Likewise, if a related 
person transfers cash to a controlled foreign corporation in a 
sale of assets by the controlled foreign corporation to the 
related person for non- tax business purposes, such a transfer 
will not be considered to have a principal purpose of avoiding 
the purposes of Code section 965(b)(3). Similarly, a transfer 
of cash or other property to a controlled foreign corporation 
for purposes of providing initial or ongoing working capital to 
the controlled foreign corporation or expanding the controlled 
foreign corporation's operations will not be considered to have 
a principal purpose of avoiding the purposes of Code section 
965(b)(3). In addition, a transfer by a U.S. shareholder in 
repayment of an obligation owed to a controlled foreign 
corporation will not be considered to have a principal purpose 
of avoiding the purposes of Code section 965(b)(3), absent 
special circumstances indicating that the U.S. shareholder is 
using the repayment effectively to fund the dividend 
repatriation. It is expected that these special circumstances 
would not be found to exist in cases involving the repayment of 
short-term debt (i.e., debt with a term of no more than three 
years).
    In light of the timing of this Act and the fact that Code 
section 965 will expire for many affected taxpayers at the end 
of 2005, it is understood that the Treasury Department in all 
likelihood will not issue regulations under this authority. If 
no such regulations are issued, it would be expected that 
generally applicable tax principles would be invoked to reach 
results consistent with the principles and examples described 
above.
    The provision also clarifies the definition of ``applicable 
financial statement'' under Code section 965(c)(1). In the case 
of a U.S. shareholder that is required to file a financial 
statement with the Securities and Exchange Commission (or is 
included in such a statement filed by another person), the 
provision clarifies that the applicable financial statement is 
the most recent audited annual statement that was so filed and 
certified on or before June 30, 2003. For purposes of this 
rule, a restatement of a previously filed and certified 
financial statement that occurs after June 30, 2003 does not 
alter the statement's status as having been filed and certified 
on or before June 30, 2003. In addition, the provision 
clarifies that the term ``applicable financial statement'' 
includes the notes that form an integral part of the financial 
statement; other materials, including work papers or materials 
that may be filed for some purposes with a financial statement 
but that do not form an integral part of such statement, may 
not be relied upon for purposes of producing an earnings or tax 
number under the provision. For example, if a note that is an 
integral part of an applicable financial statement states that 
the U.S. shareholder has not provided for deferred taxes on $1 
billion of undistributed earnings of foreign subsidiaries 
because such earnings are intended to be reinvested permanently 
(or indefinitely) abroad, the U.S. shareholder's limit under 
Code section 965(b)(1) is $1 billion. If an applicable 
financial statement does not show a specific earnings or tax 
amount described in Code section 965(b)(1)(B) or (C), a 
taxpayer cannot rely on underlying work papers or other 
materials that are not a part of the financial statement to 
derive such an amount. If an applicable financial statement 
states that an earnings or tax amount is indeterminate (or that 
determination of a specific amount of earnings or taxes is not 
feasible), then the earnings or tax amount so described is 
treated as being zero. A specific earnings or tax amount can be 
relied upon for purposes of Code section 965(b)(1) as long as 
such amount is presented on the applicable financial statement 
as satisfying the indefinite reversal criterion of Accounting 
Principles Board Opinion 23 (``APB 23'') relating to deferred 
taxes on undistributed foreign earnings, and is disclosed as 
required under Financial Accounting Standards Board Statement 
109 (``FAS 109''), regardless of whether the exact words 
``permanently reinvested'' are used, and regardless of whether 
APB 23 or FAS 109 is cited by name.
    The provision also clarifies that the expense disallowance 
rule of Code section 965(d)(2) applies only to deductions for 
expenses that are directly allocable to the deductible portion 
of the dividend. For these purposes, an expense is ``directly 
allocable'' if it relates directly to generating the dividend 
income in question. Thus, deductions for direct expenses such 
as certain legal and accounting fees and stewardship costs are 
disallowed under this provision. Deductions for indirect 
expenses such as interest, research and experimentation costs, 
sales and marketing costs, state and local taxes, general and 
administrative costs, and depreciation and amortization are not 
disallowed under this provision.
    In addition, the provision clarifies that foreign taxes 
that are not allowed as foreign tax credits by reason of Code 
section 965(d) do not give rise to income inclusions under Code 
section 78.
    The provision also clarifies that under Code section 
965(e)(1), the only foreign tax credits that may be used to 
reduce the tax on the nondeductible portion of a dividend are 
credits for foreign taxes that are attributable to the 
nondeductible portion of the dividend. Credits for other 
foreign taxes cannot be used to reduce the tax on the 
nondeductible portion of the dividend.
    The provision also clarifies Code section 965(f) to provide 
that an election to apply Code section 965 is timely if made on 
or before the due date (including extensions) for filing the 
tax return for the relevant taxable year.
    Treatment of deduction for State and local sales taxes 
under the alternative minimum tax (Act sec. 501).--The 
provision clarifies that the itemized deduction for State and 
local sales taxes does not apply in calculating alternative 
minimum taxable income.
    Naval shipbuilding (Act sec. 708).--The provision provides 
that the five-taxable year period for use of the 40/60 
percentage-of-completion/capitalized cost method is determined 
with respect to the construction commencement date, not the 
contract commencement date. The provision further provides that 
any change of accounting method required by the provision is 
not subject to section 481.
    Credit for production of refined coal (Act sec. 710).--The 
provision strikes the word ``synthetic'' from the definition of 
refined coal to carry out the intent that qualifying solid 
fuels produced from coal (including lignite) meet two new 
primary standards, an emissions reduction test and a value 
enhancement test, and not also be subject to a ``chemical 
change'' test promulgated under Treasury guidance for certain 
fuels from coal to qualify for credit under Code sec. 29.
    Tax treatment of expatriated entities and their foreign 
parents (Act sec. 801).--The provision clarifies that the 
inversion gain rule of Code section 7874(a)(1) does not apply 
to an entity that is an expatriated entity with respect to an 
entity that is treated as a domestic corporation under Code 
section 7874(b).
    Expatriation of individuals (Act sec. 804).--The provision 
clarifies that the exception to the requirement of minimal 
prior physical presence in the United States is both for (i) 
teachers, students, athletes, and foreign government 
individuals, and (ii) individuals receiving medical attention.
    The provision clarifies that the Act does not create an 
additional requirement that an individual file a statement 
under section 6039G if such a filing was not already required 
under present law.
    The provision clarifies that taxpayers who lose citizenship 
or terminate long-term resident status will continue to be 
treated for Federal tax purposes as citizens or long-term 
residents until they meet the notice and information reporting 
requirements of section 7701(n).
    Penalty for failure to disclose reportable transactions 
(Act sec. 811).--The provision clarifies that the penalty for 
failing to disclose participation in a reportable transaction 
applies to returns and statements that are filed after the date 
of enactment, without regard to the original or extended due 
date for such return or statement.
    Accuracy-related penalties for listed transactions and 
reportable transactions with a significant tax avoidance 
purpose (Act sec. 812).--The provision clarifies that 
underpayments attributable to an understatement resulting from 
participation in a listed transaction or a reportable 
transaction with a significant tax avoidance purpose are not 
subject to accuracy- related penalties under section 6662 to 
the extent that an accuracy-related penalty under section 6662A 
is imposed upon such underpayment. (However, in the case of 
underpayments resulting from substantial valuation 
misstatements, the accuracy-related penalty under section 6662A 
does not apply to the extent that the accuracy-related penalty 
under section 6662 is applied to such underpayments (i.e., the 
section 6662 penalty amount is increased under section 6662(h) 
because the substantial valuation misstatement is determined to 
be a gross valuation misstatement).) The provision clarifies 
that accuracy-related penalties under section 6662A do not 
apply to underpayments to which a fraud penalty under section 
6663 is applied.
    The provision clarifies that, with respect to disqualified 
opinions, the strengthened reasonable cause exception to 
section 6662A penalties does not apply to the opinion of a tax 
advisor if (1) the opinion was provided to the taxpayer before 
the date of enactment, (2) the opinion relates to a transaction 
entered into before the date of enactment, and (3) the tax 
treatment of items relating to the transaction was included on 
a return or statement filed by the taxpayer before the date 
enactment.
    Statute of limitations for unreported listed transactions 
(Act sec. 814).--The Act provides that the statute of 
limitations with respect to an undisclosed listed transaction 
does not expire until one year after the earlier of (1) the 
date on which the Secretary is furnished the required 
information, or (2) the date on which a material advisor 
satisfies the list maintenance requirements with respect to a 
request by the Secretary. The provision clarifies that a 
``material advisor'' for this purpose includes either a 
material advisor as defined in section 6111(b)(1) or, in the 
case of material aid, assistance, or advice rendered on or 
before the date of enactment, a material advisor as defined in 
Treasury regulations under section 6112. (See Treas. Reg. sec. 
301.6112-1(c)(2).)
    Material advisor list maintenance requirement and penalty 
(Act sec. 815).--The provision clarifies that the penalty under 
section 6708 for failing to comply with the section 6112 list 
maintenance requirements applies to both (1) material advisors 
with respect to reportable transactions under present-law 
section 6112, and (2) organizers and sellers of potentially 
abusive tax shelters under prior-law section 6112. (This 
provision also would clarify the determination of the date on 
which a material advisor satisfies the list maintenance 
requirements for purposes of the extended statute of 
limitations for undisclosed listed transactions under section 
814 of the Act.)
    Minimum holding period for withholding taxes on gain and 
income other than dividends (Act sec. 832).--The provision 
clarifies that the exception from the minimum holding period 
for certain withholding taxes paid by registered or licensed 
brokers and dealers on income and gain from securities also 
apply to gain from the sale of stock.
    Disallowance of certain partnership loss transfers (Act 
sec. 833).--The provision redrafts the wording of the provision 
relating to basis adjustments to undistributed partnership 
property in Code section 734(b) to clarify that it applies in 
the case of a distribution of property to a partner by a 
partnership with respect to which there is a substantial basis 
reduction.
    Repeal of special rules for FASITs and modifications to 
rules for REMICs (Act sec. 835).--The provision clarifies that, 
if more than 50 percent of the obligations transferred to, or 
purchased by, a REMIC are originated by a government entity and 
are principally secured by an interest in real property, then 
each obligation originated by a government entity and 
transferred to, or purposed by, the REMIC is treated as 
principally secured by an interest in real property. Thus, the 
provision more closely aligns this rule with the ``principally 
secured'' standard that generally is provided by the definition 
of a qualified mortgage, and the provision clarifies that the 
treatment of obligations as principally secured by an interest 
in real property under this rule does not extend to obligations 
that are not originated by a government entity.
    Importation or transfer of built-in losses (Act sec. 
836).--The provision provides that on the tax-free liquidation 
of a corporation, the fair market value basis rule applies only 
to property described in section 362(e)(1)(B), i.e., property 
which became subject to U.S. income tax on the liquidation. The 
provision is drafted to conform the scope of the liquidation 
rule to the rule applicable to transfers of property by 
shareholders to corporations.
    The provision provides that the election under section 
362(e)(2)(C) to apply the basis limitation to the transferor's 
stock basis is made at such time and in such form and manner as 
the Secretary may prescribe, and, once made, is irrevocable.
    Sale of principal residence following section 1031 exchange 
(Act sec. 840).--The provision clarifies that the exclusion 
under section 121 is denied on the sale or exchange of a 
principal residence by a taxpayer who did not recognize gain 
under section 1031 on the exchange in which the residence was 
acquired (or a by person whose basis in the residence is 
determined in whole or in part with reference to the basis of 
the residence in the hands of that taxpayer). The provision 
also makes a clerical change to the numbering of paragraphs.
    Limitation on deductions allocable to property used by tax-
exempt entities (Act sec. 849).--The Act establishes rules to 
limit deductions that are allocable to tax-exempt use property. 
For this purpose, the Act generally defines ``tax-exempt use 
property'' by reference to the definition provided in section 
168(h). Section 168(h) generally provides that tax-exempt use 
property includes tangible property that is leased to a tax-
exempt entity, as well as certain property owned by a 
partnership that has a tax-exempt partner and provides for 
certain special allocations. The provision clarifies that the 
deduction limitation rules established by the Act apply without 
regard to whether the tax-exempt use property is treated as 
such by reason of a lease or otherwise (e.g., because the 
property is owned by a partnership that has a tax-exempt 
partner and provides for certain special allocations). In the 
case of property treated as tax-exempt use property other than 
by reason of a lease, the provision clarifies that the 
deduction limitation rules generally are effective for property 
acquired after March 12, 2004.
    Reporting with respect to donations of motor vehicles, 
boats and airplanes (Act sec. 884).--The provision clarifies 
that the acknowledgement by the donee organization is to 
include whether the donee organization provided any goods or 
services in consideration of the vehicle, and a description and 
good faith estimate of the value of any such goods or services, 
or, if the goods or services consist solely of intangible 
religious benefits, a statement to that effect.
    Nonqualified deferred compensation plans (Act sec. 885).--
The provision clarifies that the additional tax and interest 
under the nonqualified deferred compensation provision of the 
Act are not treated as payments of regular tax for alternative 
minimum tax purposes. The provision also clarifies that the 
application of the rule providing that certain additional 
deferrals must be for a period of not less than five years is 
not limited to the first payment for which deferral is made. 
The provision also clarifies that Treasury Department guidance 
providing a limited period during which plans can conform to 
the requirements applies to plans adopted before January 1, 
2005. The provision also clarifies that the effective date of 
the funding provisions relating to offshore trusts and 
financial triggers is January 1, 2005. Thus, for example, 
amounts set aside in an offshore trust before such date for the 
purpose of paying deferred compensation and plans providing for 
the restriction of assets in connection with a change in the 
employer's financial health are subject to the funding 
provisions on January 1, 2005. Under the provision, not later 
than 90 days after the date of enactment of this provision, the 
Secretary of the Treasury shall issue guidance under which a 
nonqualified deferred compensation plan which is in violation 
of the requirements of the funding provisions relating to 
offshore trusts and financial triggers will be treated as not 
violating such requirements if the plan comes into conformance 
with such requirements during a limited period as specified by 
the Secretary in guidance. For example, trusts or assets set 
aside outside of the United States that would otherwise result 
in income inclusion and interest under the provision as of 
January 1, 2005, may be modified to come into conformance with 
the provision during the limited period of time as specified by 
the Secretary.
    Identified straddles (Act sec. 888).--The provision 
clarifies that taxpayers are permitted to identify a straddle 
as an identified straddle under section 1092(a)(2)(B) (by 
making a clear and unambiguous identification on their books 
and records) without regard to whether the Secretary has 
prescribed regulations under the mandate in that section. The 
provision provides that the Secretary's mandate under the 
provision is to issue guidance in the form of regulations or in 
another form.
    Modification of treatment of transfers to creditors in 
divisive reorganizations (Act sec. 898).--The provision 
clarifies that the amount of the adjusted basis of property 
that is taken into account for purposes of Code section 
361(b)(3) is reduced by the liabilities assumed (within the 
meaning of Code section 357(c)).
    Nonqualified preferred stock (Act sec. 899).--The provision 
clarifies that the ``real and meaningful likelihood'' 
requirement under the Act (which applies so that stock shall 
not be treated as participating in corporate growth to any 
significant extent unless there is a ``real and meaningful 
likelihood'' of the shareholder actually participating in the 
earnings and growth of the corporation) applies also for 
purposes of determining whether stock is not stock that is 
``limited and preferred as to dividends.''
    Consistent amortization period for intangibles and 
treatment of partnership organizational expenses (Act sec. 
902).--The provision corrects the reference to ``taxpayers'' to 
refer to ``partnerships'' in the rules relating to deduction or 
amortization of partnership organizational expenses.
    Limitation of employer deduction for certain entertainment 
expenses (Act sec. 907).--Section 907 of the Act limits the 
deduction for certain entertainment expenses with respect to 
specified individuals. A specified individual is defined as any 
individual subject to the requirements of section 16(a) of the 
Securities Act of 1934 with respect to the taxpayer or who 
would be subject to such requirements if the taxpayer were an 
issuer of equity securities. The provision clarifies that a 
specified individual includes an individual who is subject to 
the requirements of section 16(a) of the Securities Act of 1934 
with respect to a related entity of the taxpayer or who would 
be subject to such requirements if the related entity were an 
issuer of equity securities.

Amendment related to the Working Families Tax Relief Act of 2004

    Uniform definition of child (Act secs. 201, 203, and 
207).--The provision makes conforming amendments, consistent 
with those enacted with respect to various other provisions, 
for purposes of health savings accounts, the dependent care 
credit, and dependent care assistance programs. Under the 
conforming amendments, an individual may qualify as a dependent 
for these limited purposes without regard to whether the 
individual has gross income that exceeds an otherwise 
applicable gross income limitation or is married and files a 
joint return. In addition, such an individual who is treated as 
a dependent under these conforming amendment provisions is not 
subject to the general rule that a dependent of a taxpayer 
shall be treated as having no dependents for the taxable year 
of such individual beginning in such calendar year.
    The provision clarifies Code section 152(e) to permit a 
divorced or legally separated custodial parent to waive, by 
written declaration, his or her right to claim a child as a 
dependent for purposes of the dependency exemption and child 
credit (but not with respect to other child-related tax 
benefits). By means of the waiver, the noncustodial parent is 
granted the right to claim the child as a dependent for these 
purposes. The provision clarifies that the waiver rules under 
the uniform definition of qualifying child operate as under 
prior law.

Amendment related to the Jobs and Growth Tax Relief Reconciliation Act 
        of 2003

    Bonus depreciation (Act sec. 201).--Present-law rules for 
additional first-year depreciation provide criteria under which 
certain noncommercial aircraft, and certain property having 
longer production periods (as described in Code section 
168(k)(2)(B)), can qualify for the extended placed-in-service 
date. The provision clarifies that property acquired and placed 
in service during 2005 pursuant to a written binding contract 
which was entered into after May 5, 2003, and before January 1, 
2005, is eligible for 50-percent additional first-year 
depreciation deduction.
    The provision corrects the reference to a date in the rules 
applicable to qualified New York Liberty Zone property so that 
it refers to the January 1, 2005, date in the corresponding 
rule for additional first-year depreciation in Code section 
168(k).

Amendments related to the Victims of Terrorism Tax Relief Act of 2001

    Rules relating to disclosure of taxpayer return information 
(Act sec. 201).--The provision corrects cross references within 
the disclosure rules (Code section 6103) relating to disclosure 
to the National Archives and Records Administration.

Amendments related to the Economic Growth and Tax Relief Reconciliation 
        Act of 2001

    Option to treat elective deferral as after-tax Roth 
contributions (Act sec. 617).--A special rule allows employees 
with at least 15 years of service with certain organizations to 
make additional elective deferrals to a tax-deferred annuity, 
subject to an annual and cumulative limit. The cumulative limit 
is $15,000, reduced by any additional pretax elective deferrals 
made for preceding years. For taxable years beginning after 
2005, plans may allow employees to designate pretax elective 
deferrals as Roth contributions. Under the provision, the 
$15,000 cumulative limit is reduced also by designated Roth 
contributions made for preceding years.
    Equitable treatment for contributions to defined 
contribution plans (Act sec. 632).--Under the law as in effect 
before the Act, a special limit applied to contributions to 
tax-sheltered annuities for foreign missionaries with adjusted 
gross income not exceeding $17,000. The special limit was 
inadvertently dropped by the Act. The special limit was 
restored in a technical correction in the Job Creation and 
Worker Assistance Act of 2002, but did not accurately reflect 
the pre-Act rule. The provision revises the special limit to 
reflect the pre-Act rule.

Amendments related to the Internal Revenue Service Restructuring and 
        Reform Act of 1998

    Special procedures for third-party summons (Act sec. 
3415).--Code section 7609(c)(2)(F) provides that section 7609 
does not apply to a summons described in subsection (f) or (g), 
which refers to a John Doe summons and certain emergency 
summonses, respectively. The provision corrects this reference, 
so as to make only the notice procedures of section 7609(a) 
inapplicable to a John Doe summons or an emergency summons, 
rather than making the entire section 7609 inapplicable.

Amendments related to the Taxpayer Relief Act of 1997

    Tentative carryback and refund adjustments and treatment of 
carrybacks or adjustments for certain unused deductions (Act 
sec. 1055).--The provision corrects a reference in rules 
relating to tentative carryback and refund adjustments to refer 
to coordination rules in Code section 6611(f)(4)(B). The 
provision also corrects a reference in rules relating to 
carrybacks or adjustments for certain unused deductions to 
refer to the filing date within the meaning of Code section 
6611(f)(4)(B).
    Adjustments to basis of stock in controlled foreign 
corporations (Act sec. 1112(b)).--The provision clarifies that 
the basis adjustments of Code section 961(c) apply not only 
with respect to the stock of the controlled foreign corporation 
that earns the subpart F income that gives rise to the basis 
adjustments, but also with respect to the stock of higher-tier 
controlled foreign corporations in the same chain of ownership.
    Notice of certain transfers to foreign persons (Act sec. 
1144).--The provision corrects the omission of a conjunction in 
the description of transfers that are generally subject to 
certain information reporting requirements.

Amendment related to the Omnibus Budget Reconciliation Act of 1990

    Depreciation of certain solar- or wind-powered equipment 
(Act sec. 11813).--The provision clarifies that 5-year property 
includes certain heating, cooling, and other equipment using 
solar or wind (rather than solar and wind) energy.

Amendment related to the Omnibus Budget Reconciliation Act of 1987

    Clarification of earnings and profits and stock basis where 
LIFO recapture tax applies (Act sec. 10227).--Under present 
law, the LIFO recapture amount is included in the income of a C 
corporation that becomes an S corporation for its last taxable 
year that it was a C corporation (sec. 1363(d)). Any increase 
in tax by reason of this inclusion is payable in four equal 
annual installments. The provision provides that the rules 
relating to (1) the prohibition on adjustments of earnings and 
profits of an S corporation and (2) the requirement to reduce 
the basis of stock of the S corporation by reason of 
nondeductible expenses do not apply to any corporate tax 
imposed by reason of section 1363(d). No inference is intended 
as to the treatment of other corporate taxes.

Clerical amendments

    The provisions include clerical and typographical 
amendments to the Code, which are effective upon enactment 
(December 22, 2005).

               B. Other Corrections (sec. 413 of the Act)


Amendments related to the American Jobs Creation Act of 2004

    Expansion of bank S corporation eligible shareholders to 
include IRAs (Act sec. 233).--The provision expands the 
provision in the Act allowing certain bank stock to be held by 
an IRA (or to be sold by an IRA to the beneficiary) to include 
stock in a depository holding company (as defined in section 
3(w)(1) of the Federal Deposit Insurance Act). A depository 
holding company includes a bank holding company and a thrift 
holding company.
    Exclusion of investment securities income from passive 
income test for bank S corporations (Act sec. 237).--The 
provision expands the rule in the Act which provides that, in 
the case of a bank, bank holding company, or financial holding 
company, certain interest and dividend income is not treated as 
passive under the S corporation passive investment income 
rules. Under the provision, this rule applies to a bank and to 
a depository holding company (as defined in section 3(w)(1) of 
the Federal Deposit Insurance Act). A depository holding 
company includes a bank holding company and a thrift holding 
company.
    Information returns for qualified subchapter S subsidiaries 
(Act sec. 239).--The provision provides that an S corporation 
and a qualified subchapter S subsidiary are recognized as a 
separate entities for purposes of making information returns, 
except as otherwise provided by the Treasury Department.

 PART TEN: EXTENSION OF PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
           MENTAL HEALTH BENEFITS (PUBLIC LAW 109-151) \269\
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    \269\ H.R. 4579. The House passed the bill on the suspension 
calendar on December 17, 2005. The Senate passed the bill by unanimous 
consent on December 22, 2005. The President signed the bill on December 
30, 2005.
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 A. Extension of Parity in the Application of Certain Limits to Mental 
  Health Benefits (sec. 1 of the Act and sec. 9812(f)(3) of the Code, 
           sec. 712(f) of ERISA and sec. 2705(f) of the PHSA)

                              Present Law

    The Code, the Employee Retirement Income Security Act of 
1974 (``ERISA'') and the Public Health Service Act (``PHSA'') 
contain provisions under which group health plans that provide 
both medical and surgical benefits and mental health benefits 
cannot impose aggregate lifetime or annual dollar limits on 
mental health benefits that are not imposed on substantially 
all medical and surgical benefits (``mental health parity 
requirements''). In the case of a group health plan which 
provides benefits for mental health, the mental health parity 
requirements do not affect the terms and conditions (including 
cost sharing, limits on numbers of visits or days of coverage, 
and requirements relating to medical necessity) relating to the 
amount, duration, or scope of mental health benefits under the 
plan, except as specifically provided in regard to parity in 
the imposition of aggregate lifetime limits and annual limits.
    The Code imposes an excise tax on group health plans which 
fail to meet the mental health parity requirements. The excise 
tax is equal to $100 per day during the period of noncompliance 
and is generally imposed on the employer sponsoring the plan if 
the plan fails to meet the requirements. The maximum tax that 
can be imposed during a taxable year cannot exceed the lesser 
of 10 percent of the employer's group health plan expenses for 
the prior year or $500,000. No tax is imposed if the Secretary 
determines that the employer did not know, and in exercising 
reasonable diligence would not have known, that the failure 
existed.
    The mental health parity requirements do not apply to group 
health plans of small employers nor do they apply if their 
application results in an increase in the cost under a group 
health plan of at least one percent. Further, the mental health 
parity requirements do not require group health plans to 
provide mental health benefits.
    The Code, ERISA and PHSA mental health parity requirements 
are scheduled to expire with respect to benefits for services 
furnished after December 31, 2005.

                     Explanation of Provision \270\
---------------------------------------------------------------------------

    \270\ The provision was subsequently extended in Division A, 
section 115 of the Tax Relief and Health Care Act of 2006, Pub. L. 109-
432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision extends the present-law Code excise tax for 
failure to comply with the mental health parity requirements 
through December 31, 2006. It also extends the ERISA and PHSA 
requirements through December 31, 2006.

                             Effective Date

    The provision is effective on date of enactment (December 
30, 2005).

  PART ELEVEN: TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005 
                       (PUBLIC LAW 109-222) \271\
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    \271\ H.R. 4297. The House Committee on Ways and Means reported the 
bill on November 11, 2005 (H.R. Rep. No. 109-304). The House passed the 
bill on December 8, 2005. The Senate Committee on Finance reported S. 
2020 on November 16, 2005. The Senate passed S. 2020 on November 18, 
2005. The Senate passed H.R. 4297, as amended by the provisions of S. 
2020, on February 2, 2006. The conference report was filed on May 9, 
2006 (H.R. Rep. No. 109-455). The House passed the conference report on 
May 10, 2006, and the Senate passed the conference report on May 11, 
2006. The President signed the bill on May 17, 2006.
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       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

A. Extension of Increased Expensing for Small Business (sec. 101 of the 
                     Act and sec. 179 of the Code)

                              Present Law

    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs. Present law provides that the maximum 
amount a taxpayer may expense, for taxable years beginning in 
2003 through 2007, is $100,000 of the cost of qualifying 
property placed in service for the taxable year.\272\ In 
general, qualifying property is defined as depreciable tangible 
personal property that is purchased for use in the active 
conduct of a trade or business. Off-the-shelf computer software 
placed in service in taxable years beginning before 2008 is 
treated as qualifying property. The $100,000 amount is reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $400,000. The $100,000 and $400,000 amounts are indexed 
for inflation for taxable years beginning after 2003 and before 
2008.
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    \272\ Additional section 179 incentives are provided with respect 
to a qualified property used by a business in the New York Liberty Zone 
(sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal 
community (sec. 1400J).
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    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179. An expensing 
election is made under rules prescribed by the Secretary.\273\
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    \273\ Sec. 179(c)(1). Under Treas. Reg. sec. 179-5, applicable to 
property placed in service in taxable years beginning after 2002 and 
before 2008, a taxpayer is permitted to make or revoke an election 
under section 179 without the consent of the Commissioner on an amended 
Federal tax return for that taxable year. This amended return must be 
filed within the time prescribed by law for filing an amended return 
for the taxable year. T.D. 9209, July 12, 2005.
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    For taxable years beginning in 2008 and thereafter (or 
before 2003), the following rules apply. A taxpayer with a 
sufficiently small amount of annual investment may elect to 
deduct up to $25,000 of the cost of qualifying property placed 
in service for the taxable year. The $25,000 amount is reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $200,000. The $25,000 and $200,000 amounts are not 
indexed. In general, qualifying property is defined as 
depreciable tangible personal property that is purchased for 
use in the active conduct of a trade or business (not including 
off- the-shelf computer software). An expensing election may be 
revoked only with consent of the Commissioner.\274\
---------------------------------------------------------------------------
    \274\ Sec. 179(c)(2).
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                           Reasons for Change

    The Congress believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of capital for property used in a trade or business. 
With a lower cost of capital, the Congress believes small 
businesses will invest in more equipment and employ more 
workers. Second, it eliminates depreciation recordkeeping 
requirements with respect to expensed property. In 2004, 
Congress acted to increase the value of these benefits and to 
increase the number of taxpayers eligible for taxable years 
through 2007. The Congress believes that the changes to section 
179 expensing will continue to provide important benefits if 
extended, and the Act therefore extends these changes for an 
additional two years.

                        Explanation of Provision

    The Act extends for two years the increased amount that a 
taxpayer may deduct and the other section 179 rules applicable 
in taxable years beginning before 2008. Thus, under the 
provision, these present-law rules continue in effect for 
taxable years beginning after 2007 and before 2010.

                             Effective Date

    The provision is effective for taxable years beginning 
after 2007.

 B. Reduced Rates for Capital Gains and Dividends of Individuals (sec. 
               102 of the Act and sec. 1(h) of the Code)

                              Present Law

Capital gains
            In general
    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of a capital 
asset, any gain generally is included in income. Any net 
capital gain of an individual is generally taxed at maximum 
rates lower than the rates applicable to ordinary income. Net 
capital gain is the excess of the net long-term capital gain 
for the taxable year over the net short-term capital loss for 
the year. Gain or loss is treated as long-term if the asset is 
held for more than one year.
    Capital losses generally are deductible in full against 
capital gains. In addition, individual taxpayers may deduct 
capital losses against up to $3,000 of ordinary income in each 
year. Any remaining unused capital losses may be carried 
forward indefinitely to another taxable year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
(5) certain U.S. publications, (6) certain commodity derivative 
financial instruments, (7) hedging transactions, and (8) 
business supplies. In addition, the net gain from the 
disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as 
capital gain to the extent of all previous depreciation 
allowances. Gain from the disposition of depreciable real 
property is generally not treated as capital gain to the extent 
of the depreciation allowances in excess of the allowances that 
would have been available under the straight-line method of 
depreciation.
            Tax rates before 2009
    Under present law, for taxable years beginning before 
January 1, 2009, the maximum rate of tax on the adjusted net 
capital gain of an individual is 15 percent. Any adjusted net 
capital gain which otherwise would be taxed at a 10- or 15-
percent rate is taxed at a five-percent rate (zero for taxable 
years beginning after 2007). These rates apply for purposes of 
both the regular tax and the alternative minimum tax.
    Under present law, the ``adjusted net capital gain'' of an 
individual is the net capital gain reduced (but not below zero) 
by the sum of the 28-percent rate gain and the unrecaptured 
section 1250 gain. The net capital gain is reduced by the 
amount of gain that the individual treats as investment income 
for purposes of determining the investment interest limitation 
under section 163(d).
    The term ``28-percent rate gain'' means the excess of the 
sum of the amount of net gain attributable to long-term capital 
gains and losses from the sale or exchange of collectibles (as 
defined in section 408(m) without regard to paragraph (3) 
thereof) and an amount of gain equal to the additional amount 
of gain that would be excluded from gross income under section 
1202 (relating to certain small business stock) if the 
percentage limitations of section 1202(a) did not apply), over 
the sum of the net short-term capital loss for the taxable year 
and any long-term capital loss carryover to the taxable year.
    ``Unrecaptured section 1250 gain'' means any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) held more than one year to the 
extent of the gain that would have been treated as ordinary 
income if section 1250 applied to all depreciation, reduced by 
the net loss (if any) attributable to the items taken into 
account in computing 28-percent rate gain. The amount of 
unrecaptured section 1250 gain (before the reduction for the 
net loss) attributable to the disposition of property to which 
section 1231 (relating to certain property used in a trade or 
business) applies may not exceed the net section 1231 gain for 
the year.
    An individual's unrecaptured section 1250 gain is taxed at 
a maximum rate of 25 percent, and the 28-percent rate gain is 
taxed at a maximum rate of 28 percent. Any amount of 
unrecaptured section 1250 gain or 28-percent rate gain 
otherwise taxed at a 10- or 15-percent rate is taxed at the 
otherwise applicable rate.
            Tax rates after 2008
    For taxable years beginning after December 31, 2008, the 
maximum rate of tax on the adjusted net capital gain of an 
individual is 20 percent. Any adjusted net capital gain which 
otherwise would be taxed at a 10- or 15-percent rate is taxed 
at a 10-percent rate.
    In addition, any gain from the sale or exchange of property 
held more than five years that would otherwise have been taxed 
at the 10-percent rate is taxed at an 8-percent rate. Any gain 
from the sale or exchange of property held more than five years 
and the holding period for which began after December 31, 2000, 
that would otherwise have been taxed at a 20-percent rate is 
taxed at an 18-percent rate.
    The tax rates on 28-percent gain and unrecaptured section 
1250 gain are the same as for taxable years beginning before 
2009.

Dividends

            In general
    A dividend is the distribution of property made by a 
corporation to its shareholders out of its after-tax earnings 
and profits.
            Tax rates before 2009
    Under present law, dividends received by an individual from 
domestic corporations and qualified foreign corporations are 
taxed at the same rates that apply to capital gains. This 
treatment applies for purposes of both the regular tax and the 
alternative minimum tax. Thus, for taxable years beginning 
before 2009, dividends received by an individual are taxed at 
rates of five (zero for taxable years beginning after 2007) and 
15 percent.
    If a shareholder does not hold a share of stock for more 
than 60 days during the 121-day period beginning 60 days before 
the ex-dividend date (as measured under section 246(c)), 
dividends received on the stock are not eligible for the 
reduced rates. Also, the reduced rates are not available for 
dividends to the extent that the taxpayer is obligated to make 
related payments with respect to positions in substantially 
similar or related property.
    Qualified dividend income includes otherwise qualified 
dividends received from qualified foreign corporations. The 
term ``qualified foreign corporation'' includes a foreign 
corporation that is eligible for the benefits of a 
comprehensive income tax treaty with the United States which 
the Treasury Department determines to be satisfactory and which 
includes an exchange of information program. In addition, a 
foreign corporation is treated as a qualified foreign 
corporation with respect to any dividend paid by the 
corporation with respect to stock that is readily tradable on 
an established securities market in the United States.
    Dividends received from a corporation that is a passive 
foreign investment company (as defined in section 1297) in 
either the taxable year of the distribution, or the preceding 
taxable year, are not qualified dividends.
    Special rules apply in determining a taxpayer's foreign tax 
credit limitation under section 904 in the case of qualified 
dividend income. For these purposes, rules similar to the rules 
of section 904(b)(2)(B) concerning adjustments to the foreign 
tax credit limitation to reflect any capital gain rate 
differential will apply to any qualified dividend income.
    If a taxpayer receives an extraordinary dividend (within 
the meaning of section 1059(c)) eligible for the reduced rates 
with respect to any share of stock, any loss on the sale of the 
stock is treated as a long-term capital loss to the extent of 
the dividend.
    A dividend is treated as investment income for purposes of 
determining the amount of deductible investment interest only 
if the taxpayer elects to treat the dividend as not eligible 
for the reduced rates.
    The amount of dividends qualifying for reduced rates that 
may be paid by a regulated investment company (``RIC'') for any 
taxable year in which the qualified dividend income received by 
the RIC is less than 95 percent of its gross income (as 
specially computed) may not exceed the sum of (i) the qualified 
dividend income of the RIC for the taxable year and (ii) the 
amount of earnings and profits accumulated in a non-RIC taxable 
year that were distributed by the RIC during the taxable year.
    The amount of dividends qualifying for reduced rates that 
may be paid by a real estate investment trust (``REIT'') for 
any taxable year may not exceed the sum of (i) the qualified 
dividend income of the REIT for the taxable year, (ii) an 
amount equal to the excess of the income subject to the taxes 
imposed by section 857(b)(1) and the regulations prescribed 
under section 337(d) for the preceding taxable year over the 
amount of these taxes for the preceding taxable year, and (iii) 
the amount of earnings and profits accumulated in a non-REIT 
taxable year that were distributed by the REIT during the 
taxable year.
    The reduced rates do not apply to dividends received from 
an organization that was exempt from tax under section 501 or 
was a tax-exempt farmers' cooperative in either the taxable 
year of the distribution or the preceding taxable year; 
dividends received from a mutual savings bank that received a 
deduction under section 591; or deductible dividends paid on 
employer securities.\275\
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    \275\ In addition, for taxable years beginning before 2009, amounts 
treated as ordinary income on the disposition of certain preferred 
stock (sec. 306) are treated as dividends for purposes of applying the 
reduced rates; the tax rate for the accumulated earnings tax (sec. 531) 
and the personal holding company tax (sec. 541) is reduced to 15 
percent; and the collapsible corporation rules (sec. 341) are repealed.
---------------------------------------------------------------------------
            Tax rates after 2008
    For taxable years beginning after 2008, dividends received 
by an individual are taxed at ordinary income tax rates.

                           Reasons for Change

    The Congress believes that the lower capital gain and 
dividend rates have had a positive effect on the economy and 
should be extended to continue to promote economic growth by 
increasing the after-tax return to saving and investment. The 
Congress further believes that the extension will encourage the 
payment of dividends by corporations.

                        Explanation of Provision

    The Act extends for two years the present-law provisions 
relating to lower capital gain and dividend tax rates (through 
taxable years beginning on or before December 31, 2010).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2008.

                   C. Controlled Foreign Corporations


1. Subpart F exception for active financing income (sec. 103(a) of the 
        Act and secs. 953 and 954 of the Code)

                              Present Law

    Under the subpart F rules, 10-percent U.S. shareholders of 
a controlled foreign corporation (``CFC'') are subject to U.S. 
tax currently on certain income earned by the CFC, whether or 
not such income is distributed to the shareholders. The income 
subject to current inclusion under the subpart F rules 
includes, among other things, insurance income and foreign base 
company income. Foreign base company income includes, among 
other things, foreign personal holding company income and 
foreign base company services income (i.e., income derived from 
services performed for or on behalf of a related person outside 
the country in which the CFC is organized).
    Foreign personal holding company income generally consists 
of the following: (1) dividends, interest, royalties, rents, 
and annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and REMICs; (3) net gains from 
commodities transactions; (4) net gains from certain foreign 
currency transactions; (5) income that is equivalent to 
interest; (6) income from notional principal contracts; (7) 
payments in lieu of dividends; and (8) amounts received under 
personal service contracts.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income.\276\
---------------------------------------------------------------------------
    \276\ Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business 
(so-called ``active financing income'').\277\
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    \277\ Temporary exceptions from the subpart F provisions for 
certain active financing income applied only for taxable years 
beginning in 1998. Those exceptions were modified and extended for one 
year, applicable only for taxable years beginning in 1999. The Tax 
Relief Extension Act of 1999 (Pub. L. No. 106-170) clarified and 
extended the temporary exceptions for two years, applicable only for 
taxable years beginning after 1999 and before 2002. The Job Creation 
and Worker Assistance Act of 2002 (Pub. L. No. 107-147) modified and 
extended the temporary exceptions for five years, for taxable years 
beginning after 2001 and before 2007.
---------------------------------------------------------------------------
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is eligible for the exceptions if, 
among other things, substantially all of the activities in 
connection with such transactions are conducted directly by the 
CFC or QBU in its home country, and such income is treated as 
earned by the CFC or QBU in its home country for purposes of 
such country's tax laws. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
    In the case of insurance, in addition to a temporary 
exception from foreign personal holding company income for 
certain income of a qualifying insurance company with respect 
to risks located within the CFC's country of creation or 
organization, certain temporary exceptions from insurance 
income and from foreign personal holding company income apply 
for certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch, provided certain requirements are met 
under each of the exceptions. Further, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met.
    In the case of a life insurance or annuity contract, 
reserves for such contracts are determined as follows for 
purposes of these provisions. The reserves equal the greater 
of: (1) the net surrender value of the contract (as defined in 
section 807(e)(1)(A)), including in the case of pension plan 
contracts; or (2) the amount determined by applying the tax 
reserve method that would apply if the qualifying life 
insurance company were subject to tax under Subchapter L of the 
Code, with the following modifications. First, there is 
substituted for the applicable Federal interest rate an 
interest rate determined for the functional currency of the 
qualifying insurance company's home country, calculated (except 
as provided by the Treasury Secretary in order to address 
insufficient data and similar problems) in the same manner as 
the mid-term applicable Federal interest rate (within the 
meaning of section 1274(d)). Second, there is substituted for 
the prevailing State assumed rate the highest assumed interest 
rate permitted to be used for purposes of determining statement 
reserves in the foreign country for the contract. Third, in 
lieu of U.S. mortality and morbidity tables, mortality and 
morbidity tables are applied that reasonably reflect the 
current mortality and morbidity risks in the foreign country. 
Fourth, the Treasury Secretary may provide that the interest 
rate and mortality and morbidity tables of a qualifying 
insurance company may be used for one or more of its branches 
when appropriate. In no event may the reserve for any contract 
at any time exceed the foreign statement reserve for the 
contract, reduced by any catastrophe, equalization, or 
deficiency reserve or any similar reserve.
    Present law permits a taxpayer in certain circumstances, 
subject to approval by the IRS through the ruling process or in 
published guidance, to establish that the reserve of a life 
insurance company for life insurance and annuity contracts is 
the amount taken into account in determining the foreign 
statement reserve for the contract (reduced by catastrophe, 
equalization, or deficiency reserve or any similar reserve). 
IRS approval is to be based on whether the method, the interest 
rate, the mortality and morbidity assumptions, and any other 
factors taken into account in determining foreign statement 
reserves (taken together or separately) provide an appropriate 
means of measuring income for Federal income tax purposes. In 
seeking a ruling, the taxpayer is required to provide the IRS 
with necessary and appropriate information as to the method, 
interest rate, mortality and morbidity assumptions and other 
assumptions under the foreign reserve rules so that a 
comparison can be made to the reserve amount determined by 
applying the tax reserve method that would apply if the 
qualifying insurance company were subject to tax under 
Subchapter L of the Code (with the modifications provided under 
present law for purposes of these exceptions). The IRS also may 
issue published guidance indicating its approval. Present law 
continues to apply with respect to reserves for any life 
insurance or annuity contract for which the IRS has not 
approved the use of the foreign statement reserve. An IRS 
ruling request under this provision is subject to the present-
law provisions relating to IRS user fees.

                           Reasons for Change

    In the Taxpayer Relief Act of 1997, one-year temporary 
exceptions from foreign personal holding company income were 
enacted for income from the active conduct of an insurance, 
banking, financing, or similar business. In 1998, 1999, and 
2002, the provisions were extended, and in some cases, 
modified. The Congress believes that it is appropriate to 
extend the temporary provisions, as modified by the previous 
legislation, for an additional two years.

                        Explanation of Provision

    The Act extends for two years (for taxable years beginning 
before 2009) the present-law temporary exceptions from subpart 
F foreign personal holding company income, foreign base company 
services income, and insurance income for certain income that 
is derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business.

                             Effective Date

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2006, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

2. Look-through treatment of payments between related controlled 
        foreign corporations under foreign personal holding company 
        income rules (sec. 103(b) of the Act and sec. 954(c) of the 
        Code)

                              Present Law

    In general, the rules of subpart F (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation (``CFC'') to include certain 
income of the CFC (referred to as ``subpart F income'') on a 
current basis for U.S. tax purposes, regardless of whether the 
income is distributed to the shareholders.
    Subpart F income includes foreign base company income. One 
category of foreign base company income is foreign personal 
holding company income. For subpart F purposes, foreign 
personal holding company income generally includes dividends, 
interest, rents, and royalties, among other types of income. 
However, foreign personal holding company income does not 
include dividends and interest received by a CFC from a related 
corporation organized and operating in the same foreign country 
in which the CFC is organized, or rents and royalties received 
by a CFC from a related corporation for the use of property 
within the country in which the CFC is organized. Interest, 
rent, and royalty payments do not qualify for this exclusion to 
the extent that such payments reduce the subpart F income of 
the payor.

                           Reasons for Change

    Most countries allow their companies to redeploy active 
foreign earnings with no additional tax burden. The Congress 
believes that this provision will make U.S. companies and U.S. 
workers more competitive with respect to such countries. By 
allowing U.S. companies to reinvest their active foreign 
earnings where they are most needed without incurring the 
immediate additional tax that companies based in many other 
countries never incur, the Congress believes that the provision 
will enable U.S. companies to make more sales overseas, and 
thus produce more goods in the United States.

                     Explanation of Provision \278\

    Under the Act, for taxable years beginning after 2005 and 
before 2009, and for taxable years of U.S. shareholders with or 
within which such taxable years of such foreign corporations 
end, dividends, interest,\279\ rents, and royalties received by 
one CFC from a related CFC are not treated as foreign personal 
holding company income to the extent attributable or properly 
allocable to non-subpart-F income of the payor. For this 
purpose, a related CFC is a CFC that controls or is controlled 
by the other CFC, or a CFC that is controlled by the same 
person or persons that control the other CFC. Ownership of more 
than 50 percent of the CFC's stock (by vote or value) 
constitutes control for these purposes. The Act provides that 
the Secretary shall prescribe such regulations as are 
appropriate to prevent the abuse of the purposes of this 
provision.
---------------------------------------------------------------------------
    \278\ The provision was subsequently amended in Division A, section 
426 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
described in Part Fourteen.
    \279\ Interest for this purpose includes factoring income which is 
treated as equivalent to interest under sec. 954(c)(1)(E).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2005, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

                       TITLE II--OTHER PROVISIONS

 A. Taxation of Certain Settlement Funds (sec. 201 of the Act and sec. 
                           468B of the Code)

                              Present Law

    Present law provides that if a taxpayer makes a payment to 
a designated settlement fund pursuant to a court order, the 
deduction timing rules that require economic performance 
generally are deemed to be met as the payments are made by the 
taxpayer to the fund. A designated settlement fund means a fund 
which: is established pursuant to a court order; extinguishes 
completely the taxpayer's tort liability arising out of 
personal injury, death or property damage; is administered by 
persons a majority of whom are independent of the taxpayer; and 
under the terms of the fund the taxpayer (or any related 
person) may not hold any beneficial interest in the income or 
corpus of the fund.
    Generally, a designated or qualified settlement fund is 
taxed as a separate entity at the maximum trust rate on its 
modified income. Modified income is generally gross income less 
deductions for administrative costs and other incidental 
expenses incurred in connection with the operation of the 
settlement fund.
    The cleanup of hazardous waste sites is sometimes funded by 
environmental ``settlement funds'' or escrow accounts. These 
escrow accounts are established in consent decrees between the 
Environmental Protection Agency (``EPA'') and the settling 
parties under the jurisdiction of a Federal district court. The 
EPA uses these accounts to resolve claims against private 
parties under Comprehensive Environmental Response, 
Compensation and Liability Act of 1980 (``CERCLA'').
    Present law provides that nothing in any provision of law 
is to be construed as providing that an escrow account, 
settlement fund, or similar fund is not subject to current 
income tax.

                           Reasons for Change

    The Congress believes that environmental escrow accounts 
established under court consent decrees are essential for the 
EPA to resolve or satisfy claims under the CERCLA. The tax 
treatment of these settlement funds may prevent taxpayers from 
entering into prompt settlements with the EPA for the cleanup 
of Superfund hazardous waste sites and reduce the ultimate 
amount of funds available for the sites' cleanup. Because these 
settlement funds are controlled by the government and, upon 
termination, any remaining funds belong to the government, the 
Congress believes it is appropriate to establish that these 
funds are to be treated as beneficially owned by the United 
States.

                     Explanation of Provision \280\

    The provision provides that certain settlement funds 
established in consent decrees for the sole purpose of 
resolving claims under CERCLA are to be treated as beneficially 
owned by the United States government and therefore not subject 
to Federal income tax.
---------------------------------------------------------------------------
    \280\ The provision was subsequently made permanent in Division A, 
section 409 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    To qualify the settlement fund must be: (1) established 
pursuant to a consent decree entered by a judge of a United 
States District Court; (2) created for the receipt of 
settlement payments for the sole purpose of resolving claims 
under CERCLA; (3) controlled (in terms of expenditures of 
contributions and earnings thereon) by the government or an 
agency or instrumentality thereof; and (4) upon termination, 
any remaining funds will be disbursed to such government entity 
and used in accordance with applicable law. For purposes of the 
provision, a government entity means the United States, any 
State of political subdivision thereof, the District of 
Columbia, any possession of the United States, and any agency 
or instrumentality of the foregoing.
    The provision does not apply to accounts or funds 
established after December 31, 2010.

                             Effective Date

    The provision is effective for accounts and funds 
established after the date of enactment (May 17, 2006).

  B. Modifications to Rules Relating to Taxation of Distributions of 
Stock and Securities of a Controlled Corporation (secs. 202 and 507 of 
                   the Act and sec. 355 of the Code)


                              Present Law

    A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
to its shareholders as if the corporation had sold such 
property for its fair market value. In addition, the 
shareholders receiving the distributed property are ordinarily 
treated as receiving a dividend of the value of the 
distribution (to the extent of the distributing corporation's 
earnings and profits), or capital gain in the case of a stock 
buyback that significantly reduces the shareholder's interest 
in the parent corporation.
    An exception to these rules applies if the distribution of 
the stock of a controlled corporation satisfies the 
requirements of section 355 of the Code. If all the 
requirements are satisfied, there is no tax to the distributing 
corporation or to the shareholders on the distribution.
    One requirement to qualify for tax-free treatment under 
section 355 is that both the distributing corporation and the 
controlled corporation must be engaged immediately after the 
distribution in the active conduct of a trade or business that 
has been conducted for at least five years and was not acquired 
in a taxable transaction during that period (the ``active 
business test'').\281\ For this purpose, a corporation is 
engaged in the active conduct of a trade or business only if 
(1) the corporation is directly engaged in the active conduct 
of a trade or business, or (2) the corporation is not directly 
engaged in an active business, but substantially all its assets 
consist of stock and securities of one or more corporations 
that it controls that are engaged in the active conduct of a 
trade or business.\282\
---------------------------------------------------------------------------
    \281\ Section 355(b).
    \282\ Section 355(b)(2)(A). The IRS takes the position that the 
statutory test requires that at least 90 percent of the fair market 
value of the corporation's gross assets consist of stock and securities 
of a controlled corporation that is engaged in the active conduct of a 
trade or business. Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; 
Rev. Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------
    In determining whether a corporation is directly engaged in 
an active trade or business that satisfies the requirement, old 
IRS guidelines for advance ruling purposes required that the 
value of the gross assets of the trade or business being relied 
on must ordinarily constitute at least five percent of the 
total fair market value of the gross assets of the corporation 
directly conducting the trade or business.\283\ More recently, 
the IRS has suspended this specific rule in connection with its 
general administrative practice of moving IRS resources away 
from advance rulings on factual aspects of section 355 
transactions in general.\284\
---------------------------------------------------------------------------
    \283\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
    \284\ Rev. Proc. 2003-48, 2003-29 I.R.B. 86.
---------------------------------------------------------------------------
    If the distributing or controlled corporation is not 
directly engaged in an active trade or business, then the IRS 
takes the position that the ``substantially all'' test as 
applied to that corporation requires that at least 90 percent 
of the fair market value of the corporation's gross assets 
consist of stock and securities of a controlled corporation 
that is engaged in the active conduct of a trade or 
business.\285\
---------------------------------------------------------------------------
    \285\ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc. 
77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------
    In determining whether assets are part of a five-year 
qualifying active business, assets acquired more recently than 
five years prior to the distribution, in a taxable transaction, 
are permitted to qualify as five-year ``active business'' 
assets if they are considered to have been acquired as part of 
an expansion of an existing business that does so qualify.\286\
---------------------------------------------------------------------------
    \286\ Treas. Reg. sec. 1.355-3(b)(ii).
---------------------------------------------------------------------------
    When a corporation holds an interest in a partnership, IRS 
revenue rulings have allowed an active business of the 
partnership to count as an active business of a corporate 
partner in certain circumstances. One such case involved a 
situation in which the corporation owned at least 20 percent of 
the partnership, was actively engaged in management of the 
partnership, and the partnership itself had an active 
business.\287\
---------------------------------------------------------------------------
    \287\ Rev. Rul. 92-17, 1002-1 C.B. 142; see also, Rev. Rul. 2002-
49, 2002-2 C.B. 50.
---------------------------------------------------------------------------
    In addition to its active business requirements, section 
355 does not apply to any transaction that is a ``device'' for 
the distribution of earnings and profits to a shareholder 
without the payment of tax on a dividend. A transaction is 
ordinarily not considered a ``device'' to avoid dividend tax if 
the distribution would have been treated by the shareholder as 
a redemption that was a sale or exchange of its stock, rather 
than as a dividend, if section 355 had not applied.\288\
---------------------------------------------------------------------------
    \288\ Treas. Reg. sec. 1.355-2(d)(5)(iv).
---------------------------------------------------------------------------

                           Reasons for Change

    Prior to a spin-off under section 355 of the Code, 
corporate groups that have conducted business in separate 
corporate entities often must undergo elaborate restructurings 
to place active businesses in the proper entities to satisfy 
the five-year active business requirement. If the top-tier 
corporation of a chain that is being spun off or retained is a 
holding company, then the requirements regarding the activities 
of its subsidiaries are more stringent than if the top-tier 
corporation itself engaged in some active business. The 
Congress believed that it is appropriate to simplify planning 
for corporate groups that use a holding company structure to 
engage in distributions that qualify for tax-free treatment 
under section 355.

                        Explanation of Provision

    Under the provision, the active business test is determined 
by reference to the relevant separate affiliated group. For the 
distributing corporation, the relevant separate affiliated 
group consists of the distributing corporation as the common 
parent and all corporations affiliated with the distributing 
corporation through stock ownership described in section 
1504(a)(1)(B) (regardless of whether the corporations are 
includible corporations under section 1504(b)), immediately 
after the distribution. The relevant separate affiliated group 
for a controlled corporation is determined in a similar manner 
(with the controlled corporation as the common parent).
    A separate part of the provision denies section 355 
treatment if either the distributing or distributed corporation 
is a disqualified investment corporation immediately after the 
transaction (including any series of related transactions) and 
any person that did not hold 50 percent or more of the voting 
power or value of stock of such distributing or controlled 
corporation immediately before the transaction does hold a such 
a 50 percent or greater interest immediately after such 
transaction.\289\ The attribution rules of section 318 apply 
for purposes of this determination.
---------------------------------------------------------------------------
    \289\ The disqualified investment corporation provision applies 
when a person directly or indirectly holds 50 percent of either the 
vote or the value of a company immediately following a distribution, 
and such person did not hold such 50 percent interest directly or 
indirectly prior to the distribution. As one example, the provision 
applies if a person that held 50 percent or more of the vote, but not 
of the value, of a distributing corporation immediately prior to a 
transaction in which a controlled corporation that was 100 percent 
owned by that distributing corporation is distributed, directly or 
indirectly holds 50 percent of the value of either the distributing or 
controlled corporation immediately following such transaction.
---------------------------------------------------------------------------
    A disqualified investment corporation is any distributing 
or controlled corporation if the fair market value of the 
investment assets of the corporation is two-thirds or more of 
the fair market value of all assets of the corporation (75 
percent (three-quarters) for distributions occurring during the 
one-year period beginning on May 17, 2006, the date of 
enactment). Except as otherwise provided, the term ``investment 
assets'' for this purpose means (i) cash, (ii) any stock or 
securities in a corporation, (iii) any interest in a 
partnership, (iv) any debt instrument or other evidence of 
indebtedness; (v) any option, forward or futures contract, 
notional principal contract, or derivative; (vi) foreign 
currency, or (vii) any similar asset.
    The term ``investment assets'' does not include any asset 
which is held for use in the active and regular conduct of (i) 
a lending or finance business (as defined in section 
954(h)(4)); (ii) a banking business through a bank (as defined 
in section 581), a domestic building and loan association 
(within the meaning of section 7701(a)(19)), or any similar 
institution specified by the Secretary; or (iii) an insurance 
business if the conduct of the business is licensed, 
authorized, or regulated by an applicable insurance regulatory 
body. These exceptions only apply with respect to any business 
if substantially all the income of the business is derived from 
persons who are not related (within the meaning of section 
267(b) or 707(b)(1)) to the person conducting the business.
    The term ``investment assets'' also does not include any 
security (as defined in section 475(c)(2)) which is held by a 
dealer in securities and to which section 475(a) applies.
    The term ``investment assets'' also does not include any 
stock or securities in, or any debt instrument, evidence of 
indebtedness, option, forward or futures contract, notional 
principal contract, or derivative issued by, a corporation 
which is a 20-percent controlled entity with respect to the 
distributing or controlled corporation. Instead, the 
distributing or controlled corporation is treated as owning its 
ratable share of the assets of any 20-percent controlled 
entity.
    The term 20-percent controlled entity means any corporation 
with respect to which the corporation in question (distributing 
or controlled) owns directly or indirectly stock possessing at 
least 20 percent of voting power and value, excluding stock 
that is not entitled to vote, is limited and preferred as to 
dividends and does not participate in corporate growth to any 
significant extent, has redemption and liquidation rights which 
do not exceed the issue price of such stock (except for a 
reasonable redemption or liquidation premium), and is not 
convertible into another class of stock.
    The term ``investment assets'' also does not include any 
interest in a partnership, or any debt instrument or other 
evidence of indebtedness issued by the partnership, if one or 
more trades or businesses of the partnership are, (or without 
regard to the 5-year requirement of section 355(b)(2)(B), would 
be) taken into account by the distributing or controlled 
corporation, as the case may be, in determining whether the 
active business test of section 355 is met by such corporation.
    The Treasury department shall provide regulations as may be 
necessary to carry out, or prevent the avoidance of, the 
purposes of the provision, including regulations in cases 
involving related persons, intermediaries, pass-through 
entities, or other arrangements; and the treatment of assets 
unrelated to the trade or business of a corporation as 
investment assets if, prior to the distribution, investment 
assets were used to acquire such assets. Regulations may also 
in appropriate cases exclude from the application of the 
provision a distribution which does not have the character of a 
redemption and which would be treated as a sale or exchange 
under section 302, and may modify the application of the 
attribution rules.\290\
---------------------------------------------------------------------------
    \290\ The enumeration of specific situations that Treasury 
regulations may address is not intended to restrict or limit any other 
situations that Treasury may address under the general authority of new 
section 355(g)(5) to carry out, or prevent the avoidance of, the 
purposes of the disqualified investment corporation provision.
---------------------------------------------------------------------------

                             Effective Date

    The first part of the provision, relating to the 
application of the active business requirement by reference to 
the relevant separate affiliated group, applies to 
distributions after May 17, 2006 (the date of enactment) and on 
or before December 31, 2010,\291\ with three exceptions. The 
provision does not apply to distributions (1) made pursuant to 
an agreement which is binding on May 17, 2006, and at all times 
thereafter, (2) described in a ruling request submitted to the 
IRS on or before May 17, 2006, or (3) described on or before 
May 17, 2006 in a public announcement or in a filing with the 
Securities and Exchange Commission. The distributing 
corporation may irrevocably elect not to have the exceptions 
described above apply.
---------------------------------------------------------------------------
    \291\ The provision was subsequently made permanent in Division A, 
section 410 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The relevant separate affiliated group part of the 
provision also applies, solely for the purpose of determining 
whether, after May 17, 2006, there is continuing qualification 
under the requirements of section 355(b)(2)(A) of distributions 
made before such date, as a result of an acquisition, 
disposition, or other restructuring after such date and on or 
before December 31, 2010.\292\
---------------------------------------------------------------------------
    \292\ For example, a holding company taxpayer that had distributed 
a controlled corporation in a spin-off before the date of enactment, in 
which spin-off the taxpayer satisfied the ``substantially all'' active 
business stock test of section 355(b)(2)(A) (as in effect before the 
date of enactment) immediately after the distribution, would not be 
deemed to have failed to satisfy any requirement that it continue that 
same qualified structure for any period of time after the distribution, 
solely because of a restructuring that occurs after May 17, 2006 and 
before January 1, 2011, and that would satisfy the requirements of new 
section 355(b)(2)(A). Under the extension of the effective date 
described in the immediately preceding footnote, the requirement that 
the restructuring occur before January 1, 2011 is removed.
---------------------------------------------------------------------------
    The part of the provision relating to transactions 
involving a disqualified investment corporation is effective 
for distributions after May 17, 2006, except in transactions 
which are (i) made pursuant to an agreement which was binding 
on May 17, 2006 enactment and at all times thereafter; (ii) 
described in a ruling request submitted to the Internal Revenue 
Service on or before such date, or (iii) described on or before 
such date in a public announcement or in a filing with the 
Securities and Exchange Commission.

C. Qualified Veterans' Mortgage Bonds (sec. 203 of the Act and sec. 143 
                              of the Code)


                              Present Law

    Private activity bonds are bonds that nominally are issued 
by States or local governments, but the proceeds of which are 
used (directly or indirectly) by a private person and payment 
of which is derived from funds of such private person. The 
exclusion from income for State and local bonds does not apply 
to private activity bonds, unless the bonds are issued for 
certain permitted purposes (``qualified private activity 
bonds''). The definition of a qualified private activity bond 
includes both qualified mortgage bonds and qualified veterans' 
mortgage bonds.
    Qualified veterans' mortgage bonds are private activity 
bonds the proceeds of which are used to make mortgage loans to 
certain veterans. Authority to issue qualified veterans' 
mortgage bonds is limited to States that had issued such bonds 
before June 22, 1984. Qualified veterans' mortgage bonds are 
not subject to the State volume limitations generally 
applicable to private activity bonds. Instead, annual issuance 
in each State is subject to a State volume limitation based on 
the volume of such bonds issued by the State before June 22, 
1984. The five States eligible to issue these bonds are Alaska, 
California, Oregon, Texas, and Wisconsin. Loans financed with 
qualified veterans' mortgage bonds can be made only with 
respect to principal residences and can not be made to acquire 
or replace existing mortgages. Mortgage loans made with the 
proceeds of these bonds can be made only to veterans who served 
on active duty before 1977 and who applied for the financing 
before the date 30 years after the last date on which such 
veteran left active service (the ``eligibility period'').
    Qualified mortgage bonds are issued to make mortgage loans 
to qualified mortgagors for owner-occupied residences. The Code 
imposes several limitations on qualified mortgage bonds, 
including income limitations for homebuyers and purchase price 
limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).

                           Reasons for Change

    The Congress believes that the qualified veterans' mortgage 
bond program should be expanded to more recent veterans 
including potentially the men and women serving on active duty 
today. The Congress also believes that such an expansion 
requires modified volume limits for these bonds.

                     Explanation of Provision \293\

---------------------------------------------------------------------------
    \293\ The provision was subsequently made permanent in Division A, 
section 411 of the Tax Relief and Health Care Act of 2006, Pub. L. 109-
432, described in Part Fourteen.
---------------------------------------------------------------------------
    In the case of qualified veterans' mortgage bonds issued by 
the States of Alaska, Oregon, and Wisconsin, the provision 
repeals the requirement that veterans receiving loans financed 
with qualified veterans' mortgage bonds must have served before 
1977. In addition, the provision reduces the eligibility period 
for applying for a loan following release from the military 
service to 25 years (rather than 30 years) for loans financed 
with bonds issued by the States of Alaska, Oregon, and 
Wisconsin.
    The provision also provides new State volume limits for 
qualified veterans' mortgage bonds issued by the States of 
Alaska, Oregon, and Wisconsin. In 2010, the new annual limit on 
the total volume of veterans' bonds that may be issued by each 
of these three States is $25 million. These volume limits are 
phased-in over the four-year period immediately preceding 2010 
by allowing the applicable percentage of the 2010 volume 
limits. The following table provides those percentages.

------------------------------------------------------------------------
            Calendar Year:                 Applicable Percentage is:
------------------------------------------------------------------------
2006.................................  20 percent
2007.................................  40 percent
2008.................................  60 percent
2009.................................  80 percent
------------------------------------------------------------------------

    The volume limits are zero for 2011 and each year 
thereafter. Unused allocation cannot be carried forward to 
subsequent years.
    The provision does not amend present law as it relates to 
qualified veterans' mortgage bonds issued by the States of 
California or Texas.

                             Effective Date

    The provision expanding the definition of eligible veterans 
applies to bonds issued on or after the date of enactment (May 
17, 2006). The provision amending State volume limitations 
applies to allocations of volume limitation made after April 5, 
2006.

D. Capital Gains Treatment for Certain Self-Created Musical Works (sec. 
               204 of the Act and sec. 1221 of the Code)


                              Present Law


Capital gains

    The maximum tax rate on the net capital gain income of an 
individual is 15 percent for taxable years beginning in 2006. 
By contrast, the maximum tax rate on an individual's ordinary 
income is 35 percent. The reduced 15-percent rate generally is 
available for gain from the sale or exchange of a capital asset 
for which the taxpayer has satisfied a holding-period 
requirement. Capital assets generally include all property held 
by a taxpayer with certain specified exclusions.
    An exclusion from the definition of a capital asset applies 
to inventory property or property held by a taxpayer primarily 
for sale to customers in the ordinary course of the taxpayer's 
trade or business. Another exclusion from capital asset status 
applies to copyrights, literary, musical, or artistic 
compositions, letters or memoranda, or similar property held by 
a taxpayer whose personal efforts created the property (or held 
by a taxpayer whose basis in the property is determined by 
reference to the basis of the taxpayer whose personal efforts 
created the property). Consequently, when a taxpayer that owns 
copyrights in, for example, books, songs, or paintings that the 
taxpayer created (or when a taxpayer to which the copyrights 
have been transferred by the works' creator in a substituted 
basis transaction) sells the copyrights, gain from the sale is 
treated as ordinary income, not capital gain.

Charitable contributions

    A taxpayer generally is allowed a deduction for the fair 
market value of property contributed to a charity. If a 
taxpayer makes a contribution of property that would have 
generated ordinary income (or short-term capital gain), the 
taxpayer's charitable contribution deduction generally is 
limited to the property's adjusted basis.

                           Reasons for Change

    The Congress believes it is appropriate to allow taxpayers 
to treat as capital gain the income from a sale or exchange of 
musical compositions or copyrights in musical works the 
taxpayer created.

                     Explanation of Provision \294\

---------------------------------------------------------------------------
    \294\ The provision was subsequently made permanent in Division A, 
section 412 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision provides that at the election of a taxpayer, 
the sale or exchange before January 1, 2011 of musical 
compositions or copyrights in musical works created by the 
taxpayer's personal efforts (or having a basis determined by 
reference to the basis in the hands of the taxpayer whose 
personal efforts created the compositions or copyrights) is 
treated as the sale or exchange of a capital asset. The 
provision does not change the present law limitation on a 
taxpayer's charitable deduction for the contribution of those 
compositions or copyrights.

                             Effective Date

    The provision is effective for sales or exchanges in 
taxable years beginning after the date of enactment (May 17, 
2006).

E. Decrease Minimum Vessel Tonnage Limit to 6,000 Deadweight Tons (sec. 
               205 of the Act and sec. 1355 of the Code)


                              Present Law

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
including income from shipping operations, whether derived in 
the United States or abroad. In order to mitigate double 
taxation, a foreign tax credit for income taxes paid to foreign 
countries is provided to reduce or eliminate the U.S. tax owed 
on such income, subject to certain limitations.
    Generally, the United States taxes foreign corporations 
only on income that has a sufficient nexus to the United 
States. Thus, a foreign corporation is generally subject to 
U.S. tax only on income, including income from shipping 
operations, which is ``effectively connected'' with the conduct 
of a trade or business in the United States (sec. 882). Such 
``effectively connected income'' generally is taxed in the same 
manner and at the same rates as the income of a U.S. 
corporation.
    The United States imposes a four percent tax on the amount 
of a foreign corporation's U.S. source gross transportation 
income (sec. 887). Transportation income includes income from 
the use (or hiring or leasing for use) of a vessel and income 
from services directly related to the use of a vessel. Fifty 
percent of the transportation income attributable to 
transportation that either begins or ends (but not both) in the 
United States is treated as U.S. source gross transportation 
income. The tax does not apply, however, to U.S. source gross 
transportation income that is treated as income effectively 
connected with the conduct of a U.S. trade or business. U.S. 
source gross transportation income is not treated as 
effectively connected income unless (1) the taxpayer has a 
fixed place of business in the United States involved in 
earning the income, and (2) substantially all the income is 
attributable to regularly scheduled transportation.
    The tax imposed by section 882 or 887 on income from 
shipping operations may be limited by an applicable U.S. income 
tax treaty or by an exemption of a foreign corporation's 
international shipping operations income in instances where a 
foreign country grants an equivalent exemption (sec. 883).
    Notwithstanding the general rules described above, the 
American Jobs Creation Act of 2004 (``AJCA'') \295\ generally 
allows corporations that are qualifying vessel operators \296\ 
to elect a ``tonnage tax'' in lieu of the corporate income tax 
on taxable income from certain shipping activities. 
Accordingly, an electing corporation's gross income does not 
include its income from qualifying shipping activities (and 
items of loss, deduction, or credit are disallowed with respect 
to such excluded income), and electing corporations are only 
subject to tax on these activities at the maximum corporate 
income tax rate on their notional shipping income, which is 
based on the net tonnage of the corporation's qualifying 
vessels.\297\ No deductions are allowed against the notional 
shipping income of an electing corporation, and no credit is 
allowed against the notional tax imposed under the tonnage tax 
regime. In addition, special deferral rules apply to the gain 
on the sale of a qualifying vessel, if such vessel is replaced 
during a limited replacement period.
---------------------------------------------------------------------------
    \295\ Pub. L. No. 108-357, sec. 248. The tonnage tax regime is 
effective for taxable years beginning after the date of enactment of 
AJCA (October 22, 2004).
    \296\ Generally, a qualifying vessel operator is a corporation that 
(1) operates one or more qualifying vessels and (2) meets certain 
requirements with respect to its shipping activities.
    \297\ An electing corporation's notional shipping income for the 
taxable year is the product of the following amounts for each of the 
qualifying vessels it operates: (1) the daily notional shipping income 
from the operation of the qualifying vessel, and (2) the number of days 
during the taxable year that the electing corporation operated such 
vessel as a qualifying vessel in the United States foreign trade. The 
daily notional shipping income from the operation of a qualifying 
vessel is (1) 40 cents for each 100 tons of so much of the net tonnage 
of the vessel as does not exceed 25,000 net tons, and (2) 20 cents for 
each 100 tons of so much of the net tonnage of the vessel as exceeds 
25,000 net tons. ``United States foreign trade'' means the 
transportation of goods or passengers between a place in the United 
States and a foreign place or between foreign places. The temporary use 
in the United States domestic trade (i.e., the transportation of goods 
or passengers between places in the United States) of any qualifying 
vessel or the temporary ceasing to use a qualifying vessel may be 
disregarded, under special rules.
---------------------------------------------------------------------------
    Generally, a ``qualifying vessel'' is defined as a self-
propelled (or a combination of self-propelled and non-self-
propelled) U.S.-flag vessel of not less than 10,000 deadweight 
tons \298\ that is used exclusively in the U.S. foreign trade.
---------------------------------------------------------------------------
    \298\ Deadweight measures the lifting capacity of a ship expressed 
in long tons (2,240 lbs.), including cargo, crew, and consumables such 
as fuel, lube oil, drinking water, and stores. It is the difference 
between the number of tons of water a vessel displaces without such 
items on board and the number of tons it displaces when fully loaded.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believes that the tonnage tax regime provides 
operators of qualifying U.S.-flag vessels in the U.S. foreign 
trade the opportunity to be competitive with their tax-
advantaged foreign competitors. However, there are a number of 
U.S.-flag vessels that are operated in the U.S. foreign trade 
but which do not qualify for tonnage tax treatment because 
their carrying capacity is less than 10,000 deadweight tons. 
The Congress believes that the expansion of the tonnage tax 
regime to smaller vessels will permit the operators of such 
vessels to be competitive with their foreign competitors as 
well as with their larger U.S.-flag competitors.

                     Explanation of Provision \299\

---------------------------------------------------------------------------
    \299\ The provision was subsequently made permanent in Division A, 
section 413 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision expands the definition of ``qualifying 
vessel'' to include self-propelled (or a combination of self-
propelled and non-self-propelled) U.S. flag vessels of not less 
than 6,000 deadweight tons used exclusively in the United 
States foreign trade. The modified definition applies for 
taxable years beginning after December 31, 2005, and ending 
before January 1, 2011.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

 F. Modification of Special Arbitrage Rule for Certain Funds (sec. 206 
                              of the Act)


                              Present Law

    In general, present-law tax-exempt bond arbitrage 
restrictions provide that interest on a State or local 
government bond is not eligible for tax-exemption if the 
proceeds are invested, directly or indirectly, in materially 
higher yielding investments or if the debt service on the bond 
is secured by or paid from (directly or indirectly) such 
investments. An exception to the arbitrage restrictions, 
enacted in 1984, provides that the pledge of income from 
investments in the Texas Permanent University Fund (the 
``Fund'') as security for a limited amount of tax-exempt bonds 
will not cause interest on those bonds to be taxable. The terms 
of this exception are limited to State constitutional or 
statutory restrictions continuously in effect since October 9, 
1969. In addition, the exception only applies to an amount of 
tax-exempt bonds that does not exceed 20 percent of the value 
of the Fund.
    The Fund consists of certain State lands that were set 
aside for the benefit of higher education, the income from 
mineral rights to these lands, and certain other earnings on 
Fund assets. The Texas constitution directs that monies held in 
the Fund are to be invested in interest-bearing obligations and 
other securities. Income from the Fund is apportioned between 
two university systems operated by the State. Tax-exempt bonds 
issued by the university systems to finance buildings and other 
permanent improvements were secured by and payable from the 
income of the Fund.
    Prior to 1999, the constitution did not permit the 
expenditure or mortgage of the Fund for any purpose. In 1999, 
the State constitutional rules governing the Fund were modified 
with regard to the manner in which amounts in the Fund are 
distributed for the benefit of the two university systems. The 
State constitutional amendments allow for the possibility that 
in the event investment earnings are less than annual debt 
service on the bonds some of the debt service could be 
considered as having been paid with the Fund corpus. The 1984 
exception refers only to bonds secured by investment earnings 
on securities or obligations held by the Fund. Despite the 
constitutional amendments, the IRS has agreed to continue to 
apply the 1984 exception to the Fund through August 31, 2007, 
if clarifying legislation is introduced in the 109th Congress 
prior to August 31, 2005. Clarifying legislation was introduced 
in the 109th Congress on May 26, 2005.\300\
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    \300\ H.R. 2661.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress understands that the State constitutional 
amendments have the effect of permitting the Fund to make 
annual distributions in a manner similar to standard university 
endowment funds, rather than tying distributions to annual 
income performance, which can create a variable pattern of 
distributions. The Congress does not believe that the Fund 
should lose the benefits of the 1984 exception from the tax-
exempt bond arbitrage restrictions by adopting a more modern 
approach to the management of Fund distributions.

                     Explanation of Provision \301\

    The provision codifies and extends the IRS agreement for 
bonds issued before August 31, 2009. The 1984 exception is 
conformed to the State constitutional amendments to permit its 
continued applicability to bonds of the two university systems. 
The limitation on the aggregate amount of bonds which may 
benefit from the exception is not modified, and remains at 20 
percent of the value of the Fund.
---------------------------------------------------------------------------
    \301\ The provision was subsequently made permanent in Division A, 
section 414 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (May 17, 2006).

G. Amortization of Expenses Incurred in Creating or Acquiring Music or 
   Music Copyrights (sec. 207 of the Act and sec. 167(g) of the Code)


                              Present Law

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. Section 
167(g) provides that the cost of motion picture films, sound 
recordings, copyrights, books, patents, and other property 
specified in regulations is eligible to be recovered using the 
income forecast method of depreciation.
    Under the income forecast method, the depreciation 
deduction with respect to eligible property for a taxable year 
is determined by multiplying the adjusted basis of the property 
by a fraction, the numerator of which is the income generated 
by the property during the year, and the denominator of which 
is the total forecasted or estimated income expected to be 
generated prior to the close of the tenth taxable year after 
the year the property was placed in service. Any costs that are 
not recovered by the end of the tenth taxable year after the 
property was placed in service may be taken into account as 
depreciation in such year.
    The adjusted basis of property that may be taken into 
account under the income forecast method includes only amounts 
that satisfy the economic performance standard of section 
461(h) (except in the case of certain participations and 
residuals). In addition, taxpayers that claim depreciation 
deductions under the income forecast method are required to pay 
(or receive) interest based on a recalculation of depreciation 
under a ``look-back'' method.
    The ``look-back'' method is applied in any ``recomputation 
year'' by (1) comparing depreciation deductions that had been 
claimed in prior periods to depreciation deductions that would 
have been claimed had the taxpayer used actual, rather than 
estimated, total income from the property; (2) determining the 
hypothetical overpayment or underpayment of tax based on this 
recalculated depreciation; and (3) applying the overpayment 
rate of section 6621 of the Code. Except as provided in 
Treasury regulations, a ``recomputation year'' is the third and 
tenth taxable year after the taxable year the property was 
placed in service, unless the actual income from the property 
for each taxable year ending with or before the close of such 
years was within 10 percent of the estimated income from the 
property for such years.
    A special rule is provided under Treasury guidance in the 
case of certain authors and other taxpayers, with respect to 
their capitalization of costs under section 263A and with 
respect to the recovery or amortization of such costs. 
Specifically, IRS Notice 88-62 (1988-1 C.B. 548) provides an 
elective safe harbor under which eligible taxpayers capitalize 
qualified created costs incurred during the taxable year and 
amortize 50 percent of the costs in the taxable year incurred, 
and 25 percent in each of the two successive taxable years. 
Under the Notice, qualified creative costs generally are those 
incurred by a self-employed individual in the production of 
creative properties (such as films, sound recordings, musical 
and dance compositions including accompanying words, and other 
similar properties), provided the personal efforts of the 
individual predominantly create the properties. An eligible 
taxpayer is an individual, and also a corporation or 
partnership, substantially all of which is owned by one 
qualified employee owner (an individual and family members).

                        Explanation of Provision

    The provision provides an election with respect to expenses 
paid or incurred with respect to musical compositions and 
related copyrights. Under the election, if any expense is paid 
or incurred by the taxpayer in creating or acquiring any 
musical composition (including accompanying words) or any 
copyright with respect to a musical composition that is 
required to be capitalized, then the income forecast method 
does not apply to such expenses, but rather, the expenses are 
amortized over a five-year period. The five-year period is the 
period beginning with the month in which the composition or 
copyright is placed in service.
    The election applies on a taxable year basis and may be 
made for any taxable year which begins before January 1, 2011. 
Thus, a taxpayer that places in service any musical composition 
or copyright with respect to a musical composition in a taxable 
year may elect to apply the provision with respect to all 
musical compositions and musical composition copyrights placed 
in service in that taxable year. An eligible taxpayer that does 
not make the election may recover the costs under any method 
allowable under present law, including the income forecast 
method.
    The provision does not apply to certain expenses. The 
expenses to which it does not apply are expenses: (1) that are 
qualified creative expenses under section 263A(h); (2) to which 
a simplified procedure established under section 263A(j)(2) 
applies; (3) that are an amortizable section 197 intangible; or 
(4) that, without regard to this provision, would not be 
allowable as a deduction.

                             Effective Date

    The provision is effective for expenses paid or incurred 
with respect to property placed in service in taxable years 
beginning after December 31, 2005.

H. Capital Expenditure Limitation for Qualified Small Issue Bonds (sec. 
                208 of the Act and sec. 144 of the Code)


                              Present Law

    Qualified small-issue bonds are tax-exempt State and local 
government bonds used to finance private business manufacturing 
facilities (including certain directly related and ancillary 
facilities) or the acquisition of land and equipment by certain 
farmers. In both instances, these bonds are subject to limits 
on the amount of financing that may be provided, both for a 
single borrowing and in the aggregate. In general, no more than 
$1 million of small-issue bond financing may be outstanding at 
any time for property of a business (including related parties) 
located in the same municipality or county. Generally, this $1 
million limit may be increased to $10 million if all other 
capital expenditures of the business in the same municipality 
or county are counted toward the limit over a six-year period 
that begins three years before the issue date of the bonds and 
ends three years after such date. Outstanding aggregate 
borrowing is limited to $40 million per borrower (including 
related parties) regardless of where the property is located.
    For bonds issued after September 30, 2009, the Code permits 
up to $10 million of capital expenditures to be disregarded, in 
effect increasing from $10 million to $20 million the maximum 
allowable amount of total capital expenditures by an eligible 
business in the same municipality or county.\302\ However, no 
more than $10 million of bond financing may be outstanding at 
any time for property of an eligible business (including 
related parties) located in the same municipality or county. 
Other limits (e.g., the $40 million per borrower limit) also 
continue to apply.
---------------------------------------------------------------------------
    \302\ Sec. 144(a)(4)(G) as added by sec. 340(a) of the American 
Jobs Creation Act of 2004, Pub. L. No. 108-357 (2004).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision accelerates the application of the $20 
million capital expenditure limitation from bonds issued after 
September 30, 2009, to bonds issued after December 31, 2006.

                             Effective Date

    The provision is effective on the date of enactment for 
bonds issued after December 31, 2006.

  I. Modification of Treatment of Loans to Qualified Continuing Care 
     Facilities (sec. 209 of the Act and sec. 7872(g) of the Code)


                              Present Law

    Present law provides generally that certain loans that bear 
interest at a below-market rate are treated as loans bearing 
interest at the market rate, accompanied by imputed payments 
characterized in accordance with the substance of the 
transaction (for example, as a gift, compensation, a dividend, 
or interest).\303\
---------------------------------------------------------------------------
    \303\ Sec. 7872.
---------------------------------------------------------------------------
    An exception to this imputation rule is provided for any 
calendar year for a below-market loan made by a lender to a 
qualified continuing care facility pursuant to a continuing 
care contract, if the lender or the lender's spouse attains age 
65 before the close of the calendar year.\304\
---------------------------------------------------------------------------
    \304\ Sec. 7872(g).
---------------------------------------------------------------------------
    The exception applies only to the extent the aggregate 
outstanding loans by the lender (and spouse) to any qualified 
continuing care facility do not exceed $163,300 (for 
2006).\305\
---------------------------------------------------------------------------
    \305\ Rev. Rul. 2005-75, 2005-49 I.R.B. 1073.
---------------------------------------------------------------------------
    For this purpose, a continuing care contract means a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for their life or lives; (2) the individual or the 
individual's spouse will first reside in a separate, 
independent living unit with additional facilities outside such 
unit for the providing of meals and other personal care and 
will not require long-term nursing care, and then will be 
provided long-term and skilled nursing care as the health of 
the individual or the individual's spouse requires; and (3) no 
additional substantial payment is required if the individual or 
the individual's spouse requires increased personal care 
services or long-term and skilled nursing care.
    For this purpose, a qualified continuing care facility 
means one or more facilities that are designed to provide 
services under continuing care contracts, and substantially all 
of the residents of which are covered by continuing care 
contracts. A facility is not treated as a qualified continuing 
care facility unless substantially all facilities that are used 
to provide services required to be provided under a continuing 
care contract are owned or operated by the borrower. For these 
purposes, a nursing home is not a qualified continuing care 
facility.

                     Explanation of Provision \306\

    The provision modifies the present-law exception under 
section 7872(g) relating to loans to continuing care facilities 
by eliminating the dollar cap on aggregate outstanding loans 
and making other modifications.
---------------------------------------------------------------------------
    \306\ The provision was subsequently made permanent in Division A, 
section 425 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 
109-432, described in Part Fourteen.
---------------------------------------------------------------------------
    The provision provides an exception to the imputation rule 
of section 7872 for any calendar year for any below-market loan 
owed by a facility which on the last day of the year is a 
qualified continuing care facility, if the loan was made 
pursuant to a continuing care contract and if the lender or the 
lender's spouse attains age 62 before the close of the year.
    For this purpose, a continuing care contract means a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for their life or lives; (2) the individual or the 
individual's spouse will be provided with housing, as 
appropriate for the health of such individual or individual's 
spouse, (i) in an independent living unit (which has additional 
available facilities outside such unit for the provision of 
meals and other personal care), and (ii) in an assisted living 
facility or a nursing facility, as is available in the 
continuing care facility; and (3) the individual or the 
individual's spouse will be provided assisted living or nursing 
care as the health of the individual or the individual's spouse 
requires, and as is available in the continuing care facility. 
The Secretary is required to issue guidance that limits the 
term ``continuing care contract'' to contracts that provide 
only facilities, care, and services described in the preceding 
sentence.
    For purposes of the provision, a qualified continuing care 
facility means one or more facilities: (1) that are designed to 
provide services under continuing care contracts; (2) that 
include an independent living unit, plus an assisted living or 
nursing facility, or both; and (3) substantially all of the 
independent living unit residents of which are covered by 
continuing care contracts. For these purposes, a nursing home 
is not a qualified continuing care facility.
    For purposes of defining the terms ``continuing care 
contract'' and ``qualified continuing care facility'' under the 
provision, the term ``assisted living facility'' is intended to 
mean a facility at which assistance is provided (1) with 
activities of daily living (such as eating, toileting, 
transferring, bathing, dressing, and continence) or (2) in 
cases of cognitive impairment, to protect the health or safety 
of an individual. The term ``nursing facility'' is intended to 
mean a facility that offers care requiring the utilization of 
licensed nursing staff.
    The provision does not apply to any calendar year after 
2010. Thus, the provision does not apply with respect to 
interest imputed after December 31, 2010. After such date, the 
law as in effect prior to enactment applies.

                             Effective Date

    The provision is generally effective for calendar years 
beginning after December 31, 2005, with respect to loans made 
before, on, or after such date.

               TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

  A. Extend and Increase Alternative Minimum Tax Exemption Amount for 
       Individuals (sec. 301 of the Act and sec. 55 of the Code)

                              Present Law

    Present law imposes an alternative minimum tax. The 
alternative minimum tax is the amount by which the tentative 
minimum tax exceeds the regular income tax. An individual's 
tentative minimum tax is the sum of (1) 26 percent of so much 
of the taxable excess as does not exceed $175,000 ($87,500 in 
the case of a married individual filing a separate return) and 
(2) 28 percent of the remaining taxable excess. The taxable 
excess is so much of the alternative minimum taxable income 
(``AMTI'') as exceeds the exemption amount. The maximum tax 
rates on net capital gain and dividends used in computing the 
regular tax are used in computing the tentative minimum tax. 
AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments.
    The exemption amounts are: (1) $45,000 ($58,000 for taxable 
years beginning before 2006) in the case of married individuals 
filing a joint return and surviving spouses; (2) $33,750 
($40,250 for taxable years beginning before 2006) in the case 
of unmarried individuals other than surviving spouses; (3) 
$22,500 ($29,000 for taxable years beginning before 2006) in 
the case of married individuals filing a separate return; and 
(4) $22,500 in the case of estates and trusts. The exemption 
amounts are phased out by an amount equal to 25 percent of the 
amount by which the individual's AMTI exceeds (1) $150,000 in 
the case of married individuals filing a joint return and 
surviving spouses, (2) $112,500 in the case of unmarried 
individuals other than surviving spouses, and (3) $75,000 in 
the case of married individuals filing separate returns, 
estates, and trusts. These amounts are not indexed for 
inflation.

                        Explanation of Provision

    Under the provision, for taxable years beginning in 2006, 
the exemption amounts are increased to: (1) $62,550 in the case 
of married individuals filing a joint return and surviving 
spouses; (2) $42,500 in the case of unmarried individuals other 
than surviving spouses; and (3) $31,275 in the case of married 
individuals filing a separate return.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

  B. Allowance of Nonrefundable Personal Credits Against Regular and 
 Alternative Minimum Tax Liability (sec. 302 of the Act and sec. 26 of 
                               the Code)


                              Present Law

    Present law provides for certain nonrefundable personal tax 
credits (i.e., the dependent care credit, the credit for the 
elderly and disabled, the adoption credit, the child tax 
credit, the credit for interest on certain home mortgages, the 
HOPE Scholarship and Lifetime Learning credits, the credit for 
savers, the credit for certain nonbusiness energy property, the 
credit for residential energy efficient property, and the D.C. 
first-time homebuyer credit).
    For taxable years beginning in 2005, the nonrefundable 
personal credits are allowed to the extent of the full amount 
of the individual's regular tax and alternative minimum tax.
    For taxable years beginning after 2005, the nonrefundable 
personal credits (other than the adoption credit, child credit 
and saver's credit) are allowed only to the extent that the 
individual's regular income tax liability exceeds the 
individual's tentative minimum tax, determined without regard 
to the minimum tax foreign tax credit. The adoption credit, 
child credit, and saver's credit are allowed to the full extent 
of the individual's regular tax and alternative minimum tax.
    The alternative minimum tax is the amount by which the 
tentative minimum tax exceeds the regular income tax. An 
individual's tentative minimum tax is the sum of (1) 26 percent 
of so much of the taxable excess as does not exceed $175,000 
($87,500 in the case of a married individual filing a separate 
return) and (2) 28 percent of the remaining taxable excess. The 
taxable excess is so much of the alternative minimum taxable 
income (``AMTI'') as exceeds the exemption amount. The maximum 
tax rates on net capital gain and dividends used in computing 
the regular tax are used in computing the tentative minimum 
tax. AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments.
    The exemption amounts are: (1) $45,000 ($58,000 for taxable 
years beginning before 2006) in the case of married individuals 
filing a joint return and surviving spouses; (2) $33,750 
($40,250 for taxable years beginning before 2006) in the case 
of other unmarried individuals; (3) $22,500 ($29,000 for 
taxable years beginning before 2006) in the case of married 
individuals filing a separate return; and (4) $22,500 in the 
case of an estate or trust. The exemption amount is phased out 
by an amount equal to 25 percent of the amount by which the 
individual's AMTI exceeds (1) $150,000 in the case of married 
individuals filing a joint return and surviving spouses, (2) 
$112,500 in the case of other unmarried individuals, and (3) 
$75,000 in the case of married individuals filing separate 
returns, an estate, or a trust. These amounts are not indexed 
for inflation.

                           Reasons for Change

    The Congress believes that the nonrefundable personal 
credits should be useable without limitation by reason of the 
alternative minimum tax.

                        Explanation of Provision

    The provision extends for one year the present-law 
provision allowing nonrefundable personal credits to the full 
extent of the individual's regular tax and alternative minimum 
tax (through taxable years beginning on or before December 31, 
2006).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

              TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS

 A. Modifications to Corporate Estimated Tax Payments (sec. 401 of the 
                                  Act)

                              Present Law

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability. For a 
corporation whose taxable year is a calendar year, these 
estimated tax payments must be made by April 15, June 15, 
September 15, and December 15.

                        Explanation of Provision

    In case of a corporation with assets of at least $1 
billion, payments due in July, August, and September, 2006, 
shall be increased to 105 percent of the payment otherwise due 
and the next required payment shall be reduced accordingly.
    In case of a corporation with assets of at least $1 
billion, the payments due in July, August, and September, 2012, 
shall be increased to 106.25 percent of the payment otherwise 
due and the next required payment shall be reduced accordingly.
    In case of a corporation with assets of at least $1 
billion, the payments due in July, August, and September, 2013, 
shall be increased to 100.75 percent of the payment otherwise 
due and the next required payment shall be reduced accordingly.
    With respect to corporate estimated tax payments due on 
September 15, 2010, 20.5 percent shall not be due until October 
1, 2010.
    With respect to corporate estimated tax payments due on 
September 15, 2011, 27.5 percent shall not be due until October 
1, 2011.

                             Effective Date

    The provision is effective on the date of enactment (May 
17, 2006).

                   TITLE V--REVENUE OFFSET PROVISIONS

   A. Application of Earnings Stripping Rules to Partners Which Are 
      Corporations (sec. 501 of the Act and sec. 163 of the Code)

                              Present Law

    Present law provides rules to limit the ability of U.S. 
corporations to reduce the U.S. tax on their U.S.-source income 
through earnings stripping transactions. Section 163(j) 
specifically addresses earnings stripping involving interest 
payments, by limiting the deductibility of interest paid to 
certain related parties (``disqualified interest''),\307\ if 
the payor's debt-equity ratio exceeds 1.5 to 1 and the payor's 
net interest expense exceeds 50 percent of its ``adjusted 
taxable income'' (generally taxable income computed without 
regard to deductions for net interest expense, net operating 
losses, and depreciation, amortization, and depletion). 
Disallowed interest amounts can be carried forward 
indefinitely. In addition, excess limitation (i.e., any excess 
of the 50-percent limit over a company's net interest expense 
for a given year) can be carried forward three years.
---------------------------------------------------------------------------
    \307\ This interest also may include interest paid to unrelated 
parties in certain cases in which a related party guarantees the debt.
---------------------------------------------------------------------------
    Proposed Treasury regulations provide that a partner's 
proportionate share of partnership liabilities is treated as 
liabilities incurred directly by the partner, for purposes of 
applying the earnings stripping limitation to interest payments 
by a corporate partner of a partnership.\308\ The proposed 
Treasury regulations provide that interest paid or accrued to a 
partnership is treated as paid or accrued to the partners of 
the partnership in proportion to each partner's distributive 
share of the partnership's interest income for the taxable 
year.\309\ In addition, the proposed Treasury regulations 
provide that interest expense paid or accrued by a partnership 
is treated as paid or accrued by the partners of the 
partnership in proportion to each partner's distributive share 
of the partnership's interest expense.\310\
---------------------------------------------------------------------------
    \308\ Prop. Treas. Reg. sec. 1.163(j)-3(b)(3).
    \309\ Prop. Treas. Reg. sec. 1.163(j)-2(e)(4).
    \310\ Prop. Treas. Reg. sec. 1.163(j)-2(e)(5).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision codifies the approach of the proposed 
Treasury regulations by providing that, except to the extent 
provided by regulations, in the case of a corporation that 
owns, directly or indirectly, an interest in a partnership, the 
corporation's share of partnership liabilities is treated as 
liabilities of the corporation for purposes of applying the 
earnings stripping rules to the corporation. The provision 
provides that the corporation's distributive share of interest 
income of the partnership, and of interest expense of the 
partnership, is treated as interest income or interest expense 
of the corporation.
    The provision provides Treasury regulatory authority to 
reallocate shares of partnership debt, or distributive shares 
of the partnership's interest income or interest expense, as 
may be appropriate to carry out the purposes of the provision. 
For example, it is not intended that the application of the 
earnings stripping rules to corporations with direct or 
indirect interests in partnerships be circumvented through the 
use of allocations of partnership interest income or expense 
(or partnership liabilities) to or away from partners.

                             Effective Date

    The provision is effective for taxable years beginning on 
or after the date of enactment (May 17, 2006).

B. Amend Information Reporting Requirements to Include Interest on Tax-
      Exempt Bonds (sec. 502 of the Act and sec. 6049 of the Code)


                              Present Law


Tax-exempt bonds

    Generally, gross income does not include interest on State 
or local bonds.\311\ State and local bonds are classified 
generally as either governmental bonds or private activity 
bonds. Governmental bonds are bonds the proceeds of which are 
primarily used to finance governmental facilities or the debt 
is repaid with governmental funds. Private activity bonds are 
bonds in which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain purposes 
(``qualified private activity bonds'') permitted by the 
Code.\312\
---------------------------------------------------------------------------
    \311\ Sec. 103.
    \312\ Secs. 103(b)(1) and 141.
---------------------------------------------------------------------------

Tax-exempt interest reporting by taxpayers

    The Code provides that every person required to file a 
return must report the amount of tax-exempt interest received 
or accrued during any taxable year.\313\ There are a number of 
reasons why the amount of tax-exempt interest received is 
relevant to determining tax liability despite the general 
exclusion from income. For example, the interest income from 
qualified private activity bonds (other than qualified 
501(c)(3) bonds) issued after August 7, 1986, is a preference 
item for purposes of calculating the alternative minimum tax 
(``AMT'').\314\ Tax-exempt interest also is relevant for 
determining eligibility for the earned income credit (the 
``EIC'') \315\ and the amount of Social Security benefits 
includable in gross income.\316\ Moreover, determining 
includable Social Security benefits is necessary for 
calculating either adjusted or modified adjusted gross income 
under several Code sections.\317\
---------------------------------------------------------------------------
    \313\ Sec. 6012(d).
    \314\ Sec. 57(a)(5). Special rules apply to exclude refundings of 
bonds issued before August 8, 1986, and certain bonds issued before 
September 1, 1986.
    \315\ Sec. 32(i).
    \316\ Sec. 86.
    \317\ See Secs. 135, 219, and 221.
---------------------------------------------------------------------------

Information reporting by payors

    The Code generally requires every person who makes payments 
of interest aggregating $10 or more or receives payments of 
interest as a nominee and who makes payments aggregating $10 or 
more to file an information return setting forth the amount of 
interest payments for the calendar year and the name, address, 
and TIN \318\ of the person to whom interest is paid.\319\ 
Treasury regulations prescribe the form and manner for filing 
interest payment information returns. Penalties are imposed for 
failures to file interest payment information returns or payee 
statements.\320\ Treasury regulations also impose recordkeeping 
requirements on any person required to file information 
returns.\321\ The Code excludes interest paid on tax-exempt 
bonds from interest reporting requirements.\322\
---------------------------------------------------------------------------
    \318\ The taxpayer's identification number, generally, for 
individuals is the taxpayer's social security number. Sec. 7701(a)(41).
    \319\ Sec. 6049.
    \320\ Secs. 6721 and 6722.
    \321\ Treas. Reg. sec. 1.6001-1(a).
    \322\ Sec. 6049.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision eliminates the exception from information 
reporting requirements for interest paid on tax-exempt bonds.

                             Effective Date

    The provision is effective for interest paid on tax-exempt 
bonds after December 31, 2005.

C. Amortization of Geological and Geophysical Expenditures (sec. 503 of 
                  the Act and sec. 167(h) of the Code)


                              Present Law

    Geological and geophysical expenditures (``G&G costs'') are 
costs incurred by a taxpayer for the purpose of obtaining and 
accumulating data that will serve as the basis for the 
acquisition and retention of mineral properties by taxpayers 
exploring for minerals. G&G costs incurred in connection with 
oil and gas exploration in the United States may be amortized 
over two years.\323\ In the case of abandoned property, 
remaining basis may not be recovered in the year of abandonment 
of a property as all basis is recovered over the two-year 
amortization period.
---------------------------------------------------------------------------
    \323\ Sec. 167(h).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the two-year amortization period for 
G&G costs to five years for certain major integrated oil 
companies. Under the provision, the five-year amortization rule 
for G&G costs applies only to integrated oil companies that 
have an average daily worldwide production of crude oil of at 
least 500,000 barrels for the taxable year, gross receipts in 
excess of $1 billion in the last taxable year ending during 
calendar year 2005, and an ownership interest in a crude oil 
refiner of 15 percent or more.

                             Effective Date

    The provision applies to amounts paid or incurred after the 
date of enactment (May 17, 2006).

     D. Application of Foreign Investment in Real Property Tax Act 
(``FIRPTA'') to Regulated Investment Companies (``RICs'') (sec. 504 of 
                the Act and sec. 897(h)(4) of the Code)


                              Present Law


In general

    A nonresident alien individual or foreign corporation is 
taxable on its taxable income which is effectively connected 
with the conduct of a trade or business within the United 
States, at the income tax rates applicable to U.S. persons. A 
nonresident alien individual is taxed (at a 30-percent rate) on 
gains, derived from sources within the United States, from the 
sale or exchange of capital assets if the individual is present 
in the United States for 183 days or more during the taxable 
year.
    In addition, the Foreign Investment in Real Property Tax 
Act (FIRPTA) \324\ generally treats a nonresident alien 
individual or foreign corporation's gain or loss from the 
disposition of a U.S. real property interest (USRPI) as income 
that is effectively connected with a U.S. trade or business, 
and thus taxable at the income tax rates applicable to U.S. 
persons, including the rates for net capital gain. A foreign 
investor subject to tax on this income is required to file a 
U.S. income tax return under the normal rules relating to 
receipt of income effectively connected with a U.S. trade or 
business.
---------------------------------------------------------------------------
    \324\ FIRPTA is codified in section 897 of the Code.
---------------------------------------------------------------------------
    The payor of FIRPTA effectively connected income to a 
foreign person is generally required to withhold U.S. tax from 
the payment. Withholding is generally 10 percent of the sales 
price in the case of a direct sale by the foreign person of a 
USRPI, and 35 percent of the amount of a distribution to a 
foreign person of proceeds attributable to such sales from an 
entity such as a partnership.\325\ The foreign person can 
request a refund with its U.S. tax return, if appropriate based 
on that person's total U.S. effectively connected income and 
deductions (if any) for the taxable year.
---------------------------------------------------------------------------
    \325\ Sec. 1445 and Treasury regulations thereunder. The Treasury 
department is authorized to issue regulations that would reduce the 35 
percent withholding on distributions to 15 percent during the time that 
the maximum income tax rate on dividends and capital gains of U.S. 
persons is 15 percent.
    Section 1445 statutorily requires the 10 percent withholding by the 
purchaser of a USRPI and the 35 percent withholding (or less if 
directed by Treasury) on certain distributions by partnerships, trusts, 
and estates, among other situations. Treasury regulations prescribe the 
35 percent withholding requirement for distributions by REITs to 
foreign shareholders. Treas. Reg. sec. 1.1445-8. No regulations have 
been issued relating specifically to RIC distributions, which first 
became subject to FIRPTA in 2005.
---------------------------------------------------------------------------
    USRPIs include interests in real property located in the 
United States or the U.S. Virgin Islands, and stock of a 
domestic U.S. real property holding company (USRPHC), generally 
defined as any corporation, unless the taxpayer established 
that the fair market value of its U.S. real property interests 
is less than 50 percent of the combined fair market value of 
all its real property interests (U.S. and worldwide) and of all 
its assets used or held for use in a trade or business.\326\ 
However, any class of stock that is regularly traded on an 
established securities market located in the U.S. is treated as 
a U.S. real property interest only if the seller held more than 
5 percent of the stock at any time during the 5-year period 
ending on the date of disposition of the stock.\327\
---------------------------------------------------------------------------
    \326\ Sec. 897(c)(2).
    \327\ Sec. 897(c)(3).
---------------------------------------------------------------------------

Special rules for certain investment entities

    Real estate investment trusts and regulated investment 
companies are generally passive investment entities. They are 
organized as U.S. domestic entities and are taxed as U.S. 
domestic corporations. However, because of their special 
status, they are entitled to deduct amounts distributed to 
shareholders and, in some cases, to allow the shareholders to 
characterize these amounts based on the type of income the REIT 
or RIC received. Among numerous other requirements for 
qualification as a REIT or RIC, the entity is required to 
distribute to shareholders at least 90 percent its income 
(excluding net capital gain) annually.\328\ A REIT or RIC may 
designate a capital gain dividend to its shareholders, who then 
treat the amount designated as capital gain.\329\ A REIT or RIC 
is taxed at regular corporate rates on undistributed income; 
but the combination of the requirement to distribute income 
other than net capital gain, plus the ability to declare a 
capital gain dividend and avoid corporate level tax on such 
income, can result in little, if any, corporate level tax paid 
by a REIT or RIC. Instead, the shareholder-level tax on 
distributions is the principal tax paid with respect to income 
of these entities. The requirements for REIT eligibility 
include primary investment in real estate assets (which assets 
can include mortgages). The requirements for RIC eligibility 
include primary investment in stocks and securities (which can 
include stock of REITs or of other RICs).
---------------------------------------------------------------------------
    \328\ Secs. 852(a)(1) and 852(b)(2)(A); 857(a)(1).
    \329\ Secs. 852(b)(3); 857(b)(3).
---------------------------------------------------------------------------
    FIRPTA contains special rules for real estate investment 
trusts (REITs) and regulated investment companies (RICs).\330\
---------------------------------------------------------------------------
    \330\ Sec. 897(h).
---------------------------------------------------------------------------
    Stock of a ``domestically controlled'' REIT is not a USRPI. 
The term ``domestically controlled'' is defined to mean that 
less than 50 percent in value of the REIT has been owned by 
non-U.S. shareholders during the 5-year period ending on the 
date of disposition.\331\ For 2005, 2006, and 2007, a similar 
exception applies to RIC stock. Thus, stock of a domestically 
controlled REIT or RIC can be sold without FIRPTA consequences. 
This exception applies regardless of whether the sale of stock 
is made directly by a foreign person, or by a REIT or RIC whose 
distributions to foreign persons of gain attributable to the 
sale of USRPI's would be subject to FIRPTA as described below.
---------------------------------------------------------------------------
    \331\ Sec. 897(h)(2) and (h)(4)(B).
---------------------------------------------------------------------------
    A distribution by a REIT to a foreign shareholder, to the 
extent attributable to gain from the REIT's sale or exchange of 
USRPIs, is generally treated as FIRPTA gain to the shareholder. 
An exception enacted in 2004 applies if the distribution is 
made on a class of REIT stock that is regularly traded on an 
established securities market located in the United States and 
the foreign shareholder has not held more than 5 percent of the 
class of stock at any time during the one-year period ending on 
the date of the distribution.\332\ Where the exception applies, 
the distribution to the foreign shareholder is treated as the 
distribution of an ordinary dividend (rather than as a capital 
gain dividend), subject to 30-percent (or lower treaty rate) 
withholding.\333\
---------------------------------------------------------------------------
    \332\ This exception, effective beginning in 2005, was added by 
section 418 of the American Jobs Creation Act of 2004 (``AJCA''), Pub. 
L. No. 108-357, and modified by section 403(p) of the Tax Technical 
Corrections Act of 2005.
    \333\ Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
    Prior to 2005, distributions by RICs to foreign 
shareholders, to the extent attributable to the RIC's sale or 
exchange of USRPIs, were not treated as FIRPTA gain. If 
distributions were attributable to long-term capital gains, the 
RIC could designate the distributions as long-term capital gain 
dividends that would not be subject to any tax to the foreign 
shareholder, rather than as a regular dividends subject to 30-
percent (or lower treaty rate) withholding.\334\ For 2005, 
2006, and 2007, RICs are subject to the rule that had applied 
to REITs prior to 2005, i.e., any distribution to a foreign 
shareholder attributable to gain from the RIC's sale of a USRPI 
is characterized as FIRPTA gain, without any exceptions.\335\
---------------------------------------------------------------------------
    \334\ Sec. 852(b)(3)(C); Treas. Reg. sec. 1.1441-3(c)(2)(D).
    \335\ This requirement for RICs was added by section 411 of the 
American Jobs Creation Act of 2004 (``AJCA''), in connection with the 
enactment of other rules that allow RICs to identify certain types of 
distributions to foreign shareholders, attributable to the RIC's 
receipt of short-term capital gains or interest income, as 
distributions to such shareholders of such short-term gains or interest 
income and thus not taxed to the foreign shareholders, rather than as 
regular dividends that would be subject to withholding. See Secs. 
871(k), 881(e), 1441(c)(12) and 1442(a). All these rules are scheduled 
to expire at the end of 2007, as is the rule subjecting to FIRPTA all 
distributions of RIC gain attributable to sales of U.S. real property 
interests and the rule excepting from FIRPTA a foreign person's sale of 
stock of a ``domestically controlled'' RIC.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that distributions by a RIC to 
foreign shareholders of amounts attributable to the sale of 
USRPIs are not treated as FIRPTA income unless the RIC itself 
is a U.S. real property holding corporation (i.e. 50 percent or 
more of its value is represented by its U.S. real property 
interests, including investments in U.S. real property holding 
corporations). In determining whether a RIC is a real property 
holding company for this purpose, a special rule applies that 
requires the RIC to include as U.S. real property interests its 
holdings of RIC or REIT stock if such RIC or REIT is a U.S. 
real property holding corporation, even if such stock is 
regularly traded on an established securities market and even 
if the RIC owns less than 5 percent of such stock. Another 
special rule requires the RIC to include as U.S. real property 
interests its interests in any domestically controlled RIC or 
REIT that is a U.S. real property holding corporation.

                             Effective Date

    The provision takes effect as if included in the provisions 
of section 411 of the American Jobs Creation Act of 2004 to 
which it relates.

E. Treatment of REIT and RIC Distributions Attributable to FIRPTA Gains 
 (secs. 505 and 506 of the Act and secs. 897, 852, and 871 of the Code)


                              Present Law


General treatment of U.S.-source income of foreign investors

            Fixed and determinable annual and periodical income
    The United States generally imposes a flat 30-percent tax, 
collected by withholding, on the gross amount of U.S.-source 
investment income payments, such as interest, dividends, rents, 
royalties and similar types of fixed and determinable annual 
and periodical income, to nonresident alien individuals and 
foreign corporations (``foreign persons'').\336\ Under 
treaties, the United States may reduce or eliminate such taxes.
---------------------------------------------------------------------------
    \336\ Secs. 871(a), 881, 1441, and 1442.
---------------------------------------------------------------------------
            Dividends
    Even taking into account U.S. treaties, the tax on a 
dividend generally is not entirely eliminated. Instead, U.S.-
source portfolio investment dividends received by foreign 
persons generally are subject to U.S. withholding tax at a rate 
of at least 15 percent.
            Interest
    Although payments of U.S.-source interest that is not 
effectively connected with a U.S. trade or business generally 
are subject to the 30-percent withholding tax, there are 
exceptions to that rule. For example, interest from certain 
deposits with banks and other financial institutions is exempt 
from tax.\337\ Original issue discount on obligations maturing 
in 183 days or less from the date of original issue (without 
regard to the period held by the taxpayer) is also exempt from 
tax.\338\ An additional exception is provided for certain 
interest paid on portfolio obligations.\339\ Such ``portfolio 
interest'' generally is defined as any U.S.-source interest 
(including original issue discount), not effectively connected 
with the conduct of a U.S. trade or business, (i) on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto (i.e., the obligation is ``foreign 
targeted''), and (ii) that is not received by a 10-percent 
shareholder.\340\ With respect to a registered obligation, a 
statement that the beneficial owner is not a U.S. person is 
required.\341\ This exception is not available for any interest 
received either by a bank on a loan extended in the ordinary 
course of its business (except in the case of interest paid on 
an obligation of the United States), or by a controlled foreign 
corporation from a related person.\342\ Moreover, this 
exception is not available for certain contingent interest 
payments.\343\ For 2005, 2006 and 2007, a regulated investment 
company (``RIC'') may designate certain distributions to 
foreign shareholders that are attributable to the RIC's 
qualified interest income as non-taxable interest distributions 
to such foreign persons.\344\
---------------------------------------------------------------------------
    \337\ Secs. 871(i)(2)(A) and 881(d).
    \338\ Sec. 871(g).
    \339\ Secs. 871(h) and 881(c).
    \340\ Secs. 871(h)(3) and 881(c)(3).
    \341\ Secs. 871(h)(2), (5) and 881(c)(2).
    \342\ Sec. 881(c)(3).
    \343\ Secs. 871(h)(4) and 881(c)(4).
    \344\ This interest distribution rule was added by section 411 of 
the American Jobs Creation Act of 2004 (``AJCA''), Pub. L. No. 108-357.
---------------------------------------------------------------------------
            Capital gains
    A foreign person generally is not subject to U.S. tax on 
capital gain, including gain realized on the disposition of 
stock or securities issued by a U.S. person, unless the gain is 
effectively connected with the conduct of a trade or business 
in the United States or such person is an individual present in 
the United States for a period or periods aggregating 183 days 
or more during the taxable year.\345\ A regulated investment 
company (RIC) can generally designate dividends to foreign 
persons that are attributable to the RIC's long term capital 
gain as a long-term gain dividends that are not subject to 
withholding.\346\ For 2005, 2006 and 2007, RICs may also 
designate short-term capital gain dividends.\347\
---------------------------------------------------------------------------
    \345\ Secs. 871(a)(2) and 881.
    \346\ Treas. Reg. sec. 1.1441-3(c)(2)(D).
    \347\ This short-term gain distribution rule was added by section 
411 of AJCA.
---------------------------------------------------------------------------
    For the years 2005, 2006 and 2007, RIC capital gain 
dividends that are attributable to the sale of U.S. real 
property interests (which can include stock of companies that 
are U.S. real property holding companies) are subject to 
special rules described below.
    Real estate investment trusts (REITs) can also designate 
long-term capital gain dividends to shareholders; but when made 
to a foreign person such distributions attributable to the sale 
of U.S. real property interests are also subject to the special 
rules described below.

Foreign Investment in Real Property Tax Act (``FIRPTA'')

    Unlike most other U.S. source capital gains, which are 
generally not taxed to a foreign investor, the Foreign 
Investment in Real Property Tax Act of 1980 (FIRPTA) subjects 
gain or loss of a foreign person from the disposition of a U.S. 
real property interest (USRPI) to tax as if the taxpayer were 
engaged in a trade or business within the United States and the 
gain or loss were effectively connected with such trade or 
business.\348\ In addition to an interest in real property 
located in the United States or the Virgin Islands, USRPIs 
include (among other things) any interest in a domestic 
corporation unless the taxpayer establishes that the 
corporation was not, during a five-year period ending on the 
date of the disposition of the interest, a U.S. real property 
holding corporation (which is defined generally to mean any 
corporation the fair market value of whose U.S. real property 
interests equals or exceeds 50 percent of the sum of the fair 
market values of its real property interests and any other of 
its assets used or held for use in a trade or business).
---------------------------------------------------------------------------
    \348\ Sec. 897.
---------------------------------------------------------------------------
    Distributions by a REIT to its foreign shareholders 
attributable to the sale of USRPIs are generally treated as 
income from the sale of USRPIs.\349\ Treasury regulations 
require the REIT to withhold at 35 percent on such a 
distribution.\350\ However, there is an exception for 
distributions by a REIT with respect to stock of the REIT that 
is regularly traded on an established securities market located 
in the U.S., to a foreign shareholder that has not held more 
than 5 percent of the stock of the REIT for the one year period 
ending with the date of the distribution.\351\ In such cases, 
the REIT and the shareholder treat the distribution to a 
foreign shareholder as the distribution of an ordinary 
dividend,\352\ subject to the 30-percent (or lower treaty rate) 
withholding applicable to dividends.
---------------------------------------------------------------------------
    \349\ Sec. 897(h)(1).
    \350\ Treas. Reg. sec. 1.1445-8.
    \351\ Sec. 897(h)(1)(second sentence).
    \352\ Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
    For 2005, 2006, and 2007, any RIC distribution to a foreign 
shareholder attributable to the sale of USRPIs is treated as 
FIRPTA income, without any exceptions.\353\ However, no 
Treasury regulations have been issued addressing withholding 
obligations with respect to such distributions.
---------------------------------------------------------------------------
    \353\ Sec. 897(h)(1).
---------------------------------------------------------------------------
    A more complete description of the provisions of FIRPTA and 
the special rules under FIRPTA that apply to RICs and REITs is 
contained under ``Present Law'' for the provision ``Application 
of Foreign Investors in Real Property Tax Act (FIRPTA) to 
Regulated Investment Companies (RICS)''.
    Although the law thus provides rules for taxing foreign 
persons under FIRPTA on distributions of gain from the sale of 
USRPIs by RICs or REITs, some taxpayers may be taking the 
position that if a foreign person invests in a RIC or REIT 
that, in turn, invests in a lower-tier RIC or REIT that is the 
entity that disposes of USRPIs and distributes the proceeds, 
then the proceeds from such disposition by the lower-tier RIC 
or REIT cease to be FIRPTA income when distributed to the 
upper-tier RIC or REIT (which is not itself a foreign person), 
and can thereafter be distributed by that latter entity to its 
foreign shareholders as non-FIRPTA income of such RIC or REIT, 
rather than continuing to be categorized as FIRPTA income. 
Furthermore, RICs may take the position that in the absence of 
regulations or a specific statutory rule addressing the 
withholding rules for FIRPTA capital gain that is treated as 
effectively connected with a U.S. trade or business, such gain 
should be considered capital gain for which no withholding is 
required.
    In addition, some foreign persons may be attempting to 
avoid FIRPTA tax on a distribution from a RIC or a REIT, by 
selling the RIC or REIT stock shortly before the distribution 
and buying back the stock shortly after the distribution. If 
the stock is not a U.S. real property interest in the hands of 
the foreign seller, that person would take the position that 
the gain on the sale of the stock is capital gain not subject 
to U.S. tax. Stock of a RIC or REIT that is ``domestically 
controlled'' is not a U.S. real property interest.\354\
---------------------------------------------------------------------------
    \354\ Sec. 897(g)(3). A RIC or REIT is ``domestically controlled'' 
if less than 50 percent in value of the entity's stock is held by 
foreign persons. RIC stock ceases to be eligible for this exception as 
of the end of 2007. Distributions by a domestically controlled RIC or 
REIT, if attributable to the sale of U.S. real property interests, are 
not exempt from FIRPTA by reason of such domestic control. A foreign 
person that would be subject to FIRPTA on receipt of a distribution 
from such an entity might sell its stock before the distribution and 
repurchase stock after the distribution in an attempt to avoid FIRPTA 
consequences.
    Under a different exception from FIRPTA, applicable to stock of all 
entities, neither RIC nor REIT stock is a U.S. real property interest 
if the RIC or REIT stock is regularly traded on an established 
securities market located in the United States and if the stock sale is 
made by a foreign shareholder that has not owned more than five percent 
of the stock during the five years ending with the date of the sale. 
Sec. 897(c)(3). Distributions by a REIT to a foreign person, 
attributable to the sale of U.S. real property interests, are also not 
subject to FIRPTA if made with respect to stock that is regularly 
traded on an established securities market located in the United States 
and made to a foreign person that has not held more than five percent 
of the REIT stock for the one-year period ending on the date of 
distribution. (Sec. 897(h)(1), second sentence.) Thus, any foreign 
shareholder of such a regularly traded REIT that would be exempt from 
FIRPTA on a sale of the REIT stock immediately before a distribution 
would also generally be exempt from FIRPTA on a distribution from the 
REIT if such shareholder held the stock through the date of the 
distribution, due to the holding period requirements. Distributions 
that are not subject to FIRPTA under this five percent exception are 
recharacterized as ordinary dividends and thus would normally be 
subject to ordinary dividend withholding rules. Secs. 857(b)(3)(F) and 
1441.
---------------------------------------------------------------------------
    If the stock is a USRPI in the hands of the foreign person, 
the transferee generally is required to withhold 10 percent of 
the gross sales price under general FIRPTA withholding 
rules.\355\
---------------------------------------------------------------------------
    \355\ Secs. 1445(a) and 1445(e).
---------------------------------------------------------------------------

                        Explanation of Provision

    The first part of the provision requires any distribution 
that is made by a RIC or a REIT that would otherwise be subject 
to FIRPTA because the distribution is attributable to the 
disposition of a U.S. real property interest (USRPI) to retain 
its character as FIRPTA income when distributed to any other 
RIC or REIT, and to be treated as if it were from the 
disposition of a USRPI by that other RIC or REIT. Under the 
provision, a RIC continues to be subject to FIRPTA, even after 
December 31, 2007, in any case in which a REIT makes a 
distribution to the RIC that is attributable to gain from the 
sale of U.S. real property interests. The provision amends 
section 1445 so that it explicitly requires withholding on RIC 
and REIT distributions to foreign persons, attributable to the 
sale of USRPIs, at 35 percent, or, to the extent provided by 
regulations, at 15 percent.\356\
---------------------------------------------------------------------------
    \356\ This provision is similar to present law section 1445(c)(1). 
The regulatory authority to reduce the withholding to 15 percent 
sunsets in accordance with the same sunset that applies to section 
1445(c)(1), at the time that the present law maximum 15 percent rate on 
dividends is scheduled to sunset.
    Treasury regulations under section 1445 already impose FIRPTA 
withholding on REITs under present law. Treasury has not yet written 
regulations applicable to RICs. No inference is intended regarding the 
existing Treasury regulations in force under section 1445 with respect 
to REITs.
---------------------------------------------------------------------------
    The provision also provides that a distribution by a RIC or 
REIT to a foreign shareholder attributable to sales of USRPIs 
is not treated as gain from the sale of a USRPI by that 
shareholder if the distribution is made with respect to a class 
of RIC stock that is regularly traded on an established 
securities market \357\ located in the U.S. and if such 
shareholder did not hold more than 5 percent of such stock of 
within the one year period ending on the date of the 
distribution. Such distributions instead are treated as 
dividend distributions.\358\
---------------------------------------------------------------------------
    \357\ It is intended that the rules generally applicable for this 
purpose under section 897 also apply under the provision in determining 
whether a class of interests is regularly traded on an established 
securities market located in the United States. For example, at the 
present time the rules currently in force for this purpose include 
Temp. Reg. sec. 1.897-9T(d)(2).
    \358\ The provision treats such distributions as ordinary dividend 
distributions rather than as distributions of long term capital gain. 
This rule is the same as the present law rule for publicly traded REITs 
making a distribution to a foreign shareholder. In addition, under the 
immediately preceding provision, for the years 2005, 2006 and 2007 that 
RICs are subject to FIRPTA, a RIC can make distributions from sales of 
USRPIs to shareholders who do not meet this rule, and such 
distributions will be treated not as dividends but as non-taxable long- 
or short-term capital gain, if so designated by the RIC, as long as the 
RIC itself is not a USRPHC after applying the special rules for 
counting the RIC's ownership of REIT or other RIC stock.
---------------------------------------------------------------------------
    If the distribution is not to a foreign shareholder but to 
a RIC or REIT, the character of the distribution as FIRPTA gain 
is retained and must be tracked by the recipient RIC or REIT, 
but the distribution itself does not become dividend income in 
the hands of such RIC or REIT. Therefore, such recipient RIC or 
REIT can in turn distribute amounts attributable to that 
distribution (attributable to the sale of USRPIs) to its U.S 
shareholders as capital gain. However, if any recipient RIC or 
REIT in turn distributes to a foreign shareholder amounts that 
are attributable to a sale by a lower tier RIC or REIT of 
USRPIs, such amounts distributed to a foreign shareholder shall 
be treated as FIRPTA gain or as dividend income, according to 
whether or not such distribution to such foreign shareholder 
qualifies for dividend treatment.
    The second part of the provision requires a foreign person 
that disposes of stock of a RIC or REIT during the 30-day 
period preceding the ex-dividend date of a distribution on that 
stock that would have been treated as a distribution from the 
disposition of a USRPI, that acquires a substantially identical 
stock interest during the 61-day period beginning the first day 
of such 30-day period,\359\ and that does not in fact receive 
the distribution in a manner that subjects the person to tax 
under FIRPTA, to pay FIRPTA tax on an amount equal to the 
amount of the distribution that was not taxed under FIRPTA as a 
result of the disposition. Treatment of a foreign shareholder 
of a RIC or REIT as if it had received a FIRPTA distribution 
that is treated as U.S. effectively connected income also is 
extended to transactions that meet the definition of 
``substitute dividend payments'' provided for purposes of 
section 861 and that would be properly treated by the foreign 
taxpayer as receipt of a distribution of FIRPTA gain if the 
distribution from the RIC or REIT had itself been received by 
the taxpayer, but that, by virtue of the substitute dividend 
payment, is not so treated but for the provision,\360\ as well 
as to other similar arrangements to which Treasury may extend 
the rules.
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    \359\ Thus, the 61-day period includes the 30 days before and the 
30 days after the ex-dividend date, in addition to the ex-dividend date 
itself.
    \360\ The provision adopts the definition of ``substitute dividend 
payment'' used for purposes of section 861, which definition applies to 
determine substitute dividend payments under the provision, even though 
the recipient may not be an individual and even though the underlying 
payment would not have been treated as a dividend to the recipient but 
as a distribution of FIRPTA gain. Treasury regulations section 1.861-
3(a)(6) defines a ``substitute dividend payment'' as a payment, made to 
the transferor of a security in a securities lending transaction or a 
sale-repurchase transaction, of an amount equivalent to a dividend 
distribution which the owner of the transferred security is entitled to 
receive during the term of the transaction. The regulation applies to 
amounts received or accrued by the taxpayer. The regulation defines a 
securities lending transaction as a transfer of one or more securities 
that is described in section 1058(a) or a substantially similar 
transaction. The regulation defines a sale-repurchase transaction as an 
agreement under which a person transfers a security in exchange for 
cash and simultaneously agrees to receive substantially identical 
securities from the transferee in the future in exchange for cash. 
Under the regulation, a ``substitute dividend payment'' is generally 
sourced and in many instances characterized in the same manner as the 
underlying distribution with respect to the transferred security.
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    A foreign person is treated as having acquired any interest 
acquired by any person treated as related to that foreign 
person under section 267(b) or (707(b)(1)(C).\361\ For purposes 
of this new ``wash sale'' rule, the treatment of a RIC as a 
``qualified investment entity'' continues even after December 
31, 2007.
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    \361\ These relationships generally include persons that are 
engaged in trades or businesses under common control (generally, a more 
than 50 percent relationship).
---------------------------------------------------------------------------
    This ``wash sale'' part of the provision applies only in 
the case of a shareholder that would have been treated as 
receiving FIRPTA income on the distribution if that shareholder 
had in fact received the distribution, but that would not have 
been treated as receiving FIRPTA income if the form of the 
disposition transaction were respected. This category of 
persons consists of persons that are shareholders in a 
domestically controlled RIC or REIT (since sales of shares of 
such an entity are not subject to FIRPTA tax), but does not 
include a person who sells stock that is regularly traded on an 
established securities market located in the U.S. and who did 
not own more than five percent of such stock during the one 
year period ending on the date of the distribution (since such 
a person would not have been subject to FIRPTA tax under 
present and prior law for REITs and under the provision for 
RICs, supra., if that person had received the dividend instead 
of disposing of the stock).
    Notwithstanding the recharacterization of the disposition 
as involving a FIRPTA distribution to the foreign person, no 
withholding on disposition proceeds to the foreign person on 
the disposition of such stock would be required. No inference 
is intended as to what situations under present law would or 
would not be respected as dispositions.

                             Effective Date

    The first part of the provision, relating to distributions 
generally, applies to distributions with respect to taxable 
years of RICs and REITs beginning after December 31, 2005, 
except that no withholding is required under sections 1441, 
1442, or 1445 with respect to any distribution before May 17, 
2006 (the date of enactment) if such amount was not otherwise 
required to be withheld under any such section as in effect 
before the changes made by the provision.
    The second part of the provision, relating to the ``wash 
sale'' and substitute dividend payment transactions, is 
applicable to distributions and substitute dividend payments 
occurring on or after June 16, 2006 (the 30th day following May 
17, 2006, the date of enactment).
    No inference is intended regarding the treatment under 
present law of any transactions addressed by the provision.

F. 355 Distributions Involving Disqualified Investment Companies (sec. 
                507 of the Act and sec. 355 of the Code)

    A description of this section is included in the 
description of section 202 of the Act at Title II B.

 G. Impose Loan and Redemption Requirements on Pooled Financing Bonds 
             (sec. 508 of the Act and sec. 149 of the Code)


                              Present Law


In general

    Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of such bonds are used to finance 
direct activities of governmental units or if such bonds are 
repaid with revenues of governmental units. These bonds are 
called ``governmental bonds.'' Interest on State or local 
government bonds issued to finance activities of private 
persons is taxable unless a specific exception applies. These 
bonds are called ``private activity bonds.'' The exclusion from 
income for State and local bonds does not apply to private 
activity bonds, unless the bonds are issued for certain 
permitted purposes. In addition, the Code imposes qualification 
requirements that apply to all State and local bonds. Arbitrage 
restrictions, for example, limit the ability of issuers to 
profit from investment of tax-exempt bond proceeds. The Code 
also imposes requirements that only apply to specific types of 
bond issues. For instance, pooled financing bonds (defined 
below) are not tax-exempt unless the issuer meets certain 
requirements regarding the expected use of proceeds.

Pooled financing bond restrictions

    State or local governments also issue bonds to provide 
financing for the benefit of a third party (a ``conduit 
borrower''). Pooled financing bonds are bond issues that are 
used to make or finance loans to two or more conduit borrowers, 
unless the conduit loans are to be used to finance a single 
project.\362\ The Code imposes several requirements on pooled 
financing bonds if more than $5 million of proceeds are 
expected to be used to make loans to conduit borrowers. For 
purposes of these rules, a pooled financing bond does not 
include certain private activity bonds.\363\
---------------------------------------------------------------------------
    \362\ Treas. Reg. sec. 1.150-1(b).
    \363\ Sec. 149(f)(4)(B).
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    A pooled financing bond is not tax-exempt unless the issuer 
reasonably expects that at least 95 percent of the net proceeds 
will be lent to ultimate borrowers by the end of the third year 
after the date of issue. The term ``net proceeds'' is defined 
to mean the proceeds of the issue less the following amounts: 
(1) proceeds used to finance issuance costs; (2) proceeds 
necessary to pay interest on the bonds during a three-year 
period; and (3) amounts in reasonably required reserves.\364\
---------------------------------------------------------------------------
    \364\ Sec. 149(f)(2)(C).
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    An issuer's past experience regarding loan origination is a 
criterion upon which the reasonableness of the issuer's 
expectations can be based. As an additional requirement for tax 
exemption, all legal and underwriting costs associated with the 
issuance of pooled financing bonds may not be contingent and 
must be substantially paid within 180 days of the date of 
issuance.

Arbitrage restrictions on tax-exempt bonds

    To prevent the issuance of more Federally subsidized tax-
exempt bonds than necessary; the tax exemption for State and 
local bonds does not apply to any arbitrage bond.\365\ An 
arbitrage bond is defined as any bond that is part of an issue 
if any proceeds of the issue are reasonably expected to be used 
(or intentionally are used) to acquire higher yielding 
investments or to replace funds that are used to acquire higher 
yielding investments. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'') before funds are needed for the purpose of the 
borrowing or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, investment profits that are earned 
during these periods or on such investments must be rebated to 
the Federal Government (``arbitrage rebate'').
---------------------------------------------------------------------------
    \365\ Secs. 103(a) and (b)(2).
---------------------------------------------------------------------------
    The Code contains several exceptions to the arbitrage 
rebate requirement, including an exception for bonds issued by 
small governments (the ``small issuer exception''). For this 
purpose, small governments are defined as general purpose 
governmental units that issue no more than $5 million of tax-
exempt governmental bonds in a calendar year.\366\
---------------------------------------------------------------------------
    \366\ The $5 million limit is increased to $15 million if at least 
$10 million of the bonds are used to finance public schools.
---------------------------------------------------------------------------
    Pooled financing bonds are subject to the arbitrage 
restrictions that apply to all tax-exempt bonds, including 
arbitrage rebate. Under certain circumstances, however, small 
governments may issue pooled financing bonds without those 
bonds counting towards the determination of whether the issuer 
qualifies for the small issuer exception to arbitrage rebate. 
In the case of a pooled financing bond where the ultimate 
borrowers are governmental units with general taxing powers not 
subordinate to the issuer of the pooled bond, the pooled bond 
does not count against the issuer's $5 million limitation, 
provided the issuer is not a borrower from the pooled 
bond.\367\ However, the issuer of the pooled financing bond 
remains subject to the arbitrage rebate requirement for 
unloaned proceeds.\368\
---------------------------------------------------------------------------
    \367\ Sec. 148(f)(4)(D)(ii)(II).
    \368\ Treas. Reg. sec. 1.148-8(d)(1).
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    The provision imposes new requirements on pooled financing 
bonds as a condition of tax-exemption. First, the provision 
imposes a written loan commitment requirement to restrict the 
issuance of pooled bonds where potential borrowers have not 
been identified (``blind pools''). Second, in addition to the 
current three-year expectations requirement, the issuer must 
reasonably expect that at least 30 percent of the net proceeds 
of the pooled bond will be loaned to ultimate borrowers one 
year after the date of issue. Third, the provision requires the 
redemption of outstanding bonds with proceeds that are not 
loaned to ultimate borrowers within the required loan 
origination periods. Finally, the provision eliminates the rule 
allowing an issuer of pooled financing bonds to disregard the 
pooled bonds for purposes of determining whether the issuer 
qualifies for the small issuer exception to rebate.

Borrower identification

    Under the provision, interest on a pooled financing bond is 
tax exempt only if the issuer obtains written commitments with 
ultimate borrowers for loans equal to at least 30 percent of 
the net proceeds of the pooled bond prior to issuance. The loan 
commitment requirement does not apply to pooled financing bonds 
issued by (i) States (or an integral part of a State) to 
provide loans to subordinate governmental units or (ii) State 
entities created to provide financing for water-infrastructure 
projects through the federally-sponsored State revolving fund 
program.

Loan origination expectations

    The provision imposes new reasonable expectations 
requirements for loan originations. The issuer must expect that 
at least 30 percent of the net proceeds of a pooled financing 
bond will be loaned to ultimate borrowers one year after the 
date of issue. This is in addition to the present-law 
requirement that at least 95 percent of the net proceeds will 
be loaned by the end of the third year after the date of issue. 
Bond proceeds that are not loaned to borrowers as required 
under the one- and three-year rules must be used to redeem 
outstanding bonds within 90 days of the expiration of such one- 
and three-year periods.

Redemption requirement

    Under the provision, if pooled financing bond proceeds are 
not loaned to borrowers within prescribed periods, outstanding 
bonds equal to the amount of proceeds that were not loaned 
within the required period must be redeemed within 90 days of 
the expiration of the relevant loan origination period, i.e., 
either the one- or three-year period. For example, if one year 
after the date of issue only 25 percent of the net proceeds of 
such issue have been used to make loans to ultimate borrowers, 
an amount equal to five percent of the net proceeds of the 
issue is no longer available to make loans and must be used to 
redeem bonds within the following six-month period. Similarly, 
if only 85 percent of the net proceeds of an issue are used to 
make qualifying loans (or to redeem bonds) on the date that is 
three years after the date the bonds are issued, 10 percent of 
the remaining net proceeds must be used to redeem bonds within 
the following six months.

Small issuer exception

    The provision eliminates the rule disregarding pooled 
financing bonds from the issuer's $5,000,000 annual limitation 
for purposes of the small issuer exception to arbitrage rebate.

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment (May 17, 2006).

 H. Partial Payments Required With Submissions of Offers-in-Compromise 
            (sec. 509 of the Act and sec. 7122 of the Code)


                              Present Law

    The IRS has the authority to compromise any civil or 
criminal case arising under the internal revenue laws.\369\ In 
general, taxpayers initiate this process by making an offer-in-
compromise, which is an offer by the taxpayer to settle an 
outstanding tax liability for less than the total amount due. 
The IRS currently imposes a user fee of $150 on most offers, 
payable upon submission of the offer to the IRS. Taxpayers may 
justify their offers on the basis of doubt as to collectibility 
or liability or on the basis of effective tax administration. 
In general, enforcement action is suspended during the period 
that the IRS evaluates an offer. In some instances, it may take 
the IRS 12 to 18 months to evaluate an offer.\370\ Taxpayers 
are permitted (but not required) to make a deposit with their 
offer; if the offer is rejected, the deposit is generally 
returned to the taxpayer. There are two general categories 
\371\ of offers-in-compromise, lump-sum offers and periodic 
payment offers. Taxpayers making lump-sum offers propose to 
make one lump-sum payment of a specified dollar amount in 
settlement of their outstanding liability. Taxpayers making 
periodic payment offers propose to make a series of payments 
over time (either short-term or long-term) in settlement of 
their outstanding liability.
---------------------------------------------------------------------------
    \369\ Sec. 7122.
    \370\ Olsen v. United States, 326 F. Supp. 2d 184 (D. Mass. 2004).
    \371\ The IRS categorizes payment plans with more specificity, 
which is generally not significant for purposes of the provision. See 
Form 656, Offer-in-Compromise, page 6 of instruction booklet (revised 
July 2004).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires a taxpayer to make partial payments 
to the IRS while the taxpayer's offer is being considered by 
the IRS. For lump-sum offers, taxpayers must make a down 
payment of 20 percent of the amount of the offer with any 
application. For purposes of this provision, a lump-sum offer 
includes single payments as well as payments made in five or 
fewer installments. For periodic payment offers, the provision 
requires the taxpayer to comply with the taxpayer's own 
proposed payment schedule while the offer is being considered. 
Offers submitted to the IRS that do not comport with these 
payment requirements may be returned to the taxpayer as 
unprocessable and immediate enforcement action is permitted. 
Any user fee imposed by the IRS for participation in the offer-
in-compromise program must be submitted with the appropriate 
partial payment. The user fee is applied to the taxpayer's 
outstanding tax liability.
    The provision also provides that an offer is deemed 
accepted if the IRS does not make a decision with respect to 
the offer within two years from the date the offer was 
submitted.
    The provision authorizes the Secretary to issue regulations 
providing exceptions to the partial payment requirements in the 
case of offers from certain low-income taxpayers and offers 
based on doubt as to liability.

                             Effective Date

    The provision is effective for offers-in-compromise 
submitted on and after the date which is 60 days after the date 
of enactment (May 17, 2006).

I. Increase in Age of Minor Children Whose Unearned Income Is Taxed as 
   if Parent's Income (sec. 510 of the Act and sec. 1(g) of the Code)


                              Present Law


Filing requirements for children

    A single unmarried individual eligible to be claimed as a 
dependent on another taxpayer's return generally must file an 
individual income tax return if he or she has: (1) earned 
income only over $5,150 (for 2006); (2) unearned income only 
over the minimum standard deduction amount for dependents ($850 
in 2006); or (3) both earned income and unearned income 
totaling more than the smaller of (a) $5,150 (for 2006) or (b) 
the larger of (i) $850 (for 2006), or (ii) earned income plus 
$300.\372\ Thus, if a dependent child has less than $850 in 
gross income, the child does not have to file an individual 
income tax return for 2006.\373\
---------------------------------------------------------------------------
    \372\ Sec. 6012(a)(1)(C). Other filing requirements apply to 
dependents who are married, elderly, or blind. See, Internal Revenue 
Service, Publication 929, Tax Rules for Children and Dependents, at 2, 
Table 1 (2005).
    \373\ A taxpayer generally need not file a return if he or she has 
gross income in an amount less than the standard deduction (and, if 
allowable to the taxpayer, the personal exemption amount). An 
individual who may be claimed as a dependent of another taxpayer is not 
eligible to claim the dependency exemption relating to that individual. 
Sec. 151(d)(2). For taxable years beginning in 2006, the standard 
deduction amount for an individual who may be claimed as a dependent by 
another taxpayer may not exceed the greater of $850 or the sum of $300 
and the individual's earned income.
---------------------------------------------------------------------------
    A child who cannot be claimed as a dependent on another 
person's tax return is subject to the generally applicable 
filing requirements. Such a child generally must file a return 
if the individual's gross income exceeds the sum of the 
standard deduction and the personal exemption amount ($3,300 
for 2006).

Taxation of unearned income under section 1(g)

    Special rules (generally referred to as the ``kiddie tax'') 
apply to the unearned income of a child who is under age 
14.\374\ The kiddie tax applies if: (1) the child has not 
reached the age of 14 by the close of the taxable year; (2) the 
child's unearned income was more than $1,700 (for 2006); and 
(3) the child is required to file a return for the year. The 
kiddie tax applies regardless of whether the child may be 
claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
    \374\ Sec. 1(g).
---------------------------------------------------------------------------
    For these purposes, unearned income is income other than 
wages, salaries, professional fees, or other amounts received 
as compensation for personal services actually rendered.\375\ 
For children under age 14, net unearned income (for 2006, 
generally unearned income over $1,700) is taxed at the parent's 
rate if the parent's rate is higher than the child's rate. The 
remainder of a child's taxable income (i.e., earned income, 
plus unearned income up to $1,700 (for 2006), less the child's 
standard deduction) is taxed at the child's rates, regardless 
of whether the kiddie tax applies to the child. In general, a 
child is eligible to use the preferential tax rates for 
qualified dividends and capital gains.\376\
---------------------------------------------------------------------------
    \375\ Sec. 1(g)(4) and sec. 911(d)(2).
    \376\ Sec. 1(h).
---------------------------------------------------------------------------
    The kiddie tax is calculated by computing the ``allocable 
parental tax.'' This involves adding the net unearned income of 
the child to the parent's income and then applying the parent's 
tax rate. A child's ``net unearned income'' is the child's 
unearned income less the sum of (1) the minimum standard 
deduction allowed to dependents ($850 for 2006), and (2) the 
greater of (a) such minimum standard deduction amount or (b) 
the amount of allowable itemized deductions that are directly 
connected with the production of the unearned income.\377\ A 
child's net unearned income cannot exceed the child's taxable 
income.
---------------------------------------------------------------------------
    \377\ Sec. 1(g)(4).
---------------------------------------------------------------------------
    The allocable parental tax equals the hypothetical increase 
in tax to the parent that results from adding the child's net 
unearned income to the parent's taxable income. If the child 
has net capital gains or qualified dividends, these items are 
allocated to the parent's hypothetical taxable income according 
to the ratio of net unearned income to the child's total 
unearned income. If a parent has more than one child subject to 
the kiddie tax, the net unearned income of all children is 
combined, and a single kiddie tax is calculated. Each child is 
then allocated a proportionate share of the hypothetical 
increase, based upon the child's net unearned income relative 
to the aggregate net unearned income of all of the parent's 
children subject to the tax.
    Special rules apply to determine which parent's tax return 
and rate is used to calculate the kiddie tax. If the parents 
file a joint return, the allocable parental tax is calculated 
using the income reported on the joint return. In the case of 
parents who are married but file separate returns, the 
allocable parental tax is calculated using the income of the 
parent with the greater amount of taxable income. In the case 
of unmarried parents, the child's custodial parent is the 
parent whose taxable income is taken into account in 
determining the child's liability. If the custodial parent has 
remarried, the stepparent is treated as the child's other 
parent. Thus, if the custodial parent and stepparent file a 
joint return, the kiddie tax is calculated using that joint 
return. If the custodial parent and stepparent file separate 
returns, the return of the one with the greater taxable income 
is used. If the parents are unmarried but lived together all 
year, the return of the parent with the greater taxable income 
is used.\378\
---------------------------------------------------------------------------
    \378\ Sec. 1(g)(5); Internal Revenue Service, Publication 929, Tax 
Rules for Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
    Unless the parent elects to include the child's income on 
the parent's return (as described below) the child files a 
separate return to report the child's income.\379\ In this 
case, items on the parent's return are not affected by the 
child's income. The total tax due from a child is the greater 
of:
---------------------------------------------------------------------------
    \379\ The child must attach to the return Form 8615, Tax for 
Children Under Age 14 With Investment Income of More Than $1,700 
(2006).
---------------------------------------------------------------------------
          1. the sum of (a) the tax payable by the child on the 
        child's earned income and unearned income up to $1,700 
        (for 2006), plus (b) the allocable parental tax on the 
        child's unearned income, or
          2. the tax on the child's income without regard to 
        the kiddie tax provisions.

Parental election to include child's dividends and interest on parent's 
        return

    Under certain circumstances, a parent may elect to report a 
child's dividends and interest on the parent's return. If the 
election is made, the child is treated as having no income for 
the year and the child does not have to file a return. The 
parent makes the election on Form 8814, Parents' Election to 
Report Child's Interest and Dividends. The requirements for the 
parent's election are that:
          1. the child has gross income only from interest and 
        dividends (including capital gains distributions and 
        Alaska Permanent Fund Dividends); \380\
---------------------------------------------------------------------------
    \380\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
          2. such income is more than the minimum standard 
        deduction amount for dependents ($850 in 2006) and less 
        than 10 times that amount ($8500 in 2006);
          3. no estimated tax payments for the year were made 
        in the child's name and taxpayer identification number;
          4. no backup withholding occurred; and
          5. the child is required to file a return if the 
        parent does not make the election.
    Only the parent whose return must be used when calculating 
the kiddie tax may make the election. The parent includes in 
income the child's gross income in excess of twice the minimum 
standard deduction amount for dependents (i.e., the child's 
gross income in excess of $1,700 for 2007). This amount is 
taxed at the parent's rate. The parent also must report an 
additional tax liability equal to the lesser of: (1) $85 (in 
2006), or (2) 10 percent of the child's gross income exceeding 
the child's standard deduction ($850 in 2006).
    Including the child's income on the parent's return can 
affect the parent's deductions and credits that are based on 
adjusted gross income, as well as income-based phaseouts, 
limitations, and floors.\381\ In addition, certain deductions 
that the child would have been entitled to take on his or her 
own return are lost.\382\ Further, if the child received tax-
exempt interest from a private activity bond, that item is 
considered a tax preference of the parent for alternative 
minimum tax purposes.\383\
---------------------------------------------------------------------------
    \381\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2005).
    \382\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2005).
    \383\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------

Taxation of compensation for services under section 1(g)

    Compensation for a child's services is considered the gross 
income of the child, not the parent, even if the compensation 
is not received or retained by the child (e.g. is the parent's 
income under local law).\384\ If the child's income tax is not 
paid, however, an assessment against the child will be 
considered as also made against the parent to the extent the 
assessment is attributable to amounts received for the child's 
services.\385\
---------------------------------------------------------------------------
    \384\ Sec. 73(a).
    \385\ Sec. 6201(c).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision increases the age to which the kiddie tax 
provisions apply from under 14 to under 18 years of age. The 
provision also creates an exception to the kiddie tax for 
distributions from certain qualified disability trusts, defined 
by cross-reference to sections 1917 and 1614(a)(3) of the 
Social Security Act. The provision provides that the kiddie tax 
does not apply to a child who is married and files a joint 
return for the taxable year

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

  J. Imposition of Withholding on Certain Payments Made by Government 
        Entities (sec. 511 of the Act and sec. 3402 of the Code)


                              Present Law


Withholding requirements

    Employers are required to withhold income tax on wages paid 
to employees, including wages and salaries of employees or 
elected officials of Federal, State, and local government 
units. Withholding rates vary depending on the amount of wages 
paid, the length of the payroll period, and the number of 
withholding allowances claimed by the employee.
    Certain non-wage payments also are subject to mandatory or 
voluntary withholding. For example:
    Employers are required to withhold FICA and Railroad 
Retirement taxes from wages paid to their employees. 
Withholding rates are generally uniform.
    Payors of pensions are required to withhold from payments 
made to payees, unless the payee elects no withholding.\386\ 
Withholding from periodic payments is at variable rates, 
parallel to income tax withholding from wages, whereas 
withholding from nonperiodic payments is at a flat 10-percent 
rate.
---------------------------------------------------------------------------
    \386\ Withholding at a rate of 20 percent is required in the case 
of an eligible rollover distribution that is not directly rolled over.
---------------------------------------------------------------------------
    A variety of payments (such as interest and dividends) are 
subject to backup withholding if the payee has not provided a 
valid taxpayer identification number (TIN). Withholding is at a 
flat rate based on the fourth lowest rate of tax applicable to 
single taxpayers.
    Certain gambling proceeds are subject to withholding. 
Withholding is at a flat rate based on the third lowest rate of 
tax applicable to single taxpayers.
    Voluntary withholding applies to certain Federal payments, 
such as Social Security payments. Withholding is at rates 
specified by Treasury regulations.
    Voluntary withholding applies to unemployment compensation 
benefits. Withholding is at a flat 10-percent rate.
    Foreign taxpayers are generally subject to withholding on 
certain U.S.-source income which is not effectively connected 
with the conduct of a U.S. trade or business. Withholding is at 
a flat 30-percent rate (14-percent for certain items of 
income).
    Many payments, including payments made by government 
entities, are not subject to withholding under present law. For 
example, no tax is generally withheld from payments made to 
workers who are not classified as employees (i.e., independent 
contractors).

Information reporting

    Present law imposes numerous information reporting 
requirements that enable the Internal Revenue Service (``IRS'') 
to verify the correctness of taxpayers' returns. For example, 
every person engaged in a trade or business generally is 
required to file information returns for each calendar year for 
payments of $600 or more made in the course of the payor's 
trade or business. Special information reporting requirements 
exist for employers required to deduct and withhold tax from 
employees' income. In addition, any service recipient engaged 
in a trade or business and paying for services is required to 
make a return according to regulations when the aggregate of 
payments is $600 or more. Government entities are specifically 
required to make an information return, reporting certain 
payments to corporations as well as individuals. Moreover, the 
head of every Federal executive agency that enters into certain 
contracts must file an information return reporting the 
contractor's name, address, TIN, date of contract action, 
amount to be paid to the contractor, and any other information 
required by Forms 8596 (Information Return for Federal 
Contracts) and 8596A (Quarterly Transmittal of Information 
Returns for Federal Contracts).

                        Explanation of Provision

    The provision requires withholding on certain payments to 
persons providing property or services made by the Government 
of the United States, every State, every political subdivision 
thereof, and every instrumentality of the foregoing (including 
multi-State agencies). The withholding requirement applies 
regardless of whether the government entity making such payment 
is the recipient of the property or services. Political 
subdivisions of States (or any instrumentality thereof) with 
less than $100 million of annual expenditures for property or 
services that would otherwise be subject to withholding under 
this provision are exempt from the withholding requirement.
    The rate of withholding is three percent on all payments 
regardless of whether the payments are for property or 
services. Payments subject to withholding under the provision 
include any payment made in connection with a government 
voucher or certificate program which functions as a payment for 
property or services. For example, payments to a commodity 
producer under a government commodity support program are 
subject to the withholding requirement. The provision imposes 
information reporting requirements on the payments that are 
subject to withholding under the provision.
    The provision does not apply to any payments made through a 
Federal, State, or local government public assistance or public 
welfare program for which eligibility is determined by a needs 
or income test. For example, payments under government programs 
providing food vouchers or medical assistance to low-income 
individuals are not subject to withholding under the provision. 
However, payments under government programs to provide health 
care or other services that are not based on the needs or 
income of the recipients are subject to withholding, including 
programs where eligibility is based on the age of the 
beneficiary.
    The provision does not apply to payments of wages or to any 
other payment with respect to which mandatory (e.g., U.S.-
source income of foreign taxpayers) or voluntary (e.g., 
unemployment benefits) withholding applies under present law. 
The provision does not exclude payments that are potentially 
subject to backup withholding under section 3406. If, however, 
payments are actually being withheld under backup withholding, 
withholding under the provision does not apply.
    The provision also does not apply to the following: 
payments of interest; payments for real property; payments to 
tax-exempt entities or foreign governments; intra-governmental 
payments; payments made pursuant to a classified or 
confidential contract (as defined in section 6050M(e)(3)); and 
payments to government employees that are not otherwise 
excludable from the new withholding provision with respect to 
the employees' services as an employees.

                             Effective Date

    The provision applies to payments made after December 31, 
2010.

 K. Eliminate Income Limitations on Roth IRA Conversions (sec. 512 of 
                   the Act and sec. 408A of the Code)


                              Present Law

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs and Roth IRAs. The 
total amount that an individual may contribute to one or more 
IRAs for a year is generally limited to the lesser of: (1) a 
dollar amount ($4,000 for 2006); and (2) the amount of the 
individual's compensation that is includible in gross income 
for the year. In the case of an individual who has attained age 
50 before the end of the year, the dollar amount is increased 
by an additional amount ($1,000 for 2006). In the case of a 
married couple, contributions can be made up to the dollar 
limit for each spouse if the combined compensation of the 
spouses that is includible in gross income is at least equal to 
the contributed amount. IRA contributions in excess of the 
applicable limit are generally subject to an excise tax of six 
percent per year until withdrawn.
    Contributions to a traditional IRA may or may not be 
deductible. The extent to which contributions to a traditional 
IRA are deductible depends on whether or not the individual (or 
the individual's spouse) is an active participant in an 
employer-sponsored retirement plan and the taxpayer's AGI. An 
individual may deduct his or her contributions to a traditional 
IRA if neither the individual nor the individual's spouse is an 
active participant in an employer-sponsored retirement plan. If 
an individual or the individual's spouse is an active 
participant in an employer-sponsored retirement plan, the 
deduction is phased out for taxpayers with AGI over certain 
levels. To the extent an individual does not or cannot make 
deductible contributions, the individual may make nondeductible 
contributions to a traditional IRA, subject to the maximum 
contribution limit. Distributions from a traditional IRA are 
includible in gross income to the extent not attributable to a 
return of nondeductible contributions.
    Individuals with adjusted gross income (``AGI'') below 
certain levels may make contributions to a Roth IRA (up to the 
maximum IRA contribution limit). The maximum Roth IRA 
contribution is phased out between $150,000 to $160,000 of AGI 
in the case of married taxpayers filing a joint return and 
between $95,000 to $105,000 in the case of all other returns 
(except a separate return of a married individual).\387\ 
Contributions to a Roth IRA are not deductible. Qualified 
distributions from a Roth IRA are excludable from gross income. 
Distributions from a Roth IRA that are not qualified 
distributions are includible in gross income to the extent 
attributable to earnings. In general, a qualified distribution 
is a distribution that is made on or after the individual 
attains age 59\1/2\, death, or disability or which is a 
qualified special purpose distribution. A distribution is not a 
qualified distribution if it is made within the five-taxable 
year period beginning with the taxable year for which an 
individual first made a contribution to a Roth IRA.
---------------------------------------------------------------------------
    \387\ In the case of a married taxpayer filing a separate return, 
the phaseout range is $0 to $10,000 of AGI.
---------------------------------------------------------------------------
    A taxpayer with AGI of $100,000 or less may convert all or 
a portion of a traditional IRA to a Roth IRA.\388\ The amount 
converted is treated as a distribution from the traditional IRA 
for income tax purposes, except that the 10-percent additional 
tax on early withdrawals does not apply.
---------------------------------------------------------------------------
    \388\ Married taxpayers filing a separate return may not convert 
amounts in a traditional IRA into a Roth IRA.
---------------------------------------------------------------------------
    In the case of a distribution from a Roth IRA that is not a 
qualified distribution, certain ordering rules apply in 
determining the amount of the distribution that is includible 
in income. For this purpose, a distribution that is not a 
qualified distribution is treated as made in the following 
order: (1) regular Roth IRA contributions; (2) conversion 
contributions (on a first in, first out basis); and (3) 
earnings. To the extent a distribution is treated as made from 
a conversion contribution, it is treated as made first from the 
portion, if any, of the conversion contribution that was 
required to be included in income as a result of the 
conversion.
    Includible amounts withdrawn from a traditional IRA or a 
Roth IRA before attainment of age 59\1/2\, death, or disability 
are subject to an additional 10-percent early withdrawal tax, 
unless an exception applies.

                        Explanation of Provision

    The provision eliminates the income limits on conversions 
of traditional IRAs to Roth IRAs.\389\ Thus, taxpayers may make 
such conversions without regard to their AGI.
---------------------------------------------------------------------------
    \389\ Under the provision, married taxpayers filing a separate 
return may convert amounts in a traditional IRA into a Roth IRA.
---------------------------------------------------------------------------
    For conversions occurring in 2010, unless a taxpayer elects 
otherwise, the amount includible in gross income as a result of 
the conversion is included ratably in 2011 and 2012. That is, 
unless a taxpayer elects otherwise, none of the amount 
includible in gross income as a result of a conversion 
occurring in 2010 is included in income in 2010, and half of 
the income resulting from the conversion is includible in gross 
income in 2011 and half in 2012. However, income inclusion is 
accelerated if converted amounts are distributed before 
2012.\390\ In that case, the amount included in income in the 
year of the distribution is increased by the amount 
distributed, and the amount included in income in 2012 (or 2011 
and 2012 in the case of a distribution in 2010) is the lesser 
of: (1) half of the amount includible in income as a result of 
the conversion; and (2) the remaining portion of such amount 
not already included in income. The following example 
illustrates the application of the accelerated inclusion rule.
---------------------------------------------------------------------------
    \390\ Whether a distribution consists of converted amounts is 
determined under the present-law ordering rules.
---------------------------------------------------------------------------
    Example.--Taxpayer A has a traditional IRA with a value of 
$100, consisting of deductible contributions and earnings. A 
does not have a Roth IRA. A converts the traditional IRA to a 
Roth IRA in 2010, and, as a result of the conversion, $100 is 
includible in gross income. Unless A elects otherwise, $50 of 
the income resulting from the conversion is included in income 
in 2011 and $50 in 2012. Later in 2010, A takes a $20 
distribution, which is not a qualified distribution and all of 
which, under the ordering rules, is attributable to amounts 
includible in gross income as a result of the conversion. Under 
the accelerated inclusion rule, $20 is included in income in 
2010. The amount included in income in 2011 is the lesser of 
(1) $50 (half of the income resulting from the conversion) or 
(2) $70 (the remaining income from the conversion), or $50. The 
amount included in income in 2012 is the lesser of (1) $50 
(half of the income resulting from the conversion) or (2) $30 
(the remaining income from the conversion, i.e., $100-$70 ($20 
included in income in 2010 and $50 included in income in 
2011)), or $30.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2009.

   L. Repeal of FSC/ETI Binding Contract Relief (sec. 513 of the Act)


                           Present Law \391\

    For most of the last two decades, the United States 
provided export-related tax benefits under the foreign sales 
corporation (``FSC'') regime. In 2000, the World Trade 
Organization (``WTO'') held that the FSC regime constituted a 
prohibited export subsidy under the relevant trade agreements. 
In response to this WTO finding, the United States repealed the 
FSC rules and enacted a new regime, under the FSC Repeal and 
Extraterritorial Income (``ETI'') Exclusion Act of 2000. 
Transition rules delayed the repeal of the FSC rules and the 
effective date of ETI for transactions in the ordinary course 
of a trade or business occurring before January 1, 2002, or 
after December 31, 2001 pursuant to a binding contract between 
the taxpayer and an unrelated person which was in effect on 
September 30, 2000 and at all times thereafter (the ``FSC 
binding contract relief'').\392\ In 2002, the WTO held that the 
ETI regime also constituted a prohibited export subsidy.
---------------------------------------------------------------------------
    \391\ This section includes a description of the law in effect 
before the repeal of the general ETI rules applicable before the 
American Jobs Creation Act of 2004 as well as the law in effect 
immediately prior to enactment of the provision below.
    \392\ An election was provided, however, under which taxpayers 
could adopt ETI at an earlier date for transactions after September 30, 
2000. This election allowed the ETI rules to apply to transactions 
after September 30, 2000, including transactions occurring pursuant to 
pre-existing binding contracts.
---------------------------------------------------------------------------
    In general, under the ETI regime, an exclusion from gross 
income applied with respect to ``extraterritorial income,'' 
which was a taxpayer's gross income attributable to ``foreign 
trading gross receipts.'' This income was eligible for the 
exclusion to the extent that it was ``qualifying foreign trade 
income.'' Qualifying foreign trade income was the amount of 
gross income that, if excluded, would result in a reduction of 
taxable income by the greatest of: (1) 1.2 percent of the 
foreign trading gross receipts derived by the taxpayer from the 
transaction; (2) 15 percent of the ``foreign trade income'' 
derived by the taxpayer from the transaction;\393\ or (3) 30 
percent of the ``foreign sale and leasing income'' derived by 
the taxpayer from the transaction.\394\
---------------------------------------------------------------------------
    \393\ ``Foreign trade income'' was the taxable income of the 
taxpayer (determined without regard to the exclusion of qualifying 
foreign trade income) attributable to foreign trading gross receipts.
    \394\ ``Foreign sale and leasing income'' was the amount of the 
taxpayer's foreign trade income (with respect to a transaction) that 
was properly allocable to activities constituting foreign economic 
processes. Foreign sale and leasing income also included foreign trade 
income derived by the taxpayer in connection with the lease or rental 
of qualifying foreign trade property for use by the lessee outside the 
United States.
---------------------------------------------------------------------------
    Foreign trading gross receipts were gross receipts derived 
from certain activities in connection with ``qualifying foreign 
trade property'' with respect to which certain economic 
processes had taken place outside of the United States. 
Specifically, the gross receipts must have been: (1) from the 
sale, exchange, or other disposition of qualifying foreign 
trade property; (2) from the lease or rental of qualifying 
foreign trade property for use by the lessee outside the United 
States; (3) for services which were related and subsidiary to 
the sale, exchange, disposition, lease, or rental of qualifying 
foreign trade property (as described above); (4) for 
engineering or architectural services for construction projects 
located outside the United States; or (5) for the performance 
of certain managerial services for unrelated persons. A 
taxpayer could elect to treat gross receipts from a transaction 
as not being foreign trading gross receipts. As a result of 
such an election, a taxpayer could use any related foreign tax 
credits in lieu of the exclusion.
    Qualifying foreign trade property generally was property 
manufactured, produced, grown, or extracted within or outside 
the United States that was held primarily for sale, lease, or 
rental in the ordinary course of a trade or business for direct 
use, consumption, or disposition outside the United States. No 
more than 50 percent of the fair market value of such property 
could be attributable to the sum of: (1) the fair market value 
of articles manufactured outside the United States; and (2) the 
direct costs of labor performed outside the United States. With 
respect to property that was manufactured outside the United 
States, certain rules were provided to ensure consistent U.S. 
tax treatment with respect to manufacturers.
    The American Jobs Creation Act of 2004 (``AJCA'') repealed 
the ETI exclusion,\395\ generally effective for transactions 
after December 31, 2004. AJCA provides a general transition 
rule under which taxpayers retain 100 percent of their ETI 
benefits for transactions prior to 2005, 80 percent of their 
otherwise-applicable ETI benefits for transactions during 2005, 
and 60 percent of their otherwise-applicable ETI benefits for 
transactions during 2006.
---------------------------------------------------------------------------
    \395\ Pub. L. No. 108-357, sec. 101. In addition, foreign 
corporations that elected to be treated for all Federal tax purposes as 
domestic corporations in order to facilitate the claiming of ETI 
benefits were allowed to revoke such elections within one year of the 
date of enactment of the repeal without recognition of gain or loss, 
subject to anti-abuse rules.
---------------------------------------------------------------------------
    In addition to the general transition rule, AJCA provides 
that the ETI exclusion provisions remain in effect for 
transactions in the ordinary course of a trade or business if 
such transactions are pursuant to a binding contract \396\ 
between the taxpayer and an unrelated person and such contract 
is in effect on September 17, 2003, and at all times thereafter 
(the ``ETI binding contract relief'').
---------------------------------------------------------------------------
    \396\ This rule also applies to a purchase option, renewal option, 
or replacement option that is included in such contract. For this 
purpose, a replacement option is considered enforceable against a 
lessor notwithstanding the fact that a lessor retained approval of the 
replacement lessee.
---------------------------------------------------------------------------
    In early 2006, the WTO Appellate Body held that the ETI 
general transition rule and the FSC and ETI binding contract 
relief measures are prohibited export subsidies.

                        Explanation of Provision

    The provision repeals both the FSC binding contract relief 
and the ETI binding contract relief. The general transition 
rule remains in effect.

                             Effective Date

    The provision is effective for taxable years beginning 
after date of enactment (May 17, 2006).

   M. Modification of Wage Limit for Purposes of Domestic Production 
  Activities Deduction (sec. 514 of the Act and sec. 199 of the Code)


                              Present Law


In general

    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to a portion of the taxpayer's qualified production 
activities income. For taxable years beginning after 2009, the 
deduction is nine percent of such income. For taxable years 
beginning in 2005 and 2006, the deduction is three percent of 
income and, for taxable years beginning in 2007, 2008 and 2009, 
the deduction is six percent of income. However, the deduction 
for a taxable year is limited to 50 percent of the wages paid 
by the taxpayer during the calendar year that ends in such 
taxable year.\397\
---------------------------------------------------------------------------
    \397\ For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year. Elective deferrals include elective deferrals as defined in 
section 402(g)(3), amounts deferred under section 457, and, for taxable 
years beginning after December 31, 2005, designated Roth contributions 
(as defined in section 402A).
---------------------------------------------------------------------------

Qualified production activities income

    In general, ``qualified production activities income'' is 
equal to domestic production gross receipts (defined by section 
199(c)(4)), reduced by the sum of: (1) the costs of goods sold 
that are allocable to such receipts; and (2) other expenses, 
losses, or deductions which are properly allocable to such 
receipts.

Application of wage limitation to passthrough entities

    For purposes of applying the wage limitation, a 
shareholder, partner, or similar person who is allocated 
components of qualified production activities income from a 
passthrough entity also is treated as having been allocated 
wages from such entity in an amount that is equal to the lesser 
of: (1) such person's allocable share of wages, as determined 
under regulations prescribed by the Secretary; or (2) twice the 
qualified production activities income that actually is 
allocated to such person for the taxable year.

                        Explanation of Provision

    Under the provision, the wage limitation is modified such 
that taxpayers may only include amounts which are properly 
allocable to domestic production gross receipts.\398\ Thus, the 
wage limitation is 50 percent of those wages which are deducted 
in arriving at qualified production activities income.
---------------------------------------------------------------------------
    \398\ As under present law, the Secretary shall provide rules for 
the proper allocation of items (including wages) in determining 
qualified production activities income. Section 199(c)(2).
---------------------------------------------------------------------------
    In addition, the provision repeals the special limitation 
on wages treated as allocated to partners or shareholders of 
passthrough entities. Accordingly, for purposes of the wage 
limitation, a shareholder, partner, or similar person who is 
allocated components of qualified production activities income 
from a passthrough entity is treated as having been allocated 
wages from such entity in an amount that is equal to such 
person's allocable share of wages as determined under 
regulations prescribed by the Secretary, even if such amount is 
more than twice the qualified production activities income that 
actually is allocated to such person for the taxable year. The 
shareholder, partner, or similar person will then include in 
its wage limitation only those wages which are deducted in 
arriving at qualified production activities income.

                             Effective Date

    The provision is effective with respect to taxable years 
beginning after the date of enactment (May 17, 2006).

 N. Modification of Exclusion for Citizens Living Abroad (sec. 515 of 
                   the Act and sec. 911 of the Code)


                              Present Law


In general

    U.S. citizens generally are subject to U.S. income tax on 
all their income, whether derived in the United States or 
elsewhere. A U.S. citizen who earns income in a foreign country 
also may be taxed on that income by the foreign country. The 
United States generally cedes the primary right to tax a U.S. 
citizen's non-U.S. source income to the foreign country in 
which the income is derived. This concession is effected by the 
allowance of a credit against the U.S. income tax imposed on 
foreign-source income for foreign taxes paid on that income. 
The amount of the credit for foreign income tax paid on 
foreign-source income generally is limited to the amount of 
U.S. tax otherwise owed on that income. Accordingly, if the 
amount of foreign tax paid on foreign-source income is less 
than the amount of U.S. tax owed on that income, a foreign tax 
credit generally is allowed in an amount not exceeding the 
amount of the foreign tax, and a residual U.S. tax liability 
remains.
    A U.S. citizen or resident living abroad may be eligible to 
exclude from U.S. taxable income certain foreign earned income 
and foreign housing costs.\399\ This exclusion applies 
regardless of whether any foreign tax is paid on the foreign 
earned income or housing costs. To qualify for these 
exclusions, an individual (a ``qualified individual'') must 
have his or her tax home in a foreign country and must be 
either (1) a U.S. citizen \400\ who is a bona fide resident of 
a foreign country or countries for an uninterrupted period that 
includes an entire taxable year, or (2) a U.S. citizen or 
resident present in a foreign country or countries for at least 
330 full days in any 12-consecutive-month period.
---------------------------------------------------------------------------
    \399\ Sec. 911.
    \400\ Generally, only U.S. citizens may qualify under the bona fide 
residence test. A U.S. resident alien who is a citizen of a country 
with which the United States has a tax treaty may, however, quality for 
the section 911 exclusions under the bona fide residence test by 
application of a nondiscrimination provision of the treaty.
---------------------------------------------------------------------------

Exclusion for compensation

    The foreign earned income exclusion generally is available 
for a qualified individual's non-U.S. source earned income 
attributable to personal services performed by that individual 
during the period of foreign residence or presence described 
above. The maximum exclusion amount for any calendar year is 
$80,000 in 2002 through 2007 and is indexed for inflation after 
2007.

Exclusion for housing costs

    A qualified individual is allowed an exclusion from gross 
income (or, as described below, a deduction) for certain 
foreign housing costs paid or incurred by or on behalf of the 
individual. The amount of this housing cost exclusion is equal 
to the excess of a taxpayer's ``housing expenses'' over a base 
housing amount. The term ``housing expenses'' means the 
reasonable expenses paid or incurred during the taxable year 
for a taxpayer's housing (and, if they live with the taxpayer, 
for the housing of the taxpayer's spouse and dependents) in a 
foreign country. The term includes expenses attributable to 
housing such as utilities and insurance, but it does not 
include separately deductible interest and taxes. If the 
taxpayer maintains a second household outside the United States 
for a spouse or dependents who do not reside with the taxpayer 
because of dangerous, unhealthful, or otherwise adverse living 
conditions, the housing expenses of the second household also 
are eligible for exclusion. The base housing amount above which 
costs are eligible for exclusion in a taxable year is 16 
percent of the annual salary (computed on a daily basis) of a 
grade GS-14, step 1, U.S. government employee, multiplied by 
the number of days of foreign residence or presence (as 
described above) in the taxable year. For 2006 this salary is 
$77,793; the current base housing amount therefore is $12,447 
(assuming the taxpayer is a bona fide resident of or is present 
in a foreign country every day during the year).
    To the extent otherwise excludable housing costs are not 
paid or reimbursed by a taxpayer's employer, these costs 
generally are allowed as a deduction in computing adjusted 
gross income.

Exclusion limitation amounts

    The combined foreign earned income exclusion and housing 
cost exclusion (including the amount of any deductible housing 
costs) may not exceed the taxpayer's total foreign earned 
income for the taxable year. The taxpayer's foreign tax credit 
is reduced by the amount of the credit that is attributable to 
excluded income.

Tax brackets

    A taxpayer with excludable income under section 911 is 
subject to tax on the taxpayer's other income, after 
deductions, starting in the lowest tax rate bracket.

                        Explanation of Provision


Exclusion for compensation

    The provision adjusts for inflation the maximum amount of 
the foreign earned income exclusion in taxable years beginning 
in calendar years after 2005 (rather than, as under present 
law, after 2007). The limitation in 2006 therefore is 
$82,400.\401\
---------------------------------------------------------------------------
    \401\ This $82,400 amount is calculated under section 
911(b)(2)(D)(ii), as amended by the provision, using current U.S. 
Bureau of Labor Statistics (``BLS'') Consumer Price Index data.
---------------------------------------------------------------------------

Exclusion for housing costs

    Under the provision, the base housing amount used in 
calculating the foreign housing cost exclusion in a taxable 
year is 16 percent of the amount (computed on a daily basis) of 
the foreign earned income exclusion limitation (instead of the 
present law 16 percent of the grade GS-14, step 1 amount), 
multiplied by the number of days of foreign residence or 
presence (as previously described) in that year.
    Reasonable foreign housing expenses in excess of the base 
housing amount remain excluded from gross income (or, if paid 
by the taxpayer, are deductible) under the Act, but the amount 
of the exclusion is limited to 30 percent of the maximum amount 
of a taxpayer's foreign earned income exclusion.\402\ The 
Secretary is given authority to issue regulations or other 
guidance providing for the adjustment of this 30-percent 
housing cost limitation based on geographic differences in 
housing costs relative to housing costs in the United States. 
The Congress intends that the Secretary be permitted to use 
publicly available data, such as the Quarterly Report Indexes 
published by the U.S. Department of State or any other 
information deemed reliable by the Secretary, in making 
adjustments. The Congress also intends that the Secretary may 
adjust the 30-percent amount upward or downward. The Congress 
intends that the Secretary make adjustments annually.
---------------------------------------------------------------------------
    \402\ In certain programs including grant-making to subsidize 
rents, the U.S. Department of Housing and Urban Development considers 
maximum affordable housing costs to be 30 percent of a household's 
income. See, e.g., United States Housing Act of 1937, 42 U.S.C. sec. 
1437a(a)(1)(A), as amended.
---------------------------------------------------------------------------
    Under the 30-percent rule described above, the maximum 
amount of the foreign housing cost exclusion in 2006 is 
(assuming foreign residence or presence on all days in the 
year) $11,536 (= ($82,400 x 30 percent) - ($82,400 x 16 
percent)).\403\
---------------------------------------------------------------------------
    \403\ The $11,536 amount is based on a calculation under section 
911(b)(2)(D)(ii), as amended by the provision, using the BLS data 
described above.
---------------------------------------------------------------------------

Tax brackets

    Under the provision, if an individual excludes an amount 
from income under section 911, any income in excess of the 
exclusion amount determined under section 911 is taxed (under 
the regular tax and alternative minimum tax) by applying to 
that income the tax rates that would have been applicable had 
the individual not elected the section 911 exclusion. For 
example, an individual with $80,000 of foreign earned income 
that is excluded under section 911 and with $20,000 in other 
taxable income (after deductions) would be subject to tax on 
that $20,000 at the rate or rates applicable to taxable income 
in the range of $80,000 to $100,000.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

O. Tax Involvement of Accommodation Parties in Tax Shelter Transactions 
 (sec. 516 of the Act and secs. 6011, 6033, 6652, and new sec. 4965 of 
                               the Code)


                              Present Law


Disclosure of listed and other reportable transactions by taxpayers

    Present law provides that a taxpayer that participates in a 
reportable transaction (including a listed transaction) and 
that is required to file a tax return must attach to its return 
a disclosure statement in the form prescribed by the 
Secretary.\404\ For this purpose, the term taxpayer includes 
any person, including an individual, trust, estate, 
partnership, association, company, or corporation.\405\
---------------------------------------------------------------------------
    \404\ Treas. Reg. sec. 1.6011-4(a).
    \405\ Sec. 7701(a)(1); Treas. Reg. sec. 1.6011-4(c)(1).
---------------------------------------------------------------------------
    Under present Treasury regulations, a reportable 
transaction includes a listed transaction and five other 
categories of transactions: (1) confidential transactions, 
which are transactions offered to a taxpayer under conditions 
of confidentiality and for which the taxpayer has paid an 
advisor a minimum fee; (2) transactions with contractual 
protection, which include transactions for which the taxpayer 
or a related party has the right to a full or partial refund of 
fees if all or part of the intended tax consequences from the 
transaction are not sustained, or for which fees are contingent 
on the taxpayer's realization of tax benefits from the 
transaction; (3) loss transactions, which are transactions 
resulting in the taxpayer claiming a loss under section 165 
that exceeds certain thresholds, depending upon the type of 
taxpayer; (4) transactions with a significant book-tax 
difference; and (5) transactions involving a brief asset 
holding period.\406\ A listed transaction means a reportable 
transaction which is the same as, or substantially similar to, 
a transaction specifically identified by the Secretary as a tax 
avoidance transaction for purposes of section 6011 (relating to 
the filing of returns and statements), and identified by 
notice, regulation, or other form of published guidance as a 
listed transaction.\407\ The fact that a transaction is a 
reportable transaction does not affect the legal determination 
of whether the taxpayer's treatment of the transaction is 
proper.\408\ Present law authorizes the Secretary to define a 
reportable transaction on the basis of such transaction being 
of a type which the Secretary determines as having a potential 
for tax avoidance or evasion.\409\
---------------------------------------------------------------------------
    \406\ Treas. Reg. sec. 1.6011-4(b). In Notice 2006-6 (January 6, 
2006), the IRS indicated that it was removing transactions with a 
significant book-tax difference from the categories of reportable 
transactions.
    \407\ Sec. 6707A(c)(2); Treas. Reg. sec. 1.6011-4(b)(2).
    \408\ Treas. Reg. sec. 1.6011-4(a).
    \409\ Sec. 6707A(c)(1).
---------------------------------------------------------------------------
    Treasury regulations provide guidance regarding the 
determination of when a taxpayer participates in a transaction 
for these purposes.\410\ A taxpayer has participated in a 
listed transaction if the taxpayer's tax return reflects tax 
consequences or a tax strategy described in the published 
guidance that lists the transaction, or if the taxpayer knows 
or has reason to know that the taxpayer's tax benefits are 
derived directly or indirectly from tax consequences of a tax 
strategy described in published guidance that lists a 
transaction. A taxpayer has participated in a confidential 
transaction if the taxpayer's tax return reflects a tax benefit 
from the transaction and the taxpayer's disclosure of the tax 
treatment or tax structure of the transaction is limited under 
conditions of confidentiality. A taxpayer has participated in a 
transaction with contractual protection if the taxpayer's tax 
return reflects a tax benefit from the transaction, and the 
taxpayer has the right to the full or partial refund of fees or 
the fees are contingent.
---------------------------------------------------------------------------
    \410\ Treas. Reg. Sec. 1.6011-4(c)(3).
---------------------------------------------------------------------------
    Present law provides a penalty for any person who fails to 
include on any return or statement any required information 
with respect to a reportable transaction.\411\ The penalty 
applies without regard to whether the transaction ultimately 
results in an understatement of tax, and applies in addition to 
any other penalty that may be imposed.
---------------------------------------------------------------------------
    \411\ Sec. 6707A.
---------------------------------------------------------------------------
    The penalty for failing to disclose a reportable 
transaction is $10,000 in the case of a natural person and 
$50,000 in any other case. The amounts are increased to 
$100,000 and $200,000, respectively, if the failure is with 
respect to a listed transaction. The penalty cannot be waived 
with respect to a listed transaction. As to reportable 
transactions, the IRS Commissioner may rescind all or a portion 
of the penalty if rescission would promote compliance with the 
tax laws and effective tax administration.

Disclosure of listed and other reportable transactions by material 
        advisors

    Present law requires each material advisor with respect to 
any reportable transaction (including any listed transaction) 
to timely file an information return with the Secretary (in 
such form and manner as the Secretary may prescribe).\412\ The 
information return must include (1) information identifying and 
describing the transaction, (2) information describing any 
potential tax benefits expected to result from the transaction, 
and (3) such other information as the Secretary may prescribe. 
The return must be filed by the date specified by the 
Secretary.
---------------------------------------------------------------------------
    \412\ Sec. 6707(a), as added by the American Jobs Creation Act of 
2004, Pub. L. No. 108-357, sec. 816(a).
---------------------------------------------------------------------------
    A ``material advisor'' means any person (1) who provides 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring, or 
carrying out any reportable transaction, and (2) who directly 
or indirectly derives gross income in excess of $250,000 
($50,000 in the case of a reportable transaction substantially 
all of the tax benefits from which are provided to natural 
persons) or such other amount as may be prescribed by the 
Secretary for such advice or assistance.\413\
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    \413\ Sec. 6707(b)(1).
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    The Secretary may prescribe regulations which provide (1) 
that only one material advisor is required to file an 
information return in cases in which two or more material 
advisors would otherwise be required to file information 
returns with respect to a particular reportable transaction, 
(2) exemptions from the requirements of this section, and (3) 
other rules as may be necessary or appropriate to carry out the 
purposes of this section.\414\
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    \414\ Sec. 6707(c).
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    Present law imposes a penalty on any material advisor who 
fails to timely file an information return, or who files a 
false or incomplete information return, with respect to a 
reportable transaction (including a listed transaction).\415\ 
The amount of the penalty is $50,000. If the penalty is with 
respect to a listed transaction, the amount of the penalty is 
increased to the greater of (1) $200,000, or (2) 50 percent of 
the gross income derived by such person with respect to aid, 
assistance, or advice which is provided with respect to the 
transaction before the date the information return that 
includes the transaction is filed. An intentional failure or 
act by a material advisor with respect to the requirement to 
disclose a listed transaction increases the penalty to 75 
percent of the gross income derived from the transaction.
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    \415\ Sec. 6707(b).
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    The penalty cannot be waived with respect to a listed 
transaction. As to reportable transactions, the IRS 
Commissioner can rescind all or a portion of the penalty if 
rescission would promote compliance with the tax laws and 
effective tax administration.

                        Explanation of Provision


In general

    In general, under the provision, certain tax-exempt 
entities are subject to penalties for being a party to a 
prohibited tax shelter transaction. A prohibited tax shelter 
transaction is a transaction that the Secretary determines is a 
listed transaction (as defined in section 6707A(c)(2)) or a 
prohibited reportable transaction. A prohibited reportable 
transaction is a confidential transaction or a transaction with 
contractual protection (as defined by the Secretary in 
regulations) which is a reportable transaction as defined in 
sec. 6707A(c)(1). Under the provision, a tax-exempt entity is 
an entity that is described in section 501(c), 501(d), or 
170(c) (not including the United States), Indian tribal 
governments, and tax qualified pension plans, individual 
retirement arrangements (``IRAs''), and similar tax-favored 
savings arrangements (such as Coverdell education savings 
accounts, health savings accounts, and qualified tuition 
plans).

Entity level tax

    Under the provision, if a tax-exempt entity is a party at 
any time to a transaction during a taxable year and knows or 
has reason to know that the transaction is a prohibited tax 
shelter transaction, the entity is subject to a tax for such 
year equal to the greater of (1) 100 percent of the entity's 
net income (after taking into account any tax imposed with 
respect to the transaction) for such year that is attributable 
to the transaction or (2) 75 percent of the proceeds received 
by the entity that are attributable to the transaction for such 
year. A tax also is imposed in the event that a tax-exempt 
entity becomes a party to a prohibited tax shelter transaction 
without knowing or having reason to know that the transaction 
is a prohibited tax shelter transaction. In that case, the tax-
exempt entity is subject to a tax in the taxable year the 
entity becomes a party and any subsequent taxable year of the 
highest unrelated business taxable income rate times the 
greater of (1) the entity's net income (after taking into 
account any tax imposed with respect to the transaction) for 
such year that is attributable to the transaction or (2) 75 
percent of the proceeds received by the entity that are 
attributable to the transaction for such year.
    In addition, if a transaction is not a listed transaction 
at the time a tax-exempt entity becomes a party to the 
transaction (and is not otherwise a prohibited tax shelter 
transaction), but the transaction subsequently is determined by 
the Secretary to be a listed transaction (a ``subsequently 
listed transaction''), the entity must pay each taxable year an 
excise tax equal to the highest unrelated business taxable 
income rate multiplied by the greater of (1) the entity's net 
income (after taking into account any tax imposed) that is 
attributable to the subsequently listed transaction and that is 
properly allocable to the period beginning on the later of the 
date such transaction is listed by the Secretary or the first 
day of the taxable year or (2) 75 percent of the proceeds 
received by the entity that are attributable to the 
subsequently listed transaction and that are properly allocable 
to the period beginning on the later of the date such 
transaction is listed by the Secretary or the first day of the 
taxable year. The Secretary has the authority to promulgate 
regulations that provide guidance regarding the determination 
of the allocation of net income or proceeds of a tax-exempt 
entity that is attributable to a transaction to various 
periods, including before and after the listing of the 
transaction or the date which is 90 days after the date of 
enactment of the provision.
    There is no reasonable cause exception to imposition of the 
entity level tax. The entity level tax does not apply to tax 
qualified pension plans, IRAs, and similar tax-favored savings 
arrangements (such as Coverdell education savings accounts, 
health savings accounts, and qualified tuition plans).
    In general, it is intended that in determining whether a 
tax-exempt entity is a ``party'' to a prohibited tax shelter 
transaction all the facts and circumstances should be taken 
into account. Absence of a written agreement is not 
determinative. Certain indirect involvement in a prohibited tax 
shelter transaction would not result in an entity being 
considered a party to the transaction. For example, investment 
by a tax-exempt entity in a mutual fund that in turn invests in 
or participates in a prohibited tax shelter transaction does 
not, in general, make the tax-exempt entity a party to such 
transaction, absent facts or circumstances that indicate that 
the purpose of the tax exempt entity's investment in the mutual 
fund was specifically to participate in such a transaction. 
However, whether a tax-exempt entity is a party to such a 
transaction will be informed by whether the entity or entity 
manager knew or had reason to know that an investment of the 
entity would be used in a prohibited tax shelter transaction. 
Presence of such knowledge or reason to know may indicate that 
that the purpose of the investment was to participate in the 
prohibited tax shelter transaction and that the tax-exempt 
entity is a party to such transaction.

Disclosure of being a party to prohibited tax shelter transactions

    The provision requires that a taxable party to a prohibited 
tax shelter transaction disclose to the tax-exempt entity that 
the transaction is a prohibited tax shelter transaction. 
Failure to make such disclosure is subject to the present-law 
penalty for failure to include reportable transaction 
information under section 6707A. Thus, the penalty is $10,000 
in the case of a natural person or $50,000 in any other case, 
except that if the transaction is a listed transaction, the 
penalty is $100,000 in the case of a natural person and 
$200,000 in any other case.\416\
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    \416\ The IRS Commissioner may rescind all or any portion of any 
such penalty if the violation is with respect to a prohibited tax 
shelter transaction other than a listed transaction and doing so would 
promote compliance with the requirements of the Code and effective tax 
administration. See sec. 6707A(d).
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    The provision requires disclosure by a tax-exempt entity to 
the IRS of being a party to a prohibited tax shelter 
transaction and disclosure of other known parties to the 
transaction. The penalty for failure to disclose is imposed on 
the entity (or entity manager, in the case of qualified pension 
plans and similar tax favored retirement arrangements) at $100 
per day the failure continues, not to exceed $50,000. If any 
tax-exempt entity or entity manager fails to comply with a 
demand on the tax-exempt entity or entity manager by the 
Secretary for disclosure, such person or persons shall pay a 
penalty of $100 per day (beginning on the date of the failure 
to comply) not to exceed $10,000 per prohibited tax shelter 
transaction. As under present-law section 6652, no penalty is 
imposed with respect to any failure if it is shown that the 
failure is due to reasonable cause.

Penalty on entity managers

    A tax of $20,000 is imposed on an entity manager that 
approves or otherwise causes a tax-exempt entity to be a party 
to a prohibited tax shelter transaction at any time during the 
taxable year, knowing or with reason to know that the 
transaction is a prohibited tax shelter transaction. In the 
case of tax qualified pension plans, IRAs, and similar tax-
favored savings arrangements (such as Coverdell education 
savings accounts, health savings accounts, and qualified 
tuition plans) an entity manager is the person that approves or 
otherwise causes the entity to be a party to a prohibited tax 
shelter transaction. In all other cases the entity manager is 
the person with authority or responsibility similar to that 
exercised by an officer, director, or trustee of an 
organization, and with respect to any act, the person having 
authority or responsibility with respect to such act.
    In the case of a qualified pension plan, IRA, or similar 
tax-favored savings arrangement (such as a Coverdell education 
savings account, health savings account, or qualified tuition 
plan), it is intended that, in general, a person who decides 
that assets of the plan, IRA, or other savings arrangement are 
to be invested in a prohibited tax shelter transaction is the 
entity manager under the provision. Except in the case of a 
fully self-directed plan or other savings arrangement with 
respect to which a participant or beneficiary decides to invest 
in the prohibited tax shelter transaction, a participant or 
beneficiary generally is not an entity manager under the 
provision. Thus, for example, a participant or beneficiary is 
not an entity manager merely by reason of choosing among pre-
selected investment options (as is typically the case if a 
qualified retirement plan provides for participant-directed 
investments).\417\ Similarly, if an individual has an IRA and 
may choose among various mutual funds offered by the IRA 
trustee, but has no control over the investments held in the 
mutual funds, the individual is not an entity manager under the 
provision.
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    \417\ Depending on the circumstances, the person who is responsible 
for determining the preselected investment options may be an entity 
manager under the provision.
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Reason to know standard

    In general, it is intended that in order for an entity or 
entity manager to have reason to know that a transaction is a 
prohibited tax shelter transaction, the entity or entity 
manager must have knowledge of sufficient facts that would lead 
a reasonable person to conclude that the transaction is a 
prohibited tax shelter transaction. If there is justifiable 
reliance on a reasoned written opinion of legal counsel 
(including in-house counsel) or of an independent accountant 
with expertise in tax matters, after making full disclosure of 
relevant facts about a transaction to such counsel or 
accountant, that a transaction is not a prohibited tax shelter 
transaction, then absent knowledge of facts not considered in 
the reasoned written opinion that would lead a reasonable 
person to conclude that the transaction is a prohibited tax 
shelter transaction, the reason to know standard is not met.
    Not obtaining a reasoned written opinion of legal counsel 
does not alone indicate whether a person has reason to know. 
However, if a transaction is extraordinary for the entity, 
promises a return for the organization that is exceptional 
considering the amount invested by, the participation of, or 
the absence of risk to the organization or the transaction is 
of significant size, either in an absolute sense or relative to 
the receipts of the entity, then, in general, the presence of 
such factors may indicate that the entity or entity manager has 
a responsibility to inquire further about whether a transaction 
is a prohibited tax shelter transaction, or, absent such 
inquiry, that the reason to know standard is satisfied. For 
example, if a tax-exempt entity's investment in a transaction 
is $1,000, and the entity is promised or expects to receive 
$10,000 in the near term, in general, the rate of return would 
be considered exceptional and the entity should make inquiries 
with respect to the transaction. As another example, if a tax-
exempt entity's expected income from a transaction is greater 
than five percent of the entity's annual receipts, or is in 
excess of $1,000,000, and the entity fails to make appropriate 
inquiries with respect to its participation in such 
transaction, such failure is a factor tending to show that the 
reason to know standard is met. Appropriate inquiries need not 
involve obtaining a reasoned written opinion. In general, if a 
transaction does not present the factors described above and 
the organization is small (measured by receipts and assets) and 
described in section 501(c)(3), it is expected that the reason 
to know standard will not be met.

                             Effective Date

    In general, the provision is effective for taxable years 
ending after the date of enactment (May 17, 2006), with respect 
to transactions before, on, or after such date, except that no 
tax shall apply with respect to income or proceeds that are 
properly allocable to any period ending on or before the date 
that is 90 days after the date of enactment (May 17, 2006). The 
tax on certain knowing transactions does not apply to any 
prohibited tax shelter transaction to which a tax-exempt entity 
became a party on or before the date of enactment (May 17, 
2006). The disclosure provisions apply to disclosures the due 
date for which are after the date of enactment (May 17, 2006).

  PART TWELVE: HEROES EARNED RETIREMENT OPPORTUNITIES ACT (PUBLIC LAW 
                             109-227) \418\

    A. Combat Zone Compensation Taken into Account for Purposes of 
Determining Limitation and Deductibility of Contributions to Individual 
    Retirement Plans (sec. 2 of the Act and sec. 219(f) of the Code)

                              Present Law

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs and Roth IRAs (secs. 
408 and 408A). The total amount that an individual may 
contribute to one or more IRAs for a year is generally limited 
to the lesser of: (1) a dollar amount ($4,000 for 2006); and 
(2) the amount of the individual's compensation that is 
includible in gross income for the year. In the case of an 
individual who has attained age 50 before the end of the year, 
the dollar amount is increased by an additional amount ($1,000 
for 2006). In the case of a married couple, contributions can 
be made up to the dollar limit for each spouse if the combined 
compensation of the spouses that is includible in gross income 
is at least equal to the contributed amount. IRA contributions 
in excess of the applicable limit are generally subject to an 
excise tax of six percent per year until withdrawn.
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    \418\ H.R. 1499. The House passed the bill on the suspension 
calendar on May 23, 2005. The Senate passed the bill with an amendment 
by unanimous consent on November 15, 2005. The House agreed to the 
Senate amendment with an amendment on May 9, 2006. The Senate agreed to 
the House amendment by unanimous consent on May 18, 2006. The President 
signed the bill on May 29, 2006.
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    An individual may make contributions to a traditional IRA 
(up to the contribution limit) without regard to his or her 
adjusted gross income. An individual may deduct his or her 
contributions to a traditional IRA if neither the individual 
nor the individual's spouse is an active participant in an 
employer-sponsored retirement plan. If an individual or the 
individual's spouse is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for 
taxpayers with adjusted gross income over certain levels.
    Individuals with adjusted gross income below certain levels 
may make contributions to a Roth IRA (up to the contribution 
limit). Contributions to a Roth IRA are not deductible.
    An IRA contribution can be made after the end of the year 
to which the contribution relates if made not later than the 
due date (without regard to extensions) of the tax return for 
the year. In that case, the IRA contribution is deemed to be 
made on the last day of the year to which it relates.
    Present law provides an exclusion from gross income for 
combat pay received by members of the Armed Forces (sec. 112). 
Thus, combat pay is not includible compensation for purposes of 
applying the limit on IRA contributions.
    In general, a taxpayer must file a claim for credit or 
refund of an overpayment of tax within three years of the 
filing of the tax return or within two years of the payment of 
the tax, whichever expires later (sec. 6511(a)).\419\ A claim 
for credit or refund that is not filed within these time 
periods is rejected as untimely. Assessment of a tax deficiency 
generally must be made within three years of the filing of the 
tax return (sec. 6501(a)).
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    \419\ If no tax return is filed, the two-year limit applies.
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                        Explanation of Provision

    Under the provision, for purposes of applying the limit on 
IRA contributions, an individual's gross income is determined 
without regard to the exclusion for combat pay. Thus, combat 
pay received by an individual is treated as includible 
compensation for purposes of determining the amount that the 
individual (and the individual's spouse) can contribute to an 
IRA.
    The provision includes a special rule providing an extended 
period for making IRA contributions attributable to excludible 
combat pay for taxable years beginning after December 31, 2003 
(for which the provision is effective), and ending before the 
date of enactment. Under the special rule, a contribution for 
such a year made not later than the last day of the three-year 
period beginning on the date of enactment of the provision (May 
29, 2006) is treated as having been made on the last day of the 
taxable year. Thus, such contributions made within the three-
year period are considered timely. If such a contribution 
results in a tax overpayment for the year for which the 
contribution is made, a claim for credit or refund of the 
overpayment is considered timely if filed before the close of 
the one-year period beginning on the date the contribution is 
actually made. The period for assessing a tax deficiency 
attributable to such a contribution does not expire before the 
close of the three-year period beginning on the date the 
contribution is made.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2003.

  PART THIRTEEN: PENSION PROTECTION ACT OF 2006 (PUBLIC LAW 109-280) 
                                 \420\

 TITLE I--REFORM OF FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT 
                             PENSION PLANS

   A. Minimum Funding Standards for Single-Employer Defined Benefit 
Pension Plans (secs. 101, 102, 107, 111, 112, 114, and 301 of the Act, 
   secs. 302-308 of ERISA, and sec. 412 and new sec. 430 of the Code)

                              Present Law

In general
    Single-employer defined benefit pension plans are subject 
to minimum funding requirements under the Employee Retirement 
Income Security Act of 1974 (``ERISA'') and the Internal 
Revenue Code (the ``Code'').\421\ The amount of contributions 
required for a plan year under the minimum funding rules is 
generally the amount needed to fund benefits earned during that 
year plus that year's portion of other liabilities that are 
amortized over a period of years, such as benefits resulting 
from a grant of past service credit. The amount of required 
annual contributions is determined under one of a number of 
acceptable actuarial cost methods. Additional contributions are 
required under the deficit reduction contribution rules in the 
case of certain underfunded plans. No contribution is required 
under the minimum funding rules in excess of the full funding 
limit (described below).
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    \420\ H.R. 4. The House passed the bill on July 28, 2006. The 
Senate passed the bill on August 3, 2006. The President signed the bill 
on August 17, 2006. Some provisions that are identical or similar to 
the pension provisions in the Act were contained in other bills 
reported by the House Committees on Ways and Means and Education and 
the Workforce and the Senate Committees on Finance and Health, 
Education, Labor, and Pensions, or passed by the House or the Senate 
during the 109th Congress. These bills include H.R. 2830, S. 1953, and 
S. 1783. For a technical explanation of the bill prepared by the staff 
of the Joint Committee on Taxation, see Joint Committee on Taxation, 
Technical Explanation of H.R. 4, the ``Pension Protection Act of 
2006,'' as Passed by the House on July 28, 2006, and as Considered by 
the Senate on August 3, 2006 (JCX-38-06), August 3, 2006. For 
references to the technical explanation, see 152 Cong. Rec. H. 6158 
(July 28, 2006) and 152 Cong. Rec. S. 8763 (August 3, 2006).
    \421\ Multiemployer defined benefit pension plans are also subject 
to the minimum funding requirements, but the rules for multiemployer 
plans differ in various respects from the rules applicable to single-
employer plans. Governmental plans and church plans are generally 
exempt from the minimum funding requirements.
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General minimum funding rules
            Funding standard account
    As an administrative aid in the application of the funding 
requirements, a defined benefit pension plan is required to 
maintain a special account called a ``funding standard 
account'' to which specified charges and credits are made for 
each plan year, including a charge for normal cost and credits 
for contributions to the plan. Other charges or credits may 
apply as a result of decreases or increases in past service 
liability as a result of plan amendments, experience gains or 
losses, gains or losses resulting from a change in actuarial 
assumptions, or a waiver of minimum required contributions.
    In determining plan funding under an actuarial cost method, 
a plan's actuary generally makes certain assumptions regarding 
the future experience of a plan. These assumptions typically 
involve rates of interest, mortality, disability, salary 
increases, and other factors affecting the value of assets and 
liabilities. If the plan's actual unfunded liabilities are less 
than those anticipated by the actuary on the basis of these 
assumptions, then the excess is an experience gain. If the 
actual unfunded liabilities are greater than those anticipated, 
then the difference is an experience loss. Experience gains and 
losses for a year are generally amortized as credits or charges 
to the funding standard account over five years.
    If the actuarial assumptions used for funding a plan are 
revised and, under the new assumptions, the accrued liability 
of a plan is less than the accrued liability computed under the 
previous assumptions, the decrease is a gain from changes in 
actuarial assumptions. If the new assumptions result in an 
increase in the plan's accrued liability, the plan has a loss 
from changes in actuarial assumptions. The accrued liability of 
a plan is the actuarial present value of projected pension 
benefits under the plan that will not be funded by future 
contributions to meet normal cost or future employee 
contributions. The gain or loss for a year from changes in 
actuarial assumptions is amortized as credits or charges to the 
funding standard account over ten years.
    If minimum required contributions are waived (as discussed 
below), the waived amount (referred to as a ``waived funding 
deficiency'') is credited to the funding standard account. The 
waived funding deficiency is then amortized over a period of 
five years, beginning with the year following the year in which 
the waiver is granted. Each year, the funding standard account 
is charged with the amortization amount for that year unless 
the plan becomes fully funded.
    If, as of the close of a plan year, the funding standard 
account reflects credits at least equal to charges, the plan is 
generally treated as meeting the minimum funding standard for 
the year. If, as of the close of the plan year, charges to the 
funding standard account exceed credits to the account, then 
the excess is referred to as an ``accumulated funding 
deficiency.'' Thus, as a general rule, the minimum contribution 
for a plan year is determined as the amount by which the 
charges to the funding standard account would exceed credits to 
the account if no contribution were made to the plan. For 
example, if the balance of charges to the funding standard 
account of a plan for a year would be $200,000 without any 
contributions, then a minimum contribution equal to that amount 
would be required to meet the minimum funding standard for the 
year to prevent an accumulated funding deficiency.
            Credit balances
    If credits to the funding standard account exceed charges, 
a ``credit balance'' results. A credit balance results, for 
example, if contributions in excess of minimum required 
contributions are made. Similarly, a credit balance may result 
from large net experience gains. The amount of the credit 
balance, increased with interest at the rate used under the 
plan to determine costs, is applied against charges to the 
funding standard account, thus reducing required contributions.
            Funding methods and general concepts
    A defined benefit pension plan is required to use an 
acceptable actuarial cost method to determine the elements 
included in its funding standard account for a year. Generally, 
an actuarial cost method breaks up the cost of benefits under 
the plan into annual charges consisting of two elements for 
each plan year. These elements are referred to as: (1) normal 
cost; and (2) supplemental cost.
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions as to interest, mortality, time of payment, etc., 
had been fulfilled. The normal cost will be funded by future 
contributions to the plan: (1) in level dollar amounts; (2) as 
a uniform percentage of payroll; (3) as a uniform amount per 
unit of service (e.g., $1 per hour); or (4) on the basis of the 
actuarial present values of benefits considered accruing in 
particular plan years.
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses, changes in actuarial assumptions, and 
amounts necessary to make up funding deficiencies for which a 
waiver was obtained. Supplemental costs must be amortized 
(i.e., recognized for funding purposes) over a specified number 
of years, depending on the source. For example, the cost 
attributable to a past service liability is generally amortized 
over 30 years.
    Normal costs and supplemental costs under a plan are 
computed on the basis of an actuarial valuation of the assets 
and liabilities of a plan. An actuarial valuation is generally 
required annually and is made as of a date within the plan year 
or within one month before the beginning of the plan year. 
However, a valuation date within the preceding plan year may be 
used if, as of that date, the value of the plan's assets is at 
least 100 percent of the plan's current liability (i.e., the 
present value of benefits under the plan, as described below).
    For funding purposes, the actuarial value of plan assets 
may be used, rather than fair market value. The actuarial value 
of plan assets is the value determined on the basis of a 
reasonable actuarial valuation method that takes into account 
fair market value and is permitted under Treasury regulations. 
Any actuarial valuation method used must result in a value of 
plan assets that is not less than 80 percent of the fair market 
value of the assets and not more than 120 percent of the fair 
market value. In addition, if the valuation method uses average 
value of the plan assets, values may be used for a stated 
period not to exceed the five most recent plan years, including 
the current year.
    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), or which, in the aggregate, 
result in a total plan contribution equivalent to a 
contribution that would be determined if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.\422\
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    \422\ Under present law, certain changes in actuarial assumptions 
that decrease the liabilities of an underfunded single-employer plan 
must be approved by the Secretary of the Treasury.
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Additional contributions for underfunded plans
            In general
    Under special funding rules (referred to as the ``deficit 
reduction contribution'' rules),\423\ an additional charge to a 
plan's funding standard account is generally required for a 
plan year if the plan's funded current liability percentage for 
the plan year is less than 90 percent.\424\ A plan's ``funded 
current liability percentage'' is generally the actuarial value 
of plan assets as a percentage of the plan's current 
liability.\425\ In general, a plan's current liability means 
all liabilities to employees and their beneficiaries under the 
plan, determined on a present-value basis.
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    \423\ The deficit reduction contribution rules apply to single-
employer plans, other than single-employer plans with no more than 100 
participants on any day in the preceding plan year. Single-employer 
plans with more than 100 but not more than 150 participants are 
generally subject to lower contribution requirements under these rules.
    \424\ Under an alternative test, a plan is not subject to the 
deficit reduction contribution rules for a plan year if (1) the plan's 
funded current liability percentage for the plan year is at least 80 
percent, and (2) the plan's funded current liability percentage was at 
least 90 percent for each of the two immediately preceding plan years 
or each of the second and third immediately preceding plan years.
    \425\ In determining a plan's funded current liability percentage 
for a plan year, the value of the plan's assets is generally reduced by 
the amount of any credit balance under the plan's funding standard 
account. However, this reduction does not apply in determining the 
plan's funded current liability percentage for purposes of whether an 
additional charge is required under the deficit reduction contribution 
rules.
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    The amount of the additional charge required under the 
deficit reduction contribution rules is the sum of two amounts: 
(1) the excess, if any, of (a) the deficit reduction 
contribution (as described below), over (b) the contribution 
required under the normal funding rules; and (2) the amount (if 
any) required with respect to unpredictable contingent event 
benefits. The amount of the additional charge cannot exceed the 
amount needed to increase the plan's funded current liability 
percentage to 100 percent (taking into account the expected 
increase in current liability due to benefits accruing during 
the plan year).
    The deficit reduction contribution is generally the sum of 
(1) the ``unfunded old liability amount,'' (2) the ``unfunded 
new liability amount,'' and (3) the expected increase in 
current liability due to benefits accruing during the plan 
year.\426\ The ``unfunded old liability amount'' is the amount 
needed to amortize certain unfunded liabilities under 1987 and 
1994 transition rules. The ``unfunded new liability amount'' is 
the applicable percentage of the plan's unfunded new liability. 
Unfunded new liability generally means the unfunded current 
liability of the plan (i.e., the amount by which the plan's 
current liability exceeds the actuarial value of plan assets), 
but determined without regard to certain liabilities (such as 
the plan's unfunded old liability and unpredictable contingent 
event benefits). The applicable percentage is generally 30 
percent, but decreases by .40 of one percentage point for each 
percentage point by which the plan's funded current liability 
percentage exceeds 60 percent. For example, if a plan's funded 
current liability percentage is 85 percent (i.e., it exceeds 60 
percent by 25 percentage points), the applicable percentage is 
20 percent (30 percent minus 10 percentage points (25 
multiplied by .4)).\427\
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    \426\ The deficit reduction contribution may also include an 
additional amount as a result of the use of a new mortality table 
prescribed by the Secretary of the Treasury in determining current 
liability for plan years beginning after 2006, as described below.
    \427\ In making these computations, the value of the plan's assets 
is reduced by the amount of any credit balance under the plan's funding 
standard account.
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    A plan may provide for unpredictable contingent event 
benefits, which are benefits that depend on contingencies that 
are not reliably and reasonably predictable, such as facility 
shutdowns or reductions in workforce. The value of any 
unpredictable contingent event benefit is not considered in 
determining additional contributions until the event has 
occurred. The event on which an unpredictable contingent event 
benefit is contingent is generally not considered to have 
occurred until all events on which the benefit is contingent 
have occurred.
            Required interest rate and mortality table
    Specific interest rate and mortality assumptions must be 
used in determining a plan's current liability for purposes of 
the special funding rule. For plans years beginning before 
January 1, 2004, and after December 31, 2005, the interest rate 
used to determine a plan's current liability must be within a 
permissible range of the weighted average of the interest rates 
on 30-year Treasury securities for the four-year period ending 
on the last day before the plan year begins.\428\ The 
permissible range is generally from 90 percent to 105 percent 
(120 percent for plan years beginning in 2002 or 2003).\429\ 
The interest rate used under the plan generally must be 
consistent with the assumptions which reflect the purchase 
rates that would be used by insurance companies to satisfy the 
liabilities under the plan.\430\
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    \428\ The weighting used for this purpose is 40 percent, 30 
percent, 20 percent and 10 percent, starting with the most recent year 
in the four-year period. Notice 88-73, 1988-2 C.B. 383.
    \429\ If the Secretary of the Treasury determines that the lowest 
permissible interest rate in this range is unreasonably high, the 
Secretary may prescribe a lower rate, but not less than 80 percent of 
the weighted average of the 30-year Treasury rate.
    \430\ Code sec. 412(b)(5)(B)(iii)(II); ERISA sec. 
302(b)(5)(B)(iii)(II). Under Notice 90-11, 1990-1 C.B. 319, the 
interest rates in the permissible range are deemed to be consistent 
with the assumptions reflecting the purchase rates that would be used 
by insurance companies to satisfy the liabilities under the plan.
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    Under the Pension Funding Equity Act of 2004 (``PFEA 
2004''),\431\ a special interest rate applies in determining 
current liability for plan years beginning in 2004 or 
2005.\432\ For these years, the interest rate used must be 
within a permissible range of the weighted average of the rates 
of interest on amounts invested conservatively in long-term 
investment-grade corporate bonds during the four-year period 
ending on the last day before the plan year begins. The 
permissible range for these years is from 90 percent to 100 
percent. The interest rate is to be determined by the Secretary 
of the Treasury on the basis of two or more indices that are 
selected periodically by the Secretary and are in the top three 
quality levels available.
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    \431\ Pub. L. No. 108-218 (2004).
    \432\ In addition, under PFEA 2004, if certain requirements are 
met, reduced contributions under the deficit reduction contribution 
rules apply for plan years beginning after December 27, 2003, and 
before December 28, 2005, in the case of plans maintained by commercial 
passenger airlines, employers primarily engaged in the production or 
manufacture of a steel mill product or in the processing of iron ore 
pellets, or a certain labor organization.
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    In determining current liability, the 1983 Group Annuity 
Mortality Table has been used since 1995.\433\ Under present 
law, the Secretary of the Treasury may prescribe other tables 
to be used based on the actual experience of pension plans and 
projected trends in such experience. In addition, the Secretary 
of the Treasury is required to periodically review (at least 
every five years) any tables in effect and, to the extent the 
Secretary determines necessary, update such tables to reflect 
the actuarial experience of pension plans and projected trends 
in such experience.\434\ Under Prop. Treas. Reg. 1.412(l)(7)-1, 
beginning in 2007, RP-2000 Mortality Tables are used with 
improvements in mortality (including future improvements) 
projected to the current year and with separate tables for 
annuitants and nonannuitants.\435\
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    \433\ Rev. Rul. 95-28, 1995-1 C.B. 74. Separate mortality tables 
are required to be used with respect to disabled participants.
    \434\ Code sec. 412(l)(7)(C)(ii)(III); ERISA sec. 
302(d)(7)(C)(ii)(III).
    \435\ Separate tables continue to apply with respect to disabled 
participants.
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Other rules

            Full funding limitation
    No contributions are required under the minimum funding 
rules in excess of the full funding limitation. The full 
funding limitation is the excess, if any, of (1) the accrued 
liability under the plan (including normal cost), over (2) the 
lesser of (a) the market value of plan assets or (b) the 
actuarial value of plan assets.\436\ However, the full funding 
limitation may not be less than the excess, if any, of 90 
percent of the plan's current liability (including the expected 
increase in current liability due to benefits accruing during 
the plan year) over the actuarial value of plan assets. In 
general, current liability is all liabilities to plan 
participants and beneficiaries accrued to date, whereas the 
accrued liability under the full funding limitation may be 
based on projected future benefits, including future salary 
increases.
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    \436\ For plan years beginning before 2004, the full funding 
limitation was generally defined as the excess, if any, of (1) the 
lesser of (a) the accrued liability under the plan (including normal 
cost) or (b) a percentage (170 percent for 2003) of the plan's current 
liability (including the current liability normal cost), over (2) the 
lesser of (a) the market value of plan assets or (b) the actuarial 
value of plan assets, but in no case less than the excess, if any, of 
90 percent of the plan's current liability over the actuarial value of 
plan assets. Under the Economic Growth and Tax Relief Reconciliation 
Act of 2001 (``EGTRRA''), the full funding limitation based on 170 
percent of current liability is repealed for plan years beginning in 
2004 and thereafter. The provisions of EGTRRA generally do not apply 
for years beginning after December 31, 2010.
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            Timing of plan contributions
    In general, plan contributions required to satisfy the 
funding rules must be made within 8\1/2\ months after the end 
of the plan year. If the contribution is made by such due date, 
the contribution is treated as if it were made on the last day 
of the plan year.
    In the case of a plan with a funded current liability 
percentage of less than 100 percent for the preceding plan 
year, estimated contributions for the current plan year must be 
made in quarterly installments during the current plan 
year.\437\ The amount of each required installment is generally 
25 percent of the lesser of (1) 90 percent of the amount 
required to be contributed for the current plan year or (2) 100 
percent of the amount required to be contributed for the 
preceding plan year.\438\ If a required installment is not 
made, interest applies for the period of underpayment at a rate 
of the greater of (1) 175 percent of the Federal mid-term rate, 
or (2) the plan rate.
---------------------------------------------------------------------------
    \437\ Code sec. 412(m); ERISA sec. 302(e).
    \438\ If quarterly contributions are required with respect to a 
plan, the amount of a quarterly installment must also be sufficient to 
cover any shortfall in the plan's liquid assets (a ``liquidity 
shortfall'').
---------------------------------------------------------------------------
            Funding waivers
    Within limits, the Secretary of the Treasury is permitted 
to waive all or a portion of the contributions required under 
the minimum funding standard for a plan year (a ``waived 
funding deficiency'').\439\ A waiver may be granted if the 
employer (or employers) responsible for the contribution could 
not make the required contribution without temporary 
substantial business hardship and if requiring the contribution 
would be adverse to the interests of plan participants in the 
aggregate. Generally, no more than three waivers may be granted 
within any period of 15 consecutive plan years.
---------------------------------------------------------------------------
    \439\ Code sec. 412(d); ERISA sec. 303. Under similar rules, the 
amortization period applicable to an unfunded past service liability or 
loss may also be extended.
---------------------------------------------------------------------------
    The IRS is authorized to require security to be provided as 
a condition of granting a waiver of the minimum funding 
standard if the sum of the plan's accumulated funding 
deficiency and the balance of any outstanding waived funding 
deficiencies exceeds $1 million.
            Failure to make required contributions
    An employer is generally subject to an excise tax if it 
fails to make minimum required contributions and fails to 
obtain a waiver from the IRS.\440\ The excise tax is 10 percent 
of the amount of the accumulated funding deficiency. In 
addition, a tax of 100 percent may be imposed if the 
accumulated funding deficiency is not corrected within a 
certain period.
---------------------------------------------------------------------------
    \440\ Code sec. 4971. An excise tax applies also if a quarterly 
installment is less than the amount required to cover the plan's 
liquidity shortfall.
---------------------------------------------------------------------------
    If the total of the contributions the employer fails to 
make (plus interest) exceeds $1 million and the plan's funded 
current liability percentage is less than 100 percent, a lien 
arises in favor of the plan with respect to all property of the 
employer and the members of the employer's controlled group. 
The amount of the lien is the total amount of the missed 
contributions (plus interest).

                        Explanation of Provision


Interest rate required for plan years beginning in 2006 and 2007

    For plan years beginning after December 31, 2005, and 
before January 1, 2008, the provision applies the present-law 
funding rules, with an extension of the interest rate 
applicable in determining current liability for plan years 
beginning in 2004 and 2005. Thus, in determining current 
liability for funding purposes for plan years beginning in 2006 
and 2007, the interest rate used must be within the permissible 
range (90 to 100 percent) of the weighted average of the rates 
of interest on amounts invested conservatively in long-term 
investment-grade corporate bonds during the four-year period 
ending on the last day before the plan year begins.

Funding rules for plan years beginning after 2007_in general

    For plan years beginning after December 31, 2007, in the 
case of single-employer defined benefit plans, the provision 
repeals the present-law funding rules (including the 
requirement that a funding standard account be maintained) and 
provides a new set of rules for determining minimum required 
contributions.\441\ Under the provision, the minimum required 
contribution to a single-employer defined benefit pension plan 
for a plan year generally depends on a comparison of the value 
of the plan's assets with the plan's funding target and target 
normal cost. As described in more detail below, under the 
provision, credit balances generated under present law are 
carried over (into a ``funding standard carryover balance'') 
and generally may be used in certain circumstances to reduce 
otherwise required minimum contributions. In addition, as 
described more fully below, contributions in excess of the 
minimum contributions required under the provision for plan 
years beginning after 2007 generally are credited to a 
prefunding balance that may be used in certain circumstances to 
reduce otherwise required minimum contributions. To facilitate 
the use of such balances to reduce minimum required 
contributions, while avoiding use of such balances for more 
than one purpose, in some circumstances the value of plan 
assets is reduced by the prefunding balance and/or the funding 
standard carryover balance.
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    \441\ A delayed effective date applies to certain plans as 
discussed in Items C, D and E below. Changes to the funding rules for 
multiemployer plans are discussed in Title II below. Governmental plans 
and church plans continue to be exempt from the funding rules to the 
extent provided under present law.
---------------------------------------------------------------------------
    The minimum required contribution for a plan year, based on 
the value of plan assets (reduced by any prefunding balance and 
funding standard carryover balance) compared to the funding 
target, is shown in the following table:

------------------------------------------------------------------------
                                                The minimum required
                    If:                           contribution is:
------------------------------------------------------------------------
the value of plan assets (reduced by any    the sum of: (1) target
 prefunding balance and funding standard     normal cost; (2) any
 carryover balance) is less than the         shortfall amortization
 funding target                              charge; and (3) any waiver
                                             amortization charge.
------------------------------------------------------------------------
the value of plan assets (reduced by any    the target normal cost,
 prefunding balance and funding standard     reduced (but not below
 carryover balance) equals or exceeds the    zero) by the excess of (1)
 funding target                              the value of plan assets
                                             (reduced by any prefunding
                                             balance and funding
                                             standard carryover
                                             balance), over (2) the
                                             funding target.
------------------------------------------------------------------------

    Under the provision, a plan's funding target is the present 
value of all benefits accrued or earned as of the beginning of 
the plan year. A plan's target normal cost for a plan year is 
the present value of benefits expected to accrue or be earned 
during the plan year. A shortfall amortization charge is 
generally the sum of the amounts required to amortize any 
shortfall amortization bases for the plan year and the six 
preceding plan years. A shortfall amortization base is 
generally required to be established for a plan year if the 
plan has a funding shortfall for a plan year.\442\ A shortfall 
amortization base may be positive or negative, i.e., an 
offsetting amortization base is established for gains. In 
general, a plan has a funding shortfall if the plan's funding 
target for the year exceeds the value of the plan's assets 
(reduced by any prefunding balance and funding standard 
carryover balance). A waiver amortization charge is the amount 
required to amortize a waived funding deficiency.
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    \442\ Under a special rule, discussed below, a shortfall 
amortization base does not have to be established if the value of a 
plan's assets (reduced by any prefunding balance, but only if the 
employer elects to use any portion of the prefunding balance to reduce 
required contributions for the year) is at least equal to the plan's 
funding target for the plan year.
---------------------------------------------------------------------------
    The provision specifies the interest rates and mortality 
table that must be used in determining a plan's target normal 
cost and funding target, as well as certain other actuarial 
assumptions, including special assumptions (``at-risk'' 
assumptions) for a plan in at-risk status. A plan is in at-risk 
status for a year if the value of the plan's assets (reduced by 
any prefunding and funding standard carryover balances) for the 
preceding year was less than (1) 80 percent of the plan's 
funding target determined without regard to the at-risk 
assumptions, and (2) 70 percent of the plan's funding target 
determined using the at-risk assumptions. Under a transition 
rule, instead of 80 percent, the following percentages apply: 
65 percent for 2008, 70 percent for 2009, and 75 percent for 
2010.

Target normal cost

    Under the provision, the minimum required contribution for 
a plan year generally includes the plan's target normal cost 
for the plan year. A plan's target normal cost is the present 
value of all benefits expected to accrue or be earned under the 
plan during the plan year (the ``current'' year). For this 
purpose, an increase in any benefit attributable to services 
performed in a preceding year by reason of a compensation 
increase during the current year is treated as having accrued 
during the current year.
    If the value of a plan's assets (reduced by any funding 
standard carryover balance and prefunding balance) exceeds the 
plan's funding target for a plan year, the minimum required 
contribution for the plan year is target normal cost reduced by 
such excess (but not below zero).

Funding target and shortfall amortization charges

            In general
    If the value of a plan's assets (reduced by any funding 
standard carryover balance and prefunding balance) is less than 
the plan's funding target for a plan year, so that the plan has 
a funding shortfall,\443\ the minimum required contribution is 
generally increased by a shortfall amortization charge. As 
discussed more fully below, the shortfall amortization charge 
is the aggregate total (not less than zero) of the shortfall 
amortization installments for the plan year with respect to any 
shortfall amortization bases for the plan year and the six 
preceding plan years.
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    \443\ Under a special rule, in determining a plan's funding 
shortfall, the value of plan assets is not reduced by any funding 
standard carryover balance or prefunding balance if, with respect to 
the funding standard carryover balance or prefunding balance, there is 
in effect for the year a binding written agreement with the Pension 
Benefit Guaranty Corporation which provides that such balance is not 
available to reduce the minimum required contribution for the plan 
year.
---------------------------------------------------------------------------
            Funding target
    A plan's funding target for a plan year is the present 
value of all benefits accrued or earned under the plan as of 
the beginning of the plan year. For this purpose, all benefits 
(including early retirement or similar benefits) are taken into 
account. Benefits accruing in the plan year are not taken into 
account in determining the plan's funding target, regardless of 
whether the valuation date for the plan year is later than the 
first day of the plan year.\444\
---------------------------------------------------------------------------
    \444\ Benefits accruing during the plan year are taken into account 
in determining normal cost for the plan year.
---------------------------------------------------------------------------
            Shortfall amortization charge
    The shortfall amortization charge for a plan year is the 
aggregate total (not less than zero) of the shortfall 
amortization installments for the plan year with respect to any 
shortfall amortization bases for that plan year and the six 
preceding plan years. The shortfall amortization installments 
with respect to a shortfall amortization base for a plan year 
are the amounts necessary to amortize the shortfall 
amortization base in level annual installments over the seven-
plan-year period beginning with the plan year. The shortfall 
amortization installment with respect to a shortfall 
amortization base for any plan year in the seven-year period is 
the annual installment determined for that year for that 
shortfall amortization base. Shortfall amortization 
installments are determined using the appropriate segment 
interest rates (discussed below).
            Shortfall amortization base and phase-in of funding target
    A shortfall amortization base is determined for a plan year 
based on the plan's funding shortfall for the plan year. The 
funding shortfall is the amount (if any) by which the plan's 
funding target for the year exceeds the value of the plan's 
assets (reduced by any funding standard carryover balance and 
prefunding balance).
    The shortfall amortization base for a plan year is (1) the 
plan's funding shortfall, minus (2) the present value, 
determined using the segment interest rates (discussed below), 
of the aggregate total of the shortfall amortization 
installments and waiver amortization installments that have 
been determined for the plan year and any succeeding plan year 
with respect to any shortfall amortization bases and waiver 
amortization bases for preceding plan years.
    A shortfall amortization base may be positive or negative, 
depending on whether the present value of remaining 
installments with respect to prior year amortization bases is 
more or less than the plan's funding shortfall. In either case, 
the shortfall amortization base is amortized over seven years. 
Shortfall amortization installments for a particular plan year 
with respect to positive and negative shortfall amortization 
bases are netted in determining the shortfall amortization 
charge for the plan year, but the resulting shortfall 
amortization charge cannot be less than zero. Thus, negative 
amortization installments may not offset waiver amortization 
installments or normal cost.
    Under a special rule, a shortfall amortization base does 
not have to be established for a plan year if the value of a 
plan's assets (reduced by any prefunding balance, but only if 
the employer elects to use any portion of the prefunding 
balance to reduce required contributions for the year) is at 
least equal to the plan's funding target for the plan year. For 
purposes of the special rule, a transition rule applies for 
plan years beginning after 2007 and before 2011. The transition 
rule does not apply to a plan that (1) is not in effect for 
2007, or (2) is subject to the present-law deficit reduction 
contribution rules for 2007 (i.e., a plan covering more than 
100 participants and with a funded current liability below the 
applicable threshold).
    Under the transition rule, a shortfall amortization base 
does not have to be established for a plan year during the 
transition period if the value of plan assets (reduced by any 
prefunding balance, but only if the employer elects to use the 
prefunding balance to reduce required contributions for the 
year) for the plan year is at least equal to the applicable 
percentage of the plan's funding target for the year. The 
applicable percentage is 92 percent for 2008, 94 percent for 
2009, and 96 percent for 2010. However, the transition rule 
does not apply to a plan for any plan year after 2008 unless, 
for each preceding plan year after 2007, the plan's shortfall 
amortization base was zero (i.e., the plan was eligible for the 
special rule each preceding year).
            Early deemed amortization of funding shortfalls for 
                    preceding years
    If a plan's funding shortfall for a plan year is zero 
(i.e., the value of the plan's assets, reduced by any funding 
standard carryover balance and prefunding balance, is at least 
equal to the plan's funding target for the year), any shortfall 
amortization bases for preceding plan years are eliminated. 
That is, for purposes of determining any shortfall amortization 
charges for that year and succeeding years, the shortfall 
amortization bases for all preceding years (and all shortfall 
amortization installments determined with respect to such 
bases) are reduced to zero.

Waiver amortization charges

    The provision retains the present-law rules under which the 
Secretary of the Treasury may waive all or a portion of the 
contributions required under the minimum funding standard for a 
plan year (referred to as a ``waived funding 
deficiency'').\445\ If a plan has a waived funding deficiency 
for any of the five preceding plan years, the minimum required 
contribution for the plan year is increased by the waiver 
amortization charge for the plan year.
---------------------------------------------------------------------------
    \445\ In the case of single-employer plans, the provision repeals 
the present-law rules under which the amortization period applicable to 
an unfunded past service liability or loss may be extended.
---------------------------------------------------------------------------
    The waiver amortization charge for a plan year is the 
aggregate total of the waiver amortization installments for the 
plan year with respect to any waiver amortization bases for the 
five preceding plan years. The waiver amortization installments 
with respect to a waiver amortization base for a plan year are 
the amounts necessary to amortize the waiver amortization base 
in level annual installments over the five-year plan period 
beginning with the succeeding plan year. The waiver 
amortization installment with respect to that waiver 
amortization base for any plan year in the five-year period is 
the annual installment determined for the shortfall 
amortization base. Waiver amortization installments are 
determined using the appropriate segment interest rates 
(discussed below). The waiver amortization base for a plan year 
is the amount of the waived funding deficiency (if any) for the 
plan year.
    If a plan's funding shortfall for a plan year is zero 
(i.e., the value of the plan's assets, reduced by any funding 
standard carryover balance and prefunding balance, is at least 
equal to the plan's funding target for the year), any waiver 
amortization bases for preceding plan years are eliminated. 
That is, for purposes of determining any waiver amortization 
charges for that year and succeeding years, the waiver 
amortization bases for all preceding years (and all waiver 
amortization installments determined with respect to such 
bases) are reduced to zero.

Actuarial assumptions used in determining a plan's target normal cost 
        and funding target

            Interest rates
    The provision specifies the interest rates that must be 
used in determining a plan's target normal cost and funding 
target. Under the provision, present value is determined using 
three interest rates (``segment'' rates), each of which applies 
to benefit payments expected to be made from the plan during a 
certain period. The first segment rate applies to benefits 
reasonably determined to be payable during the five-year period 
beginning on the first day of the plan year; the second segment 
rate applies to benefits reasonably determined to be payable 
during the 15-year period following the initial five-year 
period; and the third segment rate applies to benefits 
reasonably determined to be payable the end of the 15-year 
period. Each segment rate is a single interest rate determined 
monthly by the Secretary of the Treasury on the basis of a 
corporate bond yield curve, taking into account only the 
portion of the yield curve based on corporate bonds maturing 
during the particular segment rate period.
    The corporate bond yield curve used for this purpose is to 
be prescribed on a monthly basis by the Secretary of the 
Treasury and reflect the average, for the 24-month period 
ending with the preceding month, of yields on investment grade 
corporate bonds with varying maturities and that are in the top 
three quality levels available. The yield curve should reflect 
the average of the rates on all bonds in the top three quality 
levels on which the yield curve is based.
    The Secretary of the Treasury is directed to publish each 
month the corporate bond yield curve and each of the segment 
rates for the month. In addition, such Secretary is directed to 
publish a description of the methodology used to determine the 
yield curve and segment rates, which is sufficiently detailed 
to enable plans to make reasonable projections regarding the 
yield curve and segment rates for future months, based on a 
plan's projection of future interest rates.
    Under the provision, the present value of liabilities under 
a plan is determined using the segment rates for the 
``applicable month'' for the plan year. The applicable month is 
the month that includes the plan's valuation date for the plan 
year, or, at the election of the plan sponsor, any of the four 
months preceding the month that includes the valuation date. An 
election of a preceding month applies to the plan year for 
which it is made and all succeeding plan years unless revoked 
with the consent of the Secretary of the Treasury.
    Solely for purposes of determining minimum required 
contributions, in lieu of the segment rates described above, an 
employer may elect to use interest rates on a yield curve based 
on the yields on investment grade corporate bonds for the month 
preceding the month in which the plan year begins (i.e., 
without regard to the 24-month averaging described above). Such 
an election may be revoked only with consent of the Secretary 
of the Treasury.
    The provision provides a transition rule for plan years 
beginning in 2008 and 2009 (other than for plans first 
effective after December 31, 2007). Under this rule, for plan 
years beginning in 2008, the first, second, or third segment 
rate with respect to any month is the sum of: (1) the product 
of the segment rate otherwise determined for the month, 
multiplied by 33\1/3\ percent; and (2) the product of the 
applicable long-term corporate bond rate,\446\ multiplied by 
66\2/3\ percent. For plan years beginning in 2009, the first, 
second, or third segment rate with respect to any month is the 
sum of: (1) the product of the segment rate otherwise 
determined for the month, multiplied by 66\2/3\ percent; and 
(2) the product of applicable long-term corporate bond rate 
multiplied by 33\1/3\ percent. An employer may elect not to 
have the transition rule apply with respect to a plan. Such an 
election may be revoked only with consent of the Secretary of 
the Treasury.
---------------------------------------------------------------------------
    \446\ The applicable long-term corporate bond rate is a rate that 
is from 90 to 100 percent of the weighted average of the rates of 
interest on amounts invested conservatively in long-term investment-
grade corporate bonds during the four-year period ending on the last 
day before the plan year begins as determined by the Secretary under 
the method in effect for 2007.
---------------------------------------------------------------------------
    Under the provision, certain amounts are determined using 
the plan's ``effective interest rate'' for a plan year. The 
effective interest rate with respect to a plan for a plan year 
is the single rate of interest which, if used to determine the 
present value of the benefits taken into account in determining 
the plan's funding target for the year, would result in an 
amount equal to the plan's funding target (as determined using 
the first, second, and third segment rates).
            Mortality table
    Under the provision, the Secretary of the Treasury is 
directed to prescribe by regulation the mortality tables to be 
used in determining present value or making any computation 
under the funding rules.\447\ Such tables are to be based on 
the actual experience of pension plans and projected trends in 
such experience. In prescribing tables, the Secretary is to 
take into account results of available independent studies of 
mortality of individuals covered by pension plans. In addition, 
the Secretary is required (at least every 10 years) to revise 
any table in effect to reflect the actual experience of pension 
plans and projected trends in such experience.
---------------------------------------------------------------------------
    \447\ As under present law, separate mortality tables are required 
to be used with respect to disabled participants.
---------------------------------------------------------------------------
    The provision also provides for the use of a separate 
mortality table upon request of the plan sponsor and approval 
by the Secretary of the Treasury in accordance with procedures 
described below. In order for the table to be used: (1) the 
table must reflect the actual experience of the pension plans 
maintained by the plan sponsor and projected trends in general 
mortality experience, and (2) there must be a sufficient number 
of plan participants, and the pension plans must have been 
maintained for a sufficient period of time, to have credible 
information necessary for that purpose. A separate mortality 
table can be a mortality table constructed by the plan's 
enrolled actuary from the plan's own experience or a table that 
is an adjustment to the table prescribed by the Secretary which 
sufficiently reflects the plan's experience. Except as provided 
by the Secretary, a separate table may not be used for any plan 
unless (1) a separate table is established and used for each 
other plan maintained by the plan sponsor and, if the plan 
sponsor is a member of a controlled group, each member of the 
controlled group,\448\ and (2) the requirements for using a 
separate table are met with respect to the table established 
for each plan, taking into account only the participants of 
that plan, the time that plan has been in existence, and the 
actual experience of that plan. In general, a separate table 
may be used during the period of consecutive plan years (not to 
exceed 10) specified in the request. However, a separate 
mortality table ceases to be in effect as of the earlier of (1) 
the date on which there is a significant change in the 
participants in the plan by reason of a plan spinoff or merger 
or otherwise, or (2) the date on which the plan actuary 
determines that the table does not meet the requirements for 
being used.
---------------------------------------------------------------------------
    \448\ For example, the Secretary may deem it appropriate to provide 
an exception in the case of a small plan.
---------------------------------------------------------------------------
    A plan sponsor must submit a separate mortality table to 
the Secretary for approval at least seven months before the 
first day of the period for which the table is to be used. A 
mortality table submitted to the Secretary for approval is 
treated as in effect as of the first day of the period unless 
the Secretary, during the 180-day period beginning on the date 
of the submission, disapproves of the table and provides the 
reasons that the table fails to meet the applicable criteria. 
The 180-day period is to be extended upon mutual agreement of 
the Secretary and the plan sponsor.
            Other assumptions
    Under the provision, in determining any present value or 
making any computation, the probability that future benefits 
will be paid in optional forms of benefit provided under the 
plan must be taken into account (including the probability of 
lump-sum distributions determined on the basis of the plan's 
experience and other related assumptions). The assumptions used 
to determine optional forms of benefit under a plan may differ 
from the assumptions used to determine present value for 
purposes of the funding rules under the provision. Differences 
in the present value of future benefit payments that result 
from the different assumptions used to determine optional forms 
of benefit under a plan must be taken into account in 
determining any present value or making any computation for 
purposes of the funding rules.
    The provision generally does not require other specified 
assumptions to be used in determining the plan's target normal 
cost and funding target except in the case of at-risk plans 
(discussed below). However, similar to present law, the 
determination of present value or other computation must be 
made on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), and which, in combination, 
offer the actuary's best estimate of anticipated experience 
under the plan.\449\
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    \449\ The provision retains the present-law rule under which 
certain changes in actuarial assumptions that decrease the liabilities 
of an underfunded single-employer plan must be approved by the 
Secretary of the Treasury.
---------------------------------------------------------------------------

Special assumptions for at-risk plans

    The provision applies special assumptions (``at-risk'' 
assumptions) in determining the funding target and normal cost 
of a plan in at-risk status. Whether a plan is in at-risk 
status for a plan year depends on its funding target attainment 
percentage for the preceding year. A plan's funding target 
attainment percentage for a plan year is the ratio, expressed 
as a percentage, that the value of the plan's assets (reduced 
by any funding standard carryover balance and prefunding 
balance) bears to the plan's funding target for the year. For 
this purpose, the plan's funding target is determined using the 
actuarial assumptions for plans that are not at-risk.
    Under the provision, a plan is in at-risk status for a year 
if, for the preceding year: (1) the plan's funding target 
attainment percentage, determined without regard to the at-risk 
assumptions, was less than 80 percent (with a transition rule 
discussed below), and (2) the plan's funding target attainment 
percentage, determined using the at-risk assumptions (without 
regard to whether the plan was in at-risk status for the 
preceding year), was less than 70 percent. Under a transition 
rule applicable for plan years beginning in 2008, 2009, and 
2010, instead of 80 percent, the following percentages apply: 
65 percent for 2008, 70 percent for 2009, and 75 percent for 
2010. In the case of plan years beginning in 2008, the plan's 
funding target attainment percentage for the preceding plan 
year may be determined using such methods of estimation as the 
Secretary of Treasury may provide.
    Under the provision, the at-risk rules do not apply if a 
plan had 500 or fewer participants on each day during the 
preceding plan year. For this purpose, all defined benefit 
pension plans (other than multiemployer plans) maintained by 
the same employer (or a predecessor employer), or by any member 
of such employer's controlled group, are treated as a single 
plan, but only participants with respect to such employer or 
controlled group member are taken into account.
    If a plan is in at-risk status, the plan's funding target 
and normal cost are determined using the assumptions that: (1) 
all employees who are not otherwise assumed to retire as of the 
valuation date, but who will be eligible to elect benefits in 
the current and 10 succeeding years, are assumed to retire at 
the earliest retirement date under plan, but not before the end 
of the plan year; and (2) all employees are assumed to elect 
the retirement benefit available under the plan at the assumed 
retirement age that results in the highest present value. In 
some cases, a loading factor also applies.
    The at-risk assumptions are not applied to certain 
employees of specified automobile manufacturers for purposes of 
determining whether a plan is in at-risk status, i.e., whether 
the plan's funding target attainment percentage, determined 
using the at-risk assumptions, was less than 70 percent for the 
preceding plan year. An employee is disregarded for this 
purpose if: (1) the employee is employed by a specified 
automobile manufacturer; (2) the employee is offered, pursuant 
to a bona fide retirement incentive program, a substantial 
amount of additional cash compensation, substantially enhanced 
retirement benefits under the plan, or materially reduced 
employment duties, on the condition that by a specified date no 
later than December 31, 2010, the employee retires (as defined 
under the terms of the plan); (3) the offer is made during 2006 
pursuant to a bona fide retirement incentive program and 
requires that the offer can be accepted no later than a 
specified date (not later than December 31, 2006); and (4) the 
employee does not accept the offer before the specified date on 
which the offer expires. For this purpose, a specified 
automobile manufacturer is (1) any automobile manufacturer and 
(2) any manufacturer of automobile parts that supplies parts 
directly to an automobile manufacturer and which, after a 
transaction or series of transactions ending in 1999, ceased to 
be a member of the automobile manufacturer's controlled group.
    The funding target of a plan in at-risk status for a plan 
year is generally the sum of: (1) the present value of all 
benefits accrued or earned as of the beginning of the plan 
year, determined using the at-risk assumptions described above, 
and (2) in the case of a plan that has also been in at-risk 
status for at least two of the four preceding plans years, a 
loading factor. The loading factor is the sum of (1) $700 times 
the number of participants in the plan, plus (2) four percent 
of the funding target determined without regard to the loading 
factor.\450\ The at-risk funding target is in no event less 
than the funding target determined without regard to the at-
risk rules.
---------------------------------------------------------------------------
    \450\ This loading factor is intended to reflect the cost of 
purchasing group annuity contracts in the case of termination of the 
plan.
---------------------------------------------------------------------------
    The target normal cost of a plan in at-risk status for a 
plan year is generally the sum of: (1) the present value of 
benefits expected to accrue or be earned under the plan during 
the plan year, determined using the special assumptions 
described above, and (2) in the case of a plan that has also 
been in at-risk status for at least two of the four preceding 
plans years, a loading factor of four percent of the target 
normal cost determined without regard to the loading 
factor.\451\ The at-risk target normal cost is in no event less 
than at-risk normal cost determined without regard to the at-
risk rules.
---------------------------------------------------------------------------
    \451\ Target normal cost for a plan in at-risk status does not 
include a loading factor of $700 per plan participant.
---------------------------------------------------------------------------
    If a plan has been in at-risk status for fewer than five 
consecutive plan years, the amount of a plan's funding target 
for a plan year is the sum of: (1) the amount of the funding 
target determined without regard to the at-risk rules, plus (2) 
the transition percentage for the plan year of the excess of 
the amount of the funding target determined under the at-risk 
rules over the amount determined without regard to the at-risk 
rules. Similarly, if a plan has been in at-risk status for 
fewer than five consecutive plan years, the amount of a plan's 
target normal cost for a plan year is the sum of: (1) the 
amount of the target normal cost determined without regard to 
the at-risk rules, plus (2) the transition percentage for the 
plan year of the excess of the amount of the target normal cost 
determined under the at-risk rules over the amount determined 
without regard to the at-risk rules. The transition percentage 
is the product of 20 percent times the number of consecutive 
plan years for which the plan has been in at-risk status. In 
applying this rule, plan years beginning before 2008 are not 
taken into account.

Funding standard carryover balance or prefunding balance

            In general
    The provision preserves credit balances that have 
accumulated under present law (referred to as ``funding 
standard carryover balances''). In addition, for plan years 
beginning after 2007, new credit balances (referred to as 
``prefunding balances'') result if an employer makes 
contributions greater than those required under the new funding 
rules. In general, under the Act, employers may choose whether 
to count funding standard carryover balances and prefunding 
balances in determining the value of plan assets or to use the 
balances to reduce required contributions, but not both. In 
this regard, the provision provides more favorable rules with 
respect to the use of funding standard carryover balances.
    Under the provision, if the value of a plan's assets 
(reduced by any prefunding balance) is at least 80 percent of 
the plan's funding target (determined without regard to the at-
risk rules) for the preceding plan year,\452\ the plan sponsor 
may elect to credit all or a portion of the funding standard 
carryover balance or prefunding balance against the minimum 
required contribution for the current plan year (determined 
after any funding waiver), thus reducing the amount that must 
be contributed for the current plan year.
---------------------------------------------------------------------------
    \452\ In the case of plan years beginning in 2008, the percentage 
for the preceding plan year may be determined using such methods of 
estimation as the Secretary of the Treasury may provide.
---------------------------------------------------------------------------
    The value of plan assets is generally reduced by any 
funding standard carryover balance or prefunding balance for 
purposes of determining minimum required contributions, 
including a plan's funding shortfall, and a plan's funding 
target attainment percentage (discussed above). However, the 
plan sponsor may elect to permanently reduce a funding standard 
carryover balance or prefunding balance, so that the value of 
plan assets is not required to be reduced by that amount in 
determining the minimum required contribution for the plan 
year. Any reduction of a funding standard carryover balance or 
prefunding balance applies before determining the balance that 
is available for crediting against minimum required 
contributions for the plan year.
            Funding standard carryover balance
    In the case of a single-employer plan that is in effect for 
a plan year beginning in 2007 and, as of the end of the 2007 
plan year, has a positive balance in the funding standard 
account maintained under the funding rules as in effect for 
2007, the plan sponsor may elect to maintain a funding standard 
carryover balance. The funding standard carryover balance 
consists of a beginning balance in the amount of the positive 
balance in the funding standard account as of the end of the 
2007 plan year, decreased (as described below) and adjusted to 
reflect the rate of net gain or loss on plan assets.
    For subsequent years (i.e., as of the first day of each 
plan year beginning after 2008), the funding standard carryover 
balance of a plan is decreased (but not below zero) by the sum 
of: (1) any amount credited to reduce the minimum required 
contribution for the preceding plan year, plus (2) any amount 
elected by the plan sponsor as a reduction in the funding 
standard carryover balance (thus reducing the amount by which 
the value of plan assets must be reduced in determining minimum 
required contributions).
            Prefunding balance
    The plan sponsor may elect to maintain a prefunding 
balance, which consists of a beginning balance of zero for the 
2008 plan year, increased and decreased (as described below) 
and adjusted to reflect the rate of net gain or loss on plan 
assets.
    For subsequent years, i.e., as of the first day of plan 
year beginning after 2008 (the ``current'' plan year), the plan 
sponsor may increase the prefunding balance by an amount, not 
to exceed (1) the excess (if any) of the aggregate total 
employer contributions for the preceding plan year, over (2) 
the minimum required contribution for the preceding plan year. 
For this purpose, any excess contribution for the preceding 
plan year is adjusted for interest accruing for the periods 
between the first day of the current plan year and the dates on 
which the excess contributions were made, determined using the 
effective interest rate of the plan for the preceding plan year 
and treating contributions as being first used to satisfy the 
minimum required contribution.
    The amount by which the aggregate total employer 
contributions for the preceding plan year exceeds the minimum 
required contribution for the preceding plan year is reduced 
(but not below zero) by the amount of contributions an employer 
would need to make to avoid a benefit limitation that would 
otherwise be imposed for the preceding plan year under the 
provisions of the provision relating to benefit limitations for 
single-employer plans.\453\ Thus, contributions needed to avoid 
a benefit limitation do not result in an increase in the plan's 
prefunding balance.\454\
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    \453\ Any contribution that may be taken into account in satisfying 
the requirement to make additional contributions with respect to more 
than one type of benefit limitation is taken into account only once for 
purposes of this reduction.
    \454\ The benefit limitations are discussed in Part B below.
---------------------------------------------------------------------------
    As of the first day of each plan year beginning after 2008, 
the prefunding balance of a plan is decreased (but not below 
zero) by the sum of: (1) any amount credited to reduce the 
minimum required contribution for the preceding plan year, plus 
(2) any amount elected by the plan sponsor as a reduction in 
the prefunding balance (thus reducing the amount by which the 
value of plan assets must be reduced in determining minimum 
required contributions). As discussed above, if any portion of 
the prefunding balance is used to reduce a minimum required 
contribution, the value of plan assets must be reduced by the 
prefunding balance in determining whether a shortfall 
amortization base must be established for the plan year (i.e., 
whether the value of plan assets for a plan year is less than 
the plan's funding target for the plan year). Thus, the 
prefunding balance may not be included in the value of plan 
assets in order to avoid a shortfall amortization base for a 
plan year and also used to reduce the minimum required 
contribution for the same year.
            Other rules
    In determining the prefunding balance or funding standard 
carryover balance as of the first day of a plan year, the plan 
sponsor must adjust the balance in accordance with regulations 
prescribed by the Secretary of the Treasury to reflect the rate 
of return on plan assets for the preceding year. The rate of 
return is determined on the basis of the fair market value of 
the plan assets and must properly take into account, in 
accordance with regulations, all contributions, distributions, 
and other plan payments made during the period.
    To the extent that a plan has a funding standard carryover 
balance of more than zero for a plan year, none of the plan's 
prefunding balance may be credited to reduce a minimum required 
contribution, nor may an election be made to reduce the 
prefunding balance for purposes of determining the value of 
plan assets. Thus, the funding standard carryover balance must 
be used for these purposes before the prefunding balance may be 
used.
    Any election relating to the prefunding balance and funding 
standard carryover balance is to be made in such form and 
manner as the Secretary of the Treasury prescribes.

Other rules and definitions

            Valuation date
    Under the provision, all determinations made with respect 
to minimum required contributions for a plan year (such as the 
value of plan assets and liabilities) must be made as of the 
plan's valuation date for the plan year. In general, the 
valuation date for a plan year must be the first day of the 
plan year. However, any day in the plan year may be designated 
as the plan's valuation date if, on each day during the 
preceding plan year, the plan had 100 or fewer 
participants.\455\ For this purpose, all defined benefit 
pension plans (other than multiemployer plans) maintained by 
the same employer (or a predecessor employer), or by any member 
of such employer's controlled group, are treated as a single 
plan, but only participants with respect to such employer or 
controlled group member are taken into account.
---------------------------------------------------------------------------
    \455\ In the case of a plan's first plan year, the ability to use a 
valuation date other than the first day of the plan year is determined 
by taking into account the number of participants the plan is 
reasonably expected to have on each day during that first plan year.
---------------------------------------------------------------------------
            Value of plan assets
    Under the provision, the value of plan assets is generally 
fair market value. However, the value of plan assets may be 
determined on the basis of the averaging of fair market values, 
but only if such method: (1) is permitted under regulations; 
(2) does not provide for averaging of fair market values over 
more than the period beginning on the last day of the 25th 
month preceding the month in which the plan's valuation date 
occurs and ending on the valuation date (or similar period in 
the case of a valuation date that is not the first day of a 
month); and (3) does not result in a determination of the value 
of plan assets that at any time is less than 90 percent or more 
than 110 percent of the fair market value of the assets at that 
time. Any averaging must be adjusted for contributions and 
distributions as provided by the Secretary of the Treasury.
    If a required contribution for a preceding plan year is 
made after the valuation date for the current year, the 
contribution is taken into account in determining the value of 
plan assets for the current plan year. For plan years beginning 
after 2008, only the present value of the contribution is taken 
into account, determined as of the valuation date for the 
current plan year, using the plan's effective interest rate for 
the preceding plan year. In addition, any required contribution 
for the current plan year is not taken into account in 
determining the value of plan assets. If any contributions for 
the current plan year are made before the valuation date, plan 
assets as of the valuation date does not include (1) the 
contributions, and (2) interest on the contributions for the 
period between the date of the contributions and the valuation 
date, determined using the plan's effective interest rate for 
the current plan year.
            Timing rules for contributions
    As under present law, the due date for the payment of a 
minimum required contribution for a plan year is generally 8\1/
2\ months after the end of the plan year. Any payment made on a 
date other than the valuation date for the plan year must be 
adjusted for interest accruing at the plan's effective interest 
rate for the plan year for the period between the valuation 
date and the payment date. Quarterly contributions must be made 
during a plan year if the plan had a funding shortfall for the 
preceding plan year (that is, if the value of the plan's 
assets, reduced by the funding standard carryover balance and 
prefunding balance, was less than the plan's funding target for 
the preceding plan year).\456\ If a quarterly installment is 
not made, interest applies for the period of underpayment at 
the rate of interest otherwise applicable (i.e., the plan's 
effective interest rate) plus 5 percentage points.
---------------------------------------------------------------------------
    \456\ The provision retains the present-law rules under which the 
amount of any quarterly installment must be sufficient to cover any 
liquidity shortfall.
---------------------------------------------------------------------------
            Excise tax on failure to make minimum required 
                    contributions
    The provision retains the present-law rules under which an 
employer is generally subject to an excise tax if it fails to 
make minimum required contributions and fails to obtain a 
waiver from the IRS.\457\ The excise tax is 10 percent of the 
aggregate unpaid minimum required contributions for all plan 
years remaining unpaid as of the end of any plan year. In 
addition, a tax of 100 percent may be imposed if any unpaid 
minimum required contributions remain unpaid after a certain 
period.
---------------------------------------------------------------------------
    \457\ The provision retains the present-law rules under which a 
lien in favor of the plan with respect to property of the employer (and 
members of the employer's controlled group) arises in certain 
circumstances in which the employer fails to make required 
contributions.
---------------------------------------------------------------------------
            Conforming changes
    The provision makes various technical and conforming 
changes to reflect the new funding requirements.

                             Effective Date

    The extension of the interest rate applicable in 
determining current liability for plan years beginning in 2004 
and 2005 is effective for plan years beginning after December 
31, 2005, and before January 1, 2008. The modifications to the 
single-employer plan funding rules are effective for plan years 
beginning after December 31, 2007.

 B. Benefit Limitations Under Single-Employer Defined Benefit Pension 
  Plans (secs. 103 and 113 of the Act, new secs. 101(j) and 206(g) of 
                  ERISA, and new sec. 436 of the Code)


                              Present Law 


Plant shutdown and other unpredictable contingent event benefits

    A plan may provide for unpredictable contingent event 
benefits, which are benefits that depend on contingencies other 
than age, service, compensation, death or disability or that 
are not reliably and reasonably predictable as determined by 
the Secretary. Some of these benefits are commonly referred to 
as ``plant shutdown'' benefits. Under present law, 
unpredictable contingent event benefits generally are not taken 
into account for funding purposes until the event has occurred.
    Defined pension plans are not permitted to provide 
``layoff'' benefits (i.e., severance benefits).\458\ However, 
defined benefit pension plans may provide subsidized early 
retirement benefits, including early retirement window 
benefits.\459\
---------------------------------------------------------------------------
    \458\ Treas. Reg. sec. 1.401-1(b)(1)(i).
    \459\ See, e.g., Treas. Reg. secs. 1.401(a)(4)-3(f)(4) and 
1.411(a)-7(c).
---------------------------------------------------------------------------

Limitation on certain benefit increases while funding waivers in effect

    Within limits, the IRS is permitted to waive all or a 
portion of the contributions required under the minimum funding 
standard for a plan year.\460\ In the case of a single-employer 
plan, a waiver may be granted if the employer responsible for 
the contribution could not make the required contribution 
without temporary substantial business hardship for the 
employer (and members of the employer's controlled group) and 
if requiring the contribution would be adverse to the interests 
of plan participants in the aggregate.
---------------------------------------------------------------------------
    \460\ Code sec. 412(d); ERISA sec. 303.
---------------------------------------------------------------------------
    If a funding waiver is in effect for a plan, subject to 
certain exceptions, no plan amendment may be adopted that 
increases the liabilities of the plan by reason of any increase 
in benefits, any change in the accrual of benefits, or any 
change in the rate at which benefits vest under the plan.\461\
---------------------------------------------------------------------------
    \461\ Code sec. 412(f); ERISA sec. 304(b)(1).
---------------------------------------------------------------------------

Security for certain plan amendments

    In the case of a single-employer defined benefit pension 
plan, if a plan amendment increasing current liability is 
adopted and the plan's funded current liability percentage is 
less than 60 percent (taking into account the effect of the 
amendment, but disregarding any unamortized unfunded old 
liability), the employer and members of the employer's 
controlled group must provide security in favor of the 
plan.\462\ The amount of security required is the excess of: 
(1) the lesser of (a) the amount by which the plan's assets are 
less than 60 percent of current liability, taking into account 
the benefit increase, or (b) the amount of the benefit increase 
and prior benefit increases after December 22, 1987, over (2) 
$10 million. The amendment is not effective until the security 
is provided.
---------------------------------------------------------------------------
    \462\ Code sec. 401(a)(29); ERISA sec. 307.
---------------------------------------------------------------------------
    The security must be in the form of a surety bond, cash, 
certain U.S. government obligations, or such other form as is 
satisfactory to the Secretary of the Treasury and the parties 
involved. The security is released after the funded liability 
of the plan reaches 60 percent.

Prohibition on benefit increases during bankruptcy

    Subject to certain exceptions, if an employer maintaining a 
single-employer defined benefit pension plan is involved in 
bankruptcy proceedings, no plan amendment may be adopted that 
increases the liabilities of the plan by reason of any increase 
in benefits, or any change in the accrual of benefits, or any 
change in the rate at which benefits vest under the plan.\463\ 
This limitation does not apply if the plan's funded current 
liability percentage is at least 100 percent, taking into 
account the amendment.
---------------------------------------------------------------------------
    \463\ Code sec. 401(a)(33); ERISA sec. 204(i).
---------------------------------------------------------------------------

Restrictions on benefit payments due to liquidity shortfalls

    In the case of a single-employer plan with a funded current 
liability percentage of less than 100 percent for the preceding 
plan year, estimated contributions for the current plan year 
must be made in quarterly installments during the current plan 
year. If quarterly contributions are required with respect to a 
plan, the amount of a quarterly installment must also be 
sufficient to cover any shortfall in the plan's liquid assets 
(a ``liquidity shortfall''). In general, a plan has a liquidity 
shortfall for a quarter if the plan's liquid assets (such as 
cash and marketable securities) are less than a certain amount 
(generally determined by reference to disbursements from the 
plan in the preceding 12 months).
    If a quarterly installment is less than the amount required 
to cover the plan's liquidity shortfall, limits apply to the 
benefits that can be paid from a plan during the period of 
underpayment. During that period, the plan may not make any 
prohibited payment, defined as: (1) any payment in excess of 
the monthly amount paid under a single life annuity (plus any 
social security supplement provided under the plan) to a 
participant or beneficiary whose annuity starting date occurs 
during the period; (2) any payment for the purchase of an 
irrevocable commitment from an insurer to pay benefits (e.g., 
an annuity contract); or (3) any other payment specified by the 
Secretary of the Treasury by regulations.\464\
---------------------------------------------------------------------------
    \464\ Code sec. 401(a)(32); ERISA sec. 206(e).
---------------------------------------------------------------------------

                        Explanation of Provision


Plant shutdown and other unpredictable contingent event benefits

    Under the provision, if a participant is entitled to an 
unpredictable contingent event benefit payable with respect to 
any event occurring during any plan year, the plan must provide 
that such benefits may not be provided if the plan's adjusted 
funding target attainment percentage for that plan year: (1) is 
less than 60 percent; or (2) would be less than 60 percent 
taking into account the occurrence of the event. For this 
purpose, the term unpredictable contingent event benefit means 
any benefit payable solely by reason of: (1) a plant shutdown 
(or similar event, as determined by the Secretary of the 
Treasury); or (2) any event other than attainment of any age, 
performance of any service, receipt or derivation of any 
compensation, or the occurrence of death or disability.
    The determination of whether the limitation applies is made 
in the year the unpredictable contingent event occurs. For 
example, suppose a plan provides for benefits upon the 
occurrence of a plant shutdown, and a plant shutdown occurs in 
2010. Taking into account the plant shutdown, the plan's 
adjusted funding target attainment percentage is less than 60 
percent. Thus, the limitation applies, and benefits payable 
solely by reason of the plant shutdown may not be paid (unless 
the employer makes contributions to the plan as described 
below), regardless of whether the benefits will be paid in the 
2010 plan year or a later plan year.\465\
---------------------------------------------------------------------------
    \465\ Benefits already being paid as a result of a plant shutdown 
or other event that occurred in a preceding year are not affected by 
the limitation.
---------------------------------------------------------------------------
    The limitation ceases to apply with respect to any plan 
year, effective as of the first day of the plan year, if the 
plan sponsor makes a contribution (in addition to any minimum 
required contribution for the plan year) equal to: (1) if the 
plan's adjusted funding target attainment percentage is less 
than 60 percent, the amount of the increase in the plan's 
funding target for the plan year attributable to the occurrence 
of the event; or (2) if the plan's adjusted funding target 
attainment percentage would be less than 60 percent taking into 
account the occurrence of the event, the amount sufficient to 
result in a adjusted funding target attainment percentage of 60 
percent.
    The limitation does not apply for the first five years a 
plan (or a predecessor plan) is in effect.

Plan amendments increasing benefit liabilities

    Certain plan amendments may not take effect during a plan 
year if the plan's adjusted funding target attainment 
percentage for the plan year: (1) is less than 80 percent; or 
(2) would be less than 80 percent taking into account the 
amendment.\466\ In such a case, no amendment may take effect if 
it has the effect of increasing the liabilities of the plan by 
reason of any increase in benefits, the establishment of new 
benefits, any change in the rate of benefit accrual, or any 
change in the rate at which benefits vest under the plan. The 
limitation does not apply to an amendment that provides for an 
increase in benefits under a formula which is not based on 
compensation, but only if the rate of increase does not exceed 
the contemporaneous rate of increase in average wages of the 
participants covered by the amendment.
---------------------------------------------------------------------------
    \466\ Under the provision, the present-law rules limiting benefit 
increases while an employer is in bankruptcy continue to apply.
---------------------------------------------------------------------------
    The limitation ceases to apply with respect to any plan 
year, effective as of the first day of the plan year (or, if 
later, the effective date of the amendment), if the plan 
sponsor makes a contribution (in addition to any minimum 
required contribution for the plan year) equal to: (1) if the 
plan's adjusted funding target attainment percentage is less 
than 80 percent, the amount of the increase in the plan's 
funding target for the plan year attributable to the amendment; 
or (2) if the plan's adjusted funding target attainment 
percentage would be less than 80 percent taking into account 
the amendment, the amount sufficient to result in a adjusted 
funding target attainment percentage of 80 percent.
    The limitation does not apply for the first five years a 
plan (or a predecessor plan) is in effect.

Prohibited payments

    A plan must provide that, if the plan's adjusted funding 
target attainment percentage for a plan year is less than 60 
percent, the plan will not make any prohibited payments after 
the valuation date for the plan year.
    A plan must also provide that, if the plan's adjusted 
funding target attainment percentage for a plan year is 60 
percent or greater, but less than 80 percent, the plan may not 
pay any prohibited payments exceeding the lesser of: (1) 50 
percent of the amount otherwise payable under the plan, and (2) 
the present value of the maximum PBGC guarantee with respect to 
the participant (determined under guidance prescribed by the 
PBGC, using the interest rates and mortality table applicable 
in determining minimum lump-sum benefits). The plan must 
provide that only one payment under this exception may be made 
with respect to any participant during any period of 
consecutive plan years to which the limitation applies. For 
this purpose, a participant and any beneficiary of the 
participant (including an alternate payee) is treated as one 
participant. If the participant's accrued benefit is allocated 
to an alternate payee and one or more other persons, the amount 
that may be distributed is allocated in the same manner unless 
the applicable qualified domestic relations order provides 
otherwise.
    In addition, a plan must provide that, during any period in 
which the plan sponsor is in bankruptcy proceedings, the plan 
may not pay any prohibited payment. However, this limitation 
does not apply on or after the date the plan's enrolled actuary 
certifies that the adjusted funding target attainment 
percentage of the plan is not less than 100 percent.
    For purposes of these limitations, ``prohibited payment'' 
is defined as under the present-law rule restricting 
distributions during a period of a liquidity shortfall and 
means (1) any payment in excess of the monthly amount paid 
under a single life annuity (plus any social security 
supplement provided under the plan) to a participant or 
beneficiary whose annuity starting date occurs during the 
period, (2) any payment for the purchase of an irrevocable 
commitment from an insurer to pay benefits (e.g., an annuity 
contract), or (3) any other payment specified by the Secretary 
of the Treasury by regulations.
    The prohibited payment limitation does not apply to a plan 
for any plan year if the terms of the plan (as in effect for 
the period beginning on September 1, 2005, and ending with the 
plan year) provide for no benefit accruals with respect to any 
participant during the period.

Cessation of benefit accruals

    A plan must provide that, if the plan's adjusted funding 
target attainment percentage is less than 60 percent for a plan 
year, all future benefit accruals under the plan must cease as 
of the valuation date for the plan year. The limitation applies 
only for purposes of the accrual of benefits; service during 
the freeze period is counted for other purposes. For example, 
if accruals are frozen under the provision, service earned 
during the freeze period still counts for vesting purposes. Or, 
as another example, suppose a plan provides that payment of 
benefits begins when a participant terminates employment after 
age 55 and with 25 years of service. Under this example, if a 
participant who is age 55 and has 23 years of service when the 
freeze on accruals becomes applicable terminates employment two 
years later, the participant has 25 years of service for this 
purpose and thus can begin receiving benefits. However 
(assuming the freeze on accruals is still in effect), the 
amount of the benefit is based on the benefit accrued before 
the freeze (i.e., counting only 23 years of service).
    The limitation ceases to apply with respect to any plan 
year, effective as of the first day of the plan year, if the 
plan sponsor makes a contribution (in addition to any minimum 
required contribution for the plan year) equal to the amount 
sufficient to result in an adjusted funding target attainment 
percentage of 60 percent.
    The limitation does not apply for the first five years a 
plan (or a predecessor plan) is in effect.

Adjusted funding target attainment percentage

            In general
    The term ``funding target attainment percentage'' is 
defined as under the minimum funding rules, i.e., the ratio, 
expressed as a percentage, that the value of the plan's assets 
(reduced by any funding standard carryover balance and 
prefunding balance) bears to the plan's funding target for the 
year (determined without regard to at-risk status). A plan's 
adjusted funding target attainment percentage is determined in 
the same way, except that the value of the plan's assets and 
the plan's funding target are both increased by the aggregate 
amount of purchases of annuities for employees other than 
highly compensated employees made by the plan during the two 
preceding plan years.
            Special rule for fully funded plans
    Under a special rule, if a plan's funding target attainment 
percentage is at least 100 percent, determined by not reducing 
the value of the plan's assets by any funding standard 
carryover balance or prefunding balance, the value of the 
plan's assets is not so reduced in determining the plan's 
funding target attainment percentage for purposes of whether 
the benefit limitations apply. Under a transition rule for a 
plan year beginning after 2007 and before 2011, the 
``applicable percentage'' for the plan year is substituted for 
100 percent in applying the special rule. For this purpose, the 
applicable percentage is 92 percent for 2008, 94 percent for 
2009, and 96 percent for 2010. However, for any plan year 
beginning after 2008, the transition rule does not apply unless 
the plan's funding target attainment percentage (determined by 
not reducing the value of the plan's assets by any funding 
standard carryover balance or prefunding balance) for each 
preceding plan year in the transition period is at least equal 
to the applicable percentage for the preceding year.
            Presumptions as to funded status
    Under the provision, certain presumptions apply in 
determining whether limitations apply with respect to a plan, 
subject to certification of the plan's adjusted funding target 
attainment percentage by the plan's enrolled actuary.
    If a plan was subject to a limitation for the preceding 
year, the plan's adjusted funding target attainment percentage 
for the current year is presumed to be the same as for the 
preceding year until the plan actuary certifies the plan's 
actual adjusted funding target attainment percentage for the 
current year.
    If (1) a plan was not subject to a limitation for the 
preceding year, but its adjusted funding target attainment 
percentage for the preceding year was not more than 10 
percentage points greater than the threshold for a limitation, 
and (2) as of the first day of the fourth month of the current 
plan year, the plan actuary has not certified the plan's actual 
adjusted funding target attainment percentage for the current 
year, the plan's funding target attainment percentage is 
presumed to be reduced by 10 percentage points as of that day 
and that day is deemed to be the plan's valuation date for 
purposes of applying the benefit limitation. As a result, the 
limitation applies as of that date until the actuary certifies 
the plan's actual adjusted funding target attainment 
percentage.
    In any other case, if the plan actuary has not certified 
the plan's actual adjusted funding target attainment percentage 
by the first day of the tenth month of the current plan year, 
for purposes of the limitations, the plan's adjusted funding 
target attainment percentage is conclusively presumed to be 
less than 60 percent as of that day and that day is deemed to 
be the valuation date for purposes of applying the benefit 
limitations.\467\
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    \467\ For purposes of applying the presumptions to plan years 
beginning in 2008, the funding target attainment percentage for the 
preceding year may be determined using such methods of estimation as 
the Secretary of the Treasury may provide.
---------------------------------------------------------------------------

Reduction of funding standard carryover and prefunding balances

            Election to reduce balances
    As discussed above, the value of plan assets is generally 
reduced by any funding standard carryover or prefunding in 
determining a plan's funding target attainment percentage. As 
provided for under the funding rules applicable to single-
employer plans, a plan sponsor may elect to reduce a funding 
standard carryover balance or prefunding balance, so that the 
value of plan assets is not required to be reduced by that 
amount in determining the plan's funding target attainment 
percentage.
            Deemed reduction of balances in the case of collectively 
                    bargained plans
    If a benefit limitation would otherwise apply to a plan 
maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more 
employers, the plan sponsor is treated as having made an 
election to reduce any prefunding balance or funding standard 
carryover balance by the amount necessary to prevent the 
benefit limitation from applying. However, the employer is not 
treated as having made such an election if the election would 
not prevent the benefit limitation from applying to the plan.
            Deemed reduction of balances in the case of other plans
    If the prohibited payment limitation would otherwise apply 
to a plan that is not maintained pursuant to a collective 
bargaining agreement, the plan sponsor is treated as having 
made an election to reduce any prefunding balance or funding 
standard carryover balance by the amount necessary to prevent 
the benefit limitation from applying. However, the employer is 
not treated as having made such an election if the election 
would not prevent the benefit limitation from applying to the 
plan.

Contributions made to avoid a benefit limitation

    Under the provision, an employer may make contributions (in 
addition to any minimum required contribution) in an amount 
sufficient to increase the plan's adjusted funding target 
attainment percentage to a level to avoid a limitation on 
unpredictable contingent event benefits, a plan amendment 
increasing benefits, or additional accruals. An employer may 
not use a prefunding balance or funding standard carryover 
balance in lieu of such a contribution, and such a contribution 
does not result in an increase in any prefunding balance.
    Instead of making additional contributions to avoid a 
benefit limitation, an employer may provide security in the 
form of a surety bond, cash, certain U.S. government 
obligations, or such other form as is satisfactory to the 
Secretary of the Treasury and the parties involved. In such a 
case, the plan's adjusted funding target attainment percentage 
is determined by treating the security as a plan asset. Any 
such security may be perfected and enforced at any time after 
the earlier of: (1) the date on which the plan terminates; (2) 
if the plan sponsor fails to make a required contribution for 
any subsequent plan year, the due date for the contribution; or 
(3) if the plan's adjusted funding target attainment percentage 
is less than 60 percent for a consecutive period of seven 
years, the valuation date for the last year in the period. The 
security will be released (and any related amounts will be 
refunded with any accrued interest) at such time as the 
Secretary of the Treasury may prescribe in regulations 
(including partial releases by reason of increases in the 
plan's funding target attainment percentage).

Treatment of plan as of close of prohibited or cessation period

    Under the provision, if a limitation on prohibited payments 
or future benefit accruals ceases to apply to a plan, all such 
payments and benefit accruals resume, effective as of the day 
following the close of the period for which the limitation 
applies. \468\ Nothing in this rule is to be construed as 
affecting a plan's treatment of benefits which would have been 
paid or accrued but for the limitation.
---------------------------------------------------------------------------
    \468\ This rule does not apply to limitations on unpredictable 
contingent event benefits and plan amendments increasing liabilities.
---------------------------------------------------------------------------

Notice to participants

    The plan administrator must provide written notice to 
participants and beneficiaries within 30 days: (1) after the 
plan has become subject to the limitation on unpredictable 
uncontingent event benefits or prohibited payments; (2) in the 
case of a plan to which the limitation on benefit accruals 
applies, after the valuation date for the plan year in which 
the plan's adjusted target attainment percentage is less than 
60 percent (or, if earlier, the date the adjusted target 
attainment percentage is deemed to be less than 60 percent). 
Notice must also be provided at such other times as may be 
determined by the Secretary of the Treasury. The notice may be 
in electronic or other form to the extent such form is 
reasonably accessible to the recipient.
    If the plan administrator fails to provide the required 
notice, the Secretary of Labor may impose a civil penalty of up 
to $1,000 a day from the time of the failure.

Effective Date

    The provision generally applies with respect to plan years 
beginning after December 31, 2007.
    In the case of a plan maintained pursuant to one or more 
collective bargaining agreements between employee 
representatives and one or more employers ratified before 
January 1, 2008, the provision does not apply to plan years 
beginning before the earlier of: (1) the later of (a) the date 
on which the last collective bargaining agreement relating to 
the plan terminates (determined without regard to any extension 
thereof agreed to after the date of enactment (August 17, 
2006)), or (b) the first day of the first plan year to which 
the provision would otherwise apply; or (2) January 1, 2010. 
For this purpose, any plan amendment made pursuant to a 
collective bargaining agreement relating to the plan that 
amends the plan solely to conform to any requirement under the 
provision is not to be treated as a termination of the 
collective bargaining agreement.

 C. Special Rules for Multiple-Employer Plans of Certain Cooperatives 
                         (sec. 104 of the Act)


                              Present Law

    Defined benefit pension plans are required to meet certain 
minimum funding rules. In some cases, additional contributions 
are required under the deficit reduction contribution rules if 
a single-employer defined benefit pension plan is underfunded. 
Additional contributions generally are not required in the case 
of a plan with a funded current liability percentage of at 
least 90 percent. A plan's funded current liability percentage 
is the value of plan assets as a percentage of current 
liability. In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan, determined using specified interest and mortality 
assumptions. In the case of a plan with a funded current 
liability percentage of less than 100 percent for the preceding 
plan year, estimated contributions for the current plan year 
must be made in quarterly installments during the current plan 
year.
    The PBGC insures benefits under most single-employer 
defined benefit pension plans in the event the plan is 
terminated with insufficient assets to pay for plan benefits. 
The PBGC is funded in part by a flat-rate premium per plan 
participant, and variable-rate premiums based on the amount of 
unfunded vested benefits under the plan. A specified interest 
rate and a specified mortality table apply in determining 
unfunded vested benefits for this purpose.
    A multiple-employer plan is a plan that is maintained by 
more than one employer and is not maintained pursuant to a 
collective bargaining agreement.\469\ A multiple-employer plan 
is subject to the minimum funding rules for single-employer 
plans and to PBGC variable-rate premiums.
---------------------------------------------------------------------------
    \469\ A plan maintained by more than one employer pursuant to a 
collective bargaining agreement is referred to as a multiemployer plan.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides a delayed effective date for the new 
single-employer plan funding rules in the case of a plan that 
was in existence on July 26, 2005, and was an eligible 
cooperative plan for the plan year including that date. The new 
funding rules do not apply with respect to such a plan for plan 
years beginning before the earlier of: (1) the first plan year 
for which the plan ceases to be an eligible cooperative plan, 
or (2) January 1, 2017. In addition, in applying the present-
law funding rules to an eligible cooperative plan to such a 
plan for plan years beginning after December 31, 2007, and 
before the first plan year for which the new funding rules 
apply, the interest rate used is the interest rate applicable 
under the new funding rules with respect to payments expected 
to be made from the plan after the 20-year period beginning on 
the first day of the plan year (i.e., the third segment rate 
under the new funding rules).
    A plan is treated as an eligible cooperative plan for a 
plan year if it is maintained by more than one employer and at 
least 85 percent of the employers are: (1) certain rural 
cooperatives; \470\ or (2) certain cooperative organizations 
that are more than 50-percent owned by agricultural producers 
or by cooperatives owned by agricultural producers, or 
organizations that are more than 50-percent owned, or 
controlled by, one or more such cooperative organizations. A 
plan is also treated as an eligible cooperative plan for any 
plan year for which it is maintained by more than one employer 
and is maintained by a rural telephone cooperative association.
---------------------------------------------------------------------------
    \470\ This is as defined in Code section 401(k)(7)(B) without 
regard to (iv) thereof and includes (1) organizations engaged primarily 
in providing electric service on a mutual or cooperative basis, or 
engaged primarily in providing electric service to the public in its 
service area and which is exempt from tax or which is a State or local 
government, other than a municipality; (2) certain civic leagues and 
business leagues exempt from tax 80 percent of the members of which are 
described in (1); (3) certain cooperative telephone companies; and (4) 
any organization that is a national association of organizations 
described above.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

D. Temporary Relief for Certain PBGC Settlement Plans (sec. 105 of the 
                                  Act)


                              Present Law

    Defined benefit pension plans are required to meet certain 
minimum funding rules. In some cases, additional contributions 
are required under the deficit reduction contribution rules if 
a single-employer defined benefit pension plan is underfunded. 
Additional contributions generally are not required in the case 
of a plan with a funded current liability percentage of at 
least 90 percent. A plan's funded current liability percentage 
is the value of plan assets as a percentage of current 
liability. In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan, determined using specified interest and mortality 
assumptions. In the case of a plan with a funded current 
liability percentage of less than 100 percent for the preceding 
plan year, estimated contributions for the current plan year 
must be made in quarterly installments during the current plan 
year.
    The PBGC insures benefits under most single-employer 
defined benefit pension plans in the event the plan is 
terminated with insufficient assets to pay for plan benefits. 
The PBGC is funded in part by a flat-rate premium per plan 
participant, and variable-rate premiums based on the amount of 
unfunded vested benefits under the plan. A specified interest 
rate and a specified mortality table apply in determining 
unfunded vested benefits for this purpose.

                        Explanation of Provision

    The provision agreement provides a delayed effective date 
for the new single-employer plan funding rules in the case of a 
plan that was in existence on July 26, 2005, and was a ``PBGC 
settlement plan'' as of that date. The new funding rules do not 
apply with respect to such a plan for plan years beginning 
before January 1, 2014. In addition, in applying the present-
law funding rules to a such a plan for plan years beginning 
after December 31, 2007, and before January 1, 2014, the 
interest rate used is the interest rate applicable under the 
new funding rules with respect to payments expected to be made 
from the plan after the 20-year period beginning on the first 
day of the plan year (i.e., the third segment rate under the 
new funding rules).
    Under the provision, the term ``PBGC settlement plan'' 
means a single-employer defined benefit plan: (1) that was 
sponsored by an employer in bankruptcy proceedings giving rise 
to a claim by the PBGC of not greater than $150 million, and 
the sponsorship of which was assumed by another employer (not a 
member of the same controlled group as the bankrupt sponsor) 
and the PBGC's claim was settled or withdrawn in connection 
with the assumption of the sponsorship; or (2) that, by 
agreement with the PBGC, was spun off from a plan subsequently 
terminated by the PBGC in an involuntary termination.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

E. Special Rules for Plans of Certain Government Contractors (sec. 106 
                              of the Act)


                              Present Law

    Defined benefit pension plans are required to meet certain 
minimum funding rules. In some cases, additional contributions 
are required under the deficit reduction contribution rules if 
a single-employer defined benefit pension plan is underfunded. 
Additional contributions generally are not required in the case 
of a plan with a funded current liability percentage of at 
least 90 percent. A plan's funded current liability percentage 
is the value of plan assets as a percentage of current 
liability. In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan, determined using specified interest and mortality 
assumptions. In the case of a plan with a funded current 
liability percentage of less than 100 percent for the preceding 
plan year, estimated contributions for the current plan year 
must be made in quarterly installments during the current plan 
year.
    The PBGC insures benefits under most single-employer 
defined benefit pension plans in the event the plan is 
terminated with insufficient assets to pay for plan benefits. 
The PBGC is funded in part by a flat-rate premium per plan 
participant, and variable-rate premiums based on the amount of 
unfunded vested benefits under the plan. A specified interest 
rate and a specified mortality table apply in determining 
unfunded vested benefits for this purpose.

                        Explanation of Provision

    The provision provides a delayed effective date for the new 
single-employer plan funding rules in the case of an eligible 
government contractor plan. The new funding rules do not apply 
with respect to such a plan for plan years beginning before the 
earliest of: (1) the first plan year for which the plan ceases 
to be an eligible government contractor plan, (2) the effective 
date of the Cost Accounting Standards Pension Harmonization 
Rule, and (3) the first plan year beginning after December 31, 
2010. In addition, in applying the present-law funding rules to 
a such a plan for plan years beginning after December 31, 2007, 
and before the first plan year for which the new funding rules 
apply, the interest rate used is the interest rate applicable 
under the new funding rules with respect to payments expected 
to be made from the plan after the 20-year period beginning on 
the first day of the plan year (i.e., the third segment rate 
under the new funding rules).
    Under the provision, a plan is treated as an eligible 
government contractor plan if it is maintained by a corporation 
(or member of the same affiliated group): (1) whose primary 
source of revenue is derived from business performed under 
contracts with the United States that are subject to the 
Federal Acquisition Regulations and also to the Defense Federal 
Acquisition Regulation Supplement; (2) whose revenue derived 
from such business in the previous fiscal year exceeded $5 
billion; and (3) whose pension plan costs that are assignable 
under those contracts are subject to certain provisions of the 
Cost Accounting Standards.
    The provision also requires the Cost Accounting Standards 
Board, not later than January 1, 2010, to review and revise the 
relevant provisions of the Cost Accounting Standards to 
harmonize minimum contributions required under ERISA of 
eligible government contractor plans and government 
reimbursable pension plan costs. Any final rule adopted by the 
Cost Accounting Standards Board shall be deemed the Cost 
Accounting Standards Pension Harmonization Rule.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

F. Modification of Transition Rule to Pension Funding Requirements for 
  Interstate Bus Company (sec. 115 of the Act, and sec. 769(c) of the 
Retirement Protection Act, as added by sec. 1508 of the Taxpayer Relief 
                              Act of 1997)


                              Present Law

    Defined benefit pension plans are required to meet certain 
minimum funding rules. In some cases, additional contributions 
are required under the deficit reduction contribution rules if 
a single-employer defined benefit pension plan is underfunded. 
Additional contributions generally are not required in the case 
of a plan with a funded current liability percentage of at 
least 90 percent. A plan's funded current liability percentage 
is the value of plan assets as a percentage of current 
liability. In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan, determined using specified interest and mortality 
assumptions. In the case of a plan with a funded current 
liability percentage of less than 100 percent for the preceding 
plan year, estimated contributions for the current plan year 
must be made in quarterly installments during the current plan 
year.
    The PBGC insures benefits under most single-employer 
defined benefit pension plans in the event the plan is 
terminated with insufficient assets to pay for plan benefits. 
The PBGC is funded in part by a flat-rate premium per plan 
participant, and variable rate premiums based on the amount of 
unfunded vested benefits under the plan. A specified interest 
rate and a specified mortality table apply in determining 
unfunded vested benefits for this purpose.
    A special rule modifies the minimum funding requirements in 
the case of certain plans. The special rule applies in the case 
of plans that: (1) were not required to pay a variable rate 
PBGC premium for the plan year beginning in 1996; (2) do not, 
in plan years beginning after 1995 and before 2009, merge with 
another plan (other than a plan sponsored by an employer that 
was a member of the controlled group of the employer in 1996); 
and (3) are sponsored by a company that is engaged primarily in 
interurban or interstate passenger bus service.
    The special rule generally treats a plan to which it 
applies as having a funded current liability percentage of at 
least 90 percent for plan years beginning after 1996 and before 
2004 if for such plan year the funded current liability 
percentage is at least 85 percent. If the funded current 
liability of the plan is less than 85 percent for any plan year 
beginning after 1996 and before 2004, the relief from the 
minimum funding requirements generally applies only if certain 
specified contributions are made.
    For plan years beginning in 2004 and 2005, the funded 
current liability percentage of the plan is treated as at least 
90 percent for purposes of determining the amount of required 
contributions (100 percent for purposes of determining whether 
quarterly contributions are required). As a result, for these 
years, additional contributions under the deficit reduction 
contribution rules and quarterly contributions are not required 
with respect to the plan. In addition, for these years, the 
mortality table used under the plan is used in calculating PBGC 
variable rate premiums.
    For plan years beginning after 2005 and before 2010, the 
funded current liability percentage generally will be deemed to 
be at least 90 percent if the actual funded current liability 
percentage is at least at certain specified levels. The relief 
from the minimum funding requirements generally applies for a 
plan year beginning in 2006, 2007, or 2008 only if 
contributions to the plan for the plan year equal at least the 
expected increase in current liability due to benefits accruing 
during the plan year.

                        Explanation of Provision

    The provision revises the special rule for a plan that is 
sponsored by a company engaged primarily in interurban or 
interstate passenger bus service and that meets the other 
requirements for the special rule under present law. The 
provision extends the application of the special rule under 
present law for plan years beginning in 2004 and 2005 to plan 
years beginning in 2006 and 2007. The provision also provides 
several special rules relating to determining minimum required 
contributions and variable rate premiums for plan years 
beginning after 2007 when the new funding rules for single-
employer plans apply.
    Under the provision, for the plan year beginning in 2006 or 
2007, a plan's funded current liability percentage of a plan is 
treated as at least 90 percent for purposes of determining the 
amount of required contributions (100 percent for purposes of 
determining whether quarterly contributions are required). As a 
result, for the 2006 and 2007 plan years, additional 
contributions under the deficit reduction contribution rules 
and quarterly contributions are not required with respect to 
the plan. In addition, the mortality table used under the plan 
is used in calculating PBGC variable rate premiums.
    Under the provision, for plan years beginning after 2007, 
the mortality table used under the plan is used in: (1) 
determining any present value or making any computation under 
the minimum funding rules applicable to the plan; and (2) 
calculating PBGC variable rate premiums. Under a special phase-
in (in lieu of the phase-in otherwise applicable under the 
provision relating to funding rules for single-employer plans), 
for purposes of determining whether a shortfall amortization 
base is required for plan years beginning after 2007 and before 
2012, the applicable percentage of the plan's funding shortfall 
is the following: 90 percent for 2008, 92 percent for 2009, 94 
percent for 2010, and 96 percent for 2011. In addition, for 
purposes of the quarterly contributions requirement, the plan 
is treated as not having a funding shortfall for any plan year. 
As a result, quarterly contributions are not required with 
respect to the plan.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2005.

G. Restrictions on Funding of Nonqualified Deferred Compensation Plans 
  by Employers Maintaining Underfunded or Terminated Single-Employer 
         Plans (sec. 116 of the Act and sec. 409A of the Code)


                              Present Law

    Amounts deferred under a nonqualified deferred compensation 
plan for all taxable years are currently includible in gross 
income to the extent not subject to a substantial risk of 
forfeiture and not previously included in gross income, unless 
certain requirements are satisfied.\471\ For example, 
distributions from a nonqualified deferred compensation plan 
may be allowed only upon certain times and events. Rules also 
apply for the timing of elections. If the requirements are not 
satisfied, in addition to current income inclusion, interest at 
the underpayment rate plus one percentage point is imposed on 
the underpayments that would have occurred had the compensation 
been includible in income when first deferred, or if later, 
when not subject to a substantial risk of forfeiture. The 
amount required to be included in income is also subject to a 
20-percent additional tax.
---------------------------------------------------------------------------
    \471\ Code sec. 409A.
---------------------------------------------------------------------------
    In the case of assets set aside in a trust (or other 
arrangement) for purposes of paying nonqualified deferred 
compensation, such assets are treated as property transferred 
in connection with the performance of services under Code 
section 83 at the time set aside if such assets (or trust or 
other arrangement) are located outside of the United States or 
at the time transferred if such assets (or trust or other 
arrangement) are subsequently transferred outside of the United 
States. A transfer of property in connection with the 
performance of services under Code section 83 also occurs with 
respect to compensation deferred under a nonqualified deferred 
compensation plan if the plan provides that upon a change in 
the employer's financial health, assets will be restricted to 
the payment of nonqualified deferred compensation.

                        Explanation of Provision

    Under the provision, if during any restricted period in 
which a defined benefit pension plan of an employer is in at-
risk status,\472\ assets are set aside (directly or indirectly) 
in a trust (or other arrangement as determined by the Secretary 
of the Treasury), or transferred to such a trust or other 
arrangement, for purposes of paying deferred compensation of an 
applicable covered employee, such transferred assets are 
treated as property transferred in connection with the 
performance of services (whether or not such assets are 
available to satisfy the claims of general creditors) under 
Code section 83. The rule does not apply in the case of assets 
that are set aside before the defined benefit pension plan is 
in at-risk status.
---------------------------------------------------------------------------
    \472\ At-risk status is defined as under the provision relating to 
funding rules for single-employer defined benefit pension plans. Under 
those rules, in general, a plan is in at-risk for a year if, for the 
preceding year: (1) the plan's funding target attainment percentage, 
determined without regard to the at-risk assumptions, was less than 80 
percent, and (2) the plan's funding target attainment percentage, 
determined using the at-risk assumptions (without regard to whether the 
plan was in at-risk status for the preceding year), was less than 70 
percent.
---------------------------------------------------------------------------
    If a nonqualified deferred compensation plan of an employer 
provides that assets will be restricted to the provision of 
benefits under the plan in connection with a restricted period 
(or other similar financial measure determined by the Secretary 
of Treasury) of any defined benefit pension plan of the 
employer, or assets are so restricted, such assets are treated 
as property transferred in connection with the performance of 
services (whether or not such assets are available to satisfy 
the claims of general creditors) under Code section 83.
    A restricted period is (1) any period in which a single-
employer defined benefit pension plan of an employer is in at 
risk-status, (2) any period in which the employer is in 
bankruptcy, and (3) the period that begins six months before 
and ends six months after the date any defined benefit pension 
plan of the employer is terminated in an involuntary or 
distress termination. The provision does not apply with respect 
to assets set aside before a restricted period.
    In general, applicable covered employees include the chief 
executive officer (or individual acting in such capacity), the 
four highest compensated officers for the taxable year (other 
than the chief executive officer), and individuals subject to 
section 16(a) of the Securities Exchange Act of 1934. An 
applicable covered employee includes any (1) covered employee 
of a plan sponsor; (2) covered employee of a member of a 
controlled group which includes the plan sponsor; and (3) 
former employee who was a covered employee at the time of 
termination of employment with the plan sponsor or a member of 
a controlled group which includes the plan sponsor.
    A nonqualified deferred compensation plan is any plan that 
provides for the deferral of compensation other than a 
qualified employer plan or any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or death benefit 
plan. A qualified employer plan means a qualified retirement 
plan, tax-deferred annuity, simplified employee pension, and 
SIMPLE.\473\ A qualified governmental excess benefit 
arrangement (sec. 415(m)) is a qualified employer plan. An 
eligible deferred compensation plan (sec. 457(b)) is also a 
qualified employer plan under the provision. The term plan 
includes any agreement or arrangement, including an agreement 
or arrangement that includes one person.
---------------------------------------------------------------------------
    \473\ A qualified employer plan also includes a section 501(c)(18) 
trust.
---------------------------------------------------------------------------
    Any subsequent increases in the value of, or any earnings 
with respect to, transferred or restricted assets are treated 
as additional transfers of property. Interest at the 
underpayment rate plus one percentage point is imposed on the 
underpayments that would have occurred had the amounts been 
includible in income for the taxable year in which first 
deferred or, if later, the first taxable year not subject to a 
substantial risk of forfeiture. The amount required to be 
included in income is also subject to an additional 20-percent 
tax.
    Under the provision, if an employer provides directly or 
indirectly for the payment of any Federal, State or local 
income taxes with respect to any compensation required to be 
included in income under the provision, interest is imposed on 
the amount of such payment in the same manner as if the payment 
were part of the deferred compensation to which it related. As 
under present law, such payment is included in income; in 
addition, under the provision, such payment is subject to a 20 
percent additional tax. The payment is also nondeductible by 
the employer.

                             Effective Date

    The provision is effective for transfers or other 
reservations of assets after date of enactment (August 17, 
2006).

    TITLE II--FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS

A. Funding Rules for Multiemployer Defined Benefit Plans (secs. 201 and 
  211 of the Act, new sec. 304 of ERISA, and new sec. 431 of the Code)

                              Present Law

Multiemployer plans
    A multiemployer plan is a plan to which more than one 
unrelated employer contributes, which is established pursuant 
to one or more collective bargaining agreements, and which 
meets such other requirements as specified by the Secretary of 
Labor. Multiemployer plans are governed by a board of trustees 
consisting of an equal number of employer and employee 
representatives. In general, the level of contributions to a 
multiemployer plan is specified in the applicable collective 
bargaining agreements, and the level of plan benefits is 
established by the plan trustees.
    Defined benefit multiemployer plans are subject to the same 
general minimum funding rules as single-employer plans, except 
that different rules apply in some cases. For example, 
different amortization periods apply for some costs in the case 
of multiemployer plans. In addition, the deficit reduction 
contribution rules do not apply to multiemployer plans.
Funding standard account
    As an administrative aid in the application of the funding 
requirements, a defined benefit pension plan is required to 
maintain a special account called a ``funding standard 
account'' to which specified charges and credits are made for 
each plan year, including a charge for normal cost and credits 
for contributions to the plan. Other credits or charges or 
credits may apply as a result of decreases or increases in past 
service liability as a result of plan amendments or experience 
gains or losses, gains or losses resulting from a change in 
actuarial assumptions, or a waiver of minimum required 
contributions.
    If, as of the close of the plan year, charges to the 
funding standard account exceed credits to the account, then 
the excess is referred to as an ``accumulated funding 
deficiency.'' For example, if the balance of charges to the 
funding standard account of a plan for a year would be $200,000 
without any contributions, then a minimum contribution equal to 
that amount would be required to meet the minimum funding 
standard for the year to prevent an accumulated funding 
deficiency. If credits to the funding standard account exceed 
charges, a ``credit balance'' results. The amount of the credit 
balance, increased with interest, can be used to reduce future 
required contributions.
Funding methods and general concepts
            In general
    A defined benefit pension plan is required to use an 
acceptable actuarial cost method to determine the elements 
included in its funding standard account for a year. Generally, 
an actuarial cost method breaks up the cost of benefits under 
the plan into annual charges consisting of two elements for 
each plan year. These elements are referred to as: (1) normal 
cost; and (2) supplemental cost.
            Normal cost
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions as to interest, mortality, time of payment, etc., 
had been fulfilled.
            Supplemental cost
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses, changes in actuarial assumptions, and 
amounts necessary to make up funding deficiencies for which a 
waiver was obtained. Supplemental costs must be amortized 
(i.e., recognized for funding purposes) over a specified number 
of years, depending on the source.
            Valuation of assets
    For funding purposes, the actuarial value of plan assets 
may be used, rather than fair market value. The actuarial value 
of plan assets is the value determined under a reasonable 
actuarial valuation method that takes into account fair market 
value and is permitted under Treasury regulations. Any 
actuarial valuation method used must result in a value of plan 
assets that is not less than 80 percent of the fair market 
value of the assets and not more than 120 percent of the fair 
market value. In addition, if the valuation method uses average 
value of the plan assets, values may be used for a stated 
period not to exceed the five most recent plan years, including 
the current year.
            Reasonableness of assumptions
    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), or which, in the aggregate, 
result in a total plan contribution equivalent to a 
contribution that would be obtained if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.
Charges and credits to the funding standard account
            In general
    Under the minimum funding standard, the portion of the cost 
of a plan that is required to be paid for a particular year 
depends upon the nature of the cost. For example, the normal 
cost for a year is generally required to be funded currently. 
Other costs are spread (or amortized) over a period of years. 
In the case of a multiemployer plan, past service liability is 
amortized over 40 or 30 years depending on how the liability 
arose, experience gains and losses are amortized over 15 years, 
gains and losses from changes in actuarial assumptions are 
amortized over 30 years, and waived funding deficiencies are 
amortized over 15 years.
            Normal cost
    Each plan year, a plan's funding standard account is 
charged with the normal cost assigned to that year under the 
particular acceptable actuarial cost method adopted by the 
plan. The charge for normal cost will require an offsetting 
credit in the funding standard account. Usually, an employer 
contribution is required to create the credit. For example, if 
the normal cost for a plan year is $150,000, the funding 
standard account would be charged with that amount for the 
year. Assuming that there are no other credits in the account 
to offset the charge for normal cost, an employer contribution 
of $150,000 will be required for the year to avoid an 
accumulated funding deficiency.
            Past service liability
    There are three separate charges to the funding standard 
account one or more of which may apply to a multiemployer plan 
as the result of past service liabilities. In the case of a 
plan in existence on January 1, 1974, past service liability 
under the plan on the first day on which the plan was first 
subject to ERISA is amortized over 40 years. In the case of a 
plan which was not in existence on January 1, 1974, past 
service liability under the plan on the first day on which the 
plan was first subject to ERISA is amortized over 30 years. 
Past service liability due to plan amendments is amortized over 
30 years.
            Experience gains and losses
    In determining plan funding under an actuarial cost method, 
a plan's actuary generally makes certain assumptions regarding 
the future experience of a plan. These assumptions typically 
involve rates of interest, mortality, disability, salary 
increases, and other factors affecting the value of assets and 
liabilities. The actuarial assumptions are required to be 
reasonable, as discussed above. If the plan's actual unfunded 
liabilities are less than those anticipated by the actuary on 
the basis of these assumptions, then the excess is an 
experience gain. If the actual unfunded liabilities are greater 
than those anticipated, then the difference is an experience 
loss. In the case of a multiemployer plan, experience gains and 
losses for a year are generally amortized over a 15-year 
period, resulting in credits or charges to the funding standard 
account.
            Gains and losses from changes in assumptions
    If the actuarial assumptions used for funding a plan are 
revised and, under the new assumptions, the accrued liability 
of a plan is less than the accrued liability computed under the 
previous assumptions, the decrease is a gain from changes in 
actuarial assumptions. If the new assumptions result in an 
increase in the accrued liability, the plan has a loss from 
changes in actuarial assumptions. The accrued liability of a 
plan is the actuarial present value of projected pension 
benefits under the plan that will not be funded by future 
contributions to meet normal cost or future employee 
contributions. In the case of a multiemployer plan, the gain or 
loss for a year from changes in actuarial assumptions is 
amortized over a period of 30 years, resulting in credits or 
charges to the funding standard account.

Shortfall funding method

    Certain plans may elect to determine the required charges 
to the funding standard account under the shortfall method. 
Under such method, the charges are computed on the basis of an 
estimated number of units of service or production for which a 
certain amount per unit is to be charged. The difference 
between the net amount charged under this method and the net 
amount that otherwise would have been charged for the same 
period is a shortfall loss or gain that is amortized over 
subsequent plan years. The use of the shortfall method and 
changes to use of the shortfall method are generally subject to 
IRS approval.

Funding waivers and amortization of waived funding deficiencies

    Within limits, the Secretary of the Treasury is permitted 
to waive all or a portion of the contributions required under 
the minimum funding standard for the year (a ``waived funding 
deficiency''). In the case of a multiemployer plan, a waiver 
may be granted if 10 percent or more of the number of employers 
contributing to the plan could not make the required 
contribution without temporary substantial business hardship 
and if requiring the contribution would be adverse to the 
interests of plan participants in the aggregate. The minimum 
funding requirements may not be waived with respect to a 
multiemployer plan for more five out of any 15 consecutive 
years.
    If a funding deficiency is waived, the waived amount is 
credited to the funding standard account. In the case of a 
multiemployer plan, the waived amount is then amortized over a 
period of 15 years, beginning with the year following the year 
in which the waiver is granted. Each year, the funding standard 
account is charged with the amortization amount for that year 
unless the plan becomes fully funded. In the case of a 
multiemployer plan, the interest rate used for purposes of 
determining the amortization on the waived amount is the rate 
determined under section 6621(b) of the Internal Revenue Code 
(relating to the Federal short-term rate).

Extension of amortization periods

    Amortization periods may be extended for up to 10 years by 
the Secretary of the Treasury if the Secretary finds that the 
extension would carry out the purposes of ERISA and would 
provide adequate protection for participants under the plan and 
if such Secretary determines that the failure to permit such an 
extension would (1) result in a substantial risk to the 
voluntary continuation of the plan or a substantial curtailment 
of pension benefit levels or employee compensation, and (2) be 
adverse to the interests of plan participants in the aggregate. 
The interest rate with respect to extensions of amortization 
periods is the same as that used with respect to waived funding 
deficiencies.

Alternative funding standard account

    As an alternative to applying the rules described above, a 
plan which uses the entry age normal cost method may satisfy an 
alternative minimum funding standard. Under the alternative, 
the minimum required contribution for the year is generally 
based on the amount necessary to bring the plan's assets up to 
the present value of accrued benefits, determined using the 
actuarial assumptions that apply when a plan terminates. The 
alternative funding standard account has been rarely used.

Controlled group liability for required contributions

    Unlike the rule for single-employer plans which imposes 
liability for minimum required contributions to all members of 
the employer's controlled group, controlled-group liability 
does not apply to contributions an employer is required to make 
to a multiemployer plan.

                        Explanation of Provision


Amortization periods

    The provision modifies the amortization periods applicable 
to multiemployer plans so that the amortization period for most 
charges is 15 years. Under the provision, past service 
liability under the plan is amortized over 15 years (rather 
than 30); past service liability due to plan amendments is 
amortized over 15 years (rather than 30); and experience gains 
and losses resulting from a change in actuarial assumptions are 
amortized over 15 years (rather than 30). As under present law, 
experience gains and losses and waived funding deficiencies are 
amortized over 15 years. The new amortization periods do not 
apply to amounts being amortized under present-law amortization 
periods, that is, no recalculation of amortization schedules 
already in effect is required under the provision. The 
provision eliminates the alternative funding standard account.

Actuarial assumptions

    The provision provides that in applying the funding rules, 
all costs, liabilities, interest rates, and other factors are 
required to be determined on the basis of actuarial assumptions 
and methods, each of which is reasonable (taking into account 
the experience of the plan and reasonable expectations). In 
addition, as under present law, the assumptions are required to 
offer the actuary's best estimate of anticipated experience 
under the plan.

Extension of amortization periods

    The provision provides that, upon application to the 
Secretary of the Treasury, the Secretary is required to grant 
an extension of the amortization period for up to five years 
with respect to any unfunded past service liability, investment 
loss, or experience loss. Included with the application must be 
a certification by the plan's actuary that (1) absent the 
extension, the plan would have an accumulated funding 
deficiency in the current plan year and any of the nine 
succeeding plan years, (2) the plan sponsor has adopted a plan 
to improve the plan's funding status, (3) taking into account 
the extension, the plan is projected to have sufficient assets 
to timely pay its expected benefit liabilities and other 
anticipated expenditures, and (4) required notice has been 
provided. The automatic extension provision does not apply with 
respect to any application submitted after December 31, 2014.
    The Secretary of the Treasury may also grant an additional 
extension of such amortization periods for an additional five 
years. The standards for determining whether such an extension 
may be granted are the same as under present law. In addition, 
the provision requires the Secretary of the Treasury to act 
upon an application for an additional extension within 180 days 
after submission. If the Secretary rejects the application, the 
Secretary must provide notice to the plan detailing the 
specific reasons for the rejection.
    As under present law, these extensions do not apply unless 
the applicant demonstrates to the satisfaction of the Treasury 
Secretary that notice of the application has been provided to 
each affected party (as defined in ERISA section 4001(a)(21)).

Interest rate applicable to funding waivers and extension of 
        amortization periods

    The provision eliminates the special interest rate rule for 
funding waivers and extensions of amortization periods so that 
the plan rate applies.

Additional provisions

            Controlled group liability for required contributions
    The provision imposes joint and several liability on all 
members of the employer's controlled group for minimum required 
contributions to single-employer or multiemployer plans.
            Shortfall funding method
    The provision provides that, for plan years beginning 
before January 1, 2015, certain multiemployer plans may adopt, 
use or cease using the shortfall funding method and such 
adoption, use, or cessation of use is deemed approved by the 
Secretary of the Treasury. Plans are eligible if (1) the plan 
has not used the shortfall funding method during the five-year 
period ending on the day before the date the plan is to use the 
shortfall funding method; and (2) the plan is not operating 
under an amortization period extension and did not operate 
under such an extension during such five-year period. Benefit 
restrictions apply during a period that a multiemployer plan is 
using the shortfall funding method. In general, plan amendments 
increasing benefits cannot be adopted while the shortfall 
funding method is in use. The provision is not intended to 
affect a plan's ability to adopt the shortfall funding method 
with IRS approval or to affect a plan's right to change funding 
methods as otherwise permitted.

                             Effective Date

    The provision is effective for plan years beginning after 
2007.

 B. Additional Funding Rules for Multiemployer Plans in Endangered or 
Critical Status (secs. 202, 212 and 221(c) of the Act, new sec. 305 of 
                  ERISA, and new sec. 432 of the Code)


                              Present Law


In general

    Multiemployer defined benefit plans are subject to minimum 
funding rules similar to those applicable to single-employer 
plans.\474\ If a multiemployer plan has an accumulated funding 
deficiency for a year, an excise tax of five percent generally 
applies, increasing to 100 percent if contributions sufficient 
to eliminate the funding deficiency are not made within a 
certain period.
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    \474\ See the explanation of the preceding provision for a 
discussion of the minimum funding rules for multiemployer defined 
benefit plans. Under Treasury regulations, certain noncollectively 
bargained employees covered by a multiemployer plan may be treated as 
collectively bargained employees for purposes of applying the minimum 
coverage rules of the Code. Treas. Reg. sec. 1.410(b)-6(d)(2)(ii)(D).
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    Additional required contributions and benefit reductions 
may apply if a multiemployer plan is in reorganization status 
or is insolvent.

Reorganization status

    Certain modifications to the single-employer plan funding 
rules apply to multiemployer plans that experience financial 
difficulties, referred to as ``reorganization status.'' A plan 
is in reorganization status for a year if the contribution 
needed to balance the charges and credits to its funding 
standard account exceeds its ``vested benefits charge.'' \475\ 
The plan's vested benefits charge is generally the amount 
needed to amortize, in equal annual installments, unfunded 
vested benefits under the plan over: (1) 10 years in the case 
of obligations attributable to participants in pay status; and 
(2) 25 years in the case of obligations attributable to other 
participants. A plan in reorganization status is eligible for a 
special funding credit. In addition, a cap on year-to-year 
contribution increases and other relief is available to 
employers that continue to contribute to the plan.
---------------------------------------------------------------------------
    \475\ ERISA sec. 4241; Code sec. 418.
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    Subject to certain requirements, a multiemployer plan in 
reorganization status may also be amended to reduce or 
eliminate accrued benefits in excess of the amount of benefits 
guaranteed by the PBGC.\476\ Benefits may be reduced or 
eliminated notwithstanding the anti-cutback rules, which 
generally require that accrued benefits may not be decreased by 
plan amendment. In order for accrued benefits to be reduced, at 
least six months before the beginning of the plan year in which 
the amendment is adopted, notice must be given that the plan is 
in reorganization status and that, if contributions to the plan 
are not increased, accrued benefits will be reduced or an 
excise tax will be imposed on employers obligated to contribute 
to the plan. The notice must be provided to plan participants 
and beneficiaries, any employer who has an obligation to 
contribute to the plan, and any employee organization 
representing employees in the plan.
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    \476\ ERISA sec. 4244A; Code sec. 418D.
---------------------------------------------------------------------------

Insolvency

    In the case of multiemployer plans, the PBGC insures plan 
insolvency, rather than plan termination. A plan is insolvent 
when its available resources are not sufficient to pay the plan 
benefits for the plan year in question, or when the sponsor of 
a plan in reorganization reasonably determines, taking into 
account the plan's recent and anticipated financial experience, 
that the plan's available resources will not be sufficient to 
pay benefits that come due in the next plan year.\477\ 
Notwithstanding the anti-cutback rules, an insolvent plan is 
required to reduce benefits to the level that can be covered by 
the plan's assets. However, benefits cannot be reduced below 
the level guaranteed by the PBGC.\478\ If a multiemployer plan 
is insolvent, the PBGC guarantee is provided in the form of 
loans to the plan trustees. If the plan recovers from 
insolvency status, loans from the PBGC can be repaid. Plans in 
reorganization status are required to compare assets and 
liabilities to determine if the plan will become insolvent in 
the future.
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    \477\ ERISA sec. 4245; Code sec. 418E.
    \478\ The limit of benefits that the PBGC guarantees under a 
multiemployer plan is the sum of 100 percent of the first $11 of 
monthly benefits and 75 percent of the next $33 of monthly benefits for 
each year of service. ERISA sec. 4022A(c).
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                        Explanation of Provision


In general

    The provision provides additional funding rules for 
multiemployer defined benefit plans in effect on July 16, 2006, 
that are in endangered or critical status. The provision 
requires the adoption of and compliance with (1) a funding 
improvement plan in the case of a multiemployer plan in 
endangered status, and (2) a rehabilitation plan in the case of 
a multiemployer plan in critical status.
    Under the provision, in the case of a plan in critical 
status, additional required contributions and benefit 
reductions apply and employers are relieved of liability for 
minimum required contributions under the otherwise applicable 
funding rules, provided that a rehabilitation plan is adopted 
and followed.

Annual certification of status; notice; annual reports

    Not later than the 90th day of each plan year, the plan 
actuary must certify to the Secretary of the Treasury and to 
the plan sponsor whether or not the plan is in endangered or 
critical status for the plan year. In the case of a plan that 
is in a funding improvement or rehabilitation period, the 
actuary must certify whether or not the plan is making 
scheduled progress in meeting the requirements of its funding 
improvement or rehabilitation plan.
    In making the determinations and projections applicable 
under the endangered and critical status rules, the plan 
actuary must make projections for the current and succeeding 
plan years of the current value of the assets of the plan and 
the present value of all liabilities to participants and 
beneficiaries under the plan for the current plan year as of 
the beginning of such year. The actuary's projections must be 
based on reasonable actuarial estimates, assumptions, and 
methods that offer the actuary's best estimate of anticipated 
experience under the plan. An exception to this rule applies in 
the case of projected industry activity. Any projection of 
activity in the industry or industries covered by the plan, 
including future covered employment and contribution levels, 
must be based on information provided by the plan sponsor, 
which shall act reasonably and in good faith. The projected 
present value of liabilities as of the beginning of the year 
must be based on the most recent actuarial statement required 
with respect to the most recently filed annual report or the 
actuarial valuation for the preceding plan year.
    Any actuarial projection of plan assets must assume (1) 
reasonably anticipated employer contributions for the current 
and succeeding plan years, assuming that the terms of one or 
more collective bargaining agreements pursuant to which the 
plan is maintained for the current plan year continue in effect 
for the succeeding plan years, or (2) that employer 
contributions for the most recent plan year will continue 
indefinitely, but only if the plan actuary determines that 
there have been no significant demographic changes that would 
make continued assumption of such terms unreasonable.
    Failure of the plan's actuary to certify the status of the 
plan is treated as a failure to file the annual report (thus, 
an ERISA penalty of up to $1,100 per day applies).
    If a plan is certified to be in endangered or critical 
status, notification of the endangered or critical status must 
be provided within 30 days after the date of certification to 
the participants and beneficiaries, the bargaining parties, the 
PBGC and the Secretary of Labor.\479\ If it is certified that a 
plan is or will be in critical status, the plan sponsor must 
included in the notice an explanation of the possibility that 
(1) adjustable benefits may be reduced and (2) such reductions 
may apply to participants and beneficiaries whose benefit 
commencement date is on or after the date such notice is 
provided for the first plan year in which the plan is in 
critical status. The Secretary of Labor is required to 
prescribe a model notice to satisfy these requirements.
---------------------------------------------------------------------------
    \479\ If a plan actuary certifies that it is reasonably expected 
that a plan will be in critical status with respect to the first plan 
year after 2007, notice may be provided at any time after date of 
enactment, as long as it is provided on or before the date otherwise 
required.
---------------------------------------------------------------------------
    The plan sponsor must annually update the funding 
improvement or rehabilitation plan. Updates are required to be 
filed with the plan's annual report.

Endangered status

            Definition of endangered status
    A multiemployer plan is in endangered status if the plan is 
not in critical status and, as of the beginning of the plan 
year, (1) the plan's funded percentage for the plan year is 
less than 80 percent, or (2) the plan has an accumulated 
funding deficiency for the plan year or is projected to have an 
accumulated funding deficiency in any of the six succeeding 
plan years (taking into account amortization extensions). A 
plan's funded percentage is the percentage of plan assets over 
accrued liability of the plan. A plan that meets the 
requirements of both (1) and (2) is treated as in seriously 
endangered status.
            Information to be provided to bargaining parties
    Within 30 days of the adoption of a funding improvement 
plan, the plan sponsor must provide to the bargaining parties 
schedules showing revised benefit structures, revised 
contribution structures, or both, which, if adopted, may 
reasonably be expected to enable the multiemployer plan to meet 
the applicable benchmarks in accordance with the funding 
improvement plan, including (1) one proposal for reductions in 
the amount of future benefit accruals necessary to achieve the 
applicable benchmarks, assuming no amendments increasing 
contributions under the plan (other than amendments increasing 
contributions necessary to achieve the applicable benchmarks 
after amendments have reduced future benefit accruals to the 
maximum extent permitted by law) (the ``default schedule''), 
and (2) one proposal for increases in contributions under the 
plan necessary to achieve the applicable benchmarks, assuming 
no amendments reducing future benefit accruals under the plan. 
The applicable benchmarks are the requirements of the funding 
improvement plan (discussed below). The plan sponsor may 
provide the bargaining parties with additional information if 
deemed appropriate.
    The plan sponsor must annually update any schedule of 
contribution rates to reflect the experience of the plan.
            Funding improvement plan and funding improvement period
    In the case of a multiemployer plan in endangered status, a 
funding improvement plan must be adopted within 240 days 
following the deadline for certifying a plan's status.\480\ A 
funding improvement plan is a plan which consists of the 
actions, including options or a range of options, to be 
proposed to the bargaining parties, formulated to provide, 
based on reasonably anticipated experience and reasonable 
actuarial assumptions, for the attainment by the plan of 
certain requirements.
---------------------------------------------------------------------------
    \480\ This requirement applies for the initial determination year 
(i.e., the first plan year that the plan is in endangered status).
---------------------------------------------------------------------------
    The funding improvement plan must provide that during the 
funding improvement period, the plan will have a certain 
required increase in the funded percentage and no accumulated 
funding deficiency for any plan year during the funding 
improvement period, taking into account amortization extensions 
(the ``applicable benchmarks''). In the case of a plan that is 
not in seriously endangered status, under the applicable 
benchmarks, the plan's funded percentage must increase such 
that the funded percentage as of the close of the funding 
improvement period equals or exceeds a percentage equal to the 
sum of (1) the funded percentage at the beginning of the 
period, plus (2) 33 percent of the difference between 100 
percent and the percentage in (1). Thus, the difference between 
100 percent and the plan's funded percentage at the beginning 
of the period must be reduced by at least one-third during the 
funding improvement period.
    The funding improvement period is the 10-year period 
beginning on the first day of the first plan year beginning 
after the earlier of (1) the second anniversary of the date of 
adoption of the funding improvement plan, or (2) the expiration 
of collective bargaining agreements that were in effect on the 
due date for the actuarial certification of endangered status 
for the initial determination year and covering, as of such 
date, at least 75 percent of the plan's active participants. 
The period ends if the plan is no longer in endangered status 
or if the plan enters critical status.
    In the case of a plan in seriously endangered status that 
is funded 70 percent or less, under the applicable benchmarks, 
the difference between 100 percent and the plan's funded 
percentage at the beginning of the period must be reduced by at 
least one-fifth during the funding improvement period. In the 
case of such plans, a 15-year funding improvement period is 
used.
    In the case of a seriously endangered plan that is more 
than 70 percent funded as of the beginning of the initial 
determination year, the same benchmarks apply for plan years 
beginning on or before the date on which the last collective 
bargaining agreements in effect on the date for actuarial 
certification for the initial determination year and covering 
at least 75 percent of active employees in the multiemployer 
plan have expired if the plan actuary certifies within 30 days 
after certification of endangered status that the plan is not 
projected to attain the funding percentage increase otherwise 
required by the provision. Thus, for such plans, the difference 
between 100 percent and the plan's funded percentage at the 
beginning of the period must be reduced by at least one-fifth 
during the 15-year funding improvement period. For subsequent 
years for such plans, if the plan actuary certifies that the 
plan is not able to attain the increase generally required 
under the provision, the same benchmarks continue to apply.
    As previously discussed, the plan sponsor must annually 
update the funding improvement plan and must file the update 
with the plan's annual report.
    If, for the first plan year following the close of the 
funding improvement period, the plan's actuary certifies that 
the plan is in endangered status, such year is treated as an 
initial determination year. Thus, a new funding improvement 
plan must be adopted within 240 days of the required 
certification date. In such case, the plan may not be amended 
in a manner inconsistent with the funding improvement plan in 
effect for the preceding plan year until a new funding 
improvement plan is adopted.
            Requirements pending approval of plan and during funding 
                    improvement period
    Certain restrictions apply during the period beginning on 
the date of certification for the initial determination year 
and ending on the day before the first day of the funding 
improvement period (the ``funding plan adoption period'').
    During the funding plan adoption period, the plan sponsor 
may not accept a collective bargaining agreement or 
participation agreement that provides for (1) a reduction in 
the level of contributions for any participants; (2) a 
suspension of contributions with respect to any period of 
service; or (3) any new or indirect exclusion of younger or 
newly hired employees from plan participation.
    In addition, during the funding plan adoption period, 
except in the case of amendments required as a condition of 
qualification under the Internal Revenue Code or to apply with 
other applicable law, no amendment may be adopted which 
increases liabilities of the plan by reason of any increase in 
benefits, any change in accrual of benefits, or any change in 
the rate at which benefits become nonforfeitable under the 
plan.
    In the case of a plan in seriously endangered status, 
during the funding plan adoption period, the plan sponsor must 
take all reasonable actions (consistent with the terms of the 
plan and present law) which are expected, based on reasonable 
assumptions, to achieve an increase in the plan's funded 
percentage and a postponement of an accumulated funding 
deficiency for at least one additional plan year. These actions 
include applications for extensions of amortization periods, 
use of the shortfall funding method in making funding standard 
account computations, amendments to the plan's benefit 
structure, reductions in future benefit accruals, and other 
reasonable actions.
    Upon adoption of a funding improvement plan, the plan may 
not be amended to be inconsistent with the funding improvement 
plan. During the funding improvement period, a plan sponsor may 
not accept a collective bargaining agreement or participation 
agreement with respect to the multiemployer plan that provides 
for (1) a reduction in the level of contributions for any 
participants; (2) a suspension of contributions with respect to 
any period of service, or (3) any new direct or indirect 
exclusion of younger or newly hired employees from plan 
participation.
    After the adoption of a funding improvement plan, a plan 
may not be amended to increase benefits, including future 
benefit accruals, unless the plan actuary certifies that the 
benefit increase is consistent with the funding improvement 
plan and is paid for out of contributions not required by the 
funding improvement plan to meet the applicable benchmark in 
accordance with the schedule contemplated in the funding 
improvement plan.
            Effect of and penalty for failure to adopt a funding 
                    improvement plan
    If a collective bargaining agreement providing for 
contributions under a multiemployer plan that was in effect at 
the time the plan entered endangered status expires, and after 
receiving one or more schedules from the plan sponsor, the 
bargaining parties fail to agree on changes to contribution or 
benefit schedules necessary to meet the applicable benchmarks, 
the plan sponsor must implement the default schedule. The 
schedule must be implemented on the earlier of the date (1) on 
which the Secretary of Labor certifies that the parties are at 
an impasse, or (2) which is 180 days after the date on which 
the collective bargaining agreement expires.
    In the case of the failure of a plan sponsor to adopt a 
funding improvement plan by the end of the 240-day period after 
the required certification date, an ERISA penalty of up to 
$1,100 a day applies.
            Excise tax on employers failing to meet required 
                    contributions
    If the funding improvement plan requires an employer to 
make contributions to the plan, an excise tax applies upon the 
failure of the employer to make such required contributions 
within the time required under the plan. The amount of tax is 
equal to the amount of the required contribution the employer 
failed to make in a timely manner.
            Application of excise tax to plans in endangered status/
                    penalty for failure to achieve benchmarks
    In the case of a plan in endangered status, which is not in 
seriously endangered status, a civil penalty of $1,100 a day 
applies for the failure of the plan to meet the applicable 
benchmarks by the end of the funding improvement period.
    In the case of a plan in seriously endangered status, an 
excise tax applies for the failure to meet the benchmarks by 
the end of the funding improvement period. In such case, an 
excise tax applies based on the greater of (1) the amount of 
the contributions necessary to meet such benchmarks or (2) the 
plan's accumulated funding deficiency. The excise tax applies 
for each succeeding plan year until the benchmarks are met.
            Waiver of excise tax
    In the case of a failure which is due to reasonable cause 
and not to willful neglect, the Secretary of the Treasury may 
waive all or part of the excise tax on employers failing to 
make required contributions and the excise tax for failure to 
achieve the applicable benchmarks. The party against whom the 
tax is imposed has the burden of establishing that the failure 
was due to reasonable cause and not willful neglect. Reasonable 
cause includes unanticipated and material market fluctuations, 
the loss of a significant contributing employer, or other 
factors to the extent that the payment of tax would be 
excessive or otherwise inequitable relative to the failure 
involved. The determination of reasonable cause is based on the 
facts and circumstances of each case and requires the parties 
to act with ordinary business care and prudence. The standard 
requires the funding improvement plan to be based on reasonably 
foreseeable events. It is expected that reasonable cause would 
include instances in which the plan experiences a net equity 
loss of at least ten percent during the funding improvement 
period, a change in plan demographics such as the bankruptcy of 
a significant contributing employer, a legal change (including 
the outcome of litigation) that unexpectedly increases the 
plan's benefit obligations, or a strike or lockout for a 
significant period.

Critical status

            Definition of critical status
    A multiemployer plan is in critical status for a plan year 
if as of the beginning of the plan year:
          1. The funded percentage of the plan is less than 65 
        percent and the sum of (A) the market value of plan 
        assets, plus (B) the present value of reasonably 
        anticipated employer and employee contributions for the 
        current plan year and each of the six succeeding plan 
        years (assuming that the terms of the collective 
        bargaining agreements continue in effect) is less than 
        the present value of all benefits projected to be 
        payable under the plan during the current plan year and 
        each of the six succeeding plan years (plus 
        administrative expenses),
          2. (A) The plan has an accumulated funding deficiency 
        for the current plan year, not taking into account any 
        amortization extension, or (B) the plan is projected to 
        have an accumulated funding deficiency for any of the 
        three succeeding plan years (four succeeding plan years 
        if the funded percentage of the plan is 65 percent or 
        less), not taking into account any amortization 
        extension,
          3. (A) The plan's normal cost for the current plan 
        year, plus interest for the current plan year on the 
        amount of unfunded benefit liabilities under the plan 
        as of the last day of the preceding year, exceeds the 
        present value of the reasonably anticipated employer 
        contributions for the current plan year, (B) the 
        present value of nonforfeitable benefits of inactive 
        participants is greater than the present value of 
        nonforfeitable benefits of active participants, and (C) 
        the plan has an accumulated funding deficiency for the 
        current plan year, or is projected to have an 
        accumulated funding deficiency for any of the four 
        succeeding plan years (not taking into account 
        amortization period extensions), or
          4. The sum of (A) the market value of plan assets, 
        plus (B) the present value of the reasonably 
        anticipated employer contributions for the current plan 
        year and each of the four succeeding plan years 
        (assuming that the terms of the collective bargaining 
        agreements continue in effect) is less than the present 
        value of all benefits projected to be payable under the 
        plan during the current plan year and each of the four 
        succeeding plan years (plus administrative expenses).
            Additional contributions during critical status
    In the case of a plan in critical status, the provision 
imposes an additional required contribution (``surcharge'') on 
employers otherwise obligated to make a contribution in the 
initial critical year, i.e., the first plan year for which the 
plan is in critical status. The amount of the surcharge is five 
percent of the contribution otherwise required to be made under 
the applicable collective bargaining agreement. The surcharge 
is 10 percent of contributions otherwise required in the case 
of succeeding plan years in which the plan is in critical 
status. The surcharge applies 30 days after the employer is 
notified by the plan sponsor that the plan is in critical 
status and the surcharge is in effect. The surcharges are due 
and payable on the same schedule as the contributions on which 
the surcharges are based. Failure to make the surcharge payment 
is treated as a delinquent contribution. The surcharge is not 
required with respect to employees covered by a collective 
bargaining agreement (or other agreement pursuant to which the 
employer contributes), beginning on the effective date of a 
collective bargaining agreement (or other agreement) that 
includes terms consistent with a schedule presented by the plan 
sponsor. The amount of the surcharge may not be the basis for 
any benefit accrual under the plan.
    Surcharges are disregarded in determining an employer's 
withdrawal liability except for purposes of determining the 
unfunded vested benefits attributable to an employer under 
ERISA section 4211(c)(4) or a comparable method approved under 
ERISA section 4211(c)(5).\481\
---------------------------------------------------------------------------
    \481\ The PBGC is directed to prescribe simplified methods for 
determining withdrawal liability in this case.
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            Reductions to previously earned benefits
    Notwithstanding the anti-cutback rules, the plan sponsor 
may make any reductions to adjustable benefits which the plan 
sponsor deems appropriate, based upon the outcome of collective 
bargaining over the schedules required to be provided by the 
plan sponsor as discussed below. Adjustable benefits means (1) 
benefits, rights, and features under the plan, including post-
retirement death benefits, 60-month guarantees, disability 
benefits not yet in pay status, and similar benefits; (2) any 
early retirement benefit or retirement-type subsidy and any 
benefit payment option (other than the qualified joint-and-
survivor annuity); and (3) benefit increase that would not be 
eligible for PBGC guarantee on the first day of the initial 
critical year because the increases were adopted (or, if later, 
took effect) less than 60 months before such first day. Except 
as provided in (3), nothing should be construed to permit a 
plan to reduce the level of a participant's accrued benefit 
payable at normal retirement age.
    The plan sponsor may not reduce adjustable benefits of any 
participant or beneficiary whose benefit commencement date is 
before the date on which the plan provides notice to the 
participant or beneficiary that the plan is in critical status 
and that benefits may be reduced. An exception applies in the 
case of benefit increases that would not be eligible for PBGC 
guarantee because the increases were adopted less than 60 
months before the first day of the initial critical year.
    The plan sponsor must include in the schedules provided to 
the bargaining parties an allowance for funding the benefits of 
participants with respect to whom contributions are not 
currently required to be made, and shall reduce their benefits 
to the extent permitted under the Code and ERISA and considered 
appropriate by the plan sponsor based on the plan's then 
current overall funding status.
    Notice of any reduction of adjustable benefits must be 
provided at least 30 days before the general effective date of 
the reduction for all participants and beneficiaries. Benefits 
may not be reduced until the notice requirement is satisfied. 
Notice must be provided to (1) plan participants and 
beneficiaries; (2) each employer who has an obligation to 
contribute under the plans; and (3) each employee organization 
which, for purposes of collective bargaining, represents plan 
participants employed by such employer. The notice must contain 
(1) sufficient information to enable participants and 
beneficiaries to understand the effect of any reduction of 
their benefits, including an estimate (on an annual or monthly 
basis) of any affected adjustable benefit that a participant or 
beneficiary would otherwise have been eligible for as of the 
general effective date for benefit reductions; and (2) 
information as to the rights and remedies of plan participants 
and beneficiaries as well as how to contact the Department of 
Labor for further information and assistance where appropriate. 
The notice must be provided in a form and manner prescribed in 
regulations of the Secretary of Labor. In such regulations, the 
Secretary of Labor must establish a model notice.
    Benefit reduction are disregarded in determining a plan's 
unfunded vested benefits for purposes of determining an 
employer's withdrawal liability.\482\
---------------------------------------------------------------------------
    \482\ The PBGC is directed to prescribe simplified methods for 
determining withdrawal liability in this case.
---------------------------------------------------------------------------
            Information to be provided to bargaining parties
    Within 30 days after adoption of the rehabilitation plan, 
the plan sponsor must provide to the bargaining parties 
schedules showing revised benefit structures, revised 
contribution structures, or both which, if adopted, may 
reasonably be expected to enable the multiemployer plan to 
emerge from critical status in accordance with the 
rehabilitation plan.\483\ The schedules must reflect reductions 
in future benefit accruals and adjustable benefits and 
increases in contributions that the plan sponsor determined are 
reasonably necessary to emerge from critical status. One 
schedule must be designated as the default schedule and must 
assume no increases in contributions other than increases 
necessary to emerge from critical status after future benefit 
accruals and other benefits (other than benefits the reduction 
or elimination of which are not permitted under the anti-
cutback rules) have been reduced. The plan sponsor may also 
provide additional information as appropriate.
---------------------------------------------------------------------------
    \483\ A schedule of contribution rates provided by the plan sponsor 
and relied upon by bargaining parties in negotiating a collective 
bargaining agreement must remain in effect for the duration of the 
collective bargaining agreement.
---------------------------------------------------------------------------
    The plan sponsor must periodically update any schedule of 
contributions rates to reflect the experience of the plan.
            Rehabilitation plan
    If a plan is in critical status for a plan year, the plan 
sponsor must adopt a rehabilitation plan within 240 days 
following the required date for the actuarial certification of 
critical status.\484\
---------------------------------------------------------------------------
    \484\ The requirement applies with respect to the initial critical 
year.
---------------------------------------------------------------------------
    A rehabilitation plan is a plan which consists of actions, 
including options or a range of options to be proposed to the 
bargaining parties, formulated, based on reasonable anticipated 
experience and reasonable actuarial assumptions, to enable the 
plan to cease to be in critical status by the end of the 
rehabilitation period and may include reductions in plan 
expenditures (including plan mergers and consolidations), 
reductions in future benefits accruals or increases in 
contributions, if agreed to by the bargaining parties, or any 
combination of such actions.
    A rehabilitation plan must provide annual standards for 
meeting the requirements of the rehabilitation. The plan must 
also include the schedules required to be provided to the 
bargaining parties.
    If the plan sponsor determines that, based on reasonable 
actuarial assumptions and upon exhaustion of all reasonable 
measures, the plan cannot reasonably be expected to emerge from 
critical status by the end of the rehabilitation period, the 
plan must include reasonable measures to emerge from critical 
status at a later time or to forestall possible insolvency. In 
such case, the plan must set forth alternatives considered, 
explain why the plan is not reasonably expected to emerge from 
critical status by the end of the rehabilitation period, and 
specify when, if ever, the plan is expected to emerge from 
critical status in accordance with the rehabilitation plan.
    As previously discussed, the plan sponsor must annually 
update the rehabilitation plan and must file the update with 
the plan's annual report.
            Rehabilitation period
    The rehabilitation period is the 10-year period beginning 
on the first day of the first plan year following the earlier 
of (1) the second anniversary of the date of adoption of the 
rehabilitation plan or (2) the expiration of collective 
bargaining agreements that were in effect on the due date for 
the actuarial certification of critical status for the initial 
critical year and covering at least 75 percent of the active 
participants in the plan.
    The rehabilitation period ends if the plan emerges from 
critical status. A plan in critical status remains in critical 
status until a plan year for which the plan actuary certifies 
that the plan is not projected to have an accumulated funding 
deficiency for the plan year or any of the nine succeeding plan 
years, without regard to the use of the shortfall method and 
taking into account amortization period extensions.
            Rules for reductions in future benefit accrual rates
    Any schedule including reductions in future benefit 
accruals forming part of a rehabilitation plan must not reduce 
the rate of benefit accruals below (1) a monthly benefit 
(payable as a single life annuity commencing at the 
participant's normal retirement age) equal to one percent of 
the contributions required to be made with respect to a 
participant or the equivalent standard accrual rate for a 
participant or group of participants under the collective 
bargaining agreements in effect as of the first day of the 
initial critical year, or (2) if lower, the accrual rate under 
the plan on such first day.
    The equivalent standard accrual rate is determined by the 
plan sponsor based on the standard or average contribution base 
units which the plan sponsor determines to be representative 
for active participants and such other factors that the plan 
sponsor determines to be relevant. The provision does not limit 
the ability of the plan sponsor to prepare and provide the 
bargaining parties with alternative schedules to the default 
schedule that establish lower or higher accrual and 
contribution rates than the rates described above.
    Benefit reductions are disregarded in determining an 
employer's withdrawal liability.
            Requirements pending approval and during rehabilitation 
                    period
    Rehabilitation plan adoption period.--Certain restrictions 
apply during the period beginning on the date of certification 
and ending on the day before the first day of the 
rehabilitation period (defined as the ``rehabilitation plan 
adoption period'').
    During the rehabilitation plan adoption period, the plan 
sponsor may not accept a collective bargaining agreement or 
participation agreement that provides for (1) a reduction in 
the level of contributions for any participants; (2) a 
suspension of contributions with respect to any period of 
service; or (3) any new direct or indirect exclusion of younger 
or newly hired employees from plan participation. Except in the 
case of amendments required as a condition of qualification 
under the Internal Revenue Code or to comply with other 
applicable law, during the rehabilitation plan adoption period, 
no amendments that increase the liabilities of the plan by 
reason of any increase in benefits, any change in the accrual 
of benefits, or any change in the rate at which benefits become 
nonforfeitable may be adopted.
    During rehabilitation period.--A plan may not be amended 
after the date of adoption of a rehabilitation plan to be 
inconsistent with the rehabilitation plan.
    A plan may not be amended after the date of adoption of a 
rehabilitation plan to increase benefits (including future 
benefit accruals) unless the plan actuary certifies that such 
increase is paid for out of additional contributions not 
contemplated by the rehabilitation plan and, after taking into 
account the benefit increases, the plan is still reasonably 
expected to emerge from critical status by the end of the 
rehabilitation period on the schedule contemplated by the 
rehabilitation plan.
    Beginning on the date that notice of certification of the 
plan's critical status is sent, lump sum and other similar 
benefits may not be paid. The restriction does not apply if the 
present value of the participant's accrued benefit does not 
exceed $5,000. The restriction also does not apply to any 
makeup payment in the case of a retroactive annuity starting 
date or any similar payment of benefits owed with respect to a 
prior period.
    The plan sponsor must annually update the plan and must 
file updates with the plan's annual report. Schedules must be 
annually updated to reflect experience of the plan.
            Effect and penalty for failure to adopt a rehabilitation 
                    plan
    If a collective bargaining agreement providing for 
contributions under a multiemployer plan that was in effect at 
the time the plan entered endangered status expires, and after 
receiving one of more schedules from the plan sponsor, the 
bargaining parties fail to adopt a contribution or benefit 
schedule with terms consistent with the rehabilitation plan and 
the scheduled from the plan sponsor, the plan sponsor must 
implement the default schedule. The schedule must be 
implemented on the earlier of the date (1) on which the 
Secretary of Labor certifies that the parties are at an 
impasse, or (2) which is 180 days after the date on which the 
collective bargaining agreement expires.
    Upon the failure of a plan sponsor to adopt a 
rehabilitation plan within 240 days after the date required for 
certification, an ERISA penalty of $1,100 a day applies. In 
addition, upon the failure to timely adopt a rehabilitation 
plan, an excise tax is imposed on the plan sponsor equal to the 
greater of (1) the present law excise tax or (2) $1,100 per 
day. The tax must be paid by the plan sponsor.
            Excise tax on employers failing to meet required 
                    contributions
    If the rehabilitation plan requires an employer to make 
contributions to the plan, an excise tax applies upon the 
failure of the employer to make such required contributions 
within the time required under the plan. The amount of tax is 
equal to the amount of the required contribution the employer 
failed to make in a timely manner.
            Application of excise tax to plans in critical status/
                    penalty for failure to meet benchmarks or make 
                    scheduled progress
    In the case of a plan in critical status, if a 
rehabilitation plan is adopted and complied with, employers are 
not liable for contributions otherwise required under the 
general funding rules. In addition, the present-law excise tax 
does not apply.
    If a plan fails to leave critical status at the end of the 
rehabilitation period or fails to make scheduled progress in 
meeting its requirements under the rehabilitation plan for 
three consecutive years, the present law excise tax applies 
based on the greater of (1) the amount of the contributions 
necessary to leave critical status or make scheduled progress 
or (2) the plan's accumulated funding deficiency. The excise 
tax applies for each succeeding plan year until the 
requirements are met.
            Waiver of excise tax
    In the case of a failure which is due to reasonable cause 
and not to willful neglect, the Secretary of the Treasury may 
waive all or part of the excise tax on employers failing to 
make required contributions and the excise tax for failure to 
meet the rehabilitation plan requirements or make scheduled 
progress. The standards applicable to waivers of the excise tax 
for plans in endangered status apply to waivers of plans in 
critical status.

Additional rules

            In general
    The actuary's determination with respect to a plan's normal 
cost, actuarial accrued liability, and improvements in a plan's 
funded percentage must be based on the unit credit funding 
method (whether or not that method is used for the plan's 
actuarial valuation).
    In the case of a plan sponsor described under section 
404(c) of the Code, the term ``plan sponsor'' means the 
bargaining parties.
            Expedited resolution of plan sponsor decisions
    If, within 60 days of the due date for the adoption of a 
funding improvement plan or a rehabilitation plan, the plan 
sponsor has not agreed on a funding improvement plan or a 
rehabilitation plan, any member of the board or group that 
constitutes the plan sponsor may require that the plan sponsor 
enter into an expedited dispute resolution procedure for the 
development and adoption of a funding improvement plan or 
rehabilitation plan.
            Nonbargained participation
    In the case of an employer who contributes to a 
multiemployer plan with respect to both employees who are 
covered by one or more collective bargaining agreements and to 
employees who are not so covered, if the plan is in endangered 
or critical status, benefits of and contributions for the 
nonbargained employees, including surcharges on those 
contributions, must be determined as if the nonbargained 
employees were covered under the first to expire of the 
employer's collective bargaining agreements in effect when the 
plan entered endangered or critical status.\485\ In the case of 
an employer who contributes to a multiemployer plan only with 
respect to employees who are not covered by a collective 
bargaining agreement, the additional funding rules apply as if 
the employer were the bargaining party, and its participation 
agreement with the plan was a collective bargaining agreement 
with a term ending on the first day of the plan year beginning 
after the employer is provided the schedule requires to be 
provided by the plan sponsor.
---------------------------------------------------------------------------
    \485\ Treasury regulations allowing certain noncollectively 
bargained employees covered by a multiemployer plan to be treated as 
collectively bargained employees for purposes of the minimum coverge 
rules of the Code do not apply in making determinations under the 
provision.
---------------------------------------------------------------------------
            Special rule for certain restored benefits
    In the case of benefits which were reduced pursuant to a 
plan amendment adopted on or after January 1, 2002, and before 
June 30, 2005, if, pursuant to the plan document, the trust 
agreement, or a formal written communication from the plan 
sponsor to participants provided before June 30, 2005, such 
benefits were restored, the rules under the provision do not 
apply to such benefit restorations to the extent that any 
restriction on the providing or accrual of such benefits would 
otherwise apply by reason of the provision.
            Cause of action to compel adoption of funding improvement 
                    or rehabilitation plan
    The provision creates a cause of action under ERISA in the 
case that the plan sponsor of a plan certified to be in 
endangered or critical (1) has not adopted a funding 
improvement or rehabilitation plan within 240 days of 
certification of endangered or critical or (2) fails to update 
or comply with the terms of the funding improvement or 
rehabilitation plan. In such case, a civil action may be 
brought by an employer that has an obligation to contribute 
with respect to the plan, or an employee organization that 
represents active participants, for an order compelling the 
plan sponsor to adopt a funding improvement or rehabilitation 
plan or to update or comply with the terms of the funding 
improvement or rehabilitation plan.

                             Effective Date

    The provision is effective for plan years beginning after 
2007. The additional funding rules for plans in endangered or 
critical status do not apply to plan years beginning after 
December 31, 2014.
    If a plan is operating under a funding improvement or 
rehabilitation plan for its last year beginning before January 
1, 2015, the plan shall continue to operate under such funding 
improvement or rehabilitation plan during any period after 
December 31, 2014, that such funding improvement or 
rehabilitation plan is in effect.

 C. Measures to Forestall Insolvency of Multiemployer Plans (secs. 203 
   and 213 of the Act, sec. 4245 of ERISA, and sec. 418E of the Code)


                              Present Law

    In the case of multiemployer plans, the PBGC insures plan 
insolvency, rather than plan termination. A plan is insolvent 
when its available resources are not sufficient to pay the plan 
benefits for the plan year in question, or when the sponsor of 
a plan in reorganization reasonably determines, taking into 
account the plan's recent and anticipated financial experience, 
that the plan's available resources will not be sufficient to 
pay benefits that come due in the next plan year.
    In order to anticipate future insolvencies, at the end of 
the first plan year in which a plan is in reorganization and at 
least every three plans year thereafter, the plan sponsor must 
compare the value of plan assets for the plan year with the 
total amount of benefit payments made under the plan for the 
plan year.\486\ Unless the plan sponsor determines that the 
value of plan assets exceeds three times the total amount of 
benefit payments, the plan sponsor must determine whether the 
plan will be insolvent for any of the next three plan years.
---------------------------------------------------------------------------
    \486\ Code sec. 418E(d)(1); ERISA sec. 4245(d)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the requirements for anticipating 
future insolvencies of plans in reorganization status. Under 
the provision, unless the plan sponsor determines that the 
value of plan assets exceeds three times the total amount of 
benefit payments, the plan sponsor must determine whether the 
plan will be insolvent for any of the next five plan years, 
rather than three plan years as under present law. If the plan 
sponsor makes a determination that the plan will be insolvent 
for any of the next five plan years, the plan sponsor must make 
the comparison of plan assets and benefit payments under the 
plan at least annually until the plan sponsor makes a 
determination that the plan will not be insolvent in any of the 
next five plan years.

                             Effective Date

    The provision is effective with respect to determinations 
made in plan years beginning after 2007.

 D. Withdrawal Liability Reforms (sec. 204 of the Act, and secs. 4203, 
               4205, 4210, 4219, 4221 and 4225 of ERISA)


1. Update of rules relating to limitation on withdrawal liability in 
        certain cases

                              Present Law

    Under ERISA, an employer which withdraws from a 
multiemployer plan in a complete or partial withdrawal is 
liable to the plan in the amount determined to be the 
employer's withdrawal liability.\487\ In general, a ``complete 
withdrawal'' means the employer has permanently ceased 
operations under the plan or has permanently ceased to have an 
obligation to contribute.\488\ A ``partial withdrawal'' 
generally occurs if, on the last day of a plan year, there is a 
70-percent contribution decline for such plan year or there is 
a partial cessation of the employer's contribution 
obligation.\489\
---------------------------------------------------------------------------
    \487\ ERISA sec. 4201.
    \488\ ERISA sec. 4203.
    \489\ ERISA sec. 4205.
---------------------------------------------------------------------------
    When an employer withdraws from a multiemployer plan, the 
plan sponsor is required to determine the amount of the 
employer's withdrawal liability, notify the employer of the 
amount of the withdrawal liability, and collect the amount of 
the withdrawal liability from the employer.\490\ The employer's 
withdrawal liability generally is based on the extent of the 
plan's unfunded vested benefits for the plan years preceding 
the withdrawal.\491\
---------------------------------------------------------------------------
    \490\ ERISA sec. 4202.
    \491\ ERISA secs. 4209 and 4211.
---------------------------------------------------------------------------
    ERISA section 4225 provides rules limiting or subordinating 
withdrawal liability in certain cases. The amount of unfunded 
vested benefits allocable to an employer is limited in the case 
of certain sales of all or substantially all of the employer's 
assets \492\ and in the case of an insolvent employer 
undergoing liquidation or dissolution.\493\
---------------------------------------------------------------------------
    \492\ ERISA sec. 4225(a).
    \493\ ERISA sec. 4225(b).
---------------------------------------------------------------------------
    In the case of a bona fide sale of all or substantially all 
of the employer's assets in an arm's length transaction to an 
unrelated party, the unfunded vested benefits allocable to an 
employer is limited to the greater of (1) a portion of the 
liquidation or dissolution value of the employer (determined 
after the sale or exchange of such assets), or (2) the unfunded 
vested benefits attributable to the employees of the employer. 
The portion to be used in (1) is determined in accordance with 
a table described in ERISA section 4225(a)(2). Other 
limitations on withdrawal liability also apply.

                        Explanation of Provision

    The provision prescribes a new table under ERISA section 
4225(a)(2) to be used in determining the portion of the 
liquidation or dissolution value of the employer for the 
calculation of the limitation of unfunded vested benefits 
allocable to an employer in the case of a bona fide sale of all 
or substantially all of the employer's assets in an arm's 
length transaction to an unrelated party. The provision also 
modifies the calculation of the limit so that the unfunded 
vested benefits allocable to an employer do not exceed the 
greater of (1) a portion of the liquidation or dissolution 
value of the employer (determined after the sale or exchange of 
such assets), or (2) in the case of a plan using the 
attributable method of allocating withdrawal liability, the 
unfunded vested benefits attributable to the employees of the 
employer. Present law ERISA section 4225(b) is not amended by 
the provision.

                             Effective Date

    The provisions are effective for sales occurring on or 
after January 1, 2007.

2. Withdrawal liability continues if work contracted out

                              Present Law

    Under ERISA, an employer which withdraws from a 
multiemployer plan in a complete or partial withdrawal is 
liable to the plan in the amount determined to be the 
employer's withdrawal liability.\494\ In general, a ``complete 
withdrawal'' means the employer has permanently ceased 
operations under the plan or has permanently ceased to have an 
obligation to contribute.\495\
---------------------------------------------------------------------------
    \494\ ERISA sec. 4201.
    \495\ ERISA sec. 4203.
---------------------------------------------------------------------------
    A ``partial withdrawal'' generally occurs if, on the last 
day of a plan year, there is a 70-percent contribution decline 
for such plan year or there is a partial cessation of the 
employer's contribution obligation.\496\ A partial cessation of 
the employer's obligation occurs if (1) the employer 
permanently ceases to have an obligation to contribute under 
one or more, but fewer than all collective bargaining 
agreements under which obligated to contribute, but the 
employer continues to perform work in the jurisdiction of the 
collective bargaining agreement or transfers such work to 
another location or (2) an employer permanently ceases to have 
an obligation to contribute under the plan with respect to work 
performed at one or more, but fewer than all of its facilities, 
but continues to perform work at the facility of the type for 
which the obligation to contribute ceased.\497\
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    \496\ ERISA sec. 4205.
    \497\ ERISA sec. 4205(b)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a partial withdrawal also occurs if 
the employer permanently ceases to have an obligation to 
contribute under one or more, but fewer than all collective 
bargaining agreements under which obligated to contribute, but 
the employer transfers such work to an entity or entities owned 
or controlled by the employer.

                             Effective Date

    The provision is effective with respect to work transferred 
on or after the date of enactment (August 17, 2006).

3. Application of forgiveness rule to plans primarily covering 
        employees in building and construction

                              Present Law

    Under ERISA, an employer which withdraws from a 
multiemployer plan in a complete or partial withdrawal is 
liable to the plan in the amount determined to be the 
employer's withdrawal liability.\498\ A multiemployer plan, 
other than a plan which primarily covers employees in the 
building and construction industry, may adopt a rule that an 
employer who withdraws from the plan is not subject to 
withdrawal liability if certain requirements are 
satisfied.\499\ In general, the employer is not liable if the 
employer (1) first had an obligation to contribute to the plan 
after the date of enactment of the Multiemployer Pension Plan 
Amendments Act of 1980; (2) contributed to the plan for no more 
than the lesser of six plan years or the number of years 
required for vesting under the plan; (3) was required to make 
contributions to the plan for each year in an amount equal to 
less than two percent of all employer contributions for the 
year; and (4) never avoided withdrawal liability because of the 
special rule.
---------------------------------------------------------------------------
    \498\ ERISA sec. 4201.
    \499\ ERISA sec. 4210.
---------------------------------------------------------------------------
    A multiemployer plan, other than a plan that primarily 
covers employees in the building and construction industry, may 
be amended to provide that the amount of unfunded benefits 
allocable to an employer that withdraws from the plan is 
determined under an alternative method.\500\
---------------------------------------------------------------------------
    \500\ ERISA sec. 4211(c)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the rule allowing plans to exempt 
certain employers from withdrawal liability to plans primarily 
covering employees in the building and construction industry. 
In addition, the provision also provides that a plan (including 
a plan which primarily covers employees in the building and 
construction industry) may be amended to provide that the 
withdrawal liability method otherwise applicable shall be 
applied by substituting the plan year which is specified in the 
amendment and for which the plan has no unfunded vested 
benefits for the plan year ending before September 26, 1980.

                             Effective Date

    The provision is effective with respect to plan withdrawals 
occurring on or after January 1, 2007.

4. Procedures applicable to disputes involving withdrawal liability

                              Present Law

    Under ERISA, when an employer withdraws from a 
multiemployer plan, the employer is generally liable for its 
share of unfunded vested benefits, determined as of the date of 
withdrawal (generally referred to as the ``withdrawal 
liability''). Whether and when a withdrawal has occurred and 
the amount of the withdrawal liability is determined by the 
plan sponsor. The plan sponsor's assessment of withdrawal 
liability is presumed correct unless the employer shows by a 
preponderance of the evidence that the plan sponsor's 
determination of withdrawal liability was unreasonable or 
clearly erroneous. A similar standard applies in the event the 
amount of the plan's unfunded vested benefits is challenged.
    The first payment of withdrawal liability determined by the 
plan sponsor is generally due no later than 60 days after 
demand, even if the employer contests the determination of 
liability. Disputes between an employer and plan sponsor 
concerning withdrawal liability are resolved through 
arbitration, which can be initiated by either party. Even if 
the employer contests the determination, payments of withdrawal 
liability must be made by the employer until the arbitrator 
issues a final decision with respect to the determination 
submitted for arbitration.
    For purposes of withdrawal liability, all trades or 
businesses under common control are treated as a single 
employer. In addition, the plan sponsor may disregard a 
transaction in order to assess withdrawal liability if the 
sponsor determines that the principal purpose of the 
transaction was to avoid or evade withdrawal liability. For 
example, if a subsidiary of a parent company is sold and the 
subsidiary then withdraws from a multiemployer plan, the plan 
sponsor may assess withdrawal liability as if the subsidiary 
were still part of the parent company's controlled group if the 
sponsor determines that a principal purpose of the sale of the 
subsidiary was to evade or avoid withdrawal liability.
    In the case of an employer that receives a notification of 
withdrawal liability and demand for payment after October 31, 
2003, a special rule may apply if a transaction is disregarded 
by a plan sponsor in determining that a withdrawal has occurred 
or that an employer is liable for withdrawal liability. If the 
transaction that is disregarded by the plan sponsor occurred 
before January 1, 1999, and at least five years before the date 
of the withdrawal, then (1) the determination by the plan 
sponsor that a principal purpose of the transaction was to 
evade or avoid withdrawal liability is not be presumed to be 
correct, (2) the plan sponsor, rather than the employer, has 
the burden to establish, by a preponderance of the evidence, 
the elements of the claim that a principal purpose of the 
transaction was to evade or avoid withdrawal liability, and (3) 
if an employer contests the plan sponsor's determination 
through an arbitration proceeding, or through a claim brought 
in a court of competent jurisdiction, the employer is not 
obligated to make any withdrawal liability payments until a 
final decision in the arbitration proceeding, or in court, 
upholds the plan sponsor's determination.

                        Explanation of Provision

    Under the provision, if (1) a plan sponsor determines that 
a complete or partial withdrawal of an employer has occurred or 
an employer is liable for withdrawal liability payments with 
respect to the complete or partial withdrawal from the plan and 
(2) such determination is based in whole or in part on a 
finding by the plan sponsor that a principal purpose of any 
transaction that occurred after December 31, 1998, and at least 
five years (two years in the case of a small employer) before 
the date of complete or partial withdrawal was to evade or 
avoid withdrawal liability, the person against which the 
withdrawal liability is assessed may elect to use a special 
rule relating to required payments. Under the special rule, if 
the electing person contests the plan sponsor's determination 
with respect to withdrawal liability payments through an 
arbitration proceeding, through a claim brought in a court of 
competent jurisdiction, or as otherwise permitted by law, the 
electing person is not obligated to make the withdrawal 
liability payments until a final decision in the arbitration 
proceeding, or in court, upholds the plan sponsor's 
determination. The special rule applies only if the electing 
person (1) provides notice to the plan sponsor of its election 
to apply the special rule within 90 days after the plan sponsor 
notifies the electing person of its liability, and (2) if a 
final decision on the arbitration proceeding, or in court, of 
the withdrawal liability dispute has not been rendered within 
12 months from the date of such notice, the electing person 
provides to the plan, effective as of the first day following 
the 12-month period, a bond issued by a corporate surety, or an 
amount held on escrow by a bank or similar financial 
institution satisfactory to the plan, in an amount equal to the 
sum of the withdrawal liability payments that would otherwise 
be due for the 12-month period beginning with the first 
anniversary of such notice. The bond or escrow must remain in 
effect until there is a final decision in the arbitration 
proceeding, or in court, of the withdrawal liability dispute. 
At such time, the bond or escrow must be paid to the plan if 
the final decision upholds the plan sponsor's determination. If 
the withdrawal liability dispute is not concluded by 12 months 
after the electing person posts the bond or escrow, the 
electing person must, at the start of each succeeding 12-month 
period, provide an additional bond or amount held in escrow 
equal to the sum of the withdrawal liability payments that 
would otherwise be payable to the plan during that period.
    A small employer is an employer which, for the calendar 
year in which the transaction occurred, and for each of the 
three preceding years, on average (1) employs no more than 500 
employees, and (2) is required to make contributions to the 
plan on behalf of not more than 250 employees.

                             Effective Date

    The provision is effective for any person that receives a 
notification of withdrawal liability and demand for payment on 
or after the date of enactment (August 17, 2006) with respect 
to a transaction that occurred after December 31, 1998.

E. Prohibition on Retaliation against Employers Exercising their Rights 
to Petition the Federal Government (sec. 205 of the Act and sec. 510 of 
                                 ERISA)


                              Present Law

    Under ERISA section 510, it is unlawful for any person to 
discharge, fine, suspend, expel, discipline, or discriminate 
against a participant or beneficiary for exercising any right 
to which he is entitled under the provisions of an employee 
benefit plan, Title I or section 3001 of ERISA, or for the 
purpose of interfering with the attainment of any right to 
which a participant may become entitled. It is also unlawful 
for any person to discharge, fine, suspend, expel or 
discriminate against any person because he has given 
information or has testified or is about to testify in any 
inquiry or proceeding relating to ERISA. The civil enforcement 
provisions under ERISA section 503 are applicable in the 
enforcement of such provisions.

                        Explanation of Provision

    The provision provides that in the case of a multiemployer 
plan, it is unlawful for the plan sponsor or any other person 
to discriminate against any contributing employer for 
exercising rights under ERISA or for giving information or 
testifying in an inquiry or proceedings relating to ERISA 
before Congress. The provision amends the anti-retaliation 
section of ERISA to provide protection for employers who 
contribute to multiemployer plans and others. The provision is 
intended to close a loophole in the existing whistleblower 
protections. In June 2005, a witness who appeared on behalf of 
several other companies testified before the Retirement 
Security & Aging Subcommittee of the Senate Health, Education, 
Labor & Pensions Committee. Subsequent to that testimony there 
was an allegation that some of these companies may have been 
targeted for possible audits.
    It is intended that retaliation against any employer who 
has an obligation to contribute to a plan due to testifying 
before Congress or exercising his or her rights to petition for 
redress of grievances would amount to unlawful retaliation 
under ERISA as amended by the provision. Exercising rights 
under ERISA, testifying before Congress, and giving information 
in any inquiry or proceeding relating to this Act are intended 
to be protected under the provision.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

F. Special Rule for Certain Benefits Funded Under an Agreement Approved 
                   by the PBGC (sec. 206 of the Act)


                              Present Law

    No provision.

                        Explanation of Provision

    The provision provides that in the case of a multiemployer 
plan that is a party to an agreement that was approved by the 
PBGC before June 30, 2005, and that increases benefits and 
provides for special withdrawal liability rules, certain 
benefit increases funded pursuant to the agreement are not 
subject to the multiemployer plan funding rules under the 
provision (including the additional funding rules for plans in 
endangered or critical status) if the multiemployer plan is 
funded in compliance with the agreement (or any amendment 
thereto).

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

 G. Exception from Excise Tax for Certain Multiemployer Pension Plans 
                         (sec. 214 of the Act)


                              Present Law

    If a multiemployer plan has an accumulated funding 
deficiency for a year, an excise tax of five percent generally 
applies, increasing to 100 percent if contributions sufficient 
to eliminate the funding deficiency are not made within a 
certain period.\501\
---------------------------------------------------------------------------
    \501\ Code sec. 4971.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the present-law excise tax does not 
apply with respect to any accumulated funding deficiency of a 
multiemployer plan (1) with less than 100 participants; (2) 
with respect to which the contributing employers participated 
in a Federal fishery capacity reduction program; (3) with 
respect to which employers under the plan participated in the 
Northeast Fisheries Assistance Program; and (4) with respect to 
which the annual normal cost is less than $100,000 and the plan 
is experiencing a funding deficiency on the date of enactment 
(August 17, 2006). The tax does not apply to any taxable year 
beginning before the earlier of (1) the taxable year in which 
the plan sponsor adopts a rehabilitation plan, or (2) the 
taxable year that contains January 1, 2009.

                             Effective Date

    The provision is effective for any taxable year beginning 
before the earlier of (1) the taxable year in which the plan 
sponsor adopts a rehabilitation plan, or (2) the taxable year 
that contains January 1, 2009.

  H. Sunset of Multiemployer Plan Funding Provisions (sec. 221 of the 
                                  Act)


                              Present Law

    No provision.

                        Explanation of Provision

    The provision directs the Secretary of Labor, the Secretary 
of Treasury, and the Executive Director of the PBGC, not later 
than December 31, 2011, to conduct a study of the effect of the 
changes made by the provision on the operation and funding 
status of multiemployer plans and report the results of the 
study, including recommendations for legislation, to Congress. 
The study must include (1) the effect of funding difficulties, 
funding rules in effect before the date of enactment, and the 
changes made by the provision on small businesses participating 
in multiemployer plans; (2) the effect on the financial status 
of small employers of funding targets set in funding 
improvement and rehabilitation plans and associated 
contribution increases, funding deficiencies, excise taxes, 
withdrawal liability, the possibility of alternative schedules 
and procedures for financially-troubled employers, and other 
aspects of the multiemployer system; and (3) the role of the 
multiemployer pension plan system in helping small employers to 
offer pension benefits.
    The provision provides that the rules applicable to plans 
in endangered and critical status and the shortfall funding 
method under the general funding rules for multiemployer plans 
do not apply to plan years beginning after December 31, 
2014.\502\ The present-law rules are reinstated for such years 
except that funding improvement and rehabilitation plans in 
effect at the time of the sunset continue.
---------------------------------------------------------------------------
    \502\ As previously discussed, the rules relating to the automatic 
amortization extension do not apply with respect to any application 
submitted after December 31, 2014.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

                  TITLE III--INTEREST RATE ASSUMPTIONS

A. Extension of Replacement of 30-Year Treasury Rates (sec. 301 of the 
      Act, secs. 302 and 4006 of ERISA, and sec. 412 of the Code)

    The provisions relating to extension of the replacement of 
the 30-year Treasury rate for purposes of single-employer 
funding rules are described above, under Title I. The provision 
relating to extension of the replacement of the 30-year 
Treasury rate for PBGC premium purposes is described below, 
under Title IV.

B. Interest Rate Assumption for Determination of Lump-Sum Distributions 
  (sec. 302 of the Act, sec. 205(g) of ERISA, and sec. 417(e) of the 
                                 Code)

                              Present Law

    Accrued benefits under a defined benefit pension plan 
generally must be paid in the form of an annuity for the life 
of the participant unless the participant consents to a 
distribution in another form. Defined benefit pension plans 
generally provide that a participant may choose among other 
forms of benefit offered under the plan, such as a lump-sum 
distribution. These optional forms of benefit generally must be 
actuarially equivalent to the life annuity benefit payable to 
the participant.
    A defined benefit pension plan must specify the actuarial 
assumptions that will be used in determining optional forms of 
benefit under the plan in a manner that precludes employer 
discretion in the assumptions to be used. For example, a plan 
may specify that a variable interest rate will be used in 
determining actuarial equivalent forms of benefit, but may not 
give the employer discretion to choose the interest rate.
    Statutory interest and mortality assumptions must be used 
in determining the minimum value of certain optional forms of 
benefit, such as a lump sum. That is, the lump sum payable 
under the plan may not be less than the amount of the lump sum 
that is actuarially equivalent to the life annuity payable to 
the participant, determined using the statutory assumptions. 
The statutory assumptions consist of an applicable interest 
rate and an applicable mortality table (as published by the 
IRS).
    The applicable interest rate is the annual interest rate on 
30-year Treasury securities for the month before the date of 
distribution or such other time as prescribed by Treasury 
regulations. The regulations provide various options for 
determining the interest rate to be used under the plan, such 
as the period for which the interest rate will remain constant 
(``stability period'') and the use of averaging.
    The applicable mortality table is a mortality table based 
on the 1994 Group Annuity Reserving Table (``94 GAR''), 
projected through 2002.
    An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant.\503\ This 
restriction is sometimes referred to as the ``anticutback'' 
rule and applies to benefits that have already accrued. For 
purposes of the anticutback rule, an amendment is also treated 
as reducing an accrued benefit if, with respect to benefits 
accrued before the amendment is adopted, the amendment has the 
effect of either (1) eliminating or reducing an early 
retirement benefit or a retirement-type subsidy, or (2) except 
as provided by Treasury regulations, eliminating an optional 
form of benefit.
---------------------------------------------------------------------------
    \503\ Code sec. 411(d)(6); ERISA sec. 204(g).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision changes the interest rate and mortality table 
used in calculating the minimum value of certain optional forms 
of benefit, such as lump sums.\504\
---------------------------------------------------------------------------
    \504\ Under the provision of the Act relating to plan amendments, 
if certain requirements are met, a plan amendment to implement the 
changes made to the minimum value requirements may be made 
retroactively and without violating the anticutback rule.
---------------------------------------------------------------------------
    Minimum value is calculated using the first, second, and 
third segment rates as applied under the funding rules, with 
certain adjustments, for the month before the date of 
distribution or such other time as prescribed by Treasury 
regulations. The adjusted first, second, and third segment 
rates are derived from a corporate bond yield curve prescribed 
by the Secretary of the Treasury for such month which reflects 
the yields on investment grade corporate bonds with varying 
maturities (rather than a 24-month average, as under the 
minimum funding rules). Thus, the interest rate that applies 
depends upon how many years in the future a participant's 
annuity payment will be made. Typically, a higher interest rate 
applies for payments made further out in the future.
    A transition rule applies with respect to interest rates 
used in determining distributions in plan years beginning in 
2008 through 2011. Under the transition rule, for plan years 
beginning in 2008, the first, second, or third segment rate 
with respect to any month is the sum of: (1) the product of the 
segment rate otherwise determined for the month, multiplied by 
20 percent; and (2) the product of the annual interest rate on 
30-year Treasury securities determined for the month (i.e., the 
applicable interest rate under present law), multiplied by 80 
percent. For plan years beginning in 2009, the first, second, 
or third segment rate with respect to any month is the sum of: 
(1) the product of the segment rate otherwise determined for 
the month, multiplied by 40 percent; and (2) the product of the 
annual interest rate on 30-year Treasury securities determined 
for the month, multiplied by 60 percent. For plan years 
beginning in 2010, the first, second, or third segment rate 
with respect to any month is the sum of: (1) the product of the 
segment rate otherwise determined for the month, multiplied by 
60 percent; and (2) the product of the annual interest rate on 
30-year Treasury securities determined for the month, 
multiplied by 40 percent. For plan years beginning in 2011, the 
first, second, or third segment rate with respect to any month 
is the sum of: (1) the product of the segment rate otherwise 
determined for the month, multiplied by 80 percent; and (2) the 
product of the annual interest rate on 30-year Treasury 
securities for the month, multiplied by 20 percent.
    The mortality table that must be used for calculating lump 
sums under the Act is based on the mortality table required for 
minimum funding purposes under the Act, modified as appropriate 
by the Secretary of the Treasury. The Secretary is to prescribe 
gender-neutral tables for use in determining minimum lump sums.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2007.

 C. Interest Rate Assumption for Applying Benefit Limitations to Lump-
  Sum Distributions (sec. 303 of the Act and sec. 415(b) of the Code)


                              Present Law

    Annual benefits payable under a defined benefit pension 
plan generally may not exceed the lesser of (1) 100 percent of 
average compensation, or (2) $175,000 (for 2006). The dollar 
limit generally applies to a benefit payable in the form of a 
straight life annuity. If the benefit is not in the form of a 
straight life annuity (e.g., a lump sum), the benefit generally 
is adjusted to an equivalent straight life annuity. For 
purposes of adjusting a benefit in a form that is subject to 
the minimum value rules, such as a lump-sum benefit, the 
interest rate used generally must be not less than the greater 
of: (1) the rate applicable in determining minimum lump sums, 
i.e., the interest rate on 30-year Treasury securities; or (2) 
the interest rate specified in the plan. In the case of plan 
years beginning in 2004 or 2005, the interest rate used 
generally must be not less than the greater of: (1) 5.5 
percent; or (2) the interest rate specified in the plan.\505\
---------------------------------------------------------------------------
    \505\ In the case of a plan under which lump-sum benefits are 
determined solely as required under the minimum value rules (rather 
than using an interest rate that results in larger lump-sum benefits), 
the interest rate specified in the plan is the interest rate applicable 
under the minimum value rules. Thus, for purposes of applying the 
benefit limits to lump-sum benefits under the plan, the interest rate 
used must be not less than the greater of: (1) 5.5 percent; or (2) the 
interest rate applicable under the minimum value rules.
---------------------------------------------------------------------------
    An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant.\506\ This 
restriction is sometimes referred to as the ``anticutback'' 
rule and applies to benefits that have already accrued. For 
purposes of the anticutback rule, an amendment is also treated 
as reducing an accrued benefit if, with respect to benefits 
accrued before the amendment is adopted, the amendment has the 
effect of either (1) eliminating or reducing an early 
retirement benefit or a retirement-type subsidy, or (2) except 
as provided by Treasury regulations, eliminating an optional 
form of benefit.
---------------------------------------------------------------------------
    \506\ Code sec. 411(d)(6); ERISA sec. 204(g).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the Act, for purposes of adjusting a benefit in a 
form that is subject to the minimum value rules, such as a 
lump-sum benefit, the interest rate used generally must be not 
less than the greater of: (1) 5.5 percent; (2) the rate that 
provides a benefit of not more than 105 percent of the benefit 
that would be provided if the rate (or rates) applicable in 
determining minimum lump sums were used; or (3) the interest 
rate specified in the plan.\507\
---------------------------------------------------------------------------
    \507\ Under the provision of the Act relating to plan amendments, 
if certain requirements are met, a plan amendment to implement the 
change made to the interest rate used in adjusting a benefit in a form 
that is subject to the minimum value rules may be made retroactively 
and without violating the anticutback rule.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2005.

            TITLE IV--PBGC GUARANTEE AND RELATED PROVISIONS

 A. PBGC Premiums (secs. 301 and 401 of the Act and sec. 4006 of ERISA)

                              Present Law

The PBGC
    The minimum funding requirements permit an employer to fund 
defined benefit plan benefits over a period of time. Thus, it 
is possible that a plan may be terminated at a time when plan 
assets are not sufficient to provide all benefits accrued by 
employees under the plan. In order to protect plan participants 
from losing retirement benefits in such circumstances, the 
Pension Benefit Guaranty Corporation (``PBGC''), a corporation 
within the Department of Labor, was created in 1974 under ERISA 
to provide an insurance program for benefits under most defined 
benefit plans maintained by private employers.
Termination of single-employer defined benefit plans
    An employer may voluntarily terminate a single-employer 
plan only in a standard termination or a distress termination. 
The PBGC may also involuntarily terminate a plan (that is, the 
termination is not voluntary on the part of the employer).
    A standard termination is permitted only if plan assets are 
sufficient to cover benefit liabilities. If assets in a defined 
benefit plan are not sufficient to cover benefit liabilities, 
the employer may not terminate the plan unless the employer 
(and members of the employer's controlled group) meets one of 
four criteria of financial distress.\508\
---------------------------------------------------------------------------
    \508\ The four criteria for a distress termination are: (1) the 
contributing sponsor, and every member of the controlled group of which 
the sponsor is a member, is being liquidated in bankruptcy or any 
similar Federal law or other similar State insolvency proceedings; (2) 
the contributing sponsor and every member of the sponsor's controlled 
group is being reorganized in bankruptcy or similar State proceeding; 
(3) the PBGC determines that termination is necessary to allow the 
employer to pay its debts when due; or (4) the PBGC determines that 
termination is necessary to avoid unreasonably burdensome pension costs 
caused solely by a decline in the employer's work force.
---------------------------------------------------------------------------
    The PBGC may institute proceedings to terminate a plan if 
it determines that the plan in question has not met the minimum 
funding standards, will be unable to pay benefits when due, has 
a substantial owner who has received a distribution greater 
than $10,000 (other than by reason of death) while the plan has 
unfunded nonforfeitable benefits, or may reasonably be expected 
to increase PBGC's long-run loss unreasonably. The PBGC must 
institute proceedings to terminate a plan if the plan is unable 
to pay benefits that are currently due.
Guaranteed benefits
    When an underfunded plan terminates, the amount of benefits 
that the PBGC will pay depends on legal limits, asset 
allocation, and recovery on the PBGC's employer liability 
claim. The PBGC guarantee applies to ``basic benefits.'' Basic 
benefits generally are benefits accrued before a plan 
terminates, including (1) benefits at normal retirement age; 
(2) most early retirement benefits; (3) disability benefits for 
disabilities that occurred before the plan was terminated; and 
(4) certain benefits for survivors of plan participants. 
Generally only that part of the retirement benefit that is 
payable in monthly installments (rather than, for example, 
lump-sum benefits payable to encourage early retirement) is 
guaranteed.\509\
---------------------------------------------------------------------------
    \509\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, subsidized early retirement benefits) are guaranteed 
only if the triggering event occurs before plan termination.
    For plans terminating in 2006, the maximum guaranteed 
benefit for an individual retiring at age 65 and receiving a 
single life annuity is $3,971.59 per month or $47,659.08 per 
year.\510\ The dollar limit is indexed annually for inflation. 
The guaranteed amount is reduced for benefits starting before 
age 65.
---------------------------------------------------------------------------
    \510\ The PBGC generally pays the greater of the guaranteed benefit 
amount and the amount that was covered by plan assets when it 
terminated. Thus, depending on the amount of assets in the terminating 
plan, participants may receive more than the amount guaranteed by PBGC.
    Special rules limit the guaranteed benefits of individuals who are 
substantial owners covered by a plan whose benefits have not been 
increased by reason of any plan amendment. A substantial owner 
generally is an individual who: (1) owns the entire interest in an 
unincorporated trade or business; (2) in the case of a partnership, is 
a partner who owns, directly or indirectly, more than 10 percent of 
either the capital interest or the profits interest in the partnership; 
(3) in the case of a corporation, owns, directly or indirectly, more 
than 10 percent in value of either the voting stock of the corporation 
or all the stock of the corporation; or (4) at any time within the 
preceding 60 months was a substantial owner under the plan. ERISA sec. 
4022(b)(5).
---------------------------------------------------------------------------
    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.\511\
---------------------------------------------------------------------------
    \511\ The phase in does not apply if the benefit is less than $20 
per month.
---------------------------------------------------------------------------
PBGC premiums
            In general
    The PBGC is funded by assets in terminated plans, amounts 
recovered from employers who terminate underfunded plans, 
premiums paid with respect to covered plans, and investment 
earnings. All covered single-employer plans are required to pay 
a flat per-participant premium and underfunded plans are 
subject to an additional variable rate premium based on the 
level of underfunding. The amount of both the flat rate premium 
and the variable rate premium are set by statute; the premiums 
are not indexed for inflation.
            Flat rate premium
    Under the Deficit Reduction Act of 2005,\512\ the flat-rate 
premium is $30 for plan years beginning after December 31, 
2005, with indexing after 2006 based on increases in average 
wages.
---------------------------------------------------------------------------
    \512\ Pub. L. No. 109-171, enacted February 8, 2006.
---------------------------------------------------------------------------
            Variable rate premium
    The variable rate premium is equal to $9 per $1,000 of 
unfunded vested benefits. ``Unfunded vested benefits'' is the 
amount which would be the unfunded current liability (as 
defined under the minimum funding rules) if only vested 
benefits were taken into account and if benefits were valued at 
the variable premium interest rate. No variable rate premium is 
imposed for a year if contributions to the plan for the prior 
year were at least equal to the full funding limit for that 
year.
    In determining the amount of unfunded vested benefits, the 
interest rate used is generally 85 percent of the interest rate 
on 30 year Treasury securities for the month preceding the 
month in which the plan year begins (100 percent of the 
interest rate on 30 year Treasury securities for plan years 
beginning in 2002 and 2003). Under the Pension Funding Equity 
Act of 2004, in determining the amount of unfunded vested 
benefits for plan years beginning after December 31, 2003, and 
before January 1, 2006, the interest rate used is 85 percent of 
the annual rate of interest determined by the Secretary of the 
Treasury on amounts invested conservatively in long term 
investment-grade corporate bonds for the month preceding the 
month in which the plan year begins.
            Termination premium
    Under the Deficit Reduction Act of 2005, a new premium 
generally applies in the case of certain plan terminations 
occurring after 2005 and before 2011. A premium of $1,250 per 
participant is imposed generally for the year of the 
termination and each of the following two years. The premium 
applies in the case of a plan termination by the PBGC or a 
distress termination due to reorganization in bankruptcy, the 
inability of the employer to pay its debts when due, or a 
determination that a termination is necessary to avoid 
unreasonably burdensome pension costs caused solely by a 
decline in the workforce. In the case of a termination due to 
reorganization, the liability for the premium does not arise 
until the employer is discharged from the reorganization 
proceeding. The premium does not apply with respect to a plan 
terminated during bankruptcy reorganization proceedings 
pursuant to a bankruptcy filing before October 18, 2005.

                        Explanation of Provision


Variable rate premium

    For 2006 and 2007, the Act extends the present-law rule 
under which, in determining the amount of unfunded vested 
benefits for variable rate premium purposes, the interest rate 
used is 85 percent of the annual rate of interest determined by 
the Secretary of the Treasury on amounts invested 
conservatively in long term investment-grade corporate bonds 
for the month preceding the month in which the plan year 
begins.
    Beginning in 2008, the determination of unfunded vested 
benefits for purposes of the variable rate premium is modified 
to reflect the changes to the funding rules of the provision. 
Thus, under the provision, unfunded vested benefits are equal 
to the excess (if any) of (1) the plan's funding target \513\ 
for the year determined as under the minimum funding rules, but 
taking into account only vested benefits over (2) the fair 
market value of plan assets. In valuing unfunded vested 
benefits the interest rate is the first, second, and third 
segment rates which would be determined under the funding rules 
of the provision, if the segment rates were based on the yields 
of corporate bond rates, rather than a 24-month average of such 
rates. Under the Act, deductible contributions are no longer 
limited by the full funding limit; thus, the rule providing 
that no variable rate premium is required if contributions for 
the prior plan year were at least equal to the full funding 
limit no longer applies under the provision.
---------------------------------------------------------------------------
    \513\ The assumptions used in determining funded target are the 
same as under the minimum funding rules. Thus, for a plan in at-risk 
status, the at-risk assumptions are used.
---------------------------------------------------------------------------

Termination premium

    The Act makes permanent the termination premium enacted in 
the Deficit Reduction Act of 2005.

                             Effective Date

    The extension of the present-law interest rate for purposes 
of calculating the variable rate premium is effective for plan 
years beginning in 2006 and 2007. The modifications to the 
variable rate premium are effective for plan years beginning 
after December 31, 2007. The provision extending the 
termination premium is effective on the date of enactment 
(August 17, 2006).

 B. Special Funding Rules for Plans Maintained by Commercial Airlines 
                         (sec. 402 of the Act)


                              Present Law


Minimum funding rules in general

    Single-employer defined benefit pension plans are subject 
to minimum funding requirements under the Employee Retirement 
Income Security Act of 1974 (``ERISA'') and the Internal 
Revenue Code (the ``Code'').\514\ The amount of contributions 
required for a plan year under the minimum funding rules is 
generally the amount needed to fund benefits earned during that 
year plus that year's portion of other liabilities that are 
amortized over a period of years, such as benefits resulting 
from a grant of past service credit. The amount of required 
annual contributions is determined under one of a number of 
acceptable actuarial cost methods. Additional contributions are 
required under the deficit reduction contribution rules in the 
case of certain underfunded plans. No contribution is required 
under the minimum funding rules in excess of the full funding 
limit. A detailed description of the present-law funding rules 
is provided in Title I, above.
---------------------------------------------------------------------------
    \514\ Code sec. 412. The minimum funding rules also apply to 
multiemployer plans, but the rules for multiemployer plans differ in 
various respects from the rules applicable to single-employer plans.
---------------------------------------------------------------------------

Notice of certain plan amendments

    A notice requirement must be met if an amendment to a 
defined benefit pension plan provides for a significant 
reduction in the rate of future benefit accrual. In that case, 
the plan administrator must furnish a written notice concerning 
the amendment. Notice may also be required if a plan amendment 
eliminates or reduces an early retirement benefit or 
retirement-type subsidy. The plan administrator is required to 
provide the notice to any participant or alternate payee whose 
rate of future benefit accrual may reasonably be expected to be 
significantly reduced by the plan amendment (and to any 
employee organization representing affected participants). The 
notice must be written in a manner calculated to be understood 
by the average plan participant and must provide sufficient 
information to allow recipients to understand the effect of the 
amendment. In the case of a single-employer plan, the plan 
administrator is generally required to provide the notice at 
least 45 days before the effective date of the plan amendment. 
In the case of a multiemployer plan, the notice is generally 
required to be provided 15 days before the effective date of 
the plan amendment.

PBGC termination insurance program

    The minimum funding requirements permit an employer to fund 
defined benefit plan benefits over a period of time. Thus, it 
is possible that a plan may be terminated at a time when plan 
assets are not sufficient to provide all benefits accrued by 
employees under the plan. In order to protect plan participants 
from losing retirement benefits in such circumstances, the PBGC 
guarantees basic benefits under most defined benefit plans. 
When an underfunded plan terminates, the amount of benefits 
that the PBGC will pay depends on legal limits, asset 
allocation, and recovery on the PBGC's employer liability 
claim. There is a dollar limit on the amount of otherwise 
guaranteed benefits based on the year in which the plan 
terminates. For plans terminating in 2006, the maximum 
guaranteed benefit for an individual retiring at age 65 and 
receiving a single life annuity is $3,971.59 per month or 
$47,659.08 per year.\515\ The dollar limit is indexed annually 
for inflation. The guaranteed amount is reduced for benefits 
starting before age 65. In the case of a plan or a plan 
amendment that has been in effect for less than five years 
before a plan termination, the amount guaranteed is phased in 
by 20 percent a year.\516\
---------------------------------------------------------------------------
    \515\ The PBGC generally pays the greater of the guaranteed benefit 
amount and the amount that was covered by plan assets when it 
terminated. Thus, depending on the amount of assets in the terminating 
plan, participants may receive more than the amount guaranteed by PBGC.
    Special rules limit the guaranteed benefits of individuals who are 
substantial owners covered by a plan whose benefits have not been 
increased by reason of any plan amendment. A substantial owner 
generally is an individual who: (1) owns the entire interest in an 
unincorporated trade or business; (2) in the case of a partnership, is 
a partner who owns, directly or indirectly, more than 10 percent of 
either the capital interest or the profits interest in the partnership; 
(3) in the case of a corporation, owns, directly or indirectly, more 
than 10 percent in value of either the voting stock of the corporation 
or all the stock of the corporation; or (4) at any time within the 
preceding 60 months was a substantial owner under the plan.
    \516\ The phase in does not apply if the benefit is less than $20 
per month.
---------------------------------------------------------------------------

Termination premiums

    Under the Deficit Reduction Act of 2005, a new premium 
generally applies in the case of certain plan terminations 
occurring after 2005 and before 2011. A premium of $1,250 per 
participant is imposed generally for the year of the 
termination and each of the following two years. The premium 
applies in the case of a plan termination by the PBGC or a 
distress termination due to reorganization in bankruptcy, the 
inability of the employer to pay its debts when due, or a 
determination that a termination is necessary to avoid 
unreasonably burdensome pension costs caused solely by a 
decline in the workforce. In the case of a termination due to 
reorganization, the liability for the premium does not arise 
until the employer is discharged from the reorganization 
proceeding. The premium does not apply with respect to a plan 
terminated during bankruptcy reorganization proceedings 
pursuant to a bankruptcy filing before October 18, 2005.

Minimum coverage requirements

    The Code imposes minimum coverage requirements on qualified 
retirement plans in order to ensure that plans cover a broad 
cross section of employees.\517\ In general, the minimum 
coverage requirements are satisfied if one of the following 
criteria are met: (1) the plan benefits at least 70 percent of 
employees who are not highly compensated employees; (2) the 
plan benefits a percentage of employees who are not highly 
compensated employees which is at least 70 percent of the 
percentage of highly compensated employees participating under 
the plan; or (3) the plan meets the average benefits test.
---------------------------------------------------------------------------
    \517\ Code sec. 410(b).
---------------------------------------------------------------------------
    Certain employees may be disregarded in applying the 
minimum coverage requirements. Under one exclusion, in the case 
of a plan established or maintained pursuant to an agreement 
which the Secretary of Labor finds to be a collective 
bargaining agreement between air pilots represented in 
accordance with title II of the Railway Labor Act and one or 
more employers, all employees not covered by such agreement may 
be disregarded. This exclusion does not apply in the case of a 
plan which provides contributions or benefits for employees 
whose principal duties are not customarily performed aboard 
aircraft in flight.

Alternative deficit reduction contribution for certain plans

    Under present law, certain employers (``applicable 
employers'') may elect a reduced amount of additional required 
contribution under the deficit reduction contribution rules (an 
``alternative deficit reduction contribution'') with respect to 
certain plans for applicable plan years. An applicable plan 
year is a plan year beginning after December 27, 2003, and 
before December 28, 2005, for which the employer elects a 
reduced contribution. If an employer so elects, the amount of 
the additional deficit reduction contribution for an applicable 
plan year is the greater of: (1) 20 percent of the amount of 
the additional contribution that would otherwise be required; 
or (2) the additional contribution that would be required if 
the deficit reduction contribution for the plan year were 
determined as the expected increase in current liability due to 
benefits accruing during the plan year.
    An applicable employer is an employer that is: (1) a 
commercial passenger airline; (2) primarily engaged in the 
production or manufacture of a steel mill product, or the 
processing of iron ore pellets; or (3) an organization 
described in section 501(c)(5) that established the plan for 
which an alternative deficit reduction contribution is elected 
on June 30, 1955.

                        Explanation of Provision


In general

    The provision provides special funding rules for certain 
eligible plans. For purposes of the provision, an eligible plan 
is a single-employer defined benefit pension plan sponsored by 
an employer that is a commercial passenger airline or the 
principal business of which is providing catering services to a 
commercial passenger airline.
    The plan sponsor of an eligible plan may make one of two 
alternative elections. In the case of a plan that meets certain 
benefit accrual and benefit increase restrictions, an election 
allowing a 17-year amortization of the plan's unfunded 
liability is available. A plan that does not meet such 
requirements may elect to use a 10-year amortization period in 
amortizing the plan's shortfall amortization base for the first 
taxable year beginning in 2008.

Election for plans that meet benefit accrual and benefit increase 
        restriction requirements

            In general
    Under the provision, if an election of a 17-year 
amortization period is made with respect to an eligible plan 
for a plan year (an ``applicable'' plan year), the minimum 
required contribution is determined under a special method. 
\518\ If minimum required contributions as determined under the 
provision are made: (1) for an applicable plan year beginning 
before January 1, 2008 (for which the present-law funding rules 
apply), the plan does not have an accumulated funding 
deficiency; and (2) for an applicable plan year beginning on or 
after January 1, 2008 (for which the funding rules under the 
provision apply), the minimum required contribution is the 
contribution determined under the provision.
---------------------------------------------------------------------------
    \518\ Any charge or credit in the funding standard account 
determined under the present-law rules or any prefunding balance or 
funding standard carryover balance (determined under the funding 
provisions of the Act) as of the end of the last year preceding the 
first applicable year is reduced to zero.
---------------------------------------------------------------------------
    The employer may select either a plan year beginning in 
2006 or 2007 as the first plan year to which the election 
applies. The election applies to such plan year and all 
subsequent plan years, unless the election is revoked with the 
approval of the Secretary of the Treasury. The election must be 
made (1) no later than December 31, 2006, in the case of an 
election for a plan year beginning in 2006, or (2) not later 
than December 31, 2007, in the case of a plan year beginning in 
2007. An election under the provision must be made in such 
manner as prescribed by the Secretary of the Treasury. The 
employer may change the plan year with respect to the plan by 
specifying a new plan year in the election. Such a change in 
plan year does not require approval of the Secretary of the 
Treasury.
            Determination of required contribution
    Under the provision, the minimum required contribution for 
any applicable plan year during the amortization period is the 
amount required to amortize the plan's unfunded liability, 
determined as of the first day of the plan year, in equal 
annual installments over the remaining amortization period. For 
this purpose, the amortization period is the 17-plan-year 
period beginning with the first applicable plan year. Thus, the 
annual amortization amount is redetermined each year, based on 
the plan's unfunded liability at that time and the remainder of 
the amortization period. For any plan years beginning after the 
end of the amortization period, the plan is subject to the 
generally applicable minimum funding rules (as provided under 
the Act, including the benefit limitations applicable to 
underfunded plans). The plan's prefunding balance and funding 
standard carryover balance as of the first day of the first 
year beginning after the end of the amortization period are 
zero. \519\
---------------------------------------------------------------------------
    \519\ If an election to use the special method is revoked before 
the end of the amortization period, the plan is subject to the 
generally applicable minimum funding rules beginning with the first 
plan year for which the election is revoked, and the plan's prefunding 
balance as of the beginning of that year is zero.
---------------------------------------------------------------------------
    Any waived funding deficiency as of the day before the 
first day of the first applicable plan year is deemed satisfied 
and the amount of such waived funding deficiency must be taken 
into account in determining the plan's unfunded liability under 
the provision. Any plan amendment adopted to satisfy the 
benefit accrual restrictions of the provision (discussed below) 
or any increase in benefits provided to such plan's 
participants under a defined contribution or multiemployer plan 
will not be deemed to violate the prohibition against benefit 
increases during a waiver period.\520\
---------------------------------------------------------------------------
    \520\ ERISA sec. 304(b); Code sec. 412(f).
---------------------------------------------------------------------------
    For purposes of the provision, a plan's unfunded liability 
is the unfunded accrued liability under the plan, determined 
under the unit credit funding method. As under present law, 
minimum required contributions (including the annual 
amortization amount) under the provision must be determined 
using actuarial assumptions and methods, each of which is 
reasonable (taking into account the experience of the plan and 
reasonable expectations), or which, in the aggregate, result in 
a total plan contribution equivalent to a contribution that 
would be obtained if each assumption and method were 
reasonable. The assumptions are required also to offer the 
actuary's best estimate of anticipated experience under the 
plan. Under the election, a rate of interest of 8.85 percent is 
used in determining the plan's accrued liability. The value of 
plan assets used must be the fair market value.
    If any applicable plan year with respect to an eligible 
plan using the special method includes the date of enactment of 
the provision (August 17, 2006) and a plan was spun off from 
such eligible plan during the plan year, but before the date of 
enactment, the minimum required contribution under the special 
method for the applicable plan year is an aggregate amount 
determined as if the plans were a single plan for that plan 
year (based on the full 12-month plan year in effect prior to 
the spin off). The employer is to designate the allocation of 
the aggregate amount between the plans for the applicable plan 
year.
            Benefit accrual and benefit increase restrictions
    Benefit accrual restrictions.--Under the provision, 
effective as of the first day of the first applicable plan year 
and at all times thereafter while an election under the 
provision is in effect, an eligible plan must include two 
accrual restrictions. First, the plan must provide that, with 
respect to each participant: (1) the accrued benefit, any death 
or disability benefit, and any social security supplement are 
frozen at the amount of the benefit or supplement immediately 
before such first day; and (2) all other benefits under the 
plan are eliminated. However, such freezing or elimination of 
benefits or supplements is required only to the extent that it 
would be permitted under the anticutback rule if implemented by 
a plan amendment adopted immediately before such first day.
    Second, if an accrued benefit of a participant has been 
subject to the limitations on benefits under section 415 of the 
Code and would otherwise be increased if such limitation is 
increased, the plan must provide that, effective as of the 
first day of the first applicable plan year (or, if later, the 
date of enactment) any such increase will not take effect. The 
plan does not fail to meet the anticutback rule solely because 
the plan is amended to meet this requirement.
    Benefit increase restriction.--No applicable benefit 
increase under an eligible plan may take effect at any time 
during the period beginning on July 26, 2005, and ending on the 
day before the first day of the first applicable plan year. For 
this purpose, an applicable benefit increase is any increase in 
liabilities of the plan by plan amendment (or otherwise as 
specified by the Secretary) which would occur by reason of: (1) 
any increase in benefits; (2) any change in the accrual of 
benefits; or (3) any change in the rate at which benefits 
become nonforfeitable under the plan.
    Exception for imputed disability service.--The benefit 
accrual and benefit increase restrictions do not apply to any 
accrual or increase with respect to imputed serviced provided 
to a participant during any period of the participant's 
disability occurring on or after the effective date of the plan 
amendment providing for the benefit accrual restrictions (on or 
after July 26, 2005, in the case of benefit increase 
restrictions) if the participant: (1) was receiving disability 
benefits as of such date or (2) was receiving sick pay and 
subsequently determined to be eligible for disability benefits 
as of such date.
            Rules relating to PBGC guarantee and plan terminations
    Under the provision, if a plan to which an election applies 
is terminated before the end of the 10-year period beginning on 
the first day of the first applicable plan year, certain 
aspects of the PBGC guarantee provisions are applied as if the 
plan terminated on the first day of the first applicable plan 
year. Specifically, the amount of guaranteed benefits payable 
by the PBGC is determined based on plan assets and liabilities 
as of the assumed termination date. The difference between the 
amount of guaranteed benefits determined as of the assumed 
termination date and the amount of guaranteed benefits 
determined as of the actual termination date is to be paid from 
plan assets before other benefits.
    The provision of the Act under which defined benefit plans 
that are covered by the PBGC insurance program are not taken 
into account in applying the overall limit on deductions for 
contributions to combinations of defined benefit and defined 
contribution plans, does not apply to an eligible plan to which 
the special method applies. Thus, the overall deduction limit 
applies.
    In the case of notice required with respect to an amendment 
that is made to an eligible plan maintained pursuant to one or 
more collective bargaining agreements in order to comply with 
the benefit accrual and benefit increase restrictions under the 
provision, the provision allows the notice to be provided 15 
days before the effective date of the plan amendment.
            Termination premiums
    If a plan terminates during the five-year period beginning 
on the first day of the first applicable plan year, termination 
premiums are imposed at a rate of $2,500 per participant (in 
lieu of the present-law $1,250 amount). The increased 
termination premium applies notwithstanding that a plan was 
terminated during bankruptcy reorganization proceedings 
pursuant to a bankruptcy filing before October 18, 2005 (i.e., 
the present-law grandfather rule does not apply).
    The Secretary of Labor may waive the additional termination 
premium if the Secretary determines that the termination 
occurred as the result of extraordinary circumstances such as a 
terrorist attack or other similar event. It is intended that 
extraordinary circumstances means a substantial, system-wide 
adverse effect on the airline industry such as the terrorist 
attack which occurred on September 11, 2001. It is intended 
that the waiver of the additional premiums occur only in rare 
and unpredictable events. Extraordinary circumstances would not 
include a mere economic event such as the high price of oil or 
fuel, or a downturn in the market.

Alternative election in the case of plans not meeting benefit accrual 
        and benefit increase restrictions

    In lieu of the election above, a plan sponsor may elect, 
for the first taxable year beginning in 2008, to amortize the 
shortfall amortization base for such taxable year over a period 
of 10 plan years (rather than seven plan years) beginning with 
such plan year. Under such election, the benefit accrual, 
benefit increase and other restrictions discussed above do not 
apply. This 10-year amortization election must be made by 
December 31, 2007.

Authority of Treasury to disqualify successor plans

    If either election is made under the provision and the 
eligible plan is maintained by an employer that establishes or 
maintains one or more other single-employer defined benefit 
plans, and such other plans in combination provide benefit 
accruals to any substantial number of successor employees, the 
Secretary of Treasury may disqualify such successor plans 
unless all benefit obligations of the eligible plan have been 
satisfied. Successor employees include any employee who is or 
was covered by the eligible plan and any employee who performs 
substantially the same type of work with respect to the same 
business operations as an employee covered by the eligible 
plan.

Alternative deficit reduction contribution for certain plans

    In the case of an employer which is a commercial passenger 
airline, the provision extends the alternative deficit 
reduction contributions rules to plan years beginning before 
December 28, 2007.

Application of minimum coverage rules

    In applying the minimum coverage rules to a plan, 
management pilots who are not represented in accordance with 
title II of the Railway Labor Act are treated as covered by a 
collective bargaining agreement if the management pilots manage 
the flight operations of air pilots who are so represented and 
the management pilots are, pursuant to the terms of the 
agreement, included in the group of employees benefiting under 
the plan.
    The exclusion under the minimum coverage rules for air 
pilots represented in accordance with title II of the Railway 
Labor Act does not apply in the case of a plan which provides 
contributions or benefits for employees whose principal duties 
are not customarily performed aboard an aircraft in flight 
(other than management pilots described above).

                             Effective Date

    The provision is effective for plan years ending after the 
date of enactment (August 17, 2006) except that the 
modifications to the minimum coverage rules apply to years 
beginning before, on, or after the date of enactment.

 C. Limitations on PBGC Guarantee of Shutdown and Other Benefits (sec. 
                 403 of the Act and sec. 4022 of ERISA)


                              Present Law

    A plan may provide for unpredictable contingent event 
benefits, which are benefits that depend on contingencies that 
are not reliably and reasonably predictable, such as facility 
shutdowns or reductions in workforce. Under present law, 
unpredictable contingent event benefits generally are not taken 
into account for funding purposes until the event has occurred.
    Under present law, defined benefit pension plans are not 
permitted to provide ``layoff'' benefits (i.e., severance 
benefits).\521\ However, defined benefit pension plans may 
provide subsidized early retirement benefits, including early 
retirement window benefits.\522\
---------------------------------------------------------------------------
    \521\ Treas. Reg. sec. 1.401-1(b)(1)(i).
    \522\ Treas. Reg. secs. 1.401(a)(4)-3(f)(4) and 1.411(a)-7(c).
---------------------------------------------------------------------------
    Within certain limits, the PBGC guarantees any retirement 
benefit that was vested on the date of plan termination (other 
than benefits that vest solely on account of the termination), 
and any survivor or disability benefit that was owed or was in 
payment status at the date of plan termination.\523\ Generally 
only that part of the retirement benefit that is payable in 
monthly installments is guaranteed.\524\
---------------------------------------------------------------------------
    \523\ ERISA sec. 4022(a).
    \524\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that, before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, early retirement benefits provided only if a plant 
shuts down) are guaranteed only if the triggering event occurs 
before plan termination.
    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.

                        Explanation of Provision

    Under the Act, the PBGC guarantee applies to unpredictable 
contingent event benefits as if a plan amendment had been 
adopted on the date the event giving rise to the benefits 
occurred. An unpredictable contingent event benefit is defined 
as under the benefit limitations applicable to single-employer 
plans (described above) and means a benefit payable solely by 
reason of (1) a plant shutdown (or similar event as determined 
by the Secretary of the Treasury), or (2) an event other than 
the attainment of any age, performance of any service, receipt 
or derivation of any compensation, or occurrence of death or 
disability.

                             Effective Date

    The provision applies to benefits that become payable as a 
result of an event which occurs after July 26, 2005.

 D. Rules Relating to Bankruptcy of the Employer (sec. 404 of the Act 
                   and secs. 4022 and 4044 of ERISA)


                              Present Law


Guaranteed benefits

    When an underfunded plan terminates, the amount of benefits 
that the PBGC will pay depends on legal limits, asset 
allocation, and recovery on the PBGC's employer liability 
claim. The PBGC guarantee applies to ``basic benefits.'' Basic 
benefits generally are benefits accrued before a plan 
terminates, including (1) benefits at normal retirement age; 
(2) most early retirement benefits; (3) disability benefits for 
disabilities that occurred before the plan was terminated; and 
(4) certain benefits for survivors of plan participants. 
Generally only that part of the retirement benefit that is 
payable in monthly installments is guaranteed.\525\
---------------------------------------------------------------------------
    \525\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, subsidized early retirement benefits) are guaranteed 
only if the triggering event occurs before plan termination.
    For plans terminating in 2006, the maximum guaranteed 
benefit for an individual retiring at age 65 and receiving a 
single life annuity is $3,971.59 per month or $47,659.08 per 
year.\526\ The dollar limit is indexed annually for inflation. 
The guaranteed amount is reduced for benefits starting before 
age 65.
---------------------------------------------------------------------------
    \526\ The PBGC generally pays the greater of the guaranteed benefit 
amount and the amount that was covered by plan assets when it 
terminated. Thus, depending on the amount of assets in the terminating 
plan, participants may receive more than the amount guaranteed by PBGC.
    Special rules limit the guaranteed benefits of individuals who are 
substantial owners covered by a plan whose benefits have not been 
increased by reason of any plan amendment. A substantial owner 
generally is an individual who: (1) owns the entire interest in an 
unincorporated trade or business; (2) in the case of a partnership, is 
a partner who owns, directly or indirectly, more than 10 percent of 
either the capital interest or the profits interest in the partnership; 
(3) in the case of a corporation, owns, directly or indirectly, more 
than 10 percent in value of either the voting stock of the corporation 
or all the stock of the corporation; or (4) at any time within the 
preceding 60 months was a substantial owner under the plan. ERISA sec. 
4022(b)(5).
---------------------------------------------------------------------------
    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.\527\
---------------------------------------------------------------------------
    \527\ The phase in does not apply if the benefit is less than $20 
per month.
---------------------------------------------------------------------------

Asset allocation

    ERISA contains rules for allocating the assets of a single-
employer plan when the plan terminates. Plan assets available 
to pay for benefits under a terminating plan include all plan 
assets remaining after subtracting all liabilities (other than 
liabilities for future benefit payments), paid or payable from 
plan assets under the provisions of the plan. On termination, 
the plan administrator must allocate plan assets available to 
pay for benefits under the plan in the manner prescribed by 
ERISA. In general, plan assets available to pay for benefits 
under the plan are allocated to six priority categories. If the 
plan has sufficient assets to pay for all benefits in a 
particular priority category, the remaining assets are 
allocated to the next lower priority category. This process is 
repeated until all benefits in the priority categories are 
provided or until all available plan assets have been 
allocated.

                        Explanation of Provision

    Under the Act, the amount of guaranteed benefits payable by 
the PBGC is frozen when a contributing sponsor enters 
bankruptcy or a similar proceeding.\528\ If the plan terminates 
during the contributing sponsor's bankruptcy, the amount of 
guaranteed benefits payable by the PBGC is determined based on 
plan provisions, salary, service, and the guarantee in effect 
on the date the employer entered bankruptcy. The priority among 
participants for purposes of allocating plan assets and 
employer recoveries to non-guaranteed benefits in the event of 
plan termination is determined as of the date the sponsor 
enters bankruptcy or a similar proceeding.
---------------------------------------------------------------------------
    \528\ For purposes of the provision, a contributing sponsor is 
considered to have entered bankruptcy if the sponsor files or has had 
filed against it a petition seeking liquidation or reorganization in a 
case under title 11 of the United States Code or under any similar 
Federal law or law of a State or political subdivision.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective with respect to Federal 
bankruptcy or similar proceedings or arrangements for the 
benefit of creditors which are initiated on or after the date 
that is 30 days after enactment.

E. PBGC Variable Rate Premiums for Small Plans (sec. 405 of the Act and 
                          sec. 4006 of ERISA)


                              Present Law

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides insurance protection for participants and 
beneficiaries under certain defined benefit pension plans by 
guaranteeing certain basic benefits under the plan in the event 
the plan is terminated with insufficient assets to pay benefits 
promised under the plan. The guaranteed benefits are funded in 
part by premium payments from employers who sponsor defined 
benefit pension plans. The amount of the required annual PBGC 
premium for a single-employer plan is generally a flat rate 
premium of $19 per participant and an additional variable-rate 
premium based on a charge of $9 per $1,000 of unfunded vested 
benefits. Unfunded vested benefits under a plan generally means 
(1) the unfunded current liability for vested benefits under 
the plan, over (2) the value of the plan's assets, reduced by 
any credit balance in the funding standard account. No 
variable-rate premium is imposed for a year if contributions to 
the plan were at least equal to the full funding limit.
    The PBGC guarantee is phased in ratably in the case of 
plans that have been in effect for less than five years, and 
with respect to benefit increases from a plan amendment that 
was in effect for less than five years before termination of 
the plan.

                        Explanation of Provision

    In the case of a plan of a small employer, the per 
participant variable-rate premium is no more than $5 multiplied 
by the number of plan participants in the plan at the end of 
the preceding plan year. For purposes of the provision, a small 
employer is a contributing sponsor that, on the first day of 
the plan year, has 25 or fewer employees. For this purpose, all 
employees of the members of the controlled group of the 
contributing sponsor are to be taken into account. In the case 
of a plan to which more than one unrelated contributing sponsor 
contributed, employees of all contributing sponsors (and their 
controlled group members) are to be taken into account in 
determining whether the plan was a plan of a small employer. 
For example, under the provision, in the case of a plan with 20 
participants, the total variable rate premium is not more than 
$2,000, that is, (20  $5)  20.

                             Effective Date

    The provision applies to plan years beginning after 
December 31, 2006.

   F. Authorization for PBGC to Pay Interest on Premium Overpayment 
        Refunds (sec. 406 of the Act and sec. 4007(b) of ERISA)


                              Present Law

    The PBGC charges interest on underpayments of premiums, but 
is not authorized to pay interest on overpayments.

                        Explanation of Provision

    The provision allows the PBGC to pay interest on 
overpayments made by premium payors. Interest paid on 
overpayments is to be calculated at the same rate and in the 
same manner as interest charged on premium underpayments.

                             Effective Date

    The provision is effective with respect to interest 
accruing for periods beginning not earlier than the date of 
enactment (August 17, 2006).

 G. Rules for Substantial Owner Benefits in Terminated Plans (sec. 407 
       of the Act and secs. 4021, 4022, 4043, and 4044 of ERISA)


                              Present Law

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides participants and beneficiaries in a defined 
benefit pension plan with certain minimal guarantees as to the 
receipt of benefits under the plan in case of plan termination. 
The employer sponsoring the defined benefit pension plan is 
required to pay premiums to the PBGC to provide insurance for 
the guaranteed benefits. In general, the PBGC will guarantee 
all basic benefits which are payable in periodic installments 
for the life (or lives) of the participant and his or her 
beneficiaries and are non-forfeitable at the time of plan 
termination. The amount of the guaranteed benefit is subject to 
certain limitations. One limitation is that the plan (or an 
amendment to the plan which increases benefits) must be in 
effect for 60 months before termination for the PBGC to 
guarantee the full amount of basic benefits for a plan 
participant, other than a substantial owner. In the case of a 
substantial owner, the guaranteed basic benefit is phased in 
over 30 years beginning with participation in the plan. A 
substantial owner is one who owns, directly or indirectly, more 
than 10 percent of the voting stock of a corporation or all the 
stock of a corporation. Special rules restricting the amount of 
benefit guaranteed and the allocation of assets also apply to 
substantial owners.

                        Explanation of Provision

    The provision provides that the 60-month phase-in of 
guaranteed benefits applies to a substantial owner with less 
than 50 percent ownership interest. For a substantial owner 
with a 50 percent or more ownership interest (``majority 
owner''), the phase-in occurs over a 10-year period and depends 
on the number of years the plan has been in effect. The 
majority owner's guaranteed benefit is limited so that it 
cannot be more than the amount phased in over 60 months for 
other participants. The rules regarding allocation of assets 
apply to substantial owners, other than majority owners, in the 
same manner as other participants.

                             Effective Date

    The provision is effective for plan terminations with 
respect to which notices of intent to terminate are provided, 
or for which proceedings for termination are instituted by the 
PBGC, after December 31, 2005.

    H. Acceleration of PBGC Computation of Benefits Attributable to 
Recoveries from Employers (sec. 408 of the Act and secs. 4022(c), 4044, 
                         and 4062(c) of ERISA)


                              Present Law


In general

    The Pension Benefit Guaranty Corporation (``PBGC'') 
provides insurance protection for participants and 
beneficiaries under certain defined benefit pension plans by 
guaranteeing certain basic benefits under the plan in the event 
the plan is terminated with insufficient assets to pay promised 
benefits.\529\ The guaranteed benefits are funded in part by 
premium payments from employers who sponsor defined benefit 
plans. In general, the PBGC guarantees all basic benefits which 
are payable in periodic installments for the life (or lives) of 
the participant and his or her beneficiaries and are non-
forfeitable at the time of plan termination. For plans 
terminating in 2006, the maximum guaranteed benefit for an 
individual retiring at age 65 and receiving a straight life 
annuity is $3971.59 per month, or $47,659.08 per year.
---------------------------------------------------------------------------
    \529\ The PBGC termination insurance program does not cover plans 
of professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
    The PBGC pays plan benefits, subject to the guarantee 
limits, when it becomes trustee of a terminated plan. The PBGC 
also pays amounts in addition to the guarantee limits 
(``additional benefits'') if there are sufficient plan assets, 
including amounts recovered from the employer for unfunded 
benefit liabilities and contributions owed to the plan. The 
employer (including members of its controlled group) is 
statutorily liable for these amounts.

Plan underfunding recoveries

    The PBGC's recoveries on its claims for unfunded benefit 
liabilities are shared between the PBGC and plan participants. 
The amounts recovered are allocated partly to the PBGC to help 
cover its losses for paying unfunded guaranteed benefits and 
partly to participants to help cover the loss of benefits that 
are above the PBGC's guarantees and are not funded. In 
determining the portion of the recovered amounts that will be 
allocated to participants, present law specifies the use of a 
recovery ratio based on plan terminations during a specified 
period, rather than the actual amount recovered for each 
specific plan. The recovery ratio that applies to a plan 
includes the PBGC's actual recovery experience for plan 
terminations in the five-Federal fiscal year period immediately 
preceding the Federal fiscal year in which falls the notice of 
intent to terminate for the particular plan.
    The recovery ratio is used for all but very large plans 
taken over by the PBGC. For a very large plan (i.e., a plan for 
which participants' benefit losses exceed $20 million) actual 
recovery amounts with respect to the specific plan are used to 
determine the portion of the amounts recovered that will be 
allocated to participants.

Recoveries for due and unpaid employer contributions

    Amounts recovered from an employer for contributions owed 
to the plan are treated as plan assets and are allocated to 
plan benefits in the same manner as other assets in the plan's 
trust on the plan termination date. The amounts recovered are 
determined on a plan-specific basis rather than based on an 
historical average recovery ratio.

                        Explanation of Provision

    The provision changes the five-year period used to 
determine the recovery ratio for unfunded benefit liabilities 
so that the period begins two years earlier. Thus, under the 
provision, the recovery ratio that applies to a plan includes 
the PBGC's actual recovery experience for plan terminations in 
the five-Federal fiscal year period ending with the third 
fiscal year preceding the fiscal year in which falls the notice 
of intent to terminate for the particular plan.
    In addition, the provision creates a recovery ratio for 
determining amounts recovered for contributions owed to the 
plan, based on the PBGC's recovery experience over the same 
five-year period.
    The provision does not apply to very large plans (i.e., 
plans for which participants' benefit losses exceed $20 
million). As under present law, in the case of a very large 
plan, actual amounts recovered for unfunded benefit liabilities 
and for contributions owed to the plan are used to determine 
the amount available to provide additional benefits to 
participants.

                             Effective Date

    The provision is effective for any plan termination for 
which notices of intent to terminate are provided (or, in the 
case of a termination by the PBGC, a notice of determination 
that the plan must be terminated is issued) on or after the 
date that is 30 days after the date of enactment (August 17, 
2006).

 I. Treatment of Certain Plans Where There is a Cessation or Change in 
Membership of a Controlled Group (sec. 409 of the Act and sec. 4041(b) 
                               of ERISA)


                              Present Law

    An employer may voluntarily terminate a single-employer 
plan only in a standard termination or a distress termination. 
A standard termination is permitted only if plan assets are 
sufficient to cover benefit liabilities. Benefit liabilities 
are defined generally as the present value of all benefits due 
under the plan (this amount is referred to as ``termination 
liability''). This present value is determined using interest 
and mortality assumptions prescribed by the PBGC.

                        Explanation of Provision

    Under the provision, if: (1) there is a transaction or 
series of transactions which result in a person ceasing to be a 
member of a controlled group; and (2) such person, immediately 
before the transaction or series of transactions maintained a 
single-employer defined benefit plan which is fully funded, 
then the interest rate used in determining whether the plan is 
sufficient for benefit liabilities or to otherwise assess plan 
liabilities for purposes of section 4041(b) or section 
4042(a)(4) shall not be less than the interest rate used in 
determining whether the plan is fully funded.
    The provision does not apply to any transaction or series 
of transactions unless (1) any employer maintaining the plan 
immediately before or after such transactions or series of 
transactions (a) has an outstanding senior unsecured debt 
instrument which is rated investment grade by each of the 
nationally recognized statistical rating organizations for 
corporate bonds that has issued a credit rating for such 
instrument, or (b) if no such debt instrument of such employer 
has been rated by such an organization but one or more of such 
organizations has made an issuer credit rating for such 
employer, all such organizations which have so rated the 
employer have rated such employer investment grade and (2) the 
employer maintaining the plan after the transaction or series 
of transaction employs at least 20 percent of the employees 
located within United States who were employed by such employer 
immediately before the transaction or series of transactions.
    The provision does not apply in the case of determinations 
of liabilities by the PBGC or a court if the plan is terminated 
after the close of the two-year period beginning on the date of 
the transaction (or first transaction in a series of 
transactions).
    For purposes of the provision, a plan is considered fully 
funded with respect to a transaction or series of transactions 
if (1) in the case of a transaction or series of transactions 
which occur in a plan year beginning before January 1, 2008, 
the funded current liability percentage for the plan year 
(determined under the minimum funding rules) is at least 100 
percent, or (2) in the case of a transaction or series of 
transactions which occur on or after January 1, 2008, the 
funding target attainment percentage (as determined under the 
minimum funding rules) as of the valuation date for the plan 
year is at least 100 percent.

                             Effective Date

    The provision applies to transactions or series of 
transactions occurring on or after the date of enactment 
(August 17, 2006).

  J. Missing Participants (sec. 410 of the Act and sec. 4050 of ERISA)


                              Present Law

    In the case of a defined benefit pension plan that is 
subject to the plan termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 
(''ERISA''), is maintained by a single employer, and terminates 
under a standard termination, the plan administrator generally 
must purchase annuity contracts from a private insurer to 
provide the benefits to which participants are entitled and 
distribute the annuity contracts to the participants.
    If the plan administrator of a terminating single employer 
plan cannot locate a participant after a diligent search (a 
``missing participant''), the plan administrator may satisfy 
the distribution requirement only by purchasing an annuity from 
an insurer or transferring the participant's designated benefit 
to the Pension Benefit Guaranty Corporation (``PBGC''), which 
holds the benefit of the missing participant as trustee until 
the PBGC locates the missing participant and distributes the 
benefit.\530\
---------------------------------------------------------------------------
    \530\ Secs. 4041(b)(3)(A) and 4050 of ERISA.
---------------------------------------------------------------------------
    The PBGC missing participant program is not available to 
multiemployer plans or defined contribution plans and other 
plans not covered by Title IV of ERISA.

                        Explanation of Provision

    Under the provision, the PBGC is directed to prescribe 
rules for terminating multiemployer plans similar to the 
present-law missing participant rules applicable to terminating 
single-employer plans that are subject to Title IV of ERISA.
    In addition, under the provision, plan administrators of 
certain types of plans not subject to the PBGC termination 
insurance program under present law are permitted, but not 
required, to elect to transfer missing participants' benefits 
to the PBGC upon plan termination. Specifically, the provision 
extends the missing participants program (in accordance with 
regulations) to defined contribution plans, defined benefit 
pension plans that have no more than 25 active participants and 
are maintained by professional service employers, and the 
portion of defined benefit pension plans that provide benefits 
based upon the separate accounts of participants and therefore 
are treated as defined contribution plans under ERISA.

                             Effective Date

    The provision is effective for distributions made after 
final regulations implementing the provision are prescribed.

K. Director of the PBGC (sec. 411 of the Act and secs. 4002 and 4003 of 
                                 ERISA)


                              Present Law

    The PBGC is a corporation within the Department of Labor. 
In carrying out its functions, the PBGC is administered by the 
chairman of the board of directors in accordance with the 
policies established by the board. The board of directors 
consists of the Secretaries of Labor, Treasury and 
Commerce.\531\ The Secretary of Labor is the chairman of the 
board. The executive director of the PBGC is selected by the 
chairman of the board.
---------------------------------------------------------------------------
    \531\ ERISA sec. 4002.
---------------------------------------------------------------------------
    The PBGC is authorized to make such investigations as it 
deems necessary to enforce any provisions of title IV of ERISA 
or any rule or regulation thereunder. For the purpose of any 
such investigation (or any other proceeding under title IV or 
ERISA), any member of the board of directors or any officer 
designated by the chairman of the board may administer oaths, 
subpoena witnesses and take other actions as provided by ERISA 
as the corporation deems relevant or material to the 
inquiry.\532\
---------------------------------------------------------------------------
    \532\ ERISA sec. 4003.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that, in carrying out its functions, 
the PBGC will be administered by a Director, who is appointed 
by the President by and with the advice and consent of the 
Senate. The Director is to act in accordance with the policies 
established by the PBGC board. The Senate Committees on Finance 
and on Health, Education, Labor, and Pensions are given joint 
jurisdiction over the nomination of a person nominated by the 
President to be Director of the PBGC. If one of such Committees 
votes to order reported such a nomination, the other such 
Committee is to report on the nomination within 30 calendar 
days, or it is automatically discharged.\533\
---------------------------------------------------------------------------
    \533\ The provision relating to the Senate committees is treated as 
an exercise of rulemaking power of the Senate and is deemed a part of 
the rules of the Senate. It is applicable only with respect to the 
procedure to be followed in the case of a nomination of the Director of 
the PBGC and it supersedes other Senate rules only to the extent that 
it is inconsistent with such rules. The provision does not change the 
constitutional right of the Senate to change its rules (so far as 
relating to the procedure of the Senate) at any time, in the same 
manner and to the same extent as in the case of any other rule of the 
Senate.
---------------------------------------------------------------------------
    The Director, and any officer designated by the Director, 
is given the authority with respect to investigations that is 
provided under present law to members of the PBGC board and 
officers designated by the chairman of the board.
    The Director is to be compensated at the rate of 
compensation provided under Level III of the Executive 
Schedule.\534\ Effective January 1, 2006, such annual rate of 
pay is $152,000.
---------------------------------------------------------------------------
    \534\ 5 U.S.C. sec. 5314.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006). The term of the individual serving as Executive 
Director of the PBGC on the date of enactment expires on the 
date of enactment. Such individual, or any other individual, 
may serve as interim Director of the PBGC until an individual 
is appointed as Director in accordance with the provision.

L. Inclusion of Information in the PBGC Annual Report (sec. 412 of the 
                      Act and sec. 4008 of ERISA)


                              Present Law

    As soon as practicable after the close of each fiscal year, 
the PBGC is required to transmit to the President and Congress 
a report relative to the conduct of its business for the year. 
The report must include (1) financial statements setting forth 
its finances and the result of its operations and (2) an 
actuarial evaluation of the expected operations and status of 
the four revolving funds used by the PBGC in carrying out its 
operations.

                        Explanation of Provision

    Under the provision, additional information is required to 
be provided in the PBGC's annual report. The report must 
include (1) a summary of the Pension Insurance Modeling System 
microsimulation model, including the specific simulation 
parameters, specific initial values, temporal parameters, and 
policy parameters used to calculate the PBGC's financial 
statements; (2) a comparison of (a) the average return on 
investments earned with respect to assets invested by the PBGC 
for the year to which the report relates and (b) an amount 
equal to 60 percent of the average return on investment for the 
year in the Standard & Poor's 500 Index, plus 40 percent of the 
average return on investment for such year in the Lehman 
Aggregate Bond Index (or in a similar fixed income index), and 
(3) a statement regarding the deficit or surplus for the year 
that the PBGC would have had if it had earned the return 
described in (2) with respect to its invested assets.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

                          TITLE V--DISCLOSURE

 A. Defined Benefit Plan Funding Notice (sec. 501 of the Act and secs. 
                       101(f) and 4011 of ERISA)

                              Present Law

    Defined benefit pension plans are generally required to 
meet certain minimum funding requirements. These requirements 
are designed to help ensure that such plans are adequately 
funded. In addition, the Pension Benefit Guaranty Corporation 
(``PBGC'') guarantees benefits under defined benefit pension 
plans, subject to limits.
    Certain notices must be provided to participants in a 
single-employer defined benefit pension plan relating to the 
funding status of the plan. For example, ERISA requires an 
employer of a single-employer defined benefit plan to notify 
plan participants if the employer fails to make required 
contributions (unless a request for a funding waiver is 
pending).\535\ In addition, in the case of an underfunded 
single-employer plan for which PBGC variable rate premiums are 
required, the plan administrator generally must notify plan 
participants of the plan's funding status and the limits on the 
PBGC benefit guarantee if the plan terminates while 
underfunded.\536\
---------------------------------------------------------------------------
    \535\ ERISA sec. 101(d).
    \536\ ERISA sec. 4011.
---------------------------------------------------------------------------
    Effective for plan years beginning after December 31, 2004, 
the plan administrator of a multiemployer defined benefit 
pension plan must provide an annual funding notice to: (1) each 
participant and beneficiary; (2) each labor organization 
representing such participants or beneficiaries; (3) each 
employer that has an obligation to contribute under the plan; 
and (4) the PBGC.
    Such a notice must include: (1) identifying information, 
including the name of the plan, the address and phone number of 
the plan administrator and the plan's principal administrative 
officer, each plan sponsor's employer identification number, 
and the plan identification number; (2) a statement as to 
whether the plan's funded current liability percentage for the 
plan year to which the notice relates is at least 100 percent 
(and if not, a statement of the percentage); (3) a statement of 
the value of the plan's assets, the amount of benefit payments, 
and the ratio of the assets to the payments for the plan year 
to which the notice relates; (4) a summary of the rules 
governing insolvent multiemployer plans, including the 
limitations on benefit payments and any potential benefit 
reductions and suspensions (and the potential effects of such 
limitations, reductions, and suspensions on the plan); (5) a 
general description of the benefits under the plan that are 
eligible to be guaranteed by the PBGC and the limitations of 
the guarantee and circumstances in which such limitations 
apply; and (6) any additional information the plan 
administrator elects to include to the extent it is not 
inconsistent with regulations prescribed by the Secretary of 
Labor.
    The annual funding notice must be provided no later than 
two months after the deadline (including extensions) for filing 
the plan's annual report for the plan year to which the notice 
relates (i.e., nine months after the end of the plan year 
unless the due date for the annual report is extended). The 
funding notice must be provided in a form and manner prescribed 
in regulations by the Secretary of Labor. Additionally, it must 
be written so as to be understood by the average plan 
participant and may be provided in written, electronic, or some 
other appropriate form to the extent that it is reasonably 
accessible to persons to whom the notice is required to be 
provided.
    A plan administrator that fails to provide the required 
notice to a participant or beneficiary may be liable to the 
participant or beneficiary in the amount of up to $100 a day 
from the time of the failure and for such other relief as a 
court may deem proper.

                        Explanation of Provision

    The provision expands the annual funding notice requirement 
that applies under present law to multiemployer plans, so that 
it applies also to single-employer plans and, in the case of a 
single-employer plan, includes a summary of the PBGC rules 
governing plan termination. The provision also changes the 
information that must be provided in the notice and accelerates 
the time when the notice must be provided.
    In addition to the information required under present law, 
an annual funding notice with respect to either a single-
employer or multiemployer plan must include the following 
additional information, as of the end of the plan year to which 
the notice relates: (1) a statement of the number of 
participants who are retired or separated from service and 
receiving benefits, retired or separated participants who are 
entitled to future benefits, and active participants; (2) a 
statement setting forth the funding policy of the plan and the 
asset allocation of investments under the plan (expressed as 
percentages of total assets); (3) an explanation containing 
specific information of any plan amendment, scheduled benefit 
increase or reduction, or other known event taking effect in 
the current plan year and having a material effect on plan 
liabilities or assets for the year (as defined in regulations 
by the Secretary); and (4) a statement that a person may obtain 
a copy of the plan's annual report upon request, through the 
Department of Labor Internet website, or through an Intranet 
website maintained by the applicable plan sponsor.
    In the case of a single-employer plan, the notice must 
provide: (1) a statement as to whether the plan's funding 
target attainment percentage (as defined under the minimum 
funding rules for single-employer plans) for the plan year to 
which the notice relates and the two preceding plan years, is 
at least 100 percent (and, if not, the actual percentages); (2) 
a statement of (a) the total assets (separately stating any 
funding standard carryover or prefunding balance) and the 
plan's liabilities for the plan year and the two preceding 
years, determined in the same manner as under the funding 
rules, and (b) the value of the plan's assets and liabilities 
as of the last day of the plan year to which the notice 
relates, determined using fair market value and the interest 
rate used in determining variable rate premiums; and (3) if 
applicable, a statement that each contributing sponsor, and 
each member of the sponsor's controlled group, was required to 
provide the information under section 4010 for the plan year to 
which the notice relates.
    In the case of a multiemployer plan, the notice must 
provide: (1) a statement as to whether the plan's funded 
percentage (as defined under the minimum funding rules for 
multiemployer plans) for the plan year to which the notice 
relates and the two preceding plan years, is at least 100 
percent (and, if not, the actual percentages); (2) a statement 
of the value of the plan's assets and liabilities for the plan 
year to which the notice relates and the two preceding plan 
years; (3) whether the plan was in endangered or critical 
status and, if so, a summary of the plan's funding improvement 
or rehabilitation plan and a statement describing how a person 
can obtain a copy of the plan's funding improvement or 
rehabilitation plan and the actuarial or financial data that 
demonstrate any action taken by the plan toward fiscal 
improvement; and (4) a statement that the plan administrator 
will provide, on written request, a copy of the plan's annual 
report to any labor organization representing participants and 
beneficiaries and any employer that has an obligation to 
contribute to the plan.
    The annual funding notice must be provided within 120 days 
after the end of the plan year to which it relates. In the case 
of a plan covering not more than 100 employees for the 
preceding year, the annual funding notice must be provided upon 
filing of the annual report with respect to the plan (i.e., 
within seven months after the end of the plan year unless the 
due date for the annual report is extended).
    The Secretary of Labor is required to publish a model 
notice not later than one year after the date of enactment 
(August 17, 2006). In addition, the Secretary of Labor is given 
the authority to promulgate any interim final rules as 
appropriate to carry out the requirement that a model notice be 
published.
    Under the provision, the annual funding notice includes the 
information provided in the notice required under present law 
in the case of a single-employer plan that is subject to PBGC 
variable rate premiums. Accordingly, that present-law notice 
requirement is repealed under the provision.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2007, except that the repeal of the notice 
required under present law in the case of a single-employer 
plan that is subject to PBGC variable rate premiums is 
effective for plan years beginning after December 31, 2006. 
Under a transition rule, any requirement to report a plan's 
funding target attainment percentage or funded percentage for a 
plan year beginning before January 1, 2008, is met if (1) in 
the case of a plan year beginning in 2006, the plan's funded 
current liability percentage is reported, and (2) in the case 
of a plan year beginning in 2007, the funding target attainment 
percentage or funded percentage as determined using such 
methods of estimation as the Secretary of the Treasury may 
provide is reported.

 B. Access to Multiemployer Pension Plan Information (sec. 502 of the 
  Act, secs. 101, 204(h), and 502(c) of ERISA, and sec. 4980F of the 
                                 Code)


                              Present Law


Annual report

    The plan administrator of a pension plan generally must 
file an annual return with the Secretary of the Treasury, an 
annual report with the Secretary of Labor, and certain 
information with the Pension Benefit Guaranty Corporation 
(``PBGC''). Form 5500, which consists of a primary form and 
various schedules, includes the information required to be 
filed with all three agencies. The plan administrator satisfies 
the reporting requirement with respect to each agency by filing 
the Form 5500 with the Department of Labor.
    In the case of a defined benefit pension plan, the annual 
report must include an actuarial statement. The actuarial 
statement must include, for example, information as to the 
value of plan assets, the plan's accrued and current 
liabilities, the plan's actuarial cost method and actuarial 
assumptions, and plan contributions. The report must be signed 
by an actuary enrolled to practice before the IRS, Department 
of Labor and the PBGC.
    The Form 5500 is due by the last day of the seventh month 
following the close of the plan year. The due date generally 
may be extended up to two and one-half months. Copies of filed 
Form 5500s are available for public examination at the U.S. 
Department of Labor.

Notice of significant reduction in benefit accruals

    If an amendment to a defined benefit pension plan provides 
for a significant reduction in the rate of future benefit 
accrual, the plan administrator must furnish a written notice 
concerning the amendment. Notice may also be required if a plan 
amendment eliminates or reduces an early retirement benefit or 
retirement-type subsidy. The plan administrator is required to 
provide the notice to any participant or alternate payee whose 
rate of future benefit accrual may reasonably be expected to be 
significantly reduced by the plan amendment (and to any 
employee organization representing affected participants). The 
notice must be written in a manner calculated to be understood 
by the average plan participant and must provide sufficient 
information to allow recipients to understand the effect of the 
amendment. The plan administrator is generally required to 
provide the notice at least 45 days before the effective date 
of the plan amendment.

                        Explanation of Provision

    Under the provision, a plan administrator of a 
multiemployer plan must, within 30 days of a written request, 
provide a plan participant or beneficiary, employee 
organization or employer that has an obligation to contribute 
to the plan with a copy of: (1) any periodic actuarial report 
(including any sensitivity testing) for any plan year that has 
been in the plan's possession for at least 30 days; (2) a copy 
of any quarterly, semi-annual, or annual financial report 
prepared for the plan by any plan investment manager or advisor 
or other person who is a plan fiduciary that has been in the 
plan's possession for at least 30 days; and (3) a copy of any 
application for an amortization extension filed with the 
Secretary of the Treasury. Any actuarial report, financial 
report, or amortization extension application provided to a 
participant, beneficiary, or employer must not include any 
individually identifiable information regarding any 
participant, beneficiary, employee, fiduciary, or contributing 
employer, or reveal any proprietary information regarding the 
plan, any contributing employer, or any entity providing 
services to the plan. Regulations relating to the requirement 
to provide these documents on request must be issued within one 
year after the date of enactment (August 17, 2006).
    In addition, the plan sponsor or administrator of a 
multiemployer plan must provide to any employer having an 
obligation to contribute to the plan, within 180 days of a 
written request, notice of: (1) the estimated amount that would 
be the employer's withdrawal liability with respect to the plan 
if the employer withdrew from the plan on the last day of the 
year preceding the date of the request; and (2) an explanation 
of how the estimated liability amount was determined, including 
the actuarial assumptions and methods used to determine the 
value of plan liabilities and assets, the data regarding 
employer contributions, unfunded vested benefits, annual 
changes in the plan's unfunded vested benefits, and the 
application of any relevant limitations on the estimated 
withdrawal liability. Regulations may permit a longer time than 
180 days as may be necessary in the case of a plan that 
determines withdrawal liability using certain methods.
    A person is not entitled to receive more than one copy of 
any actuarial or financial report or amortization extension 
application or more than one notice of withdrawal liability 
during any 12-month period. The plan administrator or sponsor 
may make a reasonable charge to cover copying, mailing, and 
other costs of furnishing copies or notices, subject to a 
maximum amount that may be prescribed by regulations. Any 
information or notice required to be provided under the 
provision may be provided in written, electronic, or other 
appropriate form to the extent such form is reasonably 
available to the persons to whom the information is required to 
be provided.
    In the case of a failure to comply with these requirements, 
the Secretary of Labor may assess a civil penalty of up to 
$1,000 per day for each failure to provide a notice.
    Under the provision, notice of an amendment that provides 
for a significant reduction in the rate of future benefit 
accrual must be provided also to each employer that has an 
obligation to contribute to the plan.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2007.

 C. Additional Annual Reporting Requirements and Electronic Display of 
 Annual Report Information (secs. 503-504 of the Act and secs. 103 and 
                             104 of ERISA)


                              Present Law


Annual report

    The plan administrator of a pension plan generally must 
file an annual return with the Secretary of the Treasury, an 
annual report with the Secretary of Labor, and certain 
information with the Pension Benefit Guaranty Corporation 
(``PBGC''). Form 5500, which consists of a primary form and 
various schedules, includes the information required to be 
filed with all three agencies. The plan administrator satisfies 
the reporting requirement with respect to each agency by filing 
the Form 5500 with the Department of Labor.
    In the case of a defined benefit pension plan, the annual 
report must include an actuarial statement. The actuarial 
statement must include, for example, information as to the 
value of plan assets, the plan's accrued and current 
liabilities, the plan's actuarial cost method and actuarial 
assumptions, and plan contributions. The report must be signed 
by an actuary enrolled to practice before the IRS, Department 
of Labor and the PBGC.
    The Form 5500 is due by the last day of the seventh month 
following the close of the plan year. The due date generally 
may be extended up to two and one-half months. Copies of filed 
Form 5500s are available for public examination at the U.S. 
Department of Labor.

Summary annual report

    A participant must be provided with a copy of the full 
annual report on written request. In addition, the plan 
administrator must automatically provide participants with a 
summary of the annual report within two months after the due 
date of the annual report (i.e., by the end of the ninth month 
after the end of the plan year unless an extension applies). 
The summary annual report must include a statement whether 
contributions were made to keep the plan funded in accordance 
with minimum funding requirements, or whether contributions 
were not made and the amount of the deficit. The current value 
of plan assets is also required to be disclosed. If an 
extension applies for the Form 5500, the summary annual report 
must be provided within two months after the extended due date. 
A plan administrator who fails to provide a summary annual 
report to a participant within 30 days of the participant 
making a request for the report may be liable to the 
participant for a civil penalty of up to $100 a day from the 
date of the failure.

                        Explanation of Provision


Annual report

    The provision requires additional information to be 
provided in the annual report filed with respect to a defined 
benefit pension plan. In a case in which the liabilities under 
the plan as of the end of a plan year consist (in whole or in 
part) of liabilities under two or more other pension plans as 
of immediately before the plan year, the annual report must 
include the plan's funded percentage as of the last day of the 
plan year and the funded percentage of each of such other 
plans. Funded percentage is defined as: (1) in the case of a 
single-employer plan, the plan's funded target attainment 
percentage (as defined under the minimum funding rules for 
single-employer plans); and (2) in the case of a multiemployer 
plan, the plan's funded percentage (as defined under the 
minimum funding rules for multiemployer plans).
    An annual report filed with respect to a multiemployer plan 
must include, as of the end of the plan year, the following 
additional information: (1) the number of employers obligated 
to contribute to the plan; (2) a list of the employers that 
contributed more than five percent of the total contributions 
to the plan during the plan year; (3) the number of 
participants on whose behalf no contributions were made by an 
employer as an employer of the participant for the plan year 
and two preceding years; (4) the ratios of the number of 
participants under the plan on whose behalf no employer had an 
obligation to make an employer contribution during the plan 
year, to the number of participants under the plan on whose 
behalf no employer had an obligation to make an employer 
contribution during each of the two preceding plan years; (5) 
whether the plan received an amortization extension for the 
plan year and, if so, the amount by which it changed the 
minimum required contribution for the year, what minimum 
contribution would have been required without the extension, 
and the period of the extension; (6) whether the plan used the 
shortfall funding method and, if so, the amount by which it 
changed the minimum required contribution for the year, what 
minimum contribution would have been required without the use 
of this method, and the period for which the method is used; 
(7) whether the plan was in critical or endangered status for 
the plan year, and if so, a summary of any funding improvement 
or rehabilitation plan (or modification thereto) adopted during 
the plan year, and the funded percentage of the plan; (8) the 
number of employers that withdrew from the plan during the 
preceding plan year and the aggregate amount of withdrawal 
liability assessed, or estimated to be assessed, against the 
withdrawn employers; (9) if the plan that has merged with 
another plan or if assets and liabilities have been transferred 
to the plan, the actuarial valuation of the assets and 
liabilities of each affected plan during the year preceding the 
effective date of the merger or transfer, based upon the most 
recent data available as of the day before the first day of the 
plan year, or other valuation method performed under standards 
and procedures as prescribed by regulation.
    The Secretary of Labor is required, not later than one year 
after the date of enactment (August 17, 2006), to publish 
guidance to assist multiemployer plans to identify and 
enumerate plan participants for whom there is no employer with 
an obligation to make an employer contribution under the plan 
and report such information in the annual report. The Secretary 
may provide rules as needed to apply this requirement with 
respect to contributions made on a basis other than hours 
worked, such as on the basis of units of production.
    The actuarial statement filed with the annual return must 
include a statement explaining the actuarial assumptions and 
methods used in projecting future retirements and asset 
distributions under the plan.

Electronic display of annual report

    Identification and basic plan information and actuarial 
information included in the annual report must be filed with 
the Secretary of Labor in an electronic format that 
accommodates display on the Internet (in accordance with 
regulations). The Secretary of Labor is to provide for the 
display of such information, within 90 days after the filing of 
the annual report, on a website maintained by the Secretary of 
Labor on the Internet and other appropriate media. Such 
information is also required to be displayed on any Intranet 
website maintained by the plan sponsor (or by the plan 
administrator on behalf of the plan sponsor) in accordance with 
regulations.

Summary annual report

    Under the provision, the requirement to provide a summary 
annual report to participants applies does not apply to defined 
benefit pension plans.\537\
---------------------------------------------------------------------------
    \537\ As discussed in Part A above, detailed information about a 
defined benefit pension plan must be provided to participants in an 
annual funding notice.
---------------------------------------------------------------------------

Multiemployer plan summary report

    The provision requires the plan administrator of a 
multiemployer plan to provide a report containing certain 
summary plan information to each employee organization and each 
employer with an obligation to contribute to the plan within 30 
days after the due date of the plan's annual report. The report 
must contain: (1) a description of the contribution schedules 
and benefit formulas under the plan, and any modification to 
such schedules and formulas, during such plan year; (2) the 
number of employers obligated to contribute to the plan; (3) a 
list of the employers that contributed more than 5 percent of 
the total contributions to the plan during such plan year; (4) 
the number of participants under the plan on whose behalf no 
employer contributions have been made to the plan for such plan 
year and for each of the two preceding plan years; (5) whether 
the plan was in critical or endangered status for the plan year 
and, if so, a list of the actions taken by the plan to improve 
its funding status and a statement describing how to obtain a 
copy of the plan's funding improvement or rehabilitation plan, 
as applicable, and the actuarial and financial data that 
demonstrate any action taken by the plan toward fiscal 
improvement; (6) the number of employers that withdrew from the 
plan during the preceding plan year and the aggregate amount of 
withdrawal liability assessed, or estimated to be assessed, 
against such withdrawn employers, as reported on the annual 
report for the plan year; (7) if the plan has merged with 
another plan or if assets and liabilities have been transferred 
to the plan, the actuarial valuation of the assets and 
liabilities of each affected plan during the year preceding the 
effective date of the merger or transfer, based upon the most 
recent data available as of the day before the first day of the 
plan year, or other valuation method performed under standards 
and procedures as prescribed by regulation; (8) a description 
as to whether the plan sought or received an amortization 
extension or used the shortfall funding method for the plan 
year; and (9) notification of the right to obtain upon written 
request a copy of the annual report filed with respect to the 
plan, the summary plan description, and the summary of any 
material modification of the plan, subject to a limitation of 
one copy of any such document in any 12-month period and any 
reasonable charge to cover copying, mailing, and other costs of 
furnishing the document. Nothing in this report requirement 
waives any other ERISA provision requiring plan administrators 
to provide, upon request, information to employers that have an 
obligation to contribute under the plan.

                             Effective Date

    The provisions are effective for plan years beginning after 
December 31, 2007.

  D. Section 4010 Filings with the PBGC (sec. 505 of the Act and sec. 
                             4010 of ERISA)


                              Present Law

    Present law provides that, in certain circumstances, the 
contributing sponsor of a single-employer plan defined benefit 
pension plan covered by the PBGC (and members of the 
contributing sponsor's controlled group) must provide certain 
information to the PBGC (referred to as ``section 4010 
reporting''). This information includes financial information 
with respect to the contributing sponsor (and controlled group 
members) and actuarial information with respect to single-
employer plans maintained by the sponsor (and controlled group 
members).\538\ Section 4010 reporting is required if: (1) the 
aggregate unfunded vested benefits (determined using the 
interest rate used in determining variable-rate premiums) as of 
the end of the preceding plan year under all plans maintained 
by members of the controlled group exceed $50 million 
(disregarding plans with no unfunded vested benefits); (2) the 
conditions for imposition of a lien (i.e., required 
contributions totaling more than $1 million have not been made) 
have occurred with respect to an underfunded plan maintained by 
a member of the controlled group; or (3) minimum funding 
waivers in excess of $1 million have been granted with respect 
to a plan maintained by any member of the controlled group and 
any portion of the waived amount is still outstanding. 
Information provided to the PBGC in accordance with these 
requirements is not available to the public.
---------------------------------------------------------------------------
    \538\ ERISA sec. 4010.
---------------------------------------------------------------------------
    The PBGC may assess a penalty for a failure to provide the 
required information in the amount of up to $1,000 a day for 
each day the failure continues.\539\
---------------------------------------------------------------------------
    \539\ ERISA sec. 4071.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the requirement of section 4010 
reporting applicable under present law if aggregate unfunded 
vested benefits exceed $50 million is replaced with a 
requirement of section 4010 reporting if: (1) the funding 
target attainment percentage at the end of the preceding plan 
year of a plan maintained by a contributing sponsor or any 
member of its controlled group is less than 80 percent. It is 
intended that the PBGC may waive the requirement in appropriate 
circumstances, such as in the case of small plans.
    The provision also requires the information provided to the 
PBGC to include the following: (1) the amount of benefit 
liabilities under the plan determined using the assumptions 
used by the PBGC in determining liabilities; (2) the funding 
target of the plan determined as if the plan has been in at-
risk status for at least 5 plan years; and (3) the funding 
target attainment percentage of the plan.
    A plan's funding target, a plan's funding target attainment 
percentage, and at-risk status are determined under the 
provision relating to funding rules applicable to single-
employer plans under the Act. Thus, a plan's funding target for 
a plan year is the present value of the benefits earned or 
accrued under the plan as of the beginning of the plan year. A 
plan's ``funding target attainment percentage'' means the 
ratio, expressed as a percentage, that the value of the plan's 
assets (reduced by any funding standard carryover balance and 
prefunding balance) bears to the plan's funding target for the 
year (determined without regard to the special assumptions that 
apply to at-risk plans). A plan is in at-risk status for a plan 
year if the plan's funding target attainment percentage for the 
preceding year was less than (1) 80 percent, determined without 
regard to the special at-risk assumptions, and (2) 70 percent, 
determined using the special at-risk assumptions.
    The provision requires the PBGC to provide the Senate 
Committees on Health, Education, Labor, and Pensions and 
Finance and the House Committees on Education and the Workforce 
and Ways and Means with a summary report in the aggregate of 
the information submitted to the PBGC under section 4010.

                             Effective Date

    The provision is effective for filings for years beginning 
after December 31, 2007.

  E. Disclosure of Plan Termination Information to Plan Participants 
         (sec. 506 of the Act and secs. 4041 and 4042 of ERISA)


                              Present Law

    In the case of a single-employer defined benefit pension 
plan covered under the PBGC insurance program, the plan sponsor 
may voluntarily terminate the plan in a standard termination or 
a distress termination.\540\ A standard termination is 
permitted only if plan assets are sufficient to cover benefit 
liabilities.
---------------------------------------------------------------------------
    \540\ The PBGC may not proceed with a voluntary termination if the 
termination would violate an existing collective bargaining agreement.
---------------------------------------------------------------------------
    If assets in a defined benefit plan are not sufficient to 
cover benefit liabilities, the plan sponsor may not terminate 
the plan unless the plan sponsor (and members of the plan 
sponsor's controlled group) meets one of four criteria of 
financial distress. The four criteria for a distress 
termination are: (1) the plan sponsor, and every member of the 
controlled group of which the sponsor is a member, is being 
liquidated in bankruptcy or any similar Federal law or other 
similar State insolvency proceedings; (2) the plan sponsor and 
every member of the sponsor's controlled group is being 
reorganized in bankruptcy or similar State proceeding; (3) the 
PBGC determines that termination is necessary to allow the plan 
sponsor to pay its debts when due; or (4) the PBGC determines 
that termination is necessary to avoid unreasonably burdensome 
pension costs caused solely by a decline in the plan sponsor's 
work force.
    In order for a plan sponsor to terminate a plan, the plan 
administrator must provide each affected party with advance 
written notice of the intent to terminate at least 60 days 
before the proposed termination date. Additional information 
must be included as required by the PBGC. For this purpose, an 
affected party is: (1) a plan participant; (2) a beneficiary of 
a deceased participant or an alternate payee under a qualified 
domestic relations order; (3) any employee organization 
representing plan participants; and (4) the PBGC (except in the 
case of a standard termination). In the case of a proposed 
distress termination, as soon as practicable after providing 
notice, the plan administrator must provide the PBGC with 
certain information, including information necessary for the 
PBGC to determine whether any of the criteria for a distress 
termination is met.
    The PBGC may institute proceedings to terminate a single-
employer plan if it determines that the plan in question: (1) 
has not met the minimum funding standards; (2) will be unable 
to pay benefits when due; (3) has a substantial owner who has 
received a distribution greater than $10,000 (other than by 
reason of death) while the plan has unfunded vested benefits; 
or (4) may reasonably be expected to increase the PBGC's long-
run loss with respect to the plan unreasonably if the plan is 
not terminated. The PBGC must institute proceedings to 
terminate a plan if the plan is unable to pay benefits that are 
currently due.
    If the PBGC determines that the requirements for an 
involuntary plan termination are met, it must provide notice to 
the plan.

                        Explanation of Provision

    The provision revises the rules applicable in the case of a 
distress termination to require a plan administrator to provide 
an affected party with any information provided to the PBGC in 
connection with the proposed plan termination. The plan 
administrator must provide the information not later than 15 
days after: (1) the receipt of a request for the information 
from the affected party; or (2) the provision of new 
information to the PBGC relating to a previous request.
    The provision also requires the plan sponsor or plan 
administrator of a plan that has received notice from the PBGC 
of a determination that the plan should be involuntarily 
terminated to provide an affected party with any information 
provided to the PBGC in connection with the plan termination. 
In addition, the PBGC is required to provide a copy of the 
administrative record, including the trusteeship decision 
record in connection with a plan termination. The plan sponsor, 
plan administrator, or PBGC must provide the required 
information not later than 15 days after: (1) the receipt of a 
request for the information from the affected party; or (2) in 
the case of information provided to the PBGC, the provision of 
new information to the PBGC relating to a previous request.
    The PBGC may prescribe the form and manner in which 
information is to be provided, which is to include delivery in 
written, electronic, or other appropriate form to the extent 
such form is reasonably accessible to individuals to whom the 
information is required to be provided. A plan administrator or 
plan sponsor may charge a reasonable fee for any information 
provided under this subparagraph in other than electronic form.
    A plan administrator or plan sponsor may not provide the 
relevant information in a form that includes any information 
that may directly or indirectly be associated with, or 
otherwise identify, an individual participant or beneficiary. 
In addition, a court may limit disclosure of confidential 
information (as described under the Freedom of Information Act) 
to any authorized representative of the participants or 
beneficiaries that agrees to ensure the confidentiality of such 
information. For this purpose, an authorized representative 
means any employee organization representing participants in 
the pension plan.

                             Effective Date

    The provision generally applies with respect to any plan 
termination, with respect to which the notice of intent to 
terminate, or notice that the PBGC has determined that the 
requirements for an involuntary plan termination are met, 
occurs after the date of enactment (August 17, 2006). Under a 
transition rule, if notice under the provision would otherwise 
be required before the 90th day after the date of enactment, 
such notice is not required to be provided until the 90th day.

F. Notice of Freedom to Divest Employer Securities (sec. 507 of the Act 
             and new sec. 101(m) and sec. 502(c) of ERISA)


                              Present Law

    Under ERISA, a plan administrator is required to furnish 
participants with certain notices and information about the 
plan. This information includes, for example, a summary plan 
description that includes certain information, including 
administrative information about the plan, the plan's 
requirements as to eligibility for participation and benefits, 
the plan's vesting provisions, and the procedures for claiming 
benefits under the plan. Under ERISA, if a plan administrator 
fails or refuses to furnish to a participant information 
required to be provided to the participant within 30 days of 
the participant's written request, the participant generally 
may bring a civil action to recover from the plan administrator 
$100 a day, within the court's discretion, or other relief that 
the court deems proper.

                        Explanation of Provision

    The provision requires a new notice in connection with the 
right of an applicable individual to divest his or her account 
under an applicable defined contribution plan of employer 
securities, as required under the provision of the Act relating 
to diversification rights with respect to amounts invested in 
employer securities. Not later than 30 days before the first 
date on which an applicable individual is eligible to exercise 
such right with respect to any type of contribution, the 
administrator of the plan must provide the individual with a 
notice setting forth such right and describing the importance 
of diversifying the investment of retirement account assets. 
Under the diversification provision, an applicable individual's 
right to divest his or her account of employer securities 
attributable to elective deferrals and employee after-tax 
contributions and the right to divest his or her account of 
employer securities attributable to other contributions (i.e., 
nonelective employer contributions and employer matching 
contributions) may become exercisable at different times. Thus, 
to the extent the applicable individual is first eligible to 
exercise such rights at different times, separate notices are 
required.
    The notice must be written in a manner calculated to be 
understood by the average plan participant and may be delivered 
in written, electronic, or other appropriate form to the extent 
such form is reasonably accessible to the applicable 
individual. The Secretary of Treasury has regulatory authority 
over the required notice and is directed to prescribe a model 
notice to be used for this purpose within 180 days of the date 
of enactment of the provision (August 17, 2006). It is expected 
that the Secretary of Treasury will consult with the Secretary 
of Labor on the description of the importance of diversifying 
the investment of retirement account assets. In addition, it is 
intended that the Secretary of Treasury will prescribe rules to 
enable the notice to be provided at reduced administrative 
expense, such as allowing the notice to be provided with the 
summary plan description, with a reminder of these rights 
within a reasonable period before they become exercisable.
    In the case of a failure to provide a required notice of 
diversification rights, the Secretary of Labor may assess a 
civil penalty against the plan administrator of up to $100 a 
day from the date of the failure. For this purpose, each 
violation with respect to any single applicable individual is 
treated as a separate violation.

                             Effective Date

    The provision generally applies to plan years beginning 
after December 31, 2006. Under a transition rule, if notice 
would otherwise be required to be provided before 90 days after 
the date of enactment (August 17, 2006), notice is not required 
until 90 days after the date of enactment.

 G. Periodic Pension Benefit Statements (sec. 508 of the Act and secs. 
                      105(a) and 502(c) of ERISA)


                              Present Law

    ERISA provides that the administrator of a defined 
contribution or defined benefit pension plan must furnish a 
benefit statement to any participant or beneficiary who makes a 
written request for such a statement. The benefit statement 
must indicate, on the basis of the latest available 
information: (1) the participant's or beneficiary's total 
accrued benefit; and (2) the participant's or beneficiary's 
vested accrued benefit or the earliest date on which the 
accrued benefit will become vested. A participant or 
beneficiary is not entitled to receive more than one benefit 
statement during any 12-month period. If a plan administrator 
fails or refuses to furnish a benefit statement to a 
participant or beneficiary within 30 days of a written request, 
the participant or beneficiary may bring a civil action to 
recover from the plan administrator $100 a day, within the 
court's discretion, or other relief that the court deems 
proper.

                        Explanation of Provision


In general

    The provision revises the benefit statement requirements 
under ERISA. The new requirements depend in part on the type of 
plan and the individual to whom the statement is provided. The 
benefit statement requirements do not apply to a one-
participant retirement plan.\541\
---------------------------------------------------------------------------
    \541\ A one-participant retirement plan is defined as under the 
provision of ERISA that requires advance notice of a blackout period to 
be provided to participants and beneficiaries affected by the blackout 
period, as discussed in Part H below.
---------------------------------------------------------------------------
    A benefit statement is required to indicate, on the basis 
of the latest available information: (1) the total benefits 
accrued; (2) the vested accrued benefit or the earliest date on 
which the accrued benefit will become vested; and (3) an 
explanation of any permitted disparity or floor-offset 
arrangement that may be applied in determining accrued benefits 
under the plan.\542\ With respect to information on vested 
benefits, the Secretary of Labor is required to provide that 
the requirements are met if, at least annually, the plan: (1) 
updates the information on vested benefits that is provided in 
the benefit statement; or (2) provides in a separate statement 
information as is necessary to enable participants and 
beneficiaries to determine their vested benefits.
---------------------------------------------------------------------------
    \542\ Under the permitted disparity rules, contributions or 
benefits may be provided at a higher rate with respect to compensation 
above a specified level and at a lower rate with respect to 
compensation up to the specified level. In addition, benefits under a 
defined benefit plan may be offset by a portion of a participant's 
expected social security benefits. Under a floor-offset arrangement, 
benefits under a defined benefit pension plan are reduced by benefits 
under a defined contribution plan.
---------------------------------------------------------------------------
    If a plan administrator fails to provide a required benefit 
statement to a participant or beneficiary, the participant or 
beneficiary may bring a civil action to recover from the plan 
administrator $100 a day, within the court's discretion, or 
other relief that the court deems proper.

Requirements for defined contribution plans

    The administrator of a defined contribution plan is 
required to provide a benefit statement (1) to a participant or 
beneficiary who has the right to direct the investment of the 
assets in his or her account, at least quarterly, (2) to any 
other participant or other beneficiary who has his or her own 
account under the plan, at least annually, and (3) to other 
beneficiaries, upon written request, but limited to one request 
during any 12-month period.
    A benefit statement provided with respect to a defined 
contribution plan must include the value of each investment to 
which assets in the individual's account are allocated 
(determined as of the plan's most recent valuation date), 
including the value of any assets held in the form of employer 
securities (without regard to whether the securities were 
contributed by the employer or acquired at the direction of the 
individual). A quarterly benefit statement provided to a 
participant or beneficiary who has the right to direct 
investments must also provide: (1) an explanation of any 
limitations or restrictions on any right of the individual to 
direct an investment; (2) an explanation, written in a manner 
calculated to be understood by the average plan participant, of 
the importance, for the long-term retirement security of 
participants and beneficiaries, of a well-balanced and 
diversified investment portfolio, including a statement of the 
risk that holding more than 20 percent of a portfolio in the 
security of one entity (such as employer securities) may not be 
adequately diversified; and (3) a notice directing the 
participant or beneficiary to the Internet website of the 
Department of Labor for sources of information on individual 
investing and diversification.

Requirements for defined benefit plans

    The administrator of a defined benefit plan is required 
either: (1) to furnish a benefit statement at least once every 
three years to each participant who has a vested accrued 
benefit under the plan and who is employed by the employer at 
the time the benefit statements are furnished to participants; 
or (2) to furnish at least annually to each such participant 
notice of the availability of a benefit statement and the 
manner in which the participant can obtain it. The Secretary of 
Labor is authorized to provide that years in which no employee 
or former employee benefits under the plan need not be taken 
into account in determining the three-year period. It is 
intended that the annual notice of the availability of a 
benefit statement may be included with other communications to 
the participant if done in a manner reasonably designed to 
attract the attention of the participant.
    The administrator of a defined benefit pension plan is also 
required to furnish a benefit statement to a participant or 
beneficiary upon written request, limited to one request during 
any 12-month period.
    In the case of a statement provided to a participant with 
respect to a defined benefit plan (other than at the 
participant's request), information may be based on reasonable 
estimates determined under regulations prescribed by the 
Secretary of Labor in consultation with the Pension Benefit 
Guaranty Corporation.

Form of benefit statement

    A benefit statement must be written in a manner calculated 
to be understood by the average plan participant. It may be 
delivered in written, electronic, or other appropriate form to 
the extent such form is reasonably accessible to the recipient. 
For example, regulations could permit current benefit 
statements to be provided on a continuous basis through a 
secure plan website for a participant or beneficiary who has 
access to the website.
    The Secretary of Labor is directed, within one year after 
the date of enactment (August 17, 2006), to develop one or more 
model benefit statements that may be used by plan 
administrators in complying with the benefit statement 
requirements. The use of the model statement is optional. It is 
intended that the model statement include items such as the 
amount of vested accrued benefits as of the statement date that 
are payable at normal retirement age under the plan, the amount 
of accrued benefits that are forfeitable but that may become 
vested under the terms of the plan, information on how to 
contact the Social Security Administration to obtain a 
participant's personal earnings and benefit estimate statement, 
and other information that may be important to understanding 
benefits earned under the plan. The Secretary of Labor is also 
given the authority to promulgate any interim final rules as 
determined appropriate to carry out the benefit statement 
requirements.

                             Effective Date

    The provision is generally effective for plan years 
beginning after December 31, 2006. In the case of a plan 
maintained pursuant to one or more collective bargaining 
agreements, the provision is effective for plan years beginning 
after the earlier of (1) the later of December 31, 2007, or the 
date on which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment), or (2) December 31, 2008.

 H. Notice to Participants or Beneficiaries of Blackout Periods (sec. 
                509 of the Act and sec. 101(i) of ERISA)


                              Present Law


In general

    The Sarbanes-Oxley Act of 2002 \543\ amended ERISA to 
require that the plan administrator of an individual account 
plan \544\ provide advance notice of a blackout period (a 
``blackout notice'') to plan participants and beneficiaries to 
whom the blackout period applies.\545\ Generally, notice must 
be provided at least 30 days before the beginning of the 
blackout period. In the case of a blackout period that applies 
with respect to employer securities, the plan administrator 
must also provide timely notice of the blackout period to the 
employer (or the affiliate of the employer that issued the 
securities, if applicable).
---------------------------------------------------------------------------
    \543\ Pub. L. No. 107-204 (2002).
    \544\ An ``individual account plan'' is the term generally used 
under ERISA for a defined contribution plan.
    \545\ ERISA sec. 101(i), as enacted by section 306(b) of the 
Sarbanes-Oxley Act of 2002. Under section 306(a), a director or 
executive officer of a publicly-traded corporation is prohibited from 
trading in employer stock during blackout periods in certain 
circumstances. Section 306 is effective 180 days after enactment.
---------------------------------------------------------------------------
    The blackout notice requirement does not apply to a one-
participant retirement plan, which is defined as a plan that 
(1) on the first day of the plan year, covered only the 
employer (and the employer's spouse) and the employer owns the 
entire business (whether or not incorporated) or covers only 
one or more partners (and their spouses) in a business 
partnership (including partners in an S or C corporation as 
defined in section 1361(a) of the Code), (2) meets the minimum 
coverage requirements without being combined with any other 
plan that covers employees of the business, (3) does not 
provide benefits to anyone except the employer (and the 
employer's spouse) or the partners (and their spouses), (4) 
does not cover a business that is a member of an affiliated 
service group, a controlled group of corporations, or a group 
of corporations under common control, and (5) does not cover a 
business that leases employees.\546\
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    \546\ Governmental plans and church plans are exempt from ERISA. 
Accordingly, the blackout notice requirement does not apply to these 
plans.
---------------------------------------------------------------------------

Definition of blackout period

    A blackout period is any period during which any ability of 
participants or beneficiaries under the plan, which is 
otherwise available under the terms of the plan, to direct or 
diversify assets credited to their accounts, or to obtain loans 
or distributions from the plan, is temporarily suspended, 
limited, or restricted if the suspension, limitation, or 
restriction is for any period of more than three consecutive 
business days. However, a blackout period does not include a 
suspension, limitation, or restriction that (1) occurs by 
reason of the application of securities laws, (2) is a change 
to the plan providing for a regularly scheduled suspension, 
limitation, or restriction that is disclosed through a summary 
of material modifications to the plan or materials describing 
specific investment options under the plan, or changes thereto, 
or (3) applies only to one or more individuals, each of whom is 
a participant, alternate payee, or other beneficiary under a 
qualified domestic relations order.

Timing of notice

    Notice of a blackout period is generally required at least 
30 days before the beginning of the period. The 30-day notice 
requirement does not apply if (1) deferral of the blackout 
period would violate the fiduciary duty requirements of ERISA 
and a plan fiduciary so determines in writing, or (2) the 
inability to provide the 30-day advance notice is due to events 
that were unforeseeable or circumstances beyond the reasonable 
control of the plan administrator and a plan fiduciary so 
determines in writing. In those cases, notice must be provided 
as soon as reasonably practicable under the circumstances 
unless notice in advance of the termination of the blackout 
period is impracticable.
    Another exception to the 30-day period applies in the case 
of a blackout period that applies only to one or more 
participants or beneficiaries in connection with a merger, 
acquisition, divestiture, or similar transaction involving the 
plan or the employer and that occurs solely in connection with 
becoming or ceasing to be a participant or beneficiary under 
the plan by reason of the merger, acquisition, divestiture, or 
similar transaction. Under the exception, the blackout notice 
requirement is treated as met if notice is provided to the 
participants or beneficiaries to whom the blackout period 
applies as soon as reasonably practicable.
    The Secretary of Labor may provide additional exceptions to 
the notice requirement that the Secretary determines are in the 
interests of participants and beneficiaries.

Form and content of notice

    A blackout notice must be written in a manner calculated to 
be understood by the average plan participant and must include 
(1) the reasons for the blackout period, (2) an identification 
of the investments and other rights affected, (3) the expected 
beginning date and length of the blackout period, and (4) in 
the case of a blackout period affecting investments, a 
statement that the participant or beneficiary should evaluate 
the appropriateness of current investment decisions in light of 
the inability to direct or diversify assets during the blackout 
period, and (5) other matters as required by regulations. If 
the expected beginning date or length of the blackout period 
changes after notice has been provided, the plan administrator 
must provide notice of the change (and specify any material 
change in other matters related to the blackout) to affected 
participants and beneficiaries as soon as reasonably 
practicable.
    Notices provided in connection with a blackout period (or 
changes thereto) must be provided in writing and may be 
delivered in electronic or other form to the extent that the 
form is reasonably accessible to the recipient. The Secretary 
of Labor is required to issue guidance regarding the notice 
requirement and a model blackout notice.

Penalty for failure to provide notice

    In the case of a failure to provide notice of a blackout 
period, the Secretary of Labor may assess a civil penalty 
against a plan administrator of up to $100 per day for each 
failure to provide a blackout notice. For this purpose, each 
violation with respect to a single participant or beneficiary 
is treated as a separate violation.

                        Explanation of Provision

    The provision modifies the definition of a one-participant 
retirement plan to be consistent with Department of Labor 
regulations under which certain business owners and their 
spouses are not treated as employees.\547\ As modified, a one-
participant retirement plan is a plan that: (1) on the first 
day of the plan year, either covered only one individual (or 
the individual and his or her spouse) and the individual owned 
100 percent of the plan sponsor, whether or not incorporated, 
or covered only one or more partners (or partners and their 
spouses) in the plan sponsor; and (2) does not cover a business 
that leases employees.
---------------------------------------------------------------------------
    \547\ 29 C.F.R. sec. 2510.3-3(c) (2006).
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective as if included in section 306 of 
the Sarbanes-Oxley Act of 2002.

  TITLE VI--INVESTMENT ADVICE, PROHIBITED TRANSACTIONS, AND FIDUCIARY 
                                 RULES

A. Prohibited Transaction Exemption for Provision of Investment Advice 
  (sec. 601 of the Act, sec. 408 of ERISA, and sec. 4975 of the Code)

                              Present Law

    ERISA and the Code prohibit certain transactions between an 
employer-sponsored retirement plan and a disqualified person 
(referred to as a ``party in interest'' under ERISA).\548\ 
Under ERISA, the prohibited transaction rules apply to 
employer-sponsored retirement plans and welfare benefit plans. 
Under the Code, the prohibited transaction rules apply to 
qualified retirement plans and qualified retirement annuities, 
as well as individual retirement accounts and annuities 
(``IRAs''), health savings accounts (``HSAs''), Archer MSAs, 
and Coverdell education savings accounts.\549\
---------------------------------------------------------------------------
    \548\ ERISA sec. 406; Code sec. 4975.
    \549\ The prohibited transaction rules under ERISA and the Code 
generally do not apply to governmental plans or church plans.
---------------------------------------------------------------------------
    Disqualified persons include a fiduciary of the plan, a 
person providing services to the plan, and an employer with 
employees covered by the plan. For this purpose, a fiduciary 
includes any person who (1) exercises any authority or control 
respecting management or disposition of the plan's assets, (2) 
renders investment advice for a fee or other compensation with 
respect to any plan moneys or property, or has the authority or 
responsibility to do so, or (3) has any discretionary authority 
or responsibility in the administration of the plan.
    Prohibited transactions include (1) the sale, exchange or 
leasing of property, (2) the lending of money or other 
extension of credit, (3) the furnishing of goods, services or 
facilities, (4) the transfer to, or use by or for the benefit 
of, the income or assets of the plan, (5) in the case of a 
fiduciary, any act that deals with the plan's income or assets 
for the fiduciary's own interest or account, and (6) the 
receipt by a fiduciary of any consideration for the fiduciary's 
own personal account from any party dealing with the plan in 
connection with a transaction involving the income or assets of 
the plan. However, certain transactions are exempt from 
prohibited transaction treatment, for example, certain loans to 
plan participants.
    Under ERISA, the Secretary of Labor may assess a civil 
penalty against a person who engages in a prohibited 
transaction, other than a transaction with a plan covered by 
the prohibited transaction rules of the Code. The penalty may 
not exceed five percent of the amount involved in the 
transaction for each year or part of a year that the prohibited 
transaction continues. If the prohibited transaction is not 
corrected within 90 days after notice from the Secretary of 
Labor, the penalty may be up to 100 percent of the amount 
involved in the transaction. Under the Code, if a prohibited 
transaction occurs, the disqualified person who participates in 
the transaction is subject to a two-tier excise tax. The first 
level tax is 15 percent of the amount involved in the 
transaction. The second level tax is imposed if the prohibited 
transaction is not corrected within a certain period and is 100 
percent of the amount involved.

                        Explanation of Provision

In general
    The provision adds a new category of prohibited transaction 
exemption under ERISA and the Code in connection with the 
provision of investment advice through an ``eligible investment 
advice arrangement'' to participants and beneficiaries of a 
defined contribution plan who direct the investment of their 
accounts under the plan and to beneficiaries of IRAs.\550\ If 
the requirements under the provision are met, the following are 
exempt from prohibited transaction treatment: (1) the provision 
of investment advice; (2) an investment transaction (i.e., a 
sale, acquisition, or holding of a security or other property) 
pursuant to the advice; and (3) the direct or indirect receipt 
of fees or other compensation in connection with the provision 
of the advice or an investment transaction pursuant to the 
advice. The prohibited transaction exemptions provided under 
the provision do not in any manner alter existing individual or 
class exemptions provided by statute or administrative action.
---------------------------------------------------------------------------
    \550\ The portions of the provision relating to IRAs apply to HSAs, 
Archer MSAs, and Coverdell education savings accounts. References here 
to IRAs include such other arrangements as well.
---------------------------------------------------------------------------
    The provision also directs the Secretary of Labor, in 
consultation with the Secretary of the Treasury, to determine, 
based on certain information to be solicited by the Secretary 
of Labor, whether there is any computer model investment advice 
program that meets the requirements of the provision and may be 
used by IRAs. The determination is to be made by December 31, 
2007. If the Secretary of Labor determines there is such a 
program, the exemptions described above apply in connection 
with the use of the program with respect to IRA beneficiaries. 
If the Secretary of Labor determines that there is not such a 
program, such Secretary is directed to grant a class exemption 
from prohibited transaction treatment (as discussed below) for 
the provision of investment advice, investment transactions 
pursuant to such advice, and related fees to beneficiaries of 
such arrangements.
Eligible investment advice arrangements
            In general
    The exemptions provided under the provision apply in 
connection with the provision of investment advice by a 
fiduciary adviser under an eligible investment advice 
arrangement. An eligible investment advice arrangement is an 
arrangement (1) meeting certain requirements (discussed below) 
and (2) which either (a) provides that any fees (including any 
commission or compensation) received by the fiduciary adviser 
for investment advice or with respect to an investment 
transaction with respect to plan assets do not vary depending 
on the basis of any investment option selected, or (b) uses a 
computer model under an investment advice program as described 
below in connection with the provision of investment advice to 
a participant or beneficiary. In the case of an eligible 
investment advice arrangement with respect to a defined 
contribution plan, the arrangement must be expressly authorized 
by a plan fiduciary other than (1) the person offering the 
investment advice program, (2) any person providing investment 
options under the plan, or (3) any affiliate of (1) or (2).
            Investment advice program using computer model
    If an eligible investment advice arrangement provides 
investment advice pursuant to a computer model, the model must 
(1) apply generally accepted investment theories that take into 
account the historic returns of different asset classes over 
defined periods of time, (2) use relevant information about the 
participant or beneficiary, (3) use prescribed objective 
criteria to provide asset allocation portfolios comprised of 
investment options under the plan, (4) operate in a manner that 
is not biased in favor of any investment options offered by the 
fiduciary adviser or related person, and (5) take into account 
all the investment options under the plan in specifying how a 
participant's or beneficiary's account should be invested 
without inappropriate weighting of any investment option. An 
eligible investment expert must certify, before the model is 
used and in accordance with rules prescribed by the Secretary, 
that the model meets these requirements. The certification must 
be renewed if there are material changes to the model as 
determined under regulations. For this purpose, an eligible 
investment expert is a person who meets requirements prescribed 
by the Secretary and who does not bear any material affiliation 
or contractual relationship with any investment adviser or 
related person.
    In addition, if a computer model is used, the only 
investment advice that may be provided under the arrangement is 
the advice generated by the computer model, and any investment 
transaction pursuant the advice must occur solely at the 
direction of the participant or beneficiary. This requirement 
does not preclude the participant or beneficiary from 
requesting other investment advice, but only if the request has 
not been solicited by any person connected with carrying out 
the investment advice arrangement.
            Audit requirements
    In the case of an eligible investment advice arrangement 
with respect to a defined contribution plan, an annual audit of 
the arrangement for compliance with applicable requirements 
must be conducted by an independent auditor (i.e., unrelated to 
the person offering the investment advice arrangement or any 
person providing investment options under the plan) who has 
appropriate technical training or experience and proficiency 
and who so represents in writing. The auditor must issue a 
report of the audit results to the fiduciary that authorized 
use of the arrangement. In the case of an eligible investment 
advice arrangement with respect to IRAs, an audit is required 
at such times and in such manner as prescribed by the Secretary 
of Labor.
            Notice requirements
    Before the initial provision of investment advice, the 
fiduciary adviser must provide written notice (which may be in 
electronic form) containing various information to the 
recipient of the advice, including information relating to: (1) 
the role of any related party in the development of the 
investment advice program or the selection of investment 
options under the plan; (2) past performance and rates of 
return for each investment option offered under the plan; (3) 
any fees or other compensation to be received by the fiduciary 
adviser or affiliate; (4) any material affiliation or 
contractual relationship of the fiduciary adviser or affiliates 
in the security or other property involved in the investment 
transaction; (5) the manner and under what circumstances any 
participant or beneficiary information will be used or 
disclosed; (6) the types of services provided by the fiduciary 
adviser in connection with the provision of investment advice; 
(7) the adviser's status as a fiduciary of the plan in 
connection with the provision of the advice; and (8) the 
ability of the recipient of the advice separately to arrange 
for the provision of advice by another adviser that could have 
no material affiliation with and receive no fees or other 
compensation in connection with the security or other property. 
This information must be maintained in accurate form and must 
be provided to the recipient of the investment advice, without 
charge, on an annual basis, on request, or in the case of any 
material change.
    Any notification must be written in a clear and conspicuous 
manner, calculated to be understood by the average plan 
participant, and sufficiently accurate and comprehensive so as 
to reasonably apprise participants and beneficiaries of the 
required information. The Secretary is directed to issue a 
model form for the disclosure of fees and other compensation as 
required by the provision. The fiduciary adviser must maintain 
for at least six years any records necessary for determining 
whether the requirements for the prohibited transaction 
exemption were met. A prohibited transaction will not be 
considered to have occurred solely because records were lost or 
destroyed before the end of six years due to circumstances 
beyond the adviser's control.
            Other requirements
    In order for the exemption to apply, the following 
additional requirements must be satisfied: (1) the fiduciary 
adviser must provide disclosures applicable under securities 
laws; (2) an investment transaction must occur solely at the 
direction of the recipient of the advice; (3) compensation 
received by the fiduciary adviser or affiliates in connection 
with an investment transaction must be reasonable; and (4) the 
terms of the investment transaction must be at least as 
favorable to the plan as an arm's length transaction would be.
            Fiduciary adviser
    For purposes of the provision, ``fiduciary adviser'' is 
defined as a person who is a fiduciary of the plan by reason of 
the provision of investment advice to a participant or 
beneficiary and who is also: (1) registered as an investment 
adviser under the Investment Advisers Act of 1940 or under 
State laws; (2) a bank, a similar financial institution 
supervised by the United States or a State, or a savings 
association (as defined under the Federal Deposit Insurance 
Act), but only if the advice is provided through a trust 
department that is subject to periodic examination and review 
by Federal or State banking authorities; (3) an insurance 
company qualified to do business under State law; (4) 
registered as a broker or dealer under the Securities Exchange 
Act of 1934; (5) an affiliate of any of the preceding; or (6) 
an employee, agent or registered representative of any of the 
preceding who satisfies the requirements of applicable 
insurance, banking and securities laws relating to the 
provision of advice. A person who develops the computer model 
or markets the investment advice program or computer model is 
treated as a person who is a plan fiduciary by reason of the 
provision of investment advice and is treated as a fiduciary 
adviser, except that the Secretary of Labor may prescribe rules 
under which only one fiduciary adviser may elect treatment as a 
plan fiduciary. ``Affiliate'' means an affiliated person as 
defined under section 2(a)(3) of the Investment Company Act of 
1940. ``Registered representative'' means a person described in 
section 3(a)(18) of the Securities Exchange Act of 1934 or a 
person described in section 202(a)(17) of the Investment 
Advisers Act of 1940.
            Fiduciary rules
    Subject to certain requirements, an employer or other 
person who is a plan fiduciary, other than a fiduciary adviser, 
is not treated as failing to meet the fiduciary requirements of 
ERISA, solely by reason of the provision of investment advice 
as permitted under the provision or of contracting for or 
otherwise arranging for the provision of the advice. This rule 
applies if: (1) the advice is provided under an arrangement 
between the employer or plan fiduciary and the fiduciary 
adviser for the provision of investment advice by the fiduciary 
adviser as permitted under the provision; (2) the terms of the 
arrangement require compliance by the fiduciary adviser with 
the requirements of the provision; and (3) the terms of the 
arrangement include a written acknowledgement by the fiduciary 
adviser that the fiduciary adviser is a plan fiduciary with 
respect to the provision of the advice.
    The provision does not exempt the employer or a plan 
fiduciary from fiduciary responsibility under ERISA for the 
prudent selection and periodic review of a fiduciary adviser 
with whom the employer or plan fiduciary has arranged for the 
provision of investment advice. The employer or plan fiduciary 
does not have the duty to monitor the specific investment 
advice given by a fiduciary adviser. The provision also 
provides that nothing in the fiduciary responsibility 
provisions of ERISA is to be construed to preclude the use of 
plan assets to pay for reasonable expenses in providing 
investment advice.
Study and determination by the Secretary of Labor; class exemption
    Under the provision, the Secretary of Labor must determine, 
in consultation with the Secretary of the Treasury, whether 
there is any computer model investment advice program that can 
be used by IRAs and that meets the requirements of the 
provision. The determination is to be made on the basis of 
information to be solicited by the Secretary of Labor as 
described below. Under the provision, a computer model 
investment advice program must (1) use relevant information 
about the beneficiary, (2) take into account the full range of 
investments, including equities and bonds, in determining the 
options for the investment portfolio of the beneficiary, and 
(3) allow the account beneficiary, in directing the investment 
of assets, sufficient flexibility in obtaining advice to 
evaluate and select options. The Secretary of Labor must report 
the results of this determination to the House Committees on 
Ways and Means and Education and the Workforce and the Senate 
Committees on Finance and Health, Education, Labor, and 
Pensions no later than December 31, 2007.
    As soon as practicable after the date of enactment, the 
Secretary of Labor, in consultation with the Secretary of the 
Treasury, must solicit information as to the feasibility of the 
application of computer model investment advice programs for 
IRAs, including from (1) at least the top 50 trustees of IRAs, 
determined on the basis of assets held by such trustees, and 
(2) other persons offering such programs based on 
nonproprietary products. The information solicited by the 
Secretary of Labor from such trustees and other persons is to 
include information on their computer modeling capabilities 
with respect to the current year and the preceding year, 
including their capabilities for investment accounts they 
maintain. If a person from whom the Secretary of Labor solicits 
information does not provide such information within 60 days 
after the solicitation, the person is not entitled to use any 
class exemption granted by the Secretary of Labor as required 
under the provision (as discussed below) unless such failure is 
due to reasonable cause and not willful neglect.
    The exemptions provided under the provision with respect to 
an eligible investment advice arrangement involving a computer 
model do not apply to IRAs. If the Secretary of Labor 
determines that there is a computer model investment advice 
program that can be used by IRAs, the exemptions provided under 
the provision with respect to an eligible investment advice 
arrangement involving a computer model can apply to IRAs.
    If, as a result of the study of this issue as directed by 
the provision, the Secretary of Labor determines that there is 
not such a program, the Secretary of Labor must grant a class 
exemption from prohibited transaction treatment for (1) the 
provision of investment advice by a fiduciary adviser to 
beneficiaries of IRAs; (2) investment transactions pursuant to 
the advice; and (3) the direct or indirect receipt of fees or 
other compensation in connection with the provision of the 
advice or an investment transaction pursuant to the advice. 
Application of the exemptions are to be subject to conditions 
as are set forth in the class exemption and as are (1) in the 
interests of the IRA and its beneficiary and protective of the 
rights of the beneficiary, and (2) necessary to ensure the 
requirements of the applicable exemptions are met and the 
investment advice provided utilizes prescribed objective 
criteria to provide asset allocation portfolios comprised of 
securities or other property available as investments under the 
IRA. Such conditions could require that the fiduciary adviser 
providing the advice (1) adopt written policies and procedures 
that ensure the advice provided is not biased in favor of 
investments offered by the fiduciary adviser or a related 
person, and (2) appoint an individual responsible for annually 
reviewing the advice provided to determine that the advice is 
provided in accordance with the policies and procedures in (1).
    If the Secretary of Labor later determines that there is 
any computer model investment advice program that can be used 
by IRAs, the class exemption ceases to apply after the later of 
(1) the date two years after the Secretary's later 
determination, or (2) the date three years after the date the 
exemption first took effect.
    Any person may request the Secretary of Labor to make a 
determination with respect to any computer model investment 
advice program as to whether it can be used by IRAs, and the 
Secretary must make such determination within 90 days of the 
request. If the Secretary determines that the program cannot be 
so used, within 10 days of the determination, the Secretary 
must notify the House Committees on Ways and Means and 
Education and the Workforce and the Senate Committees on 
Finance and Health, Education, Labor, and Pensions thereof and 
the reasons for the determination.

                             Effective Date

    The provisions are effective with respect to investment 
advice provided after December 31, 2006. The provision relating 
to the study by the Secretary of Labor is effective on the date 
of enactment (August 17, 2006).

B. Prohibited Transaction Rules Relating to Financial Investments (sec. 
611 of the Act, secs. 408, 412(a), 502(i) and new sec. 3(42) of ERISA, 
                       and sec. 4975 of the Code)


1. Exemption for block trading

                              Present Law

    Present law provides statutory exemptions from the 
prohibited transaction rules for certain transactions.\551\ 
Present law does not provide a statutory prohibited transaction 
exemption for block trades. For purposes of the prohibited 
transaction rules, a fiduciary means any person who (1) 
exercises any authority or control respecting management or 
disposition of the plan's assets, (2) renders investment advice 
for a fee or other compensation with respect to any plan moneys 
or property, or has the authority or responsibility to do so, 
or (3) has any discretionary authority or responsibility in the 
administration of the plan.
---------------------------------------------------------------------------
    \551\ In addition, under ERISA section 408(a), the Secretary of 
Labor may grant exemptions with respect to particular transactions or 
classes of transactions after consultation and coordination with the 
Secretary of Treasury. An exemption may not be granted unless the 
Secretary of Labor finds that the exemption is administratively 
feasible, in the interests of the plan and its participants and 
beneficiaries, and protective of the rights of plan participants and 
beneficiaries.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides prohibited transaction exemptions 
under ERISA and the Code for a purchase or sale of securities 
or other property (as determined by the Secretary of Labor) 
between a plan and a disqualified person (other than a 
fiduciary) if: (1) the transaction involves a block trade; (2) 
at the time of the transaction, the interest of the plan 
(together with the interests of any other plans maintained by 
the same plan sponsor) does not exceed 10 percent of the 
aggregate size of the block trade; (3) the terms of the 
transaction, including the price, are at least as favorable to 
the plan as an arm's length transaction with an unrelated 
party; and (4) the compensation associated with the transaction 
is not greater than the compensation associated with an arm's 
length transaction with an unrelated party. For purposes of the 
provision, block trade is defined as any trade of at least 
10,000 shares or with a market value of at least $200,000 that 
will be allocated across two or more unrelated client accounts 
of a fiduciary. Examples of property other than securities that 
the Secretary of labor may apply the exemption to include (but 
are not limited to) future contracts and currency.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

2. Bonding relief

                              Present Law

    Subject to certain exceptions, ERISA requires a plan 
fiduciary and any person handling plan assets to be bonded, 
generally in an amount between $1,000 and $500,000. An 
exception to the bonding requirement generally applies for a 
fiduciary (or a director, officer, or employee of the 
fiduciary) that is a corporation authorized to exercise trust 
powers or conduct an insurance business if the corporation is 
subject to supervision or examination by Federal or State 
regulators and meets certain financial requirements.

                        Explanation of Provision

    The provision provides an exception to the ERISA bonding 
requirement for an entity registered as a broker or a dealer 
under the Securities Exchange Act of 1934 if the broker or 
dealer is subject to the fidelity bond requirements of a self-
regulatory organization (within the meaning of the Securities 
Exchange Act of 1934).

                             Effective Date

    The provision is effective for plan years beginning after 
the date of enactment (August 17, 2006).

3. Exemption for electronic communication network

                              Present Law

    Present law provides statutory exemptions from the 
prohibited transaction rules for certain transactions.\552\ 
Present law does not provide a statutory prohibited transaction 
exemption for transactions made through an electronic 
communication network, but such transactions may be permitted 
if the parties are not known to each other (a ``blind'' 
transaction).
---------------------------------------------------------------------------
    \552\ In addition, under ERISA section 408(a), the Secretary of 
Labor may grant exemptions with respect to particular transactions or 
classes of transactions after consultation and coordination with the 
Secretary of Treasury. An exemption may not be granted unless the 
Secretary of Labor finds that the exemption is administratively 
feasible, in the interests of the plan and its participants and 
beneficiaries, and protective of the rights of plan participants and 
beneficiaries.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides a prohibited transaction exemption 
under ERISA and the Code for a transaction involving the 
purchase or sale of securities (or other property as determined 
under regulations) between a plan and a disqualified person if: 
(1) the transaction is executed through an electronic 
communication network, alternative trading system, or similar 
execution system or trading venue that is subject to regulation 
and oversight by (a) the applicable Federal regulating entity 
or (b) a foreign regulatory entity as the Secretary of Labor 
may determine under regulations; (2) either (a) neither the 
execution system nor the parties to the transaction take into 
account the identity of the parties in the execution of trades, 
or (b) the transaction is effected under rules designed to 
match purchases and sales at the best price available through 
the execution system in accordance with applicable rules of the 
SEC or other relevant governmental authority; (3) the price and 
compensation associated with the purchase and sale are not 
greater than an arm's length transaction with an unrelated 
party; (4) if the disqualified person has an ownership interest 
in the system or venue, the system or venue has been authorized 
by the plan sponsor or other independent fiduciary for this 
type of transaction; and (5) not less than 30 days before the 
first transaction of this type executed through any such system 
or venue, a plan fiduciary is provided written notice of the 
execution of the transaction through the system or venue.
    Examples of other property for purposes of the exemption 
include (but are not limited to) futures contracts and 
currency.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

4. Exemption for service providers

                              Present Law

    Certain transactions are exempt from prohibited transaction 
treatment if made for adequate consideration. For this purpose, 
adequate consideration means: (1) in the case of a security for 
which there is a generally recognized market, either the price 
of the security prevailing on a national securities exchange 
registered under the Securities Exchange Act of 1934, or, if 
the security is not traded on such a national securities 
exchange, a price not less favorable to the plan than the 
offering price for the security as established by the current 
bid and asked prices quoted by persons independent of the 
issuer and of any disqualified person; and (2) in the case of 
an asset other than a security for which there is a generally 
recognized market, the fair market value of the asset as 
determined in good faith by a trustee or named fiduciary 
pursuant to the terms of the plan and in accordance with 
regulations.\553\
---------------------------------------------------------------------------
    \553\ ERISA sec. 3(18).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides a prohibited transaction exemption 
under ERISA for certain transactions (such as sales of 
property, loans, and transfers or use of plan assets) between a 
plan and a person that is a party in interest solely by reason 
of providing services (or solely by reason of having certain 
relationships with a service provider, or both), but only if, 
in connection with the transaction, the plan receives no less, 
nor pays no more, than adequate consideration. For this 
purpose, adequate consideration means: (1) in the case of a 
security for which there is a generally recognized market, the 
price of the security prevailing on a national securities 
exchange registered under the Securities Exchange Act of 1934, 
taking into account factors such as the size of the transaction 
and marketability of the security, or, if the security is not 
traded on such a national securities exchange, a price not less 
favorable to the plan than the offering price for the security 
as established by the current bid and asked prices quoted by 
persons independent of the issuer and of the party in interest, 
taking into account factors such as the size of the transaction 
and marketability of the security; and (2) in the case of an 
asset other than a security for which there is a generally 
recognized market, the fair market value of the asset as 
determined in good faith by a fiduciary or named fiduciaries in 
accordance with regulations. The exemption does not apply to a 
fiduciary (or an affiliate) who has or exercises any 
discretionary authority or control with respect to the 
investment of the assets involved in the transaction or 
provides investment advice with respect to the assets.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

5. Relief for foreign exchange transactions

                              Present Law

    Present law provides statutory exemptions from the 
prohibited transaction rules for certain transactions.\554\ 
Present law does not provide a statutory prohibited transaction 
exemption for foreign exchange transactions.
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    \554\ In addition, under ERISA section 408(a), the Secretary of 
Labor may grant exemptions with respect to particular transactions or 
classes of transactions after consultation and coordination with the 
Secretary of Treasury. An exemption may not be granted unless the 
Secretary of Labor finds that the exemption is administratively 
feasible, in the interests of the plan and its participants and 
beneficiaries, and protective of the rights of plan participants and 
beneficiaries.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides a prohibited transaction exemption 
under ERISA and the Code for foreign exchange transactions 
between a bank or broker-dealer (or an affiliate of either) and 
a plan in connection with the sale, purchase, or holding of 
securities or other investment assets (other than a foreign 
exchange transaction unrelated to any other investment in 
securities or other investment assets) if: (1) at the time the 
foreign exchange transaction is entered into, the terms of the 
transaction are not less favorable to the plan than the terms 
generally available in comparable arm's length foreign exchange 
transactions between unrelated parties or the terms afforded by 
the bank or the broker-dealer (or any affiliate thereof) in 
comparable arm's-length foreign exchange transactions involving 
unrelated parties; (2) the exchange rate used for a particular 
foreign exchange transaction may not deviate by more than three 
percent from the interbank bid and asked rates at the time of 
the transaction for transactions of comparable size and 
maturity as displayed on an independent service that reports 
rates of exchange in the foreign currency market for such 
currency; and (3) the bank, broker-dealer (and any affiliate of 
either) does not have investment discretion or provide 
investment advice with respect to the transaction.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

6. Definition of plan asset vehicle

                              Present Law

    Under ERISA regulations, applicable also for purposes of 
the prohibited transaction rules of the Code, when a plan holds 
a non-publicly-traded equity interest in an entity, the assets 
of the entity may be considered plan assets in certain 
circumstances unless equity participation in the entity by 
benefit plan inventors is not significant.\555\ In general, 
such equity participation is significant if, immediately after 
the most recent acquisition of any equity interest in the 
entity, 25 percent or more of the value of any class of equity 
interest in the entity (disregarding certain interests) is held 
by benefit plan investors, defined as (1) employer-sponsored 
plans (including those exempt from ERISA, such as governmental 
plans), (2) other arrangements, such as IRAs, that are subject 
only to the prohibited transaction rules of the Code, and (3) 
any entity whose assets are plan assets by reason of a plan's 
investment in the entity.\556\ In that case, unless an 
exception applies, plan assets include the plan's equity 
interest in the entity and an undivided interest in each of the 
underlying assets of the entity.
---------------------------------------------------------------------------
    \555\ 29 C.F.R. sec. 2510.3-101(a) (2005). As a result, a person 
who exercises authority or control respecting management or disposition 
of the assets of the entity or renders investment advice with respect 
to the assets for a fee (direct or indirect) is a plan fiduciary.
    \556\ 29 C.F.R. sec. 2510.3-101(f) (2005).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, the term ``plan assets'' means plan 
assets as defined under regulations prescribed by the Secretary 
of Labor. Under the regulations, the assets of any entity are 
not to be treated as plan assets if, immediately after the most 
recent acquisition of any equity interest in the entity, less 
than 25 percent of the total value of each class of equity 
interest in the entity (disregarding certain interests) is held 
by benefit plan investors. For this purpose, an entity is 
considered to hold plan assets only to the extent of the 
percentage of the equity interest held by benefit plan 
investors, which means an employee benefit plan subject to the 
fiduciary rules of ERISA, any plan to which the prohibited 
transaction rules of the Code applies, and any entity whose 
underlying assets include plan assets by reason of a plan's 
investment in such entity.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

7. Exemption for cross trading

                              Present Law

    Present law provides statutory exemptions from the 
prohibited transaction rules for certain transactions.\557\ 
Present law does not provide a statutory prohibited transaction 
exemption for cross trades.
---------------------------------------------------------------------------
    \557\ In addition, under ERISA section 408(a), the Secretary of 
Labor may grant exemptions with respect to particular transactions or 
classes of transactions after consultation and coordination with the 
Secretary of Treasury. An exemption may not be granted unless the 
Secretary of Labor finds that the exemption is administratively 
feasible, in the interests of the plan and its participants and 
beneficiaries, and protective of the rights of plan participants and 
beneficiaries.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides prohibited transaction exemptions 
under ERISA and the Code for a transaction involving the 
purchase and sale of a security between a plan and any other 
account managed by the same investment manager if certain 
requirements are met. These requirements are--
           the transaction is a purchase or sale, for 
        no consideration other than cash payment against prompt 
        delivery of a security for which market quotations are 
        readily available;
           the transaction is effected at the 
        independent current market price of the security;
           no brokerage commission, fee (except for 
        customary transfer fees, the fact of which is 
        disclosed) or other remuneration is paid in connection 
        with the transaction;
           a fiduciary (other than the investment 
        manager engaging in the cross trades or any affiliate) 
        for each plan participating in the transaction 
        authorizes in advance of any cross-trades (in a 
        document that is separate from any other written 
        agreement of the parties) the investment manager to 
        engage in cross trades at the investment manager's 
        discretion, after the fiduciary has received disclosure 
        regarding the conditions under which cross trades may 
        take place (but only if the disclosure is separate from 
        any other agreement or disclosure involving the asset 
        management relationship), including the written 
        policies and procedures of the investment manager;
           each plan participating in the transaction 
        has assets of at least $100,000,000, except that, if 
        the assets of a plan are invested in a master trust 
        containing the assets of plans maintained by employers 
        in the same controlled group, the master trust has 
        assets of at least $100,000,000;
           the investment manager provides to the plan 
        fiduciary who has authorized cross trading a quarterly 
        report detailing all cross trades executed by the 
        investment manager in which the plan participated 
        during such quarter, including the following 
        information as applicable: the identity of each 
        security bought or sold, the number of shares or units 
        traded, the parties involved in the cross trade, and 
        the trade price and the method used to establish the 
        trade price;
           the investment manager does not base its fee 
        schedule on the plan's consent to cross trading and no 
        other service (other than the investment opportunities 
        and cost savings available through a cross trade) is 
        conditioned on the plan's consent to cross trading;
           the investment manager has adopted, and 
        cross trades are effected in accordance with, written 
        cross-trading policies and procedures that are fair and 
        equitable to all accounts participating in the cross-
        trading program and that include a description of the 
        manager's pricing policies and procedures, and the 
        manager's policies and procedures for allocating cross 
        trades in an objective manner among accounts 
        participating in the cross-trading program; and
           the investment manager has designated an 
        individual responsible for periodically reviewing 
        purchases and sales to ensure compliance with the 
        written policies and procedures and, following such 
        review, the individual must issue an annual written 
        report no later than 90 days following the period to 
        which it relates, signed under penalty of perjury, to 
        the plan fiduciary who authorized the cross trading, 
        describing the steps performed during the course of the 
        review, the level of compliance, and any specific 
        instances of noncompliance.
    The written report must also notify the plan fiduciary of 
the plan's right to terminate participation in the investment 
manager's cross-trading program at any time.
    No later than 180 days after the date of enactment, the 
Secretary of Labor, after consultation with the Securities and 
Exchange Commission, is directed to issue regulations regarding 
the content of policies and procedures required to be adopted 
by an investment manager under the requirements for the 
exemption.

                             Effective Date

    The provision is effective with respect to transactions 
occurring after the date of enactment (August 17, 2006).

C. Correction Period for Certain Transactions Involving Securities and 
 Commodities (sec. 612 of the Act, sec. 408 of ERISA, and sec. 4975 of 
                               the Code)


                              Present Law

    ERISA and the Code prohibit certain transactions between an 
employer-sponsored retirement plan and a disqualified person 
(referred to as a ``party in interest'' under ERISA).\558\ 
Disqualified persons include a fiduciary of the plan, a person 
providing services to the plan, and an employer with employees 
covered by the plan. For this purpose, a fiduciary includes any 
person who (1) exercises any authority or control respecting 
management or disposition of the plan's assets, (2) renders 
investment advice for a fee or other compensation with respect 
to any plan moneys or property, or has the authority or 
responsibility to do so, or (3) has any discretionary authority 
or responsibility in the administration of the plan.
---------------------------------------------------------------------------
    \558\ Under ERISA, the prohibited transaction rules apply to 
employer-sponsored retirement plans and welfare benefit plans. Under 
the Code, the prohibited transaction rules apply to qualified 
retirement plans and qualified retirement annuities, as well as 
individual retirement accounts and annuities, Archer MSAs, health 
savings accounts, and Coverdell education savings accounts. The 
prohibited transaction rules under ERISA and the Code generally do not 
apply to governmental plans or church plans.
---------------------------------------------------------------------------
    Prohibited transactions include (1) the sale, exchange or 
leasing of property, (2) the lending of money or other 
extension of credit, (3) the furnishing of goods, services or 
facilities, (4) the transfer to, or use by or for the benefit 
of, the income or assets of the plan, (5) in the case of a 
fiduciary, any act that deals with the plan's income or assets 
for the fiduciary's own interest or account, and (6) the 
receipt by a fiduciary of any consideration for the fiduciary's 
own personal account from any party dealing with the plan in 
connection with a transaction involving the income or assets of 
the plan. However, certain transactions are exempt from 
prohibited transaction treatment, for example, certain loans to 
plan participants.
    Under the Code, if a prohibited transaction occurs, the 
disqualified person who participates in the transaction is 
subject to a two-tier excise tax. The first level tax is 15 
percent of the amount involved in the transaction. The second 
level tax is imposed if the prohibited transaction is not 
corrected within a certain period and is 100 percent of the 
amount involved. Under ERISA, the Secretary of Labor may assess 
a civil penalty against a person who engages in a prohibited 
transaction, other than a transaction with a plan covered by 
the prohibited transaction rules of the Code (i.e., involving a 
qualified retirement plan or annuity). The penalty may not 
exceed five percent of the amount involved in the transaction. 
If the prohibited transaction is not corrected within 90 days 
after notice from the Secretary of Labor, the penalty may be up 
to 100 percent of the amount involved in the transaction.\559\ 
For purposes of these rules, the ``amount involved'' generally 
means the greater of (1) the amount of money and the fair 
market value of the other property given, or (2) the amount of 
money and the fair market value of other property received by 
the plan. The terms ``correction'' and ``correct'' mean, with 
respect to a prohibited transaction, undoing the transaction to 
the extent possible, but in any case placing the plan in a 
financial position not worse than the position in which it 
would be if the disqualified person were acting under the 
highest fiduciary standards.
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    \559\ A prohibited transaction violates the fiduciary 
responsibility provisions of ERISA. Under section 502(l) of ERISA, in 
the case of a violation of fiduciary responsibility, a civil penalty is 
generally imposed of 20 percent of the amount recovered from a person 
with respect to the violation in a settlement agreement with the 
Department of Labor or a judicial proceeding, but the penalty is 
reduced by the amount of any excise tax or other civil penalty with 
respect to a prohibited transaction.
---------------------------------------------------------------------------
    For purposes of the prohibited transaction rules of the 
Code and ERISA, a transaction involving the sale of securities 
is considered to occur when the transaction is settled (that 
is, an actual change in ownership of the securities). Under 
current practice, securities transactions are commonly settled 
3 days after the agreement to sell is made. Present law does 
not provide a statutory prohibited transaction exemption that 
is based solely on correction of the transaction.

                        Explanation of Provision

    The Act provides a prohibited transaction exemption under 
ERISA and the Code for a transaction in connection with the 
acquisition, holding, or disposition of any security or 
commodity if the transaction is corrected within a certain 
period, generally within 14 days of the date the disqualified 
person (or other person knowingly participating in the 
transaction) discovers, or reasonably should have discovered, 
the transaction was a prohibited transaction. For this purpose, 
the term ``correct'' means, with respect to a transaction: (1) 
to undo the transaction to the extent possible and in any case 
to make good to the plan or affected account any losses 
resulting from the transaction; and (2) to restore to the plan 
or affected account any profits made through the use of assets 
of the plan. If the exemption applies, no excise tax is to be 
assessed with respect to the transaction, any tax assessed is 
to be abated, and any tax collected is to be credited or 
refunded as a tax overpayment.
    The exemption does not apply to any transaction between a 
plan and a plan sponsor or its affiliates that involves the 
acquisition or sale of an employer security or the acquisition, 
sale, or lease of employer real property. In addition, in the 
case of a disqualified person (or other person knowingly 
participating in the transaction), the exemption does not apply 
if, at the time of the transaction, the person knew (or 
reasonably should have known) that the transaction would 
constitute a prohibited transaction.

                             Effective Date

    The provision is effective with respect to any transaction 
that a fiduciary or other person discovers, or reasonably 
should have discovered, after the date of enactment (August 17, 
2006) constitutes a prohibited transaction.

D. Inapplicability of Relief from Fiduciary Liability During Suspension 
 of Ability of Participant or Beneficiary to Direct Investments (sec. 
                621 of the Act and sec. 404(c) of ERISA)


                              Present Law


Fiduciary rules under ERISA

    ERISA contains general fiduciary duty standards that apply 
to all fiduciary actions, including investment decisions. ERISA 
requires that a plan fiduciary generally must discharge its 
duties solely in the interests of participants and 
beneficiaries and with the care, skill, prudence, and diligence 
under the circumstances then prevailing that a prudent man 
acting in a like capacity and familiar with such matters would 
use in the conduct of an enterprise of a like character and 
with like aims. With respect to plan assets, ERISA requires a 
fiduciary to diversify the investments of the plan so as to 
minimize the risk of large losses, unless under the 
circumstances it is clearly prudent not to do so.
    A plan fiduciary that breaches any of the fiduciary 
responsibilities, obligations, or duties imposed by ERISA is 
personally liable to make good to the plan any losses to the 
plan resulting from such breach and to restore to the plan any 
profits the fiduciary has made through the use of plan assets. 
A plan fiduciary may be liable also for a breach of 
responsibility by another fiduciary (a ``co-fiduciary'') in 
certain circumstances.

Special rule for participant control of assets

    ERISA provides a special rule in the case of a defined 
contribution plan that permits participants to exercise control 
over the assets in their individual accounts. Under the special 
rule, if a participant exercises control over the assets in his 
or her account (as determined under regulations), the 
participant is not deemed to be a fiduciary by reason of such 
exercise and no person who is otherwise a fiduciary is liable 
for any loss, or by reason of any breach, that results from the 
participant's exercise of control.
    Regulations issued by the Department of Labor describe the 
requirements that must be met in order for a participant to be 
treated as exercising control over the assets in his or her 
account. With respect to investment options, the regulations 
provide in part:
           the plan must provide at least three 
        different investment options, each of which is 
        diversified and has materially different risk and 
        return characteristics;
           the plan must allow participants to give 
        investment instructions with respect to each investment 
        option under the plan with a frequency that is 
        appropriate in light of the reasonably expected market 
        volatility of the investment option (the general 
        volatility rule);
           at a minimum, participants must be allowed 
        to give investment instructions at least every three 
        months with respect to least three of the investment 
        options, and those investment options must constitute a 
        broad range of options (the three-month minimum rule);
           participants must be provided with detailed 
        information about the investment options, information 
        regarding fees, investment instructions and 
        limitations, and copies of financial data and 
        prospectuses; and
           specific requirements must be satisfied with 
        respect to investments in employer stock to ensure that 
        employees' buying, selling, and voting decisions are 
        confidential and free from employer influence.
    If these and the other requirements under the regulations 
are met, a plan fiduciary may be liable for the investment 
options made available under the plan, but not for the specific 
investment decisions made by participants.

Blackout notice

    Under ERISA, the plan administrator of a defined 
contribution plan generally must provide at least 30 days 
advance notice of a blackout period (a ``blackout notice'') to 
plan participants and beneficiaries to whom the blackout period 
applies.\560\ Failure to provide a blackout notice may result 
in a civil penalty up to $100 per day for each failure with 
respect to a single participant or beneficiary.
---------------------------------------------------------------------------
    \560\ ERISA sec. 101(i).
---------------------------------------------------------------------------
    A blackout period is any period during which any ability of 
participants or beneficiaries under the plan, which is 
otherwise available under the terms of the plan, to direct or 
diversify assets credited to their accounts, or to obtain loans 
or distributions from the plan, is temporarily suspended, 
limited, or restricted if the suspension, limitation, or 
restriction is for any period of more than three consecutive 
business days. However, a blackout period does not include a 
suspension, limitation, or restriction that (1) occurs by 
reason of the application of securities laws, (2) is a change 
to the plan providing for a regularly scheduled suspension, 
limitation, or restriction that is disclosed through a summary 
of material modifications to the plan or materials describing 
specific investment options under the plan, or changes thereto, 
or (3) applies only to one or more individuals, each of whom is 
a participant, alternate payee, or other beneficiary under a 
qualified domestic relations order.
    A blackout notice must be written in a manner calculated to 
be understood by the average plan participant and must include 
(1) the reasons for the blackout period, (2) an identification 
of the investments and other rights affected, (3) the expected 
beginning date and length of the blackout period, and (4) in 
the case of a blackout period affecting investments, a 
statement that the participant or beneficiary should evaluate 
the appropriateness of current investment decisions in light of 
the inability to direct or diversify assets during the blackout 
period, and (5) other matters as required by regulations. If 
the expected beginning date or length of the blackout period 
changes after notice has been provided, the plan administrator 
must provide notice of the change (and specify any material 
change in other matters related to the blackout) to affected 
participants and beneficiaries as soon as reasonably 
practicable.

                        Explanation of Provision

    The Act amends the special rule applicable if a participant 
exercises control over the assets in his or her account with 
respect to a case in which a qualified change in investment 
options offered under the defined contribution plan occurs. In 
such a case, for purposes of the special rule, a participant or 
beneficiary who has exercised control over the assets in his or 
her account before a change in investment options is not 
treated as not exercising control over such assets in 
connection with the change if certain requirements are met.
    For this purpose, a qualified change in investment options 
means a change in the investment options offered to a 
participant or beneficiary under the terms of the plan, under 
which: (1) the participant's account is reallocated among one 
or more remaining or new investment options offered instead of 
one or more investment options that were offered immediately 
before the effective date of the change; and (2) the 
characteristics of the remaining or new investment options, 
including characteristics relating to risk and rate of return, 
are, immediately after the change, reasonably similar to the 
characteristics of the investment options immediately before 
the change.
    The following requirements must be met in order for the 
rule to apply: (1) at least 30 but not more than 60 days before 
the effective date of the change in investment options, the 
plan administrator furnishes written notice of the change to 
participants and beneficiaries, including information comparing 
the existing and new investment options and an explanation 
that, in the absence of affirmative investment instructions 
from the participant or beneficiary to the contrary, the 
account of the participant or beneficiary will be invested in 
new options with characteristics reasonably similar to the 
characteristics of the existing investment options; (2) the 
participant or beneficiary has not provided to the plan 
administrator, in advance of the effective date of the change, 
affirmative investment instructions contrary to the proposed 
reinvestment of the participant's or beneficiary's account; and 
(3) the investment of the participant's or beneficiary's 
account as in effect immediately before the effective date of 
the change was the product of the exercise by such participant 
or beneficiary of control over the assets of the account.
    In addition, the provision amends the special rule 
applicable if a participant or beneficiary exercises control 
over the assets in his or her account so that the provision 
under which no person who is otherwise a fiduciary is liable 
for any loss, or by reason of any breach, that results from the 
participant's or beneficiary's exercise of control does not 
apply in connection with a blackout period \561\ in which the 
participant's or beneficiary's ability to direct the assets in 
his or her account is suspended by a plan sponsor or fiduciary. 
However, if a plan sponsor or fiduciary meets the requirements 
of ERISA in connection with authorizing and implementing a 
blackout period, any person who is otherwise a fiduciary is not 
liable under ERISA for any loss occurring during the blackout 
period.
---------------------------------------------------------------------------
    \561\ For this purpose, blackout period is defined as under the 
present-law provision requiring advance notice of a blackout period.
---------------------------------------------------------------------------
    Not later than one year after the date of enactment, the 
Secretary of Labor is to issue interim final regulations 
providing guidance, including safe harbors, on how plan 
sponsors or other affected fiduciaries can satisfy their 
fiduciary responsibilities during any blackout period.

                             Effective Date

    The provision generally applies to plan years beginning 
after December 31, 2007. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements, the 
provision is effective for plan years beginning after the 
earlier of (1) the later of December 31, 2008, or the date on 
which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment (August 17, 2006)), or (2) December 
31, 2009.

E. Increase in Maximum Bond Amount (sec. 622 of the Act and sec. 412(a) 
                               of ERISA)


                              Present Law

    ERISA generally requires every plan fiduciary and every 
person who handles funds or other property of a plan (a ``plan 
official'') to be bonded. The amount of the bond is fixed 
annually at no less than ten percent of the funds handled, but 
must be at least $1,000 and not more than $500,000 (unless the 
Secretary of Labor prescribes a larger amount after notice and 
an opportunity to be heard). The bond is intended to protect 
plans against loss from acts of fraud or dishonesty by plan 
officials. Qualifying bonds must have as surety a corporate 
surety company that is an acceptable surety on Federal bonds.

                        Explanation of Provision

    The provision raises the maximum bond amount to $1 million 
in the case of a plan that holds employer securities. A plan 
would not be considered to hold employer securities within the 
meaning of this section where the only securities held by the 
plan are part of a broadly diversified fund of assets, such as 
mutual or index funds.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2007.

  F. Increase in Penalties for Coercive Interference with Exercise of 
        ERISA Rights (sec. 623 of the Act and sec. 511 of ERISA)


                              Present Law

    ERISA prohibits any person from using fraud, force or 
violence (or threatening force or violence) to restrain, 
coerce, or intimidate (or attempt to) any plan participant or 
beneficiary in order to interfere with or prevent the exercise 
of their rights under the plan or ERISA. Willful violation of 
this prohibition is a criminal offense subject to a $10,000 
fine or imprisonment of up to one year, or both.

                        Explanation of Provision

    The provision increases the penalties for willful acts of 
coercive interference with participants' rights under a plan or 
ERISA. The amount of the fine is increased to $100,000, and the 
maximum term of imprisonment is increased to 10 years.

                             Effective Date

    The provision is effective for violations occurring on and 
after the date of enactment (August 17, 2006).

G. Treatment of Investment of Assets by Plan Where Participant Fails to 
 Exercise Investment Election (sec. 624 of the Act and sec. 404(c) of 
                                 ERISA)


                              Present Law

    ERISA imposes standards on the conduct of plan fiduciaries, 
including persons who make investment decisions with respect to 
plan assets. Fiduciaries are personally liable for any losses 
to the plan due to a violation of fiduciary standards.
    An individual account plan may permit participants to make 
investment decisions with respect to their accounts. ERISA 
fiduciary liability does not apply to investment decisions made 
by plan participants if participants exercise control over the 
investment of their individual accounts, as determined under 
ERISA regulations. In that case, a plan fiduciary may be 
responsible for the investment alternatives made available, but 
not for the specific investment decisions made by participants.

                        Explanation of Provision

    Under the provision, a participant in an individual account 
plan meeting certain notice requirements is treated as 
exercising control over the assets in the account with respect 
to the amount of contributions and earnings which, in the 
absence of an investment election by the participant, are 
invested by the plan in accordance with regulations prescribed 
by the Secretary of Labor. The regulations are to provide 
guidance on the appropriateness of designating default 
investments that include a mix of asset classes consistent with 
capital preservation or long-term capital appreciation, or a 
blend of both. The Secretary of Labor is directed to issue 
regulations under the provision within six months of the date 
of enactment (August 17, 2006).
    In order for this treatment to apply, each participant must 
receive, within a reasonable period of time before each plan 
year, a notice explaining (1) the participant's right under the 
plan to designate how contributions and earnings will be 
invested and (2) how, in the absence of any investment election 
by the participant, such contributions and earnings will be 
invested. The participant must also have a reasonable period of 
time after receipt of the notice and before the beginning of 
the plan year to make an investment designation. The notice 
must be sufficiently accurate and comprehensive to apprise the 
participant of his or her rights and obligations and written in 
a manner to be understood by the average participant.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2006.

       H. Clarification of Fiduciary Rules (sec. 625 of the Act)


                              Present Law

    ERISA imposes standards on the conduct of plan fiduciaries. 
Fiduciaries are personally liable for any losses to the plan 
due to a violation of fiduciary standards.
    An ERISA interpretive bulletin requires a fiduciary 
choosing an annuity provider for purposes of distributions from 
a plan (whether on separation or retirement of a participant or 
on termination of the plan) to take steps calculated to obtain 
the safest available annuity, based on the annuity provider's 
claims paying ability and creditworthiness, unless under the 
circumstances it would be in the interest of participants to do 
otherwise.\562\
---------------------------------------------------------------------------
    \562\ 29 C.F.R. sec. 2509.95-1 (2005).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision directs the Secretary of Labor to issue final 
regulations within one year of the date of enactment (August 
17, 2006), clarifying that the selection of an annuity contract 
as an optional form of distribution from a defined contribution 
plan is not subject to the safest available annuity requirement 
under the ERISA interpretive bulletin and is subject to all 
otherwise applicable fiduciary standards.
    The regulations to be issued by the Secretary of Labor are 
intended to clarify that the plan sponsor or other applicable 
plan fiduciary is required to act in accordance with the 
prudence standards of ERISA section 404(a). It is not intended 
that there be a single safest available annuity contract since 
the plan fiduciary must select the most prudent option specific 
to its plan and its participants and beneficiaries. 
Furthermore, it is not intended that the regulations restate 
all of the factors contained in the interpretive bulletin.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

 TITLE VII--BENEFIT ACCRUAL STANDARDS (secs. 701-702 of the Act, secs. 
203, 204 and 205 of ERISA, secs. 411 and 417 of the Code, and sec. 4(i) 
                                of ADEA)

                              Present Law

Prohibition on age discrimination
            In general
    A prohibition on age discrimination applies to benefit 
accruals under a defined benefit pension plan.\563\ 
Specifically, an employee's benefit accrual may not cease, and 
the rate of an employee's benefit accrual may not be reduced, 
because of the attainment of any age. However, this prohibition 
is not violated solely because the plan imposes (without regard 
to age) a limit on the amount of benefits that the plan 
provides or a limit on the number of years of service or years 
of participation that are taken into account for purposes of 
determining benefit accrual under the plan. Moreover, for 
purposes of this requirement, the subsidized portion of any 
early retirement benefit may be disregarded in determining 
benefit accruals.
---------------------------------------------------------------------------
    \563\ Code sec. 411(b)(1)(H); ERISA sec. 204(b)(1)(H).
---------------------------------------------------------------------------
    In December 2002, the IRS issued proposed regulations that 
dealt with the application of the age discrimination 
rules.\564\ The proposed regulations included rules for 
applying the age discrimination rules with respect to accrued 
benefits, optional forms ofbenefit, ancillary benefits, and 
other rights and features provided under a plan. Under the 
proposed regulations, for purposes of applying the prohibition 
on age discrimination to defined benefit pension plans, an 
employee's rate of benefit accrual for a year is generally the 
increase in the employee's accrued normal retirement benefit 
(i.e., the benefit payable at normal retirement age) for the 
plan year. In the preamble to the proposed regulations, the IRS 
requested comments on other approaches to determining the rate 
of benefit accrual, such as allowing accrual rates to be 
averaged over multiple years (for example, to accommodate plans 
that provide a higher rate of accrual in earlier years) or, in 
the case of a plan that applies an offset, determining accrual 
rates before application of the offset. As discussed below, in 
June 2004, the IRS announced the withdrawal of the proposed 
regulations.
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    \564\ 67 Fed. Reg. 76123.
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            Cash balance and other hybrid plans
    Certain types of defined benefit pension plans, such as 
cash balance plans and pension equity plans, are referred to as 
``hybrid'' plans because they combine features of a defined 
benefit pension plan and a defined contribution plan.
    Under a cash balance plan, benefits are determined by 
reference to a hypothetical account balance. An employee's 
hypothetical account balance is determined by reference to 
hypothetical annual allocations to the account (``pay 
credits'') (e.g., a certain percentage of the employee's 
compensation for the year) and hypothetical earnings on the 
account (``interest credits''). Cash balance plans are 
generally designed so that, when a participant receives a pay 
credit for a year of service, the participant also receives the 
right to future interest on the pay credit, regardless of 
whether the participant continues employment (referred to as 
``front-loaded'' interest credits). That is, the participant's 
hypothetical account continues to be credited with interest 
after the participant stops working for the employer. As a 
result, if an employee terminates employment and defers 
distribution to a later date, interest credits will continue to 
be credited to that employee's hypothetical account.
    Another type of hybrid plan is a pension equity plan 
(sometimes referred to as a ``PEP''). Under a pension equity 
plan, benefits are generally described as a percentage of final 
average pay, with the percentage determined on the basis of 
points received for each year of service, which are often 
weighted for older or longer service employees. Pension equity 
plans commonly provide interest credits for the period between 
a participant's termination of employment and commencement of 
benefits.
    Because of the front-loaded nature of accruals under cash 
balance plans, there is a longer time for interest credits to 
accrue on a pay credit to the account of a younger employee. 
Thus, a pay credit received at a younger age may provide a 
larger annuity benefit at normal retirement age than the same 
pay credit received at an older age. A similar effect may occur 
with respect to other types of hybrid plan designs, including 
pension equity plans.
    IRS consideration of cash balance plans began in the early 
1990s.\565\ At that time, the focus was on the question of 
whether such plans satisfied the nondiscrimination requirements 
under section 401(a)(4), which requires that benefits or 
contributions not discriminate in favor of highly compensated 
employees. Treasury regulations issued in 1991 under section 
401(a)(4) provided a safe harbor for cash balance plans that 
provide frontloaded interest credits and meet certain other 
requirements. In connection with the issuance of these 
regulations, Treasury spoke to the cash balance age 
discrimination issue. The preamble to the final regulations 
stated ``[t]he fact that interest adjustments through normal 
retirement age are accrued in the year of the related 
hypothetical allocation will not cause a cash balance plan to 
fail to satisfy the requirements of section 411(b)(1)(H), 
relating to age-based reductions in the rate at which benefits 
accrue under a plan.'' \566\ Many interpreted this language as 
Treasury's position that cash balance plan designs do not 
violate the prohibitions on age discrimination. The IRS has not 
to date asserted that hybrid plan formulas result in per se 
violations of age discrimination requirements. In 1999, 
Treasury and the IRS issued an announcement and a Federal 
Register notice stating that the question of whether cash 
balance conversions were age discriminatory or otherwise 
inconsistent with plan qualification rules was under active 
consideration, that further IRS determination letters on 
conversions to cash balance plans would therefore be suspended 
and requests referred to the IRS National Office until the IRS 
and Treasury had resolved the issues, and inviting public 
comment on the issues. Hundreds of comments were submitted. The 
December 2002 proposed regulations, noted above, provided that 
an employee's rate of benefit accrual for a year is generally 
the increase in the employee's accrued normal retirement 
benefit (i.e., the benefit payable at normal retirement age) 
for the plan year. However, the proposed regulations provided a 
special rule under which an employee's rate of benefit accrual 
under a cash balance plan meeting certain requirements (an 
``eligible'' cash balance plan) was based on the rate of pay 
credit provided under the plan. Thus, under the proposed 
regulations, an eligible cash balance plan would not violate 
the prohibition on age discrimination solely because pay 
credits for younger employees earn interest credits for a 
longer period.
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    \565\ Statement of Stuart L. Brown, Chief Counsel Internal Revenue 
Service, before the Senate Committee on Health, Education, Labor, and 
Pensions (Sept. 21, 1999).
    \566\ 56 Fed. Reg. 47528 (Sept. 19, 1991).
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    Section 205 of the Consolidated Appropriations Act, 2004 
(the ``2004 Appropriations Act''), enacted January 24, 2004, 
provides that none of the funds made available in the 2004 
Appropriations Act may be used by the Secretary of the 
Treasury, or his designee, to issue any rule or regulation 
implementing the 2002 proposed Treasury age discrimination 
regulations or any regulation reaching similar results.\567\ 
The 2004 Appropriations Act also required the Secretary of the 
Treasury within 180 days of enactment to present to Congress a 
legislative proposal for providing transition relief for older 
and longer-service participants affected by conversions of 
their employers' traditional pension plans to cash balance 
plans. The Treasury Department complied with this requirement 
by including in the President's budget for fiscal year 2005 a 
proposal relating to cash balance and other hybrid plans that 
specifically addresses conversions to such plans, the 
application of the age discrimination rules to such plans, and 
the determination of minimum lump sums under such plans.\568\ 
In June 2004, the IRS announced the withdrawal of the proposed 
age discrimination regulations, including the special rules for 
eligible cash balance plans.\569\ According to the 
Announcement, ``[t]his will provide Congress an opportunity to 
. . . address cash balance and other hybrid plan issues through 
legislation.''
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    \567\ Pub. L. No. 108-199 (2004).
    \568\ A similar proposal was also contained in the President's 
budget proposal for fiscal year 2006.
    \569\ IRS Announcement 2004-57, 2004-27 I.R.B. 15.
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    The application of the age discrimination rules to hybrid 
plans has been the subject of litigation. The decisions are 
divided on how ERISA requires courts to calculate the rate of 
benefit accrual.\570\
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    \570\ Compare Register v. PNC Financial Services Group, Inc. No. 
04-CV-6097, 2005 WL 3120268 (E.D. Pa. Nov. 21, 2005), Tootle v. ARINC, 
Inc., 222 F.R.D. 88 (D. Md. 2004); Eaton v. Oanan Corp., 117 F. Supp. 
2d 812 (S.D. Ind. 2000); with Cooper v. IBM Personal Pension Plan, 274 
F. Supp. 2d 1010 (S.D. Ill. 2003), Richards v. Fleetboston Financial 
Corp., 427 F. Supp. 2d 150 (D. Conn. 2006), Donaldson v. Pharmacia 
Pension Plan, 2006 WL 1669789, 38 E.B.C. 1006 (S.D. Ill. June 14, 
2006). See also Campbell v. BankBoston, 327 F.3d 1 (1st Cir. 2003) and 
Hirt v. Equitable Retirement Plan for Employees, Managers and Agents 
No. 01 Civ. 7920 (AKH), 2006 WL 2023545 (S.D.N.Y. July 20, 2006).
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Calculating minimum lump-sum distributions under hybrid plans
    Defined benefit pension plans, including cash balance plans 
and other hybrid plans, are required to provide benefits in the 
form of a life annuity commencing at a participant's normal 
retirement age. If the plan permits benefits to be paid in 
certain other forms, such as a lump sum, minimum present value 
rules apply, under which the alternative form of benefit cannot 
be less than the present value of the life annuity payable at 
normal retirement age, determined using certain statutorily 
prescribed interest and mortality assumptions.\571\
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    \571\ Code sec. 417(e); ERISA sec. 205(g)(3). For years before 
1995, these provisions required the use of an interest rate based on 
interest rates determined by the PBGC. For years after 1994, these 
provisions require the use of an interest rate based on interest rates 
on 30-year Treasury securities and a mortality table specified by the 
IRS.
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    Most cash balance plans are designed to permit a lump-sum 
distribution of a participant's hypothetical account balance 
upon termination of employment. This raises an issue as to the 
whether a distribution of a participant's hypothetical account 
balance satisfies the minimum present value rules. In 1996, the 
IRS issued proposed guidance (Notice 96-8) on the application 
of the minimum present value rules to lump-sum distributions 
under cash balance plans and requested public comments in 
anticipation of proposed regulations incorporating the proposed 
guidance.\572\
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    \572\ Notice 96-8, 1996-1996-1 C.B. 359. The Notice provides that 
regulations will be effective prospectively and, for plan years before 
regulations are effective, allows lump-sum distributions from cash 
balance plans that provide front-loaded interest credits to be based on 
a reasonable, good-faith interpretation of the minimum present value 
rules, taking into account preexisting guidance. The Notice further 
provides that plans that comply with the guidance in the Notice are 
deemed to be applying a reasonable, good-faith interpretation.
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    Under the proposed guidance, a lump-sum distribution from a 
cash balance plan cannot be less than the present value of the 
benefit payable at normal retirement age, determined using the 
statutory interest and mortality assumptions. For this purpose, 
a participant's normal retirement benefit under a cash balance 
plan is generally determined by projecting the participant's 
hypothetical account balance to normal retirement age by 
crediting to the account future interest credits at the plan 
rate, the right to which has already accrued, and converting 
the projected account balance to an actuarially equivalent life 
annuity payable at normal retirement age, using the interest 
and mortality assumptions specified in the plan. The proposed 
guidance also included rules under which cash balance plans can 
provide lump-sum distributions in the amount of participants' 
hypothetical account balances if the rate at which interest 
credits are provided under the plan is not greater (or is 
assumed not to be greater) than the statutory interest rate.
    Under the approach in the proposed guidance, a difference 
in the rate of interest credits provided under the plan, which 
is used to project the account balance forward to normal 
retirement age, and the statutory rate used to determine the 
lump-sum value (i.e., present value) of the accrued benefit can 
cause a discrepancy between the value of the minimum lump-sum 
and the employee's hypothetical account balance. This effect is 
sometimes referred to as ``whipsaw.'' In particular, if the 
plan's interest crediting rate is higher than the statutory 
interest rate, then the resulting lump-sum amount will 
generally be greater than the hypothetical account balance.
    Several courts, but not all, have applied an approach 
similar to the approach in the proposed guidance in cases 
involving the determination of lump sums under cash balance 
plans.\573\ Regulations addressing the application of the 
minimum present value rules to cash balance plans have not been 
issued.\574\
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    \573\ Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 
F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d 
Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia 
Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 
2000) (``Lyons II''), cert. denied, 532 U.S. 967 (2001); and West v. AK 
Steel Corp. Retirement Accumulation Plan, 318 F. Supp.2d 579 (S.D. Ohio 
2004). In Lyons II, the court reversed a lower court holding in Lyons 
v. Georgia Pacific Salaried Employees Retirement Plan, 66 F. Supp. 2d 
1328 (N.D. Ga. 1999) (``Lyons I''), relating to the application of the 
minimum present value rules in effect before 1995. The Lyons II court 
limited its analysis to the minimum present value rules in effect as of 
1993 when Mr. Lyons received his lump-sum distribution; however, the 
court indicated that a different result could apply under the law in 
effect after 1994. On remand, in Lyons v. Georgia Pacific Salaried 
Employees Retirement Plan, 196 F. Supp. 2d 1260 (N.D. Ga. 2002) 
(``Lyons III''), the lower court determined that payment of the 
hypothetical account balance did not violate the minimum present value 
rules in effect for years after 1994.
    \574\ As mentioned above, the President's budgets for fiscal years 
2005 and 2006 include a proposal relating to cash balance plans that 
specifically addresses the determination of minimum lump sums under 
such plans. The President's proposal would eliminate the whipsaw effect 
and allow the plan to pay the hypothetical account balance, if certain 
requirements are satisfied.
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                        Explanation of Provision


Age discrimination rules in general

    Under the provision, a plan is not treated as violating the 
prohibition on age discrimination under ERISA, the Code, and 
ADEA if a participant's accrued benefit,\575\ as determined as 
of any date under the terms of the plan would be equal to or 
greater than that of any similarly situated, younger individual 
who is or could be a participant. For this purpose, an 
individual is similarly situated to a participant if the 
individual and the participant are (and always have been) 
identical in every respect (including period of service, 
compensation, position, date of hire, work history, and any 
other respect) except for age. Under the provision, the 
comparison of benefits for older and younger participants 
applies to all possible participants under all possible dates 
under the plan, in the same manner as the present-law 
application of the backloading and accrual rules.
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    \575\ For purposes of this rule, the accrued benefit means such 
benefit accrued to date.
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    In addition, in determining a participant's accrued benefit 
for this purpose, the subsidized portion of any early 
retirement benefit or any retirement type subsidy is 
disregarded. In some cases the value of an early retirement 
subsidy may be difficult to determine; it is therefore intended 
that a reasonable approximation of such value may be used for 
this purpose. In calculating the accrued benefit, the benefit 
may, under the terms of the plan, be calculated as an annuity 
payable at normal retirement age, the balance of a hypothetical 
account, or the current value of the accumulated percentage of 
the employee's final average compensation. That is, the age 
discrimination rules may be applied on the basis of the balance 
of a hypothetical account or the current value of the 
accumulated percentage of the employee's final average 
compensation, but only if the plan terms provide the accrued 
benefit in such form. The provision is intended to apply to 
hybrid plans, including pension equity plans.
    The provision makes it clear that a plan is not treated as 
age discriminatory solely because the plan provides offsets of 
benefits under the plan to the extent such offsets are 
allowable in applying the requirements under section 401(a) of 
the Code. It is intended that such offsets also comply with 
ERISA and the ADEA.
    A plan is not treated as failing to meet the age 
discrimination requirements solely because the plan provides a 
disparity in contributions and benefits with respect to which 
the requirements of section 401(l) of the Code are met.
    A plan is not treated as failing to meet the age 
discrimination requirements solely because the plan provides 
for indexing of accrued benefits under the plan. Except in the 
case of any benefit provided in the form of a variable annuity, 
this rule does not apply with respect to any indexing which 
results in an accrued benefit less than the accrued benefit 
determined without regard to such indexing. Indexing for this 
purpose means, with respect to an accrued benefit, the periodic 
adjustment of the accrued benefit by means of the application 
of a recognized investment index or methodology. Under the 
provision, in no event may indexing be reduced or cease because 
of age.

Rules for applicable defined benefit plans

            In general
    Under the provision, an applicable defined benefit plan 
fails to satisfy the age discrimination rules unless the plan 
meets certain requirements with respect to interest credits 
and, in the case of a conversion, certain additional 
requirements. Applicable defined benefit plans must also 
satisfy certain vesting requirements.
            Interest requirement
    A plan satisfies the interest requirement if the terms of 
the plan provide that any interest credit (or equivalent 
amount) for any plan year is at a rate that is not less than 
zero and is not greater than a market rate of return. A plan 
does not fail to meet the interest requirement merely because 
the plan provides for a reasonable minimum guaranteed rate of 
return or for a rate or return that is equal to the greater of 
a fixed or variable rate of return. An interest credit (or an 
equivalent amount) of less than zero cannot result in the 
account balance or similar amount being less than the aggregate 
amount of contributions credited to the account. The Secretary 
of the Treasury may provide rules governing the calculation of 
a market rate of return and for permissible methods of 
crediting interest to the account (including fixed or variable 
interest rates) resulting in effective rates of return that 
meet the requirements of the provision.
    If the interest credit rate (or equivalent amount) is a 
variable rate, the plan must provide that, upon termination of 
the plan, the rate of interest used to determine accrued 
benefits under the plan is equal to the average of the rates of 
interest used under the plan during the five-year period ending 
on the termination date.
            Conversion rules
    Under the provision, special rules apply if an amendment to 
a defined benefit plan is adopted which would have the effect 
of converting the plan into an applicable defined benefit plan 
(an ``applicable plan amendment'').\576\ If an applicable plan 
amendment is adopted after June 29, 2005, the plan fails to 
satisfy the age discrimination rules unless the plan provides 
that the accrued benefit of any individual who was a 
participant immediately before the adoption of the amendment is 
not less than the sum of (1) the participant's accrued benefit 
for years of service before the effective date of the 
amendment, determined under the terms of the plan as in effect 
before the amendment; plus (2) the participant's accrued 
benefit for years of service after the effective date of the 
amendment, determined under the terms of the plan as in effect 
after the terms of the amendment.
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    \576\ If the benefits under two or more defined benefit plans 
established by an employer are coordinated in such a manner as to have 
the effect of the adoption of an applicable plan amendment, the sponsor 
of the defined benefit plan or plans providing for the coordination is 
treated as having adopted an applicable plan amendment as of the date 
the coordination begins. In addition, the Secretary of Treasury is 
directed to issue regulations to prevent the avoidance of the 
requirements with respect to an applicable plan amendment through the 
use of two or more plan amendments rather than a single amendment.
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    For purposes of determining the amount in (1) above, the 
plan must credit the accumulation account or similar amount 
with the amount of any early retirement benefit or retirement-
type subsidy for the plan year in which the participant retires 
if, as of such time, the participant has met the age, years of 
service, and other requirements under the plan for entitlement 
to such benefit or subsidy.
            Vesting rules
    The provision amends the ERISA and Code rules relating to 
vesting to provide that an applicable defined benefit plan must 
provide that each employee who has completed at least three 
years of serves has a nonforfeitable right to 100 percent of 
the employee's accrued benefit derived from employer 
contributions.
            Minimum present value rules
    The provision provides that an applicable defined benefit 
plan is not treated as failing to meet the minimum present 
value rules \577\ solely because of the present value of the 
accrued benefit (or any portion thereof) of any participant is, 
under the terms of the plan, equal to the amount expressed as 
the balance in the hypothetical account or as an accumulated 
percentage of the participant's final average compensation.
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    \577\ ERISA sec. 205(g), Code sec. 417(e). A plan complying with 
the provision also does not violate certain rules relating to vesting 
(ERISA sec. 203(a)(2) and Code sec. 411(a)(2)) and the determination of 
the accrued benefit (in the case of a plan which does not provide for 
employee contributions) (ERISA sec. 204(c) and Code sec. 411(c)).
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            Rules on plan termination
    The provision provides rules for making determinations of 
benefits upon termination of an applicable defined benefit 
plan. Such a plan must provide that, upon plan termination, (1) 
if the interest credit rate (or equivalent amount) under the 
plan is a variable rate, the rate of interest used to determine 
accrued benefits under the plan shall be equal to the average 
of the rates of interest used under the plan during the five-
year period ending on the termination date and (2) the interest 
rate and mortality table used to determine the amount of any 
benefit under the plan payable in the form of an annuity 
payable at normal retirement age is the rate and table 
specified under the plan for such purposes as of the 
termination date. For purposes of (2), if the rate of interest 
is a variable rate, then the rate is the average of such rates 
during the five-year period ending on the termination date.
            Definition of applicable defined benefit plan
    An applicable defined benefit plan is a defined benefit 
plan under which the accrued benefit (or any portion thereof) 
is calculated as the balance of a hypothetical account 
maintained for the participant or as an accumulated percentage 
of the participant's final average compensation. The Secretary 
of the Treasury is to provide rules which include in the 
definition of an applicable defined benefit plan any defined 
benefit plan (or portion of such a plan) which has an effect 
similar to an applicable defined benefit plan.

No inference

    Nothing in the provision is to be construed to infer the 
treatment of applicable defined benefit plans or conversions to 
such plans under the rules in ERISA, ADEA and the Code 
prohibiting age discrimination \578\ as in effect before the 
provision is effective. In addition, no inference is to be 
drawn with respect to the application of the minimum benefit 
rules to applicable defined benefit plans before the provision 
is effective.
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    \578\ ERISA sec. 204(b)(1)(H), ADEA sec. 4(i)(1), and Code sec. 
411(b)(1)(H).
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Regulations relating to mergers and acquisitions

    The Secretary of the Treasury is directed to prescribe 
regulations for the application of the provisions relating to 
applicable defined benefit plans in cases where the conversion 
of a plan to a cash balance or similar plan is made with 
respect to a group of employees who become employees by reason 
of a merger, acquisition, or similar treatment. The regulations 
are to be issued not later than 12 months after the date of 
enactment (August 17, 2006).

                             Effective Date

    In general, the provision is effective for periods 
beginning on or after June 29, 2005.
    The provision relating to the minimum value rules is 
effective for distributions after the date of enactment (August 
17, 2006).
    In the case of a plan in existence on June 29, 2005, the 
interest credit and vesting requirements for an applicable 
defined benefit plan generally apply to years beginning after 
December 31, 2007, except that the plan sponsor may elect to 
have such requirements apply for any period after June 29, 
2005, and before the first plan year beginning after December 
31, 2007. In the case of a plan maintained pursuant to one or 
more collective bargaining agreements, a delayed effective date 
applies with respect to the interest credit and vesting 
requirements for an applicable defined benefit plan.
    The provision relating to conversions of plans applies to 
plan amendments adopted after and taking effect after June 29, 
2005, except that a plan sponsor may elect to have such 
amendments apply to plan amendments adopted before and taking 
affect after such date.
    The direction to the Secretary of the Treasury to issue 
regulations relating to mergers and acquisitions is effective 
on the date of enactment (August 17, 2006).

             TITLE VIII--PENSION RELATED REVENUE PROVISIONS

                        A. Deduction Limitations

1. Increase in deduction limits applicable to single-employer and 
        multiemployer defined benefit pension plans (secs. 801 and 802 
        of the Act and sec. 404 of the Code)

                              Present Law

In general
    Employer contributions to qualified retirement plans are 
deductible subject to certain limits.
    In the case of contributions to a defined benefit pension 
plan (including both single-employer and multiemployer plans), 
the employer generally may deduct the greater of: (1) the 
amount necessary to satisfy the minimum funding requirement of 
the plan for the year; or (2) the amount of the plan's normal 
cost for the year plus the amount necessary to amortize certain 
unfunded liabilities over 10 years, but limited to the full 
funding limitation for the year.\579\ The maximum amount 
otherwise deductible generally is not less than the plan's 
unfunded current liability.\580\ In the case of a single-
employer plan covered by the PBGC insurance program that 
terminates during the year, the maximum deductible amount is 
generally not less than the amount needed to make the plan 
assets sufficient to fund benefit liabilities as defined for 
purposes of plan termination under the PBGC insurance program 
(``unfunded termination liability''). In applying these limits, 
future increases in the limits on compensation taken into 
account under a qualified retirement plan and on benefits 
payable under a defined benefit pension plan may not be taken 
into account.
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    \579\ The full funding limitation is the excess, if any, of (1) the 
accrued liability of the plan (including normal cost), over (2) the 
lesser of (a) the market value of plan assets or (b) the actuarial 
value of plan assets. However, the full funding limit is not less than 
the excess, if any, of 90 percent of the plan's current liability 
(including the current liability normal cost) over the actuarial value 
of plan assets.
    \580\ In the case of a plan with 100 or fewer participants, 
unfunded current liability for this purpose does not include the 
liability attributable to benefit increases for highly compensated 
employees resulting from a plan amendment that is made or becomes 
effective, whichever is later, within the last two years.
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    In the case of a defined contribution plan, the employer 
generally may deduct contributions in an amount up to 25 
percent of compensation paid or accrued during the employer's 
taxable year.
Overall deduction limit
    If an employer sponsors one or more defined benefit pension 
plans and one or more defined contribution plans that cover at 
least one of the same employees, an overall deduction limit 
applies to the total contributions to all plans for a plan 
year. The overall deduction limit is the greater of (1) 25 
percent of compensation, or (2) the amount necessary to meet 
the minimum funding requirement with respect to the defined 
benefit plan for the year. For this purpose, the amount 
necessary to meet the minimum funding requirement with respect 
to the defined benefit plan is treated as not less than the 
amount of the plan's unfunded current liability.
    Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year.

                        Explanation of Provision

Single-employer defined benefit pension plans
            General deduction limit
    Under the provision, for taxable years beginning in 2006 
and 2007, in the case of contributions to a single-employer 
defined benefit plan, the maximum deductible amount is not less 
than the excess (if any) of (1) 150 percent of the plan's 
current liability, over (2) the value of plan assets.
    For taxable years beginning after 2007, in the case of 
contributions to a single-employer defined benefit pension 
plan, the maximum deductible amount is equal to the greater of: 
(1) the excess (if any) of the sum of the plan's funding 
target, the plan's target normal cost, and a cushion amount for 
a plan year, over the value of plan assets (as determined under 
the minimum funding rules); \581\ and (2) the minimum required 
contribution for the plan year.\582\
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    \581\ In determining the maximum deductible amount, the value of 
plan assets is not reduced by any pre-funding balance or funding 
standard account carryover balance.
    \582\ The Act retains the present-law rule, under which, in the 
case of a single-employer plan covered by the PBGC that terminates 
during the year, the maximum deductible amount is generally not less 
than the amount needed to make the plan assets sufficient to fund 
benefit liabilities as defined for purposes of the PBGC termination 
insurance program.
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    However, in the case of a plan that is not in at-risk 
status, the first amount above is not less than the excess (if 
any) of the sum of the plan's funding target and target normal 
cost, determined as if the plan was in at-risk status, over the 
value of plan assets.
    The cushion amount for a plan year is the sum of (1) 50 
percent of the plan's funding target for the plan year; and (2) 
the amount by which the plan's funding target would increase if 
determined by taking into account increases in participants' 
compensation for future years or, if the plan does not base 
benefits attributable to past service on compensation, 
increases in benefits that are expected to occur in succeeding 
plans year, determined on the basis of average annual benefit 
increases over the previous six years.\583\ For this purpose, 
the dollar limits on benefits and on compensation apply, but, 
in the case of a plan that is covered by the PBGC insurance 
program, increases in the compensation limit (under sec. 
401(a)(17)) that are expected to occur in succeeding plan years 
may be taken into account.\584\ The rules relating to 
projecting compensation for future years are intended solely to 
enable employers to reduce volatility in pension contributions; 
the rules are not intended to create any inference that 
employees have any protected interest with respect to such 
projected increases.
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    \583\ In determining the cushion amount for a plan with 100 or 
fewer participants, a plan's funding target does not include the 
liability attributable to benefit increases for highly compensated 
employees resulting from a plan amendment that is made or becomes 
effective, whichever is later, within the last two years.
    \584\ Expected increases in the limitations on benefits under 
section 415, however, may not be taken into account.
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            Overall deduction limit
    Under the provision, in applying the overall deduction 
limit to contributions to one or more defined benefit pension 
plans and one or more defined contribution plans for years 
beginning after December 31, 2007, single-employer defined 
benefit pension plans that are covered by the PBGC insurance 
program are not taken into account. Thus, the deduction for 
contributions to a defined benefit pension plan or a defined 
contribution plan is not affected by the overall deduction 
limit merely because employees are covered by both plans if the 
defined benefit plan is covered by the PBGC insurance program 
(i.e., the separate deduction limits for contributions to 
defined contribution plans and defined benefit pension plans 
apply). In addition, in applying the overall deduction limit, 
the amount necessary to meet the minimum funding requirement 
with respect to a single-employer defined benefit pension plan 
that is not covered by the PBGC insurance program is treated as 
not less than the plan's funding shortfall (as determined under 
the minimum funding rules).
Multiemployer defined benefit pension plans
            General deduction limit
    Under the provision, for taxable years beginning after 
2005, in the case of contributions to a multiemployer defined 
benefit pension plan, the maximum deductible amount is not less 
than the excess (if any) of (1) 140 percent of the plan's 
current liability, over (2) the value of plan assets.
            Overall deduction limit
    Under the provision, for taxable years beginning after 
December 31, 2005, in applying the overall deduction limit to 
contributions to one or more defined benefit pension plans and 
one or more defined contribution plans, multiemployer plans are 
not taken into account. Thus, the deduction for contributions 
to a defined benefit pension plan or a defined contribution 
plan is not affected by the overall deduction limit merely 
because employees are covered by both plans if either plan is a 
multiemployer plan (i.e., the separate deduction limits for 
contributions to defined contribution plans and defined benefit 
pension plans apply).

                             Effective Date

    The effective dates of the provisions regarding deductions 
are described above under each provision.

2. Updating deduction rules for combination of plans (sec. 803 of the 
        Act and secs. 404(a)(7) and 4972 of the Code)

                              Present Law

    Employer contributions to qualified retirement plans are 
deductible subject to certain limits.\585\ In general, the 
deduction limit depends on the kind of plan.\586\
---------------------------------------------------------------------------
    \585\ Code sec. 404.
    \586\ See the discussion under A.1., above, for a description of 
the deduction rules for defined benefit and defined contribution plans.
---------------------------------------------------------------------------
    If an employer sponsors one or more defined benefit pension 
plans and one or more defined contribution plans that cover at 
least one of the same employees, an overall deduction limit 
applies to the total contributions to all plans for a plan 
year. The overall deduction limit is the greater of (1) 25 
percent of compensation, or (2) the amount necessary to meet 
the minimum funding requirements of the defined benefit plan 
for the year, but not less than the amount of the plan's 
unfunded current liability.
    Under EGTRRA, elective deferrals are not subject to the 
limits on deductions and are not taken into account in applying 
the limits to other employer contributions. The combined 
deduction limit of 25 percent of compensation for defined 
benefit and defined contribution plans does not apply if the 
only amounts contributed to the defined contribution plan are 
elective deferrals.\587\
---------------------------------------------------------------------------
    \587\ Under the general EGTRRA sunset, this rule expires for plan 
years beginning after 2010.
---------------------------------------------------------------------------
    Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year. Certain contributions to a defined 
contribution plan that are nondeductible solely because of the 
overall deduction limit are disregarded in determining the 
amount of nondeductible contributions for purposes of the 
excise tax. Contributions that are disregarded are the greater 
of (1) the amount of contributions not in excess of six percent 
of the compensation of the employees covered by the defined 
contribution plan, or (2) the amount of matching contributions.

                        Explanation of Provision

    Under the provision, the overall limit on employer 
deductions for contributions to combinations of defined benefit 
and defined contribution plans applies to contributions to one 
or more defined contribution plans only to the extent that such 
contributions exceed six percent of compensation otherwise paid 
or accrued during the taxable year to the beneficiaries under 
the plans. As under present law, for purposes of determining 
the excise tax on nondeductible contributions, matching 
contributions to a defined contribution plan that are 
nondeductible solely because of the overall deduction limit are 
disregarded.

                             Effective Date

    The provision is effective for contributions for taxable 
years beginning after December 31, 2005.

              B. Certain Pension Provisions Made Permanent


1. Permanency of EGTRRA pension and IRA provisions (sec. 811 of the Act 
        and Title X of EGTRRA)

                              Present Law


In general

    The Economic Growth and Tax Relief Reconciliation Act of 
2001 (``EGTRRA'') made a number of changes to the Federal tax 
laws, including a variety of provisions relating to pensions 
and individual retirement arrangements (``IRAs''). However, in 
order to comply with reconciliation procedures under the 
Congressional Budget Act of 1974 (e.g., section 313 of the 
Budget Act, under which a point of order may be lodged in the 
Senate), EGTRRA included a ``sunset'' provision, pursuant to 
which the provisions of EGTRRA expire at the end of 2010. 
Specifically, EGTRRA's provisions do not apply for taxable, 
plan, or limitation years beginning after December 31, 2010, or 
to estates of decedents dying after, or gifts or generation-
skipping transfers made after, December 31, 2010. EGTRRA 
provides that, as of the effective date of the sunset, both the 
Internal Revenue Code and the Employee Retirement Income 
Security Act of 1974 (``ERISA'') will be applied as though 
EGTRRA had never been enacted.
    Certain provisions contained in EGTRRA expire before the 
general sunset date of 2010.\588\
---------------------------------------------------------------------------
    \588\ The saver's credit (sec. 25B) expires at the end of 2006. 
Another provision of the Act makes the saver's credit permanent.
---------------------------------------------------------------------------

List of affected provisions

    Following is a list of the provisions affected by the 
general EGTRRA sunset.
            Individual retirement arrangements (``IRAs'')
           Increases in the IRA contribution limits, 
        including the ability to make catch-up contributions 
        (secs. 219, 408, and 408A of the Code and sec. 601 of 
        EGTRRA); and
           Rules relating to deemed IRAs under employer 
        plans (sec. 408(q) of the Code and sec. 602 of EGTRRA).
            Expanding coverage
           Increases in the limits on contributions, 
        benefits, and compensation under qualified retirement 
        plans, tax-sheltered annuities, and eligible deferred 
        compensation plans (secs. 401(a)(17), 402(g), 408(p), 
        414(v), 415, and 457 of the Code and sec. 611 of 
        EGTRRA);
           Application of prohibited transaction rules 
        to plan loans of S corporation owners, partners, and 
        sole proprietors (sec. 4975 of the Code and sec. 612 of 
        EGTRRA);
           Modification of the top-heavy rules (sec. 
        416 of the Code and sec. 613 of EGTRRA);
           Elective deferrals not taken into account 
        for purposes of deduction limits (sec. 404 of the Code 
        and sec. 614 of EGTRRA);
           Repeal of coordination requirements for 
        deferred compensation plans of state and local 
        governments and tax-exempt organizations (sec. 457 of 
        the Code and sec. 615 of EGTRRA);
           Modifications to deduction limits (sec. 404 
        of the Code and sec. 616 of EGTRRA);
           Option to treat elective deferrals as after-
        tax Roth contributions (sec. 402A of the Code and sec. 
        617 of EGTRRA);
           Credit for pension plan start-up costs (sec. 
        45E of the Code and sec. 619 of EGTRRA); and
           Certain nonresident aliens excluded in 
        applying minimum coverage requirements (secs. 410(b)(3) 
        and 861(a)(3) of the Code and sec. 621 of EGTRRA).
            Enhancing fairness
           Catch-up contributions for individuals age 
        50 and older (sec. 414 of the Code and sec. 631 of 
        EGTRRA);
           Equitable treatment for contributions of 
        employees to defined contribution plans (secs. 403(b), 
        415, and 457 of the Code and sec. 632 of EGTRRA);
           Faster vesting of employer matching 
        contributions (sec. 411 of the Code and sec. 633 of 
        EGTRRA);
           Modifications to minimum distribution rules 
        (sec. 401(a)(9) of the Code and sec. 634 of EGTRRA);
           Clarification of tax treatment of division 
        of section 457 plan benefits upon divorce (secs. 414(p) 
        and 457 of the Code and sec. 635 of EGTRRA);
           Provisions relating to hardship withdrawals 
        (secs. 401(k) and 402 of the Code and sec. 636 of 
        EGTRRA); and
           Waiver of tax on nondeductible contributions 
        for domestic and similar workers (sec. 4972(c)(6) of 
        the Code and sec. 637 of EGTRRA).
            Increasing portability
           Rollovers of retirement plan and IRA 
        distributions (secs. 401, 402, 403(b), 408, 457, and 
        3405 of the Code and secs. 641-644 of EGTRRA);
           Treatment of forms of distribution (sec. 
        411(d)(6) of the Code and sec. 645 of EGTRRA);
           Rationalization of restrictions on 
        distributions (secs. 401(k), 403(b), and 457 of the 
        Code and sec. 646 of EGTRRA):
           Purchase of service credit under 
        governmental pension plans (secs. 403(b) and 457 of the 
        Code and sec. 647 of EGTRRA):
           Employers may disregard rollovers for 
        purposes of cash-out rules (sec. 411(a)(11) of the Code 
        and sec. 648 of EGTRRA); and
           Minimum distribution and inclusion 
        requirements for section 457 plans (sec. 457 of the 
        Code and sec. 649 of EGTRRA).
            Strengthening pension security and enforcement
           Phase in repeal of 160 percent of current 
        liability funding limit; maximum deduction rules (secs. 
        404(a)(1), 412(c)(7), and 4972(c) of the Code and secs. 
        651-652 of EGTRRA);
           Excise tax relief for sound pension funding 
        (sec. 4972 of the Code and sec. 653 of EGTRRA);
           Modifications to section 415 limits for 
        multiemployer plans (sec. 415 of the Code and sec. 654 
        of EGTRRA);
           Investment of employee contributions in 
        401(k) plans (sec. 655 of EGTRRA);
           Prohibited allocations of stock in an S 
        corporation ESOP (secs. 409 and 4979A of the Code and 
        sec. 656 of EGTRRA);
           Automatic rollovers of certain mandatory 
        distributions (secs. 401(a)(31) and 402(f)(1) of the 
        Code and sec. 657 of EGTRRA);
           Clarification of treatment of contributions 
        to a multiemployer plan (sec. 446 of the Code and sec. 
        658 of EGTRRA); and
           Treatment of plan amendments reducing future 
        benefit accruals (sec. 4980F of the Code and sec. 659 
        of EGTRRA).
            Reducing regulatory burdens
           Modification of timing of plan valuations 
        (sec. 412 of the Code and sec. 661 of EGTRRA);
           ESOP dividends may be reinvested without 
        loss of dividend deduction (sec. 404 of the Code and 
        sec. 662 of EGTRRA);
           Repeal transition rule relating to certain 
        highly compensated employees (sec. 663 of EGTRRA);
           Treatment of employees of tax-exempt 
        entities for purposes of nondiscrimination rules (secs. 
        410, 401(k), and 401(m) of the Code and sec. 664 of 
        EGTRRA);
           Treatment of employer-provided retirement 
        advice (sec. 132 of the Code and sec. 665 of EGTRRA); 
        and
           Repeal of the multiple use test (sec. 401(m) 
        of the Code and sec. 666 of EGTRRA).

                        Explanation of Provision

    The provision repeals the sunset provision of EGTRRA as 
applied to the provisions relating to pensions and IRAs.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

2. Saver's credit made permanent (sec. 812 of the Act and sec. 25B of 
        the Code)

                              Present Law

    Present law provides a temporary nonrefundable tax credit 
for eligible taxpayers for qualified retirement savings 
contributions. The maximum annual contribution eligible for the 
credit is $2,000. The credit rate depends on the adjusted gross 
income (``AGI'') of the taxpayer. Joint returns with AGI of 
$50,000 or less, head of household returns of $37,500 or less, 
and single returns of $25,000 or less are eligible for the 
credit. The AGI limits applicable to single taxpayers apply to 
married taxpayers filing separate returns. The credit is in 
addition to any deduction or exclusion that would otherwise 
apply with respect to the contribution. The credit offsets 
minimum tax liability as well as regular tax liability. The 
credit is available to individuals who are 18 or older, other 
than individuals who are full-time students or claimed as a 
dependent on another taxpayer's return.
    The credit is available with respect to: (1) elective 
deferrals to a qualified cash or deferred arrangement (a 
``section 401(k) plan''), a tax-sheltered annuity (a ``section 
403(b)'' annuity), an eligible deferred compensation 
arrangement of a State or local government (a ``section 457 
plan''), a SIMPLE, or a simplified employee pension (``SEP''); 
(2) contributions to a traditional or Roth IRA; and (3) 
voluntary after-tax employee contributions to a tax-sheltered 
annuity or qualified retirement plan.
    The amount of any contribution eligible for the credit is 
reduced by distributions received by the taxpayer (or by the 
taxpayer's spouse if the taxpayer filed a joint return with the 
spouse) from any plan or IRA to which eligible contributions 
can be made during the taxable year for which the credit is 
claimed, the two taxable years prior to the year the credit is 
claimed, and during the period after the end of the taxable 
year for which the credit is claimed and prior to the due date 
for filing the taxpayer's return for the year. Distributions 
that are rolled over to another retirement plan do not affect 
the credit.
    The credit rates based on AGI are provided in Table 1, 
below.

                                    Table 1.--Credit Rates for Saver's Credit
----------------------------------------------------------------------------------------------------------------
            Joint filers                Heads of  households       All other filers            Credit rate
----------------------------------------------------------------------------------------------------------------
$0-$30,000..........................  $0-$22,500               $0-$15,000               50 percent.
$30,001-$32,500.....................  $22,501-$24,375          $15,001-$16,250          20 percent.
$32,501-$50,000.....................  $24,376-$37,500          $16,251-$25,000          10 percent.
Over $50,000........................  Over $37,500             Over $25,000             0 percent.
----------------------------------------------------------------------------------------------------------------

    The credit does not apply to taxable years beginning after 
December 31, 2006.

                        Explanation of Provision

                The provision makes the saver's credit 
                permanent.

                             Effective Date

    The extension of the saver's credit is effective on the 
date of enactment (August 17, 2006).\589\
---------------------------------------------------------------------------
    \589\ In addition, another provision of Act, described below, 
provides for indexing of the income limits on the saver's credit.
---------------------------------------------------------------------------

  C. Improvements in Portability, Distribution, and Contribution Rules


1. Purchase of permissive service credit (sec. 821 of the Act, and 
        secs. 403(b)(13), 415(n)(3), and 457(e)(17) of the Code)

                              Present Law


In general

    Present law imposes limits on contributions and benefits 
under qualified plans.\590\ The limits on contributions and 
benefits under qualified plans are based on the type of plan. 
Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) a certain 
dollar amount ($175,000 for 2006) or (2) 100 percent of the 
participant's average compensation for his or her high three 
years.
---------------------------------------------------------------------------
    \590\ Sec. 415.
---------------------------------------------------------------------------
    A qualified retirement plan maintained by a State or local 
government employer may provide that a participant may make 
after-tax employee contributions in order to purchase 
permissive service credit, subject to certain limits.\591\
---------------------------------------------------------------------------
    \591\ Sec. 415(n)(3).
---------------------------------------------------------------------------
    In the case of any repayment of contributions and earnings 
to a governmental plan with respect to an amount previously 
refunded upon a forfeiture of service credit under the plan 
(oranother plan maintained by a State or local government 
employer within the same State), any such repayment is not 
taken into account for purposes of the section 415 limits on 
contributions and benefits. Also, service credit obtained as a 
result of such a repayment is not considered permissive service 
credit for purposes of the section 415 limits.

Permissive service credit

            Definition of permissive service credit
    Permissive service credit means credit for a period of 
service recognized by the governmental plan which the 
participant has not received under the plan and which the 
employee receives only if the employee voluntarily contributes 
to the plan an amount (as determined by the plan) that does not 
exceed the amount necessary to fund the benefit attributable to 
the period of service and that is in addition to the regular 
employee contributions, if any, under the plan.
    The IRS has ruled that credit is not permissive service 
credit where it is purchased to provide enhanced retirement 
benefits for a period of service already credited under the 
plan, as the enhanced benefit is treated as credit for service 
already received.\592\
---------------------------------------------------------------------------
    \592\ Priv. Ltr. Rul. 200229051 (April 26, 2002).
---------------------------------------------------------------------------
            Nonqualified service
    Service credit is not permissive service credit if more 
than five years of permissive service credit is purchased for 
nonqualified service or if nonqualified service is taken into 
account for an employee who has less than five years of 
participation under the plan. Nonqualified service is service 
other than service (1) as a Federal, State or local government 
employee, (2) as an employee of an association representing 
Federal, State or local government employees, (3) as an 
employee of an educational institution which provides 
elementary or secondary education, as determined under State 
law, or (4) for military service. Service under (1), (2) and 
(3) is nonqualified service if it enables a participant to 
receive a retirement benefit for the same service under more 
than one plan.

Trustee-to-trustee transfers to purchase permissive service credit

    Under EGTRRA, a participant is not required to include in 
gross income a direct trustee- to-trustee transfer to a 
governmental defined benefit plan from a section 403(b) annuity 
or a section 457 plan if the transferred amount is used (1) to 
purchase permissive service credit under the plan, or (2) to 
repay contributions and earnings with respect to an amount 
previously refunded under a forfeiture of service credit under 
the plan (or another plan maintained by a State or local 
government employer within the same State).\593\
---------------------------------------------------------------------------
    \593\ Secs. 403(b)(13) and 457(e)(17).
---------------------------------------------------------------------------

                        Explanation of Provision


Permissive service credit

    The provision modifies the definition of permissive service 
credit by providing that permissive service credit means 
service credit which relates to benefits to which the 
participant is not otherwise entitled under such governmental 
plan, rather than service credit which such participant has not 
received under the plan. Credit qualifies as permissive service 
credit if it is purchased to provide an increased benefit for a 
period of service already credited under the plan (e.g., if a 
lower level of benefit is converted to a higher benefit level 
otherwise offered under the same plan) as long as it relates to 
benefits to which the participant is not otherwise entitled.
    The provision allows participants to purchase credit for 
periods regardless of whether service is performed, subject to 
the limits on nonqualified service.
    Under the provision, service as an employee of an 
educational organization providing elementary or secondary 
education can be determined under the law of the jurisdiction 
in which the service was performed. Thus, for example, 
permissive service credit can be granted for time spent 
teaching outside of the United States without being considered 
nonqualified service credit.

Trustee-to-trustee transfers to purchase permissive service credit

    The provision provides that the limits regarding 
nonqualified service are not applicable in determining whether 
a trustee-to-trustee transfer from a section 403(b) annuity or 
a section 457 plan to a governmental defined benefit plan is 
for the purchase of permissive service credit. Thus, failure of 
the transferee plan to satisfy the limits does not cause the 
transferred amounts to be included in the participant's income. 
As under present law, the transferee plan must satisfy the 
limits in providing permissive service credit as a result of 
the transfer.
    The provision provides that trustee-to-trustee transfers 
under sections 457(e)(17) and 403(b)(13) may be made regardless 
of whether the transfer is made between plans maintained by the 
same employer. The provision also provides that amounts 
transferred from a section 403(b) annuity or a section 457 plan 
to a governmental defined benefit plan to purchase permissive 
service credit are subject to the distribution rules applicable 
under the Internal Revenue Code to the defined benefit plan.

                             Effective Date

    The provision is generally effective as if included in the 
amendments made by section 1526 of the Taxpayer Relief Act of 
1997, except that the provision regarding trustee-to-trustee 
transfers is effective as if included in the amendments made by 
section 647 of the Economic Growth and Tax Relief 
Reconciliation Act of 2001.

2. Rollover of after-tax amounts in annuity contracts (sec. 822 of the 
        Act and sec. 402(c)(2) of the Code)

                              Present Law

    Employee after-tax contributions may be rolled over from a 
tax-qualified retirement plan into another tax-qualified 
retirement plan, if the plan to which the rollover is made is a 
defined contribution plan, the rollover is accomplished through 
a direct rollover, and the plan to which the rollover is made 
provides for separate accounting for such contributions (and 
earnings thereon). After-tax contributions can also be rolled 
over from a tax-sheltered annuity (a ``section 403(b) 
annuity'') to another tax-sheltered annuity if the rollover is 
a direct rollover, and the annuity to which the rollover is 
made provides for separate accounting for such contributions 
(and earnings thereon). After-tax contributions may also be 
rolled over to an IRA. If the rollover is to an IRA, the 
rollover need not be a direct rollover and the IRA owner has 
the responsibility to keep track of the amount of after-tax 
contributions.\594\
---------------------------------------------------------------------------
    \594\ Sec. 402(c)(2); IRS Notice 2002-3, 2002-2 I.R.B. 289.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows after-tax contributions to be rolled 
over from a qualified retirement plan to another qualified 
retirement plan (either a defined contribution or a defined 
benefit plan) or to a tax-sheltered annuity. As under present 
law, the rollover must be a direct rollover, and the plan to 
which the rollover is made must separately account for after-
tax contributions (and earnings thereon).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2006.

3. Application of minimum distribution rules to governmental plans 
        (sec. 823 of the Act)

                              Present Law

    Minimum distribution rules apply to tax-favored retirement 
arrangements, including governmental plans. In general, under 
these rules, distribution of minimum benefits must begin no 
later than the required beginning date. Minimum distribution 
rules also apply to benefits payable with respect to a plan 
participant who has died. Failure to comply with the minimum 
distribution rules results in an excise tax imposed on the plan 
participant equal to 50 percent of the required minimum 
distribution not distributed for the year. The excise tax may 
be waived in certain cases.
    In the case of distributions prior to the death of the plan 
participant, the minimum distribution rules are satisfied if 
either (1) the participant's entire interest in the plan is 
distributed by the required beginning date, or (2) the 
participant's interest in the plan is to be distributed (in 
accordance with regulations) beginning not later than the 
required beginning date, over a permissible period. The 
permissible periods are (1) the life of the participant, (2) 
the lives of the participant and a designated beneficiary, (3) 
the life expectancy of the participant, or (4) the joint life 
and last survivor expectancy of the participant and a 
designated beneficiary. In calculating minimum required 
distributions from account-type arrangements (e.g., a defined 
contribution plan or an individual retirement arrangement), 
life expectancies of the participant and the participant's 
spouse generally may be recomputed annually.
    The required beginning date generally is April 1 of the 
calendar year following the later of (1) the calendar year in 
which the participant attains age 70\1/2\ or (2) the calendar 
year in which the participant retires.
    The minimum distribution rules also apply to distributions 
to beneficiaries of deceased participants. In general, if the 
participant dies after minimum distributions have begun, the 
remaining interest must be distributed at least as rapidly as 
under the minimum distribution method being used as of the date 
of death. If the participant dies before minimum distributions 
have begun, then the entire remaining interest must generally 
be distributed within five years of the participant's death. 
The five-year rule does not apply if distributions begin within 
one year of the participant's death and are payable over the 
life of a designated beneficiary or over the life expectancy of 
a designated beneficiary. A surviving spouse beneficiary is not 
required to begin distributions until the date the deceased 
participant would have attained age 70\1/2\. In addition, if 
the surviving spouse makes a rollover from the plan into a plan 
or IRA of his or her own, the minimum distribution rules apply 
separately to the surviving spouse.

                        Explanation of Provision

    The provision directs the Secretary of the Treasury to 
issue regulations under which a governmental plan is treated as 
complying with the minimum distribution requirements, for all 
years to which such requirements apply, if the plan complies 
with a reasonable, good faith interpretation of the statutory 
requirements. It is intended that the regulations apply for 
periods before the date of enactment (August 17, 2006).

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

4. Allow direct rollovers from retirement plans to Roth IRAs (sec. 824 
        of the Act and sec. 408A(e) of the Code)

                              Present Law


IRAs in general

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs, to which both 
deductible and nondeductible contributions may be made, and 
Roth IRAs.

Traditional IRAs

    An individual may make deductible contributions to an IRA 
up to the lesser of a dollar limit (generally $4,000 for 2006) 
\595\ or the individual's compensation if neither the 
individual nor the individual's spouse is an active participant 
in an employer-sponsored retirement plan.\596\ If the 
individual (or the individual's spouse) is an active 
participant in an employer-sponsored retirement plan, the 
deduction limit is phased out for taxpayers with adjusted gross 
income (``AGI'') over certain levels for the taxable year. A 
different, higher, income phaseout applies in the case of an 
individual who is not an active participant in an employer 
sponsored plan but whose spouse is.
---------------------------------------------------------------------------
    \595\ The dollar limit is scheduled to increase until it is $5,000 
in 2008-2010. Individuals age 50 and older may make additional, catch-
up contributions.
    \596\ In the case of a married couple, deductible IRA contributions 
of up to the dollar limit can be made for each spouse (including, for 
example, a homemaker who does not work outside the home), if the 
combined compensation of both spouses is at least equal to the 
contributed amount.
---------------------------------------------------------------------------
    To the extent an individual cannot or does not make 
deductible contributions to an IRA or contributions to a Roth 
IRA, the individual may make nondeductible contributions to a 
traditional IRA.
    Amounts held in a traditional IRA are includible in income 
when withdrawn (except to the extent the withdrawal is a return 
of nondeductible contributions). Includible amounts withdrawn 
prior to attainment of age 59\1/2\ are subject to an additional 
10-percent early withdrawal tax, unless the withdrawal is due 
to death or disability, is made in the form of certain periodic 
payments, or is used for certain specified purposes.

Roth IRAs

    Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contributions that can be made to all of an individuals IRAs 
(both traditional and Roth) cannot exceed the maximum 
deductible IRA contribution limit. The maximum annual 
contribution that can be made to a Roth IRA is phased out for 
taxpayers with income above certain levels.
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) which is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings, and subject to the 10-percent early 
withdrawal tax (unless an exception applies). The same 
exceptions to the early withdrawal tax that apply to IRAs apply 
to Roth IRAs.

Rollover contributions

    If certain requirements are satisfied, a participant in a 
tax-qualified retirement plan, a tax-sheltered annuity (sec. 
403(b)), or a governmental section 457 plan may roll over 
distributions from the plan or annuity into a traditional IRA. 
Distributions from such plans may not be rolled over into a 
Roth IRA.
    Taxpayers with modified AGI of $100,000 or less generally 
may roll over amounts in a traditional IRA into a Roth 
IRA.\597\ The amount rolled over is includible in income as if 
a withdrawal had been made, except that the 10-percent early 
withdrawal tax does not apply. Married taxpayers who file 
separate returns cannot roll over amounts in a traditional IRA 
into a Roth IRA. Amounts that have been distributed from a tax-
qualified retirement plan, a tax-sheltered annuity, or a 
governmental section 457 plan may be rolled over into a 
traditional IRA, and then rolled over from the traditional IRA 
into a Roth IRA.
---------------------------------------------------------------------------
    \597\ Under the Tax Increase Prevention and Reconciliation Act of 
2005 (Pub. L. No. 109-222), the $100,000 limit is repealed for taxable 
years beginning after December 31, 2009.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows distributions from tax-qualified 
retirement plans, tax-sheltered annuities, and governmental 457 
plans to be rolled over directly from such plan into a Roth 
IRA, subject to the present law rules that apply to rollovers 
from a traditional IRA into a Roth IRA. For example, a rollover 
from a tax-qualified retirement plan into a Roth IRA is 
includible in gross income (except to the extent it represents 
a return of after-tax contributions), and the 10-percent early 
distribution tax does not apply. Similarly, an individual with 
AGI of $100,000 or more could not roll over amounts from a tax-
qualified retirement plan directly into a Roth IRA.

                             Effective Date

    The provision is effective for distributions made after 
December 31, 2007.

5. Eligibility for participation in eligible deferred compensation 
        plans (sec. 825 of the Act and sec. 457 of the Code)

                              Present Law

    A section 457 plan is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. In some cases, different rules 
apply under section 457 to governmental plans and plans of tax-
exempt employers.
    Amounts deferred under an eligible deferred compensation 
plan of a non-governmental tax-exempt organization are 
includible in gross income for the year in which amounts are 
paid or made available. Under present law, if the amount 
payable to a participant does not exceed $5,000, a plan may 
allow a distribution up to $5,000 without such amount being 
treated as made available if the distribution can be made only 
if no amount has been deferred under the plan by the 
participant during the two-year period ending on the date of 
the distribution and there has been no prior distribution under 
the plan. Prior to the Small Business Job Protection Act of 
1996, under former section 457(e)(9), benefits were not treated 
as made available because a participant could elect to receive 
a lump sum payable after separation from service and within 60 
days of the election if (1) the total amount payable under the 
plan did not exceed $3,500 and (2) no additional amounts could 
be deferred under the plan.

                        Explanation of Provision

    Under the provision, an individual is not precluded from 
participating in an eligible deferred compensation plan by 
reason of having received a distribution under section 
457(e)(9) as in effect before the Small Business Job Protection 
Act of 1996.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

6. Modifications of rules governing hardships and unforeseen financial 
        emergencies (sec. 826 of the Act)

                              Present Law

    Distributions from a qualified cash or deferred arrangement 
(a ``section 401(k) plan''), a tax-shelter annuity, section 457 
plan, or nonqualified deferred compensation plan subject to 
section 409A may not be made prior to the occurrence of one or 
more specified events. In the case of a section 401(k) plan or 
tax-sheltered annuity, one event upon which distribution is 
permitted is the case of a hardship. Similarly, distributions 
from section 457 plans and nonqualified deferred compensation 
plans subject to section 409A may be made in the case of an 
unforeseeable emergency. Under regulations, a hardship or 
unforeseeable emergency includes a hardship or unforeseeable 
emergency of a participant's spouse or dependent.

                        Explanation of Provision

    The provision directs the Secretary of the Treasury to 
revise the rules for determining whether a participant has had 
a hardship or unforeseeable emergency to provide that if an 
event would constitute a hardship or unforeseeable emergency 
under the plan if it occurred with respect to the participant's 
spouse or dependent, such event shall, to the extent permitted 
under the plan, constitute a hardship or unforeseeable 
emergency if it occurs with respect to a beneficiary under the 
plan. The provision requires that the revised rules be issued 
within 180 days after the date of enactment (August 17, 2006).

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

7. Treatment of distributions to individuals called to active duty for 
        at least 179 days (sec. 827 of the Act and sec. 72(t) of the 
        Code)

                              Present Law

    Under present law, a taxpayer who receives a distribution 
from a qualified retirement plan prior to age 59\1/2\, death, 
or disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception to the tax applies. Among other exceptions, the early 
distribution tax does not apply to distributions made to an 
employee who separates from service after age 55, or to 
distributions that are part of a series of substantially equal 
periodic payments made for the life (or life expectancy) of the 
employee or the joint lives (or life expectancies) of the 
employee and his or her beneficiary.
    Certain amounts held in a qualified cash or deferred 
arrangement (a ``401(k) plan'') or in a tax-sheltered annuity 
(a ``403(b) annuity'') may not be distributed before severance 
from employment, age 59\1/2\, death, disability, or financial 
hardship of the employee.

                        Explanation of Provision

    Under the provision, the 10-percent early withdrawal tax 
does not apply to a qualified reservist distribution. A 
qualified reservist distribution is a distribution (1) from an 
IRA or attributable to elective deferrals under a 401(k) plan, 
403(b) annuity, or certain similar arrangements, (2) made to an 
individual who (by reason of being a member of a reserve 
component as defined in section 101 of title 37 of the U.S. 
Code) was ordered or called to active duty for a period in 
excess of 179 days or for an indefinite period, and (3) that is 
made during the period beginning on the date of such order or 
call to duty and ending at the close of the active duty period. 
A 401(k) plan or 403(b) annuity does not violate the 
distribution restrictions applicable to such plans by reason of 
making a qualified reservist distribution.
    An individual who receives a qualified reservist 
distribution may, at any time during the two-year period 
beginning on the day after the end of the active duty period, 
make one or more contributions to an IRA of such individual in 
an aggregate amount not to exceed the amount of such 
distribution. The dollar limitations otherwise applicable to 
contributions to IRAs do not apply to any contribution made 
pursuant to the provision. No deduction is allowed for any 
contribution made under the provision.
    This provision applies to individuals ordered or called to 
active duty after September 11, 2001, and before December 31, 
2007. The two-year period for making recontributions of 
qualified reservist distributions does not end before the date 
that is two years after the date of enactment (August 17, 
2006).

                             Effective Date

    The provision applies to distributions after September 11, 
2001. If refund or credit of any overpayment of tax resulting 
from the provision would be prevented at any time before the 
close of the one-year period beginning on the date of the 
enactment by the operation of any law or rule of law (including 
res judicata), such refund or credit may nevertheless be made 
or allowed if claim therefor is filed before the close of such 
period.

8. Inapplicability of 10-percent additional tax on early distributions 
        of pension plans of public safety employees (sec. 828 of the 
        Act and sec. 72(t) of the Code)

                              Present Law

    Under present law, a taxpayer who receives a distribution 
from a qualified retirement plan prior to age 59\1/2\, death, 
or disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception to the tax applies. Among other exceptions, the early 
distribution tax does not apply to distributions made to an 
employee who separates from service after age 55, or to 
distributions that are part of a series of substantially equal 
periodic payments made for the life (or life expectancy) of the 
employee or the joint lives (or life expectancies) of the 
employee and his or her beneficiary.

                        Explanation of Provision

    Under the provision, the 10-percent early withdrawal tax 
does not apply to distributions from a governmental defined 
benefit pension plan to a qualified public safety employee who 
separates from service after age 50. A qualified public safety 
employee is an employee of a State or political subdivision of 
a State if the employee provides police protection, 
firefighting services, or emergency medical services for any 
area within the jurisdiction of such State or political 
subdivision.

                             Effective Date

    The provision is effective for distributions made after the 
date of enactment (August 17, 2006).

9. Rollovers by nonspouse beneficiaries (sec. 829 of the Act and sec. 
        402 of the Code)

                              Present Law


Tax-free rollovers

    Under present law, a distribution from a qualified 
retirement plan, a tax-sheltered annuity (``section 403(b) 
annuity''), an eligible deferred compensation plan of a State 
or local government employer (a ``governmental section 457 
plan''), or an individual retirement arrangement (an ``IRA'') 
generally is included in income for the year distributed. 
However, eligible rollover distributions may be rolled over tax 
free within 60 days to another plan, annuity, or IRA.\598\
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    \598\ The IRS has the authority to waive the 60-day requirement if 
failure to waive the requirement would be against equity or good 
conscience, including cases of casualty, disaster, or other events 
beyond the reasonable control of the individual. Sec. 402(c)(3)(B).
---------------------------------------------------------------------------
    In general, an eligible rollover distribution includes any 
distribution to the plan participant or IRA owner other than 
certain periodic distributions, minimum required distributions, 
and distributions made on account of hardship.\599\ 
Distributions to a participant from a qualified retirement 
plan, a tax-sheltered annuity, or a governmental section 457 
plan generally can be rolled over to any of such plans or an 
IRA.\600\ Similarly, distributions from an IRA to the IRA owner 
generally are permitted to be rolled over into a qualified 
retirement plan, a tax-sheltered annuity, a governmental 
section 457 plan, or another IRA.
---------------------------------------------------------------------------
    \599\  Sec. 402(c)(4). Certain other distributions also are not 
eligible rollover distributions, e.g., corrective distributions of 
elective deferrals in excess of the elective deferral limits and loans 
that are treated as deemed distributions.
    \600\  Some restrictions or special rules may apply to certain 
distributions. For example, after-tax amounts distributed from a plan 
can be rolled over only to a plan of the same type or to an IRA.
---------------------------------------------------------------------------
    Similar rollovers are permitted in the case of a 
distribution to the surviving spouse of the plan participant or 
IRA owner, but not to other persons.
    If an individual inherits an IRA from the individual's 
deceased spouse, the IRA may be treated as the IRA of the 
surviving spouse. This treatment does not apply to IRAs 
inherited from someone other than the deceased spouse. In such 
cases, the IRA is not treated as the IRA of the beneficiary. 
Thus, for example, the beneficiary may not make contributions 
to the IRA and cannot roll over any amounts out of the 
inherited IRA. Like the original IRA owner, no amount is 
generally included in income until distributions are made from 
the IRA. Distributions from the inherited IRA must be made 
under the rules that apply to distributions to beneficiaries, 
as described below.

Minimum distribution rules

    Minimum distribution rules apply to tax-favored retirement 
arrangements. In the case of distributions prior to the death 
of the participant, distributions generally must begin by the 
April 1 of the calendar year following the later of the 
calendar year in which the participant (1) attains age 70\1/2\ 
or (2) retires.\601\ The minimum distribution rules also apply 
to distributions following the death of the participant. If 
minimum distributions have begun prior to the participant's 
death, the remaining interest generally must be distributed at 
least as rapidly as under the minimum distribution method being 
used prior to the date of death. If the participant dies before 
minimum distributions have begun, then either (1) the entire 
remaining interest must be distributed within five years of the 
death, or (2) distributions must begin within one year of the 
death over the life (or life expectancy) of the designated 
beneficiary. A beneficiary who is the surviving spouse of the 
participant is not required to begin distributions until the 
date the deceased participant would have attained age 70\1/2\. 
Alternatively, if the surviving spouse makes a rollover from 
the plan into a plan or IRA of his or her own, minimum 
distributions generally would not need to begin until the 
surviving spouse attains age 70\1/2\.
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    \601\ In the case of five-percent owners and distributions from an 
IRA, distributions must begin by the April 1 of the calendar year 
following the year in which the individual attains age 70\1/2\.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that benefits of a beneficiary other 
than a surviving spouse may be transferred directly to an IRA. 
The IRA is treated as an inherited IRA of the nonspouse 
beneficiary. Thus, for example, distributions from the 
inherited IRA are subject to the distribution rules applicable 
to beneficiaries. The provision applies to amounts payable to a 
beneficiary under a qualified retirement plan, governmental 
section 457 plan, or a tax-sheltered annuity. To the extent 
provided by the Secretary, the provision applies to benefits 
payable to a trust maintained for a designated beneficiary to 
the same extent it applies to the beneficiary.

                             Effective Date

    The provision is effective for distributions after December 
31, 2006.

10. Direct deposit of tax refunds in an IRA (sec. 830 of the Act)

                              Present Law

    Under current IRS procedures, a taxpayer may direct that 
his or her tax refund be deposited into a checking or savings 
account with a bank or other financial institution (such as a 
mutual fund, brokerage firm, or credit union) rather than 
having the refund sent to the taxpayer in the form of a check.

                        Explanation of Provision

    The Secretary is directed to develop forms under which all 
or a portion of a taxpayer's refund may be deposited in an IRA 
of the taxpayer (or the spouse of the taxpayer in the case of a 
joint return). The provision does not modify the rules relating 
to IRAs, including the rules relating to timing and 
deductibility of contributions.

                             Effective Date

    The form required by the provision is to be available for 
taxable years beginning after December 31, 2006.

11. Additional IRA contributions for certain employees (sec. 831 of the 
        Act and secs. 25B and 219 of the Code)

                              Present Law

    Under present law, favored tax treatment applies to 
qualified retirement plans maintained by employers and to 
individual retirement arrangements (``IRAs'').
    Qualified defined contribution plans may permit both 
employees and employers to make contributions to the plan. 
Under a qualified cash or deferred arrangement (commonly 
referred to as a ``section 401(k) plan''), employees may elect 
to make pretax contributions to a plan, referred to as elective 
deferrals. Employees may also be permitted to make after-tax 
contributions to a plan. In addition, a plan may provide for 
employer nonelective contributions or matching contributions. 
Nonelective contributions are employer contributions that are 
made without regard to whether the employee makes elective 
deferrals or after-tax contributions. Matching contributions 
are employer contributions that are made only if the employee 
makes elective deferrals or after-tax contributions. Matching 
contributions are sometimes made in the form of employer stock.
    Under present law, an individual may generally make 
contributions to an IRA for a taxable year up to the lesser of 
a certain dollar amount or the individual's compensation. The 
maximum annual dollar limit on IRA contributions to IRAs is 
$4,000 for 2005-2007 and $5,000 for 2008, with indexing 
thereafter. Individuals who have attained age 50 may make 
additional ``catch-up'' contributions to an IRA for a taxable 
year of up to $500 for 2005 and $1,000 for 2006 and 
thereafter.\602\
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    \602\ These IRA limits were enacted as part of the Economic Growth 
and Tax Relief Reconciliation Act of 2001 (``EGTRRA''), Pub. L. No. 
107-16. The provisions of EGTRRA generally do not apply for years 
beginning after December 31, 2010.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, an applicable individual may elect to 
make additional IRA contributions of up to $3,000 per year for 
2007-2009. An applicable individual must have been a 
participant in a section 401(k) plan under which the employer 
matched at least 50 percent of the employee's contributions to 
the plan with stock of the employer. In addition, in a taxable 
year preceding the taxable year of an additional contribution: 
(1) the employer (or any controlling corporation of the 
employer) must have been a debtor in a bankruptcy case, and (2) 
the employer or any other person must have been subject to an 
indictment or conviction resulting from business transactions 
related to the bankruptcy. The individual must also have been a 
participant in the section 401(k) plan on the date six months 
before the bankruptcy case was filed. An applicable individual 
who elects to make these additional IRA contributions is not 
permitted to make IRA catch-up contributions that apply to 
individuals age 50 and older.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2006, and before January 1, 2010.

12. Special rule for computing high-three average compensation for 
        benefit limitation purposes (sec. 832 of the Act and sec. 
        415(b)(3) of the Code)

                              Present Law

    Annual benefits payable to a participant under a defined 
benefit pension plan generally may not exceed the lesser of (1) 
100 percent of average compensation for the participant's high 
three years, or (2) $175,000 (for 2006). The dollar limit is 
reduced proportionately for individuals with less than 10 years 
of participation in the plan. The compensation limit is reduced 
proportionately for individuals with less than 10 years of 
service.
    For purposes of determining average compensation for a 
participant's high three years, the high three years are the 
period of consecutive calendar years (not more than three) 
during which the participant was both an active participant in 
the plan and had the greatest aggregate compensation from the 
employer.

                        Explanation of Provision

    Under the provision, for purposes of determining average 
compensation for a participant's high three years, the high 
three years are the period of consecutive calendar years (not 
more than three) during which the participant had the greatest 
aggregate compensation from the employer.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2005.

13. Inflation indexing of gross income limitations on certain 
        retirement savings incentives (sec. 833 of the Act and secs. 
        25A and 219 of the Code)

                              Present Law


Saver's credit

    Present law provides a temporary nonrefundable tax credit 
for eligible taxpayers for qualified retirement savings 
contributions. The maximum annual contribution eligible for the 
credit is $2,000. The credit rate depends on the adjusted gross 
income (``AGI'') of the taxpayer. Joint returns with AGI of 
$50,000 or less, head of household returns of $37,500 or less, 
and single returns of $25,000 or less are eligible for the 
credit. The AGI limits applicable to single taxpayers apply to 
married taxpayers filing separate returns. The credit is in 
addition to any deduction or exclusion that would otherwise 
apply with respect to the contribution. The credit offsets 
minimum tax liability as well as regular tax liability. The 
credit is available to individuals who are 18 or older, other 
than individuals who are full-time students or claimed as a 
dependent on another taxpayer's return.
    Under present law, the saver's credit expires after 2006.

Individual retirement arrangements

            In general
    There are two general types of individual retirement 
arrangements (``IRAs'') under present law: traditional 
IRAs,\603\ to which both deductible and nondeductible 
contributions may be made,\604\ and Roth IRAs.\605\
---------------------------------------------------------------------------
    \603\ Sec. 408.
    \604\ Sec. 219.
    \605\ Sec. 408A.
---------------------------------------------------------------------------
    The maximum annual deductible and nondeductible 
contributions that can be made to a traditional IRA and the 
maximum contribution that can be made to a Roth IRA by or on 
behalf of an individual varies depending on the particular 
circumstances, including the individual's income. However, the 
contribution limits for IRAs are coordinated so that the 
maximum annual contribution that can be made to all of an 
individual's IRAs is the lesser of a certain dollar amount 
($4,000 for 2006) or the individual's compensation. In the case 
of a married couple, contributions can be made up to the dollar 
limit for each spouse if the combined compensation of the 
spouses is at least equal to the contributed amount. An 
individual who has attained age 50 before the end of the 
taxable year may also make catch-up contributions to an IRA. 
For this purpose, the dollar limit is increased by a certain 
dollar amount ($1,000 for 2006).\606\
---------------------------------------------------------------------------
    \606\ Under the Economic Growth and Tax Relief Reconciliation Act 
of 2001 (``EGTRRA''), the dollar limit on IRA contributions increases 
to $5,000 in 2008, with indexing for inflation thereafter. The 
provisions of EGTRRA generally do not apply for years beginning after 
December 31, 2010. As a result, the dollar limit on annual IRA 
contributions is $2,000 for years after 2010, and catch-ups 
contributions are not permitted.
---------------------------------------------------------------------------
            Traditional IRAs
    An individual may make deductible contributions to a 
traditional IRA up to the IRA contribution limit if neither the 
individual nor the individual's spouse is an active participant 
in an employer-sponsored retirement plan. If an individual (or 
the individual's spouse) is an active participant in an 
employer-sponsored retirement plan, the deduction is phased out 
for taxpayers with adjusted gross income over certain levels 
for the taxable year. The adjusted gross income phase-out 
ranges are: (1) for single taxpayers, $50,000 to $60,000; (2) 
for married taxpayers filing joint returns, $75,000 to $85,000 
for 2006 and $80,000 to $100,000 for years after 2006; and (3) 
for married taxpayers filing separate returns, $0 to $10,000. 
If an individual is not an active participant in an employer-
sponsored retirement plan, but the individual's spouse is, the 
deduction is phased out for taxpayers with adjusted gross 
income between $150,000 and $160,000.
    To the extent an individual cannot or does not make 
deductible contributions to an IRA or contributions to a Roth 
IRA, the individual may make nondeductible contributions to a 
traditional IRA, subject to the same limits as deductible 
contributions. An individual who has attained age 50 before the 
end of the taxable year may also make nondeductible catch-up 
contributions to an IRA.
    Amounts held in a traditional IRA are includible in income 
when withdrawn, except to the extent the withdrawal is a return 
of nondeductible contributions. Withdrawals from an IRA before 
age 70\1/2\, death, or disability are subject to an additional 
10-percent tax unless an exception applies.\607\
---------------------------------------------------------------------------
    \607\ Sec. 72(t).
---------------------------------------------------------------------------
            Roth IRAs
    Individuals with adjusted gross income below certain levels 
may make nondeductible contributions to a Roth IRA, subject to 
the overall limit on IRA contributions described above. The 
maximum annual contribution that can be made to a Roth IRA is 
phased out for taxpayers with adjusted gross income over 
certain levels for the taxable year. The adjusted gross income 
phase-out ranges are: (1) for single taxpayers, $95,000 to 
$110,000; (2) for married taxpayers filing joint returns, 
$150,000 to $160,000; and (3) for married taxpayers filing 
separate returns, $0 to $10,000.
    Taxpayers generally may convert a traditional IRA into a 
Roth IRA, except for married taxpayers filing separate returns. 
The amount converted is includible in income as if a withdrawal 
had been made, except that the 10-percent early withdrawal tax 
does not apply.
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings. The amount includible in income is 
also subject to the 10-percent early withdrawal tax described 
above.

                        Explanation of Provision

    The provision indexes the income limits applicable to the 
saver's credit beginning in 2007. (Another provision of the 
Act, described above, permanently extends the saver's credit.) 
Indexed amounts are rounded to the nearest multiple of $500. 
Under the indexed income limits, as under present law, the 
income limits for single taxpayers is one-half that for married 
taxpayers filing a joint return and the limits for heads of 
household are three-fourths that for married taxpayers filing a 
joint return.
    The provision also indexes the income limits for IRA 
contributions beginning in 2007. The indexing applies to the 
income limits for deductible contributions for active 
participants in an employer-sponsored plan,\608\ the income 
limits for deductible contributions if the individual is not an 
active participant but the individual's spouse is, and the 
income limits for Roth IRA contributions. Indexed amounts are 
rounded to the nearest multiple of $1,000. The provision does 
not affect the phase-out ranges under present law. Thus, for 
example, in the case of an active participant in an employer-
sponsored plan, the phase-out range is $20,000 in the case of a 
married taxpayer filing a joint return and $10,000 in the case 
of an individual taxpayer.
---------------------------------------------------------------------------
    \608\ Under the provision, for 2007, the lower end of the income 
phase out for active participants filing a joint return is $80,000 as 
adjusted to reflect inflation.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2006.

                     D. Health and Medical Benefits


1. Ability to use excess pension assets for future retiree health 
        benefits and collectively bargained retiree health benefits 
        (sec. 841 of the Act and sec. 420 of the Code)

                              Present Law


Transfer of pension assets

    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities. In addition, a reversion may occur only 
if the plan so provides. A reversion prior to plan termination 
may constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100 percent vested.
    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan 
(``retiree medical accounts''). A qualified transfer of excess 
assets of a defined benefit plan to such a separate account 
within the plan may be made in order to fund retiree health 
benefits.\609\ A qualified transfer does not result in plan 
disqualification, is not a prohibited transaction, and is not 
treated as a reversion. Thus, transferred assets are not 
includible in the gross income of the employer and are not 
subject to the excise tax on reversions. No more than one 
qualified transfer may be made in any taxable year. A qualified 
transfer may not be made from a multiemployer plan. No 
qualified transfer may be made after December 31, 2013.
---------------------------------------------------------------------------
    \609\ Sec. 420.
---------------------------------------------------------------------------
    Excess assets generally means the excess, if any, of the 
value of the plan's assets \610\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\611\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon). In addition, no deduction is allowed for 
amounts paid other than from transferred funds for qualified 
current retiree health liabilities to the extent such amounts 
are not greater than the excess of (1) the amount transferred 
(and any income thereon), over (2) qualified current retiree 
health liabilities paid out of transferred assets (and any 
income thereon). An employer may not contribute any amount to a 
health benefits account or welfare benefit fund with respect to 
qualified current retiree health liabilities for which 
transferred assets are required to be used.
---------------------------------------------------------------------------
    \610\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \611\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100 percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
    In order to a transfer to be qualified, the employer 
generally must maintain retiree health benefits at the same 
level for the taxable year of the transfer and the following 
four years.
    In addition, ERISA provides that, at least 60 days before 
the date of a qualified transfer, the employer must notify the 
Secretary of Labor, the Secretary of the Treasury, employee 
representatives, and the plan administrator of the transfer, 
and the plan administrator must notify each plan participant 
and beneficiary of the transfer.\612\
---------------------------------------------------------------------------
    \612\ ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
---------------------------------------------------------------------------

Deductions for contributions

    Deductions for contributions to qualified retirement plans 
are subject to certain limits. Deductions for contributions to 
funded welfare benefit plans are generally also subject to 
limits, including limits on the amount that may be contributed 
to an account to fund the expected cost of retiree medical 
benefits for future years. The limit on the amount that may be 
contributed to an account to fund the expected cost of retiree 
medical benefits for future years does not apply to a separate 
fund established under a collective bargaining agreement.

                        Explanation of Provision


In general

    If certain requirements are satisfied, the provision 
permits transfers of excess pension assets under a single-
employer plan to retiree medical accounts to fund the expected 
cost of retiree medical benefits for the current and future 
years (a ``qualified future transfer'') and also allows such 
transfers in the case of benefits provided under a collective 
bargaining agreement (a ``collectively bargained transfer''). 
Transfers must be made for at least a two-year period. An 
employer can elect to make a qualified future transfer or a 
collectively bargained transfer rather than a qualified 
transfer. A qualified future transfer or collectively bargained 
transfer must meet the requirements applicable to qualified 
transfers, except that the provision modifies the rules 
relating to (1) the determination of excess pension assets; (2) 
the limitation on the amount transferred; and (3) the minimum 
cost requirement. Additional requirements apply in the case of 
collectively bargained transfer.
    The general sunset applicable to qualified transfer applies 
(i.e., transfers can be made only before January 1, 2014).

Rule applicable to qualified future transfers and collectively 
        bargained transfers

    Qualified future transfers and collectively bargained 
transfers can be made to the extent that plan assets exceed the 
greater of (1) accrued liability, or (2) 120 percent of current 
liability.\613\ The provision requires that, during the 
transfer period, the plan's funded status must be maintained at 
the minimum level required to make transfers. If the minimum 
level is not maintained, the employer must make contributions 
to the plan to meet the minimum level or an amount required to 
meet the minimum level must be transferred from the health 
benefits account. The transfer period is the period not to 
exceed a total of ten consecutive taxable years beginning with 
the taxable year of the transfer. As previously discussed, the 
period must be not less than two consecutive years.
---------------------------------------------------------------------------
    \613\ The single-employer plan funding concepts are updated after 
2007 to reflect the changes to the single-employer plan funding rules 
under the Act.
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    A limit applies on the amount that can be transferred. In 
the case of a qualified future transfer, the amount of excess 
pension assets that may be transferred is limited to the sum of 
(1) the amount that is reasonably estimated to be the amount 
the employer will pay out of the account during the taxable 
year of the transfer for current retiree health liabilities, 
and (2) the sum of the qualified current retiree health 
liabilities which the plan reasonably estimates, in accordance 
with guidance issued by the Secretary, will be incurred for 
each additional year in the transfer period. The amount that 
can be transferred under a collectively bargained transfer 
cannot exceed the amount which is reasonably estimated, in 
accordance with the provisions of the collective bargaining 
agreement and generally accepted accounting principles, to be 
the amount the employer maintaining the plan will pay out of 
such account during the collectively bargained cost maintenance 
period for collectively bargained retiree health liabilities.
    The provision also modifies the minimum cost requirement 
which requires retiree medical benefits to be maintained at a 
certain level. In the case of a qualified future transfer, the 
minimum cost requirement will be satisfied if, during the 
transfer period and the four subsequent years, the annual 
average amount of employer costs is not less than applicable 
employer cost determined with respect to the transfer. An 
employer may elect to meet this minimum cost requirement by 
meeting the requirements as in effect before the amendments 
made by section 535 of the Tax Relief Extension Act of 1999 for 
each year during the transfer period and the four subsequent 
years. In the case of a collectively bargained transfer, the 
minimum cost requirements is satisfied if each collectively 
bargained group health plan under which collectively bargained 
health benefits are provided provides that the collectively 
bargained employer cost for each taxable year during the 
collectively bargained cost maintenance period is not less than 
the amount specified by the collective bargaining agreement. 
The collectively bargained employer cost is the average cost 
per covered individual of providing collectively bargained 
retiree health benefits as determined in accordance with the 
applicable collective bargaining agreement. Thus, retiree 
medical benefits must be provided at the level determined under 
the collective bargaining agreement for the shorter of (1) the 
remaining lifetime of each covered retiree (and any covered 
spouse and dependent), or (2) the period of coverage provided 
under the collectively bargained health plan for such covered 
retiree (and any covered spouse and dependent).

Additional requirements for collectively bargained transfers

    As previously discussed, the provision imposes certain 
additional requirements in the case of a collectively bargained 
transfer. Collectively bargained transfers can be made only if 
(1) for the employer's taxable year ending in 2005, medical 
benefits are provided to retirees (and spouses and dependents) 
under all the employer's benefit plans, and (2) the aggregate 
cost of benefits for such year is at least five percent of the 
employer's gross receipts. The provision also applies to 
successors of such employers. Before a collectively bargained 
transfer, the employer must designate in writing to each 
employee organization that is a party to the collective 
bargaining agreement that the transfer is a collectively 
bargained transfer.
    Collectively bargained retiree health liabilities means the 
present value, as of the beginning of a taxable year and 
determined in accordance with the applicable collective 
bargaining agreement, of all collectively bargained health 
benefits (including administrative expenses) for such taxable 
year and all subsequent taxable years during the collectively 
bargained cost maintenance period (with the exclusion of 
certain key employees) reduced by the value of assets in all 
health benefits accounts or welfare benefit funds set aside to 
pay for the collectively bargained retiree health liabilities. 
Collectively bargained health benefits are health benefits or 
coverage provided to retired employees who, immediately before 
the collectively bargained transfer, are entitled to receive 
such benefits upon retirement and who are entitled to pension 
benefits under the plan (and their spouses and dependents). If 
specified by the provisions of the collective bargaining 
agreement, collectively bargained health benefits also include 
active employees who, following their retirement, are entitled 
to receive such benefits and who are entitled to pension 
benefits under the plan (and their spouse and dependents).
    Assets transferred in a collectively bargained transfer can 
be used to pay collectively bargained retiree health 
liabilities (other than liabilities of certain key employees 
not taken into account) for the taxable year of the transfer 
and for any subsequent taxable year during the collectively 
bargained cost maintenance period. The collectively bargained 
cost maintenance period (with respect to a retiree) is the 
shorter of (1) the remaining lifetime of the covered retiree 
(and any covered spouse and dependents) or (2) the period of 
coverage provided by the collectively bargained health plan 
with respect to such covered retiree (and any covered spouse 
and dependents).
    The limit on deductions in the case of certain amounts paid 
for qualified current retiree health liabilities other than 
from the health benefits account does not apply in the case of 
a collectively bargained transfer.
    An employer may contribute additional amounts to a health 
benefits account or welfare benefit fund with respect to 
collectively bargained health liabilities for which transferred 
assets are required to be used. The deductibility of such 
contributions are subject to the limits that otherwise apply to 
a welfare benefit fund under a collective bargaining agreements 
without regard to whether such contributions are made to a 
health benefits account or a welfare benefit fund and without 
regard to the limits on deductions for contributions to 
qualified retirement plans (under Code section 404). The 
Secretary of the Treasury is directed to provide rules to 
prevent duplicate deductions for the same contributions or for 
duplicate contributions to fund the same benefits.

                             Effective Date

    The provision is effective for transfers after the date of 
enactment (August 17, 2006).

2. Transfer of excess pension assets to multiemployer health plans 
        (sec. 842 of the Act and sec. 420 of the Code)

                              Present Law

    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities. In addition, a reversion may occur only 
if the plan so provides. A reversion prior to plan termination 
may constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100 percent vested.
    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan. 
A qualified transfer of excess assets of a defined benefit plan 
to such a separate account within the plan may be made in order 
to fund retiree health benefits.\614\ A qualified transfer does 
not result in plan disqualification, is not a prohibited 
transaction, and is not treated as a reversion. Thus, 
transferred assets are not includible in the gross income of 
the employer and are not subject to the excise tax on 
reversions. No more than one qualified transfer may be made in 
any taxable year. A qualified transfer may not be made from a 
multiemployer plan. No qualified transfer may be made after 
December 31, 2013.
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    \614\ Sec. 420.
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    Excess assets generally means the excess, if any, of the 
value of the plan's assets \615\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\616\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon).
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    \615\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \616\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
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    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
    In order to a transfer to be qualified, the employer 
generally must maintain retiree health benefits at the same 
level for the taxable year of the transfer and the following 
four years.
    In addition, ERISA provides that, at least 60 days before 
the date of a qualified transfer, the employer must notify the 
Secretary of Labor, the Secretary of the Treasury, employee 
representatives, and the plan administrator of the transfer, 
and the plan administrator must notify each plan participant 
and beneficiary of the transfer.\617\
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    \617\ ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
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    Under present law, special deduction rules apply to a 
multiemployer defined benefit plan established before January 
1, 1954, under an agreement between the Federal government and 
employee representatives in a certain industry.\618\
---------------------------------------------------------------------------
    \618\ Code sec. 404(c).
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                        Explanation of Provision

    The provision allows qualified transfers of excess defined 
benefit plan assets to be made by multiemployer defined benefit 
plans.

                             Effective Date

    The provision is effective for transfer made in taxable 
years beginning after December 31, 2006.

3. Allowance of reserve for medical benefits of plans sponsored by bona 
        fide associations (sec. 843 of the Act and sec. 419A of the 
        Code)

                              Present Law

    Under present law, deductions for contributions to funded 
welfare benefit plans are generally subject to limits, 
including limits on the amount that may be contributed to an 
account to fund medical benefits (other than retiree medical 
benefits) for future years. Deductions for contributions to a 
welfare benefit fund are limited to the fund's qualified cost 
for the taxable year. The qualified cost is the sum of (1) the 
qualified direct cost for the taxable year, and (2) permissible 
additions to a qualified asset account.
    The qualified direct costs are the amount which would have 
been allowable as a deduction to the employer with respect to 
the benefits provided during the taxable year if the benefits 
were provided directly by the employer and the employer used 
the cash receipts and disbursements method of accounting. 
Additions to the qualified asset account are limited to the 
account limit. The account limit is the amount reasonably and 
actuarially necessary to fund claims uncured but unpaid (as of 
the close of the taxable year) and administrative costs with 
respect to such claims.
    These limits do not apply to a welfare benefit fund that is 
part of a plan (referred to a ``10-or-more employer'' plan), to 
which (1) more than one employer contributes, and (2) no 
employer normally contributes more than 10 percent of the total 
contributions, provided that the plan may not maintain 
experience rating arrangements with respect to individual 
employers.

                        Explanation of Provision

    The provision allows deductions for contributions to fund a 
reserve for medical benefits (other than retiree medical 
benefits) for future years provided through a bona fide 
association as defined in section 2791(d)(3) of the Public 
Health Service Act. In such case, the account limit may include 
a reserve not to exceed 35 percent of the sum of (1) qualified 
direct costs, and (2) the change in claims incurred, but unpaid 
for such taxable year with respect to medical benefits (other 
than post-retirement medical benefits).

                             Effective Date

    The provision is effective for taxable years ending after 
December 31, 2006.

4. Tax treatment of combined annuity or life insurance contracts with a 
        long-term care insurance feature (sec. 844 of the Act, secs. 
        72, 1035 and 7702B and new sec. 6050U of the Code)

                              Present Law


Annuity contracts

    In general, earnings and gains on amounts invested in a 
deferred annuity contract held by an individual are not subject 
to tax during the deferral period in the hands of the holder of 
the contract. When payout commences under a deferred annuity 
contract, the tax treatment of amounts distributed depends on 
whether the amount is received ``as an annuity'' (generally, as 
periodic payments under contract terms) or not.
    For amounts received as an annuity by an individual, an 
``exclusion ratio'' is provided for determining the taxable 
portion of each payment (sec. 72(b)). The portion of each 
payment that is attributable to recovery of the taxpayer's 
investment in the contract is not taxed. The taxable portion of 
each payment is ordinary income. The exclusion ratio is the 
ratio of the taxpayer's investment in the contract to the 
expected return under the contract, that is, the total of the 
payments expected to be received under the contract. The ratio 
is determined as of the taxpayer's annuity starting date. Once 
the taxpayer has recovered his or her investment in the 
contract, all further payments are included in income. If the 
taxpayer dies before the full investment in the contract is 
recovered, a deduction is allowed on the final return for the 
remaining investment in the contract (sec. 72(b)(3)).
    Amounts not received as an annuity generally are included 
as ordinary income if received on or after the annuity starting 
date. Amounts not received as an annuity are included in income 
to the extent allocable to income on the contract if received 
before the annuity starting date, i.e., as income first (sec. 
72(e)(2)). In general, loans under the annuity contract, 
partial withdrawals and partial surrenders are treated as 
amounts not received as an annuity and are subject to tax as 
income first (sec. 72(e)(4)). Exceptions are provided in some 
circumstances, such as for certain grandfathered contracts, 
certain life insurance and endowment contracts (other than 
modified endowment contracts), and contracts under qualified 
plans (sec. 72(e)(5)). Under these exceptions, the amount 
received is included in income, but only to the extent it 
exceeds the investment in the contract, i.e., as basis recovery 
first.

Long-term care insurance contracts

            Tax treatment
    Present law provides favorable tax treatment for qualified 
long-term care insurance contracts meeting the requirements of 
section 7702B.
    A qualified long-term care insurance contract is treated as 
an accident and health insurance contract (sec. 7702B(a)(1)). 
Amounts received under the contract generally are excludable 
from income as amounts received for personal injuries or 
sickness (sec. 104(a)(3)). The excludable amount is subject to 
a dollar cap of $250 per day or $91,250 annually (for 2006), as 
indexed, on per diem contracts only (sec. 7702B(d)). If 
payments under such contracts exceed the dollar cap, then the 
excess is excludable only to the extent of costs in excess of 
the dollar cap that are incurred for long-term care services. 
Amounts in excess of the dollar cap, with respect to which no 
actual costs were incurred for long-term care services, are 
fully includable in income without regard to the rules relating 
to return of basis under section 72.
    A plan of an employer providing coverage under a long-term 
care insurance contract generally is treated as an accident and 
health plan (benefits under which generally are excludable from 
the recipient's income under section 105).
    Premiums paid for a qualified long-term care insurance 
contract are deductible as medical expenses, subject to a 
dollar cap on the deductible amount of the premium per year 
based on the insured person's age at the end of the taxable 
year (sec. 213(d)(10)). Medical expenses generally are allowed 
as a deduction only to the extent they exceed 7.5 percent of 
adjusted gross income (sec. 213(a)).
    Unreimbursed expenses for qualified long-term care services 
provided to the taxpayer or the taxpayer's spouse or dependent 
are treated as medical expenses for purposes of the itemized 
deduction for medical expenses (subject to the floor of 7.5 
percent of adjusted gross income). Amounts received under a 
qualified long-term care insurance contract (regardless of 
whether the contract reimburses expenses or pays benefits on a 
per diem or other periodic basis) are treated as reimbursement 
for expense actually incurred for medical care (sec. 
7702B(a)(2)).
            Definitions
    A qualified long-term care insurance contract is defined as 
any insurance contract that provides only coverage of qualified 
long-term care services, and that meets additional requirements 
(sec. 7702B(b)). The contract is not permitted to provide for a 
cash surrender value or other money that can paid, assigned or 
pledged as collateral for a loan, or borrowed (and premium 
refunds are to be applied as a reduction in future premiums or 
to increase future benefits). Per diem-type and reimbursement-
type contracts are permitted.
    Qualified long-term care services are necessary diagnostic, 
preventive, therapeutic, curing, treating, mitigating, and 
rehabilitative services, and maintenance or personal care 
services that are required by a chronically ill individual and 
that are provided pursuant to a plan of care prescribed by a 
licensed health care practitioner (sec. 7702B(c)(1)).
    A chronically ill individual is generally one who has been 
certified within the previous 12 months by a licensed health 
care practitioner as being unable to perform (without 
substantial assistance) at least 2 activities of daily (ADLs) 
for at least 90 days due to a loss of functional capacity (or 
meeting other definitional requirements) (sec. 7702B(c)(2)).
            Long-term care riders on life insurance contracts
    In the case of long-term care insurance coverage provided 
by a rider on or as part of a life insurance contract, the 
requirements applicable to long-term care insurance contracts 
apply as if the portion of the contract providing such coverage 
were a separate contract (sec. 7702B(e)). The term ``portion'' 
means only the terms and benefits that are in addition to the 
terms and benefits under the life insurance contract without 
regard to long-term care coverage. As a result, if the 
applicable requirements are met by the long-term care portion 
of the contract, amounts received under the contract as 
provided by the rider are treated in the same manner as long-
term care insurance benefits, whether or not the payment of 
such amounts causes a reduction in the contract's death benefit 
or cash surrender value.
    The guideline premium limitation applicable under section 
7702(c)(2) is increased by the sum of charges (but not premium 
payments) against the life insurance contract's cash surrender 
value, less any such charges the imposition of which reduces 
premiums paid for the contract (within the meaning of sec. 
7702(f)(1)). Thus, a policyholder can pre-fund to a greater 
degree a life insurance policy with a long-term care rider 
without causing the policy to lose its tax-favored treatment as 
life insurance.
    No medical expense deduction generally is allowed under 
section 213 for charges against the life insurance contract's 
cash surrender value, unless such charges are includible in 
income because the life insurance contract is treated as a 
``modified endowment contract'' under section 72(e)(10) and 
7702A (sec. 7702B(e)((3)).

Tax-free exchanges of insurance contracts

    Present law provides for the exchange of certain insurance 
contracts without recognition of gain or loss (sec. 1035). No 
gain or loss is recognized on the exchange of: (1) a life 
insurance contract for another life insurance contract or for 
an endowment or annuity contract; or (2) an endowment contract 
for another endowment contract (that provides for regular 
payments beginning no later than under the exchanged contract) 
or for an annuity contract; or (3) an annuity contract for an 
annuity contract. The basis of the contract received in the 
exchange generally is the same as the basis of the contract 
exchanged (sec. 1031(d)). Tax-free exchanges of long-term care 
insurance contracts are not permitted.

Capitalization of certain policy acquisition expenses of insurance 
        companies

    In the case of an insurance company, specified policy 
acquisition expenses for any taxable year are required to be 
capitalized, and are amortized generally over the 120-month 
period beginning with the first month in the second half of the 
taxable year (sec. 848). Specified policy acquisition expenses 
are determined as that portion of the insurance company's 
general deductions for the taxable year that does not exceed a 
specific percentage of the net premiums for the taxable year on 
each of three categories of insurance contracts. For annuity 
contracts, the percentage is 1.75; for group life insurance 
contracts, the percentage is 2.05; and for all other specified 
insurance contracts, the percentage is 7.7. With certain 
exceptions, a specified insurance contract is any life 
insurance, annuity, or noncancellable accident and health 
insurance contract or combination thereof.

                        Explanation of Provision

    The provision provides tax rules for long-term care 
insurance that is provided by a rider on or as part of an 
annuity contract, and modifies the tax rules for long-term care 
insurance coverage provided by a rider on or as part of a life 
insurance contract.
    Under the provision, any charge against the cash value of 
an annuity contract or the cash surrender value of a life 
insurance contract made as payment for coverage under a 
qualified long- term care insurance contract that is part of or 
a rider on the annuity or life insurance contract is not 
includable in income. The investment in the contract is reduced 
(but not below zero) by the charge.
    The provision expands the rules for tax-free exchanges of 
certain insurance contracts. The provision provides that no 
gain or loss is recognized on the exchange of a life insurance 
contract, an endowment contract, an annuity contract, or a 
qualified long-term care insurance contract for a qualified 
long-term care insurance contract. The provision provides that 
a contract does not fail to be treated as an annuity contract, 
or as a life insurance contract, solely because a qualified 
long-term care insurance contract is a part of or a rider on 
such contract, for purposes of the rules for tax-free exchanges 
of certain insurance contracts.
    The provision provides that, except as otherwise provided 
in regulations, for Federal tax purposes, in the case of a 
long-term care insurance contract (whether or not qualified) 
provided by a rider on or as part of a life insurance contract 
or an annuity contract, the portion of the contract providing 
long-term care insurance coverage is treated as a separate 
contract. The term ``portion'' means only the terms and 
benefits under a life insurance contract or annuity contract 
that are in addition to the terms and benefits under the 
contract without regard to long-term care coverage. As a 
result, if the applicable requirements are met by the long-term 
care portion of the contract, amounts received under the 
contract as provided by the rider are treated in the same 
manner as long-term care insurance benefits, whether or not the 
payment of such amounts causes a reduction in the life 
insurance contract's death benefit or cash surrender value or 
in the annuity contract's cash value.
    No deduction as a medical expense is allowed for any 
payment made for coverage under a qualified long-term care 
insurance contract if the payment is made as a charge against 
the cash value of an annuity contract or the cash surrender 
value of a life insurance contract.
    The provision provides that, for taxable years beginning 
after December 31, 2009, the guideline premium limitation is 
not directly increased by charges against a life insurance 
contract's cash surrender value for coverage under the 
qualified long-term care insurance portion of the contract. 
Rather, because such charges are not included in the holder's 
income by reason of new section 72(e)(11),\619\ the charges 
reduce premiums paid under section 7702(f)(1), for purposes of 
the guideline premium limitation of section 7702. The amount by 
which premiums paid (under 7702(f)(1)) are reduced under this 
rule is intended to be the sum of any charges (but not premium 
payments) against the life insurance contract's cash surrender 
value (within the meaning of section 7702(f)(2)(a)) for long-
term care coverage made to that date under the contract. For 
taxable years beginning before January 1, 2010, the present-law 
rule of section 7702B(e)(2) before amendment by the Act (the 
so-called ``pay-as-you-go'' rule) increases the guideline 
premium limitation by this same amount, reduced by charges the 
imposition of which reduces the premiums paid under the 
contract. Thus, the provision of the Act recreates the result 
of the ``pay-as-you-go'' rule (which is repealed by the 
provision) as a reduction in premiums paid rather than as an 
increase in the guideline premium limitation.
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    \619\ Because such charges are not included in the holder's income 
under new section 72(e)(11), the effect would be to increase the 
guideline premium limitation under present-law section 7702B(e)(2)(A) 
by the amount of the charges and simultaneously to reduce it by the 
same charges under section 7702B(e)(2)(B). Such charges that are not 
included in income serve to reduce premiums paid under section 
7702(f)(1), and therefore would cancel each other out under 
7702B(e)(2)(A) and (B).
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    The provision provides that certain retirement-related 
arrangements are not treated as annuity contracts, for purposes 
of the provision.
    The provision requires information reporting by any person 
who makes a charge against the cash value of an annuity 
contract, or the cash surrender value of a life insurance 
contract, that is excludible from gross income under the 
provision. The information required to be reported includes the 
amount of the aggregate of such charges against each such 
contract for the calendar year, the amount of the reduction in 
the investment in the contract by reason of the charges, and 
the name, address, and taxpayer identification number of the 
holder of the contract. A statement is required to be furnished 
to each individual identified in the information report. 
Penalties apply for failure to file the information report or 
furnish the statement required under the provision.
    The provision modifies the application of the rules 
relating to capitalization of policy acquisition expenses of 
insurance companies. In the case of an annuity or life 
insurance contract that includes a qualified long-term care 
insurance contract as a part of or rider on the annuity or life 
insurance contract, the specified policy acquisition expenses 
that must be capitalized is determined using 7.7 percent of the 
net premiums for the taxable year on such contracts.
    The provision clarifies that, effective as if included in 
the Health Insurance Portability and Accountability Act of 1996 
(when section 7702B was enacted), except as otherwise provided 
in regulations, for Federal tax purposes (not just for purposes 
of section 7702B), in the case of a long-term care insurance 
contract (whether or not qualified) provided by a rider on or 
as part of a life insurance contract, the portion of the 
contract providing long-term care insurance coverage is treated 
as a separate contract.

                             Effective Date

    The provisions are effective generally for contracts issued 
after December 31, 1996, but only with respect to taxable years 
beginning after December 31, 2009. The provisions relating to 
tax-free exchanges apply with respect to exchanges occurring 
after December 31, 2009. The provision relating to information 
reporting applies to charges made after December 31, 2009. The 
provision relating to policy acquisition expenses applies to 
specified policy acquisition expenses determined for taxable 
years beginning after December 31, 2009. The technical 
amendment relating to long-term care insurance coverage under 
section 7702B(e) is effective as if included with the 
underlying provisions of the Health Insurance Portability and 
Accountability Act of 1996.

5. Permit tax-free distributions from governmental retirement plans for 
        premiums for health and long-term care insurance for public 
        safety officers (sec. 845 of the Act and sec. 402 of the Code)

                              Present Law

    Under present law, a distribution from a qualified 
retirement plan under section 401(a), a qualified annuity plan 
under section 403(a), a tax-sheltered annuity under section 
403(b) (a ``403(b) annuity''), an eligible deferred 
compensation plan maintained by a State or local government 
under section 457 (a ``governmental 457 plan''), or an 
individual retirement arrangement under section 408 (an 
``IRA'') generally is included in income for the year 
distributed (except to the extent the amount received 
constitutes a return of after-tax contributions or a qualified 
distribution from a Roth IRA).\620\ In addition, a distribution 
from a qualified retirement or annuity plan, a 403(b) annuity, 
or an IRA received before age 59\1/2\, death, or disability 
generally is subject to a 10-percent early withdrawal tax on 
the amount includible in income, unless an exception 
applies.\621\
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    \620\ Secs. 402(a), 403(a), 403(b), 408(d), and 457(a).
    \621\  Sec. 72(t).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that certain pension distributions 
from an eligible retirement plan used to pay for qualified 
health insurance premiums are excludible from income, up to a 
maximum exclusion of $3,000 annually. An eligible retirement 
plan includes a governmental qualified retirement or annuity 
plan, 403(b) annuity, or 457 plan. The exclusion applies with 
respect to eligible retired public safety officers who make an 
election to have qualified health insurance premiums deducted 
from amounts distributed from an eligible retirement plan and 
paid directly to the insurer. An eligible retired public safety 
officer is an individual who, by reason of disability or 
attainment of normal retirement age, is separated from service 
as a public safety officer \622\ with the employer who 
maintains the eligible retirement plan from which pension 
distributions are made.
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    \622\ The term ``public safety officer'' has the same meaning as 
under section 1204(9)(A) of the Omnibus Crime Control and Safe Streets 
Act of 1986.
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    Qualified health insurance premiums include premiums for 
accident or health insurance or qualified long-term care 
insurance contracts covering the taxpayer, the taxpayer's 
spouse, and the taxpayer's dependents. The qualified health 
insurance premiums do not have to be for a plan sponsored by 
the employer; however, the exclusion does not apply to premiums 
paid by the employee and reimbursed with pension distributions. 
Amounts excluded from income under the provision are not taken 
into account in determining the itemized deduction for medical 
expenses under section 213 or the deduction for health 
insurance of self-employed individuals under section 162.

                             Effective Date

    The provision is effective for distributions in taxable 
years beginning after December 31, 2006.

                E. United States Tax Court Modernization


1. Judges of the Tax Court (secs. 851, 852 and 853 of the Act and secs. 
        7447, 7448 and 7472 of the Code)

                              Present Law

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\623\ The salary of a Tax 
Court judge is the same salary as received by a U.S. District 
Court judge.\624\ Present law also provides Tax Court judges 
with some benefits that correspond to benefits provided to U.S. 
District Court judges, including specific retirement and 
survivor benefit programs for Tax Court judges.\625\
---------------------------------------------------------------------------
    \623\ Sec. 7441.
    \624\ Sec. 7443(c).
    \625\ Secs. 7447 and 7448.
---------------------------------------------------------------------------
    Under the retirement program, a Tax Court judge may elect 
to receive retirement pay from the Tax Court in lieu of 
benefits under another Federal retirement program. A Tax Court 
judge may also elect to participate in a plan providing annuity 
benefits for the judge's surviving spouse and dependent 
children (the ``survivors'' annuity plan''). Generally, 
benefits under the survivors'' annuity plan are payable only if 
the judge has performed at least five years of service. Cost-
of-living increases in benefits under the survivors' annuity 
plan are generally based on increases in pay for active judges.
    Tax Court judges participate in the Federal Employees Group 
Life Insurance program (the ``FEGLI'' program). Retired Tax 
Court judges are eligible to participate in the FEGLI program 
as the result of an administrative determination of their 
eligibility, rather than a specific statutory provision.
    Tax Court judges are not eligible to participate in the 
Thrift Savings Plan.

                        Explanation of Provision


Cost-of-living adjustments for survivor annuities

    The provision provides that cost-of-living increases in 
benefits under the survivors' annuity plan are generally based 
on cost-of-living increases in benefits paid under the Civil 
Service Retirement System.

Life insurance coverage

    In the case of a Tax Court judge age 65 or over, the Tax 
Court is authorized to pay on behalf of the judge any increase 
in employee premiums under the FEGLI program that occur after 
the date of enactment, including expenses generated by such 
payment, as authorized by the chief judge of the Tax Court in a 
manner consistent with payments authorized by the Judicial 
Conference of the United States (i.e., the body with policy-
making authority over the administration of the courts of the 
Federal judicial branch).

Thrift Savings Plan participation

    Under the provision, Tax Court judges are permitted to 
participate in the Thrift Savings Plan. A Tax Court judge is 
not eligible for agency contributions to the Thrift Savings 
Plan.

                             Effective Date

    The provisions are effective on the date of enactment 
(August 17, 2006), except that the provision relating to cost-
of-living increases in benefits under the survivors' annuity 
plan applies with respect to increases in Civil Service 
Retirement benefits taking effect after the date of enactment.

2. Special trial judges of the Tax Court (secs. 854 and 856 of the Act, 
        and sec. 7448 and new sec. 7443C of the Code)

                              Present Law

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\626\ The chief judge of the 
Tax Court may appoint special trial judges to handle certain 
cases.\627\ Special trial judges serve for an indefinite term. 
Special trial judges receive a salary of 90 percent of the 
salary of a Tax Court judge and are generally covered by the 
benefit programs that apply to Federal executive branch 
employees, including the Civil Service Retirement System or the 
Federal Employees' Retirement System.
---------------------------------------------------------------------------
    \626\ Sec. 7441.
    \627\ Sec. 7443A.
---------------------------------------------------------------------------

                        Explanation of Provision


Survivors' annuity plan

    Under the provision, magistrate judges of the Tax Court may 
elect to participate in the survivors' annuity plan for Tax 
Court judges. An election to participate in the survivors' 
annuity plan must be filed not later than the latest of: (1) 
twelve months after the of the provision; (2) six months after 
the date the judge takes office; or (3) six months after the 
date the judge marries.

Recall of retired special trial judges

    The provision provides rules under which a retired special 
trial judge may be recalled to perform services for up to 90 
days a year.

                             Effective Date

    The provisions are effective on the date of enactment 
(August 17, 2006).

3. Consolidate review of collection due process cases in the Tax Court 
        (sec. 855 of the Act and sec. 6330(d) of the Code)

                              Present Law

    In general, the IRS is required to notify taxpayers that 
they have a right to a fair and impartial hearing before levy 
may be made on any property or right to property.\628\ Similar 
rules apply with respect to liens.\629\ The hearing is held by 
an impartial officer from the IRS Office of Appeals, who is 
required to issue a determination with respect to the issues 
raised by the taxpayer at the hearing. The taxpayer is entitled 
to appeal that determination to a court. The appeal must be 
brought to the Tax Court, unless the Tax Court does not have 
jurisdiction over the underlying tax liability. If that is the 
case, then the appeal must be brought in the district court of 
the United States.\630\ If a court determines that an appeal 
was not made to the correct court, the taxpayer has 30 days 
after such determination to file with the correct court.
---------------------------------------------------------------------------
    \628\ Sec. 6330(a).
    \629\ Sec. 6320.
    \630\ Sec. 6330(d).
---------------------------------------------------------------------------
    The Tax Court is established under Article I of the United 
States Constitution \631\ and is a court of limited 
jurisdiction.\632\ The Tax Court only has the jurisdiction that 
is expressly conferred on it by statute.\633\ For example, the 
jurisdiction of the Tax Court includes the authority to hear 
disputes concerning notices of income tax deficiency, certain 
types of declaratory judgment, and worker classification 
status, among others, but does not include jurisdiction over 
most excise taxes imposed by the Internal Revenue Code. Thus, 
the Tax Court may not have jurisdiction over the underlying tax 
liability with respect to an appeal of a due process hearing 
relating to a collections matter. As a practical matter, many 
cases involving appeals of a due process hearing (whether 
within the jurisdiction of the Tax Court or a district court) 
do not involve the underlying tax liability.
---------------------------------------------------------------------------
    \631\ Sec. 7441.
    \632\ Sec. 7442.
    \633\ Sec. 7442.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the jurisdiction of the Tax Court by 
providing that all appeals of collection due process 
determinations are to be made to the United States Tax Court.

                             Effective Date

    The provision applies to determinations made after the date 
which is 60 days after the date of enactment (August 17, 2006).

4. Extend authority for special trial judges to hear and decide certain 
        employment status cases (sec. 857 of the Act and sec. 7443A of 
        the Code)

                              Present Law

    In connection with the audit of any person, if there is an 
actual controversy involving a determination by the IRS as part 
of an examination that (1) one or more individuals performing 
services for that person are employees of that person or (2) 
that person is not entitled to relief under section 530 of the 
Revenue Act of 1978, the Tax Court has jurisdiction to 
determine whether the IRS is correct and the proper amount of 
employment tax under such determination.\634\ Any 
redetermination by the Tax Court has the force and effect of a 
decision of the Tax Court and is reviewable.
---------------------------------------------------------------------------
    \634\ Sec. 7436.
---------------------------------------------------------------------------
    An election may be made by the taxpayer for small case 
procedures if the amount of the employment taxes in dispute is 
$50,000 or less for each calendar quarter involved.\635\ The 
decision entered under the small case procedure is not 
reviewable in any other court and should not be cited as 
authority.
---------------------------------------------------------------------------
    \635\ Sec. 7436(c).
---------------------------------------------------------------------------
    The chief judge of the Tax Court may assign proceedings to 
special trial judges. The Code enumerates certain types of 
proceedings that may be so assigned and may be decided by a 
special trial judge. In addition, the chief judge may designate 
any other proceeding to be heard by a special trial judge.\636\
---------------------------------------------------------------------------
    \636\ Sec. 7443A.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies that the chief judge of the Tax 
Court may assign to special trial judges any employment tax 
cases that are subject to the small case procedure and may 
authorize special trial judges to decide such small tax cases.

                             Effective Date

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment (August 17, 2006).

5. Confirmation of Tax Court authority to apply equitable recoupment 
        (sec. 858 of the Act and sec. 6214(b) of the Code)

                              Present Law

    Equitable recoupment is a common-law equitable principle 
that permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\637\ In Estate of Mueller v. Commissioner,\638\ the 
Court of Appeals for the Sixth Circuit held that the United 
States Tax Court (the ``Tax Court'') may not apply the doctrine 
of equitable recoupment. More recently, the Court of Appeals 
for the Ninth Circuit, in Branson v. Commissioner,\639\ held 
that the Tax Court may apply the doctrine of equitable 
recoupment.
---------------------------------------------------------------------------
    \637\ See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
States, 295 U.S. 247 (1935).
    \638\ 153 F.3d 302 (6th Cir.), cert. den., 525 U.S. 1140 (1999).
    \639\ 264 F.3d 904 (9th Cir.), cert. den., 2002 U.S. LEXIS 1545 
(U.S. Mar. 18, 2002).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision confirms that the Tax Court may apply the 
principle of equitable recoupment to the same extent that it 
may be applied in Federal civil tax cases by the U.S. District 
Courts or the U.S. Court of Claims. No implication is intended 
as to whether the Tax Court has the authority to continue to 
apply other equitable principles in deciding matters over which 
it has jurisdiction.

                             Effective Date

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment (August 17, 2006).

6. Tax Court filing fee (sec. 859 of the Act and sec. 7451 of the Code)

                              Present Law

    The Tax Court is authorized to impose a fee of up to $60 
for the filing of any petition for the redetermination of a 
deficiency or for declaratory judgments relating to the status 
and classification of 501(c)(3) organizations, the judicial 
review of final partnership administrative adjustments, and the 
judicial review of partnership items if an administrative 
adjustment request is not allowed in full.\640\ The statute 
does not specifically authorize the Tax Court to impose a 
filing fee for the filing of a petition for review of the IRS's 
failure to abate interest or for failure to award 
administrative costs and other areas of jurisdiction for which 
a petition may be filed. The practice of the Tax Court is to 
impose a $60 filing fee in all cases commenced by 
petition.\641\
---------------------------------------------------------------------------
    \640\ Sec. 7451.
    \641\ See Rule 20(b) of the Tax Court Rules of Practice and 
Procedure.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that the Tax Court is authorized to 
charge a filing fee of up to $60 in all cases commenced by the 
filing of a petition. No negative inference is to be drawn as 
to whether the Tax Court has the authority under present law to 
impose a filing fee for any case commenced by the filing of a 
petition.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

7. Use of practitioner fee (sec. 860 of the Act and sec. 7475(b) of the 
        Code)

                              Present Law

    The Tax Court is authorized to impose a fee of up to $30 
per year on practitioners admitted to practice before the Tax 
Court.\642\ These fees are to be used to employ independent 
counsel to pursue disciplinary matters.
---------------------------------------------------------------------------
    \642\ Sec. 7475.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers (i.e., a taxpayer representing himself) that will 
assist such taxpayers in controversies before the Court. For 
example, fees could be used for programs to educate pro se 
taxpayers on the procedural requirements for contesting a tax 
deficiency before the Tax Court.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

                          F. Other Provisions


1. Extension to all governmental plans of moratorium on application of 
        certain nondiscrimination rules (sec. 861 of the Act, sec. 1505 
        of the Taxpayer Relief Act of 1997, and secs. 401(a) and 401(k) 
        of the Code)

                              Present Law

    A qualified retirement plan maintained by a State or local 
government is exempt from the nondiscrimination and minimum 
participation requirements. A cash or deferred arrangement 
maintained by a State or local government is also treated as 
meeting the participation and nondiscrimination requirements 
applicable to such a qualified cash or deferred arrangement. 
Other governmental plans are subject to these 
requirements.\643\
---------------------------------------------------------------------------
    \643\ The IRS has announced that governmental plans that are 
subject to the nondiscrimination requirements are deemed to satisfy 
such requirements pending the issuance of final regulations addressing 
this issue. Notice 2003-6, 2003-3 I.R.B. 298; Notice 2001-46, 2001-2 
C.B. 122.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision exempts all governmental plans from the 
nondiscrimination and minimum participation rules. The 
provision also treats all governmental cash or deferred 
arrangements as meeting the participation and nondiscrimination 
requirements applicable to a qualified cash or deferred 
arrangement.

                             Effective Date

    The provision is effective for any year beginning after the 
date of enactment (August 17, 2006).

2. Eliminate aggregate limit for usage of excess funds from black lung 
        disability trusts to pay for retiree health (sec. 862 of the 
        Act and secs. 501(c)(21) and 9705 of the Code)

                              Present Law


Qualified black lung benefit trusts

    A qualified black lung benefit trust is exempt from Federal 
income taxation. Contributions to a qualified black lung 
benefit trust generally are deductible to the extent such 
contributions are necessary to fund the trust.
    Under present law, no assets of a qualified black lung 
benefit trust may be used for, or diverted to, any purpose 
other than (1) to satisfy liabilities, or pay insurance 
premiums to cover liabilities, arising under the Black Lung 
Acts, (2) to pay administrative costs of operating the trust, 
(3) to pay accident and health benefits or premiums for 
insurance exclusively covering such benefits (including 
administrative and other incidental expenses relating to such 
benefits) for retired coal miners and their spouses and 
dependents (within certain limits) or (4) investment in 
Federal, State, or local securities and obligations, or in time 
demand deposits in a bank or insured credit union. 
Additionally, trust assets may be paid into the national Black 
Lung Disability Trust Fund, or into the general fund of the 
U.S. Treasury.
    The amount of assets in qualified black lung benefit trusts 
available to pay accident and health benefits or premiums for 
insurance exclusively covering such benefits (including 
administrative and other incidental expenses relating to such 
benefits) for retired coal miners and their spouses and 
dependents may not exceed a yearly limit or an aggregate limit, 
whichever is less. The yearly limit is the amount of trust 
assets in excess of 110 percent of the present value of the 
liability for black lung benefits determined as of the close of 
the preceding taxable year of the trust. The aggregate limit is 
the excess of the sum of the yearly limit as of the close of 
the last taxable year ending before October 24, 1992, plus 
earnings thereon as of the close of the taxable year preceding 
the taxable year involved over the aggregate payments for 
accident of health benefits for retired coal miners and their 
spouses and dependents made from the trust since October 24, 
1992. Each of these determinations is required to be made by an 
independent actuary.
    In general, amounts used to pay retiree accident or health 
benefits are not includible in the income of the company, nor 
is a deduction allowed for such amounts.

United Mine Workers of America Combined Benefit Fund

    The United Mine Workers of America (``UMWA'') Combined 
Benefit Fund was established by the Coal Industry Retiree 
Health Benefit Act of 1992 to assume responsibility of payments 
for medical care expenses of retired miners and their 
dependents who were eligible for health care from the private 
1950 and 1974 UMWA Benefit Plans. The UMWA Combined Benefit 
Fund is financed by assessments on current and former 
signatories to labor agreements with the UMWA, past transfers 
from an overfunded United Mine Workers pension fund, and 
transfers from the Abandoned Mine Reclamation Fund.

                        Explanation of Provision

    The provision eliminates the aggregate limit on the amount 
of excess black lung benefit trust assets that may be used to 
pay accident and health benefits or premiums for insurance 
exclusively covering such benefits (including administrative 
and other incidental expenses relating to such benefits) for 
retired coal miners and their spouses and dependents.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2006.

3. Tax treatment of death benefits from company-owned life insurance 
        (``COLI'') (sec. 863 of the Act and new secs. 101(j) and 6039I 
        of the Code)

                              Present Law


Amounts received under a life insurance contract

    Amounts received under a life insurance contract paid by 
reason of the death of the insured are not includible in gross 
income for Federal tax purposes.\644\ No Federal income tax 
generally is imposed on a policyholder with respect to the 
earnings under a life insurance contract (inside buildup).\645\
---------------------------------------------------------------------------
    \644\ Sec. 101(a).
    \645\ This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract (sec. 7702).
---------------------------------------------------------------------------
    Distributions from a life insurance contract (other than a 
modified endowment contract) that are made prior to the death 
of the insured generally are includible in income to the extent 
that the amounts distributed exceed the taxpayer's investment 
in the contract (i.e., basis). Such distributions generally are 
treated first as a tax-free recovery of basis, and then as 
income.\646\
---------------------------------------------------------------------------
    \646\ Sec. 72(e). In the case of a modified endowment contract, 
however, in general, distributions are treated as income first, loans 
are treated as distributions (i.e., income rather than basis recovery 
first), and an additional 10-percent tax is imposed on the income 
portion of distributions made before age 59\1/2\ and in certain other 
circumstances (secs. 72(e) and (v)). A modified endowment contract is a 
life insurance contract that does not meet a statutory ``7-pay'' test, 
i.e., generally is funded more rapidly than seven annual level premiums 
(sec. 7702A).
---------------------------------------------------------------------------

Premium and interest deduction limitations \647\
---------------------------------------------------------------------------

    \647\ In addition to the statutory limitations described below, 
interest deductions under company-owned life insurance arrangements 
have also been limited by recent cases applying general principles of 
tax law. See Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254 
(1999), aff'd 254 F.3d 1313 (11th Cir. 2001), cert. denied, April 15, 
2002; Internal Revenue Service v. CM Holdings, Inc., 254 B.R. 578 (D. 
Del. 2000), aff'd, 301 F.3d 96 (3d Cir. 2002); American Electric Power, 
Inc. v. U.S., 136 F. Supp. 2d 762 (S. D. Ohio 2001), aff'd, 326 F.3d 
737 (6th Cir. 2003), reh. denied, 338 F.3d 534 (6th Cir. 2003), cert. 
denied, U.S. No. 03-529 (Jan. 12, 2004); Dow Chemical Company v. U.S., 
435 F.3d 594 (6th Cir. 2006), rev'g 250 F. Supp. 2d 748 (E.D. Mich. 
2003) as modified, 278 F. Supp. 2d 844 (E.D. Mich. 2003).
---------------------------------------------------------------------------
            Premiums
    Under present law, no deduction is permitted for premiums 
paid on any life insurance, annuity or endowment contract, if 
the taxpayer is directly or indirectly a beneficiary under the 
contract.\648\
---------------------------------------------------------------------------
    \648\ Sec. 264(a)(1).
---------------------------------------------------------------------------
            Interest paid or accrued with respect to the contract
    No deduction generally is allowed for interest paid or 
accrued on any debt with respect to a life insurance, annuity 
or endowment contract covering the life of any individual.\649\ 
An exception is provided under this provision for insurance of 
key persons.
---------------------------------------------------------------------------
    \649\ Sec. 264(a)(4).
---------------------------------------------------------------------------
    Interest that is otherwise deductible (e.g., is not 
disallowed under other applicable rules or general principles 
of tax law) may be deductible under the key person exception, 
to the extent that the aggregate amount of the debt does not 
exceed $50,000 per insured individual. The deductible interest 
may not exceed the amount determined by applying a rate based 
on a Moody's Corporate Bond Yield Average-Monthly Average 
Corporates. A key person is an individual who is either an 
officer or a 20-percent owner of the taxpayer. The number of 
individuals that can be treated as key persons may not exceed 
the greater of (1) five individuals, or (2) the lesser of five 
percent of the total number of officers and employees of the 
taxpayer, or 20 individuals.\650\
---------------------------------------------------------------------------
    \650\ Sec. 264(e)(3).
---------------------------------------------------------------------------
            Pro rata interest limitation
    A pro rata interest deduction disallowance rule also 
applies. Under this rule, in the case of a taxpayer other than 
a natural person, no deduction is allowed for the portion of 
the taxpayer's interest expense that is allocable to unborrowed 
policy cash surrender values.\651\ Interest expense is 
allocable to unborrowed policy cash values based on the ratio 
of (1) the taxpayer's average unborrowed policy cash values of 
life insurance, annuity and endowment contracts, to (2) the sum 
of the average unborrowed cash values (or average adjusted 
bases, for other assets) of all the taxpayer's assets.
---------------------------------------------------------------------------
    \651\ Sec. 264(f). This applies to any life insurance, annuity or 
endowment contract issued after June 8, 1997.
---------------------------------------------------------------------------
    Under the pro rata interest disallowance rule, an exception 
is provided for any contract owned by an entity engaged in a 
trade or business, if the contract covers an individual who is 
a 20-percent owner of the entity, or an officer, director, or 
employee of the trade or business. The exception also applies 
to a joint-life contract covering a 20-percent owner and his or 
her spouse.
            ``Single premium'' and ``4-out-of-7'' limitations
    Other interest deduction limitation rules also apply with 
respect to life insurance, annuity and endowment contracts. 
Present law provides that no deduction is allowed for any 
amount paid or accrued on debt incurred or continued to 
purchase or carry a single premium life insurance, annuity or 
endowment contract.\652\ In addition, present law provides that 
no deduction is allowed for any amount paid or accrued on debt 
incurred or continued to purchase or carry a life insurance, 
annuity or endowment contract pursuant to a plan of purchase 
that contemplates the systematic direct or indirect borrowing 
of part or all of the increases in the cash value of the 
contract (either from the insurer or otherwise).\653\ Under 
this rule, several exceptions are provided, including an 
exception if no part of four of the annual premiums due during 
the initial seven-year period is paid by means of such debt 
(known as the ``4-out-of-7 rule'').
---------------------------------------------------------------------------
    \652\ Sec. 264(a)(2).
    \653\ Sec. 264(a)(3).
---------------------------------------------------------------------------

Definitions of highly compensated employee

    Present law defines highly compensated employees and 
individuals for various purposes. For purposes of 
nondiscrimination rules relating to qualified retirement plans, 
an employee, including a self-employed individual, is treated 
as highly compensated with respect to a year if the employee 
(1) was a five-percent owner of the employer at any time during 
the year or the preceding year or (2) either (a) had 
compensation for the preceding year in excess of $95,000 (for 
2005) or (b) at the election of the employer had compensation 
in excess of $95,000 (for 2005) and was in the highest paid 20 
percent of employees for such year.\654\ The $95,000 dollar 
amount is indexed for inflation.
---------------------------------------------------------------------------
    \654\ Sec. 414(q). For purposes of determining the top-paid 20 
percent of employees, certain employees, such as employees subject to a 
collective bargaining agreement, are disregarded.
---------------------------------------------------------------------------
    For purposes of nondiscrimination rules relating to self-
insured medical reimbursement plans, a highly compensated 
individual is an employee who is one of the five highest paid 
officers of the employer, a shareholder who owns more than 10 
percent of the value of the stock of the employer, or is among 
the highest paid 25 percent of all employees.\655\
---------------------------------------------------------------------------
    \655\ Sec. 105(h)(5). For purposes of determining the top-paid 25 
percent of employees, certain employees, such as employees subject to a 
collective bargaining agreement, are disregarded.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides generally that, in the case of an 
employer-owned life insurance contract, the amount excluded 
from the applicable policyholder's income as a death benefit 
cannot exceed the premiums and other amounts paid by such 
applicable policyholder for the contract. The excess death 
benefit is included in income.
    Exceptions to this income inclusion rule are provided. In 
the case of an employer-owned life insurance contract with 
respect to which the notice and consent requirements of the 
provision are met, the income inclusion rule does not apply to 
an amount received by reason of the death of an insured 
individual who, with respect to the applicable policyholder, 
was an employee at any time during the 12-month period before 
the insured's death, or who, at the time the contract was 
issued, was a director or highly compensated employee or highly 
compensated individual. For this purpose, such a person is one 
who is either: (1) a highly compensated employee as defined 
under the rules relating to qualified retirement plans, 
determined without regard to the election regarding the top-
paid 20 percent of employees; or (2) a highly compensated 
individual as defined under the rules relating to self-insured 
medical reimbursement plans, determined by substituting the 
highest-paid 35 percent of employees for the highest-paid 25 
percent of employees.\656\
---------------------------------------------------------------------------
    \656\ As under present law, certain employees are disregarded in 
making the determinations regarding the top-paid groups.
---------------------------------------------------------------------------
    In the case of an employer-owned life insurance contract 
with respect to which the notice and consent requirements of 
the provision are met, the income inclusion rule does not apply 
to an amount received by reason of the death of an insured, to 
the extent the amount is (1) paid to a member of the family 
\657\ of the insured, to an individual who is the designated 
beneficiary of the insured under the contract (other than an 
applicable policyholder), to a trust established for the 
benefit of any such member of the family or designated 
beneficiary, or to the estate of the insured; or (2) used to 
purchase an equity (or partnership capital or profits) interest 
in the applicable policyholder from such a family member, 
beneficiary, trust or estate. It is intended that such amounts 
be so paid or used by the due date of the tax return for the 
taxable year of the applicable policyholder in which they are 
received as a death benefit under the insurance contract, so 
that the payment of the amount to such a person or persons, or 
the use of the amount to make such a purchase, is known in the 
taxable year for which the exception from the income inclusion 
rule is claimed.
---------------------------------------------------------------------------
    \657\ For this purpose, a member of the family is defined in 
section 267(c)(4) to include only the individual's brothers and sisters 
(whether by the whole or half blood), spouse, ancestors, and lineal 
descendants.
---------------------------------------------------------------------------
    An employer-owned life insurance contract is defined for 
purposes of the provision as a life insurance contract which 
(1) is owned by a person engaged in a trade or business and 
under which such person (or a related person) is directly or 
indirectly a beneficiary, and (2) covers the life of an 
individual who is an employee with respect to the trade or 
business of the applicable policyholder on the date the 
contract is issued.
    An applicable policyholder means, with respect to an 
employer-owned life insurance contract, the person (including 
related persons) that owns the contract, if the person is 
engaged in a trade or business, and if the person (or a related 
person) is directly or indirectly a beneficiary under the 
contract.
    For purposes of the provision, a related person includes 
any person that bears a relationship specified in section 
267(b) or 707(b)(1) \658\ or is engaged in trades or businesses 
that are under common control (within the meaning of section 
52(a) or (b)).
---------------------------------------------------------------------------
    \658\ The relationships include specified relationships among 
family members, shareholders and corporations, corporations that are 
members of a controlled group, trust grantors and fiduciaries, tax-
exempt organizations and persons that control such organizations, 
commonly controlled S corporations, partnerships and C corporations, 
estates and beneficiaries, commonly controlled partnerships, and 
partners and partnerships. Detailed rules apply to determine the 
specific relationships.
---------------------------------------------------------------------------
    The notice and consent requirements of the provision are 
met if, before the issuance of the contract, (1) the employee 
is notified in writing that the applicable policyholder intends 
to insure the employee's life, and is notified of the maximum 
face amount at issue of the life insurance contract that the 
employer might take out on the life of the employee, (2) the 
employee provides written consent to being insured under the 
contract and that such coverage may continue after the insured 
terminates employment, and (3) the employee is informed in 
writing that an applicable policyholder will be a beneficiary 
of any proceeds payable on the death of the employee.
    For purposes of the provision, an employee includes an 
officer, a director, and a highly compensated employee; an 
insured means, with respect to an employer-owned life insurance 
contract, an individual covered by the contract who is a U.S. 
citizen or resident. In the case of a contract covering the 
joint lives of two individuals, references to an insured 
include both of the individuals.
    The provision requires annual reporting and recordkeeping 
by applicable policyholders that own one or more employer-owned 
life insurance contracts. The information to be reported is (1) 
the number of employees of the applicable policyholder at the 
end of the year, (2) the number of employees insured under 
employer-owned life insurance contracts at the end of the year, 
(3) the total amount of insurance in force at the end of the 
year under such contracts, (4) the name, address, and taxpayer 
identification number of the applicable policyholder and the 
type of business in which it is engaged, and (5) a statement 
that the applicable policyholder has a valid consent (in 
accordance with the consent requirements under the provision) 
for each insured employee and, if all such consents were not 
obtained, the total number of insured employees for whom such 
consent was not obtained. The applicable policyholder is 
required to keep records necessary to determine whether the 
requirements of the reporting rule and the income inclusion 
rule of new section 101(j) are met.

                             Effective Date

    The provision generally applies to contracts issued after 
the date of enactment, except for contracts issued after such 
date pursuant to an exchange described in section 1035 of the 
Code. In addition, certain material increases in the death 
benefit or other material changes will generally cause a 
contract to be treated as a new contract, with an exception for 
existing lives under a master contract. Increases in the death 
benefit that occur as a result of the operation of section 7702 
of the Code or the terms of the existing contract, provided 
that the insurer's consent to the increase is not required, 
will not cause a contract to be treated as a new contract. In 
addition, certain changes to a contract will not be considered 
material changes so as to cause a contract to be treated as a 
new contract. These changes include administrative changes, 
changes from general to separate account, or changes as a 
result of the exercise of an option or right granted under the 
contract as originally issued.
    Examples of situations in which death benefit increases 
would not cause a contract to be treated as a new contract 
include the following:
          1. Section 7702 provides that life insurance 
        contracts need to either meet the cash value 
        accumulation test of section 7702(b) or the guideline 
        premium requirements of section 7702(c) and the cash 
        value corridor of section 7702(d). Under the corridor 
        test, the amount of the death benefit may not be less 
        than the applicable percentage of the cash surrender 
        value. Contracts may be written to comply with the 
        corridor requirement by providing for automatic 
        increases in the death benefit based on the cash 
        surrender value. Death benefit increases required by 
        the corridor test or the cash value accumulation test 
        do not require the insurer's consent at the time of 
        increase and occur in order to keep the contact in 
        compliance with section 7702.
          2. Death benefits may also increase due to normal 
        operation of the contract. For example, for some 
        contracts, policyholder dividends paid under the 
        contract may be applied to purchase paid-up additions, 
        which increase the death benefits. The insurer's 
        consent is not required for these death benefit 
        increases.
          3. For variable contacts and universal life 
        contracts, the death benefit may increase as a result 
        of market performance or the contract design. For 
        example, some contracts provide that the death benefit 
        will equal the cash value plus a specified amount at 
        risk. With these contracts, the amount of the death 
        benefit at any time will vary depending on changes in 
        the cash value of the contract. The insurance company's 
        consent is not required for these death benefit 
        increases.

4. Treatment of test room supervisors and proctors who assist in the 
        administration of college entrance and placement exams (sec. 
        864 of the Act and sec. 530 of the Revenue Reconciliation Act 
        of 1978)

                              Present Law

    Section 530 of the Revenue Act of 1978 prohibits the 
Internal Revenue Service from challenging a taxpayer's 
treatment of an individual as an independent contractor for 
employment tax purposes if the taxpayer (1) has a reasonable 
basis for such treatment and (2) consistently treats the 
individual, and any other individual holding a substantially 
similar position, as an independent contractor.

                        Explanation of Provision

    Under the provision, section 530 of the Revenue Act of 1978 
is amended to provide that in the case of an individual 
providing services as a test proctor or room supervisor by 
assisting in the administration of college entrance or 
placements examinations, the consistency requirement does not 
apply with respect to services performed after December 31, 
2006 (and remuneration paid with respect to such services). The 
provision applies if the individual (1) is performing the 
services for a tax-exempt organization, and (2) is not 
otherwise treated as an employee of such organization for 
purposes of employment taxes. Thus, under the provision, if the 
requirements are satisfied, the IRS is prohibited from 
challenging the treatment of such individuals as independent 
contractors for employment tax purposes, even if the 
organization previously treated such individuals as employees.

                             Effective Date

    The provision is effective for remuneration paid for 
services performed after December 31, 2006.

5. Rule for church plans which self-annuitize (sec. 865 of the Act and 
        sec. 401(a)(9) of the Code)

                              Present Law

    Minimum distribution rules apply to qualified retirement 
plans (sec. 401(a)(9)). Special rules apply in the case of 
payments under an annuity contract purchased with the 
employee's benefit by the plan from an insurance company.\659\ 
If certain requirements are satisfied, these special rules 
apply to annuity payments from a retirement income account 
maintained by a church (or certain other organizations as 
described in sec. 403(b)(9)) even though the payments are not 
made under an annuity purchased from an insurance company.\660\
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    \659\ Treas. Reg. sec. 1.401(a)(9)-6, A-4.
    \660\ Treas. Reg. sec. 1.403(b)-3, A-1(c)(3).
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                        Explanation of Provision

    The provision provides that annuity payments provided with 
respect to any account maintained for a participant or 
beneficiary under a qualified church plan does not fail to meet 
the minimum distribution rules merely because the payments are 
not made under an annuity contract purchased from an insurance 
company if such payments would not fail such requirements if 
provided with respect to a retirement income account described 
in section 403(b)(9).
    For purposes of the provision, a qualified church plan 
means any money purchase plan described in section 401(a) which 
(1) is a church plan (as defined in section 414(e)) with 
respect to which the election provided by section 410(d) has 
not been made, and (2) was in existence on April 17, 2002.

                             Effective Date

    The provision is effective for years ending after the date 
of enactment (August 17, 2006). No inference is intended from 
the provision with respect to the proper application of the 
minimum distribution rules to church plans before the effective 
date.

6. Exemption for income from leveraged real estate held by church plans 
        (sec. 866 of the Act and sec. 514(c)(9) of the Code)

                              Present Law

    Debt-financed income of a tax-exempt entity is subject to 
unrelated business income tax (``UBIT'') under section 514 of 
the Code. Debt-financed property generally is property that is 
held to produce income and with respect to which there is 
acquisition indebtedness.
    There is an exception to the UBIT rules for debt-financed 
property held by qualifying organizations (sec. 514(c)(9)). 
Qualified organizations include retirement plans qualified 
under section 401(a).

                        Explanation of Provision

    The provision provides that a retirement income account of 
a church (or certain other organizations) as defined in section 
403(b)(9) is a qualified organization for purposes of the 
exemption from the UBIT debt-financed property rules.

                             Effective Date

    The provision is effective for taxable years beginning on 
or after the date of enactment (August 17, 2006).

7. Church plan rule for benefit limitations (sec. 867 of the Act and 
        sec. 415(b) of the Code)

                              Present Law

    Section 415 limits the amount of benefits and contributions 
that may be provided under a tax-qualified plan. In the case of 
a defined benefit plan, the limit on annual benefits payable 
under the plan is the lesser of: (1) a dollar amount which is 
adjusted for inflation ($175,000 for 2006); and (2) 100 percent 
of the participant's compensation for the highest three years. 
Special rules apply in some cases.

                        Explanation of Provision

    The provision provides that the 100 percent of compensation 
limit does not apply to a plan maintained by an organization 
described in section 3121(w)(3)(A) except with respect to 
``highly compensated benefits''. 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 sec. 414(q)) of the 
organization. For purposes of applying the 100 percent of 
compensation limit to highly compensated benefits, all the 
benefits of the employee which would otherwise be taken into 
account in applying the limit shall be taken into account, 
i.e., the limit does not apply only to those benefits accrued 
on or after the first year in which the employee is a highly 
compensated employee.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2006.

8. Gratuitous transfers for the benefit of employees (sec. 868 of the 
        Act and sec. 664 of the Code)

                              Present Law

    Present law permits certain limited transfers of qualified 
employer securities by charitable remainder trusts to an 
employee stock ownership plan (``ESOP'') without adversely 
affecting the status of the charitable remainder trusts under 
section 664. In addition, the ESOP does not fail to be a 
qualified plan because it complies with the requirements with 
respect to a qualified gratuitous transfer.
    A number of requirements must be satisfied for a transfer 
of securities to be a qualified gratuitous transfer, including 
the following: (1) the securities transferred to the ESOP must 
previously have passed from the decedent to a charitable 
remainder trust; (2) at the time of the transfer to the ESOP, 
family members own no more than a certain percentage of the 
outstanding stock of the company; (3) immediately after the 
transfer the ESOP owns at least 60 percent of the value of the 
outstanding stock of company; and (4) the ESOP meets certain 
requirements.
    Among other requirements applicable to the ESOP, securities 
transferred to the ESOP are required to be allocated each year 
up to the applicable limit (after first allocating all other 
annual additions for the limitation year). The applicable limit 
is the lesser of (1) $30,000 (as indexed) or (2) 25 percent of 
the participant's compensation.

                        Explanation of Provision

    The provision clarifies that, under section 664, the amount 
of transferred securities required to be allocated each year is 
determined on the basis of fair market value of the securities 
when allocated to participants.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

 TITLE IX: INCREASE IN PENSION PLAN DIVERSIFICATION AND PARTICIPATION 
                      AND OTHER PENSION PROVISIONS

   A. Defined Contribution Plans Required to Provide Employees with 
  Freedom to Invest Their Plan Assets (sec. 901 of the Act, new sec. 
         401(a)(35) of the Code, and new sec. 204(j) of ERISA)

                              Present Law

In general
    Defined contribution plans may permit both employees and 
employers to make contributions to the plan. Under a qualified 
cash or deferred arrangement (commonly referred to as a 
``section 401(k) plan''), employees may elect to make pretax 
contributions to a plan, referred to as elective deferrals. 
Employees may also be permitted to make after-tax contributions 
to a plan. In addition, a plan may provide for employer 
nonelective contributions or matching contributions. 
Nonelective contributions are employer contributions that are 
made without regard to whether the employee makes elective 
deferrals or after-tax contributions. Matching contributions 
are employer contributions that are made only if the employee 
makes elective deferrals or after-tax contributions.
    Under the Code, elective deferrals, after-tax employee 
contributions, and employer matching contributions are subject 
to special nondiscrimination tests. Certain employer 
nonelective contributions may be used to satisfy these special 
nondiscrimination tests. In addition, plans may satisfy the 
special nondiscrimination tests by meeting certain safe harbor 
contribution requirements.
    The Code requires employee stock ownership plans 
(``ESOPs'') to offer certain plan participants the right to 
diversify investments in employer securities. The Employee 
Retirement Income Security Act of 1974 (``ERISA'') limits the 
amount of employer securities and employer real property that 
can be acquired or held by certain employer-sponsored 
retirement plans. The extent to which the ERISA limits apply 
depends on the type of plan and the type of contribution 
involved.
Diversification requirements applicable to ESOPs under the Code
    An ESOP is a defined contribution plan that is designated 
as an ESOP and is designed to invest primarily in qualifying 
employer securities and that meets certain other requirements 
under the Code. For purposes of ESOP investments, a 
``qualifying employer security'' is defined as: (1) publicly 
traded common stock of the employer or a member of the same 
controlled group; (2) if there is no such publicly traded 
common stock, common stock of the employer (or member of the 
same controlled group) that has both voting power and dividend 
rights at least as great as any other class of common stock; or 
(3) noncallable preferred stock that is convertible into common 
stock described in (1) or (2) and that meets certain 
requirements. In some cases, an employer may design a class of 
preferred stock that meets these requirements and that is held 
only by the ESOP.
    An ESOP can be an entire plan or it can be a component of a 
larger defined contribution plan. An ESOP may provide for 
different types of contributions. For example, an ESOP may 
include a qualified cash or deferred arrangement that permits 
employees to make elective deferrals.\661\
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    \661\ Such an ESOP design is sometimes referred to as a ``KSOP.''
---------------------------------------------------------------------------
    Under the Code, ESOPs are subject to a requirement that a 
participant who has attained age 55 and who has at least 10 
years of participation in the plan must be permitted to 
diversify the investment of the participant's account in assets 
other than employer securities.\662\ The diversification 
requirement applies to a participant for six years, starting 
with the year in which the individual first meets the 
eligibility requirements (i.e., age 55 and 10 years of 
participation). The participant must be allowed to elect to 
diversify up to 25 percent of the participant's account (50 
percent in the sixth year), reduced by the portion of the 
account diversified in prior years.
---------------------------------------------------------------------------
    \662\ Sec. 401(a)(28). The present-law diversification requirements 
do not apply to employer securities held by an ESOP that were acquired 
before January 1, 1987.
---------------------------------------------------------------------------
    The participant must be given 90 days after the end of each 
plan year in the election period to make the election to 
diversify. In the case of participants who elect to diversify, 
the plan satisfies the diversification requirement if: (1) the 
plan distributes the applicable amount to the participant 
within 90 days after the election period; (2) the plan offers 
at least three investment options (not inconsistent with 
Treasury regulations) and, within 90 days of the election 
period, invests the applicable amount in accordance with the 
participant's election; or (3) the applicable amount is 
transferred within 90 days of the election period to another 
qualified defined contribution plan of the employer providing 
investment options in accordance with (2).\663\
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    \663\ IRS Notice 88-56, 1988-1 C.B. 540, Q&A-16.
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ERISA limits on investments in employer securities and real property
    ERISA imposes restrictions on the investment of retirement 
plan assets in employer securities or employer real 
property.\664\ A retirement plan may hold only a ``qualifying'' 
employer security and only ``qualifying'' employer real 
property.
---------------------------------------------------------------------------
    \664\ ERISA sec. 407.
---------------------------------------------------------------------------
    Under ERISA, any stock issued by the employer or an 
affiliate of the employer is a qualifying employer 
security.\665\ Qualifying employer securities also include 
certain publicly traded partnership interests and certain 
marketable obligations (i.e., a bond, debenture, note, 
certificate or other evidence of indebtedness). Qualifying 
employer real property means parcels of employer real property: 
(1) if a substantial number of the parcels are dispersed 
geographically; (2) if each parcel of real property and the 
improvements thereon are suitable (or adaptable without 
excessive cost) for more than one use; (3) even if all of the 
real property is leased to one lessee (which may be an 
employer, or an affiliate of an employer); and (4) if the 
acquisition and retention of such property generally comply 
with the fiduciary rules of ERISA (with certain specified 
exceptions).
---------------------------------------------------------------------------
    \665\ Certain additional requirements apply to employer stock held 
by a defined benefit pension plan or a money purchase pension plan 
(other than certain plans in existence before the enactment of ERISA).
---------------------------------------------------------------------------
    ERISA also prohibits defined benefit pension plans and 
money purchase pension plans (other than certain plans in 
existence before the enactment of ERISA) from acquiring 
employer securities or employer real property if, after the 
acquisition, more than 10-percent of the assets of the plan 
would be invested in employer securities and real property. 
Except as discussed below with respect to elective deferrals, 
this 10-percent limitation generally does not apply to defined 
contribution plans other than money purchase pension 
plans.\666\ In addition, a fiduciary generally is deemed not to 
violate the requirement that plan assets be diversified with 
respect to the acquisition or holding of employer securities or 
employer real property in a defined contribution plan.\667\
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    \666\ The 10-percent limitation also applies to a defined 
contribution plan that is part of an arrangement under which benefits 
payable to a participant under a defined benefit pension plan are 
reduced by benefits under the defined contribution plan (i.e., a 
``floor-offset'' arrangement).
    \667\ Under ERISA, a defined contribution plan is generally 
referred to as an individual account plan. Plans that are not subject 
to the 10-percent limitation on the acquisition of employer securities 
and employer real property are referred to as ``eligible individual 
account plans.''
---------------------------------------------------------------------------
    The 10-percent limitation on the acquisition of employer 
securities and real property applies separately to the portion 
of a plan consisting of elective deferrals (and earnings 
thereon) if any portion of an individual's elective deferrals 
(or earnings thereon) are required to be invested in employer 
securities or real property pursuant to plan terms or the 
direction of a person other than the participant. This 
restriction does not apply if: (1) the amount of elective 
deferrals required to be invested in employer securities and 
real property does not exceed more than one percent of any 
employee's compensation; (2) the fair market value of all 
defined contribution plans maintained by the employer is no 
more than 10 percent of the fair market value of all retirement 
plans of the employer; or (3) the plan is an ESOP.

                        Explanation of Provision

In general
    Under the provision, in order to satisfy the plan 
qualification requirements of the Code and the vesting 
requirements of ERISA, certain defined contribution plans are 
required to provide diversification rights with respect to 
amounts invested in employer securities. Such a plan is 
required to permit applicable individuals to direct that the 
portion of the individual's account held in employer securities 
be invested in alternative investments. An applicable 
individual includes: (1) any plan participant; and (2) any 
beneficiary who has an account under the plan with respect to 
which the beneficiary is entitled to exercise the rights of a 
participant. The time when the diversification requirements 
apply depends on the type of contributions invested in employer 
securities.

Plans subject to requirements

    The diversification requirements generally apply to an 
``applicable defined contribution plan,'' \668\ which means a 
defined contribution plan holding publicly-traded employer 
securities (i.e., securities issued by the employer or a member 
of the employer's controlled group of corporations \669\ that 
are readily tradable on an established securities market).
---------------------------------------------------------------------------
    \668\ Under ERISA, the diversification requirements apply to an 
``applicable individual account plan.''
    \669\ For this purpose, ``controlled group of corporations'' has 
the same meaning as under section 1563(a), except that, in applying 
that section, 50 percent is substituted for 80 percent.
---------------------------------------------------------------------------
    For this purpose, a plan holding employer securities that 
are not publicly traded is generally treated as holding 
publicly-traded employer securities if the employer (or any 
member of the employer's controlled group of corporations) has 
issued a class of stock that is a publicly- traded employer 
security. This treatment does not apply if neither the employer 
nor any parent corporation \670\ of the employer has issued any 
publicly-traded security or any special class of stock that 
grants particular rights to, or bears particular risks for, the 
holder or the issuer with respect to any member of the 
employer's controlled group that has issued any publicly-traded 
employer security. For example, a controlled group that 
generally consists of corporations that have not issued 
publicly-traded securities may include a member that has issued 
publicly-traded stock (the ``publicly-traded member''). In the 
case of a plan maintained by an employer that is another member 
of the controlled group, the diversification requirements do 
not apply to the plan, provided that neither the employer nor a 
parent corporation of the employer has issued any publicly-
traded security or any special class of stock that grants 
particular rights to, or bears particular risks for, the holder 
or issuer with respect to the member that has issued publicly-
traded stock. The Secretary of the Treasury has the authority 
to provide other exceptions in regulations. For example, an 
exception may be appropriate if no stock of the employer 
maintaining the plan (including stock held in the plan) is 
publicly traded, but a member of the employer's controlled 
group has issued a small amount of publicly-traded stock.
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    \670\ For this purpose, ``parent corporation'' has the same meaning 
as under section 424(e), i.e., any corporation (other than the 
employer) in an unbroken chain of corporations ending with the employer 
if each corporation other than the employer owns stock possessing at 
least 50 percent of the total combined voting power of all classes of 
stock with voting rights or at least 50 percent of the total value of 
shares of all classes of stock in one of the other corporations in the 
chain.
---------------------------------------------------------------------------
    The diversification requirements do not apply to an ESOP 
that: (1) does not hold contributions (or earnings thereon) 
that are subject to the special nondiscrimination tests that 
apply to elective deferrals, employee after-tax contributions, 
and matching contributions; and (2) is a separate plan from any 
other qualified retirement plan of the employer. Accordingly, 
an ESOP that holds elective deferrals, employee contributions, 
employer matching contributions, or nonelective employer 
contributions used to satisfy the special nondiscrimination 
tests (including the safe harbor methods of satisfying the 
tests) is subject to the diversification requirements under the 
provision. The diversification rights applicable under the 
provision are broader than those applicable under the Code's 
present-law ESOP diversification rules. Thus, an ESOP that is 
subject to the new requirements is excepted from the present-
law rules.\671\
---------------------------------------------------------------------------
    \671\ An ESOP will not be treated as failing to be designed to 
invest primarily in qualifying employer securities merely because the 
plan provides diversification rights as required under the provision or 
greater diversification rights than required under the provision.
---------------------------------------------------------------------------
    The new diversification requirements also do not apply to a 
one-participant retirement plan. For purposes of the Code, a 
one-participant retirement plan is a plan that: (1) on the 
first day of the plan year, either covered only one individual 
(or the individual and his or her spouse) and the individual 
owned 100 percent of the plan sponsor (i.e., the employer 
maintaining the plan), whether or not incorporated, or covered 
only one or more partners (or partners and their spouses) in 
the plan sponsor; (2) meets the minimum coverage requirements 
without being combined with any other plan of the business that 
covers employees of the business; (3) does not provide benefits 
to anyone except the individuals and partners (and spouses) 
described in (1); (4) does not cover a business that is a 
member of an affiliated service group, a controlled group of 
corporations, or a group of corporations under common control; 
and (5) does not cover a business that uses the services of 
leased employees.\672\ It is intended that, for this purpose, a 
``partner'' includes an owner of a business that is treated as 
a partnership for tax purposes. In addition, it includes a two-
percent shareholder of an S corporation.\673\
---------------------------------------------------------------------------
    \672\ For purposes of ERISA, a one-participant retirement plan is 
defined as under the provision of ERISA that requires advance notice of 
a blackout period to be provided to participants and beneficiaries 
affected by the blackout period, as discussed below.
    \673\ Under section 1372, a two-percent shareholder of an S 
corporation is treated as a partner for fringe benefit purposes.
---------------------------------------------------------------------------

Elective deferrals and employee contributions

    In the case of amounts attributable to elective deferrals 
under a qualified cash or deferred arrangement and employee 
contributions that are invested in employer securities, any 
applicable individual must be permitted to direct that such 
amounts be invested in alternative investments.

Other contributions

    In the case of amounts attributable to contributions other 
than elective deferrals and employees contributions (i.e., 
nonelective employer contributions and employer matching 
contributions) that are invested in employer securities, an 
applicable individual who is a participant with three years of 
service,\674\ a beneficiary of such a participant, or a 
beneficiary of a deceased participant must be permitted to 
direct that such amounts be invested in alternative 
investments.
---------------------------------------------------------------------------
    \674\ Years of service is defined as under the rules relating to 
vesting (sec. 411(a)).
---------------------------------------------------------------------------
    A transition rule applies to amounts attributable to these 
other contributions that are invested in employer securities 
acquired before the first plan year for which the new 
diversification requirements apply. Under the transition rule, 
for the first three years for which the new diversification 
requirements apply to the plan, the applicable percentage of 
such amounts is subject to diversification as shown in Table 8, 
below. The applicable percentage applies separately to each 
class of employer security in an applicable individual's 
account. The transition rule does not apply to plan 
participants who have three years of service and who have 
attained age 55 by the beginning of the first plan year 
beginning after December 31, 2005.

     Table 8.--Applicable Percentage for Employer Securities Held on
                             Effective Date
------------------------------------------------------------------------
                                                             Applicable
        Plan year for which diversification applies          percentage
------------------------------------------------------------------------
First year................................................           33
Second year...............................................           66
Third year................................................          100
------------------------------------------------------------------------

    The application of the transition rule is illustrated by 
the following example. Suppose that the account of a 
participant with at least three years of service held 120 
shares of employer common stock contributed as matching 
contributions before the diversification requirements became 
effective. In the first year for which diversification applies, 
33 percent (i.e., 40 shares) of that stock is subject to the 
diversification requirements. In the second year for which 
diversification applies, a total of 66 percent of 120 shares of 
stock (i.e., 79 shares, or an additional 39 shares) is subject 
to the diversification requirements. In the third year for 
which diversification applies, 100 percent of the stock, or all 
120 shares, is subject to the diversification requirements. In 
addition, in each year, employer stock in the account 
attributable to elective deferrals and employee contributions 
is fully subject to the diversification requirements, as is any 
new stock contributed to the account.

Rules relating to the election of investment alternatives

    A plan subject to the diversification requirements is 
required to give applicable individuals a choice of at least 
three investment options, other than employer securities, each 
of which is diversified and has materially different risk and 
return characteristics. It is intended that other investment 
options generally offered by the plan also must be available to 
applicable individuals.
    A plan does not fail to meet the diversification 
requirements merely because the plan limits the times when 
divestment and reinvestment can be made to periodic, reasonable 
opportunities that occur at least quarterly. It is intended 
that applicable individuals generally be given the opportunity 
to make investment changes with respect to employer securities 
on the same basis as the opportunity to make other investment 
changes, except in unusual circumstances. Thus, in general, 
applicable individuals must be given the opportunity to request 
changes with respect to investments in employer securities with 
the same frequency as the opportunity to make other investment 
changes and such changes must be implemented in the same 
timeframe as other investment changes, unless circumstances 
require different treatment.
    Except as provided in regulations, a plan may not impose 
restrictions or conditions with respect to the investment of 
employer securities that are not imposed on the investment of 
other plan assets (other than restrictions or conditions 
imposed by reason of the application of securities laws). For 
example, such a restriction or condition includes a provision 
under which a participant who divests his or her account of 
employer securities receives less favorable treatment (such as 
a lower rate of employer contributions) than a participant 
whose account remains invested in employer securities. On the 
other hand, such a restriction does not include the imposition 
of fees with respect to other investment options under the 
plan, merely because fees are not imposed with respect to 
investments in employer securities.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2006.
    In the case of a plan maintained pursuant to one or more 
collective bargaining agreements, the provision is effective 
for plan years beginning after the earlier of (1) the later of 
December 31, 2007, or the date on which the last of such 
collective bargaining agreements terminates (determined without 
regard to any extension thereof after the date of enactment 
(August 17, 2006)), or (2) December 31, 2008.
    A special effective date applies with respect to employer 
matching and nonelective contributions (and earnings thereon) 
that are invested in employer securities that, as of September 
17, 2003: (1) consist of preferred stock; and (2) are held 
within an ESOP, under the terms of which the value of the 
preferred stock is subject to a guaranteed minimum. Under the 
special rule, the diversification requirements apply to such 
preferred stock for plan years beginning after the earlier of 
(1) December 31, 2007; or (2) the first date as of which the 
actual value of the preferred stock equals or exceeds the 
guaranteed minimum. When the new diversification requirements 
become effective for the plan under the special rule, the 
applicable percentage of employer securities held on the 
effective date that is subject to diversification is determined 
without regard to the special rule.

  B. Increase Participation Through Automatic Enrollment Arrangements 
(sec. 902 of the Act, secs. 404(c) and 514 of ERISA, and secs. 401(k), 
                   401(m), 414 and 4979 of the Code)


                              Present Law


Qualified cash or deferred arrangements_in general

    Under present law, most defined contribution plans may 
include a qualified cash or deferred arrangement (commonly 
referred to as a ``section 401(k)'' or ``401(k)'' plan),\675\ 
under which employees may elect to receive cash or to have 
contributions made to the plan by the employer on behalf of the 
employee in lieu of receiving cash. Contributions made to the 
plan at the election of the employee are referred to as 
``elective deferrals'' or ``elective contributions''.\676\ A 
401(k) plan may be designed so that the employee will receive 
cash unless an affirmative election to make contributions is 
made. Alternatively, a plan may provide that elective 
contributions are made at a specified rate unless the employee 
elects otherwise (i.e., elects not to make contributions or to 
make contributions at a different rate). Arrangements that 
operate in this manner are sometimes referred to as ``automatic 
enrollment'' or ``negative election'' plans. In either case, 
the employee must have an effective opportunity to elect to 
receive cash in lieu of contributions.\677\
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    \675\ Legally, a section 401(k) plan is not a separate type of 
plan, but is a profit-sharing, stock bonus, or pre-ERISA money purchase 
plan that contains a qualified cash or deferred arrangement. The terms 
``section 401(k) plan'' and ``401(k) plan'' are used here for 
convenience.
    \676\ The maximum annual amount of elective deferrals that can be 
made by an individual is subject to a limit ($15,000 for 2006). An 
individual who has attained age 50 before the end of the taxable year 
may also make catch-up contributions to a section 401(k) plan, subject 
to a limit ($5,000 for 2006).
    \677\ Treasury regulations provide that whether an employee has an 
effective opportunity to receive cash is based on all the relevant 
facts and circumstances, including the adequacy of notice of the 
availability of the election, the period of time during which an 
election may be made, and any other conditions on elections. Treas. 
Reg. sec. 1.401(k)-1(e)(2).
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Nondiscrimination rules

    A special nondiscrimination test applies to elective 
deferrals under a section 401(k) plan, called the actual 
deferral percentage test or the ``ADP'' test. The ADP test 
compares the actual deferral percentages (``ADPs'') of the 
highly compensated employee group and the nonhighly compensated 
employee group. The ADP for each group generally is the average 
of the deferral percentages separately calculated for the 
employees in the group who are eligible to make elective 
deferrals for all or a portion of the relevant plan year. Each 
eligible employee's deferral percentage generally is the 
employee's elective deferrals for the year divided by the 
employee's compensation for the year.
    The plan generally satisfies the ADP test if the ADP of the 
highly compensated employee group for the current plan year is 
either (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ADP of the 
nonhighly compensated employee group for the prior plan year.
    Under a safe harbor, a section 401(k) plan is deemed to 
satisfy the special nondiscrimination test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement (a ``safe harbor section 401(k) plan''). A 
plan satisfies the contribution requirement under the safe 
harbor rule if the employer either (1) satisfies a matching 
contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement. A plan generally satisfies the matching 
contribution requirement if, under the arrangement: (1) the 
employer makes a matching contribution on behalf of each 
nonhighly compensated employee that is equal to (a) 100 percent 
of the employee's elective deferrals up to three percent of 
compensation and (b) 50 percent of the employee's elective 
deferrals from three to five percent of compensation; \678\ and 
(2) the rate of match with respect to any elective deferrals 
for highly compensated employees is not greater than the rate 
of match for nonhighly compensated employees.
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    \678\ In lieu of matching contributions at rates equal to the safe 
harbor rates, a plan may provide for an alternative match if (1) the 
rate of the matching contributions does not increase as an employee's 
rate of elective deferrals increases and (2) the amount of matching 
contributions at such rate of elective deferrals is at least equal to 
the aggregate amount of contributions which would be made if the rate 
of the matching contributions equaled the safe harbor rates.
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    Employer matching contributions are also subject to a 
special nondiscrimination test, the ``ACP test,'' which 
compares the average actual contribution percentages (``ACPs'') 
of matching contributions for the highly compensated employee 
group and the nonhighly compensated employee group. The plan 
generally satisfies the ACP test if the ACP of the highly 
compensated employee group for the current plan year is either 
(1) not more than 125 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year, or (2) not 
more than 200 percent of the ACP of the nonhighly compensated 
employee group for the prior plan year and not more than two 
percentage points greater than the ACP of the nonhighly 
compensated employee group for the prior plan year.
    A safe harbor section 401(k) plan that provides for 
matching contributions is deemed to satisfy the ACP test if, in 
addition to meeting the safe harbor contribution and notice 
requirements under section 401(k), (1) matching contributions 
are not provided with respect to elective deferrals in excess 
of six percent of compensation, (2) the rate of matching 
contribution does not increase as the rate of an employee's 
elective deferrals increases, and (3) the rate of matching 
contribution with respect to any rate of elective deferral of a 
highly compensated employee is no greater than the rate of 
matching contribution with respect to the same rate of deferral 
of a nonhighly compensated employee.

Top-heavy rules

    Special rules apply in the case of a top-heavy plan. In 
general, a defined contribution plan is a top-heavy plan if the 
accounts of key employees account for more than 60 percent of 
the aggregate value of accounts under the plan. If a plan is a 
top-heavy plan, then certain minimum vesting standards and 
minimum contribution requirements apply.
    A plan that consists solely of contributions that satisfy 
the safe harbor plan rules for elective and matching 
contributions is not considered a top-heavy plan.

Tax-sheltered annuities

    Tax-sheltered annuities (``section 403(b) annuities'') may 
provide for contributions on a salary reduction basis, similar 
to section 401(k) plans. Matching contributions under a section 
403(b) annuity are subject to the same nondiscrimination rules 
under section 401(m) as matching contributions under a section 
401(k) plan (sec. 403(b)(12)). Thus, for example, the safe 
harbor method of satisfying the section 401(m) rules for 
matching contributions under a 401(k) plan applies to section 
403(b) annuities.

Excess elective contributions

    Present law provides special rules for distributions of 
elective contributions that exceed the amount permitted under 
the nondiscrimination rules or the dollar limit on such 
contributions.

Fiduciary rules applicable to default investments of individual account 
        plans

    ERISA imposes standards on the conduct of plan fiduciaries, 
including persons who make investment decisions with respect to 
plan assets. Fiduciaries are personally liable for any losses 
to the plan due to a violation of fiduciary standards.
    An individual account plan may permit participants to make 
investment decisions with respect to their accounts. ERISA 
fiduciary liability does not apply to investment decisions made 
by plan participants if participants exercise control over the 
investment of their individual accounts, as determined under 
ERISA regulations. In that case, a plan fiduciary may be 
responsible for the investment alternatives made available, but 
not for the specific investment decisions made by participants.

Preemption of State law

    ERISA generally preempts all State laws relating to 
employee benefit plans, other than generally applicable 
criminal laws and laws relating to insurance, banking, or 
securities.

Excess contributions

    An excise tax is imposed on an employer making excess 
contributions or excess aggregate contributions to a qualified 
retirement plan. Excess contributions are elective 
contributions, including qualified nonelective contributions 
and qualified matching contributions that are treated as 
elective contributions, made to a plan on behalf of highly 
compensated employees to the extent that the contributions fail 
to satisfy the applicable nondiscrimination tests for such plan 
for the year. Excess aggregate contributions are the aggregate 
amount of employer matching contributions and employee after-
tax contributions to a plan for highly compensated employees to 
the extent that the contributions fail to satisfy the 
applicable nondiscrimination tests for such plan for the year.
    The excise tax is equal to 10 percent of the excess 
contributions or excess aggregate contributions under a plan 
for the plan year ending in the taxable year. The tax does not 
apply to any excess contributions or excess aggregate 
contributions that, together with income allocable to the 
contributions, are distributed or forfeited (if forfeitable) 
within 2\1/2\ months after the close of the plan year. Any 
excess contributions or excess aggregate contributions that are 
distributed within 2\1/2\ months after the close of the plan 
year are treated as received and earned by the recipient in the 
taxable year for which such contributions are made. If the 
total of such distributions to a recipient under a plan for any 
plan year is less than $100, such distributions (and any income 
allocable thereto) are treated as earned and received by the 
recipient in the taxable year in which the distributions are 
made.
    Additionally, if certain requirements are met, excess 
contributions may be recharacterized as after-tax employee 
contributions, no later than 2\1/2\ months after the close of 
the plan year to which the excess contributions relate.\679\
---------------------------------------------------------------------------
    \679\ Treas. Reg. sec. 1.401(k)-2(b)(3).
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    Under the provision, a 401(k) plan that contains an 
automatic enrollment feature that satisfies certain 
requirements (a ``qualified automatic contribution 
arrangement'') is treated as meeting the ADP test with respect 
to elective deferrals and the ACP test with respect to matching 
contributions. In addition, a plan consisting solely of 
contributions made pursuant to a qualified automatic 
contribution arrangement is not subject to the top-heavy rules.
    A qualified automatic contribution arrangement must meet 
certain requirements with respect to: (1) automatic deferral; 
(2) matching or nonelective contributions; and (3) notice to 
employees.

Automatic deferral/amount of elective contributions

    A qualified automatic contribution arrangement must provide 
that, unless an employee elects otherwise, the employee is 
treated as making an election to make elective deferrals equal 
to a stated percentage of compensation not in excess of 10 
percent and at least equal to: three percent of compensation 
for the first year the deemed election applies to the 
participant; four percent during the second year; five percent 
during the third year; and six percent during the fourth year 
and thereafter. The stated percentage must be applied uniformly 
to all eligible employees.
    Eligible employees mean all employees eligible to 
participate in the arrangement, other than employees eligible 
to participate in the arrangement immediately before the date 
on which the arrangement became a qualified automatic 
contribution arrangement with an election in effect (either to 
participate at a certain percentage or not to participate).

Matching or nonelective contribution requirement

            Contributions
    An automatic enrollment feature satisfies the contribution 
requirement if the employer either (1) satisfies a matching 
contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the automatic enrollment feature. A plan generally satisfies 
the matching contribution requirement if, under the 
arrangement: (1) the employer makes a matching contribution on 
behalf of each nonhighly compensated employee that is equal to 
100 percent of the employee's elective deferrals as do not 
exceed one percent of compensation and 50 percent of the 
employee's elective deferrals as exceeds one percent but does 
not exceed six percent of compensation and (2) the rate of 
match with respect to any elective deferrals for highly 
compensated employees is not greater than the rate of match for 
nonhighly compensated employees.
    A plan including an automatic enrollment feature that 
provides for matching contributions is deemed to satisfy the 
ACP test if, in addition to meeting the safe harbor 
contribution requirements applicable to the qualified automatic 
enrollment feature: (1) matching contributions are not provided 
with respect to elective deferrals in excess of six percent of 
compensation, (2) the rate of matching contribution does not 
increase as the rate of an employee's elective deferrals 
increases, and (3) the rate of matching contribution with 
respect to any rate of elective deferral of a highly 
compensated employee is no greater than the rate of matching 
contribution with respect to the same rate of deferral of a 
nonhighly compensated employee.
            Vesting
    Any matching or other employer contributions taken into 
account in determining whether the requirements for a qualified 
automatic contribution arrangement are satisfied must vest at 
least as rapidly as under two-year cliff vesting. That is, 
employees with at least two years of service must be 100 
percent vested with respect to such contributions.
            Withdrawal restrictions
    Under the provision, any matching or other employer 
contributions taken into account in determining whether the 
requirements for a qualified automatic enrollment feature are 
satisfied are subject to the withdrawal rules applicable to 
elective contributions.

Notice requirement

    Under a notice requirement, each employee eligible to 
participate in the arrangement must receive notice of the 
arrangement which is sufficiently accurate and comprehensive to 
apprise the employee of such rights and obligations and is 
written in a manner calculated to be understood by the average 
employee to whom the arrangement applies. The notice must 
explain: (1) the employee's right under the arrangement to 
elect not to have elective contributions made on the employee's 
behalf or to elect to have contributions made in a different 
amount; and (2) how contributions made under the automatic 
enrollment arrangement will be invested in the absence of any 
investment election by the employee. The employee must be given 
a reasonable period of time after receipt of the notice and 
before the first election contribution is to be made to make an 
election with respect to contributions and investments.

Application to tax-sheltered annuities

    The new safe harbor rules for automatic contribution plans 
apply with respect to matching contributions under a section 
403(b) annuity through the operation of section 403(b)(12).

Corrective distributions

    The provision includes rules under which erroneous 
automatic contributions (``permissible withdrawals'') may be 
distributed from the plan. Permissible withdrawals must be made 
pursuant to an election by the employee no later than 90 days 
after the date of the first elective contribution with respect 
to the employee under the arrangement. The amount that is 
treated as a permissible withdrawal is limited to the amount of 
automatic contributions made during the 90-day period that the 
employee elects to treat as an erroneous contribution. It is 
intended that distributions of such amounts are generally 
treated as a payment of compensation, rather than as a 
contribution to and then a distribution from the plan. The 10-
percent early withdrawal tax does not apply to distributions of 
erroneous automatic contributions. In addition, it is intended 
that such contributions are not taken into account for purposes 
of applying the nondiscrimination rules or the limit on 
elective deferrals. Distributions of such contributions are not 
subject to the otherwise applicable withdrawal restrictions. 
The rules for corrective distributions apply to distributions 
from (1) qualified pension plans under Code section 401(a), (2) 
plans under which amounts are contributed by an individual's 
employer for Code section 403(b) annuity contract and (3) 
governmental eligible deferred compensation plans under Code 
section 457(b).
    The corrective distribution rules are not limited to 
arrangements meeting the requirements of a qualified automatic 
contribution arrangement.

Excess contributions

    In the case of an eligible automatic contribution 
arrangement, the excise tax on excess contributions does not 
apply to any excess contributions or excess aggregate 
contributions which, together with income allocable to the 
contributions, are distributed or forfeited (if forfeitable) 
within six months after the close of the plan year. 
Additionally, any excess contributions or excess aggregate 
contributions (and any income allocable thereto) that are 
distributed within the period required to avoid application of 
the excise tax are treated as earned and received by the 
recipient in the taxable year in which the distribution is made 
(regardless of the amount distributed), and the income 
allocable to excess contributions or excess aggregate 
contributions that must be distributed is determined through 
the end of the year for which the contributions were made.

Preemption of State law

    The provision preempts any State law that would directly or 
indirectly prohibit or restrict the inclusion in a plan of an 
automatic contribution arrangement. The Secretary of Labor may 
establish minimum standards for such arrangements in order for 
preemption to apply. An automatic contribution arrangement is 
an arrangement: (1) under which a participant may elect to have 
the plan sponsor make payments as contributions under the plan 
on behalf of the participant, or to the participant directly in 
cash, (2) under which a participant is treated as having 
elected to have the plan sponsor make such contributions in an 
amount equal to a uniform percentage of compensation provided 
under the plan until the participant specifically elects not to 
have such contributions made (or elects to have contributions 
made at a different percentage), and (3) under which 
contributions are invested in accordance with regulations 
issued by the Secretary of Labor relating to default 
investments as provided under the Act. The State law preemption 
rules under the Act are not limited to arrangements that meet 
the requirements of a qualified automatic contribution 
arrangement.
    A plan administrator must provide notice to each 
participant to whom the automatic contribution arrangement 
applies. If the notice requirement is not satisfied, an ERISA 
penalty of $1,100 per day applies.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2007. The preemption of conflicting State 
regulations is effective on the date of enactment (August 17, 
2006). No inference is intended as to the effect of conflicting 
State regulations prior to date of enactment.

 C. Treatment of Eligible Combined Defined Benefit Plans and Qualified 
Cash or Deferred Arrangements (sec. 903 of the Act, new sec. 414(x) of 
                the Code, and new sec. 210(e) of ERISA)


                              Present Law


In general

    Under present law, most defined contribution plans may 
include a qualified cash or deferred arrangement (commonly 
referred to as a ``section 401(k)'' or ``401(k)'' plan),\680\ 
under which employees may elect to receive cash or to have 
contributions made to the plan by the employer on behalf of the 
employee in lieu of receiving cash (referred to as ``elective 
deferrals'' or ``elective contributions'').\681\ A section 
401(k) plan may provide that elective deferrals are made for an 
employee at a specified rate unless the employee elects 
otherwise (i.e., elects not to make contributions or to make 
contributions at a different rate), provided that the employee 
has an effective opportunity to elect to receive cash in lieu 
of the default contributions. Such a design is sometimes 
referred to as ``automatic enrollment.''
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    \680\ Legally, a section 401(k) plan is not a separate type of 
plan, but is a profit-sharing, stock bonus, or pre-ERISA money purchase 
plan that contains a qualified cash or deferred arrangement. The terms 
``section 401(k) plan'' and ``401(k) plan'' are used here for 
convenience.
    \681\ The maximum annual amount of elective deferrals that can be 
made by an individual is subject to a dollar limit ($15,000 for 2006). 
An individual who has attained age 50 before the end of the taxable 
year may also make catch-up contributions to a section 401(k) plan, 
subject to a limit ($5,000 for 2006).
---------------------------------------------------------------------------
    Besides elective deferrals, a section 401(k) plan may 
provide for: (1) matching contributions, which are employer 
contributions that are made only if an employee makes elective 
deferrals; and (2) nonelective contributions, which are 
employer contributions that are made without regard to whether 
an employee makes elective deferrals. Under a section 401(k) 
plan, no benefit other than matching contributions can be 
contingent on whether an employee makes elective deferrals. 
Thus, for example, an employee's eligibility for benefits under 
a defined benefit pension plan cannot be contingent on whether 
the employee makes elective deferrals.
    A cash balance plan is a defined benefit pension plan with 
benefits resembling the benefits associated with defined 
contribution plans. Cash balance plans are sometimes referred 
to as ``hybrid'' plans because they combine features of a 
defined benefit pension plan and a defined contribution plan. 
Under a cash balance plan, benefits are determined by reference 
to a hypothetical account balance. An employee's hypothetical 
account balance is determined by reference to hypothetical 
annual allocations to the account (``pay credits'') (e.g., a 
certain percentage of the employee's compensation for the year) 
and hypothetical earnings on the account (``interest 
credits''). Other types of hybrid plans exist as well, such as 
so-called ``pension equity'' plans.
    The assets of a qualified retirement plan (either a defined 
contribution plan or a defined benefit pension plan) must be 
held in trust for the exclusive benefit of participants and 
beneficiaries. Defined benefit pension plans are subject to 
funding rules, which require employers to make contributions at 
specified minimum levels.\682\ In addition, limits apply on the 
extent to which defined benefit pension plan assets may be 
invested in employer securities or real property. The minimum 
funding rules and limits on investments in employer securities 
or real property generally do not apply to defined contribution 
plans.
---------------------------------------------------------------------------
    \682\ The Pension Benefit Guaranty Corporation generally guarantees 
a minimum level of benefits under a defined benefit plan.
---------------------------------------------------------------------------

Nondiscrimination requirements

    Under a general nondiscrimination requirement, the 
contributions or benefits provided under a qualified retirement 
plan must not discriminate in favor of highly compensated 
employees.\683\ Treasury regulations provide detailed and 
exclusive rules for determining whether a plan satisfies the 
general nondiscrimination rules. Under the regulations, the 
amount of contributions or benefits provided under the plan and 
the benefits, rights and features offered under the plan must 
be tested.
---------------------------------------------------------------------------
    \683\ Under special rules, referred to as the permitted disparity 
rules, higher contributions or benefits can be provided to higher-paid 
employees in certain circumstances without violating the general 
nondiscrimination rules.
---------------------------------------------------------------------------
    A special nondiscrimination test applies to elective 
deferrals under a section 401(k) plan, called the actual 
deferral percentage test or the ``ADP'' test. The ADP test 
compares the actual deferral percentages (``ADPs'') of the 
highly compensated employee group and the nonhighly compensated 
employee group. The ADP for each group generally is the average 
of the deferral percentages separately calculated for the 
employees in the group who are eligible to make elective 
deferrals for all or a portion of the relevant plan year. Each 
eligible employee's deferral percentage generally is the 
employee's elective deferrals for the year divided by the 
employee's compensation for the year.
    The plan generally satisfies the ADP test if the ADP of the 
highly compensated employee group for the current plan year is 
either (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ADP of the 
nonhighly compensated employee group for the prior plan year.
    Under a safe harbor, a section 401(k) plan is deemed to 
satisfy the special nondiscrimination test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement (a ``safe harbor section 401(k) plan''). A 
plan satisfies the contribution requirement under the safe 
harbor rule if the employer either (1) satisfies a matching 
contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement. A plan generally satisfies the matching 
contribution requirement if, under the arrangement: (1) the 
employer makes a matching contribution on behalf of each 
nonhighly compensated employee that is equal to (a) 100 percent 
of the employee's elective deferrals up to three percent of 
compensation and (b) 50 percent of the employee's elective 
deferrals from three to five percent of compensation; and (2) 
the rate of matching contribution with respect to any rate of 
elective deferrals of a highly compensated employee is not 
greater than the rate of matching contribution with respect to 
the same rate of elective deferral of a nonhighly compensated 
employee.\684\
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    \684\ Alternatively, matching contributions may be provided at a 
different rate, provided that: (1) the rate of matching contribution 
doesn't increase as the rate of elective deferral increases; and (2) 
the aggregate amount of matching contributions with respect to each 
rate of elective deferral is not less than the amount that would be 
provided under the general rule.
---------------------------------------------------------------------------
    Employer matching contributions are also subject to a 
special nondiscrimination test, the ``ACP test,'' which 
compares the average actual contribution percentages (``ACPs'') 
of matching contributions for the highly compensated employee 
group and the nonhighly compensated employee group. The plan 
generally satisfies the ACP test if the ACP of the highly 
compensated employee group for the current plan year is either 
(1) not more than 125 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year, or (2) not 
more than 200 percent of the ACP of the nonhighly compensated 
employee group for the prior plan year and not more than two 
percentage points greater than the ACP of the nonhighly 
compensated employee group for the prior plan year.
    A safe harbor section 401(k) plan that provides for 
matching contributions must satisfy the ACP test. 
Alternatively, it is deemed to satisfy the ACP test if it 
satisfies a matching contribution safe harbor, under which (1) 
matching contributions are not provided with respect to 
elective deferrals in excess of six percent of compensation, 
(2) the rate of matching contribution does not increase as the 
rate of an employee's elective deferrals increases, and (3) the 
rate of matching contribution with respect to any rate of 
elective deferral of a highly compensated employee is no 
greater than the rate of matching contribution with respect to 
the same rate of deferral of a nonhighly compensated employee.

Vesting rules

    A qualified retirement plan generally must satisfy one of 
two alternative minimum vesting schedules. A plan satisfies the 
first schedule if a participant acquires a nonforfeitable right 
to 100 percent of the participant's accrued benefit derived 
from employer contributions upon the completion of five years 
of service. A plan satisfies the second schedule if a 
participant has a nonforfeitable right to at least 20 percent 
of the participant's accrued benefit derived from employer 
contributions after three years of service, 40 percent after 
four years of service, 60 percent after five years of service, 
80 percent after six years of service, and 100 percent after 
seven years of service.
    Special vesting rules apply to elective deferrals and 
matching contributions. Elective deferrals must be immediately 
vested. Matching contributions generally must vest at least as 
rapidly as under one of two alternative minimum vesting 
schedules. A plan satisfies the first schedule if a participant 
acquires a nonforfeitable right to 100 percent of matching 
contributions upon the completion of three years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to 20 percent of matching contributions 
for each year of service beginning with the participant's 
second year of service and ending with 100 percent after six 
years of service. However, matching contributions under a safe 
harbor section 401(k) plan must be immediately vested.

Top-heavy rules

    Under present law, a top-heavy plan is a qualified 
retirement plan under which cumulative benefits are provided 
primarily to key employees. An employee is considered a key 
employee if, during the prior year, the employee was (1) an 
officer with compensation in excess of a certain amount 
($140,000 for 2006), (2) a five-percent owner, or (3) a one-
percent owner with compensation in excess of $150,000. A plan 
that is top-heavy must provide (1) minimum employer 
contributions or benefits to participants who are not key 
employees and (2) more rapid vesting for participants who are 
not key employees (as discussed below).
    In the case of a defined contribution plan, the minimum 
contribution is the lesser of (1) three percent of 
compensation, or (2) the highest percentage of compensation at 
which contributions were made for any key employee. In the case 
of a defined benefit pension, the minimum benefit is the lesser 
of (1) two percent of average compensation multiplied by the 
participant's years of service, or (2) 20 percent of average 
compensation. For this purpose, a participant's average 
compensation is generally average compensation for the 
consecutive-year period (not exceeding five years) during which 
the participant's aggregate compensation is the greatest.
    Top-heavy plans must satisfy one of two alternative minimum 
vesting schedules. A plan satisfies the first schedule if a 
participant acquires a nonforfeitable right to 100 percent of 
contributions or benefits upon the completion of three years of 
service. A plan satisfies the second schedule if a participant 
has a nonforfeitable right to 20 percent of contributions or 
benefits for each year of service beginning with the 
participant's second year of service and ending with 100 
percent after six years of service.\685\
---------------------------------------------------------------------------
    \685\ The top-heavy vesting schedules are the same as the vesting 
schedules that apply to matching contributions.
---------------------------------------------------------------------------
    A safe harbor section 401(k) plan is not subject to the 
top-heavy rules, provided that, if the plan provides for 
matching contributions, it must also satisfy the matching 
contribution safe harbor.

Other qualified retirement plan requirements

    Qualified retirement plans are subject to various other 
requirements, some of which depend on whether the plan is a 
defined contribution plan or a defined benefit pension. Such 
requirements include limits on contributions and benefits and 
spousal protections.
    In the case of a defined contribution plan, annual 
additions with respect to each plan participant cannot exceed 
the lesser of: (1) 100 percent of the participant's 
compensation; or (2) a dollar amount, indexed for inflation 
($44,000 for 2006). Annual additions are the sum of employer 
contributions, employee contributions, and forfeitures with 
respect to an individual under all defined contribution plans 
of the same employer. In the case of a defined benefit pension, 
annual benefits payable under the plan generally may not exceed 
the lesser of: (1) 100 percent of average compensation; or (2) 
a dollar amount, indexed for inflation ($175,000 for 2006).
    Defined benefit pension plans are required to provide 
benefits in the form of annuity unless the participant (and his 
or her spouse, in the case of a married participant) consents 
to another form of benefit. In addition, in the case of a 
married participant, benefits generally must be paid in the 
form of a qualified joint and survivor annuity (``QJSA'') 
unless the participant and his or her spouse consent to a 
distribution in another form. A QJSA is an annuity for the life 
of the participant, with a survivor annuity for the life of the 
spouse which is not less than 50 percent (and not more than 100 
percent) of the amount of the annuity payable during the joint 
lives of the participant and his or her spouse. These spousal 
protection requirements generally do not apply to a defined 
contribution plan that does not offer annuity distributions.

Annual reporting by qualified retirement plans

    The plan administrator of a qualified retirement plan 
generally must file an annual return with the Secretary of the 
Treasury and an annual report with the Secretary of Labor. In 
addition, in the case of a defined benefit pension, certain 
information is generally required to be filed with the Pension 
Benefit Guaranty Corporation (``PBGC''). Form 5500, which 
consists of a primary form and various schedules, includes the 
information required to be filed with all three agencies. The 
plan administrator satisfies the reporting requirement with 
respect to each agency by filing the Form 5500 with the 
Department of Labor.
    The Form 5500 is due by the last day of the seventh month 
following the close of the plan year. The due date may be 
extended up to two and one-half months. Copies of filed Form 
5500s are available for public examination at the U.S. 
Department of Labor.
    A plan administrator must automatically provide 
participants with a summary of the annual report within two 
months after the due date of the annual report (i.e., by the 
end of the ninth month after the end of the plan year unless an 
extension applies). In addition, a copy of the full annual 
report must be provided to participants on written request.

                        Explanation of Provision


In general

    The provision provides rules for an ``eligible combined 
plan.'' An eligible combined plan is a plan: (1) that is 
maintained by an employer that is a small employer at the time 
the plan is established; (2) that consists of a defined benefit 
plan and an ``applicable'' defined contribution plan; (3) the 
assets of which are held in a single trust forming part of the 
plan and are clearly identified and allocated to the defined 
benefit plan and the applicable defined contribution plan to 
the extent necessary for the separate application of the Code 
and ERISA; and (4) that meets certain benefit, contribution, 
vesting and nondiscrimination requirements as discussed below. 
For this purpose, an applicable defined contribution plan is a 
defined contribution plan that includes a qualified cash or 
deferred arrangement (i.e., a section 401(k) plan). A small 
employer is an employer that employed an average of at least 
two, but not more than 500, employees on business days during 
the preceding calendar year and at least two employees on the 
first day of the plan year.
    Except as specified in the provision, the provisions of the 
Code and ERISA are applied to any defined benefit plan and any 
applicable defined contribution plan that are part of an 
eligible combined plan in the same manner as if each were not 
part of the eligible combined plan. Thus, for example, the 
present-law limits on contributions and benefits apply 
separately to contributions under an applicable defined 
contribution plan that is part of an eligible combined plan and 
to benefits under the defined benefit plan that is part of the 
eligible combined plan. In addition, the spousal protection 
rules apply to the defined benefit plan, but not to the 
applicable defined contribution plan except to the extent 
provided under present law. Moreover, although the assets of an 
eligible combined plan are held in a single trust, the funding 
rules apply to a defined benefit plan that is part of an 
eligible combined plan on the basis of the assets identified 
and allocated to the defined benefit, and the limits on 
investing defined benefit plan assets in employer securities or 
real property apply to such assets. Similarly, separate 
participant accounts are required to be maintained under the 
applicable defined contribution plan that is part of the 
eligible combined plan, and earnings (or losses) on 
participants' account are based on the earnings (or losses) 
with respect to the assets of the applicable defined 
contribution plan.

Requirements with respect to defined benefit plan

    A defined benefit plan that is part of an eligible combined 
plan is required to provide each participant with a benefit of 
not less than the applicable percentage of the participant's 
final average pay. The applicable percentage is the lesser of: 
(1) one percent multiplied by the participant's years of 
service; or (2) 20 percent. For this purpose, final average pay 
is determined using the consecutive-year period (not exceeding 
five years) during which the participant has the greatest 
aggregate compensation.
    If the defined benefit plan is an applicable defined 
benefit plan,\686\ the plan is treated as meeting this benefit 
requirement if each participant receives a pay credit for each 
plan year of not less than the percentage of compensation 
determined in accordance with the following table:
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    \686\ Applicable defined benefit plan is defined as under the Title 
VII of the Act.

                  Table 9.--Percentage of Compensation
------------------------------------------------------------------------
  Participant's age as of the beginning of the plan year     Percentage
------------------------------------------------------------------------
30 or less................................................            2
Over 30 but less than 40..................................            4
Over 40 but less than 50..................................            6
50 or over................................................            8
------------------------------------------------------------------------

    A defined benefit that is part of an eligible combined plan 
must provide the required benefit to each participant, 
regardless of whether the participant makes elective deferrals 
to the applicable defined contribution plan that is part of the 
eligible combined plan.
    Any benefits provided under the defined benefit plan 
(including any benefits provided in addition to required 
benefits) must be fully vested after three years of service.

Requirements with respect to applicable defined contribution plan

    Certain automatic enrollment and matching contribution 
requirements must be met with respect to an applicable defined 
contribution plan that is part of an eligible combined plan. 
First, the qualified cash or deferred arrangement under the 
plan must constitute an automatic contribution arrangement, 
under which each employee eligible to participate is treated as 
having elected to make deferrals of four percent of 
compensation unless the employee elects otherwise (i.e., elects 
not to make deferrals or to make deferrals at a different 
rate). Participants must be given notice of their right to 
elect otherwise and must be given a reasonable period of time 
after receiving notice in which to make an election. In 
addition, participants must be given notice of their rights and 
obligations within a reasonable period before each year.
    Under the applicable defined contribution plan, the 
employer must be required to make matching contributions on 
behalf of each employee eligible to participate in the 
arrangement in an amount equal to 50 percent of the employee's 
elective deferrals up to four percent of compensation, and the 
rate of matching contribution with respect to any elective 
deferrals for highly compensated employees must not be not 
greater than the rate of match for nonhighly compensated 
employees.\687\ Matching contributions in addition to the 
required matching contributions may also be made. The employer 
may also make nonelective contributions under the applicable 
defined contribution plan, but any nonelective contributions 
are not taken into account in determining whether the matching 
contribution requirement is met.
---------------------------------------------------------------------------
    \687\ As under present law, matching contributions may be provided 
at a different rate, provided that: (1) the rate of matching 
contribution doesn't increase as the rate of elective deferral 
increases; and (2) the aggregate amount of matching contributions with 
respect to each rate of elective deferral is not less than the amount 
that would be provided under the general rule.
---------------------------------------------------------------------------
    Any matching contributions under the applicable defined 
contribution plan (including any in excess of required matching 
contributions) must be fully vested when made. Any nonelective 
contributions made under the applicable defined contribution 
plan must be fully vested after three years of service.

Nondiscrimination and other rules

    An applicable defined contribution plan satisfies the ADP 
test on a safe-harbor basis. Matching contributions under an 
applicable defined contribution plan must satisfy the ACP test 
or may satisfy the matching contribution safe harbor under 
present law, as modified to reflect the matching contribution 
requirements applicable under the provision.
    Nonelective contributions under an applicable defined 
contribution plan and benefits under a defined benefit plan 
that are part of an eligible combined plan are generally 
subject to the nondiscrimination rules as under present law. 
However, neither a defined benefit plan nor an applicable 
defined contribution plan that is part of an eligible combined 
plan may be combined with another plan in determining whether 
the nondiscrimination requirements are met.\688\
---------------------------------------------------------------------------
    \688\ The permitted disparity rules do not apply in determining 
whether an applicable defined contribution plan or a defined benefit 
plan that is part of an eligible combined plan satisfies (1) the 
contribution or benefit requirements under the provision or (2) the 
nondiscrimination requirements.
---------------------------------------------------------------------------
    An applicable defined contribution plan and a defined 
benefit plan that are part of an eligible combined plan are 
treated as meeting the top-heavy requirements.
    All contributions, benefits, and other rights and features 
that are provided under a defined benefit plan or an applicable 
defined contribution plan that is part of an eligible combined 
plan must be provided uniformly to all participants. This 
requirement applies regardless of whether nonuniform 
contributions, benefits, or other rights or features could be 
provided without violating the nondiscrimination rules. 
However, it is intended that a plan will not violate the 
uniformity requirement merely because benefits accrued for 
periods before a defined benefit or defined contribution plan 
became part of an eligible combined plan are protected (as 
required under the anticutback rules).

Annual reporting

    An eligible combined plan is treated as a single plan for 
purposes of annual reporting. Thus, only a single Form 5500 is 
required. All of the information required under present law 
with respect to a defined benefit plan or a defined 
contribution plan must be provided in the Form 5500 for the 
eligible combined plan. In addition, only a single summary 
annual report must be provided to participants.

Other rules

    The provision of the Act relating to default investment 
options and the preemption of State laws with respect to 
automatic enrollment arrangements are applicable to eligible 
combined plans. It is intended that in the case that an 
eligible combined plan terminates, the PBGC guarantee applies 
only to benefits under the defined benefit portion of the plan.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2009.

 D. Faster Vesting of Employer Nonelective Contributions (sec. 904 of 
         the Act, sec. 203 of ERISA, and sec. 411 of the Code)


                              Present Law

    Under present law, in general, a plan is not a qualified 
plan unless a participant's employer-provided benefit vests at 
least as rapidly as under one of two alternative minimum 
vesting schedules. A plan satisfies the first schedule if a 
participant acquires a nonforfeitable right to 100 percent of 
the participant's accrued benefit derived from employer 
contributions upon the completion of five years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to at least 20 percent of the 
participant's accrued benefit derived from employer 
contributions after three years of service, 40 percent after 
four years of service, 60 percent after five years of service, 
80 percent after six years of service, and 100 percent after 
seven years of service.\689\
---------------------------------------------------------------------------
    \689\ The minimum vesting requirements are also contained in Title 
I of the Employee Retirement Income Security Act of 1974 (``ERISA'').
---------------------------------------------------------------------------
    Faster vesting schedules apply to employer matching 
contributions. Employer matching contributions are required to 
vest at least as rapidly as under one of the following two 
alternative minimum vesting schedules. A plan satisfies the 
first schedule if a participant acquires a nonforfeitable right 
to 100 percent of employer matching contributions upon the 
completion of three years of service. A plan satisfies the 
second schedule if a participant has a nonforfeitable right to 
20 percent of employer matching contributions for each year of 
service beginning with the participant's second year of service 
and ending with 100 percent after six years of service.

                        Explanation of Provision

    The provision applies the present-law vesting schedule for 
matching contributions to all employer contributions to defined 
contribution plans.
    The provision does not apply to any employee until the 
employee has an hour of service after the effective date. In 
applying the new vesting schedule, service before the effective 
date is taken into account.

                             Effective Date

    The provision is generally effective for contributions for 
plan years beginning after December 31, 2006.
    In the case of a plan maintained pursuant to one or more 
collective bargaining agreements, the provision is not 
effective for contributions (including allocations of 
forfeitures) for plan years beginning before the earlier of (1) 
the later of the date on which the last of such collective 
bargaining agreements terminates (determined without regard to 
any extension thereof on or after the date of enactment (August 
17, 2006)) or January 1, 2007, or (2) January 1, 2009.
    In the case of an employee stock ownership plan (``ESOP'') 
which on September 26, 2005, had outstanding a loan incurred 
for the purpose of acquiring qualifying employer securities, 
the provision does not apply to any plan year beginning before 
the earlier of (1) the date on which the loan is fully repaid, 
or (2) the date on which the loan was, as of September 26, 
2005, scheduled to be fully repaid.

 E. Distributions During Working Retirement (sec. 905 of the Act, sec. 
          3(2) of ERISA, and new sec. 401(a)(35) of the Code)


                              Present Law

    Under ERISA, a pension plan is a plan, fund, or program 
established or maintained by an employer or an employee 
organization, or by both, to the extent that, by its express 
terms or surrounding circumstances, the plan, fund, or program: 
(1) provides retirement income to employees, or (2) results in 
a deferral of income by employees for periods extending to the 
termination of covered employment or beyond, regardless of the 
method of calculating contributions made to or benefits under 
the plan or the method of distributing benefits from the plan.
    For purposes of the qualification requirements applicable 
to pension plans, stock bonus plans, and profit-sharing plans 
under the Code, a pension plan is a plan established and 
maintained primarily to provide systematically for the payment 
of definitely determinable benefits to employees over a period 
of years, usually life, after retirement.\690\ A pension plan 
(i.e., a defined benefit plan or money purchase pension plan) 
may not provide for distributions before the attainment of 
normal retirement age (commonly age 65) to participants who 
have not separated from employment.\691\
---------------------------------------------------------------------------
    \690\ Treas. Reg. sec. 1.401-1(b)(1)(i).
    \691\ See, e.g., Rev. Rul. 74-254.
---------------------------------------------------------------------------
    Under proposed regulations, in the case of a phased 
retirement program, a pension plan is permitted to pay a 
portion of a participant's benefits before attainment of normal 
retirement age.\692\ A phased retirement program is a program 
under which employees who are at least age 59\1/2\ and are 
eligible for retirement may reduce (by at least 20 percent) the 
number of hours they customarily work and receive a pro rata 
portion of their retirement benefits, based on the reduction in 
their work schedule.
---------------------------------------------------------------------------
    \692\ Prop. Treas. Reg. secs. 1.401(a)-1(b)(1)(iv) and 1.401(a)-3.
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, for purposes of the definition of 
pension plan under ERISA, a distribution from a plan, fund, or 
program is not treated as made in a form other than retirement 
income or as a distribution prior to termination of covered 
employment solely because the distribution is made to an 
employee who has attained age 62 and who is not separated from 
employment at the time of such distribution.
    In addition, under the Code, a pension plan does not fail 
to be a qualified retirement plan solely because the plan 
provides that a distribution may be made to an employee who has 
attained age 62 and who is not separated from employment at the 
time of the distribution.

                             Effective Date

    The provision is effective for distributions in plan years 
beginning after December 31, 2006.

F. Treatment of Plans Maintained by Indian Tribes (sec. 906 of the Act, 
           sec. 414(d) of the Code, and sec. 3(32) of ERISA)


                              Present Law

    Governmental plans are exempt from ERISA and from Code 
requirements that correspond to ERISA requirements, such as the 
vesting rules and the funding rules. A governmental plan is 
generally a plan established and maintained for its employees 
by (1) the Federal Government, (2) the government of a State or 
political subdivision of a State, or (3) any agency or 
instrumentality of any of the foregoing.
    Benefits under a defined benefit pension plan generally 
cannot exceed the lesser of (1) 100 percent of average 
compensation, or (2) a dollar amount ($175,000 for 2006), 
subject to certain special rules for defined benefit plans 
maintained by State and local government employers and other 
special rules for employees of a police or fire department. 
Employee contributions to a defined benefit pension plan are 
generally subject to tax; however, employee contributions may 
be made to a State or local government defined benefit pension 
plan on a pretax basis (referred to as ``pickup'' 
contributions).
    Governmental defined benefit pension plans are not covered 
by the PBGC insurance program.

                        Explanation of Provision

    Under the provision, the term ``governmental plan'' for 
purposes of section 414 of the Code, section 3(32) of ERISA, 
and the PBGC termination insurance program includes a plan: (1) 
which is established and maintained by an Indian tribal 
government (as defined in Code sec. 7701(a)(40)), a subdivision 
of an Indian tribal government (determined in accordance with 
Code sec. 7871(d)), or an agency or instrumentality of either; 
and (2) all of the participants of which are qualified 
employees of such entity. A qualified employee is an employee 
of an entity described in (1), substantially all of whose 
services for such entity are in the performance of essential 
governmental services and not in the performance of commercial 
activities (whether or not such activities are an essential 
governmental function). Thus, for example, a governmental plan 
would include a plan of a tribal government all of the 
participants of which are teachers in tribal schools. On the 
other hand, a governmental plan would not include a plan 
covering tribal employees who are employed by a hotel, casino, 
service station, convenience store, or marina operated by a 
tribal government.
    Under the provision, the special benefit limitations 
applicable to employees of police and fire departments of a 
State or political subdivision (Code sec. 415(b)(2)(H)) apply 
to such employees of an Indian tribe or any political 
subdivision thereof. In addition, the rules relating to pickup 
contributions under governmental plans (Code sec. 414(h)) and 
special benefit limitations for governmental plans (sec. 
415(b)(10)) apply to tribal plans treated as governmental plans 
under the provision.

                             Effective Date

    The provision is effective for years beginning on or after 
the date of enactment (August 17, 2006).

                  TITLE X--SPOUSAL PENSION PROTECTION

  A. Regulations on Time and Order of Issuance of Domestic Relations 
                     Orders (sec. 1001 of the Act)

                              Present Law

    Benefits provided under a qualified retirement plan for a 
participant may not be assigned or alienated to creditors of 
the participant, except in very limited circumstances.\693\ One 
exception to the prohibition on assignment or alienation is a 
qualified domestic relations order (``QDRO'').\694\ A QDRO is a 
domestic relations order that creates or recognizes a right of 
an alternate payee, including a former spouse, to any plan 
benefit payable with respect to a participant and that meets 
certain procedural requirements. In addition, a QDRO generally 
may not require the plan to provide any type or form of 
benefit, or any option, not otherwise provided under the plan, 
or to provide increased benefits.
---------------------------------------------------------------------------
    \693\ Code sec. 401(a)(13); ERISA sec. 206(d).
    \694\ Code secs. 401(a)(13)(B) and 414(p); ERISA sec. 206(d)(3).
---------------------------------------------------------------------------
    Present law also provides that a QDRO may not require the 
payment of benefits to an alternate payee that are required to 
be paid to another alternate payee under a domestic relations 
order previously determined to be a QDRO. This rule implicitly 
recognizes that a domestic relations order issued after a QDRO 
may also qualify as a QDRO. However, present law does not 
otherwise provide specific rules for the treatment of a 
domestic relations order as a QDRO if the order is issued after 
another domestic relations order or a QDRO (including an order 
issued after a divorce decree) or revises another domestic 
relations order or a QDRO.
    Present law provides specific rules that apply during any 
period in which the status of a domestic relations order as a 
QDRO is being determined (by the plan administrator, by a 
court, or otherwise). During such a period, the plan 
administrator is required to account separately for the amounts 
that would have been payable to the alternate payee during the 
period if the order had been determined to be a QDRO (referred 
to as ``segregated amounts''). If, within the 18-month period 
beginning with the date on which the first payment would be 
required to be made under the order, the order (or modification 
thereof) is determined to be a QDRO, the plan administrator is 
required to pay the segregated amounts (including any interest 
thereon) to the person or persons entitled thereto. If, within 
the 18-month period, the order is determined not to be a QDRO, 
or its status as a QDRO is not resolved, the plan administrator 
is required to pay the segregated amounts (including any 
interest) to the person or persons who would be entitled to 
such amounts if there were no order. In such a case, any 
subsequent determination that the order is a QDRO is applied 
prospectively only.

                        Explanation of Provision

    The Secretary of Labor is directed to issue, not later than 
one year after the date of enactment of the provision, 
regulations to clarify the status of certain domestic relations 
orders. In particular, the regulations are to clarify that a 
domestic relations order otherwise meeting the QDRO 
requirements will not fail to be treated as a QDRO solely 
because of the time it is issued or because it is issued after 
or revises another domestic relations order or QDRO. The 
regulations are also to clarify that such a domestic relations 
order is in all respects subject to the same requirements and 
protections that apply to QDROs. For example, as under present 
law, such a domestic relations order may not require the 
payment of benefits to an alternate payee that are required to 
be paid to another alternate payee under an earlier QDRO. In 
addition, the present-law rules regarding segregated amounts 
that apply while the status of a domestic relations order as a 
QDRO is being determined continue to apply.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

  B. Benefits Under the Railroad Retirement System for Former Spouses 
  (secs. 1002 and 1003 of the Act, and secs. 2 and 5 of the Railroad 
                        Retirement Act of 1974)


                              Present Law


In general

    The Railroad Retirement System has two main components. 
Tier I of the system is financed by taxes on employers and 
employees equal to the Social Security payroll tax and provides 
qualified railroad retirees (and their qualified spouses, 
dependents, widows, or widowers) with benefits that are roughly 
equal to Social Security. Covered railroad workers and their 
employers pay the Tier I tax instead of the Social Security 
payroll tax, and most railroad retirees collect Tier I benefits 
instead of Social Security. Tier II of the system replicates a 
private pension plan, with employers and employees contributing 
a certain percentage of pay toward the system to finance 
defined benefits to eligible railroad retirees (and qualified 
spouses, dependents, widows, or widowers) upon retirement; 
however, the Federal Government collects the Tier II payroll 
contribution and pays out the benefits.

Former spouses of living railroad employees

    Generally, a former spouse of a railroad employee who is 
otherwise eligible for any Tier I or Tier II benefit cannot 
receive either benefit until the railroad employee actually 
retires and begins receiving his or her retirement benefits. 
This is the case regardless of whether a State divorce court 
has awarded such railroad retirement benefits to the former 
spouse.

Former spouses of deceased railroad employees

    The former spouse of a railroad employee may be eligible 
for survivors' benefits under Tier I of the Railroad Retirement 
System. However, a former spouse loses eligibility for any 
otherwise allowable Tier II benefits upon the death of the 
railroad employee.

                        Explanation of Provision


Former spouses of living railroad employees

    The provision eliminates the requirement that a railroad 
employee actually receive railroad retirement benefits for the 
former spouse to be entitled to any Tier I benefit or Tier II 
benefit awarded under a State divorce court decision.

Former spouses of deceased railroad employees

    The provision provides that a former spouse of a railroad 
employee does not lose eligibility for otherwise allowable Tier 
II benefits upon the death of the railroad employee.

                             Effective Date

    The provision is effective one year after the date of 
enactment (August 17, 2006).

C. Requirement for Additional Survivor Annuity Option (sec. 1004 of the 
           Act, sec. 417 of the Code, and sec. 205 of ERISA)


                              Present Law

    Defined benefit pension plans and money purchase pension 
plans are required to provide benefits in the form of a 
qualified joint and survivor annuity (``QJSA'') unless the 
participant and his or her spouse consent to another form of 
benefit. A QJSA is an annuity for the life of the participant, 
with a survivor annuity for the life of the spouse which is not 
less than 50 percent (and not more than 100 percent) of the 
amount of the annuity payable during the joint lives of the 
participant and his or her spouse.\695\ In the case of a 
married participant who dies before the commencement of 
retirement benefits, the surviving spouse must be provided with 
a qualified preretirement survivor annuity (``QPSA''), which 
must provide the surviving spouse with a benefit that is not 
less than the benefit that would have been provided under the 
survivor portion of a QJSA.
---------------------------------------------------------------------------
    \695\ Thus, for example, a QJSA could consist of an annuity for the 
life of the participant, with a survivor annuity for the life of the 
spouse equal to 75 percent of the amount of the annuity payable during 
the joint lives of the participant and his or her spouse.
---------------------------------------------------------------------------
    The participant and his or her spouse may waive the right 
to a QJSA and QPSA provided certain requirements are satisfied. 
In general, these conditions include providing the participant 
with a written explanation of the terms and conditions of the 
survivor annuity, the right to make, and the effect of, a 
waiver of the annuity, the rights of the spouse to waive the 
survivor annuity, and the right of the participant to revoke 
the waiver. In addition, the spouse must provide a written 
consent to the waiver, witnessed by a plan representative or a 
notary public, which acknowledges the effect of the waiver.
    Defined contribution plans other than money purchase 
pension plans are not required to provide a QJSA or QPSA if the 
participant does not elect an annuity as the form of payment, 
the surviving spouse is the beneficiary of the participant's 
entire vested account balance under the plan (unless the spouse 
consents to designation of another beneficiary),\696\ and, with 
respect to the participant, the plan has not received a 
transfer from a plan to which the QJSA and QPSA requirements 
applied (or separately accounts for the transferred assets). In 
the case of a defined contribution plan subject to the QJSA and 
QPSA requirements, a QPSA means an annuity for the life of the 
surviving spouse that has an actuarial value of at least 50 
percent of the participant's vested account balance as of the 
date of death.
---------------------------------------------------------------------------
    \696\ Waiver and election rules apply to the waiver of the right of 
the spouse to be the beneficiary under a defined contribution plan that 
is not required to provide a QJSA.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision revises the minimum survivor annuity 
requirements to require that, at the election of the 
participant, benefits will be paid in the form of a ``qualified 
optional survivor annuity.'' A qualified optional survivor 
annuity means an annuity for the life of the participant with a 
survivor annuity for the life of the spouse which is equal to 
the applicable percentage of the amount of the annuity that is: 
(1) payable during the joint lives of the participant and the 
spouse; and (2) the actuarial equivalent of a single annuity 
for the life of the participant.
    If the survivor annuity provided by the QJSA under the plan 
is less than 75 percent of the annuity payable during the joint 
lives of the participant and spouse, the applicable percentage 
is 75 percent. If the survivor annuity provided by the QJSA 
under the plan is greater than or equal to 75 percent of the 
annuity payable during the joint lives of the participant and 
spouse, the applicable percentage is 50 percent. Thus, for 
example, if the survivor annuity provided by the QJSA under the 
plan is 50 percent, the survivor annuity provided under the 
qualified optional survivor annuity must be 75 percent.
    The written explanation required to be provided to 
participants explaining the terms and conditions of the 
qualified joint and survivor annuity must also include the 
terms and conditions of the qualified optional survivor 
annuity.
    Under the provision of the Act relating to plan amendments, 
a plan amendment made pursuant to a provision of the Act 
generally will not violate the anticutback rule if certain 
requirements are met. Thus, a plan is not treated as having 
decreased the accrued benefit of a participant solely by reason 
of the adoption of a plan amendment pursuant to the provision 
requiring that the plan offer a qualified optional survivor 
annuity. The elimination of a subsidized QJSA is not protected 
by the anticutback provision in the Act unless an equivalent or 
greater subsidy is retained in one of the forms offered under 
the plan as amended. For example, if a plan that offers a 
subsidized 50 percent QJSA is amended to provide an 
unsubsidized 50 percent QJSA and an unsubsidized 75 percent 
joint and survivor annuity as its qualified optional survivor 
annuity, the replacement of the subsidized 50 percent QJSA with 
the unsubsidized 50 percent QJSA is not protected by the 
anticutback protection.

                             Effective Date

    The provision applies generally to plan years beginning 
after December 31, 2007. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements, the 
provision applies to plan years beginning on or after the 
earlier of (1) the later of January 1, 2008, and the last date 
on which an applicable collective bargaining agreement 
terminates (without regard to extensions), and (2) January 1, 
2009.

                  TITLE XI--ADMINISTRATIVE PROVISIONS

 A. Updating of Employee Plans Compliance Resolution System (sec. 1101 
                              of the Act)

                              Present Law

    Tax-favored treatment is provided to various retirement 
savings arrangements that meet certain requirements under the 
Code, including qualified retirement plans and annuities (secs. 
401(a) and 403(a)), tax-sheltered annuities (sec. 403(b)), 
simplified employee pensions (``SEPs'') (sec. 408(k)), and 
SIMPLE IRAs (sec. 408(p)). The Internal Revenue Service 
(``IRS'') has established the Employee Plans Compliance 
Resolution System (``EPCRS''), which is a comprehensive system 
of correction programs for sponsors of retirement plans and 
annuities that are intended to satisfy the requirements of 
section 401(a), section 403(a), section 403(b), section 408(k), 
or section 408(p), as applicable. The IRS has updated and 
expanded EPCRS several times.\697\
---------------------------------------------------------------------------
    \697\ See Rev. Proc. 2006-27, 2006-22 IRB 945.
---------------------------------------------------------------------------
    EPCRS permits employers to correct compliance failures and 
continue to provide their employees with retirement benefits on 
a tax-favored basis. EPCRS is based on the following general 
principles:
           Plans sponsors and administrators should be 
        encouraged to establish administrative practices and 
        procedures that ensure that plans are operated properly 
        in accordance with applicable Code requirements;
           Plans sponsors and administrators should 
        satisfy applicable plan document requirements;
           Plans sponsors and administrators should 
        make voluntary and timely correction of any plan 
        failures, whether involving discrimination in favor of 
        highly compensated employees, plan operations, the 
        terms of the plan document, or adoption of a plan by an 
        ineligible employer; timely and efficient correction 
        protects participating employees by providing them with 
        their expected retirement benefits, including favorable 
        tax treatment;
           Voluntary compliance is promoted by 
        providing for limited fees for voluntary corrections 
        approved by the Service, thereby reducing employers' 
        uncertainty regarding their potential tax liability and 
        participants' potential tax liability;
           Fees and sanctions should be graduated in a 
        series of steps so that there is always an incentive to 
        correct promptly;
           Sanctions for plan failures identified on 
        audit should be reasonable in light of the nature, 
        extent, and severity of the violation;
           Administration of EPCRS should be consistent 
        and uniform; and
           Sponsors should be able to rely on the 
        availability of EPCRS in taking corrective actions to 
        maintain the tax-favored status of their plans.
    The components of EPCRS provide for self-correction, 
voluntary correction with IRS approval, and correction on 
audit. The Self-Correction Program (``SCP'') generally permits 
a plan sponsor that has established compliance practices and 
procedures to correct certain insignificant failures at any 
time (including during an audit), and certain significant 
failures generally within a 2-year period, without payment of 
any fee or sanction. The Voluntary Correction Program (``VCP'') 
permits an employer, at any time before an audit, to pay a 
limited fee and receive IRS approval of a correction. For a 
failure that is discovered on audit and corrected, the Audit 
Closing Agreement Program (``Audit CAP'') provides for a 
sanction that bears a reasonable relationship to the nature, 
extent, and severity of the failure and that takes into account 
the extent to which correction occurred before audit.

                        Explanation of Provision

    The provision clarifies that the Secretary has the full 
authority to establish and implement EPCRS (or any successor 
program) and any other employee plans correction policies, 
including the authority to waive income, excise or other taxes 
to ensure that any tax, penalty or sanction is not excessive 
and bears a reasonable relationship to the nature, extent and 
severity of the failure.
    Under the provision, the Secretary of the Treasury is 
directed to continue to update and improve EPCRS (or any 
successor program), giving special attention to (1) increasing 
the awareness and knowledge of small employers concerning the 
availability and use of EPCRS, (2) taking into account special 
concerns and circumstances that small employers face with 
respect to compliance and correction of compliance failures, 
(3) extending the duration of the self-correction period under 
SCP for significant compliance failures, (4) expanding the 
availability to correct insignificant compliance failures under 
SCP during audit, and (5) assuring that any tax, penalty, or 
sanction that is imposed by reason of a compliance failure is 
not excessive and bears a reasonable relationship to the 
nature, extent, and severity of the failure.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

B. Notice and Consent Period Regarding Distributions (sec. 1102 of the 
        Act, sec. 417(a) of the Code, and sec. 205(c) of ERISA)

                              Present Law

    Notice and consent requirements apply to certain 
distributions from qualified retirement plans. These 
requirements relate to the content and timing of information 
that a plan must provide to a participant prior to a 
distribution, and to whether the plan must obtain the 
participant's consent to the distribution. The nature and 
extent of the notice and consent requirements applicable to a 
distribution depend upon the value of the participant's vested 
accrued benefit and whether the joint and survivor annuity 
requirements apply to the participant.
    If the present value of the participant's vested accrued 
benefit exceeds $5,000,\698\ the plan may not distribute the 
participant's benefit without the written consent of the 
participant. The participant's consent to a distribution is not 
valid unless the participant has received from the plan a 
notice that contains a written explanation of (1) the material 
features and the relative values of the optional forms of 
benefit available under the plan, (2) the participant's right 
to defer the receipt of a distribution, or, as applicable, to 
have the distribution directly transferred to another 
retirement plan or individual retirement arrangement (``IRA''), 
and (3) the rules concerning taxation of a distribution. If the 
joint and survivor annuity requirements are applicable, this 
notice also must contain a written explanation of (1) the terms 
and conditions of the qualified joint and survivor annuity 
(``QJSA''), (2) the participant's right to make, and the effect 
of, an election to waive the QJSA, (3) the rights of the 
participant's spouse with respect to a participant's waiver of 
the QJSA, and (4) the right to make, and the effect of, a 
revocation of a waiver of the QJSA. The plan generally must 
provide this notice to the participant no less than 30 and no 
more than 90 days before the date distribution commences.\699\
---------------------------------------------------------------------------
    \698\ The portion of a participant's benefit that is attributable 
to amounts rolled over from another plan may be disregarded in 
determining the present value of the participant's vested accrued 
benefit.
    \699\ Code sec. 417(a)(6)(A); ERISA sec. 205(c)(7)(A); Treas. Reg. 
secs. 1.402(f)-1, 1.411(a)-11(c), and 1.417(e)-1(b).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a qualified retirement plan is 
required to provide the applicable distribution notice no less 
than 30 days and no more than 180 days before the date 
distribution commences. The Secretary of the Treasury is 
directed to modify the applicable regulations to reflect the 
extension of the notice period to 180 days and to provide that 
the description of a participant's right, if any, to defer 
receipt of a distribution shall also describe the consequences 
of failing to defer such receipt.

                             Effective Date

    The provision and the modifications required to be made 
under the provision apply to years beginning after December 31, 
2006. In the case of a description of the consequences of a 
participant's failure to defer receipt of a distribution that 
is made before the date 90 days after the date on which the 
Secretary of the Treasury makes modifications to the applicable 
regulations, the plan administrator is required to make a 
reasonable attempt to comply with the requirements of the 
provision.

    C. Pension Plan Reporting Simplification (sec. 1103 of the Act)


                              Present Law

    The plan administrator of a pension plan generally must 
file an annual return with the Secretary of the Treasury, an 
annual report with the Secretary of Labor, and certain 
information with the Pension Benefit Guaranty Corporation 
(``PBGC''). Form 5500, which consists of a primary form and 
various schedules, includes the information required to be 
filed with all three agencies. The plan administrator satisfies 
the reporting requirement with respect to each agency by filing 
the Form 5500 with the Department of Labor.
    The Form 5500 series consists of 2 different forms: Form 
5500 and Form 5500-EZ. Form 5500 is the more comprehensive of 
the forms and requires the most detailed financial information. 
The plan administrator of a ``one-participant plan'' generally 
may file Form 5500-EZ. For this purpose, a plan is a one-
participant plan if: (1) the only participants in the plan are 
the sole owner of a business that maintains the plan (and such 
owner's spouse), or partners in a partnership that maintains 
the plan (and such partners' spouses); \700\ (2) the plan is 
not aggregated with another plan in order to satisfy the 
minimum coverage requirements of section 410(b); (3) the plan 
does not provide benefits to anyone other than the sole owner 
of the business (or the sole owner and spouse) or the partners 
in the business (or the partners and spouses); (4) the employer 
is not a member of a related group of employers; and (5) the 
employer does not use the services of leased employees. In 
addition, the plan administrator of a one-participant plan is 
not required to file a return if the plan does not have an 
accumulated funding deficiency and the total value of the plan 
assets as of the end of the plan year and all prior plan years 
beginning on or after January 1, 1994, does not exceed 
$100,000.
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    \700\ Under Department of Labor regulations, certain business 
owners and their spouses are not treated as employees. 29 C.F.R. sec. 
2510.3-3(c) (2006). Thus, plans covering only such individuals are not 
subject to ERISA.
---------------------------------------------------------------------------
    With respect to a plan that does not satisfy the 
eligibility requirements for Form 5500-EZ, the characteristics 
and the size of the plan determine the amount of detailed 
financial information that the plan administrator must provide 
on Form 5500. If the plan has more than 100 participants at the 
beginning of the plan year, the plan administrator generally 
must provide more information.

                        Explanation of Provision

    The Secretary of the Treasury is directed to modify the 
annual return filing requirements with respect to a one-
participant plan to provide that if the total value of the plan 
assets of such a plan as of the end of the plan year does not 
exceed $250,000, the plan administrator is not required to file 
a return. In addition, the Secretary of the Treasury and the 
Secretary of Labor are directed to provide simplified reporting 
requirements for plan years beginning after December 31, 2006, 
for certain plans with fewer than 25 participants.

                             Effective Date

    The provision relating to one-participant retirement plans 
is effective for plan years beginning on or after January 1, 
2007. The provision relating to simplified reporting for plans 
with fewer than 25 participants is effective on the date of 
enactment (August 17, 2006).

D. Voluntary Early Retirement Incentive and Employment Retention Plans 
Maintained by Local Educational Agencies and Other Entities (sec. 1104 
 of the Act, secs. 457(e)(11) and 457(f) of the Code, sec. 3(2)(B) of 
                  ERISA, and sec. 4(l)(1) of the ADEA)


                              Present Law


Eligible deferred compensation plans of State and local governments and 
        tax-exempt employers

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. For example, the amount that can be 
deferred annually under section 457 cannot exceed a certain 
dollar limit ($14,000 for 2005). Amounts deferred under a 
section 457 plan are generally includible in gross income when 
paid or made available (or, in the case of governmental section 
457 plans, when paid). Subject to certain exceptions, amounts 
deferred under a plan that does not comply with section 457 (an 
``ineligible plan'') are includible in income when the amounts 
are not subject to a substantial risk of forfeiture. Section 
457 does not apply to any bona fide vacation leave, sick leave, 
compensatory time, severance pay, disability pay, or death 
benefit plan. Additionally, section 457 does not apply to 
qualified retirement plans or qualified governmental excess 
benefit plans that provide benefits in excess of those that are 
provided under a qualified retirement plan maintained by the 
governmental employer.

ERISA

    ERISA provides rules governing the operation of most 
employee benefit plans. The rules to which a plan is subject 
depend on whether the plan is an employee welfare benefit plan 
or an employee pension benefit plan. For example, employee 
pension benefit plans are subject to reporting and disclosure 
requirements, participation and vesting requirements, funding 
requirements, and fiduciary provisions. Employee welfare 
benefit plans are not subject to all of these requirements. 
Governmental plans are exempt from ERISA.

Age Discrimination in Employment Act

    The Age Discrimination in Employment Act (``ADEA'') 
generally prohibits discrimination in employment because of 
age. However, certain defined benefit pension plans may 
lawfully provide payments that constitute the subsidized 
portion of an early retirement benefit or social security 
supplements pursuant to ADEA,\701\ and employers may lawfully 
provide a voluntary early retirement incentive plan that is 
consistent with the purposes of ADEA.\702\
---------------------------------------------------------------------------
    \701\ See ADEA sec. 4(l)(1).
    \702\ See ADEA sec. 4(f)(2).
---------------------------------------------------------------------------

                        Explanation of Provision


Early retirement incentive plans of local educational agencies and 
        education associations

            In general
    The provision addresses the treatment of certain voluntary 
early retirement incentive plans under section 457, ERISA, and 
ADEA.
            Code section 457
    Under the provision, special rules apply under section 457 
to a voluntary early retirement incentive plan that is 
maintained by a local educational agency or a tax-exempt 
education association which principally represents employees of 
one or more such agencies and that makes payments or 
supplements as an early retirement benefit, a retirement-type 
subsidy, or a social security supplement in coordination with a 
defined benefit pension plan maintained by a State or local 
government or by such an association. Such a voluntary early 
retirement incentive plan is treated as a bona fide severance 
plan for purposes of section 457, and therefore is not subject 
to the limits under section 457, to the extent the payments or 
supplements could otherwise be provided under the defined 
benefit pension plan. For purposes of the provision, the 
payments or supplements that could otherwise be provided under 
the defined benefit pension plan are to be determined by 
applying the accrual and vesting rules for defined benefit 
pension plans.\703\
---------------------------------------------------------------------------
    \703\ The accrual and vesting rules have the effect of limiting the 
social security supplements and early retirement benefits that may be 
provided under a defined benefit pension plan; however, government 
plans are exempt from these rules.
---------------------------------------------------------------------------
            ERISA
    Under the provision, voluntary early retirement incentive 
plans (as described above) are treated as welfare benefit plans 
for purposes of ERISA (other than governmental plans that are 
exempt from ERISA).
            ADEA
    The provision also addresses the treatment under ADEA of 
voluntary early retirement incentive plans that are maintained 
by local educational agencies and tax-exempt education 
associations which principally represent employees of one or 
more such agencies, and that make payments or supplements that 
constitute the subsidized portion of an early retirement 
benefit or a social security supplement and that are made in 
coordination with a defined benefit pension plan maintained by 
a State or local government or by such an association. For 
purposes of ADEA, such a plan is treated as part of the defined 
benefit pension plan and the payments or supplements under the 
plan are not severance pay that may be subject to certain 
deductions under ADEA.

Employment retention plans of local educational agencies and education 
        associations

    The provision addresses the treatment of certain employment 
retention plans under section 457 and ERISA. The provision 
applies to employment retention plans that are maintained by 
local educational agencies or tax-exempt education associations 
which principally represent employees of one or more such 
agencies and that provide compensation to an employee (payable 
on termination of employment) for purposes of retaining the 
services of the employee or rewarding the employee for service 
with educational agencies or associations.
    Under the provision, special tax treatment applies to the 
portion of an employment retention plan that provides benefits 
that do not exceed twice the applicable annual dollar limit on 
deferrals under section 457 ($14,000 for 2005). The provision 
provides an exception from the rules under section 457 for 
ineligible plans with respect to such portion of an employment 
retention plan. This exception applies for years preceding the 
year in which benefits under the employment retention plan are 
paid or otherwise made available to the employee. In addition, 
such portion of an employment retention plan is not treated as 
providing for the deferral of compensation for tax purposes.
    Under the provision, an employment retention plan is also 
treated as a welfare benefit plan for purposes of ERISA (other 
than a governmental plan that is exempt from ERISA).

                             Effective Date

    The provision is generally effective on the date of 
enactment (August 17, 2006). The amendments to section 457 
apply to taxable years ending after the date of enactment. The 
amendments to ERISA apply to plan years ending after the date 
of enactment. Nothing in the provision alters or affects the 
construction of the Code, ERISA, or ADEA as applied to any 
plan, arrangement, or conduct to which the provision does not 
apply.

  E. No Reduction in Unemployment Compensation as a Result of Pension 
   Rollovers (sec. 1105 of the Act and sec. 3304(a)(15) of the Code)


                              Present Law

    Under present law, unemployment compensation payable by a 
State to an individual generally is reduced by the amount of 
retirement benefits received by the individual. Distributions 
from certain employer-sponsored retirement plans or IRAs that 
are transferred to a similar retirement plan or IRA (``rollover 
distributions'') generally are not includible in income. Some 
States currently reduce the amount of an individual's 
unemployment compensation by the amount of a rollover 
distribution.

                        Explanation of Provision

    The provision amends the Code so that the reduction of 
unemployment compensation payable to an individual by reason of 
the receipt of retirement benefits does not apply in the case 
of a rollover distribution.

                             Effective Date

    The provision is effective for weeks beginning on or after 
the date of enactment (August 17, 2006).

 F. Revocation of Election Relating to Treatment as Multiemployer Plan 
  (sec. 1106 of the Act, sec. 3(37) of ERISA, and sec. 414(f) of the 
                                 Code)


                              Present Law

    A multiemployer plan means a plan (1) to which more than 
one employer is required to contribute; (2) which is maintained 
pursuant to one or more collective bargaining agreements 
between one or more employee organizations and more than one 
employer; and (3) which satisfies such other requirements as 
the Secretary of Labor may prescribe.\704\ Present law provides 
that within one year after the date of enactment of the 
Multiemployer Pension Plan Amendments Act of 1980, a 
multiemployer plan could irrevocably elect for the plan not to 
be treated as a multiemployer plan if certain requirements were 
satisfied.
---------------------------------------------------------------------------
    \704\ ERISA sec. 3(36); Code sec. 414(f).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows multiemployer plans to revoke an 
existing election not to treat the plan as a multiemployer plan 
if, for each of the three plan years prior to the date of 
enactment, the plan would have been a multiemployer plan, but 
for the extension in place. The revocation must be pursuant to 
procedures prescribed by the PBGC.
    The provision also provides that a plan to which more than 
one employer is required to contribute which is maintained 
pursuant to one or more collective bargaining agreements 
between one or more employee organizations and more than one 
employer (collectively the ``criteria'') may, pursuant to 
procedures prescribed by the PBGC, elect to be a multiemployer 
plan if (1) for each of the three plan years prior to the date 
of enactment, the plan has met the criteria; (2) substantially 
all of the plan's employer contributions for each of those plan 
years were made or required to be made by organizations that 
were tax-exempt; and (3) the plan was established prior to 
September 2, 1974. Such election is also available in the case 
of a plan sponsored by an organization that was established in 
Chicago, Illinois, on August 12, 1881, and is described in Code 
section 501(c)(5). There is no inference that a plan that makes 
an election to be a multiemployer plan was not a multiemployer 
plan prior to the date of enactment or would not be a 
multiemployer plan without regard to the election.
    An election made under the provision is effective beginning 
with the first plan year ending after date of enactment and is 
irrevocable. A plan that elects to be a multiemployer plan 
under the provision will cease to be a multiemployer plan as of 
the plan year beginning immediately after the first plan year 
for which the majority of its employer contributions were made 
or required to be made by organizations that were not tax-
exempt. Elections and revocations under the provision must be 
made within one year after the date of enactment.
    Not later than 30 days before an election is made, the plan 
administrator must provide notice of the pending election to 
each plan participant and beneficiary, each labor organization 
representing such participants or beneficiaries, and to each 
employer that has an obligation to contribute to the plan. Such 
notice must include the principal differences between the 
guarantee programs and benefit restrictions for single employer 
and multiemployer plans. The Secretary of Labor must prescribe 
a model notice within 180 days after date of enactment. The 
plan administrator's failure to provide the notice is treated 
as a failure to file an annual report. Thus, an ERISA penalty 
of $1,100 per day applies.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

    G. Provisions Relating to Plan Amendments (sec. 1107 of the Act)


                              Present Law

    Present law provides a remedial amendment period during 
which, under certain circumstances, a plan may be amended 
retroactively in order to comply with the qualification 
requirements.\705\ In general, plan amendments to reflect 
changes in the law generally must be made by the time 
prescribed by law for filing the income tax return of the 
employer for the employer's taxable year in which the change in 
law occurs. The Secretary of the Treasury may extend the time 
by which plan amendments need to be made.
---------------------------------------------------------------------------
    \705\ Sec. 401(b).
---------------------------------------------------------------------------
    The Code and ERISA provide that, in general, accrued 
benefits cannot be reduced by a plan amendment.\706\ This 
prohibition on the reduction of accrued benefits is commonly 
referred to as the ``anticutback rule.''
---------------------------------------------------------------------------
    \706\ Code sec. 411(d)(6); ERISA sec. 204(g).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision permits certain plan amendments made pursuant 
to the changes in the Act, or regulations issued thereunder, to 
be retroactively effective. If a plan amendment meets the 
requirements of the provision, then the plan will be treated as 
being operated in accordance with its terms and the amendment 
will not violate the anticutback rule. In order for this 
treatment to apply, the plan must be operated as if the plan 
amendment were in effect, and the amendment is required to be 
made on or before the last day of the first plan year beginning 
on or after January 1, 2009 (2011 in the case of a governmental 
plan). If the amendment is required to be made to retain 
qualified status as a result of the changes in the law (or 
regulations), the amendment is required to be made 
retroactively effective as of the date on which the change 
became effective with respect to the plan and the plan is 
required to be operated in compliance until the amendment is 
made. Amendments that are not required to retain qualified 
status but that are made pursuant to the changes made by the 
Act (or applicable regulations) may be made retroactively 
effective as of the first day the amendment is effective.
    A plan amendment will not be considered to be pursuant to 
the Act (or applicable regulations) if it has an effective date 
before the effective date of the provision under the Act (or 
regulations) to which it relates. Similarly, the provision does 
not provide relief from the anticutback rule for periods prior 
to the effective date of the relevant provision (or 
regulations) or the plan amendment. The Secretary of the 
Treasury is authorized to provide exceptions to the relief from 
the prohibition on reductions in accrued benefits. It is 
intended that the Secretary will not permit inappropriate 
reductions in contributions or benefits that are not directly 
related to the provisions under the Act.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

         TITLE XII--PROVISIONS RELATING TO EXEMPT ORGANIZATIONS

                    A. Charitable Giving Incentives

1. Tax-free distributions from individual retirement plans for 
        charitable purposes (sec. 1201 of the Act and secs. 408, 6034, 
        6104, and 6652 of the Code)

                              Present Law

In general
    If an amount withdrawn from a traditional individual 
retirement arrangement (``IRA'') or a Roth IRA is donated to a 
charitable organization, the rules relating to the tax 
treatment of withdrawals from IRAs apply to the amount 
withdrawn and the charitable contribution is subject to the 
normally applicable limitations on deductibility of such 
contributions.
Charitable contributions
    In computing taxable income, an individual taxpayer who 
itemizes deductions generally is allowed to deduct the amount 
of cash and up to the fair market value of property contributed 
to a charity described in section 501(c)(3), to certain 
veterans' organizations, fraternal societies, and cemetery 
companies,\707\ or to a Federal, State, or local governmental 
entity for exclusively public purposes.\708\ The deduction also 
is allowed for purposes of calculating alternative minimum 
taxable income.
---------------------------------------------------------------------------
    \707\ Secs. 170(c)(3)-(5).
    \708\ Sec. 170(c)(1).
---------------------------------------------------------------------------
    The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\709\
---------------------------------------------------------------------------
    \709\ Secs. 170(b) and (e).
---------------------------------------------------------------------------
    A taxpayer who takes the standard deduction (i.e., who does 
not itemize deductions) may not take a separate deduction for 
charitable contributions.\710\
---------------------------------------------------------------------------
    \710\ Sec. 170(a).
---------------------------------------------------------------------------
    A payment to a charity (regardless of whether it is termed 
a ``contribution'') in exchange for which the donor receives an 
economic benefit is not deductible, except to the extent that 
the donor can demonstrate, among other things, that the payment 
exceeds the fair market value of the benefit received from the 
charity. To facilitate distinguishing charitable contributions 
from purchases of goods or services from charities, present law 
provides that no charitable contribution deduction is allowed 
for a separate contribution of $250 or more unless the donor 
obtains a contemporaneous written acknowledgement of the 
contribution from the charity indicating whether the charity 
provided any good or service (and an estimate of the value of 
any such good or service) to the taxpayer in consideration for 
the contribution.\711\ In addition, present law requires that 
any charity that receives a contribution exceeding $75 made 
partly as a gift and partly as consideration for goods or 
services furnished by the charity (a ``quid pro quo'' 
contribution) is required to inform the contributor in writing 
of an estimate of the value of the goods or services furnished 
by the charity and that only the portion exceeding the value of 
the goods or services may be deductible as a charitable 
contribution.\712\
---------------------------------------------------------------------------
    \711\ Sec. 170(f)(8).
    \712\ Sec. 6115.
---------------------------------------------------------------------------
    Under present law, total deductible contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base, which is the taxpayer's adjusted gross 
income for a taxable year (disregarding any net operating loss 
carryback). To the extent a taxpayer has not exceeded the 50-
percent limitation, (1) contributions of capital gain property 
to public charities generally may be deducted up to 30 percent 
of the taxpayer's contribution base, (2) contributions of cash 
to private foundations and certain other charitable 
organizations generally may be deducted up to 30 percent of the 
taxpayer's contribution base, and (3) contributions of capital 
gain property to private foundations and certain other 
charitable organizations generally may be deducted up to 20 
percent of the taxpayer's contribution base.
    Contributions by individuals in excess of the 50-percent, 
30-percent, and 20-percent limits may be carried over and 
deducted over the next five taxable years, subject to the 
relevant percentage limitations on the deduction in each of 
those years.
    In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with adjusted gross 
income in excess of a threshold amount, which is indexed 
annually for inflation. The threshold amount for 2006 is 
$150,500 ($75,250 for married individuals filing separate 
returns). For those deductions that are subject to the limit, 
the total amount of itemized deductions is reduced by three 
percent of adjusted gross income over the threshold amount, but 
not by more than 80 percent of itemized deductions subject to 
the limit. Beginning in 2006, the overall limitation on 
itemized deductions phases-out for all taxpayers. The overall 
limitation on itemized deductions is reduced by one-third in 
taxable years beginning in 2006 and 2007, and by two-thirds in 
taxable years beginning in 2008 and 2009. The overall 
limitation on itemized deductions is eliminated for taxable 
years beginning after December 31, 2009; however, this 
elimination of the limitation sunsets on December 31, 2010.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity (e.g., a remainder) while 
also either retaining an interest in that property (e.g., an 
income interest) or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\713\ Exceptions to this general rule are 
provided for, among other interests, remainder interests in 
charitable remainder annuity trusts, charitable remainder 
unitrusts, and pooled income funds, and present interests in 
the form of a guaranteed annuity or a fixed percentage of the 
annual value of the property.\714\ For such interests, a 
charitable deduction is allowed to the extent of the present 
value of the interest designated for a charitable organization.
---------------------------------------------------------------------------
    \713\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \714\ Sec. 170(f)(2).
---------------------------------------------------------------------------
IRA rules
    Within limits, individuals may make deductible and 
nondeductible contributions to a traditional IRA. Amounts in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal represents a return of 
nondeductible contributions). Individuals also may make 
nondeductible contributions to a Roth IRA. Qualified 
withdrawals from a Roth IRA are excludable from gross income. 
Withdrawals from a Roth IRA that are not qualified withdrawals 
are includible in gross income to the extent attributable to 
earnings. Includible amounts withdrawn from a traditional IRA 
or a Roth IRA before attainment of age 59\1/2\ are subject to 
an additional 10-percent early withdrawal tax, unless an 
exception applies. Under present law, minimum distributions are 
required to be made from tax-favored retirement arrangements, 
including IRAs. Minimum required distributions from a 
traditional IRA must generally begin by the April 1 of the 
calendar year following the year in which the IRA owner attains 
age 70\1/2\.\715\
---------------------------------------------------------------------------
    \715\ Minimum distribution rules also apply in the case of 
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
    If an individual has made nondeductible contributions to a 
traditional IRA, a portion of each distribution from an IRA is 
nontaxable until the total amount of nondeductible 
contributions has been received. In general, the amount of a 
distribution that is nontaxable is determined by multiplying 
the amount of the distribution by the ratio of the remaining 
nondeductible contributions to the account balance. In making 
the calculation, all traditional IRAs of an individual are 
treated as a single IRA, all distributions during any taxable 
year are treated as a single distribution, and the value of the 
contract, income on the contract, and investment in the 
contract are computed as of the close of the calendar year.
    In the case of a distribution from a Roth IRA that is not a 
qualified distribution, in determining the portion of the 
distribution attributable to earnings, contributions and 
distributions are deemed to be distributed in the following 
order: (1) regular Roth IRA contributions; (2) taxable 
conversion contributions; \716\ (3) nontaxable conversion 
contributions; and (4) earnings. In determining the amount of 
taxable distributions from a Roth IRA, all Roth IRA 
distributions in the same taxable year are treated as a single 
distribution, all regular Roth IRA contributions for a year are 
treated as a single contribution, and all conversion 
contributions during the year are treated as a single 
contribution.
---------------------------------------------------------------------------
    \716\ Conversion contributions refer to conversions of amounts in a 
traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
    Distributions from an IRA (other than a Roth IRA) are 
generally subject to withholding unless the individual elects 
not to have withholding apply.\717\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
---------------------------------------------------------------------------
    \717\ Sec. 3405.
---------------------------------------------------------------------------

Split-interest trust filing requirements

    Split-interest trusts, including charitable remainder 
annuity trusts, charitable remainder unitrusts, and pooled 
income funds, are required to file an annual information return 
(Form 1041A).\718\ Trusts that are not split-interest trusts 
but that claim a charitable deduction for amounts permanently 
set aside for a charitable purpose \719\ also are required to 
file Form 1041A. The returns are required to be made publicly 
available.\720\ A trust that is required to distribute all 
trust net income currently to trust beneficiaries in a taxable 
year is exempt from this return requirement for such taxable 
year. A failure to file the required return may result in a 
penalty on the trust of $10 a day for as long as the failure 
continues, up to a maximum of $5,000 per return.
---------------------------------------------------------------------------
    \718\ Sec. 6034. This requirement applies to all split-interest 
trusts described in section 4947(a)(2).
    \719\ Sec. 642(c).
    \720\ Sec. 6104(b).
---------------------------------------------------------------------------
    In addition, split-interest trusts are required to file 
annually Form 5227.\721\ Form 5227 requires disclosure of 
information regarding a trust's noncharitable beneficiaries. 
The penalty for failure to file this return is calculated based 
on the amount of tax owed. A split-interest trust generally is 
not subject to tax and therefore, in general, a penalty may not 
be imposed for the failure to file Form 5227. Form 5227 is not 
required to be made publicly available.
---------------------------------------------------------------------------
    \721\ Sec. 6011; Treas. Reg. sec. 53.6011-1(d).
---------------------------------------------------------------------------

                        Explanation of Provision


Qualified charitable distributions from IRAs

    The provision provides an exclusion from gross income for 
otherwise taxable IRA distributions from a traditional or a 
Roth IRA in the case of qualified charitable 
distributions.\722\ The exclusion may not exceed $100,000 per 
taxpayer per taxable year. Special rules apply in determining 
the amount of an IRA distribution that is otherwise taxable. 
The present-law rules regarding taxation of IRA distributions 
and the deduction of charitable contributions continue to apply 
to distributions from an IRA that are not qualified charitable 
distributions. Qualified charitable distributions are taken 
into account for purposes of the minimum distribution rules 
applicable to traditional IRAs to the same extent the 
distribution would have been taken into account under such 
rules had the distribution not been directly distributed under 
the provision. An IRA does not fail to qualify as an IRA merely 
because qualified charitable distributions have been made from 
the IRA. It is intended that the Secretary will prescribe rules 
under which IRA owners are deemed to elect out of withholding 
if they designate that a distribution is intended to be a 
qualified charitable distribution.
---------------------------------------------------------------------------
    \722\ The provision does not apply to distributions from employer-
sponsored retirement plans, including SIMPLE IRAs and simplified 
employee pensions (``SEPs'').
---------------------------------------------------------------------------
    A qualified charitable distribution is any distribution 
from an IRA directly by the IRA trustee to an organization 
described in section 170(b)(1)(A) (other than an organization 
described in section 509(a)(3) or a donor advised fund (as 
defined in section 4966(d)(2)). Distributions are eligible for 
the exclusion only if made on or after the date the IRA owner 
attains age 70\1/2\.
    The exclusion applies only if a charitable contribution 
deduction for the entire distribution otherwise would be 
allowable (under present law), determined without regard to the 
generally applicable percentage limitations. Thus, for example, 
if the deductible amount is reduced because of a benefit 
received in exchange, or if a deduction is not allowable 
because the donor did not obtain sufficient substantiation, the 
exclusion is not available with respect to any part of the IRA 
distribution.
    If the IRA owner has any IRA that includes nondeductible 
contributions, a special rule applies in determining the 
portion of a distribution that is includible in gross income 
(but for the provision) and thus is eligible for qualified 
charitable distribution treatment. Under the special rule, the 
distribution is treated as consisting of income first, up to 
the aggregate amount that would be includible in gross income 
(but for the provision) if the aggregate balance of all IRAs 
having the same owner were distributed during the same year. In 
determining the amount of subsequent IRA distributions 
includible in income, proper adjustments are to be made to 
reflect the amount treated as a qualified charitable 
distribution under the special rule.
    Distributions that are excluded from gross income by reason 
of the provision are not taken into account in determining the 
deduction for charitable contributions under section 170.
    The provision does not apply to distributions made in 
taxable years beginning after December 31, 2007.

Qualified charitable distribution examples

    The following examples illustrate the determination of the 
portion of an IRA distribution that is a qualified charitable 
distribution. In each example, it is assumed that the 
requirements for qualified charitable distribution treatment 
are otherwise met (e.g., the applicable age requirement and the 
requirement that contributions are otherwise deductible) and 
that no other IRA distributions occur during the year.
    Example 1.--Individual A has a traditional IRA with a 
balance of $100,000, consisting solely of deductible 
contributions and earnings. Individual A has no other IRA. The 
entire IRA balance is distributed in a distribution to an 
organization described in section 170(b)(1)(A) (other than an 
organization described in section 509(a)(3) or a donor advised 
fund). Under present law, the entire distribution of $100,000 
would be includible in Individual A's income. Accordingly, 
under the provision, the entire distribution of $100,000 is a 
qualified charitable distribution. As a result, no amount is 
included in Individual A's income as a result of the 
distribution and the distribution is not taken into account in 
determining the amount of Individual A's charitable deduction 
for the year.
    Example 2.--Individual B has a traditional IRA with a 
balance of $100,000, consisting of $20,000 of nondeductible 
contributions and $80,000 of deductible contributions and 
earnings. Individual B has no other IRA. In a distribution to 
an organization described in section 170(b)(1)(A) (other than 
an organization described in section 509(a)(3) or a donor 
advised fund), $80,000 is distributed from the IRA. Under 
present law, a portion of the distribution from the IRA would 
be treated as a nontaxable return of nondeductible 
contributions. The nontaxable portion of the distribution would 
be $16,000, determined by multiplying the amount of the 
distribution ($80,000) by the ratio of the nondeductible 
contributions to the account balance ($20,000/$100,000). 
Accordingly, under present law, $64,000 of the distribution 
($80,000 minus $16,000) would be includible in Individual B's 
income.
    Under the provision, notwithstanding the present-law tax 
treatment of IRA distributions, the distribution is treated as 
consisting of income first, up to the total amount that would 
be includible in gross income (but for the provision) if all 
amounts were distributed from all IRAs otherwise taken into 
account in determining the amount of IRA distributions. The 
total amount that would be includible in income if all amounts 
were distributed from the IRA is $80,000. Accordingly, under 
the provision, the entire $80,000 distributed to the charitable 
organization is treated as includible in income (before 
application of the provision) and is a qualified charitable 
distribution. As a result, no amount is included in Individual 
B's income as a result of the distribution and the distribution 
is not taken into account in determining the amount of 
Individual B's charitable deduction for the year. In addition, 
for purposes of determining the tax treatment of other 
distributions from the IRA, $20,000 of the amount remaining in 
the IRA is treated as Individual B's nondeductible 
contributions (i.e., not subject to tax upon distribution).

Split-interest trust filing requirements

    The provision increases the penalty on split-interest 
trusts for failure to file a return and for failure to include 
any of the information required to be shown on such return and 
to show the correct information. The penalty is $20 for each 
day the failure continues up to $10,000 for any one return. In 
the case of a split-interest trust with gross income in excess 
of $250,000, the penalty is $100 for each day the failure 
continues up to a maximum of $50,000. In addition, if a person 
(meaning any officer, director, trustee, employee, or other 
individual who is under a duty to file the return or include 
required information) \723\ knowingly failed to file the return 
or include required information, then that person is personally 
liable for such a penalty, which would be imposed in addition 
to the penalty that is paid by the organization. Information 
regarding beneficiaries that are not charitable organizations 
as described in section 170(c) is exempt from the requirement 
to make information publicly available. In addition, the 
provision repeals the present-law exception to the filing 
requirement for split-interest trusts that are required in a 
taxable year to distribute all net income currently to 
beneficiaries. Such exception remains available to trusts other 
than split-interest trusts that are otherwise subject to the 
filing requirement.
---------------------------------------------------------------------------
    \723\ Sec. 6652(c)(4)(C).
---------------------------------------------------------------------------

                             Effective Date

    The provision relating to qualified charitable 
distributions is effective for distributions made in taxable 
years beginning after December 31, 2005. The provision relating 
to information returns of split-interest trusts is effective 
for returns for taxable years beginning after December 31, 
2006.

2. Extension of modification of charitable deduction for contributions 
        of food inventory (sec. 1202 of the Act and sec. 170 of the 
        Code)

                              Present Law

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis (sec. 170(e)(3)). In general, a C corporation's 
charitable contribution deductions for a year may not exceed 10 
percent of the corporation's taxable income (sec. 170(b)(2)). 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer, 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.
    To use the enhanced deduction, the taxpayer must establish 
that the fair market value of the donated item exceeds basis. 
The valuation of food inventory has been the subject of 
disputes between taxpayers and the IRS.\724\
---------------------------------------------------------------------------
    \724\ Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
(holding that the value of surplus bread inventory donated to charity 
was the full retail price of the bread rather than half the retail 
price, as the IRS asserted).
---------------------------------------------------------------------------
    Under the Katrina Emergency Tax Relief Act of 2005, any 
taxpayer, whether or not a C corporation, engaged in a trade or 
business is eligible to claim the enhanced deduction for 
certain donations made after August 28, 2005, and before 
January 1, 2006, of food inventory. For taxpayers other than C 
corporations, the total deduction for donations of food 
inventory in a taxable year generally may not exceed 10 percent 
of the taxpayer's net income for such taxable year from all 
sole proprietorships, S corporations, or partnerships (or other 
entity that is not a C corporation) from which contributions of 
``apparently wholesome food'' are made. ``Apparently wholesome 
food'' is defined as food intended for human consumption that 
meets all quality and labeling standards imposed by Federal, 
State, and local laws and regulations even though the food may 
not be readily marketable due to appearance, age, freshness, 
grade, size, surplus, or other conditions.

                        Explanation of Provision

    The provision extends the provision enacted as part of the 
Katrina Emergency Tax Relief Act of 2005. As under such Act, 
under the provision, any taxpayer, whether or not a C 
corporation, engaged in a trade or business is eligible to 
claim the enhanced deduction for donations of food inventory. 
For taxpayers other than C corporations, the total deduction 
for donations of food inventory in a taxable year generally may 
not exceed 10 percent of the taxpayer's net income for such 
taxable year from all sole proprietorships, S corporations, or 
partnerships (or other non C corporation) from which 
contributions of apparently wholesome food are made. For 
example, as under the Katrina Emergency Tax Relief Act of 2005, 
if a taxpayer is a sole proprietor, a shareholder in an S 
corporation, and a partner in a partnership, and each business 
makes charitable contributions of food inventory, the 
taxpayer's deduction for donations of food inventory is limited 
to 10 percent of the taxpayer's net income from the sole 
proprietorship and the taxpayer's interests in the S 
corporation and partnership. However, if only the sole 
proprietorship and the S corporation made charitable 
contributions of food inventory, the taxpayer's deduction would 
be limited to 10 percent of the net income from the trade or 
business of the sole proprietorship and the taxpayer's interest 
in the S corporation, but not the taxpayer's interest in the 
partnership.\725\
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    \725\ The 10 percent limitation does not affect the application of 
the generally applicable percentage limitations. For example, if 10 
percent of a sole proprietor's net income from the proprietor's trade 
or business was greater than 50 percent of the proprietor's 
contribution base, the available deduction for the taxable year (with 
respect to contributions to public charities) would be 50 percent of 
the proprietor's contribution base. Consistent with present law, such 
contributions may be carried forward because they exceed the 50 percent 
limitation. Contributions of food inventory by a taxpayer that is not a 
C corporation that exceed the 10 percent limitation but not the 50 
percent limitation could not be carried forward.
---------------------------------------------------------------------------
    Under the provision, the enhanced deduction for food is 
available only for food that qualifies as ``apparently 
wholesome food.'' ``Apparently wholesome food'' is defined as 
it is defined under the Katrina Emergency Tax Relief Act of 
2005.
    The provision does not apply to contributions made after 
December 31, 2007.

                             Effective Date

    The provision is effective for contributions made after 
December 31, 2005.

3. Basis adjustment to stock of S corporation contributing property 
        (sec. 1203 of the Act and sec. 1367 of the Code)

                              Present Law

    Under present law, if an S corporation contributes money or 
other property to a charity, each shareholder takes into 
account the shareholder's pro rata share of the contribution in 
determining its own income tax liability.\726\ A shareholder of 
an S corporation reduces the basis in the stock of the S 
corporation by the amount of the charitable contribution that 
flows through to the shareholder.\727\
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    \726\ Sec. 1366(a)(1)(A).
    \727\ Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that the amount of a shareholder's 
basis reduction in the stock of an S corporation by reason of a 
charitable contribution made by the corporation will be equal 
to the shareholder's pro rata share of the adjusted basis of 
the contributed property.\728\
---------------------------------------------------------------------------
    \728\ See Rev. Rul. 96-11 (1996-1 C.B. 140) for a rule reaching a 
similar result in the case of charitable contributions made by a 
partnership.
---------------------------------------------------------------------------
    Thus, for example, assume an S corporation with one 
individual shareholder makes a charitable contribution of stock 
with a basis of $200 and a fair market value of $500. The 
shareholder will be treated as having made a $500 charitable 
contribution (or a lesser amount if the special rules of 
section 170(e) apply), and will reduce the basis of the S 
corporation stock by $200.\729\
---------------------------------------------------------------------------
    \729\ This example assumes that basis of the S corporation stock 
(before reduction) is at least $200.
---------------------------------------------------------------------------
    The provision does not apply to contributions made in 
taxable years beginning after December 31, 2007.

                             Effective Date

    The provision applies to contributions made in taxable 
years beginning after December 31, 2005.

4. Extension of modification of charitable deduction for contributions 
        of book inventory (sec. 1204 of the Act and sec. 170 of the 
        Code)

                              Present Law

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis (sec. 170(e)(3)). In general, a C corporation's 
charitable contribution deductions for a year may not exceed 10 
percent of the corporation's taxable income (sec. 170(b)(2)). 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer, 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.
    To use the enhanced deduction, the taxpayer must establish 
that the fair market value of the donated item exceeds basis.
    The Katrina Emergency Tax Relief Act of 2005 extended the 
present-law enhanced deduction for C corporations to certain 
qualified book contributions made after August 28, 2005, and 
before January 1, 2006. For such purposes, a qualified book 
contribution means a charitable contribution of books to a 
public school that provides elementary education or secondary 
education (kindergarten through grade 12) and that is an 
educational organization that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of pupils or students in attendance at the place where its 
educational activities are regularly carried on. The enhanced 
deduction under the Katrina Emergency Tax Relief Act of 2005 is 
not allowed unless the donee organization certifies in writing 
that the contributed books are suitable, in terms of currency, 
content, and quantity, for use in the donee's educational 
programs and that the donee will use the books in such 
educational programs.

                        Explanation of Provision

    The provision extends the provision enacted as part of the 
Katrina Emergency Tax Relief Act of 2005. As under such Act, an 
enhanced deduction for C corporations for qualified book 
contributions is allowed. The provision does not apply to 
contributions made after December 31, 2007.

                             Effective Date

    The provision is effective for contributions made after 
December 31, 2005.

5. Modification of tax treatment of certain payments under existing 
        arrangements to controlling exempt organizations (sec. 1205 of 
        the Act and secs. 512 and 6033 of the Code)

                              Present Law

    In general, interest, rents, royalties, and annuities are 
excluded from the unrelated business income of tax-exempt 
organizations. However, section 512(b)(13) generally treats 
otherwise excluded rent, royalty, annuity, and interest income 
as unrelated business income if such income is received from a 
taxable or tax-exempt subsidiary that is 50 percent controlled 
by the parent tax-exempt organization. In the case of a stock 
subsidiary, ``control'' means ownership by vote or value of 
more than 50 percent of the stock. In the case of a partnership 
or other entity, control means ownership of more than 50 
percent of the profits, capital or beneficial interests. In 
addition, present law applies the constructive ownership rules 
of section 318 for purposes of section 512(b)(13). Thus, a 
parent exempt organization is deemed to control any subsidiary 
in which it holds more than 50 percent of the voting power or 
value, directly (as in the case of a first-tier subsidiary) or 
indirectly (as in the case of a second-tier subsidiary).
    Under present law, interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization are includable in the latter organization's 
unrelated business income and are subject to the unrelated 
business income tax to the extent the payment reduces the net 
unrelated income (or increases any net unrelated loss) of the 
controlled entity (determined as if the entity were tax 
exempt).

                        Explanation of Provision

    The provision provides that the general rule of section 
512(b)(13), which includes interest, rent, annuity, or royalty 
payments made by a controlled entity to the controlling tax-
exempt organization in the latter organization's unrelated 
business income to the extent the payment reduces the net 
unrelated income (or increases any net unrelated loss) of the 
controlled entity, applies only to the portion of payments 
received or accrued in a taxable year that exceeds the amount 
of the specified payment that would have been paid or accrued 
if such payment had been determined under the principles of 
section 482. Thus, if a payment of rent by a controlled 
subsidiary to its tax-exempt parent organization exceeds fair 
market value, the excess amount of such payment over fair 
market value (as determined in accordance with section 482) is 
included in the parent organization's unrelated business 
income, to the extent that such excess reduced the net 
unrelated income (or increased any net unrelated loss) of the 
controlled entity (determined as if the entity were tax 
exempt). In addition, the provision imposes a 20-percent 
penalty on the larger of such excess determined without regard 
to any amendment or supplement to a return of tax, or such 
excess determined with regard to all such amendments and 
supplements. The provision applies only to payments made 
pursuant to a binding written contract in effect on the date of 
enactment (or renewal of such a contract on substantially 
similar terms). This part of the provision does not apply to 
payments received or accrued after December 31, 2007. It is 
intended that there should be further study of such 
arrangements in light of the provision before any determination 
about whether to extend or expand the provision is made.
    The provision requires that a tax-exempt organization that 
receives interest, rent, annuity, or royalty payments from a 
controlled entity report such payments on its annual 
information return as well as any loans made to any controlled 
entity and any transfers between such organization and a 
controlled entity.
    The provision provides that, not later than January 1, 
2009, the Secretary shall submit to the Committee on Finance of 
the Senate and the Committee on Ways and Means of the House of 
Representatives a report on the effectiveness of the Internal 
Revenue Service in administering the provision and on the 
extent to which payments by controlled entities to the 
controlling exempt organization meet the requirements of 
section 482 of the Code. Such report shall include the results 
of any audit of any controlling organization or controlled 
entity and recommendations relating to the tax treatment of 
payments from controlled entities to controlling organizations.

                             Effective Date

    The provision related to payments to controlling 
organizations applies to payments received or accrued after 
December 31, 2005. The provision relating to reporting is 
effective for returns the due date (determined without regard 
to extensions) of which is after the date of enactment (August 
17, 2006). The provision relating to a report by the Secretary 
is effective on the date of enactment.

6. Encouragement of contributions of capital gain real property made 
        for conservation purposes (sec. 1206 of the Act and sec. 170 of 
        the Code)

                              Present Law


Charitable contributions generally

    In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization. The amount of deduction generally equals the fair 
market value of the contributed property on the date of the 
contribution. Charitable deductions are provided for income, 
estate, and gift tax purposes.\730\
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    \730\ Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
    In general, in any taxable year, charitable contributions 
by a corporation are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating or capital loss 
carrybacks. For individuals, the amount deductible is a 
percentage of the taxpayer's contribution base, which is the 
taxpayer's adjusted gross income computed without regard to any 
net operating loss carryback. The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. Cash contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base. Cash contributions to private foundations 
and certain other organizations generally may be deducted up to 
30 percent of the taxpayer's contribution base.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while also either retaining 
an interest in that property or transferring an interest in 
that property to a noncharity for less than full and adequate 
consideration. Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property, and qualified conservation contributions.

Capital gain property

    Capital gain property means any capital asset or property 
used in the taxpayer's trade or business the sale of which at 
its fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property to a qualified charity 
are deductible at fair market value within certain limitations. 
Contributions of capital gain property to charitable 
organizations described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) generally are 
deductible up to 30 percent of the taxpayer's contribution 
base. An individual may elect, however, to bring all these 
contributions of capital gain property for a taxable year 
within the 50-percent limitation category by reducing the 
amount of the contribution deduction by the amount of the 
appreciation in the capital gain property. Contributions of 
capital gain property to charitable organizations described in 
section 170(b)(1)(B) (e.g., private non-operating foundations) 
are deductible up to 20 percent of the taxpayer's contribution 
base.
    For purposes of determining whether a taxpayer's aggregate 
charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions. Contributions of capital gain property that 
exceed the percentage limitation may be carried forward for 
five years.

Qualified conservation contributions

    Qualified conservation contributions are not subject to the 
``partial interest'' rule, which generally bars deductions for 
charitable contributions of partial interests in property. A 
qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property. Qualified 
organizations include certain governmental units, public 
charities that meet certain public support tests, and certain 
supporting organizations. Conservation purposes include: (1) 
the preservation of land areas for outdoor recreation by, or 
for the education of, the general public; (2) the protection of 
a relatively natural habitat of fish, wildlife, or plants, or 
similar ecosystem; (3) the preservation of open space 
(including farmland and forest land) where such preservation 
will yield a significant public benefit and is either for the 
scenic enjoyment of the general public or pursuant to a clearly 
delineated Federal, State, or local governmental conservation 
policy; and (4) the preservation of an historically important 
land area or a certified historic structure.
    Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules of other charitable contributions of capital gain 
property.

                        Explanation of Provision


In general

    Under the provision, the 30-percent contribution base 
limitation on contributions of capital gain property by 
individuals does not apply to qualified conservation 
contributions (as defined under present law). Instead, 
individuals may deduct the fair market value of any qualified 
conservation contribution to an organization described in 
section 170(b)(1)(A) to the extent of the excess of 50 percent 
of the contribution base over the amount of all other allowable 
charitable contributions. These contributions are not taken 
into account in determining the amount of other allowable 
charitable contributions.
    Individuals are allowed to carryover any qualified 
conservation contributions that exceed the 50-percent 
limitation for up to 15 years.
    For example, assume an individual with a contribution base 
of $100 makes a qualified conservation contribution of property 
with a fair market value of $80 and makes other charitable 
contributions subject to the 50-percent limitation of $60. The 
individual is allowed a deduction of $50 in the current taxable 
year for the non-conservation contributions (50 percent of the 
$100 contribution base) and is allowed to carryover the excess 
$10 for up to 5 years. No current deduction is allowed for the 
qualified conservation contribution, but the entire $80 
qualified conservation contribution may be carried forward for 
up to 15 years.

Farmers and ranchers

            Individuals
    In the case of an individual who is a qualified farmer or 
rancher for the taxable year in which the contribution is made, 
a qualified conservation contribution is allowable up to 100 
percent of the excess of the taxpayer's contribution base over 
the amount of all other allowable charitable contributions.
    In the above example, if the individual is a qualified 
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified 
conservation contribution is allowed and $30 may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.
            Corporations
    In the case of a corporation (other than a publicly traded 
corporation) that is a qualified farmer or rancher for the 
taxable year in which the contribution is made, any qualified 
conservation contribution is allowable up to 100 percent of the 
excess of the corporation's taxable income (as computed under 
section 170(b)(2)) over the amount of all other allowable 
charitable contributions. Any excess may be carried forward for 
up to 15 years as a contribution subject to the 100-percent 
limitation.
            Requirement that land be available for agriculture or 
                    livestock production
    As an additional condition of eligibility for the 100 
percent limitation, with respect to any contribution of 
property in agriculture or livestock production, or that is 
available for such production, by a qualified farmer or 
rancher, the qualified real property interest must include a 
restriction that the property remain generally available for 
such production. (There is no requirement as to any specific 
use in agriculture or farming, or necessarily that the property 
be used for such purposes, merely that the property remain 
available for such purposes.) Such additional condition does 
not apply to contributions made after December 31, 2005, and on 
or before the date of enactment.
            Definition
    A qualified farmer or rancher means a taxpayer whose gross 
income from the trade or business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.
    The provision does not apply to contributions made in 
taxable years beginning after December 31, 2007.

                             Effective Date

    The provision applies to contributions made in taxable 
years beginning after December 31, 2005.

7. Excise taxes exemption for blood collector organizations (sec. 1207 
  of the Act and secs. 4041, 4221, 4253, 4483, 6416, and 7701 of the 
                                 Code)


                              Present Law


American National Red Cross

    The American National Red Cross (``Red Cross'') is a 
Congressionally chartered corporation. It is responsible for 
giving aid to members of the U.S. Armed Forces, to disaster 
victims in the United States and abroad to help people prevent, 
prepare for, and respond to emergencies.\731\ The Red Cross is 
responsible for over half of the nation's blood supply and 
blood products.
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    \731\ See 36 U.S.C. sec. 300102.
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            Exemption from certain retail and manufacturers excise 
                    taxes
    The Code permits the Secretary to exempt from excise tax 
certain articles and services to be purchased for the exclusive 
use of the United States (sec. 4293). This authority is 
conditioned upon the Secretary determining (1) that the 
imposition of such taxes will cause substantial burden or 
expense which can be avoided by granting tax exemption and (2) 
that full benefit of such exemption, if granted, will accrue to 
the United States.
    On April 18, 1979, the Secretary exercised this authority 
to exempt, with limited exceptions, the Red Cross from the 
taxes imposed by chapters 31 and 32 of the Code with respect to 
articles sold to the Red Cross for its exclusive use.\732\ An 
exemption is also authorized from the taxes imposed with 
respect to tires and inner tubes if such tire or inner tube is 
sold by any person on or in connection with the sale of any 
article to the American National Red Cross, for its exclusive 
use.\733\ No exemption is provided from the gas guzzler tax 
(sec. 4064), and the taxes imposed on aviation fuel, on fuel 
used on inland waterways (sec. 4042), and on coal (sec. 
4121).\734\ The exemption is subject to registration 
requirements for tax-free sales contained in Treasury 
regulations. Credit and refund of tax is subject to the 
requirements set forth in section 6416 relating to the 
exemption for taxable articles sold for the exclusive use of 
State and local governments.
---------------------------------------------------------------------------
    \732\ Department of the Treasury, Notice-Manufacturers and 
Retailers Excise Taxes--Exemption from Tax of Sales of Certain Articles 
to the American Red Cross, 44 F.R. 23407, 1979-1 C.B. 478 (1979). At 
the time the notice was issued the following taxes were covered in 
Chapters 31 and 32: special fuels, automotive and related items (motor 
vehicles, tires and tubes, petroleum products, coal, and recreational 
equipment (sporting goods and firearms).
    \733\ Under present law, there is no longer a tax on inner tubes.
    \734\ Department of the Treasury, Notice-Manufacturers and 
Retailers Excise Taxes--Exemption from Tax of Sales of Certain Articles 
to the American Red Cross, 44 F.R. 23407, 1979-1 C.B. 478, at 479 
(1979). The Treasury notice also exempts the Red Cross from tax on 
aircraft tires and tubes, however, present law currently limits the tax 
to highway vehicle tires (sec. 4071(a)).
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            Exemption from heavy highway motor vehicle use tax
    An annual use tax is imposed on highway motor vehicles, at 
the rates below (sec. 4481).

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

------------------------------------------------------------------------
Under 55,000 pounds.......................  No tax.
55,000-75,000 pounds......................  $100 plus $22 per 1,000
                                             pounds over 55,000.
Over 75,000 pounds........................  $550.
------------------------------------------------------------------------

    The Code provides that the Secretary may authorize 
exemption from the heavy highway vehicle use tax as to the use 
by the United States of any particular highway motor vehicle or 
class of highway motor vehicles if the Secretary determines 
that the imposition of such tax with respect to such use will 
cause substantial burden or expense which can be avoided by 
granting tax exemption and that the full benefit of such 
exemption, if granted will accrue to the United States (sec. 
4483(b)). The IRS has ruled that the Red Cross comes within the 
term ``United States'' for purposes of the exemption from the 
heavy highway motor vehicle use tax (Rev. Rul. 76-510).
            Exemption from communications excise tax
    The Code imposes a three-percent tax on amounts paid for 
local telephone service; toll telephone service and 
teletypewriter exchange service (sec. 4251). These taxes do not 
apply to amounts paid for services furnished to the Red Cross 
(sec. 4253(c)).

Certain other tax-free sales

            Exemption from certain manufacturer and retail sale excise 
                    taxes
    The following sales generally are exempt from certain 
manufacturer and retail sale excise taxes: (1) for use by the 
purchaser for further manufacture, or for resale to a second 
purchaser in further manufacture; (2) for export or for resale 
to a second purchaser for export; (3) for use by the purchaser 
as supplies for vessels or aircraft; (4) to a State or local 
government for the exclusive use of a State or local 
government; and (5) to a nonprofit educational organization for 
its exclusive use (sec. 4221). The exemption generally applies 
to manufacturers taxes imposed by chapter 32 of the Code (the 
gas guzzlers tax, and the taxes imposed on tires, certain 
vaccines, and recreational equipment) and the tax on retail 
sales of heavy trucks and trailers.\735\
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    \735\ The tax imposed by subchapter A of chapter 31 (relating to 
luxury passenger vehicles) is also exempt pursuant to this provision, 
however, this tax expired on December 31, 2002. (sec. 4001(g).)
---------------------------------------------------------------------------
    The manufacturers excise taxes on coal (sec. 4121), on 
gasoline, diesel fuel, and kerosene (sec. 4081) are not covered 
by the exemption. The exemption for a sale to a State or local 
government for their exclusive use and the exemption for sales 
to a nonprofit educational organization does not apply to the 
gas guzzlers tax, and the tax on vaccines. In addition, the 
exemption of sales for use as supplies for vessels and aircraft 
does not apply to the vaccine tax.
            Exempt sales of special fuels
    A retail excise tax is imposed on special motor fuels, 
including propane, compressed natural gas, and certain alcohol 
mixtures (sec. 4041). Section 4041 also serves as a back-up tax 
for diesel fuel or kerosene that was not subject to the 
manufacturers taxes under section 4081 (other than the Leaking 
Underground Storage Tank Trust Fund tax) if such fuel is 
delivered into the fuel supply tank of a diesel-powered highway 
vehicle or train.\736\ No tax is imposed on these fuels for 
nontaxable uses, including fuel: (1) sold for use or used as 
supplies for vessels or aircraft, (2) sold for the exclusive 
use of any State, any political subdivision of a State, or the 
District of Columbia or used by such entity as fuel, (3) sold 
for export, or for shipment to a possession of the United 
States and is actually exported or shipped, (4) sold to a 
nonprofit educational organization for its exclusive use, or 
used by such entity as fuel (sec. 4041(g)).
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    \736\ For example, tax is imposed on the delivery of any of the 
following into the fuel supply tank of a diesel powered highway vehicle 
or train of any dyed diesel or dyed kerosene for other than a 
nontaxable use; any undyed diesel fuel or undyed kerosene on which a 
credit or refund.
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Credits and refunds

            In general
    A credit or refund is allowed for overpayment of 
manufacturers or retail excise taxes (sec. 6416). Overpayments 
include (1) certain uses and resales, (2) price adjustments, 
and (3) further manufacture.
            Specified uses and resales
    The special fuel taxes, the retail tax on heavy trucks and 
trailers, and any of the manufacturers excise taxes paid on any 
article will be a deemed overpayment subject to credit or 
refund if sold for certain specified uses (sec. 6416(b)(2)). 
These uses are (1) export, (2) used or sold for use as supplies 
for vessels or aircraft, (3) sold to a State or local 
government for the exclusive use of a State or local 
government, (4) sold to a nonprofit educational organization 
for its exclusive use; (5) taxable tires sold to any person for 
use in connection with a qualified bus, or (6) the case of 
gasoline used or sold for use in the production of a special 
fuel. Certain exceptions apply in that this deemed overpayment 
rule does not apply to the taxes imposed by sections 4041 and 
4081 on diesel fuel and kerosene, and the coal taxes (sec. 
4121). Additionally, the deemed overpayment rule does not apply 
to the gas guzzler tax in the case of an article sold to a 
state or local government for its exclusive use or sold to an 
educational organization for its exclusive use.
            Special rule for tires sold in connection with other 
                    articles
    If the tax imposed on tires (sec. 4071) has been paid with 
respect to the sale of any tire by the manufacturer, producer, 
or importer, and such tire is sold by any person in connection 
with the sale of any other article, such tax will be deemed an 
overpayment by person if such other article (1) is an 
automobile bus chassis or an automobile bus body, or (2) is by 
any person exported, sold to a State or local government for 
exclusive use of a State or local government, sold to a 
nonprofit educational organization for its exclusive use, or 
used or sold for use as supplies for vessels or aircraft (sec. 
6416(b)(4)).
            Gasoline used for exempt purposes
    If gasoline is sold to any person for certain specified 
purposes, the Secretary is required to pay (without interest) 
to such person an amount equal to the product of the number of 
gallons of gasoline so sold multiplied by the rate at which tax 
was imposed on such gasoline under section 4081 (sec. 6421(c)). 
Under this provision, the specified purposes are (1) for export 
or for resale to a second purchaser for export; (2) for use by 
the purchaser as supplies for vessels or aircraft; (3) to a 
State or local government for exclusive use of a State or local 
government; and (4) to a nonprofit educational organization for 
its exclusive use (sec. 4221(a), 6421(c)).
            Diesel fuel or kerosene used in a nontaxable use
    If diesel fuel or kerosene, upon which tax has been imposed 
is used by any person in a nontaxable use, the Code authorizes 
the Secretary to pay (without interest) an amount equal to the 
aggregate amount of tax imposed on such fuel (sec. 6427(l)). 
Nontaxable uses include any exemption from the tax imposed by 
section 4041(a) (except prior taxation).

                        Explanation of Provision

    The provision exempts qualified blood collector 
organizations from certain retail and manufacturers excise 
taxes to the extent such items are for the exclusive use of 
such an organization for the distribution or collection of 
blood. A qualified blood collector organization means an 
organization that is (1) described in section 501(c)(3) and 
exempt from tax under section 501(a), (2) primarily engaged in 
the activity of the collection of blood, (3) registered with 
the Secretary for purposes of excise tax exemptions, and (4) 
registered by the Food and Drug Administration to collect 
blood.
    Under the provision, qualified blood collector 
organizations are exempt from the communications excise tax as 
provided by Treasury regulations. The provision also provides 
an exemption from the special fuels tax, and certain taxes 
imposed by chapter 32 and subchapter A and C of chapter 31 of 
the Code (i.e., the retail excise tax on heavy trucks and 
trailers, and the manufacturers excise taxes on tires).\737\ 
The provision also makes conforming amendments to allow for the 
credit or refund of these taxes and any tax paid on gasoline 
for the exclusive use of the blood collector organization. The 
provision also permits a refund of tax for diesel fuel or 
kerosene used by a qualified blood collector organization. 
Finally, the provision provides an exemption from the heavy 
vehicle use tax of a ``qualified blood collector vehicle'' by a 
qualified blood collector organization. A ``qualified blood 
collector vehicle'' means a vehicle at least 80 percent of the 
use of which during the prior taxable period was by a qualified 
blood collector organization in the collection, storage, or 
transportation of blood. A special rule is provided for the 
first taxable period a vehicle is placed in service by the 
qualified blood collector organization. For the first taxable 
period a vehicle is placed in service by the organization, the 
vehicle will be treated as a ``qualified blood collector 
vehicle'' for that period if the organization certifies that it 
reasonably expects that at least 80 percent of the use of the 
vehicle during such taxable period will be by the organization 
in the collection, storage, or transportation of blood. Such 
certification is to be provided to the Secretary on such forms 
and in such manner as the Secretary may require.
---------------------------------------------------------------------------
    \737\ Such organizations are also exempt from the expired retail 
excise tax on luxury passenger vehicles. No exemption is provided from 
the gas guzzler tax (sec. 4064), the taxes imposed on fuel used on 
inland waterways (sec. 4042), on coal (sec. 4121), and on recreational 
equipment (sport fishing equipment, bows, arrow components, and 
firearms).
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    It is expected that the excise tax exemptions of the Red 
Cross will be reexamined in conjunction with a review of its 
charter.

                             Effective Date

    Generally, the provision is effective on January 1, 2007. 
The exemption from the heavy vehicle use tax is effective for 
taxable periods beginning on or after July 1, 2007.

                   B. Reforming Exempt Organizations


1. Require reporting on certain acquisitions of interests in insurance 
        contracts in which certain exempt organizations hold an 
        interest; require Treasury Study (sec. 1211 of the Act and new 
        sec. 6050V of the Code)

                              Present Law


Amounts received under a life insurance contract

    Amounts received under a life insurance contract paid by 
reason of the death of the insured are not includible in gross 
income for Federal tax purposes.\738\ No Federal income tax 
generally is imposed on a policyholder with respect to the 
earnings under a life insurance contract (inside buildup).\739\
---------------------------------------------------------------------------
    \738\ Sec. 101(a).
    \739\ This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract. Sec. 7702.
---------------------------------------------------------------------------
    Distributions from a life insurance contract (other than a 
modified endowment contract) that are made prior to the death 
of the insured generally are includible in income to the extent 
that the amounts distributed exceed the taxpayer's investment 
in the contract (i.e., basis). Such distributions generally are 
treated first as a tax-free recovery of basis, and then as 
income.\740\
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    \740\ Sec. 72(e). In the case of a modified endowment contract, 
however, in general, distributions are treated as income first, loans 
are treated as distributions (i.e., income rather than basis recovery 
first), and an additional 10-percent tax is imposed on the income 
portion of distributions made before age 59\1/2\ and in certain other 
circumstances. Secs. 72(e) and (v). A modified endowment contract is a 
life insurance contract that does not meet a statutory ``7-pay'' test, 
i.e., generally is funded more rapidly than seven annual level 
premiums. Sec. 7702A.
---------------------------------------------------------------------------

Transfers for value

    A limitation on the exclusion for amounts received under a 
life insurance contract is provided in the case of transfers 
for value. If a life insurance contract (or an interest in the 
contract) is transferred for valuable consideration, the amount 
excluded from income by reason of the death of the insured is 
limited to the actual value of the consideration plus the 
premiums and other amounts subsequently paid by the acquiror of 
the contract.\741\
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    \741\ Section 101(a)(2). The transfer-for-value rule does not 
apply, however, in the case of a transfer in which the life insurance 
contract (or interest in the contract) transferred has a basis in the 
hands of the transferee that is determined by reference to the 
transferor's basis. Similarly, the transfer-for-value rule generally 
does not apply if the transfer is between certain parties 
(specifically, if the transfer is to the insured, a partner of the 
insured, a partnership in which the insured is a partner, or a 
corporation in which the insured is a shareholder or officer).
---------------------------------------------------------------------------

Tax treatment of charitable organizations and donors

    Present law generally provides tax-exempt status for 
charitable, educational and certain other organizations, no 
part of the net earnings of which inures to the benefit of any 
private shareholder or individual, and which meet certain other 
requirements.\742\ Governmental entities, including some 
educational organizations, are exempt from tax on income under 
other tax rules providing that gross income does not include 
income derived from the exercise of any essential governmental 
function and accruing to a State or any political subdivision 
thereof.\743\
---------------------------------------------------------------------------
    \742\ Section 501(c)(3).
    \743\ Section 115.
---------------------------------------------------------------------------
    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity for exclusively public 
purposes.\744\
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    \744\ Section 170.
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State-law insurable interest rules

    State laws generally provide that the owner of a life 
insurance contract must have an insurable interest in the 
insured person when the life insurance contract is issued. 
State laws vary as to the insurable interest of a charitable 
organization in the life of any individual. Some State laws 
provide that a charitable organization meeting the requirements 
of section 501(c)(3) of the Code is treated as having an 
insurable interest in the life of any donor,\745\ or, in other 
States, in the life of any individual who consents (whether or 
not the individual is a donor).\746\ Other States' insurable 
interest rules permit the purchase of a life insurance contract 
even though the person paying the consideration has no 
insurable interest in the life of the person insured if a 
charitable, benevolent, educational or religious institution is 
designated irrevocably as the beneficiary.\747\
---------------------------------------------------------------------------
    \745\ See, e.g., Mass. Gen. Laws Ann. ch. 175, sec. 123A(2) (West 
2005); Iowa Code Ann. sec. 511.39 (West 2004) (``a person who, when 
purchasing a life insurance policy, makes a donation to the charitable 
organization or makes the charitable organization the beneficiary of 
all or a part of the proceeds of the policy . . .).
    \746\ See, e.g., Cal. Ins. Code sec. 10110.1(f) (West 2005); 40 Pa. 
Cons. Stat. Ann. sec. 40-512 (2004); Fla. Stat. Ann. sec. 27.404 (2) 
(2004); Mich. Comp. Laws Ann. sec. 500.2212 (West 2004).
    \747\ Or. Rev. Stat. sec. 743.030 (2003); Del. Code Ann. Tit. 18, 
sec. 2705(a) (2004).
---------------------------------------------------------------------------

Transactions involving charities and non-charities acquiring life 
        insurance

    Recently, there has been an increase in transactions 
involving the acquisition of life insurance contracts using 
arrangements in which both exempt organizations, primarily 
charities, and private investors have an interest in the 
contract.\748\ The exempt organization has an insurable 
interest in the insured individuals, either because they are 
donors, because they consent, or otherwise under applicable 
State insurable interest rules. Private investors provide 
capital used to fund the purchase of the life insurance 
contracts, sometimes together with annuity contracts. Both the 
private investors and the charity have an interest in the 
contracts, directly or indirectly, through the use of trusts, 
partnerships, or other arrangements for sharing the rights to 
the contracts. Both the charity and the private investors 
receive cash amounts in connection with the investment in the 
contracts while the life insurance is in force or as the 
insured individuals die.
---------------------------------------------------------------------------
    \748\ Davis, Wendy, ``Death-Pool Donations,'' Trusts and Estates, 
May 2004, 55; Francis, Theo, ``Tax May Thwart Investment Plans 
Enlisting Charities,'' Wall St. J., Feb. 8, 2005, A-10.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision includes a temporary reporting requirement 
with respect to the acquisition of interests in certain life 
insurance contracts by certain exempt organizations, together 
with a Treasury study.
    The provision provides that, for reportable acquisitions 
occurring after the date of enactment and on or before the date 
two years from the date of enactment, an applicable exempt 
organization that makes a reportable acquisition is required to 
file an information return. The information return is to 
contain the name, address, and taxpayer identification number 
of the organization and of the issuer of the applicable 
insurance contract, and such other information as the Secretary 
of the Treasury prescribes. It is intended that the Treasury 
Department may require the reporting of other information 
relevant to the study required under the provision. The report 
is to be in the form prescribed by the Treasury Secretary and 
is required to be filed at the time established by the Treasury 
Secretary. It is intended that the Treasury Department may 
require the report to be filed within a certain period after 
the reportable acquisition takes place in order to gather 
information in a timely manner that is relevant to the study 
required under the provision.
    For this purpose, a reportable acquisition means the 
acquisition by an applicable exempt organization of a direct or 
indirect interest in a contract that the applicable exempt 
organization knows or has reason to know is an applicable 
insurance contract, if such acquisition is a part of a 
structured transaction involving a pool of such contracts.
    An applicable insurance contract means any life insurance, 
annuity, or endowment contract with respect to which both an 
applicable exempt organization and a person other than an 
applicable exempt organization have directly or indirectly held 
an interest in the contract (whether or not at the same time). 
Exceptions apply under this definition. First, the term does 
not apply if each person (other than an applicable exempt 
organization) with a direct or indirect interest in the 
contract has an insurable interest in the insured independent 
of any interest of the exempt organization in the contract. 
Second, the term does not apply if the sole interest in the 
contract of the applicable exempt organization or each person 
other than the applicable exempt organization is as a named 
beneficiary. Third, the term does not apply if the sole 
interest in the contract of each person other than the 
applicable exempt organization is either (1) as a beneficiary 
of a trust holding an interest in the contract, but only if the 
person's designation as such a beneficiary was made without 
consideration and solely on a purely gratuitous basis, or (2) 
as a trustee who holds an interest in the contract in a 
fiduciary capacity solely for the benefit of applicable exempt 
organizations or of persons otherwise meeting one of the first 
two exceptions.
    An applicable exempt organization is any organization 
described in section 170(c), 168(h)(2)(A)(iv), 2055(a), or 
2522(a). Thus, for example, an applicable exempt organization 
generally includes an organization that is exempt from Federal 
income tax by reason of being described in section 501(c)(3) 
(including one organized outside the United States), a 
government or political subdivision of a government, and an 
Indian tribal government.
    Under the provision, penalties apply for failure to file 
the return.
    The reporting requirement terminates with respect to 
reportable acquisitions occurring after the date that is two 
years after the date of enactment.
    The provision requires the Treasury Secretary to undertake 
a study on the use by tax-exempt organizations of applicable 
insurance contracts for the purpose of sharing the benefits of 
the organization's insurable interest in insured individuals 
under such contracts with investors, and whether such 
activities are consistent with the tax-exempt status of the 
organizations. The study may, for example, address whether 
certain such arrangements are or may be used to improperly 
shelter income from tax, and whether they should be listed 
transactions within the meaning of Treasury Regulation section 
1.6011-4(b)(2). No later than 30 months after the date of 
enactment, the Treasury Secretary is required to report on the 
study to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives.

                             Effective Date

    The reporting provision is effective for acquisitions of 
contracts after the date of enactment (August 17, 2006). The 
study provision is effective on the date of enactment.

2. Increase in penalty excise taxes relating to public charities, 
        social welfare organizations, and private foundations (sec. 
        1212 of the Act and secs. 4941, 4942, 4943, 4944, 4945, and 
        4958 of the Code)

                              Present Law


Public charities and social welfare organizations

    The Code imposes excise taxes on excess benefit 
transactions between disqualified persons (as defined in 
section 4958(f)) and charitable organizations (other than 
private foundations) or social welfare organizations (as 
described in section 501(c)(4)).\749\ An excess benefit 
transaction generally is a transaction in which an economic 
benefit is provided by a charitable or social welfare 
organization directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
---------------------------------------------------------------------------
    \749\ Sec. 4958. The excess benefit transaction tax commonly is 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status.
---------------------------------------------------------------------------
    The excess benefit tax is imposed on the disqualified 
person and, in certain cases, on the organization manager, but 
is not imposed on the exempt organization. An initial tax of 25 
percent of the excess benefit amount is imposed on the 
disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected. A tax 
of 10 percent of the excess benefit (not to exceed $10,000 with 
respect to any excess benefit transaction) is imposed on an 
organization manager that knowingly participated in the excess 
benefit transaction, if the manager's participation was willful 
and not due to reasonable cause, and if the initial tax was 
imposed on the disqualified person.\750\ If more than one 
person is liable for the tax on disqualified persons or on 
management, all such persons are jointly and severally liable 
for the tax.\751\
---------------------------------------------------------------------------
    \750\ Sec. 4958(d)(2). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \751\ Sec. 4958(d)(1).
---------------------------------------------------------------------------

Private foundations

            Self-dealing by private foundations
    Excise taxes are imposed on acts of self-dealing between a 
disqualified person (as defined in section 4946) and a private 
foundation.\752\ In general, self-dealing transactions are any 
direct or indirect: (1) sale or exchange, or leasing, of 
property between a private foundation and a disqualified 
person; (2) lending of money or other extension of credit 
between a private foundation and a disqualified person; (3) the 
furnishing of goods, services, or facilities between a private 
foundation and a disqualified person; (4) the payment of 
compensation (or payment or reimbursement of expenses) by a 
private foundation to a disqualified person; (5) the transfer 
to, or use by or for the benefit of, a disqualified person of 
the income or assets of the private foundation; and (6) certain 
payments of money or property to a government official.\753\ 
Certain exceptions apply.\754\
---------------------------------------------------------------------------
    \752\ Sec. 4941.
    \753\ Sec. 4941(d)(1).
    \754\ Sec. 4941(d)(2).
---------------------------------------------------------------------------
    An initial tax of five percent of the amount involved with 
respect to an act of self-dealing is imposed on any 
disqualified person (other than a foundation manager acting 
only as such) who participates in the act of self-dealing. If 
such a tax is imposed, a 2.5-percent tax of the amount involved 
is imposed on a foundation manager who participated in the act 
of self-dealing knowing it was such an act (and such 
participation was not willful and was due to reasonable cause) 
up to $10,000 per act. Such initial taxes may not be 
abated.\755\ Such initial taxes are imposed for each year in 
the taxable period, which begins on the date the act of self-
dealing occurs and ends on the earliest of the date of mailing 
of a notice of deficiency for the tax, the date on which the 
tax is assessed, or the date on which correction of the act of 
self-dealing is completed. A government official (as defined in 
section 4946(c)) is subject to such initial tax only if the 
official participates in the act of self-dealing knowing it is 
such an act. If the act of self-dealing is not corrected, a tax 
of 200 percent of the amount involved is imposed on the 
disqualified person and a tax of 50 percent of the amount 
involved (up to $10,000 per act) is imposed on a foundation 
manager who refused to agree to correcting the act of self-
dealing. Such additional taxes are subject to abatement.\756\
---------------------------------------------------------------------------
    \755\ Sec. 4962(b).
    \756\ Sec. 4961.
---------------------------------------------------------------------------
            Tax on failure to distribute income
    Private nonoperating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\757\ Failure to pay out the minimum amount results in 
an initial excise tax on the foundation of 15 percent of the 
undistributed amount. An additional tax of 100 percent of the 
undistributed amount applies if an initial tax is imposed and 
the required distributions have not been made by the end of the 
applicable taxable period.\758\ A foundation may include as a 
qualifying distribution the salaries, occupancy expenses, 
travel costs, and other reasonable and necessary administrative 
expenses that the foundation incurs in operating a grant 
program. A qualifying distribution also includes any amount 
paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes 
and certain amounts set aside for exempt purposes.\759\ Private 
operating foundations are not subject to the payout 
requirements.
---------------------------------------------------------------------------
    \757\ Sec. 4942(g)(1)(A).
    \758\ Sec. 4942(a) and (b). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \759\ Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an 
organization is permitted to adjust the distributable amount in those 
cases where distributions during the five preceding years have exceeded 
the payout requirements. Sec. 4942(i).
---------------------------------------------------------------------------
            Tax on excess business holdings
    Private foundations are subject to tax on excess business 
holdings.\760\ In general, a private foundation is permitted to 
hold 20 percent of the voting stock in a corporation, reduced 
by the amount of voting stock held by all disqualified persons 
(as defined in section 4946). If it is established that no 
disqualified person has effective control of the corporation, a 
private foundation and disqualified persons together may own up 
to 35 percent of the voting stock of a corporation. A private 
foundation shall not be treated as having excess business 
holdings in any corporation if it owns (together with certain 
other related private foundations) not more than two percent of 
the voting stock and not more than two percent in value of all 
outstanding shares of all classes of stock in that corporation. 
Similar rules apply with respect to holdings in a partnership 
(``profits interest'' is substituted for ``voting stock'' and 
``capital interest'' for ``nonvoting stock'') and to other 
unincorporated enterprises (by substituting ``beneficial 
interest'' for ``voting stock''). Private foundations are not 
permitted to have holdings in a proprietorship. Foundations 
generally have a five-year period to dispose of excess business 
holdings (acquired other than by purchase) without being 
subject to tax.\761\ This five-year period may be extended an 
additional five years in limited circumstances.\762\ The excess 
business holdings rules do not apply to holdings in a 
functionally related business or to holdings in a trade or 
business at least 95 percent of the gross income of which is 
derived from passive sources.\763\
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    \760\ Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \761\ Sec. 4943(c)(6).
    \762\ Sec. 4943(c)(7).
    \763\ Sec. 4943(d)(3).
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    The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.
            Tax on jeopardizing investments
    Private foundations and foundation managers are subject to 
tax on investments that jeopardize the foundation's charitable 
purpose.\764\ In general, an initial tax of five percent of the 
amount of the investment applies to the foundation and to 
foundation managers who participated in the making of the 
investment knowing that it jeopardized the carrying out of the 
foundation's exempt purposes. The initial tax on foundation 
managers may not exceed $5,000 per investment. If the 
investment is not removed from jeopardy (e.g., sold or 
otherwise disposed of), an additional tax of 25 percent of the 
amount of the investment is imposed on the foundation and five 
percent of the amount of the investment on a foundation manager 
who refused to agree to removing the investment from jeopardy. 
The additional tax on foundation managers may not exceed 
$10,000 per investment. An investment, the primary purpose of 
which is to accomplish a charitable purpose and no significant 
purpose of which is the production of income or the 
appreciation of property, is not considered a jeopardizing 
investment.\765\
---------------------------------------------------------------------------
    \764\ Sec. 4944. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \765\ Sec. 4944(c).
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            Tax on taxable expenditures
    Certain expenditures of private foundations are subject to 
tax.\766\ In general, taxable expenditures are expenses: (1) 
for lobbying; (2) to influence the outcome of a public election 
or carry on a voter registration drive (unless certain 
requirements are met); (3) as a grant to an individual for 
travel, study, or similar purposes unless made pursuant to 
procedures approved by the Secretary; (4) as a grant to an 
organization that is not a public charity or exempt operating 
foundation unless the foundation exercises expenditure 
responsibility \767\ with respect to the grant; or (5) for any 
non-charitable purpose. For each taxable expenditure, a tax is 
imposed on the foundation of 10 percent of the amount of the 
expenditure, and an additional tax of 100 percent is imposed on 
the foundation if the expenditure is not corrected. A tax of 
2.5 percent of the expenditure (up to $5,000) also is imposed 
on a foundation manager who agrees to making a taxable 
expenditure knowing that it is a taxable expenditure. An 
additional tax of 50 percent of the amount of the expenditure 
(up to $10,000) is imposed on a foundation manager who refuses 
to agree to correction of such expenditure.
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    \766\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \767\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
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                        Explanation of Provision


Self-dealing and excess benefit transaction initial taxes and dollar 
        limitations

    For acts of self-dealing involving a private foundation and 
a disqualified person, the provision increases the initial tax 
on the self-dealer from five percent of the amount involved to 
10 percent of the amount involved. The provision increases the 
initial tax on foundation managers from 2.5 percent of the 
amount involved to five percent of the amount involved and 
increases the dollar limitation on the amount of the initial 
and additional taxes on foundation managers per act of self-
dealing from $10,000 per act to $20,000 per act. Similarly, the 
provision doubles the dollar limitation on organization 
managers of public charities and social welfare organizations 
for participation in excess benefit transactions from $10,000 
per transaction to $20,000 per transaction.

Failure to distribute income, excess business holdings, jeopardizing 
        investments, and taxable expenditures

    The provision doubles the amounts of the initial taxes and 
the dollar limitations on foundation managers with respect to 
the private foundation excise taxes on the failure to 
distribute income, excess business holdings, jeopardizing 
investments, and taxable expenditures.
    Specifically, for the failure to distribute income, the 
initial tax on the foundation is increased from 15 percent of 
the undistributed amount to 30 percent of the undistributed 
amount.
    For excess business holdings, the initial tax on excess 
business holdings is increased from five percent of the value 
of such holdings to 10 percent of such value.
    For jeopardizing investments, the initial tax of five 
percent of the amount of the investment that is imposed on the 
foundation and on foundation managers is increased to 10 
percent of the amount of the investment. The dollar limitation 
on the initial tax on foundation managers of $5,000 per 
investment is increased to $10,000 and the dollar limitation on 
the additional tax on foundation managers of $10,000 per 
investment is increased to $20,000.
    For taxable expenditures, the initial tax on the foundation 
is increased from 10 percent of the amount of the expenditure 
to 20 percent, the initial tax on the foundation manager is 
increased from 2.5 percent of the amount of the expenditure to 
five percent, the dollar limitation on the initial tax on 
foundation managers is increased from $5,000 to $10,000, and 
the dollar limitation on the additional tax on foundation 
managers is increased from $10,000 to $20,000.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (August 17, 2006).

     3. Reform of charitable contributions of certain easements in 
registered historic districts and reduction of deduction for portion of 
  qualified conservation contribution attributable to rehabilitation 
         credit (sec. 1213 of the Act and sec. 170 of the Code)


                              Present Law


In general

    Present law provides special rules that apply to charitable 
deductions of qualified conservation contributions, which 
include conservation easements and facade easements.\768\ 
Qualified conservation contributions are not subject to the 
``partial interest'' rule, which generally bars deductions for 
charitable contributions of partial interests in property.\769\ 
Accordingly, qualified conservation contributions are 
contributions of partial interests that are eligible for a fair 
market value charitable deduction.
---------------------------------------------------------------------------
    \768\ Sec. 170(h).
    \769\ Sec. 170(f)(3).
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    A qualified conservation contribution is a contribution of 
a qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property.\770\ Qualified 
organizations include certain governmental units, public 
charities that meet certain public support tests, and certain 
supporting organizations.
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    \770\ Charitable contributions of interests that constitute the 
taxpayer's entire interest in the property are not regarded as 
qualified real property interests within the meaning of section 170(h), 
but instead are subject to the general rules applicable to charitable 
contributions of entire interests of the taxpayer (i.e., generally are 
deductible at fair market value, without regard to satisfaction of the 
requirements of section 170(h)).
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    Conservation purposes include: (1) the preservation of land 
areas for outdoor recreation by, or for the education of, the 
general public; (2) the protection of a relatively natural 
habitat of fish, wildlife, or plants, or similar ecosystem; (3) 
the preservation of open space (including farmland and forest 
land) where such preservation will yield a significant public 
benefit and is either for the scenic enjoyment of the general 
public or pursuant to a clearly delineated Federal, State, or 
local governmental conservation policy; and (4) the 
preservation of an historically important land area or a 
certified historic structure.\771\
---------------------------------------------------------------------------
    \771\ Sec. 170(h)(4)(A).
---------------------------------------------------------------------------
    In general, no deduction is available if the property may 
be put to a use that is inconsistent with the conservation 
purpose of the gift.\772\ A contribution is not deductible if 
it accomplishes a permitted conservation purpose while also 
destroying other significant conservation interests.\773\
---------------------------------------------------------------------------
    \772\ Treas. Reg. sec. 1.170A-14(e)(2).
    \773\ Treas. Reg. sec. 1.170A-14(e)(2).
---------------------------------------------------------------------------
    Taxpayers are required to obtain a qualified appraisal for 
donated property with a value of $5,000 or more, and to attach 
an appraisal summary to the tax return.\774\ Under Treasury 
regulations, a qualified appraisal means an appraisal document 
that, among other things: (1) relates to an appraisal that is 
made not earlier than 60 days prior to the date of contribution 
of the appraised property and not later than the due date 
(including extensions) of the return on which a deduction is 
first claimed under section 170; \775\ (2) is prepared, signed, 
and dated by a qualified appraiser; (3) includes (a) a 
description of the property appraised; (b) the fair market 
value of such property on the date of contribution and the 
specific basis for the valuation; (c) a statement that such 
appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number of such appraiser; 
and (4) does not involve an appraisal fee that violates certain 
prescribed rules.\776\
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    \774\ Sec. 170(f)(11)(C).
    \775\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \776\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------

Valuation

    The value of a conservation restriction granted in 
perpetuity generally is determined under the ``before and after 
approach.'' Such approach provides that the fair market value 
of the restriction is equal to the difference (if any) between 
the fair market value of the property the restriction encumbers 
before the restriction is granted and the fair market value of 
the encumbered property after the restriction is granted.\777\
---------------------------------------------------------------------------
    \777\ Treas. Reg. sec. 1.170A-14(h)(3).
---------------------------------------------------------------------------
    If the granting of a perpetual restriction has the effect 
of increasing the value of any other property owned by the 
donor or a related person, the amount of the charitable 
deduction for the conservation contribution is to be reduced by 
the amount of the increase in the value of the other 
property.\778\ In addition, the donor is to reduce the amount 
of the charitable deduction by the amount of financial or 
economic benefits that the donor or a related person receives 
or can reasonably be expected to receive as a result of the 
contribution.\779\ If such benefits are greater than those that 
will inure to the general public from the transfer, no 
deduction is allowed.\780\ In those instances where the grant 
of a conservation restriction has no material effect on the 
value of the property, or serves to enhance, rather than 
reduce, the value of the property, no deduction is 
allowed.\781\
---------------------------------------------------------------------------
    \778\ Treas. Reg. sec. 1.170A-14(h)(3)(i).
    \779\ Id.
    \780\ Id.
    \781\ Treas. Reg. sec. 1.170A-14(h)(3)(ii).
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Preservation of a certified historic structure

    A certified historic structure means any building, 
structure, or land which is (i) listed in the National 
Register, or (ii) located in a registered historic district (as 
defined in section 47(c)(3)(B)) and is certified by the 
Secretary of the Interior to the Secretary of the Treasury as 
being of historic significance to the district.\782\ For this 
purpose, a structure means any structure, whether or not it is 
depreciable, and, accordingly, easements on private residences 
may qualify.\783\ If restrictions to preserve a building or 
land area within a registered historic district permit future 
development on the site, a deduction will be allowed only if 
the terms of the restrictions require that such development 
conform with appropriate local, State, or Federal standards for 
construction or rehabilitation within the district.\784\
---------------------------------------------------------------------------
    \782\ Sec. 170(h)(4)(B).
    \783\ Treas. Reg. sec. 1.170A-14(d)(5)(iii).
    \784\ Treas. Reg. sec. 1.170A-14(d)(5)(i).
---------------------------------------------------------------------------
    The IRS and the courts have held that a facade easement may 
constitute a qualifying conservation contribution.\785\ In 
general, a facade easement is a restriction the purpose of 
which is to preserve certain architectural, historic, and 
cultural features of the facade, or front, of a building. The 
terms of a facade easement might permit the property owner to 
make alterations to the facade of the structure if the owner 
obtains consent from the qualified organization that holds the 
easement.
---------------------------------------------------------------------------
    \785\ Hillborn v. Commissioner, 85 T.C. 677 (1985) (holding the 
fair market value of a facade donation generally is determined by 
applying the ``before and after'' valuation approach); Richmond v. 
U.S., 699 F. Supp. 578 (E.D. La. 1988); Priv. Ltr. Rul. 199933029 (May 
24, 1999) (ruling that a preservation and conservation easement 
relating to the facade and certain interior portions of a fraternity 
house was a qualified conservation contribution).
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Rehabilitation credit

    In general, present law allows as part of the general 
business credit an investment tax credit.\786\ The amount of 
the investment tax credit includes the amount of a 
rehabilitation credit.\787\ The rehabilitation credit for any 
taxable year is the sum of 10 percent of the qualified 
rehabilitation expenditures with respect to any qualified 
rehabilitated building other than a certified historic 
structure and 20 percent of the qualified rehabilitation 
expenditures with respect to any certified historic 
structure.\788\ In general, a qualified rehabilitated building 
is a depreciable building (and its structural components) if 
the building has been substantially rehabilitated, was placed 
in service before the beginning of the rehabilitation, and 
(except for a certified historic structure) in the 
rehabilitation process a certain percentage of the existing 
internal and external walls and internal structural framework 
are retained in place as internal and external walls and 
internal structural framework. A qualified rehabilitation 
expenditure is, in general, an amount properly chargeable to a 
capital account (i) for depreciable property that is 
nonresidential real property, residential rental property, real 
property that has a class life of more than 12.5 years, or an 
addition or improvement to any such property and (ii) in 
connection with the rehabilitation of a qualified 
rehabilitation building.
---------------------------------------------------------------------------
    \786\ Sec. 38(b)(1).
    \787\ Sec. 46.
    \788\ Sec. 47(a).
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                        Explanation of Provision


Easements in registered historic districts

    The provision revises the rules for qualified conservation 
contributions with respect to property for which a charitable 
deduction is allowable under section 170(h)(4)(B)(ii) by reason 
of a property's location in a registered historic district. 
Under the provision, a charitable deduction is not allowable 
with respect to a structure or land area located in such a 
district (by reason of the structure or land area's location in 
such a district). A charitable deduction is allowable with 
respect to buildings (as is the case under present law) but the 
qualified real property interest that relates to the exterior 
of the building must preserve the entire exterior of the 
building, including the space above the building, the sides, 
the rear, and the front of the building. In addition, such 
qualified real property interest must provide that no portion 
of the exterior of the building may be changed in a manner 
inconsistent with the historical character of such exterior.
    For any contribution relating to a registered historic 
district made after the date of enactment of the provision, 
taxpayers must include with the return for the taxable year of 
the contribution a qualified appraisal of the qualified real 
property interest (irrespective of the claimed value of such 
interest) and attach the appraisal with the taxpayer's return, 
photographs of the entire exterior of the building,\789\ and 
descriptions of all current restrictions on development of the 
building, including, for example, zoning laws, ordinances, 
neighborhood association rules, restrictive covenants, and 
other similar restrictions. Failure to obtain and attach an 
appraisal or to include the required information results in 
disallowance of the deduction. In addition, the donor and the 
donee must enter into a written agreement certifying, under 
penalty of perjury, that the donee is a qualified organization, 
with a purpose of environmental protection, land conservation, 
open space preservation, or historic preservation, and that the 
donee has the resources to manage and enforce the restriction 
and a commitment to do so.
---------------------------------------------------------------------------
    \789\ Photographs of the entire exterior of the building are 
required to the extent practicable. For example, if the building is a 
skyscraper, aerial photographs of the roof would not be required, but 
photographs sufficient to establish the existing exterior still must be 
submitted.
---------------------------------------------------------------------------
    Taxpayers claiming a deduction for a qualified conservation 
contribution with respect to the exterior of a building located 
in a registered historic district in excess of $10,000 must pay 
a $500 fee to the Internal Revenue Service or the deduction is 
not allowed. Amounts paid are required to be dedicated to 
Internal Revenue Service enforcement of qualified conservation 
contributions.

Reduction of deduction to take account of rehabilitation credit

    The provision provides that in the case of any qualified 
conservation contribution, the amount of the deduction is 
reduced by an amount that bears the same ratio to the fair 
market value of the contribution as the sum of the 
rehabilitation credits under section 47 for the preceding five 
taxable years with respect to a building that is part of the 
contribution bears to the fair market value of the building on 
the date of the contribution. For example, if a taxpayer makes 
a qualified conservation contribution with respect to a 
building, and such taxpayer has claimed a rehabilitation credit 
with respect to such building in any of the five taxable years 
preceding the year in which the contribution is claimed, the 
taxpayer must reduce the amount of the contribution. If the 
aggregate amount of credits claimed by the taxpayer within such 
five year period is $100,000, and the fair market value of the 
building with respect to which the contribution is made is 
$1,000,000, the taxpayer must reduce the amount of the 
deduction by 10 percent (or 100,000 over 1,000,000).

                             Effective Date

    The provisions relating to deductions for contributions 
relating to structures and land areas and to the rehabilitation 
credit are effective for contributions made after the date of 
enactment (August 17, 2006). The provision relating to a filing 
fee is effective for contributions made 180 days after the date 
of enactment. The rest of the provision is effective for 
contributions made after July 25, 2006.

4. Charitable contributions of taxidermy property (sec. 1214 of the Act 
        and sec. 170 of the Code)

                              Present Law

    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity.\790\ The amount of the 
deduction allowable for a taxable year with respect to a 
charitable contribution of property may be reduced or limited 
depending on the type of property contributed, the type of 
charitable organization to which the property is contributed, 
and the income of the taxpayer.\791\ In general, more generous 
charitable contribution deduction rules apply to gifts made to 
public charities than to gifts made to private foundations. 
Within certain limitations, donors also are entitled to deduct 
their contributions to section 501(c)(3) organizations for 
Federal estate and gift tax purposes. By contrast, 
contributions to nongovernmental, non-charitable tax-exempt 
organizations generally are not deductible by the donor,\792\ 
though such organizations are eligible for the exemption from 
Federal income tax with respect to such donations.
---------------------------------------------------------------------------
    \790\ The deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
    \791\ Secs. 170(b) and (e).
    \792\ Exceptions to the general rule of non-deductibility include 
certain gifts made to a veterans' organization or to a domestic 
fraternal society. In addition, contributions to certain nonprofit 
cemetery companies are deductible for Federal income tax purposes, but 
generally are not deductible for Federal estate and gift tax purposes. 
Secs. 170(c)(3), 170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
    The amount of the deduction for charitable contributions of 
capital gain property generally equals the fair market value of 
the contributed property on the date of the contribution. 
Capital gain property means any capital asset, or property used 
in the taxpayer's trade or business, the sale of which at its 
fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations (i.e., limitations based on the donor's 
income) than other contributions of property.
    For certain contributions of property, the deductible 
amount is reduced from the fair market value of the contributed 
property by the amount of any gain, generally resulting in a 
deduction equal to the taxpayer's basis. This rule applies to 
contributions of: (1) ordinary income property, e.g., property 
that, at the time of contribution, would not have resulted in 
long-term capital gain if the property was sold by the taxpayer 
on the contribution date; \793\ (2) tangible personal property 
that is used by the donee in a manner unrelated to the donee's 
exempt (or governmental) purpose; and (3) property to or for 
the use of a private foundation (other than a foundation 
defined in section 170(b)(1)(E)).
---------------------------------------------------------------------------
    \793\ For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis plus one-
half of the item's appreciation (i.e., basis plus one-half of fair 
market value in excess of basis) or (2) two times basis. Secs. 
170(e)(3), 170(e)(4), and 170(e)(6).
---------------------------------------------------------------------------
    Charitable contributions of taxidermy are subject to the 
tangible personal property rule (number (2) above). For 
example, for appreciated taxidermy, if the property is used to 
further the donee's exempt purpose, the deduction is fair 
market value. But if the property is not used to further the 
donee's exempt purpose, the deduction is the donor's basis. If 
the taxidermy is depreciated, i.e., the value is less than the 
taxpayer's basis in such property, taxpayers generally deduct 
the fair market value of such contributions, regardless of 
whether the property is used for exempt or unrelated purposes 
by the donee.

                        Explanation of Provision

    In general, the provision provides that the amount allowed 
as a deduction for charitable contributions of taxidermy 
property that is contributed by the person who prepared, 
stuffed, or mounted the property (or by any person who paid or 
incurred the cost of such preparation, stuffing, or mounting) 
is the lesser of the taxpayer's basis in the property or the 
fair market value of the property. Specifically, a taxpayer 
that makes such a charitable contribution of taxidermy property 
for a use related to the donee's exempt purpose or function 
must, in determining the amount of the deduction, reduce the 
fair market value of the property by the amount of gain that 
would have been long-term capital gain if the property 
contributed had been sold by the taxpayer at its fair market 
value (determined at the time of the contribution). Taxidermy 
property is defined as any work of art that is the reproduction 
or preservation of an animal in whole or in part, is prepared, 
stuffed or mounted for purposes of recreating one or more 
characteristics of such animal, and contains a part of the body 
of the dead animal.
    For purposes of determining a taxpayer's basis in taxidermy 
property that is contributed by the person who prepared, 
stuffed, or mounted the property (or by any person who paid or 
incurred the cost of such preparation, stuffing, or mounting), 
the provision provides a special rule that the basis of such 
property may include only the cost of the preparing, stuffing, 
or mounting. For purposes of the special rule, it is intended 
that only the direct costs of the preparing, stuffing, or 
mounting may be included in basis. Indirect costs, not included 
in the basis, include the costs of transportation relating to 
any aspect of the taxidermy or the hunting of the animal, and 
the direct or indirect costs relating to the hunting or killing 
of an animal (including the cost of equipment and the costs of 
preparing an animal carcass for taxidermy).

                             Effective Date

    The provision is effective for contributions made after 
July 25, 2006.

5. Recapture of tax benefit for charitable contributions of exempt use 
        property not used for an exempt use (sec. 1215 of the Act and 
        secs. 170, 6050L, and new sec. 6720B of the Code)

                              Present Law


Deductibility of charitable contributions

            In general
    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity.\794\ The amount of the 
deduction allowable for a taxable year with respect to a 
charitable contribution of property may be reduced or limited 
depending on the type of property contributed, the type of 
charitable organization to which the property is contributed, 
and the income of the taxpayer\795\. In general, more generous 
charitable contribution deduction rules apply to gifts made to 
public charities than to gifts made to private foundations. 
Within certain limitations, donors also are entitled to deduct 
their contributions to section 501(c)(3) organizations for 
Federal estate and gift tax purposes. By contrast, 
contributions to nongovernmental, non-charitable tax-exempt 
organizations generally are not deductible by the donor,\796\ 
though such organizations are eligible for the exemption from 
Federal income tax with respect to such donations.
---------------------------------------------------------------------------
    \794\ The deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
    \795\ Secs. 170(b) and (e).
    \796\ Exceptions to the general rule of non-deductibility include 
certain gifts made to a veterans' organization or to a domestic 
fraternal society. In addition, contributions to certain nonprofit 
cemetery companies are deductible for Federal income tax purposes, but 
generally are not deductible for Federal estate and gift tax purposes. 
Secs. 170(c)(3), 170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
            Contributions of property
    The amount of the deduction for charitable contributions of 
capital gain property generally equals the fair market value of 
the contributed property on the date of the contribution. 
Capital gain property means any capital asset, or property used 
in the taxpayer's trade or business, the sale of which at its 
fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations (i.e., limitations based on the donor's 
income) than other contributions of property.
    For certain contributions of property, the deductible 
amount is reduced from the fair market value of the contributed 
property by the amount of any gain, generally resulting in a 
deduction equal to the taxpayer's basis. This rule applies to 
contributions of: (1) ordinary income property, e.g., property 
that, at the time of contribution, would not have resulted in 
long-term capital gain if the property was sold by the taxpayer 
on the contribution date;\797\ (2) tangible personal property 
that is used by the donee in a manner unrelated to the donee's 
exempt (or governmental) purpose; and (3) property to or for 
the use of a private foundation (other than a foundation 
defined in section 170(b)(1)(E)).
---------------------------------------------------------------------------
    \797\ For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis plus one-
half of the item's appreciation (i.e., basis plus one-half of fair 
market value in excess of basis) or (2) two times basis. Secs. 
170(e)(4), and 170(e)(6).
---------------------------------------------------------------------------
            Substantiation
    No charitable deduction is allowed for any contribution of 
$250 or more unless the taxpayer substantiates the contribution 
by a contemporaneous written acknowledgement of the 
contribution by the donee organization.\798\ Such 
acknowledgement must include the amount of cash and a 
description (but not value) of any property other than cash 
contributed, whether the donee provided any goods or services 
in consideration for the contribution (and a good faith 
estimate of the value of any such goods or services).
---------------------------------------------------------------------------
    \798\ Sec. 170(f)(8).
---------------------------------------------------------------------------
    In general, if the total charitable deduction claimed for 
non-cash property is more than $500, the taxpayer must attach a 
completed Form 8283 (Noncash Charitable Contributions) to the 
taxpayer's return or the deduction is not allowed.\799\ C 
corporations (other than personal service corporations and 
closely-held corporations) are required to file Form 8283 only 
if the deduction claimed is more than $5,000. Information 
required on the Form 8283 includes, among other things, a 
description of the property, the appraised fair market value 
(if an appraisal is required), the donor's basis in the 
property, how the donor acquired the property, a declaration by 
the appraiser regarding the appraiser's general qualifications, 
an acknowledgement by the donee that it is eligible to receive 
deductible contributions, and an indication by the donee 
whether the property is intended for an unrelated use.
---------------------------------------------------------------------------
    \799\ Sec. 170(f)(11).
---------------------------------------------------------------------------
    Taxpayers are required to obtain a qualified appraisal for 
donated property with a value of more than $5,000, and to 
attach an appraisal summary to the tax return.\800\ Under 
Treasury regulations, a qualified appraisal means an appraisal 
document that, among other things: (1) relates to an appraisal 
that is made not earlier than 60 days prior to the date of 
contribution of the appraised property and not later than the 
due date (including extensions) of the return on which a 
deduction is first claimed under section 170;\801\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number of such appraiser; 
and (4) does not involve an appraisal fee that violates certain 
prescribed rules.\802\ In the case of contributions of art 
valued at more than $20,000 and other contributions of more 
than $500,000, taxpayers are required to attach the appraisal 
to the tax return. Taxpayers may request a Statement of Value 
from the Internal Revenue Service in order to substantiate the 
value of art with an appraised value of $50,000 or more for 
income, estate, or gift tax purposes.\803\ The fee for such a 
Statement is $2,500 for one, two, or three items of art plus 
$250 for each additional item.
---------------------------------------------------------------------------
    \800\ Id.
    \801\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \802\ Treas. Reg. sec. 1.170A-13(c)(3). Sec. 170(f)(11)(E).
    \803\ Rev. Proc. 96-15, 1996-1 C.B. 627.
---------------------------------------------------------------------------
    If a donee organization sells, exchanges, or otherwise 
disposes of contributed property with a claimed value of more 
than $5,000 (other than publicly traded securities) within two 
years of the property's receipt, the donee is required to file 
a return (Form 8282) with the Secretary, and to furnish a copy 
of the return to the donor, showing the name, address, and 
taxpayer identification number of the donor, a description of 
the property, the date of the contribution, the amount received 
on the disposition, and the date of the disposition.\804\
---------------------------------------------------------------------------
    \804\ Sec. 6050L(a)(1).
---------------------------------------------------------------------------

                        Explanation of Provision

    In general, the provision recovers the tax benefit for 
charitable contributions of tangible personal property with 
respect to which a fair market value deduction is claimed and 
which is not used for exempt purposes. The provision applies to 
appreciated tangible personal property that is identified by 
the donee organization, for example on the Form 8283, as for a 
use related to the purpose or function constituting the donee's 
basis for tax exemption, and for which a deduction of more than 
$5,000 is claimed (``applicable property'').\805\
---------------------------------------------------------------------------
    \805\ Present law rules continue to apply to any contribution of 
exempt use property for which a deduction of $5,000 or less is claimed.
---------------------------------------------------------------------------
    Under the provision, if a donee organization disposes of 
applicable property within three years of the contribution of 
the property, the donor is subject to an adjustment of the tax 
benefit.\806\ If the disposition occurs in the tax year of the 
donor in which the contribution is made, the donor's deduction 
generally is basis and not fair market value. If the 
disposition occurs in a subsequent year, the donor must include 
as ordinary income for its taxable year in which the 
disposition occurs an amount equal to the excess (if any) of 
(i) the amount of the deduction previously claimed by the donor 
as a charitable contribution with respect to such property, 
over (ii) the donor's basis in such property at the time of the 
contribution.
---------------------------------------------------------------------------
    \806\ The disposition proceeds are regarded as relevant to a 
determination of fair market value.
---------------------------------------------------------------------------
    There is no adjustment of the tax benefit if the donee 
organization makes a certification to the Secretary, by written 
statement signed under penalties of perjury by an officer of 
the organization. The statement must either (1) certify that 
the use of the property by the donee was related to the purpose 
or function constituting the basis for the donee's exemption, 
and describe how the property was used and how such use 
furthered such purpose or function; or (2) state the intended 
use of the property by the donee at the time of the 
contribution and certify that such use became impossible or 
infeasible to implement. The organization must furnish a copy 
of the certification to the donor (for example, as part of the 
Form 8282, a copy of which is supplied to the donor).
    A penalty of $10,000 applies to a person that identifies 
applicable property as having a use that is related to a 
purpose or function constituting the basis for the donee's 
exemption knowing that it is not intended for such a use.\807\
---------------------------------------------------------------------------
    \807\ Other present-law penalties also may apply, such as the 
penalty for aiding and abetting the understatement of tax liability 
under section 6701.
---------------------------------------------------------------------------

Reporting of exempt use property contributions

    The provision modifies the present-law information return 
requirements that apply upon the disposition of contributed 
property by a charitable organization (Form 8282, sec. 6050L). 
The return requirement is extended to dispositions made within 
three years after receipt (from two years). The donee 
organization also must provide, in addition to the information 
already required to be provided on the return, a description of 
the donee's use of the property, a statement of whether use of 
the property was related to the purpose or function 
constituting the basis for the donee's exemption, and, if 
applicable, a certification of any such use (described above).

                             Effective Date

    The provision is effective for contributions made and 
returns filed after September 1, 2006, and with respect to the 
penalty, for identifications made after the date of enactment 
(August 17, 2006).

6. Limitation of deduction for charitable contributions of clothing and 
        household items (sec. 1216 of the Act and sec. 170 of the Code)

                              Present Law


In general

    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity.\808\ The amount of the 
deduction allowable for a taxable year with respect to a 
charitable contribution of property may be reduced or limited 
depending on the type of property contributed, the type of 
charitable organization to which the property is contributed, 
and the income of the taxpayer.\809\ In general, more generous 
charitable contribution deduction rules apply to gifts made to 
public charities than to gifts made to private foundations. 
Within certain limitations, donors also are entitled to deduct 
their contributions to section 501(c)(3) organizations for 
Federal estate and gift tax purposes. By contrast, 
contributions to nongovernmental, non-charitable tax-exempt 
organizations generally are not deductible by the donor,\810\ 
though such organizations are eligible for the exemption from 
Federal income tax with respect to such donations.
---------------------------------------------------------------------------
    \808\ The deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
    \809\ Secs. 170(b) and (e).
    \810\ Exceptions to the general rule of non-deductibility include 
certain gifts made to a veterans' organization or to a domestic 
fraternal society. In addition, contributions to certain nonprofit 
cemetery companies are deductible for Federal income tax purposes, but 
generally are not deductible for Federal estate and gift tax purposes. 
Secs. 170(c)(3), 170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------

Contributions of property

    The amount of the deduction for charitable contributions of 
capital gain property generally equals the fair market value of 
the contributed property on the date of the contribution. 
Capital gain property means any capital asset or property used 
in the taxpayer's trade or business the sale of which at its 
fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations than other contributions of property.
    For certain contributions of property, the deductible 
amount is reduced from the fair market value of the contributed 
property by the amount of any gain, generally resulting in a 
deduction equal to the taxpayer's basis. This rule applies to 
contributions of: (1) ordinary income property, e.g., property 
that, at the time of contribution, would not have resulted in 
long-term capital gain if the property was sold by the taxpayer 
on the contribution date; \811\ (2) tangible personal property 
that is used by the donee in a manner unrelated to the donee's 
exempt (or governmental) purpose; and (3) property to or for 
the use of a private foundation (other than a foundation 
defined in section 170(b)(1)(E)).
---------------------------------------------------------------------------
    \811\ For certain contributions of inventory and other property, C 
corporations may claim an enhanced deduction equal to the lesser of (1) 
basis plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times basis. 
Secs. 170(e)(3), 170(e)(4), and 170(e)(6).
---------------------------------------------------------------------------
    Charitable contributions of clothing and household items 
are subject to the tangible personal property rule (number (2) 
above). If such contributed property is appreciated property in 
the hands of the taxpayer, and is not used to further the 
donee's exempt purpose, the deduction is basis. In general, 
however, the value of clothing and household items is less than 
the taxpayer's basis in such property, with the result that 
taxpayers generally deduct the fair market value of such 
contributions, regardless of whether the property is used for 
exempt or unrelated purposes by the donee.

Substantiation

    A donor who claims a deduction for a charitable 
contribution must maintain reliable written records regarding 
the contribution, regardless of the value or amount of such 
contribution. For a contribution of money, the donor generally 
must maintain one of the following: (1) a canceled check; (2) a 
receipt (or a letter or other written communication) from the 
donee showing the name of the donee organization, the date of 
the contribution, and the amount of the contribution; or (3) in 
the absence of a canceled check or a receipt, other reliable 
written records showing the name of the donee, the date of the 
contribution, and the amount of the contribution. For a 
contribution of property other than money, the donor generally 
must maintain a receipt from the donee organization showing the 
name of the donee, the date and location of the contribution, 
and a detailed description (but not the value) of the 
property.\812\ A donor of property other than money need not 
obtain a receipt, however, if circumstances make obtaining a 
receipt impracticable. Under such circumstances, the donor must 
maintain reliable written records regarding the contribution. 
The required content of such a record varies depending upon 
factors such as the type and value of property 
contributed.\813\
---------------------------------------------------------------------------
    \812\ Treas. Reg. sec. 1.170A-13(a).
    \813\ Treas. Reg. sec. 1.170A-13(b).
---------------------------------------------------------------------------
    In addition to the foregoing recordkeeping requirements, 
substantiation requirements apply in the case of charitable 
contributions with a value of $250 or more. No charitable 
deduction is allowed for any contribution of $250 or more 
unless the taxpayer substantiates the contribution by a 
contemporaneous written acknowledgement of the contribution by 
the donee organization. Such acknowledgement must include the 
amount of cash and a description (but not value) of any 
property other than cash contributed, whether the donee 
provided any goods or services in consideration for the 
contribution, and a good faith estimate of the value of any 
such goods or services.\814\ In general, if the total 
charitable deduction claimed for non-cash property is more than 
$500, the taxpayer must attach a completed Form 8283 (Noncash 
Charitable Contributions) to the taxpayer's return or the 
deduction is not allowed.\815\ In general, taxpayers are 
required to obtain a qualified appraisal for donated property 
with a value of more than $5,000, and to attach an appraisal 
summary to the tax return.
---------------------------------------------------------------------------
    \814\ Sec. 170(f)(8).
    \815\ Sec. 170(f)(11).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that no deduction is allowed for a 
charitable contribution of clothing or household items unless 
the clothing or household item is in good used condition or 
better. The Secretary is authorized to deny by regulation a 
deduction for any contribution of clothing or a household item 
that has minimal monetary value, such as used socks and used 
undergarments. It is noted that the President's Advisory Panel 
on Federal Tax Reform and the staff of the Joint Committee on 
Taxation both have concluded that the fair market value-based 
deduction for contributions of clothing and household items 
present difficult tax administration issues, as determining the 
correct value of an item is a fact intensive, and thus also a 
resource intensive matter.\816\ As recently reported by the 
IRS, the amount claimed as deductions in tax year 2003 for 
clothing and household items was more than $9 billion.\817\ It 
is expected that the Secretary, in consultation with affected 
charities, will exercise assiduously the authority to disallow 
a deduction for some items of low value, consistent with the 
goals of improving tax administration and ensure that donated 
clothing and households items are of meaningful use to 
charitable organizations.
---------------------------------------------------------------------------
    \816\ See The President's Advisory Panel on Federal Tax Reform, 
Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System, 78 
(2005); Joint Committee on Taxation, Options to Improve Tax Compliance 
and Reform Tax Expenditures 288 (JCS-02-05), January 27, 2005.
    \817\ Internal Revenue Service, Statistics of Income Division, 
Individual Noncash Charitable Contributions, 2003, Figure A (Spring 
2006).
---------------------------------------------------------------------------
    Under the provision, a deduction may be allowed for a 
charitable contribution of an item of clothing or a household 
item not in good used condition or better if the amount claimed 
for the item is more than $500 and the taxpayer includes with 
the taxpayer's return a qualified appraisal with respect to the 
property. Household items include furniture, furnishings, 
electronics, appliances, linens, and other similar items. Food, 
paintings, antiques, and other objects of art, jewelry and 
gems, and collections are excluded from the provision.

                             Effective Date

    The provision is effective for contributions made after the 
date of enactment (August 17, 2006).

7. Modification of recordkeeping requirements for certain charitable 
        contributions (sec. 1217 of the Act and sec. 170 of the Code)

                              Present Law

    A donor who claims a deduction for a charitable 
contribution must maintain reliable written records regarding 
the contribution, regardless of the value or amount of such 
contribution. For a contribution of money, the donor generally 
must maintain one of the following: (1) a cancelled check; (2) 
a receipt (or a letter or other written communication) from the 
donee showing the name of the donee organization, the date of 
the contribution, and the amount of the contribution; or (3) in 
the absence of a cancelled check or a receipt, other reliable 
written records showing the name of the donee, the date of the 
contribution, and the amount of the contribution. For a 
contribution of property other than money, the donor generally 
must maintain a receipt from the donee organization showing the 
name of the donee, the date and location of the contribution, 
and a detailed description (but not the value) of the 
property.\818\ A donor of property other than money need not 
obtain a receipt, however, if circumstances make obtaining a 
receipt impracticable. Under such circumstances, the donor must 
maintain reliable written records regarding the contribution. 
The required content of such a record varies depending upon 
factors such as the type and value of property 
contributed.\819\
---------------------------------------------------------------------------
    \818\ Treas. Reg. sec. 1.170A-13(a).
    \819\ Treas. Reg. sec. 1.170A-13(b).
---------------------------------------------------------------------------
    In addition to the foregoing recordkeeping requirements, 
substantiation requirements apply in the case of charitable 
contributions with a value of $250 or more. No charitable 
deduction is allowed for any contribution of $250 or more 
unless the taxpayer substantiates the contribution by a 
contemporaneous written acknowledgement of the contribution by 
the donee organization. Such acknowledgement must include the 
amount of cash and a description (but not value) of any 
property other than cash contributed, whether the donee 
provided any goods or services in consideration for the 
contribution, and a good faith estimate of the value of any 
such goods or services.\820\ In general, if the total 
charitable deduction claimed for non-cash property is more than 
$500, the taxpayer must attach a completed Form 8283 (Noncash 
Charitable Contributions) to the taxpayer's return or the 
deduction is not allowed.\821\ In general, taxpayers are 
required to obtain a qualified appraisal for donated property 
with a value of more than $5,000, and to attach an appraisal 
summary to the tax return.
---------------------------------------------------------------------------
    \820\ Sec. 170(f)(8).
    \821\ Sec. 170(f)(11).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision more closely aligns the substantiation rules 
for money to the substantiation rules for property by providing 
that in the case of a charitable contribution of money, 
regardless of the amount, applicable recordkeeping requirements 
are satisfied only if the donor maintains as a record of the 
contribution a bank record or a written communication from the 
donee showing the name of the donee organization, the date of 
the contribution, and the amount of the contribution. The 
recordkeeping requirements may not be satisfied by maintaining 
other written records. It is noted that currently, taxpayers 
are required to have a contemporaneous record of contributions 
of money, but that many taxpayers may not be aware of the 
requirement and do not keep a log of such contributions. The 
provision is intended to provide greater certainty, both to 
taxpayers and to the Secretary, in determining what may be 
deducted as a charitable contribution.

                             Effective Date

    The provision is effective for contributions made in 
taxable years beginning after the date of enactment (August 17, 
2006).

8. Contributions of fractional interests in tangible personal property 
        (sec. 1218 of the Act and secs. 170, 2055, and 2522 of the 
        Code)

                              Present Law

    In general, a charitable deduction is not allowable for a 
contribution of a partial interest in property, such as an 
income interest, a remainder interest, or a right to use 
property. \822\ A gift of an undivided portion of a donor's 
entire interest in property generally is not treated as a 
nondeductible gift of a partial interest in property. \823\ For 
this purpose, an undivided portion of a donor's entire interest 
in property must consist of a fraction or percentage of each 
and every substantial interest or right owned by the donor in 
such property and must extend over the entire term of the 
donor's interest in such property. \824\ A gift generally is 
treated as a gift of an undivided portion of a donor's entire 
interest in property if the donee is given the right, as a 
tenant in common with the donor, to possession, dominion, and 
control of the property for a portion of each year appropriate 
to its interest in such property. \825\
---------------------------------------------------------------------------
    \822\ Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 
2522(c)(2) (gift tax).
    \823\ Sec. 170(f)(3)(B)(ii).
    \824\ Treas. Reg. sec. 1.170A-7(b)(1).
    \825\ Treas. Reg. sec. 1.170A-7(b)(1).
---------------------------------------------------------------------------
    A charitable contribution deduction generally is not 
allowable for a contribution of a future interest in tangible 
personal property. \826\ For this purpose, a future interest is 
one ``in which a donor purports to give tangible personal 
property to a charitable organization, but has an 
understanding, arrangement, agreement, etc., whether written or 
oral, with the charitable organization which has the effect of 
reserving to, or retaining in, such donor a right to the use, 
possession, or enjoyment of the property.'' \827\ Treasury 
regulations provide that section 170(a)(3), which generally 
denies a deduction for a contribution of a future interest in 
tangible personal property, ``[has] no application in respect 
of a transfer of an undivided present interest in property. For 
example, a contribution of an undivided one-quarter interest in 
a painting with respect to which the donee is entitled to 
possession during three months of each year shall be treated as 
made upon the receipt by the donee of a formally executed and 
acknowledged deed of gift. However, the period of initial 
possession by the donee may not be deferred in time for more 
than one year.'' \828\
---------------------------------------------------------------------------
    \826\ Sec. 170(a)(3).
    \827\ Treas. Reg. sec. 1.170A-5(a)(4).
    \828\ Treas. Reg. sec. 1.170A-5(a)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    In general, under present law and the provision a donor may 
take a deduction for a charitable contribution of a fractional 
interest in tangible personal property (such as an artwork), 
provided the donor satisfies the requirements for deductibility 
(including the requirements concerning contributions of partial 
interests and future interests in property), and in subsequent 
years make additional charitable contributions of interests in 
the same property.\829\ Under the provision, the value of a 
donor's charitable deduction for the initial contribution of a 
fractional interest in an item of tangible personal property 
(or collection of such items) shall be determined as under 
current law (e.g., based upon the fair market value of the 
artwork at the time of the contribution of the fractional 
interest and considering whether the use of the artwork will be 
related to the donee's exempt purposes). For purposes of 
determining the deductible amount of each additional 
contribution of an interest (whether or not a fractional 
interest) in the same item of property, the fair market value 
of the item is the lesser of: (1) the value used for purposes 
of determining the charitable deduction for the initial 
fractional contribution; or (2) the fair market value of the 
item at the time of the subsequent contribution. This portion 
of the provision applies for income, gift, and estate tax 
purposes.
---------------------------------------------------------------------------
    \829\ See, e.g., Winokur v. Commissioner, 90 T.C. 733 (1988).
---------------------------------------------------------------------------
    The provision provides for recapture of the income tax 
charitable deduction and gift tax charitable deduction under 
certain circumstances. First, if a donor makes an initial 
fractional contribution, then fails to contribute all of the 
donor's remaining interest in such property to the same donee 
before the earlier of 10 years from the initial fractional 
contribution or the donor's death, then the donee's charitable 
income and gift tax deductions for all previous contributions 
of interests in the item shall be recaptured (plus interest). 
If the donee of the initial contribution is no longer in 
existence as of such time, the donor's remaining interest may 
be contributed to another organization described in section 
170(c) (which describes organizations to which contributions 
that are deductible for income tax purposes may be made). 
Second, if the donee of a fractional interest in an item of 
tangible personal property fails to take substantial physical 
possession of the item during the period described above (the 
possession requirement) or fails to use the property for an 
exempt use during the period described above (the related-use 
requirement), then the donee's charitable income and gift tax 
deductions for all previous contributions of interests in the 
item shall be recaptured (plus interest). If, for example, an 
art museum described in section 501(c)(3) that is the donee of 
a fractional interest in a painting includes the painting in an 
art exhibit sponsored by the museum, such use generally will be 
treated as satisfying the related-use requirement of the 
provision.
    In any case in which there is a recapture of a deduction as 
described in the preceding paragraph, the provision also 
imposes an additional tax in an amount equal to 10 percent of 
the amount recaptured.
    Under the provision, no income or gift tax charitable 
deduction is allowed for a contribution of a fractional 
interest in an item of tangible personal property unless 
immediately before such contribution all interests in the item 
are owned (1) by the donor or (2) by the donor and the donee 
organization. The Secretary is authorized to make exceptions to 
this rule in cases where all persons who hold an interest in 
the item make proportional contributions of undivided interests 
in their respective shares of such item to the donee 
organization. For example, if A owns an undivided 40 percent 
interest in a painting and B owns an undivided 60 percent 
interest in the same painting, the Secretary may provide that A 
may take a deduction for a charitable contribution of less than 
the entire interest held by A, provided that both A and B make 
proportional contributions of undivided fractional interests in 
their respective shares of the painting to the same donee 
organization (e.g., if A contributes 50 percent of A's interest 
and B contributes 50 percent of B's interest).
    It is intended that a contribution occurring before the 
date of enactment not be treated as an initial fractional 
contribution for purposes of the provision. Instead, the first 
fractional contribution by a taxpayer after the date of 
enactment would be considered the initial fractional 
contribution under the provision, regardless of whether the 
taxpayer had made a contribution of a fractional interest in 
the same item of tangible personal property prior to the date 
of enactment.

                             Effective Date

    The provision is applicable for contributions, bequests, 
and gifts made after the date of enactment (August 17, 2006).

9. Provisions relating to substantial and gross overstatements of 
        valuations (sec. 1219 of the Act and secs. 170, 6662, 6664, 
        6696 and new sec. 6695A of the Code)

                              Present Law


Taxpayer penalties

    Present law imposes accuracy-related penalties on a 
taxpayer in cases involving a substantial valuation 
misstatement or gross valuation misstatement relating to an 
underpayment of income tax. \830\ For this purpose, a 
substantial valuation misstatement generally means a value 
claimed that is at least twice (200 percent or more) the amount 
determined to be the correct value, and a gross valuation 
misstatement generally means a value claimed that is at least 
four times (400 percent or more) the amount determined to be 
the correct value.
---------------------------------------------------------------------------
    \830\ Sec. 6662(b)(3) and (h).
---------------------------------------------------------------------------
    The penalty is 20 percent of the underpayment of tax 
resulting from a substantial valuation misstatement and rises 
to 40 percent for a gross valuation misstatement. No penalty is 
imposed unless the portion of the underpayment attributable to 
the valuation misstatement exceeds $5,000 ($10,000 in the case 
of a corporation other than an S corporation or a personal 
holding company). Under present law, no penalty is imposed with 
respect to any portion of the understatement attributable to 
any item if (1) the treatment of the item on the return is or 
was supported by substantial authority, or (2) facts relevant 
to the tax treatment of the item were adequately disclosed on 
the return or on a statement attached to the return and there 
is a reasonable basis for the tax treatment. Special rules 
apply to tax shelters.
    Present law also imposes an accuracy-related penalty on 
substantial or gross estate or gift tax valuation 
understatements.\831\ In general, there is a substantial estate 
or gift tax understatement if the value of any property claimed 
on any return is 50 percent or less of the amount determined to 
be the correct amount, and a gross understatement of estate or 
gift tax if such value is 25 percent or less of the amount 
determined to be the correct amount.
---------------------------------------------------------------------------
    \831\ Sec. 6662(g) and (h).
---------------------------------------------------------------------------
    In addition, the accuracy-related penalties do not apply if 
a taxpayer shows there was reasonable cause for an underpayment 
and the taxpayer acted in good faith.\832\
---------------------------------------------------------------------------
    \832\ Sec. 6664(c).
---------------------------------------------------------------------------

Penalty for aiding and abetting understatement of tax

    A penalty is imposed on a person who: (1) aids or assists 
in or advises with respect to a tax return or other document; 
(2) knows (or has reason to believe) that such document will be 
used in connection with a material tax matter; and (3) knows 
that this would result in an understatement of tax of another 
person. In general, the amount of the penalty is $1,000. If the 
document relates to the tax return of a corporation, the amount 
of the penalty is $10,000.

Qualified appraisals

    Present law requires a taxpayer to obtain a qualified 
appraisal for donated property with a value of more than 
$5,000, and to attach an appraisal summary to the tax 
return.\833\ Treasury Regulations state that a qualified 
appraisal means an appraisal document that, among other things: 
(1) relates to an appraisal that is made not earlier than 60 
days prior to the date of contribution of the appraised 
property and not later than the due date (including extensions) 
of the return on which a deduction is first claimed under 
section 170; (2) is prepared, signed, and dated by a qualified 
appraiser; (3) includes (a) a description of the property 
appraised; (b) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; 
(c) a statement that such appraisal was prepared for income tax 
purposes; (d) the qualifications of the qualified appraiser; 
and (e) the signature and taxpayer identification number of 
such appraiser; and (4) does not involve an appraisal fee that 
violates certain prescribed rules.\834\
---------------------------------------------------------------------------
    \833\ Sec. 170(f)(11).
    \834\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------

Qualified appraisers

    Treasury Regulations define a qualified appraiser as a 
person who holds himself or herself out to the public as an 
appraiser or performs appraisals on a regular basis, is 
qualified to make appraisals of the type of property being 
valued (as determined by the appraiser's background, 
experience, education and membership, if any, in professional 
appraisal associations), is independent, and understands that 
an intentionally false or fraudulent overstatement of the value 
of the appraised property may subject the appraiser to civil 
penalties.\835\
---------------------------------------------------------------------------
    \835\ Treas. Reg. sec. 1.170A-13(c)(5)(i).
---------------------------------------------------------------------------

Appraiser oversight

    The Secretary is authorized to regulate the practice of 
representatives of persons before the Department of the 
Treasury (``Department'').\836\ After notice and hearing, the 
Secretary is authorized to suspend or disbar from practice 
before the Department or the Internal Revenue Service (``IRS'') 
a representative who is incompetent, who is disreputable, who 
violates the rules regulating practice before the Department or 
the IRS, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented).
---------------------------------------------------------------------------
    \836\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------
    The Secretary also is authorized to bar from appearing 
before the Department or the IRS, for the purpose of offering 
opinion evidence on the value of property or other assets, any 
individual against whom a civil penalty for aiding and abetting 
the understatement of tax has been assessed. Thus, an appraiser 
who aids or assists in the preparation or presentation of an 
appraisal will be subject to disciplinary action if the 
appraiser knows that the appraisal will be used in connection 
with the tax laws and will result in an understatement of the 
tax liability of another person. The Secretary has authority to 
provide that the appraisals of an appraiser who has been 
disciplined have no probative effect in any administrative 
proceeding before the Department or the IRS.

                        Explanation of Provision


Taxpayer penalties

    The provision lowers the thresholds for imposing accuracy-
related penalties on a taxpayer. Under the provision, a 
substantial valuation misstatement exists when the claimed 
value of any property is 150 percent or more of the amount 
determined to be the correct value. A gross valuation 
misstatement occurs when the claimed value of any property is 
200 percent or more of the amount determined to be the correct 
value.
    The provision tightens the thresholds for imposing 
accuracy-related penalties with respect to the estate or gift 
tax. Under the provision, a substantial estate or gift tax 
valuation misstatement exists when the claimed value of any 
property is 65 percent or less of the amount determined to be 
the correct value. A gross misstatement of estate or gift tax 
valuation exists when the claimed value of any property is 40 
percent or less of the amount determined to be the correct 
value.
    Under the provision, the reasonable cause exception to the 
accuracy-related penalty does not apply in the case of gross 
valuation misstatements.

Appraiser oversight

            Appraiser penalties
    The provision establishes a civil penalty on any person who 
prepares an appraisal that is to be used to support a tax 
position if such appraisal results in a substantial or gross 
valuation misstatement. The penalty is equal to the greater of 
$1,000 or 10 percent of the understatement of tax resulting 
from a substantial or gross valuation misstatement, up to a 
maximum of 125 percent of the gross income derived from the 
appraisal. Under the provision, the penalty does not apply if 
the appraiser establishes that it was ``more likely than not'' 
that the appraisal was correct.
            Disciplinary proceeding
    The provision eliminates the requirement that the Secretary 
assess against an appraiser the civil penalty for aiding and 
abetting the understatement of tax before such appraiser may be 
subject to disciplinary action. Thus, the Secretary is 
authorized to discipline appraisers after notice and hearing. 
Disciplinary action may include, but is not limited to, 
suspending or barring an appraiser from: preparing or 
presenting appraisals on the value of property or other assets 
to the Department or the IRS; appearing before the Department 
or the IRS for the purpose of offering opinion evidence on the 
value of property or other assets; and providing that the 
appraisals of an appraiser who has been disciplined have no 
probative effect in any administrative proceeding before the 
Department or the IRS.
            Qualified appraisers
    The provision defines a qualified appraiser as an 
individual who (1) has earned an appraisal designation from a 
recognized professional appraiser organization or has otherwise 
met minimum education and experience requirements to be 
determined by the IRS in regulations; (2) regularly performs 
appraisals for which he or she receives compensation; (3) can 
demonstrate verifiable education and experience in valuing the 
type of property for which the appraisal is being performed; 
(4) has not been prohibited from practicing before the IRS by 
the Secretary at any time during the three years preceding the 
conduct of the appraisal; and (5) is not excluded from being a 
qualified appraiser under applicable Treasury regulations.
            Qualified appraisals
    The provision defines a qualified appraisal as an appraisal 
of property prepared by a qualified appraiser (as defined by 
the provision) in accordance with generally accepted appraisal 
standards and any regulations or other guidance prescribed by 
the Secretary.

                             Effective Date

    The provision amending the accuracy-related penalty applies 
to returns filed after the date of enactment (August 17, 2006). 
The provision establishing a civil penalty that may be imposed 
on any person who prepares an appraisal that is to be used to 
support a tax position if such appraisal results in a 
substantial or gross valuation misstatement applies to 
appraisals prepared with respect to returns or submissions 
filed after the date of enactment. The provisions relating to 
appraiser oversight apply to appraisals prepared with respect 
to returns or submissions filed after the date of enactment. 
With respect to any contribution of a qualified real property 
interest which is a restriction with respect to the exterior of 
a building described in section 170(h)(4)(C)(ii) (previously 
designated section 170(h)(4)(B)(ii), relating to certain 
property located in a registered historic district and 
certified as being of historic significance to the district), 
and any appraisal with respect to such contribution, the 
provision generally applies to returns filed after July 25, 
2006.

10. Additional exemption standards for credit counseling organizations 
        (sec. 1220 of the Act and secs. 501 and 513 of the Code)

                              Present Law

    Under present law, a credit counseling organization may be 
exempt as a charitable or educational organization described in 
section 501(c)(3), or as a social welfare organization 
described in section 501(c)(4). The IRS has issued two revenue 
rulings holding that certain credit counseling organizations 
are exempt as charitable or educational organizations or as 
social welfare organizations.
    In Revenue Ruling 65-299,\837\ an organization whose 
purpose was to assist families and individuals with financial 
problems, and help reduce the incidence of personal bankruptcy, 
was determined to be a social welfare organization described in 
section 501(c)(4). The organization counseled people in 
financial difficulties, advised applicants on payment of debts, 
and negotiated with creditors and set up debt repayment plans. 
The organization did not restrict its services to the poor, 
made no charge for counseling services, and made a nominal 
charge for certain services to cover postage and supplies. For 
financial support, the organization relied on voluntary 
contributions from local businesses, lending agencies, and 
labor unions.
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    \837\ Rev. Rul. 65-299, 1965-2 C.B. 165.
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    In Revenue Ruling 69-441,\838\ the IRS ruled an 
organization was a charitable or educational organization 
exempt under section 501(c)(3) by virtue of aiding low-income 
people who had financial problems and providing education to 
the public. The organization in that ruling had two functions: 
(1) educating the public on personal money management, such as 
budgeting, buying practices, and the sound use of consumer 
credit through the use of films, speakers, and publications; 
and (2) providing individual counseling to low-income 
individuals and families without charge. As part of its 
counseling activities, the organization established debt 
management plans for clients who required such services, at no 
charge to the clients.\839\ The organization was supported by 
contributions primarily from creditors, and its board of 
directors was comprised of representatives from religious 
organizations, civic groups, labor unions, business groups, and 
educational institutions.
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    \838\ Rev. Rul. 69-441, 1969-2 C.B. 115.
    \839\ Debt management plans are debt payment arrangements, 
including debt consolidation arrangements, entered into by a debtor and 
one or more of the debtor's creditors, generally structured to reduce 
the amount of a debtor's regular ongoing payment by modifying the 
interest rate, minimum payment, maturity or other terms of the debt. 
Such plans frequently are promoted as a means for a debtor to 
restructure debt without filing for bankruptcy.
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    In 1976, the IRS denied exempt status to an organization, 
Consumer Credit Counseling Service of Alabama, whose activities 
were distinguishable from those in Revenue Ruling 69-441 in 
that (1) it did not restrict its services to the poor, and (2) 
it charged a nominal fee for its debt management plans.\840\ 
The organization provided free information to the general 
public through the use of speakers, films, and publications on 
the subjects of budgeting, buying practices, and the use of 
consumer credit. It also provided counseling to debt-distressed 
individuals, not necessarily poor or low-income, and provided 
debt management plans at the cost of $10 per month, which was 
waived in cases of financial hardship. Its debt management 
activities were a relatively small part of its overall 
activities. The district court determined the organization 
qualified as charitable and educational within section 
501(c)(3), finding the debt management plans to be an integral 
part of the agency's counseling function, and that its debt 
management activities were incidental to its principal 
functions, as only approximately 12 percent of the counselors' 
time was applied to such programs and the charge for the 
service was nominal. The court also considered the facts that 
the agency was publicly supported, and that it had a board 
dominated by members of the general public, as factors 
indicating a charitable operation.\841\
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    \840\ Consumer Credit Counseling Service of Alabama, Inc. v. U.S., 
44 A.F.T.R. 2d (RIA) 5122 (D.D.C. 1978). The case involved 24 agencies 
throughout the United States.
    \841\ See also, Credit Counseling Centers of Oklahoma, Inc., v. 
U.S., 45 A.F.T.R. 2d (RIA) 1401 (D.D.C. 1979) (holding the same on 
virtually identical facts).
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    A recent estimate shows the number of credit counseling 
organizations increased from approximately 200 in 1990 to over 
1,000 in 2002.\842\ During the period from 1994 to late 2003, 
1,215 credit counseling organizations applied to the IRS for 
tax exempt status under section 501(c)(3), including 810 during 
2000 to 2003.\843\ The IRS has recognized more than 850 credit 
counseling organizations as tax exempt under section 
501(c)(3).\844\ Few credit counseling organizations have sought 
section 501(c)(4) status, and the IRS reports it has not seen 
any significant increase in the number or activity of such 
organizations operating as social welfare organizations.\845\ 
As of late 2003, there were 872 active tax-exempt credit 
counseling agencies operating in the United States.\846\
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    \842\ Opening Statement of The Honorable Max Sandlin, Hearing on 
Non-Profit Credit Counseling Organizations, House Ways and Means 
Committee, Subcommittee on Oversight (November 20, 2003).
    \843\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004, p. 3 
(citing letter dated December 18, 2003, to the Subcommittee from IRS 
Commissioner Everson).
    \844\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
    \845\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
    \846\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004, p. 3 
(citing letter dated December 18, 2003 to the Subcommittee from IRS 
Commissioner Everson).
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    A credit counseling organization described in section 
501(c)(3) is exempt from certain Federal and State consumer 
protection laws that provide exemptions for organizations 
described therein.\847\ Some believe that these exclusions from 
Federal and State regulation may be a primary motivation for 
the recent increase in the number of organizations seeking and 
obtaining exempt status under section 501(c)(3).\848\ Such 
regulatory exemptions generally are not available for social 
welfare organizations described in section 501(c)(4).
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    \847\ E.g., The Credit Repair Organizations Act, 15 U.S.C. section 
1679 et seq., effective April 1, 1997 (imposing restrictions on credit 
repair organizations that are enforced by the Federal Trade Commission, 
including forbidding the making of untrue or misleading statements and 
forbidding advance payments; section 501(c)(3) organizations are 
explicitly exempt from such regulation). Testimony of Commissioner Mark 
Everson before the House Ways and Means Committee, Subcommittee on 
Oversight (November 20, 2003) (California's consumer protections laws 
that impose strict standards on credit service organizations and the 
credit repair industry do not apply to nonprofit organizations that 
have received a final determination from the IRS that they are exempt 
from tax under section 501(c)(3) and are not private foundations).
    \848\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
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    Congress recently conducted hearings investigating the 
activities of credit counseling organizations under various 
consumer protection laws,\849\ such as the Federal Trade 
Commission Act.\850\ In addition, the IRS commenced a broad 
examination and compliance program with respect to the credit 
counseling industry. On May 15, 2006, the IRS announced that 
over the past two years, it had been auditing 63 credit 
counseling agencies, representing more than 40 percent of the 
revenue in the industry. Audits of 41 organizations, 
representing more than 40 percent of the revenue in the 
industry have been completed as of that date. All of such 
completed audits resulted in revocation, proposed revocation, 
or other termination of tax-exempt status.\851\ In addition, 
the IRS released two legal documents that provide a legal 
framework for determining the exempt status and related issues 
with respect to credit counseling organizations.\852\ In CCA 
200620001, the IRS found that ``[t]he critical inquiry is 
whether a credit counseling organization conducts its 
counseling program to improve an individual debtor's 
understanding of his financial problems and improve his ability 
to address those problems.'' The CCA concluded that whether a 
credit counseling organization primarily furthers educational 
purposes

    \849\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004.
    \850\ 15 U.S.C. sec. 45(a) (prohibiting unfair and deceptive acts 
or practices in or affecting commerce; although the Federal Trade 
Commission generally lacks jurisdiction to enforce consumer protection 
laws against bona fide nonprofit organizations, it may assert 
jurisdiction over a nonprofit, including a credit counseling 
organization, if it demonstrates the organization is organized to carry 
on business for profit, is a mere instrumentality of a for-profit 
entity, or operates through a common enterprise with one or more for-
profit entities).
    \851\ IRS News Release, IR-2006-80, May 15, 2006.
    \852\ Chief Counsel Advice 200431023 (July 13, 2004); Chief Counsel 
Advice 200620001 (May 9, 2006).

        can be determined by assessing the methodology by which 
        the organization conducts its counseling activities. 
        The process an organization uses to interview clients 
        and develop recommendations, train its counselors and 
        market its services can distinguish between an 
        organization whose object is to improve a person's 
        knowledge and skills to manage his personal debt, and 
        an organization that is offering counseling primarily 
        as a mechanism to enroll individuals in a specific 
        option (e.g., debt management plans) without 
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        considering the individual's best interest.

    Under the Bankruptcy Abuse Prevention and Consumer 
Protection Act of 2005, Public Law 109-8, an individual 
generally may not be a debtor in bankruptcy unless such 
individual has, within 180 days of filing a petition for 
bankruptcy, received from an approved nonprofit budget and 
credit counseling agency an individual or group briefing that 
outlines the opportunities for available credit counseling and 
assists the individual in performing a related budget 
analysis.\853\ The clerk of the court must maintain a publicly 
available list of nonprofit budget and credit counseling 
agencies approved by the U.S. Trustee (or bankruptcy 
administrator). In general, the U.S. Trustee (or bankruptcy 
administrator) shall only approve an agency that demonstrates 
that it will provide qualified counselors, maintain adequate 
provision for safekeeping and payment of client funds, provide 
adequate counseling with respect to client credit problems, and 
deal responsibly and effectively with other matters relating to 
the quality, effectiveness, and financial security of the 
services it provides. The minimum qualifications for approval 
of such an agency include: (1) in general, having an 
independent board of directors; (2) charging no more than a 
reasonable fee, and providing services without regard to 
ability to pay; (3) adequate provision for safekeeping and 
payment of client funds; (4) provision of full disclosures to 
clients; (5) provision of adequate counseling with respect to a 
client's credit problems; (6) trained counselors who receive no 
commissions or bonuses based on the outcome of the counseling 
services; (7) experience and background in providing credit 
counseling; and (8) adequate financial resources to provide 
continuing support services for budgeting plans over the life 
of any repayment plan. An individual debtor must file with the 
court a certificate from the approved nonprofit budget and 
credit counseling agency that provided the required services 
describing the services provided, and a copy of the debt 
management plan, if any, developed through the agency.\854\
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    \853\ This requirement does not apply in certain circumstances, 
such as: (1) in general, where a debtor resides in a district for which 
the U.S. Trustee has determined that the approved counseling agencies 
for such district are not reasonably able to provide adequate services 
to additional individuals; (2) where exigent circumstances merit a 
waiver, the individual seeking bankruptcy protection files an 
appropriate certification with the court, and the certification is 
acceptable to the court; and (3) in general, where a court determines, 
after notice and hearing, that the individual is unable to complete the 
requirement because of incapacity, disability, or active military duty 
in a military combat zone.
    \854\ The Act also requires that, prior to discharge of 
indebtedness under chapter 7 or chapter 13, a debtor complete an 
approved instructional course concerning personal financial management, 
which course need not be conducted by a nonprofit agency.
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                        Explanation of Provision


Requirements for exempt status of credit counseling organizations

    The provision establishes standards that a credit 
counseling organization must satisfy, in addition to present 
law requirements, in order to be organized and operated either 
as an organization described in section 501(c)(3) or in section 
501(c)(4). The provision does not diminish the requirements set 
forth recently by the IRS in Chief Counsel Advice 200431023 or 
Chief Counsel Advice 200620001 but builds on and is consistent 
with such requirements, and the analysis therein. The provision 
is not intended to raise any question about IRS actions taken, 
and the IRS is expected to continue its vigorous examination of 
the credit counseling industry, applying the additional 
standards provided by the provision. The provision does not and 
is not intended to affect the approval process for credit 
counseling agencies under Public Law 109-8. Public Law 109-8 
requires that an approved credit counseling agency be a 
nonprofit, and does not require that an approved agency be a 
section 501(c)(3) organization. It is expected that the 
Department of Justice shall continue to approve agencies for 
purposes of providing pre-bankruptcy counseling based on 
criteria that are consistent with such Public Law.
    Under the provision, an organization that provides credit 
counseling services as a substantial purpose of the 
organization (``credit counseling organization'') is eligible 
for exemption from Federal income tax only as a charitable or 
educational organization under section 501(c)(3) or as a social 
welfare organization under section 501(c)(4), and only if (in 
addition to present-law requirements) the credit counseling 
organization is organized and operated in accordance with the 
following:
          1. The organization provides credit counseling 
        services tailored to the specific needs and 
        circumstances of the consumer;
          2. The organization makes no loans to debtors (other 
        than loans with no fees or interest) and does not 
        negotiate the making of loans on behalf of debtors; 
        \855\
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    \855\ In general, negotiation of a loan involves negotiation of the 
terms of a loan, rather than the processing of a loan. Organizations 
that provide assistance to consumers to obtain a loan from the 
Department of Housing and Urban Development, for example, are not 
necessarily negotiating a loan for a consumer.
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          3. The organization provides services for the purpose 
        of improving a consumer's credit record, credit 
        history, or credit rating only to the extent that such 
        services are incidental to providing credit counseling 
        services and does not charge any separately stated fee 
        for any such services; \856\
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    \856\ Accordingly, a credit counseling organization may provide 
credit repair type services, but only to the extent that the provision 
of such services is a direct outgrowth of the provision of credit 
counseling services.
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          4. The organization does not refuse to provide credit 
        counseling services to a consumer due to inability of 
        the consumer to pay, the ineligibility of the consumer 
        for debt management plan enrollment, or the 
        unwillingness of a consumer to enroll in a debt 
        management plan;
          5. The organization establishes and implements a fee 
        policy to require that any fees charged to a consumer 
        for its services are reasonable,\857\ allows for the 
        waiver of fees if the consumer is unable to pay, and 
        except to the extent allowed by State law prohibits 
        charging any fee based in whole or in part on a 
        percentage of the consumer's debt, the consumer's 
        payments to be made pursuant to a debt management plan, 
        or on the projected or actual savings to the consumer 
        resulting from enrolling in a debt management plan;
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    \857\ Whether a credit counseling organization's fees are 
consistent with specific State law requirements is evidence of the 
reasonableness of fees but is not determinative.
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          6. The organization at all times has a board of 
        directors or other governing body (a) that is 
        controlled by persons who represent the broad interests 
        of the public, such as public officials acting in their 
        capacities as such, persons having special knowledge or 
        expertise in credit or financial education, and 
        community leaders; (b) not more than 20 percent of the 
        voting power of which is vested in persons who are 
        employed by the organization or who will benefit 
        financially, directly or indirectly, from the 
        organization's activities (other than through the 
        receipt of reasonable directors' fees or the repayment 
        of consumer debt to creditors other than the credit 
        counseling organization or its affiliates) and (c) not 
        more than 49 percent of the voting power of which is 
        vested in persons who are employed by the organization 
        or who will benefit financially, directly or 
        indirectly, from the organization's activities (other 
        than through the receipt of reasonable directors' 
        fees); \858\
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    \858\ The requirements described in paragraphs 4, 5, and 6 above 
address core issues that are related to tax-exempt status and that have 
proved to be problematic in the credit counseling industry--the 
provision of services and waiver of fees without regard to ability to 
pay, the establishment of a reasonable fee policy, and the presence of 
independent board members. No inference is intended through the 
provision of these specific requirements on credit counseling 
organizations that similar or more stringent requirements should not be 
adhered to by other exempt organizations providing fees for services. 
Rather, the provision affirms the importance of these core issues to 
the matter of tax exemption, both to credit counseling organizations 
and to other types of exempt organizations.
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          7. The organization does not own (except with respect 
        to a section 501(c)(3) organization) more than 35 
        percent of the total combined voting power of a 
        corporation (or profits or beneficial interest in the 
        case of a partnership or trust or estate) that is in 
        the trade or business of lending money, repairing 
        credit, or providing debt management plan services, 
        payment processing, and similar services; and
          8. 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.\859\
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    \859\ 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.
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Additional requirements for charitable and educational organizations

    Under the provision, a credit counseling organization is 
described in section 501(c)(3) only if, in addition to 
satisfying the above requirements and the requirements of 
section 501(c)(3), the organization is organized and operated 
such that the organization (1) does not solicit contributions 
from consumers during the initial counseling process or while 
the consumer is receiving services from the organization and 
(2) the aggregate revenues of the organization that are from 
payments of creditors of consumers of the organization and that 
are attributable to debt management plan services do not exceed 
the applicable percentage of the total revenues of the 
organization. For credit counseling organizations in existence 
on the date of enactment, the applicable percentage is 80 
percent for the first taxable year of the organization 
beginning after the date which is one year after the date of 
enactment, 70 percent for the second such taxable year 
beginning after such date, 60 percent for the third such 
taxable year beginning after such date, and 50 percent 
thereafter. For new credit counseling organizations, the 
applicable percentage is 50 percent for taxable years beginning 
after the date of enactment. Satisfaction of the aggregate 
revenues requirement is not a safe harbor; all other 
requirements of the provision (and of section 501(c)(3)) 
pertaining to section 501(c)(3) organizations also must be 
satisfied. Satisfaction of the aggregate revenues requirement 
means only that an organization has not automatically failed to 
be organized or operated consistent with exempt purposes. 
Compliance with the revenues test does not mean that the 
organization's debt management plan services activity is at a 
level that organizationally or operationally is consistent with 
exempt status. In other words, satisfaction of the aggregate 
revenues requirement (as a preliminary matter in an exemption 
application, or on an ongoing operational basis) provides no 
affirmative evidence that an organization's primary purpose is 
an exempt purpose, or that the revenues that are subject to the 
limitation (or debt management plan services revenues more 
generally) are related to exempt purposes. As described below, 
whether revenues from such activity are substantially related 
to exempt purposes depends on the facts and circumstances, that 
is, satisfaction of the aggregate revenues requirement 
generally is not relevant for purposes of whether any of an 
organization's revenues are revenues from an unrelated trade or 
business. Failure to satisfy the aggregate revenues requirement 
does not disqualify the organization from recognition of 
exemption under section 501(c)(4).

Additional requirement for social welfare organizations

    Under the provision, a credit counseling organization is 
described in section 501(c)(4) only if, in addition to 
satisfying the above requirements applicable to such 
organizations, the organization notifies the Secretary, in such 
manner as the Secretary may by regulations prescribe, that it 
is applying for recognition as a credit counseling 
organization.

Debt management plan services treated as an unrelated trade or business

    Under the provision, debt management plan services are 
treated as an unrelated trade or business for purposes of the 
tax on income from an unrelated trade or business to the extent 
such services are provided by an organization that is not a 
credit counseling organization. With respect to the provision 
of debt management plan services by a credit counseling 
organization, in order for the income from such services not to 
be unrelated business income, it is intended that, consistent 
with current law, the debt management plan service with respect 
to such income (1) must contribute importantly to the 
accomplishment of credit counseling services, and (2) must not 
be conducted on a larger scale than reasonably is necessary for 
the accomplishment of such services. For example, the provision 
of debt management plan services would not be substantially 
related to accomplishing exempt purposes if the organization 
recommended and enrolled an individual in a debt management 
plan only after determining whether the individual satisfied 
the financial criteria established by the creditors for such 
plan, without (1) considering whether it was an appropriate 
action in light of the individual's particular needs and 
objectives, (2) discussing the disadvantages of a debt 
management plan with the consumer, and (3) presenting other 
possible options to such consumer.

Definitions

            Credit counseling services
    Credit counseling services are (a) the provision of 
educational information to the general public on budgeting, 
personal finance, financial literacy, saving and spending 
practices, and the sound use of consumer credit; (b) the 
assisting of individuals and families with financial problems 
by providing them with counseling; or (c) any combination of 
such activities.
            Debt management plan services
    Debt management plan services are services related to the 
repayment, consolidation, or restructuring of a consumer's 
debt, and includes the negotiation with creditors of lower 
interest rates, the waiver or reduction of fees, and the 
marketing and processing of debt management plans.

                             Effective Date

    In general, the provision applies to taxable years 
beginning after the date of enactment (August 17, 2006). For a 
credit counseling organization that is described in section 
501(c)(3) or 501(c)(4) on the date of enactment, the provision 
is effective for taxable years beginning after the date that is 
one year after the date of enactment.

11. Expansion of the base of tax on private foundation net investment 
        income (sec. 1221 of the Act and sec. 4940 of the Code)

                              Present Law


In general

    Under section 4940(a) of the Code, private foundations that 
are recognized as exempt from Federal income tax under section 
501(a) of the Code are subject to a two-percent excise tax on 
their net investment income. Private foundations that are not 
exempt from tax, such as certain charitable trusts,\860\ also 
are subject to an excise tax under section 4940(b) based on net 
investment income and unrelated business income. The two-
percent rate of tax is reduced to one-percent if certain 
requirements are met in a taxable year.\861\ Unlike certain 
other excise taxes imposed on private foundations, the tax 
based on investment income does not result from a violation of 
substantive law by the private foundation; it is solely an 
excise tax.
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    \860\ See sec. 4947(a)(1).
    \861\ Sec. 4940(e).
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    The tax on taxable private foundations under section 
4940(b) is equal to the excess of the sum of the excise tax 
that would have been imposed under section 4940(a) if the 
foundation were tax exempt and the amount of the unrelated 
business income tax that would have been imposed if the 
foundation were tax exempt, over the income tax imposed on the 
foundation under subtitle A of the Code.

Net investment income

            Internal Revenue Code
    In general, net investment income is defined as the amount 
by which the sum of gross investment income and capital gain 
net income exceeds the deductions relating to the production of 
gross investment income.\862\
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    \862\ Sec. 4940(c)(1). Net investment income also is determined by 
applying section 103 (generally providing an exclusion for interest on 
certain State and local bonds) and section 265 (generally disallowing 
the deduction for interest and certain other expenses with respect to 
tax-exempt income). Sec. 4940(c)(5).
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    Gross investment income is the gross amount of income from 
interest, dividends, rents, payments with respect to securities 
loans, and royalties. Gross investment income does not include 
any income that is included in computing a foundation's 
unrelated business taxable income.\863\
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    \863\ Sec. 4940(c)(2).
---------------------------------------------------------------------------
    Capital gain net income takes into account only gains and 
losses from the sale or other disposition of property used for 
the production of interest, dividends, rents, and royalties, 
and property used for the production of income included in 
computing the unrelated business income tax (except to the 
extent the gain or loss is taken into account for purposes of 
such tax). Losses from sales or other dispositions of property 
are allowed only to the extent of gains from such sales or 
other dispositions, and no capital loss carryovers are 
allowed.\864\
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    \864\ Sec. 4940(c)(4).
---------------------------------------------------------------------------
            Treasury Regulations and case law
    The Treasury regulations elaborate on the Code definition 
of net investment income. The regulations cite items of 
investment income listed in the Code, and in addition clarify 
that net investment income includes interest, dividends, rents, 
and royalties derived from all sources, including from assets 
devoted to charitable activities. For example, interest 
received on a student loan is includible in the gross 
investment income of a foundation making the loan.\865\
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    \865\ Treas. Reg. sec. 53.4940-1(d)(1).
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    The regulations further provide that gross investment 
income includes certain items of investment income that are 
described in the unrelated business income tax 
regulations.\866\ Such additional items include payments with 
respect to securities loans (an item added to the Code in 
1978), annuities, income from notional principal contracts, and 
other substantially similar income from ordinary and routine 
investments to the extent determined by the Commissioner.\867\ 
These latter three categories of income are not enumerated as 
net investment income in the Code.
---------------------------------------------------------------------------
    \866\ Id.
    \867\ Treas. Reg. sec. 1.512(b)-1(a)(1).
---------------------------------------------------------------------------
    The Treasury regulations also elaborate on the Code 
definition of capital gain net income. The regulations provide 
that the only capital gains and losses that are taken into 
account are (1) gains and losses from the sale or other 
disposition of property held by a private foundation for 
investment purposes (other than program related investments), 
and (2) property used for the production of income included in 
computing the unrelated business income tax (except to the 
extent the gain or loss is taken into account for purposes of 
such tax).
    This definition of capital gain net income builds on the 
definition provided in the Code by providing an exception for 
gain and loss from program related investments and by stating, 
in addition, that ``gains and losses from the sale or other 
disposition of property used for the exempt purposes of the 
private foundation are excluded.'' \868\ As an example, the 
regulations provide that gain or loss on the sale of buildings 
used for the foundation's exempt activities are not taken into 
account for purposes of the section 4940 tax. If a foundation 
uses exempt income for exempt purposes and (other than 
incidentally) for investment purposes, then the portion of the 
gain or loss received upon sale or other disposition that is 
allocable to the investment use is taken into account for 
purposes of the tax.
---------------------------------------------------------------------------
    \868\ Treas. Reg. sec. 53.4940-1(f)(1).
---------------------------------------------------------------------------
    The regulations further provide that ``property shall be 
treated as held for investment purposes even though such 
property is disposed of by the foundation immediately upon its 
receipt, if it is property of a type which generally produces 
interest, dividends, rents, royalties, or capital gains through 
appreciation (for example, rental real estate, stock, bonds, 
mineral interest, mortgages, and securities).'' \869\
---------------------------------------------------------------------------
    \869\ Id.
---------------------------------------------------------------------------
    This regulation has been challenged in the courts. The 
regulation says that property is treated as held for investment 
purposes if it is of a type that ``generally produces'' certain 
types of income. By contrast, the Code provides that the 
property be ``used'' to produce such income. In Zemurray 
Foundation v. United States, 687 F.2d 97 (5th Cir. 1982), the 
taxpayer foundation challenged the Treasury's attempt to tax 
under section 4940 capital gain on the sale of timber property. 
The taxpayer asserted that the property was not actually used 
to produce investment income, and that the Treasury Regulation 
was invalid because the regulation would subject to tax 
property that is of a type that could generally be used to 
produce investment income. On this issue, the court upheld the 
Treasury regulation, reasoning that the regulation's use of the 
phrase ``generally used,'' though permitting taxation ``so long 
as the property sold is usable to produce the applicable types 
of income, regardless of whether the property is actually used 
to produce income or not'' was not unreasonable or plainly 
inconsistent with the statute.\870\ However, on remand to the 
district court, the district court concluded that the timber 
property at issue, though a type of property generally used to 
produce investment income, was not susceptible for such 
use.\871\ Thus, the district court concluded that the Treasury 
could not tax the gain under this portion of the regulation.
---------------------------------------------------------------------------
    \870\ Zemurray Foundation v. United States, 687 F.2d 97, 100 (5th 
Cir. 1982).
    \871\ Zemurray Foundation v. United States, 53 A.F.T.R. 2d (RIA) 
842 (E. D. La. 1983).
---------------------------------------------------------------------------
    The question then turned to the taxpayer's second challenge 
to the regulation. At issue was the meaning of the regulatory 
phrase ``capital gains through appreciation.'' The regulation 
provides that if property is of a type that generally produces 
capital gains through appreciation, then the gain is subject to 
tax. The Treasury argued that the timber property at issue, 
although held by the court not to be property (in this case) 
susceptible for use to produce interest, dividends, rents, or 
royalties, still was held by the taxpayer to produce capital 
gain through appreciation and therefore the gain should be 
subject to tax under the regulation.
    On this issue, the court held for the taxpayer, reasoning 
that the language of the Code clearly is limited to certain 
gains and losses, e.g., the court cited the Code language 
providing that ``there shall be taken into account only gains 
and losses from the sale or other disposition of property used 
for the production of interest, dividends, rents, and 
royalties. . . .'' \872\ The court noted that ``capital gains 
through appreciation'' is not enumerated in the statute. The 
court used as an example a jade figurine held by a foundation. 
Jade figurines do not generally produce interest, dividends, 
rents, or royalties, but gain on the sale of such a figurine 
would be taxable under the ``capital gains through 
appreciation'' standard, yet such standard does not appear in 
the statute. After Zemurray, the Treasury generally conceded 
this issue.\873\
---------------------------------------------------------------------------
    \872\ Zemurray Foundation v. United States, 755 F.2d 404 (5th Cir. 
1985), 413 (citing Code sec. 4940(c)(4)(A).
    \873\ G.C.M. 39538 (July 23, 1986).
---------------------------------------------------------------------------
    With respect to capital losses, the Code provides that 
carryovers are not permitted, whereas the regulations state 
that neither carryovers nor carrybacks are permitted.\874\
---------------------------------------------------------------------------
    \874\ Treas. Reg. sec. 53.4940-1(f)(3).
---------------------------------------------------------------------------
            Application of Zemurray to the Code and the regulations
    Applying the Zemurray case to the Code and regulations 
results in a general principle for purposes of present law: 
private foundations are subject to tax under section 4940 only 
on the items of income and only on gains and losses 
specifically enumerated therein. Under this principle, private 
foundations generally are not subject to the section 4940 tax 
on other substantially similar types of income from ordinary 
and routine investments, notwithstanding Treasury regulations 
to the contrary. In addition, the regulations provide that gain 
or loss from the sale or other disposition of assets used for 
exempt purposes, with specific reference to program-related 
investments, is excluded. The Code provides for no such blanket 
exclusion; thus, under the language of the Code and the 
reasoning of Zemurray, if a foundation provided office space at 
below market rent to a charitable organization for use in the 
organization's exempt purposes, gain on the sale of the 
building by the foundation should be subject to the section 
4940 tax despite the Treasury regulations.\875\
---------------------------------------------------------------------------
    \875\ See also the example in Treas. Reg. sec. 53.4940-1(f)(1).
---------------------------------------------------------------------------
    In addition, under the logic of Zemurray, capital loss 
carrybacks arguably are permitted, notwithstanding Treasury 
regulations to the contrary, because the Code mentions only a 
bar on use of carryovers and says nothing about carrybacks.

                        Explanation of Provision

    The provision amends the definition of gross investment 
income (including for purposes of capital gain net income) to 
include items of income that are similar to the items presently 
enumerated in the Code. Such similar items include income from 
notional principal contracts, annuities, and other 
substantially similar income from ordinary and routine 
investments, and, with respect to capital gain net income, 
capital gains from appreciation, including capital gains and 
losses from the sale or other disposition of assets used to 
further an exempt purpose.
    Certain gains and losses are not taken into account in 
determining capital gain net income. Specifically, under the 
provision, no gain or loss shall be taken into account with 
respect to any portion of property used for a period of not 
less than one year for a purpose or function constituting the 
basis of the private foundation's exemption, if the entire 
property is exchanged immediately following such period solely 
for property of like kind which is to be used primarily for a 
purpose or function constituting the basis for such 
foundation's exemption. Rules similar to the rules of section 
1031 (relating to exchange of property held for productive use 
or investment) apply, including, but not limited to, the 
exceptions of section 1031(a)(2) and the rule of section 
1031(a)(3) regarding completion of the exchange within 180 
days.
    The provision provides that there are no carrybacks of 
losses from sales or other dispositions of property.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment (August 17, 2006).

12. Definition of convention or association of churches (sec. 1222 of 
        the Act and sec. 7701 of the Code)

                              Present Law

    Under present law, an organization that qualifies as a 
``convention or association of churches'' (within the meaning 
of sec. 170(b)(1)(A)(i)) is not required to file an annual 
return,\876\ is subject to the church tax inquiry and church 
tax examination provisions applicable to organizations claiming 
to be a church,\877\ and is subject to certain other provisions 
generally applicable to churches.\878\ The Internal Revenue 
Code does not define the term ``convention or association of 
churches.''
---------------------------------------------------------------------------
    \876\ Sec. 6033(a)(2)(A)(i).
    \877\ Sec. 7611(h)(1)(B).
    \878\ See, e.g., Sec. 402(g)(8)(B) (limitation on elective 
deferrals); sec. 403(b)(9)(B) (definition of retirement income 
account); sec. 410(d) (election to have participation, vesting, 
funding, and certain other provisions apply to church plans); sec. 
414(e) (definition of church plan); sec. 415(c)(7) (certain 
contributions by church plans); sec. 501(h)(5) (disqualification of 
certain organizations from making the sec. 501(h) election regarding 
lobbying expenditure limits); sec. 501(m)(3) (definition of commercial-
type insurance); sec. 508(c)(1)(A) (exception from requirement to file 
application seeking recognition of exempt status); sec. 512(b)(12) 
(allowance of up to $1,000 deduction for purposes of determining 
unrelated business taxable income); sec. 514(b)(3)(E) (definition of 
debt-financed property); sec. 3121(w)(3)(A) (election regarding 
exemption from social security taxes); sec. 3309(b)(1) (application of 
federal unemployment tax provisions to services performed in the employ 
of certain organizations); sec. 6043(b)(1) (requirement to file a 
return upon liquidation or dissolution of the organization); and sec. 
7702(j)(3)(A) (treatment of certain death benefit plans as life 
insurance).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that an organization that otherwise 
is a convention or association of churches does not fail to so 
qualify merely because the membership of the organization 
includes individuals as well as churches, or because 
individuals have voting rights in the organization.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

13. Notification requirement for entities not currently required to 
        file an annual information return (sec. 1223 of the Act and 
        secs. 6033, 6652, and 7428 of the Code)

                              Present Law

    Under present law, the requirement that an exempt 
organization file an annual information return does not apply 
to several categories of exempt organizations. Organizations 
excepted from the filing requirement include organizations 
(other than private foundations), the gross receipts of which 
in each taxable year normally are not more than $25,000.\879\ 
Also exempt from the requirement are churches, their integrated 
auxiliaries, and conventions or associations of churches; the 
exclusively religious activities of any religious order; 
section 501(c)(1) instrumentalities of the United States; 
section 501(c)(21) trusts; an interchurch organization of local 
units of a church; certain mission societies; certain church-
affiliated elementary and high schools; certain State 
institutions whose income is excluded from gross income under 
section 115; certain governmental units and affiliates of 
governmental units; and other organizations that the IRS has 
relieved from the filing requirement pursuant to its statutory 
discretionary authority.
---------------------------------------------------------------------------
    \879\ Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. 
Reg. sec. 1.6033-2(g)(1). Section 6033(a)(2)(A)(ii) provides a $5,000 
annual gross receipts exception from the annual reporting requirements 
for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 
23, the IRS exercised its discretionary authority under section 6033 to 
increase the gross receipts exception to $25,000, and enlarge the 
category of exempt organizations that are not required to file Form 
990.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision requires organizations that are excused from 
filing an information return by reason of normally having gross 
receipts below a certain specified amount (generally, under 
$25,000) to furnish to the Secretary annually, in electronic 
form, the legal name of the organization, any name under which 
the organization operates or does business, the organization's 
mailing address and Internet web site address (if any), the 
organization's taxpayer identification number, the name and 
address of a principal officer, and evidence of the 
organization's continuing basis for its exemption from the 
generally applicable information return filing requirements. 
Upon such organization's termination of existence, the 
organization is required to furnish notice of such termination.
    The provision provides that if an organization fails to 
provide the required notice for three consecutive years, the 
organization's tax-exempt status is revoked. In addition, if an 
organization that is required to file an annual information 
return under section 6033(a) (Form 990) fails to file such an 
information return for three consecutive years, the 
organization's tax- exempt status is revoked. If an 
organization fails to meet its filing obligation to the IRS for 
three consecutive years in cases where the organization is 
subject to the information return filing requirement in one or 
more years during a three-year period and also is subject to 
the notice requirement for one or more years during the same 
three-year period, the organization's tax-exempt status is 
revoked.
    A revocation under the provision is effective from the date 
that the Secretary determines was the last day the organization 
could have timely filed the third required information return 
or notice. To again be recognized as tax-exempt, the 
organization must apply to the Secretary for recognition of 
tax-exemption, irrespective of whether the organization was 
required to make an application for recognition of tax-
exemption in order to gain tax-exemption originally.
    If, upon application for tax-exempt status after a 
revocation under the provision, the organization shows to the 
satisfaction of the Secretary reasonable cause for failing to 
file the required annual notices or returns, the organization's 
tax-exempt status may, in the discretion of the Secretary, be 
reinstated retroactive to the date of revocation. An 
organization may not challenge under the Code's declaratory 
judgment procedures (section 7428) a revocation of tax-
exemption made pursuant to the provision.
    There is no monetary penalty for failure to file the notice 
under the provision. Like other information returns, the 
notices are subject to the public disclosure and inspection 
rules generally applicable to exempt organizations. The 
provision does not affect an organization's obligation under 
present law to file required information returns or existing 
penalties for failure to file such returns.
    The Secretary is required to notify every organization that 
is subject to the notice filing requirement of the new filing 
obligation in a timely manner. Notification by the Secretary 
shall be by mail, in the case of any organization the identity 
and address of which is included in the list of exempt 
organizations maintained by the Secretary, and by Internet or 
other means of outreach, in the case of any other organization. 
In addition, the Secretary is required to publicize in a timely 
manner in appropriate forms and instructions and other means of 
outreach the new penalty imposed for consecutive failures to 
file the information return.
    The Secretary is authorized to publish a list of 
organizations whose exempt status is revoked under the 
provision.

                             Effective Date

    The provision is effective for notices and returns with 
respect to annual periods beginning after 2006.

14. Disclosure to State officials relating to exempt organizations 
        (sec. 1224 of the Act and secs. 6103, 6104, 7213, 7213A, and 
        7431 of the Code)

                              Present Law

    In the case of organizations that are described in section 
501(c)(3) and exempt from tax under section 501(a) or that have 
applied for exemption as an organization so described, present 
law (sec. 6104(c)) requires the Secretary to notify the 
appropriate State officer of (1) a refusal to recognize such 
organization as an organization described in section 501(c)(3), 
(2) a revocation of a section 501(c)(3) organization's tax-
exempt status, and (3) the mailing of a notice of deficiency 
for any tax imposed under section 507, chapter 41, or chapter 
42.\880\ In addition, at the request of such appropriate State 
officer, the Secretary is required to make available for 
inspection and copying, such returns, filed statements, 
records, reports, and other information relating to the above-
described disclosures, as are relevant to any State law 
determination. An appropriate State officer is the State 
attorney general, State tax officer, or any State official 
charged with overseeing organizations of the type described in 
section 501(c)(3).
---------------------------------------------------------------------------
    \880\ The applicable taxes include the termination tax on private 
foundations; taxes on public charities for certain excess lobbying 
expenses; taxes on a private foundation's net investment income, self-
dealing activities, undistributed income, excess business holdings, 
investments that jeopardize charitable purposes, and taxable 
expenditures (some of these taxes also apply to certain non-exempt 
trusts); taxes on the political expenditures and excess benefit 
transactions of section 501(c)(3) organizations; and certain taxes on 
black lung benefit trusts and foreign organizations.
---------------------------------------------------------------------------
    In general, returns and return information (as such terms 
are defined in section 6103(b)) are confidential and may not be 
disclosed or inspected unless expressly provided by law.\881\ 
Present law requires the Secretary to keep records of 
disclosures and requests for inspection \882\ and requires that 
persons authorized to receive returns and return information 
maintain various safeguards to protect such information against 
unauthorized disclosure.\883\ Willful unauthorized disclosure 
or inspection of returns or return information is subject to a 
fine and/or imprisonment.\884\ The knowing or negligent 
unauthorized inspection or disclosure of returns or return 
information gives the taxpayer a right to bring a civil 
suit.\885\ Such present-law protections against unauthorized 
disclosure or inspection of returns and return information do 
not apply to the disclosures or inspections, described above, 
that are authorized by section 6104(c).
---------------------------------------------------------------------------
    \881\ Sec. 6103(a).
    \882\ Sec. 6103(p)(3).
    \883\ Sec. 6103(p)(4).
    \884\ Secs. 7213 and 7213A.
    \885\ Sec. 7431.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision provides that upon written request by an 
appropriate State officer, the Secretary may disclose: (1) a 
notice of proposed refusal to recognize an organization as a 
section 501(c)(3) organization; (2) a notice of proposed 
revocation of tax-exemption of a section 501(c)(3) 
organization; (3) the issuance of a proposed deficiency of tax 
imposed under section 507, chapter 41, or chapter 42; (4) the 
names, addresses, and taxpayer identification numbers of 
organizations that have applied for recognition as section 
501(c)(3) organizations; and (5) returns and return information 
of organizations with respect to which information has been 
disclosed under (1) through (4) above.\886\ Disclosure or 
inspection is permitted for the purpose of, and only to the 
extent necessary in, the administration of State laws 
regulating section 501(c)(3) organizations, such as laws 
regulating tax-exempt status, charitable trusts, charitable 
solicitation, and fraud. Such disclosure or inspection may be 
made only to or by an appropriate State officer or to an 
officer or employee of the State who is designated by the 
appropriate State officer, and may not be made by or to a 
contractor or agent. The Secretary also is permitted to 
disclose or open to inspection the returns and return 
information of an organization that is recognized as tax- 
exempt under section 501(c)(3), or that has applied for such 
recognition, to an appropriate State officer if the Secretary 
determines that disclosure or inspection may constitute 
evidence of noncompliance under the laws within the 
jurisdiction of the appropriate State officer. For this 
purpose, appropriate State officer means the State attorney 
general, the State tax officer, or any other State official 
charged with overseeing organizations of the type described in 
section 501(c)(3).
---------------------------------------------------------------------------
    \886\ Such returns and return information also may be open to 
inspection by an appropriate State officer.
---------------------------------------------------------------------------
    In addition, the provision provides that upon the written 
request by an appropriate State officer, the Secretary may make 
available for inspection or disclosure returns and return 
information of an organization described in section 501(c) 
(other than section 501(c)(1) or section 501(c)(3)). Such 
returns and return information are available for inspection or 
disclosure only for the purpose of, and to the extent necessary 
in, the administration of State laws regulating the 
solicitation or administration of the charitable funds or 
charitable assets of such organizations. Such disclosure or 
inspection may be made only to or by an appropriate State 
officer or to an officer or employee of the State who is 
designated by the appropriate State officer, and may not be 
made by or to a contractor or agent. For this purpose, 
appropriate State officer means the State attorney general, the 
State tax officer, and the head of an agency designated by the 
State attorney general as having primary responsibility for 
overseeing the solicitation of funds for charitable purposes of 
such organizations.
    In addition, the provision provides that any returns and 
return information disclosed under section 6104(c) may be 
disclosed in civil administrative and civil judicial 
proceedings pertaining to the enforcement of State laws 
regulating the applicable tax-exempt organization in a manner 
prescribed by the Secretary. Returns and return information are 
not to be disclosed under section 6104(c), or in such an 
administrative or judicial proceeding, to the extent that the 
Secretary determines that such disclosure would seriously 
impair Federal tax administration. The provision makes 
disclosures of returns and return information under section 
6104(c) subject to the disclosure, recordkeeping, and safeguard 
provisions of section 6103, including through requirements that 
the Secretary maintain a permanent system of records of 
requests for disclosure (sec. 6103(p)(3)) and that the 
appropriate State officer maintain various safeguards that 
protect against unauthorized disclosure (sec. 6103(p)(4)). The 
provision provides that the willful unauthorized disclosure of 
returns or return information described in section 6104(c) is a 
felony subject to a fine of up to $5,000 and/or imprisonment of 
up to five years (sec. 7213(a)(2)), the willful unauthorized 
inspection of returns or return information described in 
section 6104(c) is subject to a fine of up to $1,000 and/or 
imprisonment of up to one year (sec. 7213A), and provides the 
taxpayer the right to bring a civil action for damages in the 
case of knowing or negligent unauthorized disclosure or 
inspection of such information (sec. 7431(a)(2)).

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006) but does not apply to requests made before such date.

15. Public disclosure relating to unrelated business income tax returns 
        (sec. 1225 of the Act and sec. 6104 of the Code)

                              Present Law

    In general, an organization described in section 501(c) or 
(d) is required to make available for public inspection a copy 
of its annual information return (Form 990) and exemption 
application materials.\887\ A penalty may be imposed on any 
person who does not make an organization's annual returns or 
exemption application materials available for public 
inspection. The penalty amount is $20 for each day during which 
a failure occurs. If more than one person fails to comply, each 
person is jointly and severally liable for the full amount of 
the penalty. The maximum penalty that may be imposed on all 
persons for any one annual return is $10,000. There is no 
maximum penalty amount for failing to make exemption 
application materials available for public inspection. Any 
person who willfully fails to comply with the public inspection 
requirements is subject to an additional penalty of 
$5,000.\888\
---------------------------------------------------------------------------
    \887\ Sec. 6104(d).
    \888\ Sec. 6685.
---------------------------------------------------------------------------
    These requirements do not apply to an organization's annual 
return for unrelated business income tax (generally Form 990-
T).\889\
---------------------------------------------------------------------------
    \889\ Treas. Reg. sec. 301.6104(d)-1(b)(4)(ii).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present-law public inspection and 
disclosure requirements and penalties applicable to the Form 
990 to the unrelated business income tax return (Form 990-T) of 
organizations described in section 501(c)(3). The provision 
provides that certain information may be withheld by the 
organization from public disclosure and inspection if public 
availability would adversely affect the organization, similar 
to the information that may be withheld under present law with 
respect to applications for tax exemption and the Form 990 
(e.g., information relating to a trade secret, patent, process, 
style of work, or apparatus of the organization, if the 
Secretary determines that public disclosure of such information 
would adversely affect the organization).

                             Effective Date

    The provision is effective for returns filed after the date 
of enactment (August 17, 2006).

116. Treasury study on donor advised funds and supporting organizations 
        (sec. 1226 of the Act)

                              Present Law


Donor advised funds

    Some charitable organizations (including community 
foundations) establish accounts to which donors may contribute 
and thereafter provide nonbinding advice or recommendations 
with regard to distributions from the fund or the investment of 
assets in the fund. Such accounts are commonly referred to as 
``donor advised funds.'' Donors who make contributions to 
charities for maintenance in a donor advised fund generally 
claim a charitable contribution deduction at the time of the 
contribution. Although sponsoring charities frequently permit 
donors (or other persons appointed by donors) to provide 
nonbinding recommendations concerning the distribution or 
investment of assets in a donor advised fund, sponsoring 
charities generally must have legal ownership and control of 
such assets following the contribution. If the sponsoring 
charity does not have such control (or permits a donor to 
exercise control over amounts contributed), the donor's 
contributions may not qualify for a charitable deduction, and, 
in the case of a community foundation, the contribution may be 
treated as being subject to a material restriction or condition 
by the donor.
    In recent years, a number of financial institutions have 
formed charitable corporations for the principal purpose of 
offering donor advised funds, sometimes referred to as 
``commercial'' donor advised funds. In addition, some 
established charities have begun operating donor advised funds 
in addition to their primary activities. The IRS has recognized 
several organizations that sponsor donor advised funds, 
including ``commercial'' donor advised funds, as section 
501(c)(3) public charities. The term ``donor advised fund'' is 
not defined in statute or regulations.

Supporting organizations

            In general
    The Code provides that certain ``supporting organizations'' 
(in general, organizations that provide support to another 
section 501(c)(3) organization that is not a private 
foundation) are classified as public charities rather than 
private foundations. \890\ To qualify as a supporting 
organization, an organization must meet all three of the 
following tests: (1) it must be organized and at all times 
operated exclusively for the benefit of, to perform the 
functions of, or to carry out the purposes of one or more 
``publicly supported organizations'' \891\ (the 
``organizational and operational tests''); \892\ (2) it must be 
operated, supervised, or controlled by or in connection with 
one or more publicly supported organizations (the 
``relationship test''); \893\ and (3) it must not be controlled 
directly or indirectly by one or more disqualified persons (as 
defined in section 4946) other than foundation managers and 
other than one or more publicly supported organizations (the 
``lack of outside control test'').\894\
---------------------------------------------------------------------------
    \890\ Sec. 509(a)(3).
    \891\ In general, supported organizations of a supporting 
organization must be publicly supported charities described in sections 
509(a)(1) or (a)(2).
    \892\ Sec. 509(a)(3)(A).
    \893\ Sec. 509(a)(3)(B).
    \894\ Sec. 509(a)(3)(C).
---------------------------------------------------------------------------
    To satisfy the relationship test, a supporting organization 
must hold one of three statutorily described close 
relationships with the supported organization. The organization 
must be: (1) operated, supervised, or controlled by a publicly 
supported organization (commonly referred to as ``Type I'' 
supporting organizations); (2) supervised or controlled in 
connection with a publicly supported organization (``Type II'' 
supporting organizations); or (3) operated in connection with a 
publicly supported organization (``Type III'' supporting 
organizations).\895\
---------------------------------------------------------------------------
    \895\ Treas. Reg. sec. 1.509(a)-4(f)(2).
---------------------------------------------------------------------------
            Type I supporting organizations
    In the case of supporting organizations that are operated, 
supervised, or controlled by one or more publicly supported 
organizations (Type I supporting organizations), one or more 
supported organizations must exercise a substantial degree of 
direction over the policies, programs, and activities of the 
supporting organization.\896\ The relationship between the Type 
I supporting organization and the supported organization 
generally is comparable to that of a parent and subsidiary. The 
requisite relationship may be established by the fact that a 
majority of the officers, directors, or trustees of the 
supporting organization are appointed or elected by the 
governing body, members of the governing body, officers acting 
in their official capacity, or the membership of one or more 
publicly supported organizations.\897\
---------------------------------------------------------------------------
    \896\ Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
    \897\ Id.
---------------------------------------------------------------------------
            Type II supporting organizations
    Type II supporting organizations are supervised or 
controlled in connection with one or more publicly supported 
organizations. Rather than the parent-subsidiary relationship 
characteristic of Type I organizations, the relationship 
between a Type II organization and its supported organizations 
is more analogous to a brother-sister relationship. In order to 
satisfy the Type II relationship requirement, generally there 
must be common supervision or control by the persons 
supervising or controlling both the supporting organization and 
the publicly supported organizations.\898\ An organization 
generally is not considered to be ``supervised or controlled in 
connection with'' a publicly supported organization merely 
because the supporting organization makes payments to the 
publicly supported organization, even if the obligation to make 
payments is enforceable under state law.\899\
---------------------------------------------------------------------------
    \898\ Treas. Reg. sec. 1.509(a)-4(h)(1).
    \899\ Treas. Reg. sec. 1.509(a)-4(h)(2).
---------------------------------------------------------------------------
            Type III supporting organizations
    Type III supporting organizations are ``operated in 
connection with'' one or more publicly supported organizations. 
To satisfy the ``operated in connection with'' relationship, 
Treasury regulations require that the supporting organization 
be responsive to, and significantly involved in the operations 
of, the publicly supported organization. This relationship is 
deemed to exist where the supporting organization meets both a 
``responsiveness test'' and an ``integral part test.'' \900\ In 
general, the responsiveness test requires that the Type III 
supporting organization be responsive to the needs or demands 
of the publicly supported organizations. In general, the 
integral part test requires that the Type III supporting 
organization maintain significant involvement in the operations 
of one or more publicly supported organizations, and that such 
publicly supported organizations are in turn dependent upon the 
supporting organization for the type of support which it 
provides.
---------------------------------------------------------------------------
    \900\ Treas. Reg. sec. 1.509(a)-4(i)(1).
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    There are two alternative methods for satisfying the 
integral part test. The first alternative is to establish that 
(1) the activities engaged in for or on behalf of the publicly 
supported organization are activities to perform the functions 
of, or carry out the purposes of, such organizations; and (2) 
these activities, but for the involvement of the supporting 
organization, normally would be engaged in by the publicly 
supported organizations themselves.\901\ Organizations that 
satisfy this ``but for'' test sometimes are referred to as 
``functionally integrated'' Type III supporting organizations. 
The second method for satisfying the integral part test is to 
establish that: (1) the supporting organization pays 
substantially all of its income to or for the use of one or 
more publicly supported organizations;\902\ (2) the amount of 
support received by one or more of the publicly supported 
organizations is sufficient to insure the attentiveness of the 
organization or organizations to the operations of the 
supporting organization (this is known as the ``attentiveness 
requirement'');\903\ and (3) a significant amount of the total 
support of the supporting organization goes to those publicly 
supported organizations that meet the attentiveness 
requirement.\904\
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    \901\ Treas. Reg. sec. 1.509(a)-4(i)(3)(ii).
    \902\ For this purpose, the IRS has defined the term 
``substantially all'' of an organization's income to mean 85 percent or 
more. Rev. Rul. 76-208, 1976-1 C.B. 161.
    \903\ Although the regulations do not specify the requisite level 
of support in numerical or percentage terms, the IRS has suggested that 
grants that represent less than 10 percent of the beneficiary's support 
likely would be viewed as insufficient to ensure attentiveness. Gen. 
Couns. Mem. 36379 (August 15, 1975). As an alternative to satisfying 
the attentiveness standard by the foregoing method, a supporting 
organization may demonstrate attentiveness by showing that, in order to 
avoid the interruption of the carrying on of a particular function or 
activity, the beneficiary organization will be sufficiently attentive 
to the operations of the supporting organization. Treas. Reg. sec. 
1.509(a)-4(i)(3)(iii)(b).
    \904\ Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
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                        Explanation of Provision

    Elsewhere in the Act, provision is made for new rules with 
respect to donor advised funds and supporting organizations. 
Many issues arise under current law with respect to such 
organizations, some of which are addressed by the Act and some 
of which would benefit from additional study. The provision 
provides that the Secretary of the Treasury shall undertake a 
study on the organization and operation of donor advised funds 
(as defined in section 4966(d)(2)) and of supporting 
organizations (organizations described in section 509(a)(3)). 
The study shall specifically consider (1) whether the amount 
and availability of the income, gift, or estate tax charitable 
deductions allowed for charitable contributions to sponsoring 
organizations (as defined in section 4966(d)(1)) of donor 
advised funds or to organizations described in section 
509(a)(3) is appropriate in consideration of (i) the use of 
contributed assets (including the type, extent, and timing of 
such use) or (ii) the use of the assets of such organizations 
for the benefit of the person making the charitable 
contribution (or a person related to such person), (2) whether 
donor advised funds should be required to distribute for 
charitable purposes a specified amount (whether based on the 
income or assets of the fund) in order to ensure that the 
sponsoring organization with respect to the fund is operating 
consistent with the purposes or functions constituting the 
basis for its exemption under section 501 or its status as an 
organization described in section 509(a), (3) whether the 
retention by donors to donor advised funds or supporting 
organizations of rights or privileges with respect to amounts 
transferred to such organizations (including advisory rights or 
privileges with respect to the making of grants or the 
investment of assets) is consistent with the treatment of such 
transfers as completed gifts that qualify for an income, gift, 
or estate tax charitable deduction, and (4) whether any of the 
issues addressed above also raise issues with respect to other 
forms of charities or charitable donations.
    Not later than one year after the date of enactment (August 
17, 2006) of this Act, the Secretary shall submit a report on 
the study, comment on any actions (audits, guidance, 
regulations, etc.) taken by the Secretary with respect to the 
issues discussed in the study, and make recommendations to the 
Committee on Finance of the Senate and the Committee on Ways 
and Means of the House of Representatives.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

17. Improved accountability of donor advised funds (secs. 1231-1235 of 
        the Act and secs. 170, 508, 2055, 2522, 4943, 4958, 6033, and 
        new secs. 4966 and 4967 of the Code)

                              Present Law


Requirements for section 501(c)(3) tax-exempt status

    Charitable organizations, i.e., organizations described in 
section 501(c)(3), generally are exempt from Federal income tax 
and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\905\ In order to qualify as operating primarily 
for a purpose described in section 501(c)(3), an organization 
must satisfy the following operational requirements: (1) the 
net earnings of the organization may not inure to the benefit 
of any person in a position to influence the activities of the 
organization; (2) the organization must operate to provide a 
public benefit, not a private benefit;\906\ (3) the 
organization may not be operated primarily to conduct an 
unrelated trade or business;\907\ (4) the organization may not 
engage in substantial legislative lobbying; and (5) the 
organization may not participate or intervene in any political 
campaign.
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    \905\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies such 
purposes as religious, charitable, scientific, testing for public 
safety, literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals. In general, an organization is organized and 
operated for charitable purposes if it provides relief for the poor and 
distressed or the underprivileged. Treas. Reg. sec. 1.501(c)(3)-
1(d)(2).
    \906\ Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \907\ Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
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Classification of section 501(c)(3) organizations

    Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.'' \908\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
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    \908\ Sec. 509(a). Private foundations are either private operating 
foundations or private non-operating foundations. In general, private 
operating foundations operate their own charitable programs in contrast 
to private non-operating foundations, which generally are grant-making 
organizations. Most private foundations are non-operating foundations.
---------------------------------------------------------------------------
    Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\909\ For 
example, the Code imposes excise taxes on acts of ``self-
dealing'' between disqualified persons (generally, an 
enumerated class of foundation insiders) \910\ and a private 
foundation. Acts of self-dealing include, for example, sales or 
exchanges, or leasing, of property; lending of money; or the 
furnishing of goods, services, or facilities between a 
disqualified person and a private foundation.\911\ In addition, 
private nonoperating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\912\ Certain expenditures of private foundations are 
also subject to tax.\913\ In general, taxable expenditures are 
expenditures: (1) for lobbying; (2) to influence the outcome of 
a public election or carry on a voter registration drive 
(unless certain requirements are met); (3) as a grant to an 
individual for travel, study, or similar purposes unless made 
pursuant to procedures approved by the Secretary; (4) as a 
grant to an organization that is not a public charity or exempt 
operating foundation unless the foundation exercises 
expenditure responsibility \914\ with respect to the grant; or 
(5) for any non-charitable purpose. Additional excise taxes may 
also apply in the event a private foundation holds certain 
business interests (``excess business holdings'') \915\ or 
makes an investment that jeopardizes the foundation's exempt 
purposes.\916\
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    \909\ Secs. 4940-4945.
    \910\ See sec. 4946(a).
    \911\ Sec. 4941.
    \912\ Sec. 4942(g)(1)(A). A qualifying distribution also includes 
any amount paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes and 
certain amounts set-aside for exempt purposes. Sec. 4942(g)(1)(B) and 
4942(g)(2).
    \913\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \914\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
    \915\ Sec. 4943.
    \916\ Sec. 4944.
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Supporting organizations

            In general
    The Code provides that certain ``supporting organizations'' 
(in general, organizations that provide support to another 
section 501(c)(3) organization that is not a private 
foundation) are classified as public charities rather than 
private foundations.\917\ To qualify as a supporting 
organization, an organization must meet all three of the 
following tests: (1) it must be organized and at all times 
operated exclusively for the benefit of, to perform the 
functions of, or to carry out the purposes of one or more 
``publicly supported organizations'' \918\ (the 
``organizational and operational tests''); \919\ (2) it must be 
operated, supervised, or controlled by or in connection with 
one or more publicly supported organizations (the 
``relationship test'');\920\ and (3) it must not be controlled 
directly or indirectly by one or more disqualified persons (as 
defined in section 4946) other than foundation managers and 
other than one or more publicly supported organizations (the 
``lack of outside control test'').\921\
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    \917\ Sec. 509(a)(3).
    \918\ In general, supported organizations of a supporting 
organization must be publicly supported charities described in sections 
509(a)(1) or (a)(2).
    \919\ Sec. 509(a)(3)(A).
    \920\ Sec. 509(a)(3)(B).
    \921\ Sec. 509(a)(3)(C).
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    To satisfy the relationship test, a supporting organization 
must hold one of three statutorily described close 
relationships with the supported organization. The organization 
must be: (1) operated, supervised, or controlled by a publicly 
supported organization (commonly referred to as ``Type I'' 
supporting organizations); (2) supervised or controlled in 
connection with a publicly supported organization (``Type II'' 
supporting organizations); or (3) operated in connection with a 
publicly supported organization (``Type III'' supporting 
organizations).\922\
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    \922\ Treas. Reg. sec. 1.509(a)-4(f)(2).
---------------------------------------------------------------------------
            Type I supporting organizations
    In the case of supporting organizations that are operated, 
supervised, or controlled by one or more publicly supported 
organizations (Type I supporting organizations), one or more 
supported organizations must exercise a substantial degree of 
direction over the policies, programs, and activities of the 
supporting organization.\923\ The relationship between the Type 
I supporting organization and the supported organization 
generally is comparable to that of a parent and subsidiary. The 
requisite relationship may be established by the fact that a 
majority of the officers, directors, or trustees of the 
supporting organization are appointed or elected by the 
governing body, members of the governing body, officers acting 
in their official capacity, or the membership of one or more 
publicly supported organizations.\924\
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    \923\ Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
    \924\ Id.
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            Type II supporting organizations
    Type II supporting organizations are supervised or 
controlled in connection with one or more publicly supported 
organizations. Rather than the parent-subsidiary relationship 
characteristic of Type I organizations, the relationship 
between a Type II organization and its supported organizations 
is more analogous to a brother-sister relationship. In order to 
satisfy the Type II relationship requirement, generally there 
must be common supervision or control by the persons 
supervising or controlling both the supporting organization and 
the publicly supported organizations.\925\ An organization 
generally is not considered to be ``supervised or controlled in 
connection with'' a publicly supported organization merely 
because the supporting organization makes payments to the 
publicly supported organization, even if the obligation to make 
payments is enforceable under state law.\926\
---------------------------------------------------------------------------
    \925\ Treas. Reg. sec. 1.509(a)-4(h)(1).
    \926\ Treas. Reg. sec. 1.509(a)-4(h)(2).
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            Type III supporting organizations
    Type III supporting organizations are ``operated in 
connection with'' one or more publicly supported organizations. 
To satisfy the ``operated in connection with'' relationship, 
Treasury regulations require that the supporting organization 
be responsive to, and significantly involved in the operations 
of, the publicly supported organization. This relationship is 
deemed to exist where the supporting organization meets both a 
``responsiveness test'' and an ``integral part test.'' \927\ In 
general, the responsiveness test requires that the Type III 
supporting organization be responsive to the needs or demands 
of the publicly supported organizations. In general, the 
integral part test requires that the Type III supporting 
organization maintain significant involvement in the operations 
of one or more publicly supported organizations, and that such 
publicly supported organizations are in turn dependent upon the 
supporting organization for the type of support which it 
provides.
---------------------------------------------------------------------------
    \927\ Treas. Reg. sec. 1.509(a)-4(i)(1).
---------------------------------------------------------------------------
    There are two alternative methods for satisfying the 
integral part test. The first alternative is to establish that 
(1) the activities engaged in for or on behalf of the publicly 
supported organization are activities to perform the functions 
of, or carry out the purposes of, such organizations; and (2) 
these activities, but for the involvement of the supporting 
organization, normally would be engaged in by the publicly 
supported organizations themselves.\928\ Organizations that 
satisfy this ``but for'' test sometimes are referred to as 
``functionally integrated'' Type III supporting organizations. 
The second method for satisfying the integral part test is to 
establish that: (1) the supporting organization pays 
substantially all of its income to or for the use of one or 
more publicly supported organizations; \929\ (2) the amount of 
support received by one or more of the publicly supported 
organizations is sufficient to insure the attentiveness of the 
organization or organizations to the operations of the 
supporting organization (this is known as the ``attentiveness 
requirement''); \930\ and (3) a significant amount of the total 
support of the supporting organization goes to those publicly 
supported organizations that meet the attentiveness 
requirement.\931\
---------------------------------------------------------------------------
    \928\ Treas. Reg. sec. 1.509(a)-4(i)(3)(ii).
    \929\ For this purpose, the IRS has defined the term 
``substantially all'' of an organization's income to mean 85 percent or 
more. Rev. Rul. 76-208, 1976-1 C.B. 161.
    \930\ Although the regulations do not specify the requisite level 
of support in numerical or percentage terms, the IRS has suggested that 
grants that represent less than 10 percent of the beneficiary's support 
likely would be viewed as insufficient to ensure attentiveness. Gen. 
Couns. Mem. 36379 (August 15, 1975). As an alternative to satisfying 
the attentiveness standard by the foregoing method, a supporting 
organization may demonstrate attentiveness by showing that, in order to 
avoid the interruption of the carrying on of a particular function or 
activity, the beneficiary organization will be sufficiently attentive 
to the operations of the supporting organization. Treas. Reg. sec. 
1.509(a)-4(i)(3)(iii)(b).
    \931\ Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
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Charitable contributions

    Contributions to organizations described in section 
501(c)(3) are deductible, subject to certain limitations, as an 
itemized deduction from Federal income taxes.\932\ Such 
contributions also generally are deductible for estate and gift 
tax purposes.\933\ However, if the taxpayer retains control 
over the assets transferred to charity, the transfer may not 
qualify as a completed gift for purposes of claiming an income, 
estate, or gift tax deduction.
---------------------------------------------------------------------------
    \932\ Sec. 170.
    \933\ Secs. 2055 and 2522.
---------------------------------------------------------------------------
    Public charities enjoy certain advantages over private 
foundations regarding the deductibility of contributions. For 
example, contributions of appreciated capital gain property to 
a private foundation generally are deductible only to the 
extent of the donor's cost basis.\934\ In contrast, 
contributions to public charities generally are deductible in 
an amount equal to the property's fair market value, except for 
gifts of inventory and other ordinary income property, short-
term capital gain property, and tangible personal property the 
use of which is unrelated to the donee organization's exempt 
purpose. In addition, under present law, a taxpayer's 
deductible contributions generally are limited to specified 
percentages of the taxpayer's contribution base, which 
generally is the taxpayer's adjusted gross income for a taxable 
year. The applicable percentage limitations vary depending upon 
the type of property contributed and the classification of the 
donee organization. In general, contributions to non-operating 
private foundations are limited to a smaller percentage of the 
donor's contribution base (up to 30 percent) than contributions 
to public charities (up to 50 percent).\935\
---------------------------------------------------------------------------
    \934\ A special rule in section 170(e)(5) provides that taxpayer 
are allowed a deduction equal to the fair market value of certain 
contributions of appreciated, publicly traded stock contributed to a 
private foundation.
    \935\ Sec. 170(b).
---------------------------------------------------------------------------
    In general, taxpayers who make contributions and claim a 
charitable deduction must satisfy recordkeeping and 
substantiation requirements.\936\ The requirements vary 
depending on the type and value of property contributed. A 
deduction generally may be denied if the donor fails to satisfy 
applicable recordkeeping or substantiation requirements.
---------------------------------------------------------------------------
    \936\ Sec. 170(f)(8).
---------------------------------------------------------------------------

Intermediate sanctions (excess benefit transaction tax)

    The Code imposes excise taxes on excess benefit 
transactions between disqualified persons and public 
charities.\937\ An excess benefit transaction generally is a 
transaction in which an economic benefit is provided by a 
public charity directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
---------------------------------------------------------------------------
    \937\ Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status. The tax also applies to transactions 
between disqualified persons and social welfare organizations (as 
described in section 501(c)(4)).
---------------------------------------------------------------------------
    For purposes of the excess benefit transaction rules, a 
disqualified person is any person in a position to exercise 
substantial influence over the affairs of the public charity at 
any time in the five-year period ending on the date of the 
transaction at issue.\938\ Persons holding certain powers, 
responsibilities, or interests (e.g., officers, directors, or 
trustees) are considered to be in a position to exercise 
substantial influence over the affairs of the public charity.
---------------------------------------------------------------------------
    \938\ Sec. 4958(f)(1). A disqualified person also includes certain 
family members of such a person, and certain entities that satisfy a 
control test with respect to such persons.
---------------------------------------------------------------------------
    An excess benefit transaction tax is imposed on the 
disqualified person and, in certain cases, on the organization 
managers, but is not imposed on the public charity. An initial 
tax of 25 percent of the excess benefit amount is imposed on 
the disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected within 
a specified period. A tax of 10 percent of the excess benefit 
(not to exceed $10,000 with respect to any excess benefit 
transaction) is imposed on an organization manager that 
knowingly participated in the excess benefit transaction, if 
the manager's participation was willful and not due to 
reasonable cause, and if the initial tax was imposed on the 
disqualified person.

Community foundations

    Community foundations generally are broadly supported 
section 501(c)(3) public charities that make grants to other 
charitable organizations located within a community 
foundation's particular geographic area. Donors sometimes make 
contributions to a community foundation through transfers to a 
separate trust or fund, the assets of which are held and 
managed by a bank or investment company.
    Certain community foundations are subject to special rules 
that permit them to treat the separate funds or trusts 
maintained by the community foundation as a single entity for 
tax purposes. This ``single entity'' status allows the 
community foundation to be classified as a public charity. One 
of the requirements that community foundations must meet is 
that funds maintained by the community foundation may not be 
subject by the donor to any material restrictions or 
conditions. The prohibition against material restrictions or 
conditions is designed to prevent a donor from encumbering a 
fund in a manner that prevents the community foundation from 
freely distributing the assets and income from it in 
furtherance of the community foundation's charitable purposes. 
Under Treasury regulations, whether a particular restriction or 
condition placed by the donor on the transfer of assets is 
material must be determined from all of the facts and 
circumstances of the transfer. The regulations set out some of 
the more significant facts and circumstances to be considered 
in making a determination, including: (1) whether the 
transferee public charity is the fee owner of the assets 
received; (2) whether the assets are held and administered by 
the public charity in a manner consistent with its own exempt 
purposes; (3) whether the governing body of the public charity 
has the ultimate authority and control over the assets and the 
income derived from them; and (4) whether the governing body of 
the public charity is independent from the donor. The 
regulations provide several non-adverse factors for determining 
whether a particular restriction or condition placed by the 
donor on the transfer of assets is material. In addition, the 
regulations list numerous factors and subfactors that indicate 
that the community foundation is prevented from freely and 
effectively employing the donated assets and the income 
thereon.

Donor advised funds

    Some charitable organizations (including community 
foundations) establish accounts to which donors may contribute 
and thereafter provide nonbinding advice or recommendations 
with regard to distributions from the fund or the investment of 
assets in the fund. Such accounts are commonly referred to as 
``donor advised funds''. Donors who make contributions to 
charities for maintenance in a donor advised fund generally 
claim a charitable contribution deduction at the time of the 
contribution. Although sponsoring charities frequently permit 
donors (or other persons appointed by donors) to provide 
nonbinding recommendations concerning the distribution or 
investment of assets in a donor advised fund, sponsoring 
charities generally must have legal ownership and control of 
such assets following the contribution. If the sponsoring 
charity does not have such control (or permits a donor to 
exercise control over amounts contributed), the donor's 
contributions may not qualify for a charitable deduction, and, 
in the case of a community foundation, the contribution may be 
treated as being subject to a material restriction or condition 
by the donor.
    In recent years, a number of financial institutions have 
formed charitable corporations for the principal purpose of 
offering donor advised funds, sometimes referred to as 
``commercial'' donor advised funds. In addition, some 
established charities have begun operating donor advised funds 
in addition to their primary activities. The IRS has recognized 
several organizations that sponsor donor advised funds, 
including ``commercial'' donor advised funds, as section 
501(c)(3) public charities. The term ``donor advised fund'' is 
not defined in statute or regulations.
    Under the Katrina Emergency Tax Relief Act of 2005, certain 
of the above-described percentage limitations on contributions 
to public charities are temporarily suspended for purposes of 
certain ``qualified contributions'' to public charities. Under 
such Act, qualified contributions do not include a contribution 
if the contribution is for establishment of a new, or 
maintenance in an existing, segregated fund or account with 
respect to which the donor (or any person appointed or 
designated by such donor) has, or reasonably expects to have, 
advisory privileges with respect to distributions or 
investments by reason of the donor's status as a donor.

Excess business holdings of private foundations

    Private foundations are subject to tax on excess business 
holdings.\939\ In general, a private foundation is permitted to 
hold 20 percent of the voting stock in a corporation, reduced 
by the amount of voting stock held by all disqualified persons 
(as defined in section 4946). If it is established that no 
disqualified person has effective control of the corporation, a 
private foundation and disqualified persons together may own up 
to 35 percent of the voting stock of a corporation. A private 
foundation shall not be treated as having excess business 
holdings in any corporation if it owns (together with certain 
other related private foundations) not more than two percent of 
the voting stock and not more than two percent in value of all 
outstanding shares of all classes of stock in that corporation. 
Similar rules apply with respect to holdings in a partnership 
(``profits interest'' is substituted for ``voting stock'' and 
``capital interest'' for ``nonvoting stock'') and to other 
unincorporated enterprises (by substituting ``beneficial 
interest'' for ``voting stock''). Private foundations are not 
permitted to have holdings in a proprietorship. Foundations 
generally have a five-year period to dispose of excess business 
holdings (acquired other than by purchase) without being 
subject to tax.\940\ This five-year period may be extended an 
additional five years in limited circumstances.\941\ The excess 
business holdings rules do not apply to holdings in a 
functionally related business or to holdings in a trade or 
business at least 95 percent of the gross income of which is 
derived from passive sources.\942\
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    \939\ Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \940\ Sec. 4943(c)(6).
    \941\ Sec. 4943(c)(7).
    \942\ Sec. 4943(d)(3).
---------------------------------------------------------------------------
    The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.

                        Explanation of Provision


Definition of a donor advised fund

            General rule
    In general, the provision defines a ``donor advised fund'' 
as a fund or account that is: (1) separately identified by 
reference to contributions of a donor or donors (2) owned and 
controlled by a sponsoring organization and (3) with respect to 
which a donor (or any person appointed or designated by such 
donor (a ``donor advisor'') has, or reasonably expects to have, 
advisory privileges with respect to the distribution or 
investment of amounts held in the separately identified fund or 
account by reason of the donor's status as a donor. All three 
prongs of the definition must be met in order for a fund or 
account to be treated as a donor advised fund.
    The provision defines a ``sponsoring organization'' as an 
organization that: (1) is described in section 170(c) \943\ 
(other than a governmental entity described in section 
170(c)(1), and without regard to any requirement that the 
organization be organized in the United States); \944\ (2) is 
not a private foundation (as defined in section 509(a)); and 
(3) maintains one or more donor advised funds.
---------------------------------------------------------------------------
    \943\ Section 170(c) describes organizations to which charitable 
contributions that are deductible for income tax purposes can be made.
    \944\ See sec. 170(c)(2)(A).
---------------------------------------------------------------------------
    The first prong of the definition requires that a donor 
advised fund be separately identified by reference to 
contributions of a donor or donors. A distinct fund or account 
of a sponsoring organization does not meet this prong of the 
definition unless the fund or account refers to contributions 
of a donor or donors, such as by naming the fund after a donor, 
or by treating a fund on the books of the sponsoring 
organization as attributable to funds contributed by a specific 
donor or donors. Although a sponsoring organization's general 
fund is a ``fund or account,'' such fund will not, as a general 
matter, be treated as a donor advised fund because the general 
funds of an organization typically are not separately 
identified by reference to contributions of a specific donor or 
donors; rather contributions are pooled anonymously within the 
general fund. Similarly, a fund or account of a sponsoring 
organization that is distinct from the organization's general 
fund and that pools contributions of multiple donors generally 
will not meet the first prong of the definition unless the 
contributions of specific donors are in some manner tracked and 
accounted for within the fund. Accordingly, if a sponsoring 
organization establishes a fund dedicated to the relief of 
poverty within a specific community, or a scholarship fund, and 
the fund attracts contributions from several donors but does 
not separately identify or refer to contributions of a donor or 
donors, the fund is not a donor advised fund even if a donor 
has advisory privileges with respect to the fund. However, a 
fund or account may not avoid treatment as a donor advised fund 
even though there is no formal recognition of such separate 
contributions on the books of the sponsoring organization if 
the fund or account operates as if contributions of a donor or 
donors are separately identified. The Secretary has the 
authority to look to the substance of an arrangement, and not 
merely its form. In addition, a fund or account may be treated 
as identified by reference to contributions of a donor or 
donors if the reference is to persons related to a donor. For 
example, if a husband made contributions to a fund or account 
that in turn is named after the husband's wife, the fund is 
treated as being separately identified by reference to 
contributions of a donor.
    The second prong of the definition provides that the fund 
be owned and controlled by a sponsoring organization. To the 
extent that a donor or person other than the sponsoring 
organization owns or controls amounts deposited to a sponsoring 
organization, a fund or account is not a donor advised fund. 
(In cases where a donor retains control of an amount provided 
to a sponsoring organization, there may not be a completed gift 
for purposes of the charitable contribution deduction.)
    The third prong of the definition provides that with 
respect to a fund or account of a sponsoring organization, a 
donor or donor advisor has or reasonably expects to have 
advisory privileges with respect to the distribution or 
investment of amounts held in the fund or account by reason of 
a donor's status as a donor. Advisory privileges are distinct 
from a legal right or obligation. For example, if a donor 
executes a gift agreement with a sponsoring organization that 
specifies certain enforceable rights of the donor with respect 
to a gift, the donor will not be treated as having ``advisory 
privileges'' due to such enforceable rights for purposes of the 
donor advised fund definition.
    The presence of an advisory privilege may be evident 
through a written document that describes an arrangement 
between the donor or donor adviser and the sponsoring 
organization whereby a donor or donor advisor may provide 
advice to the sponsoring organization about the investment or 
distribution of amounts held by a sponsoring organization, even 
if such privileges are not exercised. The presence of an 
advisory privilege also may be evident through the conduct of a 
donor or donor advisor and the sponsoring organization. For 
example, even in the absence of a writing, if a donor regularly 
provides advice to a sponsoring organization and the sponsoring 
organization regularly considers such advice, the donor has 
advisory privileges under the provision. Even if advisory 
privileges do not exist at the time of a contribution, later 
acts by the donor (through the provision of advice) and by the 
sponsoring organization (through the regular consideration of 
advice) may establish advisory privileges subsequent to the 
time of the contribution. For example, if a past donor of 
$100,000 telephones a sponsoring organization and states that 
he would like the sponsoring organization to distribute $10,000 
to an organization described in section 170(b)(1)(A), although 
the mere act of providing advice does not establish an advisory 
privilege, if the sponsoring organization distributed the 
$10,000 to the organization specified by the donor in 
consideration of the donor's advice, and reinforced the donor 
in some manner that future advice similarly would be 
considered, advisory privileges (or the reasonable expectation 
thereof) might be established. However, the mere provision of 
advice by a donor or donor advisor does not mean the donor or 
donor advisor has advisory privileges. For example, a donor's 
singular belief that he or she has advisory privileges with 
respect to the contribution does not establish an advisory 
privilege--there must be some reciprocity on the part of the 
sponsoring organization.
    A person reasonably expects to have advisory privileges if 
both the donor or donor advisor and the sponsoring organization 
have reason to believe that the donor or donor advisor will 
provide advice and that the sponsoring organization generally 
will consider it. Thus, a person reasonably may expect to have 
advisory privileges even in the absence of the actual provision 
of advice. However, a donor's expectation of advisory 
privileges is not reasonable unless it is reinforced in some 
manner by the conduct of the sponsoring organization. If, at 
the time of the contribution, the sponsoring organization had 
no knowledge that the donor had an expectation of advisory 
privileges, or no intention of considering any advice provided 
by the donor, then the donor does not have a reasonable 
expectation of advisory privileges. Ultimately, the presence or 
absence of advisory privileges (or a reasonable expectation 
thereof) depends upon the facts and circumstances, which in 
turn depend upon the conduct (including any agreement) of both 
the donor or donor advisor and the sponsoring organization with 
respect to the making and consideration of advice.
    A further requirement of the third prong is that the 
reasonable expectation of advisory privileges is by reason of 
the donor's status as a donor. Under this requirement, if a 
donor's reasonable expectation of advisory privileges is due 
solely to the donor's service to the organization, for example, 
by reason of the donor's position as an officer, employee, or 
director of the sponsoring organization, then the third prong 
of the definition is not satisfied. For instance, in general, a 
donor that is a member of the board of directors of the 
sponsoring organization may provide advice in his or her 
capacity as a board member with respect to the distribution or 
investment of amounts in a fund to which the board member 
contributed. However, if by reason of such donor's contribution 
to such fund, the donor secured an appointment on a committee 
of the sponsoring organization that advises how to distribute 
or invest amounts in such fund, the donor may have a reasonable 
expectation of advisory privileges, notwithstanding that the 
donor is an officer, employee, or director of the sponsoring 
organization.
    The third prong of the definition is applicable to a donor 
or any person appointed or designated by such donor (the donor 
advisor). For purposes of this prong, a person appointed or 
designated by a donor advisor is treated as being appointed or 
designated by a donor. In addition, for purposes of any 
exception to the definition of a donor advised fund provided 
under the provision, to the extent a donor recommends to a 
sponsoring organization the selection of members of a committee 
that will advise as to distributions or investments of amounts 
in a fund or account of such sponsoring organization, such 
members are not treated as appointed or designated by the donor 
if the recommendation of such members by such donor is based on 
objective criteria related to the expertise of the member. For 
example, if a donor recommends that a committee of a sponsoring 
organization that will provide advice regarding scholarship 
grants for the advancement of science at local secondary 
schools should consist of persons who are the heads of the 
science departments of such schools, then the donor generally 
would not be considered to have appointed or designated such 
persons, i.e., they would not be treated as donor advisors.
            Exceptions
    A donor advised fund does not include a fund or account 
that makes distributions only to a single identified 
organization or governmental entity. For example, an endowment 
fund owned and controlled by a sponsoring organization that is 
held exclusively to for the benefit of such sponsoring 
organization is not a donor advised fund even if the fund is 
named after its principal donor and such donor has advisory 
privileges with respect to the distribution of amounts held in 
the fund to such sponsoring organization. Accordingly, a donor 
that contributes to a university for purposes of establishing a 
fund named after the donor that exclusively supports the 
activities of the university is not a donor advised fund even 
if the donor has advisory privileges regarding the distribution 
or investment of amounts in the fund.
    A donor advised fund also does not include a fund or 
account with respect to which a donor or donor advisor provides 
advice as to which individuals receive grants for travel, 
study, or other similar purposes, provided that (1) the donor's 
or donor advisor's advisory privileges are performed 
exclusively by such donor or donor advisor in such person's 
capacity as a member of a committee all of the members of which 
are appointed by the sponsoring organization, (2) no 
combination of a donor or donor advisor or persons related to 
such persons, control, directly or indirectly, such committee, 
and (3) all grants from such fund or account are awarded on an 
objective and nondiscriminatory basis pursuant to a procedure 
approved in advance by the board of directors of the sponsoring 
organization, and such procedure is designed to ensure that all 
such grants meet the requirements described in paragraphs (1), 
(2), or (3) of section 4945(g) (concerning grants to 
individuals by private foundations).
    In addition, the Secretary may exempt a fund or account 
from treatment as a donor advised fund if such fund or account 
is advised by a committee not directly or indirectly controlled 
by a donor, donor advisor, or persons related to a donor or 
donor advisor. For such purposes, it is intended that indirect 
control includes the ability to exercise effective control. For 
example, if a donor, a donor advisor, and an attorney hired by 
the donor to provide advice regarding the donor's contributions 
constitute three of the five members of such a committee, the 
committee would be treated as being controlled indirectly by 
the donor for purposes of such an exception. Board membership 
alone does not establish direct or indirect control. In 
general, under this authority, the Secretary may establish 
rules regarding committee advised funds generally that, if 
followed, would result in the fund not being treated as a donor 
advised fund. The Secretary also may establish rules excepting 
certain types of committee-advised funds, such as a fund 
established exclusively for disaster relief, from the donor 
advised fund definition.
    The provision also provides that the Secretary may exempt a 
fund or account from treatment as a donor advised fund if such 
fund or account benefits a single identified charitable 
purpose.

Deductibility of contributions to a sponsoring organization for 
        maintenance in a donor advised fund

            Contributions to certain sponsoring organizations for 
                    maintenance in a donor advised fund not eligible 
                    for a charitable deduction
    Under the provision, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not 
eligible for a charitable deduction for income tax purposes if 
the sponsoring organization is a veterans' organization 
described in section 170(c)(3), a fraternal society described 
in section 170(c)(4), or a cemetery company described in 
section 170(c)(5); for gift tax purposes if the sponsoring 
organization is a fraternal society described in section 
2522(a)(3) or a veterans' organization described in section 
2522(a)(4); or for estate tax purposes if the sponsoring 
organization is a fraternal society described in section 
2055(a)(3) or a veterans' organization described in section 
2055(a)(4). In addition, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not 
eligible for a charitable deduction for income, gift, or estate 
tax purposes if the sponsoring organization is a Type III 
supporting organization (other than a functionally integrated 
Type III supporting organization). A functionally integrated 
Type III supporting organization is a Type III supporting 
organization that is not required under regulations established 
by the Secretary to make payments to supported organizations 
due to the activities of the organization related to performing 
the functions of, or carrying out the purposes of, such 
supported organizations.\945\
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    \945\ The current such regulation is Treasury regulation section 
1.509(a)-4(i)(3)(ii).
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            Additional substantiation requirements
    In addition to satisfying present-law substantiation 
requirements under section 170(f), a donor must obtain, with 
respect to each charitable contribution to a sponsoring 
organization to be maintained in a donor advised fund, a 
contemporaneous written acknowledgment from the sponsoring 
organization providing that the sponsoring organization has 
exclusive legal control over the assets contributed.

Excess business holdings

    The excess business holdings rules of section 4943 are 
applied to donor advised funds. In applying such rules, the 
term disqualified person means, with respect to a donor advised 
fund, a donor, donor advisor, a member of the family of a donor 
or donor advisor, or a 35 percent controlled entity of any such 
person. Transition rules apply to the present holdings of a 
donor advised fund similar to those of section 4943(c)(4)-(6).

Automatic excess benefit transactions, disqualified persons, taxable 
        distributions, and more than incidental benefit

            Automatic excess benefit transactions
    Under the provision, any grant, loan, compensation, or 
other similar payment from a donor advised fund to a person 
that with respect to such fund is a donor, donor advisor, or a 
person related \946\ to a donor or donor advisor automatically 
is treated as an excess benefit transaction under section 4958, 
with the entire amount \947\ paid to any such person treated as 
the amount of the excess benefit. Other similar payments 
include payments in the nature of a grant, loan, or payment of 
compensation, such as an expense reimbursement. Other similar 
payments do not include, for example, a payment pursuant to 
bona fide sale or lease of property, which instead are subject 
to the general rules of section 4958 under the special 
disqualified person rule of the provision described below. Also 
as described below, payment by a sponsoring organization of, 
for example, compensation to a person who both is a donor with 
respect to a donor advised fund of the sponsoring organization 
and a service provider with respect to the sponsoring 
organization generally, will not be subject to the automatic 
excess benefit transaction rule of the provision unless the 
payment (of a grant, loan, compensation, or other similar 
payment) properly is viewed as a payment from the donor advised 
fund and not from the sponsoring organization.
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    \946\ For purposes of the provision, a person is treated as related 
to another person if (1) such person bears a relationship to such other 
person similar to the relationships described in sections 4958(f)(1)(B) 
and 4958(f)(1)(C).
    \947\ The requirement of the provision that the entire amount of 
the payment be treated as the amount of the excess benefit differs from 
the generally applicable rule of section 4958, which provides that the 
excess benefit is the amount by which the value of the economic benefit 
provided exceeds the value of the consideration received.
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    Any amount repaid as a result of correcting an excess 
benefit transaction shall not be held in any donor advised 
fund.
            Disqualified persons
    In general, the provision provides that donors and donor 
advisors with respect to a donor advised fund (as well as 
persons related to a donor or donor advisor) are treated as 
disqualified persons under section 4958 with respect to 
transactions with such donor advised fund (though not 
necessarily with respect to transactions with the sponsoring 
organization more generally). For example, if a donor to a 
donor advised fund purchased securities from the fund, the 
purchase is subject to the rules of section 4958 because, under 
the provision, the donor is a disqualified person with respect 
to the fund. Thus, if as a result of the purchase, the donor 
receives an excess benefit as defined under generally 
applicable section 4958 rules, then the donor is subject to tax 
under such rules. If, as generally would be the case, the 
purchase was of securities that were contributed by the donor, 
a factor that may indicate the presence of an excess benefit is 
if the amount paid by the donor to acquire the securities is 
less than the amount the donor claimed the securities were 
worth for purposes of any charitable contribution deduction of 
the donor. In addition, if a donor advised fund distributes 
securities to the sponsoring organization of the fund prior to 
purchase by the donor, consideration should be given to whether 
the distribution to the sponsoring organization prior to the 
purchase was intended to circumvent the disqualified person 
rule of the provision. If so, such a distribution may be 
disregarded with the result that the purchase is treated as 
being made from the donor advised fund and not from the 
sponsoring organization.
    As a factual matter, a person who is a donor to a donor 
advised fund and thus a disqualified person with respect to the 
fund also may be a service provider with respect to the 
sponsoring organization. In general, under the provision, as 
under present law, the sponsoring organization's transactions 
with the service provider are not subject to the rules of 
section 4958 unless the service provider is a disqualified 
person with respect to the sponsoring organization (e.g., if 
the service provider serves on the board of directors of the 
sponsoring organization), or unless the transaction is not 
properly viewed as a transaction with the sponsoring 
organization but in substance is a transaction with the service 
provider's donor advised fund. If the transaction properly is 
viewed as a transaction with the donor advised fund of a 
sponsoring organization, then the transaction is subject to the 
rules of section 4958, and, as described above, if the 
transaction involves payment of a grant, loan, compensation, or 
other similar payment, then the transaction is subject to the 
special automatic excess benefit transaction rule of the 
provision. For example, if a sponsoring organization pays an 
amount as part of a service contract to a service provider (a 
bank, for example) who also is a donor to a donor advised fund 
of the sponsoring organization, and such amounts reasonably are 
charged uniformly in whole or in part as routine fees to all of 
the sponsoring organization's donor advised funds, the 
transaction generally is considered to be between the 
sponsoring organization and the service provider in such 
service provider's capacity as a service provider. The 
transaction is not considered to be a transaction between a 
donor advised fund and the service provider even though an 
amount paid under the contract was charged to a donor advised 
fund of the service provider.
    The provision provides that an investment advisor (as well 
as persons related to the investment advisor) is treated as a 
disqualified person under section 4958 with respect to the 
sponsoring organization. Under the provision, the term 
``investment advisor'' means, with respect to any sponsoring 
organization, any person (other than an employee of the 
sponsoring organization) compensated by the sponsoring 
organization for managing the investment of, or providing 
investment advice with respect to, assets maintained in donor 
advised funds (including pools of assets all or part of which 
are attributed to donor advised funds) owned by the sponsoring 
organization.
            Taxable distributions
    Under the provision, certain distributions from a donor 
advised fund are subject to tax. A ``taxable distribution'' is 
any distribution from a donor advised fund to (1) any natural 
person; (2) to any other person for any purpose other than one 
specified in section 170(c)(2)(B) (generally, a charitable 
purpose) or, if for a charitable purpose, the sponsoring 
organization does not exercise expenditure responsibility with 
respect to the distribution in accordance with section 4945(h). 
The expenditure responsibility rules generally require that an 
organization exert all reasonable efforts and establish 
adequate procedures to see that the distribution is spent 
solely for the purposes for which it was made, to obtain full 
and complete reports from the distributee on how the funds are 
spent, and to make full and detailed reports with respect to 
such expenditures to the Secretary. A taxable distribution does 
not in any case include a distribution to (1) an organization 
described in section 170(b)(1)(A) \948\ (other than to a 
disqualified supporting organization); \949\ (2) the sponsoring 
organization of such donor advised fund; or (3) to another 
donor advised fund.\950\
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    \948\ For purposes of the requirement that a distribution be ``to'' 
an organization described in section 170(b)(1)(A), in general, it is 
intended that rules similar to the rules of Treasury regulation section 
53.4945-5(a)(5) apply. Under such regulations, for purposes of 
determining whether a grant by a private foundation is ``to'' an 
organization described in section 509(a)(1), (2), or (3) and so not a 
taxable expenditure under section 4945, a foreign organization that 
otherwise is not a section 509(a)(1), (2), or (3) organization is 
considered as such if the private foundation makes a good faith 
determination that the grantee is such an organization. Similarly, 
under the provision, if a sponsoring organization makes a good faith 
determination (under standards similar to those currently applicable 
for private foundations) that a distributee organization is an 
organization described in section 170(b)(1)(A) (other than a 
disqualified supporting organization), then a distribution to such 
organization is not considered a taxable distribution.
    \949\ Under the provision, the term disqualified supporting 
organization means, with respect to any distribution from a donor 
advised fund: (1) a Type III supporting organization, other than a 
functionally integrated Type III supporting organization; and (2) any 
other supporting organization if either (a) the donor or donor advisor 
of the distributing donor advised fund directly or indirectly controls 
a supported organization of the supporting organization, or (b) the 
Secretary determines by regulations that a distribution to such 
supporting organization otherwise is inappropriate.
    \950\ Under the provision, sponsoring organizations may make grants 
to natural persons from amounts not held in donor advised funds and may 
establish scholarship funds that are not donor advised funds. A donor 
may choose to make a contribution directly to such a scholarship fund 
(or advise that a donor advised fund make a distribution to such a 
scholarship fund).
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    In the event of a taxable distribution, an excise tax equal 
to 20 percent of the amount of the distribution is imposed 
against the sponsoring organization. In addition, an excise tax 
equal to five percent of the amount of the distribution is 
imposed against any manager of the sponsoring organization 
(defined in a manner similar to the term ``foundation manager'' 
under section 4945) who knowingly approved the distribution, 
not to exceed $10,000 with respect to any one taxable 
distribution. The taxes on taxable distributions are subject to 
abatement under generally applicable present law rules.
            More than incidental benefit
    Under the provision, if a donor, a donor advisor, or a 
person related to a donor or donor advisor of a donor advised 
fund provides advice as to a distribution that results in any 
such person receiving, directly or indirectly, a more than 
incidental benefit, an excise tax equal to 125 percent of the 
amount of such benefit is imposed against the person who 
advised as to the distribution, and against the recipient of 
the benefit. Persons subject to the tax are jointly and 
severally liable for the tax. In addition, if a manager of the 
sponsoring organization (defined in a manner similar to the 
term ``foundation manager'' under section 4945) agreed to the 
making of the distribution, knowing that the distribution would 
confer a more than incidental benefit on a donor, a donor 
advisor, or a person related to a donor or donor advisor, the 
manager is subject to an excise tax equal to 10 percent of the 
amount of such benefit, not to exceed $10,000. The taxes on 
more than incidental benefit are subject to abatement under 
generally applicable present law rules.
    In general, under the provision, there is a more than 
incidental benefit if, as a result of a distribution from a 
donor advised fund, a donor, donor advisor, or related person 
with respect to such fund receives a benefit that would have 
reduced (or eliminated) a charitable contribution deduction if 
the benefit was received as part of the contribution to the 
sponsoring organization. If, for example, a donor advises a 
that a distribution from the donor's donor advised fund be made 
to the Girl Scouts of America, and the donor's daughter is a 
member of a local unit of the Girl Scouts of America, the 
indirect benefit the donor receives as a result of such 
contribution is considered incidental under the provision, as 
it generally would not have reduced or eliminated the donor's 
deduction if it had been received as part of a contribution by 
donor to the sponsoring organization.\951\
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    \951\ See, e.g., Rev. Rul. 80-77, 1980-1 C.B. 56; Rev. Proc. 90-12, 
1990-1 C.B. 471.
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Reporting and disclosure

    The provision requires each sponsoring organization to 
disclose on its information return: (1) the total number of 
donor advised funds it owns; (2) the aggregate value of assets 
held in those funds at the end of the organization's taxable 
year; and (3) the aggregate contributions to and grants made 
from those funds during the year.
    In addition, when seeking recognition of its tax-exempt 
status, a sponsoring organization must disclose whether it 
intends to maintain donor advised funds. It is intended that 
the organization must provide information regarding its planned 
operation of such funds, including, for example, a description 
of procedures it intends to use to: (1) communicate to donors 
and donor advisors that assets held in donor advised funds are 
the property of the sponsoring organization; and (2) ensure 
that distributions from donor advised funds do not result in 
more than incidental benefit to any person.

                             Effective Date

    The provision generally is effective for taxable years 
beginning after the date of enactment (August 17, 2006). The 
provision relating to excess benefit transactions is effective 
for transactions occurring after the date of enactment. 
Information return requirements are effective for taxable years 
ending after the date of enactment. The requirements concerning 
disclosures on an organization's application for tax exemption 
are effective for organizations applying for recognition of 
exempt status after the date of enactment. Requirements 
relating to charitable contributions to donor advised funds are 
effective for contributions made after 180 days from the date 
of enactment.

18. Improved accountability of supporting organizations (secs. 1241-
        1245 of the Act and secs. 509, 4942, 4943, 4945, 4958, and 6033 
        of the Code)

                              Present Law


Requirements for section 501(c)(3) tax-exempt status

    Charitable organizations, i.e., organizations described in 
section 501(c)(3), generally are exempt from Federal income tax 
and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\952\ In order to qualify as operating primarily 
for a purpose described in section 501(c)(3), an organization 
must satisfy the following operational requirements: (1) the 
net earnings of the organization may not inure to the benefit 
of any person in a position to influence the activities of the 
organization; (2) the organization must operate to provide a 
public benefit, not a private benefit; \953\ (3) the 
organization may not be operated primarily to conduct an 
unrelated trade or business; \954\ (4) the organization may not 
engage in substantial legislative lobbying; and (5) the 
organization may not participate or intervene in any political 
campaign.
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    \952\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies such 
purposes as religious, charitable, scientific, testing for public 
safety, literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals. In general, an organization is organized and 
operated for charitable purposes if it provides relief for the poor and 
distressed or the underprivileged. Treas. Reg. sec. 1.501(c)(3)-
1(d)(2).
    \953\ Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \954\ Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
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    Section 501(c)(3) organizations (with certain exceptions) 
are required to seek formal recognition of tax-exempt status by 
filing an application with the IRS (Form 1023). In response to 
the application, the IRS issues a determination letter or 
ruling either recognizing the applicant as tax-exempt or not.
    In general, organizations exempt from Federal income tax 
under section 501(a) are required to file an annual information 
return with the IRS.\955\ Under present law, the information 
return requirement does not apply to several categories of 
exempt organizations. Organizations exempt from the filing 
requirement include organizations (other than private 
foundations), the gross receipts of which in each taxable year 
normally are not more than $25,000.\956\
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    \955\ Sec. 6033(a)(1).
    \956\ Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. 
Reg. sec. 1.6033-2(g)(1). Section 6033(a)(2)(A)(ii) provides a $5,000 
annual gross receipts exception from the annual reporting requirements 
for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 
23, the IRS exercised its discretionary authority under section 6033 to 
increase the gross receipts exception to $25,000, and enlarge the 
category of exempt organizations that are not required to file Form 
990.
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Classification of section 501(c)(3) organizations

            In general
    Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.'' \957\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
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    \957\ Sec. 509(a). Private foundations are either private operating 
foundations or private non-operating foundations. In general, private 
operating foundations operate their own charitable programs in contrast 
to private non-operating foundations, which generally are grant-making 
organizations. Most private foundations are non-operating foundations.
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    Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\958\ For 
example, the Code imposes excise taxes on acts of ``self-
dealing'' between disqualified persons (generally, an 
enumerated class of foundation insiders) \959\ and a private 
foundation. Acts of self-dealing include, for example, sales or 
exchanges, or leasing, of property; lending of money; or the 
furnishing of goods, services, or facilities between a 
disqualified person and a private foundation.\960\ In addition, 
private nonoperating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\961\ Certain expenditures of private foundations are 
also subject to tax.\962\ In general, taxable expenditures are 
expenditures: (1) for lobbying; (2) to influence the outcome of 
a public election or carry on a voter registration drive 
(unless certain requirements are met); (3) as a grant to an 
individual for travel, study, or similar purposes unless made 
pursuant to procedures approved by the Secretary; (4) as a 
grant to an organization that is not a public charity or exempt 
operating foundation unless the foundation exercises 
expenditure responsibility \963\ with respect to the grant; or 
(5) for any non-charitable purpose. Additional excise taxes may 
apply in the event a private foundation holds certain business 
interests (``excess business holdings'') \964\ or makes an 
investment that jeopardizes the foundation's exempt 
purposes.\965\
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    \958\ Secs. 4940-4945.
    \959\ See sec. 4946(a).
    \960\ Sec. 4941.
    \961\ Sec. 4942(g)(1)(A). A qualifying distribution also includes 
any amount paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes and 
certain amounts set-aside for exempt purposes. Sec. 4942(g)(1)(B) and 
4942(g)(2).
    \962\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \963\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
    \964\ Sec. 4943.
    \965\ Sec. 4944.
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    Public charities also enjoy certain advantages over private 
foundations regarding the deductibility of contributions. For 
example, contributions of appreciated capital gain property to 
a private foundation generally are deductible only to the 
extent of the donor's cost basis.\966\ In contrast, 
contributions to public charities generally are deductible in 
an amount equal to the property's fair market value, except for 
gifts of inventory and other ordinary income property, short-
term capital gain property, and tangible personal property the 
use of which is unrelated to the donee organization's exempt 
purpose. In addition, under present law, a taxpayer's 
deductible contributions generally are limited to specified 
percentages of the taxpayer's contribution base, which 
generally is the taxpayer's adjusted gross income for a taxable 
year. The applicable percentage limitations vary depending upon 
the type of property contributed and the classification of the 
donee organization. In general, contributions to non-operating 
private foundations are limited to a smaller percentage of the 
donor's contribution base (up to 30 percent) than contributions 
to public charities (up to 50 percent).\967\
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    \966\ A special rule in section 170(e)(5) provides that taxpayer 
are allowed a deduction equal to the fair market value of certain 
contributions of appreciated, publicly traded stock contributed to a 
private foundation.
    \967\ Sec. 170(b).
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            Supporting organizations (section 509(a)(3))
    The Code provides that certain ``supporting organizations'' 
(in general, organizations that provide support to another 
section 501(c)(3) organization that is not a private 
foundation) are classified as public charities rather than 
private foundations.\968\ To qualify as a supporting 
organization, an organization must meet all three of the 
following tests: (1) it must be organized and at all times 
operated exclusively for the benefit of, to perform the 
functions of, or to carry out the purposes of one or more 
``publicly supported organizations'' \969\ (the 
``organizational and operational tests''); \970\ (2) it must be 
operated, supervised, or controlled by or in connection with 
one or more publicly supported organizations (the 
``relationship test''); \971\ and (3) it must not be controlled 
directly or indirectly by one or more disqualified persons (as 
defined in section 4946) other than foundation managers and 
other than one or more publicly supported organizations (the 
``lack of outside control test'').\972\
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    \968\ Sec. 509(a)(3).
    \969\ In general, supported organizations of a supporting 
organization must be publicly supported charities described in sections 
509(a)(1) or (a)(2).
    \970\ Sec. 509(a)(3)(A).
    \971\ Sec. 509(a)(3)(B).
    \972\ Sec. 509(a)(3)(C).
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    To satisfy the relationship test, a supporting organization 
must hold one of three statutorily described close 
relationships with the supported organization. The organization 
must be: (1) operated, supervised, or controlled by a publicly 
supported organization (commonly referred to as ``Type I'' 
supporting organizations); (2) supervised or controlled in 
connection with a publicly supported organization (``Type II'' 
supporting organizations); or (3) operated in connection with a 
publicly supported organization (``Type III'' supporting 
organizations).\973\
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    \973\ Treas. Reg. sec. 1.509(a)-4(f)(2).
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            Type I supporting organizations
    In the case of supporting organizations that are operated, 
supervised, or controlled by one or more publicly supported 
organizations (Type I supporting organizations), one or more 
supported organizations must exercise a substantial degree of 
direction over the policies, programs, and activities of the 
supporting organization.\974\ The relationship between the Type 
I supporting organization and the supported organization 
generally is comparable to that of a parent and subsidiary. The 
requisite relationship may be established by the fact that a 
majority of the officers, directors, or trustees of the 
supporting organization are appointed or elected by the 
governing body, members of the governing body, officers acting 
in their official capacity, or the membership of one or more 
publicly supported organizations.\975\
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    \974\ Treas. Reg. sec. 1.509(a)-4(g)(1)(i)
    \975\ Id.
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            Type II supporting organizations
    Type II supporting organizations are supervised or 
controlled in connection with one or more publicly supported 
organizations. Rather than the parent-subsidiary relationship 
characteristic of Type I organizations, the relationship 
between a Type II organization and its supported organizations 
is more analogous to a brother-sister relationship. In order to 
satisfy the Type II relationship requirement, generally there 
must be common supervision or control by the persons 
supervising or controlling both the supporting organization and 
the publicly supported organizations.\976\ An organization 
generally is not considered to be ``supervised or controlled in 
connection with'' a publicly supported organization merely 
because the supporting organization makes payments to the 
publicly supported organization, even if the obligation to make 
payments is enforceable under state law.\977\
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    \976\ Treas. Reg. sec. 1.509(a)-4(h)(1).
    \977\ Treas. Reg. sec. 1.509(a)-4(h)(2).
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            Type III supporting organizations
    Type III supporting organizations are ``operated in 
connection with'' one or more publicly supported organizations. 
To satisfy the ``operated in connection with'' relationship, 
Treasury regulations require that the supporting organization 
be responsive to, and significantly involved in the operations 
of, the publicly supported organization. This relationship is 
deemed to exist where the supporting organization meets both a 
``responsiveness test'' and an ``integral part test.'' \978\
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    \978\ Treas. Reg. sec. 1.509(a)-4(i)(1).
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    In general, the responsiveness test requires that the Type 
III supporting organization be responsive to the needs or 
demands of the publicly supported organizations. The 
responsiveness test may be satisfied in one of two ways.\979\ 
First, the supporting organization may demonstrate that: (1)(a) 
one or more of its officers, directors, or trustees are elected 
or appointed by the officers, directors, trustees, or 
membership of the supported organization; (b) one or more 
members of the governing bodies of the publicly supported 
organizations are also officers, directors, or trustees of the 
supporting organization; or (c) the officers, directors, or 
trustees of the supporting organization maintain a close 
continuous working relationship with the officers, directors, 
or trustees of the publicly supported organizations; and (2) by 
reason of such arrangement, the officers, directors, or 
trustees of the supported organization have a significant voice 
in the investment policies of the supporting organization, the 
timing and manner of making grants, the selection of grant 
recipients by the supporting organization, and otherwise 
directing the use of the income or assets of the supporting 
organization.\980\ Alternatively, the responsiveness test may 
be satisfied if the supporting organization is a charitable 
trust under state law, each specified supported organization is 
a named beneficiary under the trust's governing instrument, and 
the beneficiary organization has the power to enforce the trust 
and compel an accounting under state law.\981\
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    \979\ For an organization that was supporting or benefiting one or 
more publicly supported organizations before November 20, 1970, 
additional facts and circumstances, such as an historic and continuing 
relationship between organizations, also may be taken into 
consideration to establish compliance with either of the responsiveness 
tests. Treas. Reg. sec. 1.509(a)-4(i)(1)(ii).
    \980\ Treas. Reg. sec. 1.509(a)-4(i)(2)(ii).
    \981\ Treas. Reg. sec. 1.509(a)-4(i)(2)(iii).
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    In general, the integral part test requires that the Type 
III supporting organization maintain significant involvement in 
the operations of one or more publicly supported organizations, 
and that such publicly supported organizations are in turn 
dependent upon the supporting organization for the type of 
support which it provides. There are two alternative methods 
for satisfying the integral part test. The first alternative is 
to establish that (1) the activities engaged in for or on 
behalf of the publicly supported organization are activities to 
perform the functions of, or carry out the purposes of, such 
organizations; and (2) these activities, but for the 
involvement of the supporting organization, normally would be 
engaged in by the publicly supported organizations 
themselves.\982\ Organizations that satisfy this ``but for'' 
test sometimes are referred to as ``functionally integrated'' 
Type III supporting organizations. The second method for 
satisfying the integral part test is to establish that: (1) the 
supporting organization pays substantially all of its income to 
or for the use of one or more publicly supported organizations; 
\983\ (2) the amount of support received by one or more of the 
publicly supported organizations is sufficient to insure the 
attentiveness of the organization or organizations to the 
operations of the supporting organization (this is known as the 
``attentiveness requirement''); \984\ and (3) a significant 
amount of the total support of the supporting organization goes 
to those publicly supported organizations that meet the 
``attentiveness requirement.'' \985\
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    \982\ Treas. Reg. sec. 1.509(a)-4(i)(3)(ii).
    \983\ For this purpose, the IRS has defined the term 
``substantially all'' of an organization's income to mean 85 percent or 
more. Rev. Rul. 76-208, 1976-1 C.B. 161.
    \984\ Although the regulations do not specify the requisite level 
of support in numerical or percentage terms, the IRS has suggested that 
grants that represent less than 10 percent of the beneficiary's support 
likely would be viewed as insufficient to ensure attentiveness. Gen. 
Couns. Mem. 36379 (August 15, 1975). As an alternative to satisfying 
the attentiveness standard by the foregoing method, a supporting 
organization may demonstrate attentiveness by showing that, in order to 
avoid the interruption of the carrying on of a particular function or 
activity, the beneficiary organization will be sufficiently attentive 
to the operations of the supporting organization. Treas. Reg. sec. 
1.509(a)-4(i)(3)(iii)(b).
    \985\ Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
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Intermediate sanctions (excess benefit transaction tax)

    The Code imposes excise taxes on excess benefit 
transactions between disqualified persons and public 
charities.\986\ An excess benefit transaction generally is a 
transaction in which an economic benefit is provided by a 
public charity directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
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    \986\ Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status. The tax also applies to transactions 
between disqualified persons and social welfare organizations (as 
described in section 501(c)(4)).
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    For purposes of the excess benefit transaction rules, a 
disqualified person is any person in a position to exercise 
substantial influence over the affairs of the public charity at 
any time in the five-year period ending on the date of the 
transaction at issue.\987\ Persons holding certain powers, 
responsibilities, or interests (e.g., officers, directors, or 
trustees) are considered to be in a position to exercise 
substantial influence over the affairs of the public charity.
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    \987\ Sec. 4958(f)(1). A disqualified person also includes certain 
family members of such a person, and certain entities that satisfy a 
control test with respect to such persons.
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    An excess benefit transaction tax is imposed on the 
disqualified person and, in certain cases, on the organization 
managers, but is not imposed on the public charity. An initial 
tax of 25 percent of the excess benefit amount is imposed on 
the disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected within 
a specified period. A tax of 10 percent of the excess benefit 
(not to exceed $10,000 with respect to any excess benefit 
transaction) is imposed on an organization manager that 
knowingly participated in the excess benefit transaction, if 
the manager's participation was willful and not due to 
reasonable cause, and if the initial tax was imposed on the 
disqualified person.

Excess business holdings of private foundations

    Private foundations are subject to tax on excess business 
holdings.\988\ In general, a private foundation is permitted to 
hold 20 percent of the voting stock in a corporation, reduced 
by the amount of voting stock held by all disqualified persons 
(as defined in section 4946). If it is established that no 
disqualified person has effective control of the corporation, a 
private foundation and disqualified persons together may own up 
to 35 percent of the voting stock of a corporation. A private 
foundation shall not be treated as having excess business 
holdings in any corporation if it owns (together with certain 
other related private foundations) not more than two percent of 
the voting stock and not more than two percent in value of all 
outstanding shares of all classes of stock in that corporation. 
Similar rules apply with respect to holdings in a partnership 
(``profits interest'' is substituted for ``voting stock'' and 
``capital interest'' for ``nonvoting stock'') and to other 
unincorporated enterprises (by substituting ``beneficial 
interest'' for ``voting stock''). Private foundations are not 
permitted to have holdings in a proprietorship. Foundations 
generally have a five-year period to dispose of excess business 
holdings (acquired other than by purchase) without being 
subject to tax.\989\ This five-year period may be extended an 
additional five years in limited circumstances.\990\ The excess 
business holdings rules do not apply to holdings in a 
functionally related business or to holdings in a trade or 
business at least 95 percent of the gross income of which is 
derived from passive sources.\991\
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    \988\ Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \989\ Sec. 4943(c)(6).
    \990\ Sec. 4943(c)(7).
    \991\ Sec. 4943(d)(3).
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    The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.

                        Explanation of Provision


Provisions relating to all supporting organizations (Type I, Type II, 
        and Type III)

            Automatic excess benefit transactions
    Under the provision, if a supporting organization (Type I, 
Type II, or Type III) makes a grant, loan, payment of 
compensation, or other similar payment to a substantial 
contributor (or person related to the substantial contributor) 
of the supporting organization, for purposes of the excess 
benefit transaction rules (sec. 4958), the substantial 
contributor is treated as a disqualified person and the payment 
is treated automatically as an excess benefit transaction with 
the entire amount of the payment treated as the excess 
benefit.\992\ Accordingly, the substantial contributor is 
subject to an initial tax of 25 percent of the amount of the 
payment under section 4958(a)(1) and an organization manager 
that participated in the making of the payment, knowing that 
the payment was a grant, loan, payment of compensation, or 
other similar payment to a substantial contributor, is subject 
to a tax of 10 percent of the amount of the payment under 
section 4958(a)(2). The second tier taxes and other rules of 
section 4958 also apply to such payments. Other similar 
payments include payments in the nature of a grant, loan, or 
payment of compensation, such as an expense reimbursement. 
Other similar payments do not include, for example, a payment 
made pursuant to a bona fide sale or lease of property with a 
substantial contributor. Such payments are subject to the 
general rules of section 4958 if the substantial contributor 
meets the definition of a disqualified person under section 
4958(f), but are not subject to the automatic excess benefit 
transaction rule of the provision. The provision applies to 
payments by a supporting organization to a substantial 
contributor but not to payments by a substantial contributor to 
a supporting organization.
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    \992\ The requirement of the provision that the entire amount of 
the payment be treated as the amount of the excess benefit differs from 
the generally applicable rule of section 4958, which provides that the 
excess benefit is the amount by which the value of the economic benefit 
provided exceeds the value of the consideration received.
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    Under the provision, a substantial contributor means any 
person who contributed or bequeathed an aggregate amount of 
more than $5,000 to the organization, if such amount is more 
than two percent of the total contributions and bequests 
received by the organization before the close of the taxable 
year of the organization in which the contribution or bequest 
is received by the organization from such person. In the case 
of a trust, a substantial contributor also includes the creator 
of the trust. A substantial contributor does not include a 
public charity (other than a supporting organization). Under 
the provision, mechanical rules similar to the rules that apply 
in determining whether a person is a substantial contributor to 
a private foundation (secs. 509(d)(2)(B) and (C)) apply.
    Under the provision, a person is a related person 
(``related person'') if a person is a member of the family 
(determined under section 4958(f)(4)) of a substantial 
contributor, or a 35 percent controlled entity, defined as a 
corporation, partnership, trust, or estate in which a 
substantial contributor or family member thereof owns more than 
35 percent of the total combined voting power, profits 
interest, or beneficial interest, as the case may be.
    In addition, under the provision, loans by any supporting 
organization (Type I, Type II, or Type III) to a disqualified 
person (as defined in section 4958) of the supporting 
organization are treated as an excess benefit transaction under 
section 4958 and the entire amount of the loan is treated as an 
excess benefit. For this purpose, a disqualified person does 
not include a public charity (other than a supporting 
organization).
            Disclosure requirements
    Under the provision, all supporting organizations are 
required to file an annual information return (Form 990 series) 
with the Secretary, regardless of the organization's gross 
receipts. A supporting organization must indicate on such 
annual information return whether it is a Type I, Type II, or 
Type III supporting organization and must identify its 
supported organizations.
    Under the provision, supporting organizations must 
demonstrate annually that the organization is not controlled 
directly or indirectly by one or more disqualified persons 
(other than foundation managers and other than one or more 
publicly supported organizations) through a certification on 
the annual information return. It is intended that supporting 
organizations be able to certify that the majority of the 
organization's governing body is comprised of individuals who 
were selected based on their special knowledge or expertise in 
the particular field or discipline in which the supporting 
organization is operating, or because they represent the 
particular community that is served by the supported public 
charities.
            Disqualified person
    Under the provision, for purposes of the excess benefit 
transaction rules (sec. 4958), a disqualified person of a 
supporting organization is treated as a disqualified person of 
the supported organization.

Provisions that apply to Type III supporting organizations

            Payout with respect to Type III supporting organizations
    Under the provision, the Secretary shall promulgate new 
regulations on payments required by Type III supporting 
organizations that are not functionally integrated Type III 
supporting organizations.\993\ Such regulations shall require 
such organizations to make distributions of a percentage either 
of income or assets to the public charities they support in 
order to ensure that a significant amount is paid to such 
supported organizations. A functionally integrated Type III 
supporting organization is a Type III supporting organization 
that is not required under regulations established by the 
Secretary to make payments to supported organizations due to 
the activities of the organization related to performing the 
functions of, or carrying out the purposes of, such supported 
organizations.\994\
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    \993\ See Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
    \994\ The current such regulation is Treasury regulation section 
1.509(a)-4(i)(3)(ii). Under Treasury regulation section 1.509(a)-
4(i)(3), the integral part test of current law may be satisfied in one 
of two ways, one of which requires a payout of substantially all of an 
organization's income to or for the use of one or more publicly 
supported organizations, and one of which does not require such a 
payout. There is concern that the current income-based payout does not 
result in a significant amount being paid to charity if assets held by 
a supporting organization produce little to no income, especially in 
relation to the value of the assets held by the organization, and as 
compared to amounts paid out by nonoperating private foundations. There 
also is concern that the current regulatory standards for satisfying 
the integral part test not by reason of a payout are not sufficiently 
stringent to ensure that there is a sufficient nexus between the 
supporting and supported organizations. In revising the regulations, 
the Secretary has the discretion to determine whether it is appropriate 
to impose a payout requirement on any or all organizations not 
currently required to payout. It is intended that, in revisiting the 
current regulations, if the distinction between Type III supporting 
organizations that are required to pay out and those that are not 
required to pay out is retained, which may be appropriate, the 
Secretary nonetheless shall strengthen the standard for qualification 
as an organization that is not required to pay out. For example, as one 
requirement, the Secretary may consider whether substantially all of 
the activities of such an organization should be activities in direct 
furtherance of the functions or purposes of supported organizations.
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            Excess business holdings
    Under the provision, the excess business holdings rules of 
section 4943 are applied to Type III supporting organizations 
(other than functionally integrated Type III supporting 
organizations). In applying such rules, the term disqualified 
person has the meaning provided in section 4958, and also 
includes substantial contributors and related persons and any 
organization that is effectively controlled by the same person 
or persons who control the supporting organization or any 
organization substantially all of the contributions to which 
were made by the same person or persons who made substantially 
all of the contributions to the supporting organization. The 
excess business holdings rules do not apply if, as of November 
18, 2005, the holdings were held (and at all times thereafter, 
are held) for the benefit of the community pursuant to the 
direction (made as of such date) of a State attorney general or 
a State official with jurisdiction over the Type III supporting 
organization.
    The Secretary has the authority not to impose the excess 
business holdings rules if the organization establishes to the 
satisfaction of the Secretary that excess holdings of an 
organization are consistent with the purpose or function 
constituting the basis of the organization's exempt status. In 
exercising this authority, the Secretary should consider, in 
addition to any other factors the Secretary considers 
significant, as favorable, but not determinative, factors, a 
reasoned determination by the State attorney general with 
jurisdiction over the supporting organization, that disposition 
of the holdings would have a severe detrimental impact on the 
community, and a binding commitment by the supporting 
organization to pay out at least five percent of the value of 
the organization's assets each year to its supported 
organizations. A reasoned determination would require, among 
other things, evidence that any such determination was made 
pursuant to serious study by the State attorney general of the 
issues involved in disposing of the excess holdings, and 
findings by the State attorney general about the detrimental 
economic impact that would result from such disposition. If as 
a result of such State attorney general's study and findings, 
the State attorney general directed as a matter of State law 
that permission of the State would be required prior to any 
sale of the holdings, such a factor should be given strong 
consideration by the Secretary.
    Transition rules apply to the present holdings of an 
organization similar to those of section 4943(c)(4)-(6).\995\
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    \995\ Under the transition rules, in general, where the existing 
holdings of a supporting organization and disqualified persons are in 
excess of 50 percent (of a voting stock interest, profits interest, or 
beneficial interest), and not 20 percent or 35 percent as under the 
general rule, but are not in excess of 75 percent, a 10-year period is 
available before the holdings must be reduced to 50 percent. If such 
holdings are more than 75 percent, the reduction to 50 percent need not 
occur for a 15-year period. The 15-year period is expanded to 20 years 
if the holdings are more than 95 percent. After the expiration of the 
10, 15, or 20 year period, if disqualified persons have holdings in a 
business enterprise in excess of two percent of the enterprise, the 
supporting organization has 15 additional years to dispose of any of 
its own holdings that are above 25 percent of the holdings in the 
enterprise. If disqualified persons do not have such holdings, then the 
supporting organization has 15 additional years to dispose of any of 
its own holdings that are above 35 percent of the holdings in the 
enterprise.
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    Under the provision, the excess business holdings rules 
also apply to Type II supporting organizations but only if such 
organization accepts any gift or contribution from a person 
(other than a public charity, not including a supporting 
organization) who (1) controls, directly or indirectly, either 
alone or together (with persons described below) the governing 
body of a supported organization of the supporting 
organization; \996\ (2) is a member of the family of such a 
person; or (3) is a 35 percent controlled entity.
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    \996\ For purposes of the provision, it is intended that indirect 
control includes the ability to exercise effective control. For 
example, if a person made a gift to a supporting organization and a 
combination of such person, a person related to such person, and such 
person's personal attorney were members of the five-member board of a 
supported organization of the supporting organization, the organization 
would be treated as being indirectly controlled by such person. Board 
membership alone does not establish direct or indirect control.
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            Organizational and operational requirements
    The provision provides that, in general, after the date of 
enactment, a Type III supporting organization may not support 
an organization that is not organized in the United 
States.\997\ But, for Type III supporting organizations that 
support a foreign organization on the date of enactment, the 
provision provides that the general rule does not apply until 
the first day of the third taxable year of the organization 
beginning after the date of enactment.
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    \997\ U.S. charities established principally to provide financial 
and other assistance to a foreign charity, sometimes referred to as 
``friends of'' organizations, may not be established as supporting 
organizations under the provision. Such organizations may continue to 
obtain public charity status, however, by virtue of demonstrating broad 
public support (as described in sections 509(a)(1) and 509(a)(2)).
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            Relationship to supported organization(s)
    Under the provision, a Type III supporting organization 
must apprise each organization it supports of information 
regarding the supporting organization in order to help ensure 
the supporting organization's responsiveness. It is intended 
that such a showing could be satisfied, for example, through 
provision of documentation such as a copy of the supporting 
organization's governing documents, any changes made to the 
governing documents, the organization's annual information 
return filed with the Secretary (Form 990 series), any tax 
return (Form 990-T) filed with the Secretary, and an annual 
report (including a description of all of the support provided 
by the supporting organization, how such support was 
calculated, and a projection of the next year's support). It is 
intended that failure to make a sufficient showing is a factor 
in determining whether the responsiveness test of present law 
is met.
    In general, under the provision, a Type III supporting 
organization that is organized as a trust must, in addition to 
present law requirements, establish to the satisfaction of the 
Secretary, that it has a close and continuous relationship with 
the supported organization such that the trust is responsive to 
the needs or demands of the supported organization. A 
transition rule for existing trusts provides that the provision 
is not effective until one year after the date of enactment but 
is effective on the date of enactment for other trusts.

Other provisions

    Under the provision, if a Type I or Type III supporting 
organization accepts any gift or contribution from a person 
(other than a public charity, not including a supporting 
organization) who (1) controls, directly or indirectly, either 
alone or together (with persons described below) the governing 
body of a supported organization of the supporting 
organization; (2) is a member of the family of such a person; 
or (3) is a 35 percent controlled entity, then the supporting 
organization is treated as a private foundation for all 
purposes until such time as the organization can demonstrate to 
the satisfaction of the Secretary that it qualifies as a public 
charity other than as a supporting organization.
    Under the provision, a nonoperating private foundation may 
not count as a qualifying distribution under section 4942 any 
amount paid to (1) a Type III supporting organization that is 
not a functionally integrated Type III supporting organization 
or (2) any other supporting organization if a disqualified 
person with respect to the foundation directly or indirectly 
controls the supporting organization or a supported 
organization of such supporting organization. Any amount that 
does not count as a qualifying distribution under this rule is 
treated as a taxable expenditure under section 4945.

                             Effective Date

    The provision generally is effective on the date of 
enactment (August 17, 2006). The excess benefit transaction 
rules are effective for transactions occurring after July 25, 
2006 (except that the rule relating to the definition of a 
disqualified person is effective for transactions occurring 
after the date of enactment). The excess business holdings 
requirements are effective for taxable years beginning after 
the date of enactment. The provision relating to distributions 
by nonoperating private foundations is effective for 
distributions and expenditures made after the date of 
enactment. The return requirements are effective for returns 
filed for taxable years ending after the date of enactment.

                      TITLE XIII--OTHER PROVISIONS

  A. Exception From Local Furnishing Requirements for Certain Alaska 
             Hydroelectric Projects (sec. 1303 of the Act)

                              Present Law

    Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of such bonds are used to finance 
direct activities of governmental units or if such bonds are 
repaid with revenues of governmental units. Interest on State 
or local government bonds issued to finance activities of 
private persons is taxable unless a specific exception applies 
(``private activity bonds'').
    The interest on private activity bonds is eligible for tax-
exemption if such bonds are issued for certain purposes 
permitted by the Code (``qualified private activity bonds''). 
The definition of a qualified private activity bond includes 
bonds issued to finance certain private facilities for the 
``local furnishing'' of electricity or gas. Generally, a 
facility provides local furnishing if the area served by the 
facility does not exceed (1) two contiguous counties or (2) a 
city and a contiguous county.
    The Code generally limits the local furnishing exception to 
bonds for facilities (1) of persons who were engaged in the 
local furnishing of electric energy or gas on January 1, 1997 
(or a successor in interest to such persons), and (2) that 
serve areas served by those persons on such date (the ``service 
area limitation'') (sec. 142(f)(3)). The Small Business Job 
Protection Act of 1996 (the ``Act'') provided an exception from 
these limitations for bonds issued to finance the acquisition 
of the Snettisham hydroelectric project from the Alaska Power 
Administration (Pub. L. No. 104-188, sec. 1804 (1996)).

                        Explanation of Provision

    The provision provides an exception from the service area 
limitation under section 142(f)(3) for bonds issued prior to 
May 31, 2006, to finance the Lake Dorothy hydroelectric project 
to provide electricity to the City of Hoonah, Alaska. In 
addition, the furnishing of electric service to the City of 
Hoonah, Alaska is disregarded for purposes of applying the 
local furnishing restrictions to bonds issued before May 31, 
2006, to finance either the Lake Dorothy hydroelectric project 
(as defined in the provision) or to finance the acquisition of 
the Snettisham hydroelectric project.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

 B. Extend Certain Tax Rules for Qualified Tuition Programs (sec. 1304 
                  of the Act and sec. 529 of the Code)

                              Present Law

Overview
    Section 529 provides specified income tax and transfer tax 
rules for the treatment of accounts and contracts established 
under qualified tuition programs.\998\ A qualified tuition 
program is a program established and maintained by a State or 
agency or instrumentality thereof, or by one or more eligible 
educational institutions, which satisfies certain requirements 
and under which a person may purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to the waiver or payment of qualified higher 
education expenses of the beneficiary (a ``prepaid tuition 
program'').\999\ In the case of a program established and 
maintained by a State or agency or instrumentality thereof, a 
qualified tuition program also includes a program under which a 
person may make contributions to an account that is established 
for the purpose of satisfying the qualified higher education 
expenses of the designated beneficiary of the account, provided 
it satisfies certain specified requirements (a ``savings 
account program'').\1000\ Under both types of qualified tuition 
programs, a contributor establishes an account for the benefit 
of a particular designated beneficiary to provide for that 
beneficiary's higher education expenses.
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    \998\ The term ``account'' refers to a prepaid tuition benefit 
contract or a tuition savings account established pursuant to a 
qualified tuition program.
    \999\ Sec. 529(b)(1)(A).
    \1000\ Sec. 529(b)(1)(A).
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    For this purpose, qualified higher education expenses means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
eligible educational institution, and expenses for special 
needs services in the case of a special needs beneficiary that 
are incurred in connection with such enrollment or 
attendance.\1001\ Qualified higher education expenses generally 
also include room and board for students who are enrolled at 
least half-time.\1002\
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    \1001\ Sec. 529(e)(3)(A).
    \1002\ Sec. 529(e)(3)(B).
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Income tax treatment
    A qualified tuition program, including a savings account or 
a prepaid tuition contract established thereunder, generally is 
exempt from income tax, although it is subject to the tax on 
unrelated business income.\1003\ Contributions to a qualified 
tuition account (or with respect to a prepaid tuition contract) 
are not deductible to the contributor or includible in income 
of the designated beneficiary or account owner. Earnings 
accumulate tax-free until a distribution is made. If a 
distribution is made to pay qualified higher education 
expenses, no portion of the distribution is subject to income 
tax.\1004\ If a distribution is not used to pay qualified 
higher education expenses, the earnings portion of the 
distribution is subject to Federal income tax \1005\ and a 10-
percent additional tax (subject to exceptions for death, 
disability, or the receipt of a scholarship).\1006\ A change in 
the designated beneficiary of an account or prepaid contract is 
not treated as a distribution for income tax purposes if the 
new designated beneficiary is a member of the family of the old 
beneficiary.\1007\
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    \1003\ Sec. 529(a). An interest in a qualified tuition account is 
not treated as debt for purposes of the debt-financed property rules 
under section 514. Sec. 529(e)(4).
    \1004\ Sec. 529(c)(3)(B). Any benefit furnished to a designated 
beneficiary under a qualified tuition account is treated as a 
distribution to the beneficiary for these purposes. Sec. 
529(c)(3)(B)(iv).
    \1005\ Sec. 529(c)(3)(A) and (B)(ii).
    \1006\ Sec. 529(c)(6).
    \1007\ Sec. 529(c)(3)(C)(ii). For this purpose, ``member of the 
family'' means, with respect to a designated beneficiary: (1) the 
spouse of such beneficiary; (2) an individual who bears a relationship 
to such beneficiary which is described in paragraphs (1) through (8) of 
section 152(a) (i.e., with respect to the beneficiary, a son, daughter, 
or a descendent of either; a stepson or stepdaughter; a sibling or 
stepsibling; a father, mother, or ancestor of either; a stepfather or 
stepmother; a son or daughter of a brother or sister; a brother or 
sister of a father or mother; and a son-in-law, daughter-in-law, 
father-in-law, mother-in-law, brother-in-law, or sister-in-law), or the 
spouse of any such individual; and (3) the first cousin of such 
beneficiary. Sec. 529(e)(2).
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Gift and generation-skipping transfer (GST) tax treatment

    A contribution to a qualified tuition account (or with 
respect to a prepaid tuition contract) is treated as a 
completed gift of a present interest from the contributor to 
the designated beneficiary.\1008\ Such contributions qualify 
for the per-donee annual gift tax exclusion ($12,000 for 2006), 
and, to the extent of such exclusions, also are exempt from the 
generation-skipping transfer (GST) tax. A contributor may 
contribute in a single year up to five times the per-donee 
annual gift tax exclusion amount to a qualified tuition account 
and, for gift tax and GST tax purposes, treat the contribution 
as having been made ratably over the five-year period beginning 
with the calendar year in which the contribution is made.\1009\
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    \1008\ Sec. 529(c)(2)(A).
    \1009\ Sec. 529(c)(2)(B).
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    A distribution from a qualified tuition account or prepaid 
tuition contract generally is not subject to gift tax or GST 
tax.\1010\ Those taxes may apply, however, to a change of 
designated beneficiary if the new designated beneficiary is in 
a generation below that of the old beneficiary or if the new 
beneficiary is not a member of the family of the old 
beneficiary.\1011\
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    \1010\ Sec. 529(c)(5)(A).
    \1011\ Sec. 529(c)(5)(B).
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Estate tax treatment

    Qualified tuition program account balances or prepaid 
tuition benefits generally are excluded from the gross estate 
of any individual.\1012\ Amounts distributed on account of the 
death of the designated beneficiary, however, are includible in 
the designated beneficiary's gross estate.\1013\ If the 
contributor elected the special five-year allocation rule for 
gift tax annual exclusion purposes, any amounts contributed 
that are allocable to the years within the five-year period 
remaining after the year of the contributor's death are 
includible in the contributor's gross estate.\1014\
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    \1012\ Sec. 529(c)(4)(A).
    \1013\ Sec. 529(c)(4)(B).
    \1014\ Sec. 529(c)(4)(C).
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Certain provisions expiring under the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 (``EGTRRA'')

    The Economic Growth and Tax Relief Reconciliation Act of 
2001 (``EGTRRA'') made a number of changes to the rules 
regarding qualified tuition programs. However, in order to 
comply with reconciliation procedures under the Congressional 
Budget Act of 1974, EGTRRA includes a ``sunset'' provision, 
pursuant to which the provisions of the Act expire at the end 
of 2010. Specifically, EGTRRA's provisions do not apply for 
taxable, plan, or limitation years beginning after December 31, 
2010, or to estates of decedents dying after, or gifts or 
generation-skipping transfers made after, December 31, 2010. 
EGTRRA provides that, as of the effective date of the sunset, 
the Code will be applied as thought EGTRRA had never been 
enacted.
    The provisions of present-law section 529 scheduled to 
expire by reason of the EGTRRA sunset provision include: (1) 
the provision that makes qualified withdrawals from qualified 
tuition accounts exempt from income tax; (2) the repeal of a 
pre-EGTRRA requirement that there be more than a de minimis 
penalty imposed on amounts not used for educational purposes 
and the imposition of the 10-percent additional tax on 
distributions not used for qualified higher education purposes; 
(3) a provision permitting certain private educational 
institutions to establish prepaid tuition programs that qualify 
under section 529 if they receive a ruling or determination to 
that effect from the Internal Revenue Service, and if the 
assets are held in a trust created or organized for the 
exclusive benefit of designated beneficiaries; (4) certain 
provisions permitting rollovers from one account to another 
account; (5) certain rules regarding the treatment of room and 
board as qualifying expenses; (6) certain rules regarding 
coordination with Hope and lifetime learning credit provisions; 
(7) the provision that treats first cousins as members of the 
family for purposes of the rollover and change in beneficiary 
rules; and (8) certain provisions regarding the education 
expenses of special needs beneficiaries.\1015\
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    \1015\ EGTRRA sec. 402.
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                        Explanation of Provision


Permanently extend EGTRRA modifications to qualified tuition program 
        rules

    The provision repeals the sunset provision of EGTRRA 
insofar as it applies to the EGTRRA modifications to the rules 
regarding qualified tuition programs. As a result, the 
provision permanently extends all provisions of EGTRRA that 
expire at the end of 2010 that relate to qualified tuition 
programs.

Grant of regulatory authority to Treasury

    Present law regarding the transfer tax treatment of 
qualified tuition program accounts is unclear and in some 
situations imposes tax in a manner inconsistent with generally 
applicable transfer tax provisions. In addition, present law 
creates opportunities for abuse of qualified tuition programs. 
For example, taxpayers may seek to avoid gift and generation 
skipping transfer taxes by establishing and contributing to 
multiple qualified tuition program accounts with different 
designated beneficiaries (using the provision of section 529 
that permits a contributor to contribute up to five times the 
annual exclusion amount per donee in a single year and treat 
the contribution as having been made ratably over five years), 
with the intention of subsequently changing the designated 
beneficiaries of such accounts to a single, common beneficiary 
and distributing the entire amount to such beneficiary without 
further transfer tax consequences. Taxpayers also may seek to 
use qualified tuition program accounts as retirement accounts 
with all of the tax benefits but none of the restrictions and 
requirements of qualified retirement accounts. The provision 
grants the Secretary broad regulatory authority to clarify the 
tax treatment of certain transfers and to ensure that qualified 
tuition program accounts are used for the intended purpose of 
saving for higher education expenses of the designated 
beneficiary, including the authority to impose related 
recordkeeping and reporting requirements. The provision also 
authorizes the Secretary to limit the persons who may be 
contributors to a qualified tuition program and to determine 
any special rules for the operation and Federal tax 
consequences of such programs if such contributors are not 
individuals.

                             Effective Date

    The provision is effective on the date of enactment (August 
17, 2006).

 PART FOURTEEN: TAX RELIEF AND HEALTH CARE ACT OF 2006 (PUBLIC LAW 109-
                              432) \1016\

 I. DIVISION A--EXTENSION AND EXPANSION OF CERTAIN TAX PROVISIONS AND 
                            OTHER PROVISIONS

       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

1. Above-the-line deduction for higher education expenses (sec. 101 of 
        the Act and sec. 222 of the Code)

                              Present Law

    An individual is allowed an above-the-line deduction for 
qualified tuition and related expenses for higher education 
paid by the individual during the taxable year. Qualified 
tuition and related expenses include tuition and fees required 
for the enrollment or attendance of the taxpayer, the 
taxpayer's spouse, or any dependent of the taxpayer with 
respect to whom the taxpayer may claim a personal exemption, at 
an eligible institution of higher education for courses of 
instruction of such individual at such institution. Charges and 
fees associated with meals, lodging, insurance, transportation, 
and similar personal, living, or family expenses are not 
eligible for the deduction. The expenses of education involving 
sports, games, or hobbies are not qualified tuition and related 
expenses unless this education is part of the student's degree 
program.
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    \1016\ H.R. 6111. The House passed the bill on the suspension 
calendar on December 5, 2006. The Senate passed the bill with an 
amendment by unanimous consent on December 7, 2006. The House agreed to 
the Senate amendment with an amendment on December 8, 2006. The Senate 
agreed to the House amendment on December 8, 2006. The President signed 
the bill on December 20, 2006. For a technical explanation of the bill 
prepared by the staff of the Joint Committee on Taxation, see Joint 
Committee on Taxation, Technical Explanation of H.R. 6408, the ``Tax 
Relief and Health Care Act of 2006,'' as Introduced in the House on 
December 7, 2006 (JCX-50-06), December 7, 2006. For references to the 
technical explanation, see 152 Cong. Rec. H9069 (December 8, 2006) and 
152 Cong. Rec. S11661 (December 8, 2006).
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    The amount of qualified tuition and related expenses must 
be reduced by certain scholarships, educational assistance 
allowances, and other amounts paid for the benefit of such 
individual, and by the amount of such expenses taken into 
account for purposes of determining any exclusion from gross 
income of: (1) income from certain United States Savings Bonds 
used to pay higher education tuition and fees; and (2) income 
from a Coverdell education savings account. Additionally, such 
expenses must be reduced by the earnings portion (but not the 
return of principal) of distributions from a qualified tuition 
program if an exclusion under section 529 is claimed with 
respect to expenses otherwise deductible under section 222. No 
deduction is allowed for any expense for which a deduction is 
otherwise allowed or with respect to an individual for whom a 
Hope credit or Lifetime Learning credit is elected for such 
taxable year.
    The expenses must be in connection with enrollment at an 
institution of higher education during the taxable year, or 
with an academic term beginning during the taxable year or 
during the first three months of the next taxable year. The 
deduction is not available for tuition and related expenses 
paid for elementary or secondary education.
    For taxable years beginning in 2004 and 2005, the maximum 
deduction is $4,000 for an individual whose adjusted gross 
income for the taxable year does not exceed $65,000 ($130,000 
in the case of a joint return), or $2,000 for other individuals 
whose adjusted gross income does not exceed $80,000 ($160,000 
in the case of a joint return). No deduction is allowed for an 
individual whose adjusted gross income exceeds the relevant 
adjusted gross income limitations, for a married individual who 
does not file a joint return, or for an individual with respect 
to whom a personal exemption deduction may be claimed by 
another taxpayer for the taxable year. The deduction is not 
available for taxable years beginning after December 31, 2005.

                        Explanation of Provision

    The provision extends the tuition deduction for two years, 
through December 31, 2007.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.
2. Extension and modification of the new markets tax credit (sec. 102 
        of the Act and sec. 45D of the Code)

                              Present Law

    Section 45D provides a new markets tax credit for qualified 
equity investments made to acquire stock in a corporation, or a 
capital interest in a partnership, that is a qualified 
community development entity (``CDE'').\1017\ The amount of the 
credit allowable to the investor (either the original purchaser 
or a subsequent holder) is (1) a five-percent credit for the 
year in which the equity interest is purchased from the CDE and 
for each of the following two years, and (2) a six-percent 
credit for each of the following four years. The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available for a taxable year to the 
taxpayer who holds the qualified equity investment on the date 
of the initial investment or on the respective anniversary date 
that occurs during the taxable year. The credit is recaptured 
if at any time during the seven-year period that begins on the 
date of the original issue of the investment the entity ceases 
to be a qualified CDE, the proceeds of the investment cease to 
be used as required, or the equity investment is redeemed.
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    \1017\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554 (December 21, 
2000).
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    A qualified CDE is any domestic corporation or partnership: 
(1) whose primary mission is serving or providing investment 
capital for low-income communities or low-income persons; (2) 
that maintains accountability to residents of low-income 
communities by their representation on any governing board of 
or any advisory board to the CDE; and (3) that is certified by 
the Secretary as being a qualified CDE. A qualified equity 
investment means stock (other than nonqualified preferred stock 
as defined in sec. 351(g)(2)) in a corporation or a capital 
interest in a partnership that is acquired directly from a CDE 
for cash, and includes an investment of a subsequent purchaser 
if such investment was a qualified equity investment in the 
hands of the prior holder. Substantially all of the investment 
proceeds must be used by the CDE to make qualified low-income 
community investments. For this purpose, qualified low-income 
community investments include: (1) capital or equity 
investments in, or loans to, qualified active low-income 
community businesses; (2) certain financial counseling and 
other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.
    A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (rather than 80 percent) of statewide median family 
income. For this purpose, a high migration rural county is any 
county that, during the 20-year period ending with the year in 
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent 
of the population of the county at the beginning of such 
period.
    The Secretary has the authority to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit. For this purpose, a ``targeted population'' 
is defined by reference to section 103(20) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 
(12 U.S.C. 4702(20)) to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who (A) are 
low-income persons; or (B) otherwise lack adequate access to 
loans or equity investments. Under such Act, ``low-income'' 
means (1) for a targeted population within a metropolitan area, 
less than 80 percent of the area median family income; and (2) 
for a targeted population within a non-metropolitan area, less 
than the greater of 80 percent of the area median family income 
or 80 percent of the statewide non-metropolitan area median 
family income.\1018\ Under such Act, a targeted population is 
not required to be within any census tract. In addition, a 
population census tract with a population of less than 2,000 is 
treated as a low-income community for purposes of the credit if 
such tract is within an empowerment zone, the designation of 
which is in effect under section 1391, and is contiguous to one 
or more low-income communities.
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    \1018\ 12 U.S.C. 4702(17) defines ``low-income'' for purposes of 12 
U.S.C. 4702(20).
---------------------------------------------------------------------------
    A qualified active low-income community business is defined 
as a business that satisfies, with respect to a taxable year, 
the following requirements: (1) at least 50 percent of the 
total gross income of the business is derived from the active 
conduct of trade or business activities in any low-income 
community; (2) a substantial portion of the tangible property 
of such business is used in a low-income community; (3) a 
substantial portion of the services performed for such business 
by its employees is performed in a low-income community; and 
(4) less than five percent of the average of the aggregate 
unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
    The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006 and 
2007.

                        Explanation of Provision

    The provision extends the new markets tax credit through 
2008, permitting up to $3.5 billion in qualified equity 
investments for that calendar year. The provision also requires 
that the Secretary prescribe regulations to ensure that non-
metropolitan counties receive a proportional allocation of 
qualified equity investments.

                             Effective Date

    The provision is effective on the date of enactment.
3. Deduction of state and local general sales taxes (sec. 103 of the 
        Act and sec. 164 of the Code)

                              Present Law

    For purposes of determining regular tax liability, an 
itemized deduction is permitted for certain State and local 
taxes paid, including individual income taxes, real property 
taxes, and personal property taxes. The itemized deduction is 
not permitted for purposes of determining a taxpayer's 
alternative minimum taxable income. For taxable years beginning 
in 2004 and 2005, at the election of the taxpayer, an itemized 
deduction may be taken for State and local general sales taxes 
in lieu of the itemized deduction provided under present law 
for State and local income taxes. As is the case for State and 
local income taxes, the itemized deduction for State and local 
general sales taxes is not permitted for purposes of 
determining a taxpayer's alternative minimum taxable income. 
Taxpayers have two options with respect to the determination of 
the sales tax deduction amount. Taxpayers may deduct the total 
amount of general State and local sales taxes paid by 
accumulating receipts showing general sales taxes paid. 
Alternatively, taxpayers may use tables created by the 
Secretary of the Treasury that show the allowable deduction. 
The tables are based on average consumption by taxpayers on a 
State-by-State basis taking into account number of dependents, 
modified adjusted gross income and rates of State and local 
general sales taxation. Taxpayers who live in more than one 
jurisdiction during the tax year are required to pro-rate the 
table amounts based on the time they live in each jurisdiction. 
Taxpayers who use the tables created by the Secretary may, in 
addition to the table amounts, deduct eligible general sales 
taxes paid with respect to the purchase of motor vehicles, 
boats and other items specified by the Secretary. Sales taxes 
for items that may be added to the tables are not reflected in 
the tables themselves.
    The term ``general sales tax'' means a tax imposed at one 
rate with respect to the sale at retail of a broad range of 
classes of items. However, in the case of items of food, 
clothing, medical supplies, and motor vehicles, the fact that 
the tax does not apply with respect to some or all of such 
items is not taken into account in determining whether the tax 
applies with respect to a broad range of classes of items, and 
the fact that the rate of tax applicable with respect to some 
or all of such items is lower than the general rate of tax is 
not taken into account in determining whether the tax is 
imposed at one rate. Except in the case of a lower rate of tax 
applicable with respect to food, clothing, medical supplies, or 
motor vehicles, no deduction is allowed for any general sales 
tax imposed with respect to an item at a rate other than the 
general rate of tax. However, in the case of motor vehicles, if 
the rate of tax exceeds the general rate, such excess shall be 
disregarded and the general rate is treated as the rate of tax.
    A compensating use tax with respect to an item is treated 
as a general sales tax, provided such tax is complementary to a 
general sales tax and a deduction for sales taxes is allowable 
with respect to items sold at retail in the taxing jurisdiction 
that are similar to such item.

                        Explanation of Provision

    The present-law provision allowing taxpayers to elect to 
deduct State and local sales taxes in lieu of State and local 
income taxes is extended for two years (through December 31, 
2007).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

4. Extension and modification of the research credit (sec. 104 of the 
        Act and sec. 41 of the Code)

                              Present Law


General rule

    Prior to January 1, 2006, a taxpayer could claim a research 
credit equal to 20 percent of the amount by which the 
taxpayer's qualified research expenses for a taxable year 
exceeded its base amount for that year.\1019\ Thus, the 
research credit was generally available with respect to 
incremental increases in qualified research.
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    \1019\ Sec. 41.
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    A 20-percent research tax credit was also available with 
respect to the excess of (1) 100 percent of corporate cash 
expenses (including grants or contributions) paid for basic 
research conducted by universities (and certain nonprofit 
scientific research organizations) over (2) the sum of (a) the 
greater of two minimum basic research floors plus (b) an amount 
reflecting any decrease in nonresearch giving to universities 
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation. This separate credit 
computation was commonly referred to as the university basic 
research credit (see sec. 41(e)).
    Finally, a research credit was available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium. This separate credit computation was commonly 
referred to as the energy research credit. Unlike the other 
research credits, the energy research credit applied to all 
qualified expenditures, not just those in excess of a base 
amount.
    The research credit, including the university basic 
research credit and the energy research credit, expired on 
December 31, 2005.

Computation of allowable credit

    Except for energy research payments and certain university 
basic research payments made by corporations, the research tax 
credit applied only to the extent that the taxpayer's qualified 
research expenses for the current taxable year exceeded its 
base amount. The base amount for the current year generally was 
computed by multiplying the taxpayer's fixed-base percentage by 
the average amount of the taxpayer's gross receipts for the 
four preceding years. If a taxpayer both incurred qualified 
research expenses and had gross receipts during each of at 
least three years from 1984 through 1988, then its fixed-base 
percentage was the ratio that its total qualified research 
expenses for the 1984-1988 period bore to its total gross 
receipts for that period (subject to a maximum fixed-base 
percentage of 16 percent). All other taxpayers (so-called 
start-up firms) were assigned a fixed-base percentage of three 
percent.\1020\
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    \1020\ The Small Business Job Protection Act of 1996 expanded the 
definition of start-up firms under section 41(c)(3)(B)(i) to include 
any firm if the first taxable year in which such firm had both gross 
receipts and qualified research expenses began after 1983. A special 
rule (enacted in 1993) was designed to gradually recompute a start-up 
firm's fixed-base percentage based on its actual research experience. 
Under this special rule, a start-up firm would be assigned a fixed-base 
percentage of three percent for each of its first five taxable years 
after 1993 in which it incurs qualified research expenses. In the event 
that the research credit is extended beyond its expiration date, a 
start-up firm's fixed-base percentage for its sixth through tenth 
taxable years after 1993 in which it incurs qualified research expenses 
will be a phased-in ratio based on its actual research experience. For 
all subsequent taxable years, the taxpayer's fixed-base percentage will 
be its actual ratio of qualified research expenses to gross receipts 
for any five years selected by the taxpayer from its fifth through 
tenth taxable years after 1993 (sec. 41(c)(3)(B)).
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    In computing the credit, a taxpayer's base amount could not 
be less than 50 percent of its current-year qualified research 
expenses.
    To prevent artificial increases in research expenditures by 
shifting expenditures among commonly controlled or otherwise 
related entities, a special aggregation rule provided that all 
members of the same controlled group of corporations were 
treated as a single taxpayer (sec. 41(f)(1)). Under regulations 
prescribed by the Secretary, special rules applied for 
computing the credit when a major portion of a trade or 
business (or unit thereof) changed hands, under which qualified 
research expenses and gross receipts for periods prior to the 
change of ownership of a trade or business were treated as 
transferred with the trade or business that gave rise to those 
expenses and receipts for purposes of recomputing a taxpayer's 
fixed-base percentage (sec. 41(f)(3)).

Alternative incremental research credit regime

    Taxpayers were allowed to elect an alternative incremental 
research credit regime.\1021\ If a taxpayer elected to be 
subject to this alternative regime, the taxpayer was assigned a 
three-tiered fixed-base percentage (that was lower than the 
fixed-base percentage otherwise applicable) and the credit rate 
likewise was reduced. Under the alternative incremental credit 
regime, a credit rate of 2.65 percent applied to the extent 
that a taxpayer's current-year research expenses exceeded a 
base amount computed by using a fixed-base percentage of one 
percent (i.e., the base amount equaled one percent of the 
taxpayer's average gross receipts for the four preceding years) 
but did not exceed a base amount computed by using a fixed-base 
percentage of 1.5 percent. A credit rate of 3.2 percent applied 
to the extent that a taxpayer's current-year research expenses 
exceeded a base amount computed by using a fixed-base 
percentage of 1.5 percent but did not exceed a base amount 
computed by using a fixed-base percentage of two percent. A 
credit rate of 3.75 percent applied to the extent that a 
taxpayer's current-year research expenses exceeded a base 
amount computed by using a fixed-base percentage of two 
percent. An election to be subject to this alternative 
incremental credit regime could be made for any taxable year 
beginning after June 30, 1996, and such an election applied to 
that taxable year and all subsequent years unless revoked with 
the consent of the Secretary of the Treasury.
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    \1021\ Sec. 41(c)(4).
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Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consisted of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses).\1022\ Notwithstanding the limitation for contract 
research expenses, qualified research expenses included 100 
percent of amounts paid or incurred by the taxpayer to an 
eligible small business, university, or Federal laboratory for 
qualified energy research.
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    \1022\ Under a special rule, 75 percent of amounts paid to a 
research consortium for qualified research were treated as qualified 
research expenses eligible for the research credit (rather than 65 
percent under the general rule under section 41(b)(3) governing 
contract research expenses) if (1) such research consortium was a tax-
exempt organization that is described in section 501(c)(3) (other than 
a private foundation) or section 501(c)(6) and was organized and 
operated primarily to conduct scientific research, and (2) such 
qualified research was conducted by the consortium on behalf of the 
taxpayer and one or more persons not related to the taxpayer. Sec. 
41(b)(3)(C).
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    To be eligible for the credit, the research did not only 
have to satisfy the requirements of present-law section 174 
(described below) but also had to be undertaken for the purpose 
of discovering information that is technological in nature, the 
application of which was intended to be useful in the 
development of a new or improved business component of the 
taxpayer, and substantially all of the activities of which had 
to constitute elements of a process of experimentation for 
functional aspects, performance, reliability, or quality of a 
business component. Research did not qualify for the credit if 
substantially all of the activities related to style, taste, 
cosmetic, or seasonal design factors (sec. 41(d)(3)). In 
addition, research did not qualify for the credit: (1) if 
conducted after the beginning of commercial production of the 
business component; (2) if related to the adaptation of an 
existing business component to a particular customer's 
requirements; (3) if related to the duplication of an existing 
business component from a physical examination of the component 
itself or certain other information; or (4) if related to 
certain efficiency surveys, management function or technique, 
market research, market testing, or market development, routine 
data collection or routine quality control (sec. 41(d)(4)). 
Research did not qualify for the credit if it was conducted 
outside the United States, Puerto Rico, or any U.S. possession.

Relation to deduction

    Under section 174, taxpayers may elect to deduct currently 
the amount of certain research or experimental expenditures 
paid or incurred in connection with a trade or business, 
notwithstanding the general rule that business expenses to 
develop or create an asset that has a useful life extending 
beyond the current year must be capitalized.\1023\ While the 
research credit was in effect, however, deductions allowed to a 
taxpayer under section 174 (or any other section) were reduced 
by an amount equal to 100 percent of the taxpayer's research 
tax credit determined for the taxable year (sec. 280C(c)). 
Taxpayers could alternatively elect to claim a reduced research 
tax credit amount (13 percent) under section 41 in lieu of 
reducing deductions otherwise allowed (sec. 280C(c)(3)).
---------------------------------------------------------------------------
    \1023\ Taxpayers may elect 10-year amortization of certain research 
expenditures allowable as a deduction under section 174(a). Secs. 
174(f)(2) and 59(e).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the research credit two years (for 
amounts paid or incurred after December 31, 2005, and before 
January 1, 2008).
    The provision also modifies the research credit for taxable 
years ending after December 31, 2006, subject to the general 
termination provision applicable to the credit.
    The provision increases the rates of the alternative 
incremental credit: (1) a credit rate of three percent (rather 
than 2.65 percent) applies to the extent that a taxpayer's 
current-year research expenses exceed a base amount computed by 
using a fixed-base percentage of one percent (i.e., the base 
amount equals one percent of the taxpayer's average gross 
receipts for the four preceding years) but do not exceed a base 
amount computed by using a fixed-base percentage of 1.5 
percent; (2) a credit rate of four percent (rather than 3.2 
percent) applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of 1.5 percent but do not exceed a base 
amount computed by using a fixed-base percentage of two 
percent; and (3) a credit rate of five percent (rather than 
3.75 percent) applies to the extent that a taxpayer's current-
year research expenses exceed a base amount computed by using a 
fixed-base percentage of two percent.
    The provision also creates, at the election of the 
taxpayer, an alternative simplified credit for qualified 
research expenses. The alternative simplified credit is equal 
to 12 percent of qualified research expenses that exceed 50 
percent of the average qualified research expenses for the 
three preceding taxable years. The rate is reduced to 6 percent 
if a taxpayer has no qualified research expenses in any one of 
the three preceding taxable years.
    An election to use the alternative simplified credit 
applies to all succeeding taxable years unless revoked with the 
consent of the Secretary. An election to use the alternative 
simplified credit may not be made for any taxable year for 
which an election to use the alternative incremental credit is 
in effect. A transition rule applies which permits a taxpayer 
to elect to use the alternative simplified credit in lieu of 
the alternative incremental credit if such election is made 
during the taxable year which includes January 1, 2007. The 
transition rule only applies to the taxable year which includes 
that date.

                             Effective Date

    The extension of the research credit applies to amounts 
paid or incurred after December 31, 2005. The modification of 
the alternative incremental credit and the addition of the 
alternative simplified credit are effective for taxable years 
ending after December 31, 2006.
    Special transitional rules apply to fiscal year 2006-2007 
taxpayers. In the case of a taxpayer electing the alternative 
incremental credit, the amount of the credit is the sum of (1) 
the credit calculated as if it were extended but not modified 
multiplied by a fraction the numerator of which is the number 
of days in the taxable year before January 1, 2007, and the 
denominator of which is the total number of days in the taxable 
year and (2) the credit calculated under the provision as 
amended multiplied by a fraction the numerator of which is the 
number of days in the taxable year after December 31, 2006, and 
the denominator of which is the total number of days in the 
taxable year.
    In the case of a taxpayer electing the new alternative 
simplified credit, the amount of the credit under section 
41(a)(1) for the taxable year is the sum of (1) the credit that 
would be determined under section 41(a)(1) (including the 
alternative incremental credit for a taxpayer electing that 
credit) if it were extended but not modified multiplied by a 
fraction the numerator of which is the number of days in the 
taxable year before January 1, 2007, and the denominator of 
which is the total number of days in the taxable year and (2) 
the alternative simplified credit determined for the year 
multiplied by a fraction the numerator of which is the number 
of days in the taxable year after December 31, 2006, and the 
denominator of which is the total number of days in the taxable 
year.

5. Work opportunity tax credit and welfare-to-work tax credit (sec. 105 
        of the Act and secs. 51 and 51A of the Code)

                              Present Law


Work opportunity tax credit

            Targeted groups eligible for the credit
    The work opportunity tax credit is available on an elective 
basis for employers hiring individuals from one or more of 
eight targeted groups. The eight targeted groups are: (1) 
certain families eligible to receive benefits under the 
Temporary Assistance for Needy Families Program; (2) high-risk 
youth; (3) qualified ex-felons; (4) vocational rehabilitation 
referrals; (5) qualified summer youth employees; (6) qualified 
veterans; (7) families receiving food stamps; and (8) persons 
receiving certain Supplemental Security Income (SSI) benefits.
    A high-risk youth is an individual aged 18 but not aged 25 
on the hiring date who is certified by a designated local 
agency as having a principal place of abode within an 
empowerment zone, enterprise community, or renewal community. 
The credit is not available if such youth's principal place of 
abode ceases to be within an empowerment zone, enterprise 
community, or renewal community.
    A qualified ex-felon is an individual certified by a 
designated local agency as: (1) having been convicted of a 
felony under State or Federal law; (2) being a member of an 
economically disadvantaged family; and (3) having a hiring date 
within one year of release from prison or conviction.
    A food stamp recipient is an individual aged 18 but not 
aged 25 on the hiring date certified by a designated local 
agency as being a member of a family either currently or 
recently receiving assistance under an eligible food stamp 
program.
            Qualified wages
    Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
            Calculation of the credit
    The credit equals 40 percent (25 percent for employment of 
400 hours or less) of qualified first-year wages. Generally, 
qualified first-year wages are qualified wages (not in excess 
of $6,000) attributable to service rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual began work for the employer. Therefore, the 
maximum credit per employee is $2,400 (40 percent of the first 
$6,000 of qualified first-year wages). With respect to 
qualified summer youth employees, the maximum credit is $1,200 
(40 percent of the first $3,000 of qualified first-year wages).
            Certification rules
    An individual is not treated as a member of a targeted 
group unless: (1) on or before the day on which an individual 
begins work for an employer, the employer has received a 
certification from a designated local agency that such 
individual is a member of a targeted group; or (2) on or before 
the day an individual is offered employment with the employer, 
a pre-screening notice is completed by the employer with 
respect to such individual, and not later than the 21st day 
after the individual begins work for the employer, the employer 
submits such notice, signed by the employer and the individual 
under penalties of perjury, to the designated local agency as 
part of a written request for certification.
            Minimum employment period
    No credit is allowed for qualified wages paid to employees 
who work less than 120 hours in the first year of employment.
            Coordination of the work opportunity tax credit and the 
                    welfare-to-work tax credit
    An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee on which the employer 
claims the welfare-to-work tax credit.
            Other rules
    The work opportunity tax credit is not allowed for wages 
paid to a relative or dependent of the taxpayer. Similarly 
wages paid to replacement workers during a strike or lockout 
are not eligible for the work opportunity tax credit. Wages 
paid to any employee during any period for which the employer 
received on-the-job training program payments with respect to 
that employee are not eligible for the work opportunity tax 
credit. The work opportunity tax credit generally is not 
allowed for wages paid to individuals who had previously been 
employed by the employer. In addition, many other technical 
rules apply.
            Expiration
    The work opportunity tax credit is not available for 
individuals who begin work for an employer after December 31, 
2005.

Welfare-to-work tax credit

            Targeted group eligible for the credit
    The welfare-to-work tax credit is available on an elective 
basis to employers of qualified long-term family assistance 
recipients. Qualified long-term family assistance recipients 
are: (1) members of a family that have received family 
assistance for at least 18 consecutive months ending on the 
hiring date; (2) members of a family that have received such 
family assistance for a total of at least 18 months (whether or 
not consecutive) after August 5, 1997 (the date of enactment of 
the welfare-to-work tax credit) if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within 2 years after the Federal or State time 
limits made the family ineligible for family assistance.
            Qualified wages
    Qualified wages for purposes of the welfare-to-work tax 
credit are defined more broadly than the work opportunity tax 
credit. Unlike the definition of wages for the work opportunity 
tax credit which includes simply cash wages, the definition of 
wages for the welfare-to-work tax credit includes cash wages 
paid to an employee plus amounts paid by the employer for: (1) 
educational assistance excludable under a section 127 program 
(or that would be excludable but for the expiration of sec. 
127); (2) health plan coverage for the employee, but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129. 
The employer's deduction for wages is reduced by the amount of 
the credit.
            Calculation of the credit
    The welfare-to-work tax credit is available on an elective 
basis to employers of qualified long-term family assistance 
recipients during the first two years of employment. The 
maximum credit is 35 percent of the first $10,000 of qualified 
first-year wages and 50 percent of the first $10,000 of 
qualified second-year wages. Qualified first-year wages are 
defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning with the day the 
individual began work for the employer. Qualified second-year 
wages are defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning immediately after 
the first year of that individual's employment for the 
employer. The maximum credit is $8,500 per qualified employee.
            Certification rules
    An individual is not treated as a member of the targeted 
group unless: (1) on or before the day on which an individual 
begins work for an employer, the employer has received a 
certification from a designated local agency that such 
individual is a member of the targeted group; or (2) on or 
before the day an individual is offered employment with the 
employer, a pre-screening notice is completed by the employer 
with respect to such individual, and not later than the 21st 
day after the individual begins work for the employer, the 
employer submits such notice, signed by the employer and the 
individual under penalties of perjury, to the designated local 
agency as part of a written request for certification.
            Minimum employment period
    No credit is allowed for qualified wages paid to a member 
of the targeted group unless the number they work is at least 
400 hours or 180 days in the first year of employment.
            Coordination of the work opportunity tax credit and the 
                    welfare-to-work tax credit
    An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee on which the employer 
claims the welfare-to-work tax credit.
            Other rules
    The welfare-to-work tax credit incorporates directly or by 
reference many of these other rules contained on the work 
opportunity tax credit.
            Expiration
    The welfare-to-work credit is not available for individuals 
who begin work for an employer after December 31, 2005.

                        Explanation of Provision


First year of extension

    The provision extends the work opportunity tax credit and 
welfare-to-work tax credits for one year without modification, 
respectively (for qualified individuals who begin work for an 
employer after December 31, 2005 and before January 1, 2007).

Second year of extension

            In general
    The provision then combines and extends the two credits for 
a second year (for qualified individuals who begin work for an 
employer after December 31, 2006 and before January 1, 2008).
            Targeted groups eligible for the combined credit
    The combined credit is available on an elective basis for 
employers hiring individuals from one or more of all nine 
targeted groups. The nine targeted groups are the present-law 
eight groups with the addition of the welfare-to-work credit/
long-term family assistance recipient as the ninth targeted 
group.
    The provision repeals the requirement that a qualified ex-
felon be an individual certified as a member of an economically 
disadvantaged family.
    The provision raises the age limit for the food stamp 
recipient category to include individuals aged 18 but not aged 
40 on the hiring date.
            Qualified wages
    Qualified first-year wages for the eight work opportunity 
tax credit categories remain capped at $6,000 ($3,000 for 
qualified summer youth employees). No credit is allowed for 
second-year wages. In the case of long-term family assistance 
recipients, the cap is $10,000 for both qualified first-year 
wages and qualified second-year wages. The combined credit 
follows the work opportunity tax credit definition of wages 
which does not include amounts paid by the employer for: (1) 
educational assistance excludable under a section 127 program 
(or that would be excludable but for the expiration of sec. 
127); (2) health plan coverage for the employee, but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129. 
For all targeted groups, the employer's deduction for wages is 
reduced by the amount of the credit.
            Calculation of the credit
    First-year wages.--For the eight work opportunity tax 
credit categories, the credit equals 40 percent (25 percent for 
employment of 400 hours or less) of qualified first-year wages. 
Generally, qualified first-year wages are qualified wages (not 
in excess of $6,000) attributable to service rendered by a 
member of a targeted group during the one-year period beginning 
with the day the individual began work for the employer. 
Therefore, the maximum credit per employee for members of any 
of the eight work opportunity tax credit targeted groups 
generally is $2,400 (40 percent of the first $6,000 of 
qualified first-year wages). With respect to qualified summer 
youth employees, the maximum credit remains $1,200 (40 percent 
of the first $3,000 of qualified first-year wages). For the 
welfare-to-work/long-term family assistance recipients, the 
maximum credit equals $4,000 per employee (40 percent of 
$10,000 of wages).
    Second-year wages.--In the case of long-term family 
assistance recipients the maximum credit is $5,000 (50 percent 
of the first $10,000 of qualified second-year wages).
            Certification rules
    The provision changes the present-law 21-day requirement to 
28 days.
            Minimum employment period
    No credit is allowed for qualified wages paid to employees 
who work less than 120 hours in the first year of employment.
            Coordination of the work opportunity tax credit and the 
                    welfare-to-work tax credit
    Coordination is no longer necessary once the two credits 
are combined.

                             Effective Date

    Generally, the extension of the credits is effective for 
wages paid or incurred to a qualified individual who begins 
work for an employer after December 31, 2005, and before 
January 1, 2008. The consolidation of the credits and other 
modifications are effective for wages paid or incurred to a 
qualified individual who begins work for an employer after 
December 31, 2006, and before January 1, 2008.

6. Extend election to treat combat pay as earned income for purposes of 
        the earned income credit (sec. 106 of the Act and sec. 32 of 
        the Code)

                              Present Law


In general

    Subject to certain limitations, military compensation 
earned by members of the Armed Forces while serving in a combat 
zone may be excluded from gross income. In addition, for up to 
two years following service in a combat zone, military 
personnel may also exclude compensation earned while 
hospitalized from wounds, disease, or injuries incurred while 
serving in the zone.

Child credit

    Combat pay that is otherwise excluded from gross income 
under section 112 is treated as earned income which is taken 
into account in computing taxable income for purposes of 
calculating the refundable portion of the child credit.

Earned income credit

    Any taxpayer may elect to treat combat pay that is 
otherwise excluded from gross income under section 112 as 
earned income for purposes of the earned income credit. This 
election is available with respect to any taxable year ending 
after the date of enactment and before January 1, 2007.

                        Explanation of Provision

    The provision extends for one year (through December 31, 
2007) the availability of the election to treat combat pay that 
is otherwise excluded from gross income under section 112 as 
earned income for purposes of the earned income credit.

                             Effective Date

    The provision is effective in taxable years beginning after 
December 31, 2006.

7. Extension and modification of qualified zone academy bonds (sec. 107 
        of the Act and sec. 1397E of the Code)

                              Present Law


Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of these governmental units. Activities that can be 
financed with these tax-exempt bonds include the financing of 
public schools.
    An issuer must file with the IRS certain information in 
order for a bond issue to be tax-exempt.\1024\ Generally, this 
information return is required to be filed no later the 15th 
day of the second month after the close of the calendar quarter 
in which the bonds were issued.
---------------------------------------------------------------------------
    \1024\ Sec. 149(e).
---------------------------------------------------------------------------

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, the Code 
permits three types of tax-credit bonds. States and local 
governments have the authority to issue qualified zone academy 
bonds (``QZABS''), clean renewable energy bonds (``CREBS''), 
and ``Gulf tax credit bonds.'' \1025\ In lieu of tax-exempt 
interest, these bonds entitle eligible holders to a tax credit.
---------------------------------------------------------------------------
    \1025\ Secs. 1397E, 54, and 1400N(l), respectively.
---------------------------------------------------------------------------
    QZABs are defined as any bond issued by a State or local 
government if, among other requirements: (1) at least 95 
percent of the proceeds are used for the purpose of renovating, 
providing equipment to, developing course materials for use at, 
or training teachers and other school personnel in a 
``qualified zone academy'' (``qualified zone academy 
property'') and (2) private entities have promised to 
contribute to the qualified zone academy certain equipment, 
technical assistance or training, employee services, or other 
property or services with a value equal to at least 10 percent 
of the bond proceeds.
    A school is a ``qualified zone academy'' if: (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
enterprise community designated under the Code or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.
    A total of $400 million of QZABs may be issued annually in 
calendar years 1998 through 2005. The $400 million aggregate 
bond cap is allocated each year to the States according to 
their respective populations of individuals below the poverty 
line. Each State, in turn, allocates the issuance authority to 
qualified zone academies within such State.
    Financial institutions (banks, insurance companies, and 
corporations in the business of lending money) are the only 
taxpayers eligible to hold QZABs. An eligible taxpayer holding 
a QZAB on the credit allowance date is entitled to a credit. 
The credit is an amount equal to a credit rate multiplied by 
the face amount of the bond. The credit is includable in gross 
income (as if it were a taxable interest payment on the bond), 
and may be claimed against regular income tax and AMT 
liability.
    The Treasury Department sets the credit rate on QZABs at a 
rate estimated to allow issuance of the bonds without discount 
and without interest cost to the issuer. The maximum term of 
the bond is determined by the Treasury Department, so that the 
present value of the obligation to repay the bond is 50 percent 
of the face value of the bond.
    Issuers of QZABs are not required to report issuance of 
such bonds to the IRS under present law.

Arbitrage restrictions on tax-exempt bonds

    To prevent States and local governments from issuing more 
tax-exempt bonds than is necessary for the activity being 
financed or from issuing such bonds earlier than needed for the 
purpose of the borrowing, the income exclusion for interest 
paid on States and local bonds does not apply to any arbitrage 
bond.\1026\ An arbitrage bond is defined as any bond that is 
part of an issue if any proceeds of the issue are reasonably 
expected to be used (or intentionally are used) to acquire 
higher yielding investments or to replace funds that are used 
to acquire higher yielding investments.\1027\ In general, 
arbitrage profits may be earned only during specified periods 
(e.g., defined ``temporary periods'' before funds are needed 
for the purpose of the borrowing) or on specified types of 
investments (e.g., ``reasonably required reserve or replacement 
funds''). Subject to limited exceptions, profits that are 
earned during these periods or on such investments must be 
rebated to the Federal government. Under present law, the 
arbitrage rules apply to CREBs and Gulf tax credit bonds, but 
do not apply to QZABs.
---------------------------------------------------------------------------
    \1026\ Sec. 103(b)(2).
    \1027\ Sec. 148.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present-law provision for two 
years (through December 31, 2007).
    In addition, the provision imposes the arbitrage 
requirements of section 148 that apply to interest-bearing tax-
exempt bonds to QZABs. Principles under section 148 and the 
regulations thereunder shall apply for purposes of determining 
the yield restriction and arbitrage rebate requirements 
applicable to QZABs. For example, for arbitrage purposes, the 
yield on an issue of QZABs is computed by taking into account 
all payments of interest, if any, on such bonds, i.e., whether 
the bonds are issued at par, premium, or discount. However, for 
purposes of determining yield, the amount of the credit allowed 
to a taxpayer holding QZABs is not treated as interest, 
although such credit amount is treated as interest income to 
the taxpayer.
    The provision also imposes new spending requirements for 
QZABs. An issuer of QZABs must reasonably expect to and 
actually spend 95 percent or more of the proceeds of such bonds 
on qualified zone academy property within the five-year period 
that begins on the date of issuance. To the extent less than 95 
percent of the proceeds are used to finance qualified zone 
academy property during the five-year spending period, bonds 
will continue to qualify as QZABs if unspent proceeds are used 
within 90 days from the end of such five-year period to redeem 
any nonqualified bonds. For these purposes, the amount of 
nonqualified bonds is to be determined in the same manner as 
Treasury regulations under section 142. The provision provides 
that the five-year spending period may be extended by the 
Secretary if the issuer establishes that the failure to meet 
the spending requirement is due to reasonable cause and the 
related purposes for issuing the bonds will continue to proceed 
with due diligence.
    Finally, issuers of QZABs are required to report issuance 
to the IRS in a manner similar to the information returns 
required for tax-exempt bonds.

                             Effective Date

    The provision extending issuance authority is effective for 
obligations issued after December 31, 2005. The provisions 
imposing arbitrage restrictions, reporting requirements, and 
spending requirements apply to obligations issued after the 
date of enactment with respect to allocations of the annual 
aggregate bond cap for calendar years after 2005.

8. Above-the-line deduction for certain expenses of elementary and 
        secondary school teachers (sec. 108 of the Act and sec. 62 of 
        the Code)

                              Present Law

    In general, ordinary and necessary business expenses are 
deductible (sec. 162). However, in general, unreimbursed 
employee business expenses are deductible only as an itemized 
deduction and only to the extent that the individual's total 
miscellaneous deductions (including employee business expenses) 
exceed two percent of adjusted gross income. An individual's 
otherwise allowable itemized deductions may be further limited 
by the overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of $150,500 (for 2006).\1028\ In addition, miscellaneous 
itemized deductions are not allowable under the alternative 
minimum tax.
---------------------------------------------------------------------------
    \1028\ The adjusted income threshold is $75,250 in the case of a 
married individual filing a separate return (for 2006). For 2007, the 
adjusted income threshold is $156,400 ($78,200 for a married individual 
filing a separate return).
---------------------------------------------------------------------------
    Certain expenses of eligible educators are allowed as an 
above-the-line deduction. Specifically, for taxable years 
beginning after December 31, 2001, and prior to January 1, 
2006, an above-the-line deduction is allowed for up to $250 
annually of expenses paid or incurred by an eligible educator 
for books, supplies (other than nonathletic supplies for 
courses of instruction in health or physical education), 
computer equipment (including related software and services) 
and other equipment, and supplementary materials used by the 
eligible educator in the classroom. To be eligible for this 
deduction, the expenses must be otherwise deductible under 162 
as a trade or business expense. A deduction is allowed only to 
the extent the amount of expenses exceeds the amount excludable 
from income under section 135 (relating to education savings 
bonds), 529(c)(1) (relating to qualified tuition programs), and 
section 530(d)(2) (relating to Coverdell education savings 
accounts).
    An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school which provides elementary education or secondary 
education, as determined under State law.
    The above-the-line deduction for eligible educators is not 
allowed for taxable years beginning after December 31, 2005.

                        Explanation of Provision

    The present-law provision is extended for two years, 
through December 31, 2007.

                             Effective Date

    The provision is effective for expenses paid or incurred in 
taxable years beginning after December 31, 2005.

9. Extension and expansion to petroleum products of expensing for 
        environmental remediation costs (sec. 109 of the Act and sec. 
        198 of the Code)

                              Present Law

    Present law allows a deduction for ordinary and necessary 
expenses paid or incurred in carrying on any trade or 
business.\1029\ Treasury regulations provide that the cost of 
incidental repairs that neither materially add to the value of 
property nor appreciably prolong its life, but keep it in an 
ordinarily efficient operating condition, may be deducted 
currently as a business expense. Section 263(a)(1) limits the 
scope of section 162 by prohibiting a current deduction for 
certain capital expenditures. Treasury regulations define 
``capital expenditures'' as amounts paid or incurred to 
materially add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer, or to adapt 
property to a new or different use. Amounts paid for repairs 
and maintenance do not constitute capital expenditures. The 
determination of whether an expense is deductible or 
capitalizable is based on the facts and circumstances of each 
case.
---------------------------------------------------------------------------
    \1029\ Sec. 162.
---------------------------------------------------------------------------
    Taxpayers may elect to treat certain environmental 
remediation expenditures that would otherwise be chargeable to 
capital account as deductible in the year paid or 
incurred.\1030\ The deduction applies for both regular and 
alternative minimum tax purposes. The expenditure must be 
incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site. In 
general, any expenditure for the acquisition of depreciable 
property used in connection with the abatement or control of 
hazardous substances at a qualified contaminated site does not 
constitute a qualified environmental remediation expenditure. 
However, depreciation deductions allowable for such property, 
which would otherwise be allocated to the site under the 
principles set forth in Commissioner v. Idaho Power Co.\1031\ 
and section 263A, are treated as qualified environmental 
remediation expenditures.
---------------------------------------------------------------------------
    \1030\ Sec. 198.
    \1031\ 418 U.S. 1 (1974).
---------------------------------------------------------------------------
    A ``qualified contaminated site'' (a so-called 
``brownfield'') generally is any property that is held for use 
in a trade or business, for the production of income, or as 
inventory and is certified by the appropriate State 
environmental agency to be an area at or on which there has 
been a release (or threat of release) or disposal of a 
hazardous substance. Both urban and rural property may qualify. 
However, sites that are identified on the national priorities 
list under the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (``CERCLA'') \1032\ 
cannot qualify as targeted areas. Hazardous substances 
generally are defined by reference to sections 101(14) and 102 
of CERCLA, subject to additional limitations applicable to 
asbestos and similar substances within buildings, certain 
naturally occurring substances such as radon, and certain other 
substances released into drinking water supplies due to 
deterioration through ordinary use. Petroleum products 
generally are not regarded as hazardous substances for purposes 
of section 198 (except for purposes of determining qualified 
environmental remediation expenditures in the ``Gulf 
Opportunity Zone'' under section 1400N(g), as described 
below).\1033\
---------------------------------------------------------------------------
    \1032\ Pub. L. No. 96-510 (1980).
    \1033\ Section 101(14) of CERCLA specifically excludes ``petroleum, 
including crude oil or any fraction thereof which is not otherwise 
specifically listed or designated as a hazardous substance under 
subparagraphs (A) through (F) of this paragraph,'' from the definition 
of ``hazardous substance.''
---------------------------------------------------------------------------
    In the case of property to which a qualified environmental 
remediation expenditure otherwise would have been capitalized, 
any deduction allowed under section 198 is treated as a 
depreciation deduction and the property is treated as section 
1245 property. Thus, deductions for qualified environmental 
remediation expenditures are subject to recapture as ordinary 
income upon a sale or other disposition of the property. In 
addition, sections 280B (demolition of structures) and 468 
(special rules for mining and solid waste reclamation and 
closing costs) do not apply to amounts that are treated as 
expenses under this provision.
    Eligible expenditures are those paid or incurred before 
January 1, 2006.
    Under section 1400N(g), the above provisions apply to 
expenditures paid or incurred to abate contamination at 
qualified contaminated sites in the Gulf Opportunity Zone 
(defined as that portion of the Hurricane Katrina Disaster Area 
determined by the President to warrant individual or individual 
and public assistance from the Federal government under the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
by reason of Hurricane Katrina) before January 1, 2008; in 
addition, within the Gulf Opportunity Zone section 1400N(g) 
broadens the definition of hazardous substance to include 
petroleum products (defined by reference to section 
4612(a)(3)).

                        Explanation of Provision

    The provision extends for two years the present-law 
provisions relating to environmental remediation expenditures 
(through December 31, 2007).
    In addition, the provision expands the definition of 
hazardous substance to include petroleum products. Under the 
provision, petroleum products are defined by reference to 
section 4612(a)(3), and thus include crude oil, crude oil 
condensates and natural gasoline.\1034\
---------------------------------------------------------------------------
    \1034\ The present law exceptions for sites on the national 
priorities list under CERCLA, and for substances with respect to which 
a removal or remediation is not permitted under section 104 of CERCLA 
by reason of subsection (a)(3) thereof, would continue to apply to all 
hazardous substances (including petroleum products).
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to expenditures paid or incurred 
after December 31, 2005, and before January 1, 2008.

10. Tax incentives for investment in the District of Columbia (sec. 110 
        of the Act and secs. 1400, 1400A, 1400B, and 1400C of the Code)

                              Present Law


In general

    The Taxpayer Relief Act of 1997 designated certain 
economically depressed census tracts within the District of 
Columbia as the District of Columbia Enterprise Zone (the 
``D.C. Zone''), within which businesses and individual 
residents are eligible for special tax incentives. The census 
tracts that compose the D.C. Zone are (1) all census tracts 
that presently are part of the D.C. enterprise community 
designated under section 1391 (i.e., portions of Anacostia, Mt. 
Pleasant, Chinatown, and the easternmost part of the District), 
and (2) all additional census tracts within the District of 
Columbia where the poverty rate is not less than 20-percent. 
The D.C. Zone designation remains in effect for the period from 
January 1, 1998, through December 31, 2005. In general, the tax 
incentives available in connection with the D.C. Zone are a 20-
percent wage credit, an additional $35,000 of section 179 
expensing for qualified zone property, expanded tax-exempt 
financing for certain zone facilities, and a zero-percent 
capital gains rate from the sale of certain qualified D.C. zone 
assets.

Wage credit

    A 20-percent wage credit is available to employers for the 
first $15,000 of qualified wages paid to each employee (i.e., a 
maximum credit of $3,000 with respect to each qualified 
employee) who (1) is a resident of the D.C. Zone, and (2) 
performs substantially all employment services within the D.C. 
Zone in a trade or business of the employer.
    Wages paid to a qualified employee who earns more than 
$15,000 are eligible for the wage credit (although only the 
first $15,000 of wages is eligible for the credit). The wage 
credit is available with respect to a qualified full-time or 
part-time employee (employed for at least 90 days), regardless 
of the number of other employees who work for the employer. In 
general, any taxable business carrying out activities in the 
D.C. Zone may claim the wage credit, regardless of whether the 
employer meets the definition of a ``D.C. Zone business.'' 
\1035\
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    \1035\ However, the wage credit is not available for wages paid in 
connection with certain business activities described in section 
144(c)(6)(B) or certain farming activities. In addition, wages are not 
eleigible for the wage credit if paid to (1) a person who owns more 
than five percent of the stock (or capital or profits interests) of the 
employer, (2) certain relatives of the employer, or (3) if the employer 
is a corporation or partnership, certain relatives of a person who owns 
more than 50 percent of the business.
---------------------------------------------------------------------------
    An employer's deduction otherwise allowed for wages paid is 
reduced by the amount of wage credit claimed for that taxable 
year.\1036\ Wages are not to be taken into account for purposes 
of the wage credit if taken into account in determining the 
employer's work opportunity tax credit under section 51 or the 
welfare-to-work credit under section 51A.\1037\ In addition, 
the $15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit.\1038\ The wage credit may be used to offset up to 
25 percent of alternative minimum tax liability.\1039\
---------------------------------------------------------------------------
    \1036\ Sec. 280C(a).
    \1037\ Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2).
    \1038\ Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2).
    \1039\ Sec. 38(c)(2).
---------------------------------------------------------------------------

Section 179 expensing

    In general, a D.C. Zone business is allowed an additional 
$35,000 of section 179 expensing for qualifying property placed 
in service by a D.C. Zone business.\1040\ The section 179 
expensing allowed to a taxpayer is phased out by the amount by 
which 50 percent of the cost of qualified zone property placed 
in service during the year by the taxpayer exceeds $200,000 
($400,000 for taxable years beginning after 2002 and before 
2010). The term ``qualified zone property'' is defined as 
depreciable tangible property (including buildings), provided 
that (1) the property is acquired by the taxpayer (from an 
unrelated party) after the designation took effect, (2) the 
original use of the property in the D.C. Zone commences with 
the taxpayer, and (3) substantially all of the use of the 
property is in the D.C. Zone in the active conduct of a trade 
or business by the taxpayer.\1041\ Special rules are provided 
in the case of property that is substantially renovated by the 
taxpayer.
---------------------------------------------------------------------------
    \1040\ Sec. 1397A.
    \1041\ Sec. 1397D.
---------------------------------------------------------------------------

Tax-exempt financing

    A qualified D.C. Zone business is permitted to borrow 
proceeds from tax-exempt qualified enterprise zone facility 
bonds (as defined in section 1394) issued by the District of 
Columbia.\1042\ Such bonds are subject to the District of 
Columbia's annual private activity bond volume limitation. 
Generally, qualified enterprise zone facility bonds for the 
District of Columbia are bonds 95 percent or more of the net 
proceeds of which are used to finance certain facilities within 
the D.C. Zone. The aggregate face amount of all outstanding 
qualified enterprise zone facility bonds per qualified D.C. 
Zone business may not exceed $15 million and may be issued only 
while the D.C. Zone designation is in effect.
---------------------------------------------------------------------------
    \1042\ Sec. 1400A.
---------------------------------------------------------------------------

Zero-percent capital gains

    A zero-percent capital gains rate applies to capital gains 
from the sale of certain qualified D.C. Zone assets held for 
more than five years.\1043\ In general, a qualified ``D.C. Zone 
asset'' means stock or partnership interests held in, or 
tangible property held by, a D.C. Zone business. For purposes 
of the zero-percent capital gains rate, the D.C. Enterprise 
Zone is defined to include all census tracts within the 
District of Columbia where the poverty rate is not less than 10 
percent.
---------------------------------------------------------------------------
    \1043\ Sec. 1400B.
---------------------------------------------------------------------------
    In general, gain eligible for the zero-percent tax rate 
means gain from the sale or exchange of a qualified D.C. Zone 
asset that is (1) a capital asset or property used in the trade 
or business as defined in section 1231(b), and (2) acquired 
before January 1, 2006. Gain that is attributable to real 
property, or to intangible assets, qualifies for the zero-
percent rate, provided that such real property or intangible 
asset is an integral part of a qualified D.C. Zone 
business.\1044\ However, no gain attributable to periods before 
January 1, 1998, and after December 31, 2010, is qualified 
capital gain.
---------------------------------------------------------------------------
    \1044\ However, sole proprietorships and other taxpayers selling 
assets directly cannot claim the zero-percent rate on capital gain from 
the sale of any intangible property (i.e., the integrally related test 
does not apply).
---------------------------------------------------------------------------

District of Columbia homebuyer tax credit

    First-time homebuyers of a principal residence in the 
District of Columbia are eligible for a nonrefundable tax 
credit of up to $5,000 of the amount of the purchase price. The 
$5,000 maximum credit applies both to individuals and married 
couples. Married individuals filing separately can claim a 
maximum credit of $2,500 each. The credit phases out for 
individual taxpayers with adjusted gross income between $70,000 
and $90,000 ($110,000-$130,000 for joint filers). For purposes 
of eligibility, ``first-time homebuyer'' means any individual 
if such individual did not have a present ownership interest in 
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence 
to which the credit applies. The credit expired for purchases 
after December 31, 2005.\1045\
---------------------------------------------------------------------------
    \1045\ Sec. 1400C(i).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the designation of the D.C. Zone for 
two years (through December 31, 2007), thus extending the wage 
credit and section 179 expensing for two years.
    The provision extends the tax-exempt financing authority 
for two years, applying to bonds issued during the period 
beginning on January 1, 1998, and ending on December 31, 2007.
    The provision extends the zero-percent capital gains rate 
applicable to capital gains from the sale of certain qualified 
D.C. Zone assets for two years.
    The provision extends the first-time homebuyer credit for 
two years, through December 31, 2007.

                             Effective Date

    The provision is effective for periods beginning after, 
bonds issued after, acquisitions after, and property purchased 
after December 31, 2005.

11. Indian employment tax credit (sec. 111 of the Act and sec. 45A of 
        the Code)

                              Present Law

    In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees (sec. 45A). 
The credit is equal to 20 percent of the excess of eligible 
employee qualified wages and health insurance costs during the 
current year over the amount of such wages and costs incurred 
by the employer during 1993. The credit is an incremental 
credit, such that an employer's current-year qualified wages 
and qualified employee health insurance costs (up to $20,000 
per employee) are eligible for the credit only to the extent 
that the sum of such costs exceeds the sum of comparable costs 
paid during 1993. No deduction is allowed for the portion of 
the wages equal to the amount of the credit.
    Qualified wages means wages paid or incurred by an employer 
for services performed by a qualified employee. A qualified 
employee means any employee who is an enrolled member of an 
Indian tribe or the spouse of an enrolled member of an Indian 
tribe, who performs substantially all of the services within an 
Indian reservation, and whose principal place of abode while 
performing such services is on or near the reservation in which 
the services are performed. An ``Indian reservation'' is a 
reservation as defined in section 3(d) of the Indian Financing 
Act of 1974 or section 4(1) of the Indian Child Welfare Act of 
1978. For purposes of the preceding sentence, section 3(d) is 
applied by treating ``former Indian reservations in Oklahoma'' 
as including only lands that are (1) within the jurisdictional 
area of an Oklahoma Indian tribe as determined by the Secretary 
of the Interior, and (2) recognized by such Secretary as an 
area eligible for trust land status under 25 CFR Part 151 (as 
in effect on August 5, 1997).
    An employee is not treated as a qualified employee for any 
taxable year of the employer if the total amount of wages paid 
or incurred by the employer with respect to such employee 
during the taxable year exceeds an amount determined at an 
annual rate of $30,000 (which after adjusted for inflation 
after 1993 is currently $35,000). In addition, an employee will 
not be treated as a qualified employee under certain specific 
circumstances, such as where the employee is related to the 
employer (in the case of an individual employer) or to one of 
the employer's shareholders, partners, or grantors. Similarly, 
an employee will not be treated as a qualified employee where 
the employee has more than a 5 percent ownership interest in 
the employer. Finally, an employee will not be considered a 
qualified employee to the extent the employee's services relate 
to gaming activities or are performed in a building housing 
such activities.
    The wage credit is available for wages paid or incurred on 
or after January 1, 1994, in taxable years that begin before 
January 1, 2006.

                        Explanation of Provision

    The provision extends for two years the present-law 
employment credit provision (through taxable years beginning on 
or before December 31, 2007).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

12. Accelerated depreciation for business property on Indian 
        reservations (sec. 112 of the Act and sec. 168 of the Code)

                              Present Law

    With respect to certain property used in connection with 
the conduct of a trade or business within an Indian 
reservation, depreciation deductions under section 168(j) are 
determined using the following recovery periods:

    Property                                                       Years
3-year............................................................     2
5-year............................................................     3
7-year............................................................     4
10-year...........................................................     6
15-year...........................................................     9
20-year...........................................................    12
Nonresidential real...............................................    22

    ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property which is (1) used by 
the taxpayer predominantly in the active conduct of a trade or 
business within an Indian reservation, (2) not used or located 
outside the reservation on a regular basis, (3) not acquired 
(directly or indirectly) by the taxpayer from a person who is 
related to the taxpayer (within the meaning of section 
465(b)(3)(C)), and (4) described in the recovery-period table 
above. In addition, property is not ``qualified Indian 
reservation property'' if it is placed in service for purposes 
of conducting gaming activities. Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).
    An ``Indian reservation'' means a reservation as defined in 
section 3(d) of the Indian Financing Act of 1974 or section 
4(1) of the Indian Child Welfare Act of 1978. For purposes of 
the preceding sentence, section 3(d) is applied by treating 
``former Indian reservations in Oklahoma'' as including only 
lands that are (1) within the jurisdictional area of an 
Oklahoma Indian tribe as determined by the Secretary of the 
Interior, and (2) recognized by such Secretary as an area 
eligible for trust land status under 25 CFR Part 151 (as in 
effect on August 5, 1997).
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for Indian reservation property is 
available with respect to property placed in service on or 
after January 1, 1994, and before January 1, 2006.

                        Explanation of Provision

    The provision extends for two years the present-law 
incentive relating to depreciation of qualified Indian 
reservation property (to apply to property placed in service 
through December 31, 2007).

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2005.

13. Fifteen-year straight-line cost recovery for qualified leasehold 
        improvements and qualified restaurant property (sec. 113 of the 
        Act and sec. 168 of the Code)

                              Present Law


In general

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (''MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in- 
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.

Depreciation of leasehold improvements

    Generally, depreciation allowances for improvements made on 
leased property are determined under MACRS, even if the MACRS 
recovery period assigned to the property is longer than the 
term of the lease. This rule applies regardless of whether the 
lessor or the lessee places the leasehold improvements in 
service. If a leasehold improvement constitutes an addition or 
improvement to nonresidential real property already placed in 
service, the improvement generally is depreciated using the 
straight-line method over a 39-year recovery period, beginning 
in the month the addition or improvement was placed in service. 
However, exceptions exist for certain qualified leasehold 
improvements and certain qualified restaurant property.

Qualified leasehold improvement property

    Section 168(e)(3)(E)(iv) provides a statutory 15-year 
recovery period for qualified leasehold improvement property 
placed in service before January 1, 2006. Qualified leasehold 
improvement property is recovered using the straight-line 
method. Leasehold improvements placed in service in 2006 and 
later are subject to the general rules described above.
    Qualified leasehold improvement property is any improvement 
to an interior portion of a building that is nonresidential 
real property, provided certain requirements are met. The 
improvement must be made under or pursuant to a lease either by 
the lessee (or sublessee), or by the lessor, of that portion of 
the building to be occupied exclusively by the lessee (or 
sublessee). The improvement must be placed in service more than 
three years after the date the building was first placed in 
service. Qualified leasehold improvement property does not 
include any improvement for which the expenditure is 
attributable to the enlargement of the building, any elevator 
or escalator, any structural component benefiting a common 
area, or the internal structural framework of the building. 
However, if a lessor makes an improvement that qualifies as 
qualified leasehold improvement property, such improvement does 
not qualify as qualified leasehold improvement property to any 
subsequent owner of such improvement. An exception to the rule 
applies in the case of death and certain transfers of property 
that qualify for non- recognition treatment.

Qualified restaurant property

    Section 168(e)(3)(E)(v) provides a statutory 15-year 
recovery period for qualified restaurant property placed in 
service before January 1, 2006. For purposes of the provision, 
qualified restaurant property means any improvement to a 
building if such improvement is placed in service more than 
three years after the date such building was first placed in 
service and more than 50 percent of the building's square 
footage is devoted to the preparation of, and seating for on-
premises consumption of, prepared meals. Qualified restaurant 
property is recovered using the straight-line method.

                        Explanation of Provision

    The present-law provisions are extended for two years 
(through December 31, 2007).

                             Effective Date

    The provision applies to property placed in service after 
December 31, 2005.

14. Suspend limitation on rate of rum excise tax cover over to Puerto 
        Rico and Virgin Islands (sec. 114 of the Act and sec. 7652 of 
        the Code)

                              Present Law

    A $13.50 per proof gallon \1046\ excise tax is imposed on 
distilled spirits produced in or imported (or brought) into the 
United States.\1047\ The excise tax does not apply to distilled 
spirits that are exported from the United States, including 
exports to U.S. possessions (e.g., Puerto Rico and the Virgin 
Islands).\1048\
---------------------------------------------------------------------------
    \1046\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \1047\ Sec. 5001(a)(1).
    \1048\ Secs. 5062(b), 7653(b) and (c).
---------------------------------------------------------------------------
    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\1049\ The amount of the cover over is 
limited under Code section 7652(f) to $10.50 per proof gallon 
($13.25 per proof gallon during the period July 1, 1999 through 
December 31, 2005).
---------------------------------------------------------------------------
    \1049\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the Virgin Islands is retained by the United 
States under section 7652(b)(3).
---------------------------------------------------------------------------
    Tax amounts attributable to shipments to the United States 
of rum produced in Puerto Rico are covered over to Puerto Rico. 
Tax amounts attributable to shipments to the United States of 
rum produced in the Virgin Islands are covered over to the 
Virgin Islands. Tax amounts attributable to shipments to the 
United States of rum produced in neither Puerto Rico nor the 
Virgin Islands are divided and covered over to the two 
possessions under a formula.\1050\ Amounts covered over to 
Puerto Rico and the Virgin Islands are deposited into the 
treasuries of the two possessions for use as those possessions 
determine.\1051\ All of the amounts covered over are subject to 
the limitation.
---------------------------------------------------------------------------
    \1050\ Sec. 7652(e)(2).
    \1051\ Secs. 7652(a)(3), (b)(3), and (e)(1). 
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision temporarily suspends the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover over amount of $13.25 per proof gallon is 
extended for rum brought into the United States after December 
31, 2005 and before January 1, 2008. After December 31, 2007, 
the cover over amount reverts to $10.50 per proof gallon.

                             Effective Date

    The changes in the cover over rate are effective for 
articles brought into the United States after December 31, 
2005.

15. Parity in the application of certain limits to mental health 
        benefits (sec. 115 of the Act and sec. 9812(f)(3) of the Code, 
        sec. 712(f) of ERISA, and sec. 2705(f) of the PHSA)

                              Present Law

    The Code, the Employee Retirement Income Security Act of 
1974 (``ERISA'') and the Public Health Service Act (``PHSA'') 
contain provisions under which group health plans that provide 
both medical and surgical benefits and mental health benefits 
cannot impose aggregate lifetime or annual dollar limits on 
mental health benefits that are not imposed on substantially 
all medical and surgical benefits (``mental health parity 
requirements''). In the case of a group health plan which 
provides benefits for mental health, the mental health parity 
requirements do not affect the terms and conditions (including 
cost sharing, limits on numbers of visits or days of coverage, 
and requirements relating to medical necessity) relating to the 
amount, duration, or scope of mental health benefits under the 
plan, except as specifically provided in regard to parity in 
the imposition of aggregate lifetime limits and annual limits.
    The Code imposes an excise tax on group health plans which 
fail to meet the mental health parity requirements. The excise 
tax is equal to $100 per day during the period of noncompliance 
and is generally imposed on the employer sponsoring the plan if 
the plan fails to meet the requirements. The maximum tax that 
can be imposed during a taxable year cannot exceed the lesser 
of 10 percent of the employer's group health plan expenses for 
the prior year or $500,000. No tax is imposed if the Secretary 
determines that the employer did not know, and in exercising 
reasonable diligence would not have known, that the failure 
existed.
    The mental health parity requirements do not apply to group 
health plans of small employers nor do they apply if their 
application results in an increase in the cost under a group 
health plan of at least one percent. Further, the mental health 
parity requirements do not require group health plans to 
provide mental health benefits.
    The Code, ERISA and PHSA mental health parity requirements 
are scheduled to expire with respect to benefits for services 
furnished after December 31, 2006.

                        Explanation of Provision

    The provision extends the present-law Code excise tax for 
failure to comply with the mental health parity requirements 
through December 31, 2007. It also extends the ERISA and PHSA 
requirements through December 31, 2007.

                             Effective Date

    The provision is effective on the date of enactment.

16. Expand charitable contribution allowed for scientific property used 
        for research and expand and extend the charitable contribution 
        allowed computer technology and equipment (sec. 116 of the Act 
        and sec. 170 of the Code)

                              Present Law

    In the case of a charitable contribution of inventory or 
other ordinary-income or short-term capital gain property, the 
amount of the charitable deduction generally is limited to the 
taxpayer's basis in the property. In the case of a charitable 
contribution of tangible personal property, the deduction is 
limited to the taxpayer's basis in such property if the use by 
the recipient charitable organization is unrelated to the 
organization's tax-exempt purpose. In cases involving 
contributions to a private foundation (other than certain 
private operating foundations), the amount of the deduction is 
limited to the taxpayer's basis in the property.\1052\
---------------------------------------------------------------------------
    \1052\ Sec. 170(e)(1).
---------------------------------------------------------------------------
    Under present law, a taxpayer's deduction for charitable 
contributions of scientific property used for research and for 
contributions of computer technology and equipment generally is 
limited to the taxpayer's basis (typically, cost) in the 
property. However, certain corporations may claim a deduction 
in excess of basis for a ``qualified research contribution'' or 
a ``qualified computer contribution.'' \1053\ This enhanced 
deduction is equal to the lesser of (1) basis plus one-half of 
the item's appreciation (i.e., basis plus one half of fair 
market value in excess of basis) or (2) two times basis. The 
enhanced deduction for qualified computer contributions expired 
for any contribution made during any taxable year beginning 
after December 31, 2005.
---------------------------------------------------------------------------
    \1053\ Secs. 170(e)(4) and 170(e)(6).
---------------------------------------------------------------------------
    A qualified research contribution means a charitable 
contribution of inventory that is tangible personal property. 
The contribution must be to a qualified educational or 
scientific organization and be made not later than two years 
after construction of the property is substantially completed. 
The original use of the property must be by the donee, and be 
used substantially for research or experimentation, or for 
research training, in the U.S. in the physical or biological 
sciences. The property must be scientific equipment or 
apparatus, constructed by the taxpayer, and may not be 
transferred by the donee in exchange for money, other property, 
or services. The donee must provide the taxpayer with a written 
statement representing that it will use the property in 
accordance with the conditions for the deduction. For purposes 
of the enhanced deduction, property is considered constructed 
by the taxpayer only if the cost of the parts used in the 
construction of the property (other than parts manufactured by 
the taxpayer or a related person) do not exceed 50 percent of 
the taxpayer's basis in the property.
    A qualified computer contribution means a charitable 
contribution of any computer technology or equipment, which 
meets standards of functionality and suitability as established 
by the Secretary of the Treasury. The contribution must be to 
certain educational organizations or public libraries and made 
not later than three years after the taxpayer acquired the 
property or, if the taxpayer constructed the property, not 
later than the date construction of the property is 
substantially completed.\1054\ The original use of the property 
must be by the donor or the donee, and in the case of the 
donee,\1055\ must be used substantially for educational 
purposes related to the function or purpose of the donee. The 
property must fit productively into the donee's education plan. 
The donee may not transfer the property in exchange for money, 
other property, or services, except for shipping, installation, 
and transfer costs. To determine whether property is 
constructed by the taxpayer, the rules applicable to qualified 
research contributions apply. Contributions may be made to 
private foundations under certain conditions.\1056\
---------------------------------------------------------------------------
    \1054\ If the taxpayer constructed the property and reacquired such 
property, the contribution must be within three years of the date the 
original construction was substantially completed. Sec. 
170(e)(6)(D)(i).
    \1055\ This requirement does not apply if the property was 
reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
    \1056\ Sec. 170(e)(6)(C).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends the present-law provision relating to 
the enhanced deduction for computer technology and equipment 
for two years to apply to contributions made during any taxable 
year beginning after December 31, 2005, and before January 1, 
2008.
    Under the provision, property assembled by the taxpayer, in 
addition to property constructed by the taxpayer, is eligible 
for either the enhanced deduction relating to computer 
technology and equipment or to scientific property used for 
research. It is not intended that old or used components 
assembled by the taxpayer into scientific property or computer 
technology or equipment are eligible for the enhanced 
deduction.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

17. Availability of Archer medical savings accounts (sec. 117 of the 
        Act and sec. 220 of the Code)

                              Present Law


Archer medical savings accounts

            In general
    Within limits, contributions to an Archer medical savings 
account (``Archer MSA'') are deductible in determining adjusted 
gross income if made by an eligible individual and are 
excludable from gross income and wages for employment tax 
purposes if made by the employer of an eligible individual. 
Earnings on amounts in an Archer MSA are not currently taxable. 
Distributions from an Archer MSA for medical expenses are not 
includible in gross income. Distributions not used for medical 
expenses are includible in gross income. In addition, 
distributions not used for medical expenses are subject to an 
additional 15-percent tax unless the distribution is made after 
age 65, death, or disability.
            Eligible individuals
    Archer MSAs are available to employees covered under an 
employer-sponsored high deductible plan of a small employer and 
self-employed individuals covered under a high deductible 
health plan. An employer is a small employer if it employed, on 
average, no more than 50 employees on business days during 
either the preceding or the second preceding year. An 
individual is not eligible for an Archer MSA if he or she is 
covered under any other health plan in addition to the high 
deductible plan.
            Tax treatment of and limits on contributions
    Individual contributions to an Archer MSA are deductible 
(within limits) in determining adjusted gross income (i.e., 
``above-the-line''). In addition, employer contributions are 
excludable from gross income and wages for employment tax 
purposes (within the same limits), except that this exclusion 
does not apply to contributions made through a cafeteria plan. 
In the case of an employee, contributions can be made to an 
Archer MSA either by the individual or by the individual's 
employer.
    The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the deductible under the 
high deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage.
            Definition of high deductible plan
    A high deductible plan is a health plan with an annual 
deductible of at least $1,800 and no more than $2,700 in the 
case of individual coverage and at least $3,650 and no more 
than $5,450 in the case of family coverage (for 2006). In 
addition, the maximum out-of-pocket expenses with respect to 
allowed costs (including the deductible) must be no more than 
$3,650 in the case of individual coverage and no more than 
$6,650 in the case of family coverage (for 2006). A plan does 
not fail to qualify as a high deductible plan merely because it 
does not have a deductible for preventive care as required by 
State law. A plan does not qualify as a high deductible health 
plan if substantially all of the coverage under the plan is for 
certain permitted coverage. In the case of a self-insured plan, 
the plan must in fact be insurance (e.g., there must be 
appropriate risk shifting) and not merely a reimbursement 
arrangement.
            Cap on taxpayers utilizing Archer MSAs and expiration of 
                    pilot program
    The number of taxpayers benefiting annually from an Archer 
MSA contribution is limited to a threshold level (generally 
750,000 taxpayers). The number of Archer MSAs established has 
not exceeded the threshold level.
    After 2005, no new contributions may be made to Archer MSAs 
except by or on behalf of individuals who previously made (or 
had made on their behalf) Archer MSA contributions and 
employees who are employed by a participating employer.
    Trustees of Archer MSAs are generally required to make 
reports to the Treasury by August 1 regarding Archer MSAs 
established by July 1 of that year. If the threshold level is 
reached in a year, the Secretary is required to make and 
publish such determination by October 1 of such year.

Health savings accounts

    Health savings accounts (``HSAs'') were enacted by the 
Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003. Like Archer MSAs, an HSA is a tax-exempt trust or 
custodial account to which tax-deductible contributions may be 
made by individuals with a high deductible health plan. HSAs 
provide tax benefits similar to, but more favorable than, those 
provided by Archer MSAs. HSAs were established on a permanent 
basis.

                        Explanation of Provision

    The provision extends for two years the present-law Archer 
MSA provisions (through December 31, 2007).
    The report required by Archer MSA trustees to be made on 
August 1, 2005, or August 1, 2006, (as the case may be) is 
treated as timely filed if made before the close of the 90-day 
period beginning on the date of enactment. The determination 
and publication with respect to calendar year 2005 or 2006 
whether the threshold level has been exceeded is treated as 
timely if made before the close of the 120-day period beginning 
on the date of enactment. If it is determined that 2005 or 2006 
is a cut-off year, the cut-off date is the last date of such 
120-day period.

                             Effective Date

    The provision is effective on the date of enactment.

18. Taxable income limit on percentage depletion for oil and natural 
        gas produced from marginal properties (sec. 118 of the Act and 
        sec. 613A of the Code)

                              Present Law

    The Code permits taxpayers to recover their investments in 
oil and gas wells through depletion deductions. Two methods of 
depletion are currently allowable under the Code: (1) the cost 
depletion method, and (2) the percentage depletion method. 
Under the cost depletion method, the taxpayer deducts that 
portion of the adjusted basis of the depletable property which 
is equal to the ratio of units sold from that property during 
the taxable year to the number of units remaining as of the end 
of taxable year plus the number of units sold during the 
taxable year. Thus, the amount recovered under cost depletion 
may never exceed the taxpayer's basis in the property.
    The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners. Generally, under the percentage depletion method, 15 
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year. The amount deducted generally may not exceed 100 percent 
of the taxable income from that property in any year. For 
marginal production, the 100-percent taxable income limitation 
has been suspended for taxable years beginning after December 
31, 1997, and before January 1, 2006.
    Marginal production is defined as domestic crude oil and 
natural gas production from stripper well property or from 
property substantially all of the production from which during 
the calendar year is heavy oil. Stripper well property is 
property from which the average daily production is 15 barrel 
equivalents or less, determined by dividing the average daily 
production of domestic crude oil and domestic natural gas from 
producing wells on the property for the calendar year by the 
number of wells. Heavy oil is domestic crude oil with a 
weighted average gravity of 20 degrees API or less (corrected 
to 60 degrees Fahrenheit).

                        Explanation of Provision

    The provision extends for two years the present-law taxable 
income limitation suspension provision for marginal production 
(through taxable years beginning on or before December 31, 
2007).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2005.

19. Economic development credit for American Samoa (sec. 119 of the 
        Act)

                              Present Law


In general

    Certain domestic corporations with business operations in 
the U.S. possessions are eligible for the possession tax 
credit.\1057\ This credit offsets the U.S. tax imposed on 
certain income related to operations in the U.S. 
possessions.\1058\ For purposes of the credit, possessions 
include, among other places, American Samoa. Subject to certain 
limitations described below, the amount of the possession tax 
credit allowed to any domestic corporation equals the portion 
of that corporation's U.S. tax that is attributable to the 
corporation's non-U.S. source taxable income from (1) the 
active conduct of a trade or business within a U.S. possession, 
(2) the sale or exchange of substantially all of the assets 
that were used in such a trade or business, or (3) certain 
possessions investment.\1059\ No deduction or foreign tax 
credit is allowed for any possessions or foreign tax paid or 
accrued with respect to taxable income that is taken into 
account in computing the credit under section 936.\1060\ The 
section 936 credit expires for taxable years beginning after 
December 31, 2005.
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    \1057\ Secs. 27(b), 936.
    \1058\ Domestic corporations with activities in Puerto Rico are 
eligible for the section 30A economic activity credit. That credit is 
calculated under the rules set forth in section 936.
    \1059\ Under phase-out rules described below, investment only in 
Guam, American Samoa, and the Northern Mariana Islands (and not in 
other possessions) now may give rise to income eligible for the section 
936 credit.
    \1060\ Sec. 936(c).
---------------------------------------------------------------------------
    To qualify for the possession tax credit for a taxable 
year, a domestic corporation must satisfy two conditions. 
First, the corporation must derive at least 80 percent of its 
gross income for the three-year period immediately preceding 
the close of the taxable year from sources within a possession. 
Second, the corporation must derive at least 75 percent of its 
gross income for that same period from the active conduct of a 
possession business.
    The possession tax credit is available only to a 
corporation that qualifies as an existing credit claimant. The 
determination of whether a corporation is an existing credit 
claimant is made separately for each possession. The possession 
tax credit is computed separately for each possession with 
respect to which the corporation is an existing credit 
claimant, and the credit is subject to either an economic 
activity-based limitation or an income-based limitation.

Qualification as existing credit claimant

    A corporation is an existing credit claimant with respect 
to a possession if (1) the corporation was engaged in the 
active conduct of a trade or business within the possession on 
October 13, 1995, and (2) the corporation elected the benefits 
of the possession tax credit in an election in effect for its 
taxable year that included October 13, 1995.\1061\ A 
corporation that adds a substantial new line of business (other 
than in a qualifying acquisition of all the assets of a trade 
or business of an existing credit claimant) ceases to be an 
existing credit claimant as of the close of the taxable year 
ending before the date on which that new line of business is 
added.
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    \1061\ A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
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Economic activity-based limit

    Under the economic activity-based limit, the amount of the 
credit determined under the rules described above may not 
exceed an amount equal to the sum of (1) 60 percent of the 
taxpayer's qualified possession wages and allocable employee 
fringe benefit expenses, (2) 15 percent of depreciation 
allowances with respect to short-life qualified tangible 
property, plus 40 percent of depreciation allowances with 
respect to medium-life qualified tangible property, plus 65 
percent of depreciation allowances with respect to long-life 
qualified tangible property, and (3) in certain cases, a 
portion of the taxpayer's possession income taxes.

Income-based limit

    As an alternative to the economic activity-based limit, a 
taxpayer may elect to apply a limit equal to the applicable 
percentage of the credit that would otherwise be allowable with 
respect to possession business income; the applicable 
percentage currently is 40 percent.

Repeal and phase out

    In 1996, the section 936 credit was repealed for new 
claimants for taxable years beginning after 1995 and was phased 
out for existing credit claimants over a period including 
taxable years beginning before 2006. The amount of the 
available credit during the phase-out period generally is 
reduced by special limitation rules. These phase-out period 
limitation rules do not apply to the credit available to 
existing credit claimants for income from activities in Guam, 
American Samoa, and the Northern Mariana Islands. As described 
previously, the section 936 credit is repealed for all 
possessions, including Guam, American Samoa, and the Northern 
Mariana Islands, for all taxable years beginning after 2005.

                        Explanation of Provision

    Under the provision, a domestic corporation that is an 
existing credit claimant with respect to American Samoa and 
that elected the application of section 936 for its last 
taxable year beginning before January 1, 2006 is allowed, for 
two taxable years, a credit based on the economic activity-
based limitation rules described above. The credit is not part 
of the Code but is computed based on the rules secs. 30A and 
936.
    The amount of the credit allowed to a qualifying domestic 
corporation under the provision is equal to the sum of the 
amounts used in computing the corporation's economic activity-
based limitation (described above in the present law section) 
with respect to American Samoa, except that no credit is 
allowed for the amount of any American Samoa income taxes. 
Thus, for any qualifying corporation the amount of the credit 
equals the sum of (1) 60 percent of the corporation's qualified 
American Samoa wages and allocable employee fringe benefit 
expenses and (2) 15 percent of the corporation's depreciation 
allowances with respect to short-life qualified American Samoa 
tangible property, plus 40 percent of the corporation's 
depreciation allowances with respect to medium-life qualified 
American Samoa tangible property, plus 65 percent of the 
corporation's depreciation allowances with respect to long-life 
qualified American Samoa tangible property.
    The present-law section 936(c) rule denying a credit or 
deduction for any possessions or foreign tax paid with respect 
to taxable income taken into account in computing the credit 
under section 936 does not apply with respect to the credit 
allowed by the provision.
    The two-year credit allowed by the provision is intended to 
provide additional time for the development of a comprehensive, 
long-term economic policy toward American Samoa. It is expected 
that in developing a long-term policy, non-tax policy 
alternatives should be carefully considered. It is expected 
that long-term policy toward the possessions should take into 
account the unique circumstances in each possession.

                             Effective Date

    The provision is effective for the first two taxable years 
of a corporation which begin after December 31, 2005, and 
before January 1, 2008.

20. Extension of placed-in-service deadline for certain Gulf 
        Opportunity Zone property (sec. 120 of the Act and sec. 1400N 
        of the Code)

                              Present Law


In general

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from 3 to 25 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.

Gulf Opportunity Zone property

    Present law provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified Gulf Opportunity Zone \1062\ property. In order to 
qualify, property generally must be placed in service on or 
before December 31, 2007 (December 31, 2008 in the case of 
nonresidential real property and residential rental property).
---------------------------------------------------------------------------
    \1062\ The ``Gulf Opportunity Zone'' is defined as that portion of 
the Hurricane Katrina Disaster Area determined by the President to 
warrant individual or individual and public assistance from the Federal 
government under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act by reason of Hurricane Katrina. The term ``Hurricane 
Katrina disaster area'' means an area with respect to which a major 
disaster has been declared by the President before September 14, 2005, 
under section 401 of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act by reason of Hurricane Katrina.
---------------------------------------------------------------------------
    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes for 
the taxable year in which the property is placed in service. 
The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or 
section 263A. The basis of the property and the depreciation 
allowances in the year of purchase and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction. In addition, the provision provides 
that there is no adjustment to the allowable amount of 
depreciation for purposes of computing a taxpayer's alternative 
minimum taxable income with respect to property to which the 
provision applies. A taxpayer is allowed to elect out of the 
additional first-year depreciation for any class of property 
for any taxable year.
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet all of the following 
requirements. First, the property must be property (1) to which 
the general rules of the Modified Accelerated Cost Recovery 
System (``MACRS'') apply with an applicable recovery period of 
20 years or less, (2) computer software other than computer 
software covered by section 197, (3) water utility property (as 
defined in section 168(e)(5)), (4) certain leasehold 
improvement property, or (5) certain nonresidential real 
property and residential rental property. Second, substantially 
all of the use of such property must be in the Gulf Opportunity 
Zone and in the active conduct of a trade or business by the 
taxpayer in the Gulf Opportunity Zone. Third, the original use 
of the property in the Gulf Opportunity Zone must commence with 
the taxpayer on or after August 28, 2005. (Thus, used property 
may constitute qualified property so long as it has not 
previously been used within the Gulf Opportunity Zone. In 
addition, it is intended that additional capital expenditures 
incurred to recondition or rebuild property the original use of 
which in the Gulf Opportunity Zone began with the taxpayer 
would satisfy the ``original use'' requirement. See Treasury 
Regulation 1.48-2 Example 5.) Finally, the property must be 
acquired by purchase (as defined under section 179(d)) by the 
taxpayer on or after August 28, 2005 and placed in service on 
or before December 31, 2007. For qualifying nonresidential real 
property and residential rental property, the property must be 
placed in service on or before December 31, 2008, in lieu of 
December 31, 2007. Property does not qualify if a binding 
written contract for the acquisition of such property was in 
effect before August 28, 2005. However, property is not 
precluded from qualifying for the additional first-year 
depreciation merely because a binding written contract to 
acquire a component of the property is in effect prior to 
August 28, 2005.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies if the taxpayer 
begins the manufacture, construction, or production of the 
property on or after August 28, 2005, and the property is 
placed in service on or before December 31, 2007 (and all other 
requirements are met). In the case of qualified nonresidential 
real property and residential rental property, the property 
must be placed in service on or before December 31, 2008. 
Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a contract that is entered 
into prior to the manufacture, construction, or production of 
the property is considered to be manufactured, constructed, or 
produced by the taxpayer.
    Under a special rule, property any portion of which is 
financed with the proceeds of a tax-exempt obligation under 
section 103 is not eligible for the additional first-year 
depreciation deduction. Recapture rules apply under the 
provision if the property ceases to be qualified Gulf 
Opportunity Zone property.

                        Explanation of Provision

    The provision extends the placed-in-service deadline for 
specified Gulf Opportunity Zone extension property to qualify 
for the additional first-year depreciation deduction.\1063\ 
Specified Gulf Opportunity Zone extension property is defined 
as property substantially all the use of which is in one or 
more specified portions of the Gulf Opportunity Zone and which 
is either: (1) nonresidential real property or residential 
rental property which is placed in service by the taxpayer on 
or before December 31, 2010, or (2) in the case of a taxpayer 
who places in service a building described in (1), property 
described in section 168(k)(2)(A)(i) \1064\ if substantially 
all the use of such property is in such building and such 
property is placed in service within 90 days of the date the 
building is placed in service. However, in the case of 
nonresidential real property or residential rental property, 
only the adjusted basis of such property attributable to 
manufacture, construction, or production before January 1, 2010 
(``progress expenditures'') is eligible for the additional 
first-year depreciation.
---------------------------------------------------------------------------
    \1063\ The extension of the placed-in-service deadline does not 
apply for purposes of the increased section 179 expensing limit 
available to Gulf Opportunity Zone property.
    \1064\ Generally, property described in section 168(k)(2)(A)(i) is 
(1) property to which the general rules of the Modified Accelerated 
Cost Recovery System (``MACRS'') apply with an applicable recovery 
period of 20 years or less, (2) computer software other than computer 
software covered by section 197, (3) water utility property (as defined 
in section 168(e)(5)), or (4) certain leasehold improvement property.
---------------------------------------------------------------------------
    The specified portions of the Gulf Opportunity Zone are 
defined as those portions of the Gulf Opportunity Zone which 
are in a county or parish which is identified by the Secretary 
of the Treasury (or his delegate) as being a county or parish 
in which hurricanes occurring in 2005 damaged (in the 
aggregate) more than 60 percent of the housing units in such 
county or parish which were occupied (determined according to 
the 2000 Census.) \1065\
---------------------------------------------------------------------------
    \1065\ The Office of the Federal Coordinator for Gulf Coast 
Rebuilding at the Department of Homeland Security, in cooperation with 
the Federal Emergency Management Agency, the Small Business 
Administration, and the Department of Housing and Urban Development, 
compiled data to assess the full extent of housing damage due to 2005 
Hurricanes Katrina, Rita, and Wilma. The data was published on February 
12, 2006 and is available at www.dhs.gov/xlibrary/assets/
GulfCoast_HousingDamageEstimates_021206.pdf (last accessed December 5, 
2006). It is intended that the Secretary or his delegate will make use 
of this data in identifying counties and parishes which qualify under 
the provision.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies as if included in section 101 of the 
Gulf Opportunity Zone Act of 2005 \1066\ (``GOZA''). Section 
101 of GOZA is effective for property placed in service on or 
after August 28, 2005, in taxable years ending on or after such 
date.
---------------------------------------------------------------------------
    \1066\ Pub. L. No. 109-135 (2005).
---------------------------------------------------------------------------

21. Authority for undercover operations (sec. 121 of the Act and sec. 
        7608 of the Code)

                              Present Law

    IRS undercover operations are exempt from the otherwise 
applicable statutory restrictions controlling the use of 
government funds (which generally provide that all receipts 
must be deposited in the general fund of the Treasury and all 
expenses paid out of appropriated funds). In general, the 
exemption permits the IRS to use proceeds from an undercover 
operation to pay additional expenses incurred in the undercover 
operation. The IRS is required to conduct a detailed financial 
audit of large undercover operations in which the IRS is using 
proceeds from such operations and to provide an annual audit 
report to the Congress on all such large undercover operations.
    The provision was originally enacted in The Anti-Drug Abuse 
Act of 1988. The exemption originally expired on December 31, 
1989, and was extended by the Comprehensive Crime Control Act 
of 1990 to December 31, 1991. There followed a gap of 
approximately four and a half years during which the provision 
had lapsed. In the Taxpayer Bill of Rights II, the authority to 
use proceeds from undercover operations was extended for five 
years, through 2000. The Community Renewal Tax Relief Act of 
2000 extended the authority of the IRS to use proceeds from 
undercover operations for an additional five years, through 
2005. The Gulf Opportunity Zone Act of 2005 extended the 
authority through December 31, 2006.

                        Explanation of Provision

    The provision extends for one year the present-law 
authority of the IRS to use proceeds from undercover operations 
to pay additional expenses incurred in conducting undercover 
operations (through December 31, 2007).

                             Effective Date

    The provision is effective on the date of enactment.

22. Disclosures of certain tax return information (sec. 122 of the Act 
        and sec. 6103 of the Code)

            (a) Disclosure of tax information to facilitate combined 
                    employment tax reporting

                              Present Law

    Traditionally, Federal tax forms are filed with the Federal 
government and State tax forms are filed with individual 
States. This necessitates duplication of items common to both 
returns. The Code permits the IRS to disclose taxpayer identity 
information and signatures to any agency, body, or commission 
of any State for the purpose of carrying out with such agency, 
body or commission a combined Federal and State employment tax 
reporting program approved by the Secretary.\1067\ The Federal 
disclosure restrictions, safeguard requirements, and criminal 
penalties for unauthorized disclosure and unauthorized 
inspection do not apply with respect to disclosures or 
inspections made pursuant to this authority. This provision 
expires after December 31, 2006.
---------------------------------------------------------------------------
    \1067\ Sec. 6103(d)(5).
---------------------------------------------------------------------------
    Separately, under section 6103(c), the IRS may disclose a 
taxpayer's return or return information to such person or 
persons as the taxpayer may designate in a request for or 
consent to such disclosure. Pursuant to Treasury regulations, a 
taxpayer's participation in a combined return filing program 
between the IRS and a State agency, body or commission 
constitutes a consent to the disclosure by the IRS to the State 
agency of taxpayer identity information, signature and items of 
common data contained on the return.\1068\ No disclosures may 
be made under this authority unless there are provisions of 
State law protecting the confidentiality of such items of 
common data.
---------------------------------------------------------------------------
    \1068\ Treas. Reg. sec. 301.6103(c)-1(d)(2).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision extends for one year the present-law 
authority under section 6103(d)(5) for the combined employment 
tax reporting program (through December 31, 2007).

                             Effective Date

    The provision applies to disclosures after December 31, 
2006.
            (b) Disclosure of return information regarding terrorist 
                    activities

                              Present Law


In general

    Section 6103 provides that returns and return information 
may not be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to the information 
except as provided in the Internal Revenue Code. Section 6103 
contains a number of exceptions to this general rule of 
nondisclosure that authorize disclosure in specifically 
identified circumstances (including nontax criminal 
investigations) when certain conditions are satisfied.
    Among the disclosures permitted under the Code is 
disclosure of returns and return information for purposes of 
investigating terrorist incidents, threats, or activities, and 
for analyzing intelligence concerning terrorist incidents, 
threats, or activities. The term ``terrorist incident, threat, 
or activity'' is statutorily defined to mean an incident, 
threat, or activity involving an act of domestic terrorism or 
international terrorism.\1069\ In general, returns and taxpayer 
return information must be obtained pursuant to an ex parte 
court order. Return information, other than taxpayer return 
information, generally is available upon a written request 
meeting specific requirements. The IRS also is permitted to 
make limited disclosures of such information on its own 
initiative to the appropriate Federal law enforcement agency.
---------------------------------------------------------------------------
    \1069\ Sec. 6103(b)(11). For this purpose, ``domestic terrorism'' 
is defined in 18 U.S.C. sec. 2331(5) and ``international terrorism'' is 
defined in 18 U.S.C. sec. 2331.
---------------------------------------------------------------------------
    No disclosures may be made under these provisions after 
December 31, 2006. The procedures applicable to these 
provisions are described in detail below.

Disclosure of returns and return information_by ex parte court order

            Ex parte court orders sought by Federal law enforcement and 
                    Federal intelligence agencies
    The Code permits, pursuant to an ex parte court order, the 
disclosure of returns and return information (including 
taxpayer return information) to certain officers and employees 
of a Federal law enforcement agency or Federal intelligence 
agency. These officers and employees are required to be 
personally and directly engaged in any investigation of, 
response to, or analysis of intelligence and 
counterintelligence information concerning any terrorist 
incident, threat, or activity. These officers and employees are 
permitted to use this information solely for their use in the 
investigation, response, or analysis, and in any judicial, 
administrative, or grand jury proceeding, pertaining to any 
such terrorist incident, threat, or activity.
    The Attorney General, Deputy Attorney General, Associate 
Attorney General, an Assistant Attorney General, or a United 
States attorney, may authorize the application for the ex parte 
court order to be submitted to a Federal district court judge 
or magistrate. The Federal district court judge or magistrate 
would grant the order if based on the facts submitted he or she 
determines that: (1) there is reasonable cause to believe, 
based upon information believed to be reliable, that the return 
or return information may be relevant to a matter relating to 
such terrorist incident, threat, or activity; and (2) the 
return or return information is sought exclusively for the use 
in a Federal investigation, analysis, or proceeding concerning 
any terrorist incident, threat, or activity.
            Special rule for ex parte court ordered disclosure 
                    initiated by the IRS
    If the Secretary of the Treasury (or his delegate) 
possesses returns or return information that may be related to 
a terrorist incident, threat, or activity, the Secretary may, 
on his own initiative, authorize an application for an ex parte 
court order to permit disclosure to Federal law enforcement. In 
order to grant the order, the Federal district court judge or 
magistrate must determine that there is reasonable cause to 
believe, based upon information believed to be reliable, that 
the return or return information may be relevant to a matter 
relating to such terrorist incident, threat, or activity. The 
information may be disclosed only to the extent necessary to 
apprise the appropriate Federal law enforcement agency 
responsible for investigating or responding to a terrorist 
incident, threat, or activity and for officers and employees of 
that agency to investigate or respond to such terrorist 
incident, threat, or activity. Further, use of the information 
is limited to use in a Federal investigation, analysis, or 
proceeding concerning a terrorist incident, threat, or 
activity. Because the Department of Justice represents the 
Secretary in Federal district court, the Secretary is permitted 
to disclose returns and return information to the Department of 
Justice as necessary and solely for the purpose of obtaining 
the special IRS ex parte court order.

Disclosure of return information other than by ex parte court order

            Disclosure by the IRS without a request
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, related to a terrorist 
incident, threat, or activity to the extent necessary to 
apprise the head of the appropriate Federal law enforcement 
agency responsible for investigating or responding to such 
terrorist incident, threat, or activity. The IRS on its own 
initiative and without a written request may make this 
disclosure. The head of the Federal law enforcement agency may 
disclose information to officers and employees of such agency 
to the extent necessary to investigate or respond to such 
terrorist incident, threat, or activity. A taxpayer's identity 
is not treated as return information supplied by the taxpayer 
or his or her representative.
            Disclosure upon written request of a Federal law 
                    enforcement agency
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, to officers and 
employees of Federal law enforcement upon a written request 
satisfying certain requirements. The request must: (1) be made 
by the head of the Federal law enforcement agency (or his 
delegate) involved in the response to or investigation of 
terrorist incidents, threats, or activities, and (2) set forth 
the specific reason or reasons why such disclosure may be 
relevant to a terrorist incident, threat, or activity. The 
information is to be disclosed to officers and employees of the 
Federal law enforcement agency who would be personally and 
directly involved in the response to or investigation of 
terrorist incidents, threats, or activities. The information is 
to be used by such officers and employees solely for such 
response or investigation.
    The Code permits the redisclosure by a Federal law 
enforcement agency to officers and employees of State and local 
law enforcement personally and directly engaged in the response 
to or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.
            Disclosure upon request from the Departments of Justice or 
                    the Treasury for intelligence analysis of terrorist 
                    activity
    Upon written request satisfying certain requirements 
discussed below, the IRS is to disclose return information 
(other than taxpayer return information) to officers and 
employees of the Department of Justice, Department of the 
Treasury, and other Federal intelligence agencies, who are 
personally and directly engaged in the collection or analysis 
of intelligence and counterintelligence or investigation 
concerning terrorist incidents, threats, or activities. Use of 
the information is limited to use by such officers and 
employees in such investigation, collection, or analysis.
    The written request is to set forth the specific reasons 
why the information to be disclosed is relevant to a terrorist 
incident, threat, or activity. The request is to be made by an 
individual who is: (1) an officer or employee of the Department 
of Justice or the Department of the Treasury, (2) appointed by 
the President with the advice and consent of the Senate, and 
(3) responsible for the collection, and analysis of 
intelligence and counterintelligence information concerning 
terrorist incidents, threats, or activities. The Director of 
the United States Secret Service also is an authorized 
requester under the Act.

                        Explanation of Provision

    The provision extends for one year the present-law 
terrorist activity disclosure provisions (through December 31, 
2007).

                             Effective Date

    The provision applies to disclosures after December 31, 
2006.
            (c) Disclosure of return information to carry out income 
                    contingent repayment of student loans

                              Present Law

    Present law prohibits the disclosure of returns and return 
information, except to the extent specifically authorized by 
the Code. An exception is provided for disclosure to the 
Department of Education (but not to contractors thereof) of a 
taxpayer's filing status, adjusted gross income and identity 
information (i.e., name, mailing address, taxpayer identifying 
number) to establish an appropriate repayment amount for an 
applicable student loan. The disclosure authority for the 
income-contingent loan repayment program is scheduled to expire 
after December 31, 2006.
    The Department of Education utilizes contractors for the 
income-contingent loan verification program. The specific 
disclosure exception for the program does not permit disclosure 
of return information to contractors. As a result, the 
Department of Education obtains return information from the 
Internal Revenue Service by taxpayer consent (under section 
6103(c)), rather than under the specific exception for the 
income-contingent loan verification program (sec. 6103(l)(13)).

                        Explanation of Provision

    The provision extends for one year the present-law 
authority to disclose return information for purposes of the 
income-contingent loan repayment program (through December 31, 
2007).

                             Effective Date

    The provision applies to requests made after December 31, 
2006.

23. Special rule for elections under expired provisions (sec. 123 of 
        the Act)

                              Present Law

    Under present law, various elections under provisions of 
the Code must be made by a certain date and in a certain 
manner. For example, the election under section 280C(c)(3) of a 
reduced credit for increasing research expenditures must be 
made not later than the time for filing a return (including 
extensions).

                        Explanation of Provision

    The provision provides that, in the case of any taxable 
year which ends after December 31, 2005 and before the date of 
enactment of the Act, an election under section 41(c)(4), 
280C(c)(3)(C), or any other expired provision of the Code which 
is extended by the Act, is treated as timely if made not later 
than April 15, 2007, or such other time as the Secretary or his 
designee provide. The election shall be made in the manner 
prescribed by the Secretary or his designee.

                             Effective Date

    The provision is effective on the date of enactment.

                    TITLE II--ENERGY TAX PROVISIONS

1. Extension of placed-in-service date for tax credit for electricity 
        produced at wind, closed-loop biomass, open-loop biomass, 
        geothermal energy, small irrigation power, landfill gas, trash 
        combustion, or qualified hydropower facilities (sec. 201 of the 
        Act and sec. 45 of the Code)

                              Present Law

In general
    An income tax credit is allowed for the production of 
electricity at qualified facilities using qualified energy 
resources (sec. 45). Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal, energy, 
solar energy, small irrigation power, municipal solid waste, 
and qualified hydropower production. Qualified facilities are, 
generally, facilities that generate electricity using qualified 
energy resources. To be eligible for the credit, electricity 
produced from qualified energy resources at qualified 
facilities must be sold by the taxpayer to an unrelated person. 
In addition to the electricity production credit, an income tax 
credit is allowed for the production of refined coal and Indian 
coal at qualified facilities.
Credit amounts and credit period
            In general
    The base amount of the credit is 1.5 cents per kilowatt-
hour (indexed annually for inflation) of electricity produced. 
The amount of the credit is 1.9 cents per kilowatt-hour for 
2006. A taxpayer may generally claim a credit during the 10-
year period commencing with the date the qualified facility is 
placed in service. The credit is reduced for grants, tax-exempt 
bonds, subsidized energy financing, and other credits.
    The amount of credit a taxpayer may claim is phased out as 
the market price of electricity (or refined coal in the case of 
the refined coal production credit) exceeds certain threshold 
levels. The electricity production credit is reduced over a 3 
cent phase-out range to the extent the annual average contract 
price per kilowatt hour of electricity sold in the prior year 
from the same qualified energy resource exceeds 8 cents 
(adjusted for inflation). The refined coal credit is reduced 
over an $8.75 phase-out range as the reference price of the 
fuel used as feedstock for the refined coal exceeds the 
reference price for such fuel in 2002 (adjusted for inflation).
            Reduced credit amounts and credit periods
    Generally, in the case of open-loop biomass facilities 
(including agricultural livestock waste nutrient facilities), 
geothermal energy facilities, solar energy facilities, small 
irrigation power facilities, landfill gas facilities, and trash 
combustion facilities, the 10-year credit period is reduced to 
five years commencing on the date the facility was originally 
placed in service, for qualified facilities placed in service 
before August 8, 2005. However, for qualified open-loop biomass 
facilities (other than a facility described in sec. 
45(d)(3)(A)(i) that uses agricultural livestock waste 
nutrients) placed in service before October 22, 2004, the five-
year period commences on January 1, 2005. In the case of a 
closed-loop biomass facility modified to co-fire with coal, to 
co-fire with other biomass, or to co-fire with coal and other 
biomass, the credit period begins no earlier than October 22, 
2004.
    In the case of open-loop biomass facilities (including 
agricultural livestock waste nutrient facilities), small 
irrigation power facilities, landfill gas facilities, trash 
combustion facilities, and qualified hydropower facilities the 
otherwise allowable credit amount is 0.75 cent per kilowatt-
hour, indexed for inflation measured after 1992 (currently 0.9 
cents per kilowatt-hour for 2006).
            Credit applicable to refined coal
    The amount of the credit for refined coal is $4.375 per ton 
(also indexed for inflation after 1992 and equaling $5.679 per 
ton for 2006).
            Credit applicable to Indian coal
    A credit is available for the sale of Indian coal to an 
unrelated third part from a qualified facility for a seven-year 
period beginning on January 1, 2006, and before January 1, 
2013. The amount of the credit for Indian coal is $1.50 per ton 
for the first four years of the seven-year period and $2.00 per 
ton for the last three years of the seven-year period. 
Beginning in calendar years after 2006, the credit amounts are 
indexed annually for inflation using 2005 as the base year.
            Other limitations on credit claimants and credit amounts
    In general, in order to claim the credit, a taxpayer must 
own the qualified facility and sell the electricity produced by 
the facility (or refined coal or Indian coal, with respect to 
those credits) to an unrelated party. A lessee or operator may 
claim the credit in lieu of the owner of the qualifying 
facility in the case of qualifying open-loop biomass facilities 
and in the case of a closed-loop biomass facilities modified to 
co-fire with coal, to co-fire with other biomass, or to co-fire 
with coal and other biomass. In the case of a poultry waste 
facility, the taxpayer may claim the credit as a lessee or 
operator of a facility owned by a governmental unit.
    For all qualifying facilities, other than closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
the amount of credit a taxpayer may claim is reduced by reason 
of grants, tax-exempt bonds, subsidized energy financing, and 
other credits, but the reduction cannot exceed 50 percent of 
the otherwise allowable credit. In the case of closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
there is no reduction in credit by reason of grants, tax-exempt 
bonds, subsidized energy financing, and other credits.
    The credit for electricity produced from renewable sources 
is a component of the general business credit (sec. 38(b)(8)). 
Generally, the general business credit for any taxable year may 
not exceed the amount by which the taxpayer's net income tax 
exceeds the greater of the tentative minimum tax or so much of 
the net regular tax liability as exceeds $25,000. Excess 
credits may be carried back one year and forward up to 20 
years.
    A taxpayer's tentative minimum tax is treated as being zero 
for purposes of determining the tax liability limitation with 
respect to the section 45 credit for electricity produced from 
a facility (placed in service after October 22, 2004) during 
the first four years of production beginning on the date the 
facility is placed in service.
Qualified facilities
            Wind energy facility
    A wind energy facility is a facility that uses wind to 
produce electricity. To be a qualified facility, a wind energy 
facility must be placed in service after December 31, 1993, and 
before January 1, 2008.
            Closed-loop biomass facility
    A closed-loop biomass facility is a facility that uses any 
organic material from a plant which is planted exclusively for 
the purpose of being used at a qualifying facility to produce 
electricity. In addition, a facility can be a closed-loop 
biomass facility if it is a facility that is modified to use 
closed-loop biomass to co-fire with coal, with other biomass, 
or with both coal and other biomass, but only if the 
modification is approved under the Biomass Power for Rural 
Development Programs or is part of a pilot project of the 
Commodity Credit Corporation.
    To be a qualified facility, a closed-loop biomass facility 
must be placed in service after December 31, 1992, and before 
January 1, 2008. In the case of a facility using closed-loop 
biomass but also co-firing the closed-loop biomass with coal, 
other biomass, or coal and other biomass, a qualified facility 
must be originally placed in service and modified to co-fire 
the closed-loop biomass at any time before January 1, 2008.
            Open-loop biomass (including agricultural livestock waste 
                    nutrients) facility
    An open-loop biomass facility is a facility that uses open-
loop biomass to produce electricity. For purposes of the 
credit, open-loop biomass is defined as (1) any agricultural 
livestock waste nutrients or (2) any solid, nonhazardous, 
cellulosic waste material or any lignin material that is 
segregated from other waste materials and which is derived 
from:
           forest-related resources, including mill and 
        harvesting residues, precommercial thinnings, slash, 
        and brush;
           solid wood waste materials, including waste 
        pallets, crates, dunnage, manufacturing and 
        construction wood wastes, landscape or right-of-way 
        tree trimming; or
           agricultural sources, including orchard tree 
        crops, vineyard, grain, legumes, sugar, and other crop 
        by-products or residues.
    Agricultural livestock waste nutrients are defined as 
agricultural livestock manure and litter, including bedding 
material for the disposition of manure. Wood waste materials do 
not qualify as open-loop biomass to the extent they are 
pressure treated, chemically treated, or painted. In addition, 
municipal solid waste, gas derived from the biodegradation of 
solid waste, and paper which is commonly recycled do not 
qualify as open-loop biomass. Open-loop biomass does not 
include closed-loop biomass or any biomass burned in 
conjunction with fossil fuel (co-firing) beyond such fossil 
fuel required for start up and flame stabilization.
    In the case of an open-loop biomass facility that uses 
agricultural livestock waste nutrients, a qualified facility is 
one that was originally placed in service after October 22, 
2004, and before January 1, 2008, and has a nameplate capacity 
rating which is not less than 150 kilowatts. In the case of any 
other open-loop biomass facility, a qualified facility is one 
that was originally placed in service before January 1, 2008.
            Geothermal facility
    A geothermal facility is a facility that uses geothermal 
energy to produce electricity. Geothermal energy is energy 
derived from a geothermal deposit which is a geothermal 
reservoir consisting of natural heat which is stored in rocks 
or in an aqueous liquid or vapor (whether or not under 
pressure). To be a qualified facility, a geothermal facility 
must be placed in service after October 22, 2004 and before 
January 1, 2008.
            Solar facility
    A solar facility is a facility that uses solar energy to 
produce electricity. To be a qualified facility, a solar 
facility must be placed in service after October 22, 2004 and 
before January 1, 2006.
            Small irrigation facility
    A small irrigation power facility is a facility that 
generates electric power through an irrigation system canal or 
ditch without any dam or impoundment of water. The installed 
capacity of a qualified facility must be not less than 150 
kilowatts but less than five megawatts. To be a qualified 
facility, a small irrigation facility must be originally placed 
in service after October 22, 2004 and before January 1, 2008.
            Landfill gas facility
    A landfill gas facility is a facility that uses landfill 
gas to produce electricity. Landfill gas is defined as methane 
gas derived from the biodegradation of municipal solid waste. 
To be a qualified facility, a landfill gas facility must be 
placed in service after October 22, 2004 and before January 1, 
2008.
            Trash combustion facility
    Trash combustion facilities are facilities that burn 
municipal solid waste (garbage) to produce steam to drive a 
turbine for the production of electricity. To be a qualified 
facility, a trash combustion facility must be placed in service 
after October 22, 2004 and before January 1, 2008. A qualified 
trash combustion facility includes a new unit, placed in 
service after October 22, 2004, that increases electricity 
production capacity at an existing trash combustion facility. A 
new unit generally would include a new burner/boiler and 
turbine. The new unit may share certain common equipment, such 
as trash handling equipment, with other pre-existing units at 
the same facility. Electricity produced at a new unit of an 
existing facility qualifies for the production credit only to 
the extent of the increased amount of electricity produced at 
the entire facility.
            Hydropower facility
    A qualifying hydropower facility is (1) a facility that 
produced hydroelectric power (a hydroelectric dam) prior to 
August 8, 2005, at which efficiency improvements or additions 
to capacity have been made after such date and before January 
1, 2009, that enable the taxpayer to produce incremental 
hydropower or (2) a facility placed in service before August 8, 
2005, that did not produce hydroelectric power (a 
nonhydroelectric dam) on such date, and to which turbines or 
other electricity generating equipment have been added such 
date and before January 1, 2009.
    At an existing hydroelectric facility, the taxpayer may 
only claim credit for the production of incremental 
hydroelectric power. Incremental hydroelectric power for any 
taxable year is equal to the percentage of average annual 
hydroelectric power produced at the facility attributable to 
the efficiency improvement or additions of capacity determined 
by using the same water flow information used to determine an 
historic average annual hydroelectric power production baseline 
for that facility. The Federal Energy Regulatory Commission 
will certify the baseline power production of the facility and 
the percentage increase due to the efficiency and capacity 
improvements.
    At a nonhydroelectric dam, the facility must be licensed by 
the Federal Energy Regulatory Commission and meet all other 
applicable environmental, licensing, and regulatory 
requirements and the turbines or other generating devices must 
be added to the facility after August 8, 2005 and before 
January 1, 2009. In addition there must not be any enlargement 
of the diversion structure, or construction or enlargement of a 
bypass channel, or the impoundment or any withholding of 
additional water from the natural stream channel.
            Refined coal facility
    A qualifying refined coal facility is a facility producing 
refined coal that is placed in service after October 22, 2004 
and before January 1, 2009. Refined coal is a qualifying 
liquid, gaseous, or solid synthetic fuel produced from coal 
(including lignite) or high-carbon fly ash, including such fuel 
used as a feedstock. A qualifying fuel is a fuel that when 
burned emits 20 percent less nitrogen oxides and either SO2 or 
mercury than the burning of feedstock coal or comparable coal 
predominantly available in the marketplace as of January 1, 
2003, and if the fuel sells at prices at least 50 percent 
greater than the prices of the feedstock coal or comparable 
coal. In addition, to be qualified refined coal the fuel must 
be sold by the taxpayer with the reasonable expectation that it 
will be used for the primary purpose of producing steam.
            Indian coal facility
    A qualified Indian coal facility is a facility which is 
placed in service before January 1, 2009, that produces coal 
from reserves that on June 14, 2005, were owned by a Federally 
recognized tribe of Indians or were held in trust by the United 
States for a tribe or its members.

Summary of credit rate and credit period by facility type

 Table 10.--Summary of Section 45 Credit for Electricity Produced from Certain Renewable Resources, for Refined
                                            Coal, and for Indian Coal
----------------------------------------------------------------------------------------------------------------
                                                                       Credit
                                                                       amount    Credit period    Credit period
                                                                      for 2006   for facilities     facilities
                                                                       (cents      placed in        placed in
    Eligible electricity production or coal production activity         per      service on or    service after
                                                                     kilowatt-   before August    August 8, 2005
                                                                       hour;     8, 2005 (years    (years from
                                                                      dollars   from placed-in-     placed-in-
                                                                      per ton)   service date)    service date)
----------------------------------------------------------------------------------------------------------------
Wind...............................................................     1.9                 10               10
Closed-loop biomass................................................     1.9             10 \1\           10 \1\
Open-loop biomass (including agricultural livestock waste nutrient      0.9              5 \2\               10
 facilities).......................................................
Geothermal.........................................................     1.9                  5               10
Solar..............................................................     1.9                  5               10
Small irrigation power.............................................     0.9                  5               10
Municipal solid waste (including landfill gas facilities and trash      0.9                  5               10
 combustion facilities)............................................
Qualified hydropower...............................................     0.9                N/A               10
Refined Coal.......................................................   5.679                 10               10
Indian Coal........................................................    1.50              7 \3\            7 \3\
----------------------------------------------------------------------------------------------------------------
\1\ In the case of certain co-firing closed-loop facilities, the credit period begins no earlier than October
  22, 2004.
\2\ For certain facilities placed in service before October 22, 2004, the 5-year credit period commences on
  January 1, 2005.
\3\ For Indian coal, the credit period begins for coal sold after January 1, 2006.
For eligible pre-existing facilities and other facilities placed in service prior to January 1, 2005, the credit
  period commences on January 1, 2005. In the case of certain co-firing closed-loop facilities, the credit
  period begins no earlier than October 22, 2004. For Indian coal, the credit period begins for coal sold after
  January 1, 2006, for facilities placed-in-service before January 1, 2009.

Taxation of cooperatives and their patrons

    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception-the cooperative may exclude from its taxable 
income distributions of patronage dividends. Generally, 
cooperatives that are subject to the cooperative tax rules of 
subchapter T of the Code \1070\ are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative.\1071\ The 
availability of such deductions from taxable income has the 
effect of allowing the cooperative to be treated like a conduit 
with respect to profits derived from transactions with patrons 
who are members of the cooperative. For taxable years ending on 
or before August 8, 2005, cooperatives may not pass any portion 
of the income tax credit for electricity production through to 
their patrons.
---------------------------------------------------------------------------
    \1070\ Sec. 1381, et seq.
    \1071\ Sec. 1382.
---------------------------------------------------------------------------
    For taxable years ending after August 8, 2005, eligible 
cooperatives may elect to pass any portion of the credit 
through to their patrons. An eligible cooperative is defined as 
a cooperative organization that is owned more than 50 percent 
by agricultural producers or entities owned by agricultural 
producers. The credit may be apportioned among patrons eligible 
to share in patronage dividends on the basis of the quantity or 
value of business done with or for such patrons for the taxable 
year. The election must be made on a timely filed return for 
the taxable year, and once made, is irrevocable for such 
taxable year. The amount of the credit apportioned to patrons 
is not included in the organization's credit for the taxable 
year of the organization. The amount of the credit apportioned 
to a patron is included in the taxable year the patron with or 
within which the taxable year of the organization ends. If the 
amount of the credit for any taxable year is less than the 
amount of the credit shown on the cooperative's return for such 
taxable year, an amount equal to the excess of the reduction in 
the credit over the amount not apportioned to patrons for the 
taxable year is treated as an increase in the cooperative's 
tax. The increase is not treated as tax imposed for purposes of 
determining the amount of any tax credit.

                        Explanation of Provision

    The provision extends through December 31, 2008, the period 
during which certain facilities may be placed in service as 
qualified facilities for purposes of the electricity production 
credit. The placed-in-service date extension applies for all 
qualified facilities, except for qualified solar, refined coal, 
and Indian coal facilities.

                             Effective Date

    The provision is effective for facilities placed in service 
after December 31, 2007.

2. Extension and expansion of clean renewable energy bonds (sec. 202 of 
        the Act and sec. 54 of the Code)

                              Present law


Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units. Activities that can be 
financed with these tax-exempt bonds include the financing of 
electric power facilities (i.e., generation, transmission, 
distribution, and retailing).
    Interest on State or local government bonds to finance 
activities of private persons (''private activity bonds'') is 
taxable unless a specific exception is contained in the Code 
(or in a non-Code provision of a revenue Act). The term 
``private person'' generally includes the Federal government 
and all other individuals and entities other than States or 
local governments. The Code includes exceptions permitting 
States or local governments to act as conduits providing tax-
exempt financing for certain private activities. In most cases, 
the aggregate volume of these tax-exempt private activity bonds 
is restricted by annual aggregate volume limits imposed on 
bonds issued by issuers within each State. For calendar year 
2006, these annual volume limits, which are indexed for 
inflation, equal $80 per resident of the State, or $246.6 
million, if greater.
    The tax exemption for State and local bonds also does not 
apply to any arbitrage bond.\1072\ An arbitrage bond is defined 
as any bond that is part of an issue if any proceeds of the 
issue are reasonably expected to be used (or intentionally are 
used) to acquire higher yielding investments or to replace 
funds that are used to acquire higher yielding 
investments.\1073\ In general, arbitrage profits may be earned 
only during specified periods (e.g., defined ``temporary 
periods'') before funds are needed for the purpose of the 
borrowing or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, investment profits that are earned 
during these periods or on such investments must be rebated to 
the Federal government.
---------------------------------------------------------------------------
    \1072\ Secs. 103(a) and (b)(2).
    \1073\ Sec. 148.
---------------------------------------------------------------------------
    An issuer must file with the IRS certain information about 
the bonds issued by them in order for that bond issue to be 
tax-exempt.\1074\ Generally, this information return is 
required to be filed no later the 15th day of the second month 
after the close of the calendar quarter in which the bonds were 
issued.
---------------------------------------------------------------------------
    \1074\ Sec. 149(e).
---------------------------------------------------------------------------

Clean renewable energy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments may issue clean renewable energy bonds 
(``CREBs''). CREBs are defined as any bond issued by a 
qualified issuer if, in addition to the requirements discussed 
below, 95 percent or more of the proceeds of such bonds are 
used to finance capital expenditures incurred by qualified 
borrowers for facilities that qualify for the tax credit under 
section 45 (other than Indian coal production facilities), 
without regard to the placed-in-service date requirements of 
that section. The term ``qualified issuers'' includes (1) 
governmental bodies (including Indian tribal governments); (2) 
mutual or cooperative electric companies (described in section 
501(c)(12) or section 1381(a)(2)(C), or a not-for-profit 
electric utility which has received a loan or guarantee under 
the Rural Electrification Act); and (3) clean energy bond 
lenders. The term ``qualified borrower'' includes a 
governmental body (including an Indian tribal government) and a 
mutual or cooperative electric company.
    In addition, Notice 2006-7, 2006-10 I.R.B. 559, provides 
that projects that may be financed with CREBs include any 
facility owned by a qualified borrower that is functionally 
related and subordinate (as determined under Treas. Reg. sec. 
1.103-8(a)(3)) to any qualified facility described in sections 
45(d)(1) through (d)(9) (determined without regard to any 
placed in service date) and owned by such qualified borrower.
    Unlike tax-exempt bonds, CREBs are not interest-bearing 
obligations. Rather, the taxpayer holding CREBs on a credit 
allowance date is entitled to a tax credit. The amount of the 
credit is determined by multiplying the bond's credit rate by 
the face amount on the holder's bond. The credit rate on the 
bonds is determined by the Secretary and is to be a rate that 
permits issuance of CREBs without discount and interest cost to 
the qualified issuer. The credit accrues quarterly and is 
includible in gross income (as if it were an interest payment 
on the bond), and can be claimed against regular income tax 
liability and alternative minimum tax liability.
    CREBs are subject to a maximum maturity limitation. The 
maximum maturity is the term which the Secretary estimates will 
result in the present value of the obligation to repay the 
principal on a CREBs being equal to 50 percent of the face 
amount of such bond. In addition, the Code requires level 
amortization of CREBs during the period such bonds are 
outstanding.
    CREBs also are subject to the arbitrage requirements of 
section 148 that apply to traditional tax-exempt bonds. 
Principles under section 148 and the regulations thereunder 
apply for purposes of determining the yield restriction and 
arbitrage rebate requirements applicable to CREBs.
    To qualify as CREBs, the qualified issuer must reasonably 
expect to and actually spend 95 percent or more of the proceeds 
of such bonds on qualified projects within the five-year period 
that begins on the date of issuance. To the extent less than 95 
percent of the proceeds are used to finance qualified projects 
during the five-year spending period, bonds will continue to 
qualify as CREBs if unspent proceeds are used within 90 days 
from the end of such five-year period to redeem any 
``nonqualified bonds.'' The five-year spending period may be 
extended by the Secretary upon the qualified issuer's request 
demonstrating that the failure to satisfy the five-year 
requirement is due to reasonable cause and the projects will 
continue to proceed with due diligence.
    Issuers of CREBs are required to report issuance to the IRS 
in a manner similar to the information returns required for 
tax-exempt bonds. There is a national CREB limitation of $800 
million. CREBs must be issued before January 1, 2008. Under 
present law, no more than $500 million of CREBs authority may 
be allocated to projects for governmental bodies.

                        Explanation of Provision

    The provision authorizes an additional $400 million of 
CREBs that may be issued and extends the authority to issue 
such bonds through December 31, 2008. It is expected that the 
additional authority will be allocated through a new 
application process similar to that set forth in Notice 2005-
98, 2005-52 I.R.B 1211.
    In addition to increasing the national limitation on the 
amount of CREBs, the provision increases the maximum amount of 
CREBs that may be allocated to qualified projects of 
governmental bodies to $750 million.
    The provision provides an extension of the CREBs program, 
but it is expected that Congress will review the efficacy of 
the program, including the efficacy of imposing limitations on 
allocations to projects for governmental bodies, before 
granting additional extensions.

                             Effective Date

    The provision authorizing an additional $400 million of 
CREBs and extending the authority to issue such bonds through 
December 31, 2008, is effective for bonds issued after December 
31, 2006. The provision increasing the maximum amount of CREBs 
that may be allocated to qualified projects of governmental 
bodies is effective for allocations or reallocations after 
December 31, 2006.

3. Modification of advanced coal credit with respect to subbituminous 
        coal (sec. 203 of the Act and sec. 48A of the Code)

                              Present Law

    An investment tax credit is available for investments in 
certain qualifying advanced coal projects (sec. 48A). The 
credit amount is 20 percent for investments in qualifying 
projects that use integrated gasification combined cycle 
(``IGCC''). The credit amount is 15 percent for investments in 
qualifying projects that use other advanced coal-based 
electricity generation technologies.
    To qualify, an advanced coal project must be located in the 
United States and use an advanced coal-based generation 
technology to power a new electric generation unit or to 
retrofit or repower an existing unit. An electric generation 
unit using an advanced coal-based technology must be designed 
to achieve a 99 percent reduction in sulfur dioxide and a 90 
percent reduction in mercury, as well as to limit emissions of 
nitrous oxide and particulate matter.
    The fuel input for a qualifying project, when completed, 
must use at least 75 percent coal. The project, consisting of 
one or more electric generation units at one site, must have a 
nameplate generating capacity of at least 400 megawatts, and 
the taxpayer must provide evidence that a majority of the 
output of the project is reasonably expected to be acquired or 
utilized.
    Credits are available only for projects certified by the 
Secretary of Treasury, in consultation with the Secretary of 
Energy. Certifications are issued using a competitive bidding 
process. The Secretary of Treasury must establish a 
certification program no later than 180 days after August 8, 
2005, and each project application must be submitted during the 
three-year period beginning on the date such certification 
program is established.
    The Secretary of Treasury may allocate $800 million of 
credits to IGCC projects and $500 million to projects using 
other advanced coal-based electricity generation technologies. 
Qualified projects must be economically feasible and use the 
appropriate clean coal technologies. With respect to IGCC 
projects, credit-eligible investments include only investments 
in property associated with the gasification of coal, including 
any coal handling and gas separation equipment. Thus, 
investments in equipment that could operate by drawing fuel 
directly from a natural gas pipeline do not qualify for the 
credit.
    In determining which projects to certify that use IGCC 
technology, the Secretary must allocate power generation 
capacity in relatively equal amounts to projects that use 
bituminous coal, subbituminous coal, and lignite as primary 
feedstock. In addition, the Secretary must give high priority 
to projects which include greenhouse gas capture capability, 
increased by-product utilization, and other benefits.

                        Explanation of Provision

    The provision modifies one of the performance requirements 
necessary for an electric generation unit to be treated as 
using advanced coal-based generation technology. Under the 
provision, the performance requirement relating to the removal 
of sulfur dioxide is changed so that an electric generation 
unit designed to use subbituminous coal can meet the standard 
if it is designed either to remove 99 percent of the sulfur 
dioxide or to achieve an emission limit of 0.04 pounds of 
sulfur dioxide per million British thermal units on a 30-day 
average.

                             Effective Date

    The provision is effective for advanced coal project 
certification applications submitted after October 2, 2006.

4. Extension of energy efficient commercial buildings deduction (sec. 
        204 of the Act and sec. 179D of the Code)

                              Present Law


In general

    Code section 179D provides a deduction equal to energy-
efficient commercial building property expenditures made by the 
taxpayer. Energy-efficient commercial building property 
expenditures is defined as property (1) which is installed on 
or in any building located in the United States that is within 
the scope of Standard 90.1-2001 of the American Society of 
Heating, Refrigerating, and Air Conditioning Engineers and the 
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior 
lighting systems, (ii) the heating, cooling, ventilation, and 
hot water systems, or (iii) the building envelope, and (3) 
which is certified as being installed as part of a plan 
designed to reduce the total annual energy and power costs with 
respect to the interior lighting systems, heating, cooling, 
ventilation, and hot water systems of the building by 50 
percent or more in comparison to a reference building which 
meets the minimum requirements of Standard 90.1-2001 (as in 
effect on April 2, 2003). The deduction is limited to an amount 
equal to $1.80 per square foot of the property for which such 
expenditures are made. The deduction is allowed in the year in 
which the property is placed in service.
    Certain certification requirements must be met in order to 
qualify for the deduction. The Secretary, in consultation with 
the Secretary of Energy, will promulgate regulations that 
describe methods of calculating and verifying energy and power 
costs using qualified computer software based on the provisions 
of the 2005 California Nonresidential Alternative Calculation 
Method Approval Manual or, in the case of residential property, 
the 2005 California Residential Alternative Calculation Method 
Approval Manual.
    The Secretary is required to prescribe procedures for the 
inspection and testing for compliance of buildings that are 
comparable, given the difference between commercial and 
residential buildings, to the requirements in the Mortgage 
Industry National Accreditation Procedures for Home Energy 
Rating Systems. Individuals qualified to determine compliance 
are only those recognized by one or more organizations 
certified by the Secretary for such purposes.
    For energy-efficient commercial building property 
expenditures made by a public entity, such as public schools, 
the Secretary is required to promulgate regulations that allow 
the deduction to be allocated to the person primarily 
responsible for designing the property in lieu of the public 
entity.
    If a deduction is allowed under this provision, the basis 
of the property is reduced by the amount of the deduction.

Partial allowance of deduction

    In the case of a building that does not meet the overall 
building requirement of a 50-percent energy savings, a partial 
deduction is allowed with respect to each separate building 
system that comprises energy efficient property and which is 
certified by a qualified professional as meeting or exceeding 
the applicable system-specific savings targets established by 
the Secretary of the Treasury. The applicable system-specific 
savings targets to be established by the Secretary are those 
that would result in a total annual energy savings with respect 
to the whole building of 50 percent, if each of the separate 
systems met the system specific target. The separate building 
systems are (1) the interior lighting system, (2) the heating, 
cooling, ventilation and hot water systems, and (3) the 
building envelope. The maximum allowable deduction is $0.60 per 
square foot for each separate system.
    In the case of system-specific partial deductions, in 
general no deduction is allowed until the Secretary establishes 
system-specific targets. However, in the case of lighting 
system retrofits, until such time as the Secretary issues final 
regulations, the system-specific energy savings target for the 
lighting system is deemed to be met by a reduction in Lighting 
Power Density of 40 percent (50 percent in the case of a 
warehouse) of the minimum requirements in Table 9.3.1.1 or 
Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-2001. Also, in the 
case of a lighting system that reduces lighting power density 
by 25 percent, a partial deduction of 30 cents per square foot 
is allowed. A pro-rated partial deduction is allowed in the 
case of a lighting system that reduces lighting power density 
between 25 percent and 40 percent. Certain lighting level and 
lighting control requirements must also be met in order to 
qualify for the partial lighting deductions.
    The deduction is effective for property placed in service 
after December 31, 2005 and prior to January 1, 2008.

                        Explanation of Provision

    The provision extends the deduction to property placed in 
service prior to January 1, 2009.

                             Effective Date

    The provision is effective on the date of enactment.

5. Extension of energy efficient new homes credit (sec. 205 of the Act 
        and sec. 45L of the Code)

                              Present Law

    Code section 45L provides a credit to an eligible 
contractor for the construction of a qualified new energy-
efficient home. To qualify as a new energy-efficient home, the 
home must be: (1) a dwelling located in the United States, (2) 
substantially completed after August 8, 2005, and (3) certified 
in accordance with guidance prescribed by the Secretary to have 
a projected level of annual heating and cooling energy 
consumption that meets the standards for either a 30-percent or 
50-percent reduction in energy usage, compared to a comparable 
dwelling constructed in accordance with the standards of 
chapter 4 of the 2003 International Energy Conservation Code as 
in effect (including supplements) on August 8, 2005, and any 
applicable Federal minimum efficiency standards for equipment. 
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building 
envelope, and with respect to homes that meet the 50-percent 
standard, one-fifth of such 50 percent savings must come from 
the building envelope.
    Manufactured homes that conform to Federal manufactured 
home construction and safety standards are eligible for the 
credit provided all the criteria for the credit are met. The 
eligible contractor is the person who constructed the home, or 
in the case of a manufactured home, the producer of such home.
    The credit equals $1,000 in the case of a new home that 
meets the 30-percent standard and $2,000 in the case of a new 
home that meets the 50-percent standard. Only manufactured 
homes are eligible for the $1,000 credit.
    In lieu of meeting the standards of chapter 4 of the 2003 
International Energy Conservation Code, manufactured homes 
certified by a method prescribed by the Administrator of the 
Environmental Protection Agency under the Energy Star Labeled 
Homes program are eligible for the $1,000 credit provided 
criteria (1) and (2), above, are met.
    The credit is part of the general business credit. No 
credits attributable to qualified new energy efficient homes 
can be carried back to any taxable year ending on or before the 
effective date of the credit.
    The credit applies to homes whose construction is 
substantially completed after December 31, 2005, and which are 
purchased after December 31, 2005 and prior to January 1, 2008.

                        Explanation of Provision

    The provision extends the credit to homes whose 
construction is substantially completed after December 31, 
2005, and which are purchased after December 31, 2005 and prior 
to January 1, 2009.

                             Effective Date

    The provision is effective on the date of enactment.

6. Extension of credit for residential energy efficient property (sec. 
        206 of the Act and sec. 25D of the Code)

                              Present Law

    Code section 25D provides a personal tax credit for the 
purchase of qualified photovoltaic property and qualified solar 
water heating property that is used exclusively for purposes 
other than heating swimming pools and hot tubs. The credit is 
equal to 30 percent of qualifying expenditures, with a maximum 
credit for each of these systems of property of $2,000. Section 
25D also provides a 30 percent credit for the purchase of 
qualified fuel cell power plants. The credit for any fuel cell 
may not exceed $500 for each 0.5 kilowatt of capacity.
    Qualifying solar water heating property means an 
expenditure for property to heat water for use in a dwelling 
unit located in the United States and used as a residence if at 
least half of the energy used by such property for such purpose 
is derived from the sun. Qualified photovoltaic property is 
property that uses solar energy to generate electricity for use 
in a dwelling unit. A qualified fuel cell power plant is an 
integrated system comprised of a fuel cell stack assembly and 
associated balance of plant components that (1) converts a fuel 
into electricity using electrochemical means, (2) has an 
electricity-only generation efficiency of greater than 30 
percent. The qualified fuel cell power plant must be installed 
on or in connection with a dwelling unit located in the United 
States and used by the taxpayer as a principal residence.
    The credit is nonrefundable, and the depreciable basis of 
the property is reduced by the amount of the credit. 
Expenditures for labor costs allocable to onsite preparation, 
assembly, or original installation of property eligible for the 
credit are eligible expenditures.
    Certain equipment safety requirements need to be met to 
qualify for the credit. Special proration rules apply in the 
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than 
80 percent of the property is used for nonbusiness purposes, 
only that portion of expenditures that is used for nonbusiness 
purposes is taken into account.
    The credit applies to property placed in service after 
December 31, 2005 and prior to January 1, 2008.

                         Explanation Provision

    The provision extends the credit to property placed in 
service after December 31, 2005 and prior to January 1, 2009. 
The provision also clarifies that all property, not just 
photovoltaic property, that uses solar energy to generate 
electricity for use in a dwelling unit is qualifying property.

                             Effective Date

    The provision is effective on the date of enactment.

7. Extension of business solar and fuel cell energy credit (sec. 207 of 
        the Act and sec. 48 of the Code)

                              Present Law


In general

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage. 
Property used to generate energy for the purposes of heating a 
swimming pool is not eligible solar energy property.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of so much of the net regular tax 
liability as exceeds $25,000 or (2) the tentative minimum tax. 
An unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
    In general, property that is public utility property is not 
eligible for the credit. This rule is waived in the case of 
telecommunication companies' purchases of fuel cell and 
microturbine property.
    The credit is nonrefundable. The taxpayer's basis in the 
property is reduced by the amount of the credit claimed.

Special rules for solar energy property

    The credit for solar energy property is increased to 30 
percent in the case of periods after December 31, 2005 and 
prior to January 1, 2008. Additionally, equipment that uses 
fiber-optic distributed sunlight to illuminate the inside of a 
structure is solar energy property eligible for the 30-percent 
credit.

Fuel cells and microturbines

    The business energy credit also applies for the purchase of 
qualified fuel cell power plants, but only for periods after 
December 31, 2005 and prior to January 1, 2008. The credit rate 
is 30 percent. A qualified fuel cell power plant is an 
integrated system composed of a fuel cell stack assembly and 
associated balance of plant components that (1) converts a fuel 
into electricity using electrochemical means, (2) has an 
electricity-only generation efficiency of greater than 30 
percent. The credit may not exceed $500 for each 0.5 kilowatt 
of capacity.
    The business energy credit also applies for the purchase of 
qualifying stationary microturbine power plants, but only for 
periods after December 31, 2005 and prior to January 1, 2008. 
The credit is limited to the lesser of 10 percent of the basis 
of the property or $200 for each kilowatt of capacity.
    A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components that 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency and power factors. Such system must have an 
electricity-only generation efficiency of not less that 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts.
    Additionally, for purposes of the fuel cell and 
microturbine credits, and only in the case of 
telecommunications companies, the general present-law section 
48 restriction that would otherwise prohibit telecommunication 
companies from claiming the new credit due to their status as 
public utilities is waived.

                        Explanation of Provision

    The provision extends the present law credit at current 
credit rates through December 31, 2008.

                             Effective Date

    The provision is effective on the date of enactment.

8. Special rule for qualified methanol and ethanol fuel produced from 
        coal (sec. 208 of the Act and sec. 4041 of the Code)

                              Present Law

    The term ``qualified methanol or ethanol fuel'' means any 
liquid at least 85 percent of which consists of methanol, 
ethanol or other alcohol produced from coal (including peat). 
Qualified methanol or ethanol fuel is taxed at a reduced rate. 
Qualified methanol is taxed at 12.35 cents per gallon. 
Qualified ethanol is taxed at 13.25 cents per gallon. These 
reduced rates expire after September 30, 2007.

                        Explanation of Provision

    The provision extends the reduced rates for qualified 
methanol or ethanol fuel through December 31, 2008.

                             Effective Date

    The provision is effective on the date of enactment.

9. Special depreciation allowance for cellulosic biomass ethanol plant 
        property (sec. 209 of the Act and new sec. 168(l) of the Code)

                              Present Law

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from 3 to 25 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs (sec. 179). Present law provides that 
the maximum amount a taxpayer may expense, for taxable years 
beginning in 2003 through 2009, is $100,000 of the cost of 
qualifying property placed in service for the taxable year. The 
$100,000 amount is reduced (but not below zero) by the amount 
by which the cost of qualifying property placed in service 
during the taxable year exceeds $400,000. The $100,000 and 
$400,000 amounts are indexed for inflation for taxable years 
beginning after 2003 and before 2010. In general, under section 
179, qualifying property is defined as depreciable tangible 
personal property that is purchased for use in the active 
conduct of a trade or business. Additional section 179 
incentives are provided with respect to a qualified property 
used by a business in the New York Liberty Zone (sec. 
1400L(f)), an empowerment zone (sec. 1397A), a renewal 
community (sec. 1400J), or the Gulf Opportunity Zone (section 
1400N). Recapture rules generally apply with respect to 
property that ceases to be qualified property.
    Section 179C provides a temporary election to expense 50 
percent of the cost of qualified refinery property. Qualified 
refinery property generally includes assets, located in the 
United States, used in the refining of liquid fuels: (1) with 
respect to the construction of which there is a binding 
construction contract before January 1, 2008; (2) which are 
placed in service before January 1, 2012; (3) which increase 
the output capacity of an existing refinery by at least five 
percent or increase the percentage of total throughput 
attributable to qualified fuels (as defined in section 45K(c)) 
such that it equals or exceeds 25 percent; and (4) which meet 
all applicable environmental laws in effect when the property 
is placed in service.
    For purposes of section 179C, the term ``refinery'' refers 
to facilities the primary purpose of which is the processing of 
crude oil (whether or not previously refined) or qualified 
fuels as defined in section 45K(c). The limitation of section 
45K(d) requiring domestic production of qualified fuels is not 
applicable with respect to the definition of refinery under 
this provision; thus, otherwise qualifying refinery property is 
eligible even if the primary purpose of the refinery is the 
processing of oil produced from shale and tar sands outside the 
United States. The term refinery would include a facility which 
processes coal or biomass via gas into liquid fuel.

                        Explanation of Provision

    The provision allows an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified cellulosic biomass ethanol plant property. In order 
to qualify, the property generally must be placed in service 
before January 1, 2013.
    Qualified cellulosic biomass ethanol plant property means 
property used in the U.S. solely to produce cellulosic biomass 
ethanol. For this purpose, cellulosic biomass ethanol means 
ethanol derived from any lignocellulosic or hemicellulosic 
matter that is available on a renewable or recurring basis. For 
example, lignocellulosic or hemicellulosic matter that is 
available on a renewable or recurring basis includes bagasse 
(from sugar cane), corn stalks, and switchgrass.
    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes for 
the taxable year in which the property is placed in service. 
The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or 
section 263A. The basis of the property and the depreciation 
allowances in the year of purchase and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction. In addition, the provision provides 
that there is no adjustment to the allowable amount of 
depreciation for purposes of computing a taxpayer's alternative 
minimum taxable income with respect to property to which the 
provision applies. A taxpayer is allowed to elect out of the 
additional first-year depreciation for any class of property 
for any taxable year.
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following 
requirements. The original use of the property must commence 
with the taxpayer on or after the date of enactment of the 
provision. The property must be acquired by purchase (as 
defined under section 179(d)) by the taxpayer after the date of 
enactment and placed in service before January 1, 2013. 
Property does not qualify if a binding written contract for the 
acquisition of such property was in effect on or before the 
date of enactment.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies if the taxpayer 
begins the manufacture, construction, or production of the 
property after the date of enactment, and the property is 
placed in service before January 1, 2013 (and all other 
requirements are met). Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.
    Property any portion of which is financed with the proceeds 
of a tax-exempt obligation under section 103 is not eligible 
for the additional first-year depreciation deduction. Recapture 
rules apply under the provision if the property ceases to be 
qualified cellulosic biomass ethanol plant property.
    Property with respect to which the taxpayer has elected 50 
percent expensing under section 179C is not eligible for the 
additional first-year depreciation deduction under the 
provision.

                             Effective Date

    The provision applies to property placed in service after 
the date of enactment, in taxable years ending after such date.

10. Expenditures permitted from the Leaking Underground Storage Tank 
        Trust Fund (sec. 210 of the Act and sec. 9508 of the Code)

                              Present Law


Internal Revenue Code provisions

    Section 1362 of the Energy Policy Act of 2005 \1075\ 
extended the 0.1 cent per-gallon Leaking Underground Storage 
Tank (``LUST'') Trust Fund tax until October 1, 2011. Under 
section 9508 of the Internal Revenue Code (the ``Code''), the 
LUST Trust Fund is available only for purposes specified in 
section 9003(h) of the Solid Waste Disposal Act as in effect on 
the date of enactment of the Superfund Amendments and 
Reauthorization Act of 1986.\1076\
---------------------------------------------------------------------------
    \1075\ Pub. L. No. 109-58.
    \1076\ Sec. 9508(c).
---------------------------------------------------------------------------
    All expenditures from the LUST Trust Fund must be 
authorized by the Code. In the event of an expenditure from the 
LUST Trust Fund that is not authorized by the Code, the Code 
provides that no amounts may be appropriated to the LUST Trust 
Fund on or after the date of such expenditure. An exception to 
this rule is provided to allow for the liquidation of contracts 
entered into in accordance with the Code before October 1, 
2011. The determination of whether an expenditure is permitted 
is to be made without regard to (1) any provision of law that 
is not contained or referenced in the Code or in a revenue Act, 
and (2) whether such provision of law is a subsequently enacted 
provision or directly or indirectly seeks to waive the 
application of the Code restriction. This provision became 
effective on August 10, 2005.\1077\
---------------------------------------------------------------------------
    \1077\ Sec. 9508(e). This provision was added to the Code by 
section 11147 of the Safe, Accountable, Flexible, Efficient 
Transportation Equity Act: A Legacy for Users (Pub. L. No. 109-59).
---------------------------------------------------------------------------

Underground Storage Tank Compliance Act of 2005

    Sections 1521 through 1533 of the Energy Policy Act of 2005 
(also known as the ``Underground Storage Tank Compliance Act of 
2005'') broadened the uses of the LUST Trust Fund and 
authorizes States and the Environmental Protection Agency 
(``EPA'') to use funds appropriated from the LUST Trust Fund to 
address methyl tertiary butyl ether (``MTBE'') leaks.\1078\
---------------------------------------------------------------------------
    \1078\ The description that follows is taken primarily from 
Congressional Research Service, Energy Policy Act of 2005: Summary and 
Analysis of Enacted Provisions (March 8, 2006).
---------------------------------------------------------------------------
    Section 1522 directs EPA to allot at least 80 percent of 
the funds made available from the LUST Trust Fund to the States 
for the LUST cleanup program (section 9004 of the Solid Waste 
Disposal Act). It also requires EPA or States to conduct 
compliance inspections of underground storage tanks every three 
years (sec. 1523 (section 9005(c) of the Solid Waste Disposal 
Act)); adds operator training requirements (sec. 1524 (section 
9010 of the Solid Waste Disposal Act)); and authorizes EPA and 
States to use LUST Trust Fund money to respond to tank leaks 
involving oxygenated fuel additives (e.g., MTBE and ethanol) 
(sec. 1525 (section 9003(h) of the Solid Waste Disposal Act)). 
Section 1526 authorizes EPA and States to use LUST Trust Fund 
money to conduct inspections and enforce tank release 
prevention and detection requirements (sections 9011 and 
9003(j) of the Solid Waste Disposal Act). The Act also 
prohibits fuel delivery to ineligible tanks (sec. 1527 (section 
9012 of the Solid Waste Disposal Act)); and requires EPA, with 
Indian tribes, to develop and implement a strategy to address 
releases on tribal lands (sec. 1529 (section 9013 of the Solid 
Waste Disposal Act)).
    Sec. 1530 (section 9003(i) of the Solid Waste Disposal Act) 
requires States to do one of the following to protect 
groundwater: (1) require that new tanks are secondarily 
contained and monitored for leaks if the tank is within 1,000 
feet of a community water system or potable well; or (2) 
require that underground storage tank manufacturers and 
installers maintain evidence of financial responsibility to pay 
for corrective actions. It also requires that persons 
installing underground storage tank systems are certified or 
licensed, or that their underground storage tank system 
installation is certified by a professional engineer or 
inspected and approved by the State, or is compliant with a 
code of practice or other method that is no less protective of 
human health and the environment.
    Sec. 1531 (section 9014 of the Solid Waste Disposal Act) 
authorized to be appropriated from the LUST Trust Fund, for 
each of FY2005 through FY2009, $200 million for cleaning up 
leaks from petroleum tanks generally, and another $200 million 
for responding to tank leaks involving MTBE or other oxygenated 
fuel additives (e.g., other ethers and ethanol). This section 
further authorizes to be appropriated from the LUST Trust Fund, 
for each of FY2005 through FY2009, $155 million for EPA and 
States to carry out and enforce the underground storage tank 
leak prevention and detection requirements added by the Act and 
the LUST cleanup program.\1079\
---------------------------------------------------------------------------
    \1079\ Section 9014 provides in pertinent part: There are 
authorized to be appropriated to the Administrator the following 
amounts: . . .
    (2) From the Trust Fund, notwithstanding section 9508(c)(1) of the 
Internal Revenue Code of 1986:
    (A) to carry out section 9003(h) (except section 9003(h)(12) 
$200,000,000 for each of fiscal years 2005 through 2009;
    (B) to carry out section 9003(h)(12), $200,000,000 for each of 
fiscal years 2005 through 2009;
    (C) to carry out sections 9003(i), 9004(f), and 9005(c) 
$100,000,000 for each of fiscal years 2005 through 2009, and
    (D) to carry out sections 9010, 9011, 9012, and 9013 $55,000,000 
for each of fiscal years 2005 through 2009.
---------------------------------------------------------------------------
    These provisions became effective on the date of enactment 
(August 8, 2005).
    Public Law No. 109-168 made certain technical corrections 
to the Solid Waste Disposal Act as amended by the Energy Policy 
Act of 2005 with respect to the regulation of underground 
storage tanks and government-owned tanks. It also adjusted and 
extended the authorization for appropriations to cover fiscal 
year 2006 through fiscal year 2011.
    Although the Underground Storage Tank Compliance Act of 
2005 and Public Law No. 109-168 amended the Solid Waste 
Disposal Act, neither Act made conforming amendments to section 
9508 of the Code.

                    Explanation of Provision \1080\

---------------------------------------------------------------------------
    \1080\ An identical provision was enacted by H.R. 6131. The House 
passed H.R. 6131 on the suspension calendar on September 26, 2006. The 
Senate passed the bill without an amendment by unanimous consent on 
December 8, 2006. The President signed the bill on December 20, 2006 
(Pub. L. No. 109-433).
---------------------------------------------------------------------------
    The provision updates the permitted expenditure purposes of 
Code section 9508(c) to include the purposes added by the 
Energy Policy Act of 2005. Specifically, the provision 
authorizes LUST Trust Fund amounts to be used to carry out the 
following provisions of the Solid Waste Disposal Act (as in 
effect on January 10, 2006, the date of enactment of Pub. L. 
No. 109-168):
         section 9003(i) (relating to measures to 
        protect ground water);
         section 9003(j) (relating to compliance of 
        government-owned tanks);
         section 9004(f) (relating to 80 percent 
        distribution requirement for State enforcement 
        efforts);
         section 9005(c) (relating to inspection of 
        underground storage tanks);
         section 9010 (relating to operator training);
         section 9011 (relating to funds for release 
        prevention and compliance);
         section 9012 (relating to the delivery 
        prohibition for ineligible tanks/guidance/compliance); 
        and
         section 9013 (relating to strategy for 
        addressing tanks on tribal lands).
    The Code continues to authorize the use of amounts in the 
LUST Trust Fund to carry out the purposes of section 9003(h) of 
the Solid Waste Disposal Act (as in effect on January 10, 2006, 
the date of enactment of Pub. L. No. 109-168).

                             Effective Date

    The provision is effective on the date of enactment.

11. Modification of credit for fuel from a non-conventional source 
        (sec. 211 of the Act and sec. 45K of the Code)

                              Present Law

    Certain fuels produced from ``non-conventional sources'' 
and sold to unrelated parties are eligible for an income tax 
credit equal to $3 (generally adjusted for inflation) \1081\ 
per barrel or Btu oil barrel equivalent (``non-conventional 
source fuel credit'').\1082\ Qualified fuels must be produced 
within the United States.
---------------------------------------------------------------------------
    \1081\ The inflation adjustment is generally calculated using 1979 
as the base year. Generally, the value of the credit for fuel produced 
in 2005 was $6.79 per barrel-of-oil equivalent produced, which is 
approximately $1.20 per thousand cubic feet of natural gas. In the case 
of fuel sold after 2005, the credit for coke or coke gas is indexed for 
inflation using 2004 as the base year instead of 1979.
    \1082\ Sec. 29 (for tax years ending before 2006); sec. 45K (for 
tax years ending after 2005).
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    Qualified fuels include:
           oil produced from shale and tar sands;
           gas produced from geopressured brine, 
        Devonian shale, coal seams, tight formations, or 
        biomass; and
           liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
    Generally, the non-conventional source fuel credit has 
expired, except for certain biomass gas and synthetic fuels 
sold before January 1, 2008, and produced at facilities placed 
in service after December 31, 1992, and before July 1, 1998.
    The non-conventional source fuel credit provision also 
includes a credit for coke or coke gas produced at qualified 
facilities during a four-year period beginning on the later of 
January 1, 2006, or the date the facility was placed in 
service. For purposes of the coke production credit, qualified 
facilities are facilities placed in service before January 1, 
1993, or after June 30, 1998, and before January 1, 2010. The 
amount of credit-eligible coke produced at any one facility may 
not exceed an average barrel-of-oil equivalent of 4,000 barrels 
per day.
    The non-conventional source fuel credit is reduced (but not 
below zero) over a $6 (inflation-adjusted) phase-out period as 
the reference price for oil exceeds $23.50 per barrel (also 
adjusted for inflation). The reference price is the Secretary's 
estimate of the annual average wellhead price per barrel for 
all domestic crude oil. The credit did not phase-out for 2005 
because the reference price for that year of $50.26 did not 
exceed the inflation adjusted threshold of $51.35. Beginning 
with taxable years ending after December 31, 2005, the non-
conventional source fuel credit is part of the general business 
credit (sec. 38).

                        Explanation of Provision

    The provision repeals the phase-out limitation for coke and 
coke gas otherwise eligible for a credit under section 45K(g). 
The provision also clarifies that qualifying facilities 
producing coke and coke gas under section 45K(g) do not include 
facilities that produce petroleum-based coke or coke gas. The 
provision does not modify the existing 4,000 barrel-of-oil 
equivalent per day limitation.

                             Effective Date

    The provision is effective as if included in section 1321 
of the Energy Policy Act of 2005.

                   TITLE III--HEALTH SAVINGS ACCOUNTS

1. Provisions relating to health savings accounts (secs. 301-307 of the 
        Act and sec. 223 of the Code)

                              Present Law

Health savings accounts
            In general
    Individuals with a high deductible health plan (and no 
other health plan other than a plan that provides certain 
permitted coverage) may establish a health savings account 
(``HSA''). In general, HSAs provide tax-favored treatment for 
current medical expenses as well as the ability to save on a 
tax-favored basis for future medical expenses. In general, HSAs 
are tax-exempt trusts or custodial accounts created exclusively 
to pay for the qualified medical expenses of the account holder 
and his or her spouse and dependents.
    Within limits, contributions to an HSA made by or on behalf 
of an eligible individual are deductible by the individual. 
Contributions to an HSA are excludable from income and 
employment taxes if made by the employer. Earnings on amounts 
in HSAs are not taxable. Distributions from an HSA for 
qualified medical expenses are not includible in gross income. 
Distributions from an HSA that are not used for qualified 
medical expenses are includible in gross income and are subject 
to an additional tax of 10 percent. The 10-percent additional 
tax does not apply if the distribution is made after death, 
disability, or the individual attains the age of Medicare 
eligibility (i.e., age 65).
            Eligible individuals
    Eligible individuals for HSAs are individuals who are 
covered by a high deductible health plan and no other health 
plan that is not a high deductible health plan and which 
provides coverage for any benefit which is covered under the 
high deductible health plan. After an individual has attained 
age 65 and becomes enrolled in Medicare benefits, contributions 
cannot be made to an HSA.\1083\ Individuals who may be claimed 
as a dependent on another person's tax return may not make 
contributions to an HSA.
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    \1083\ Sec. 223(b)(7), as interpreted by Notice 2004-2, 2004-2 
I.R.B. 269, corrected by Announcement 2004-67, 2004-36 I.R.B. 459.
---------------------------------------------------------------------------
    An individual with other coverage in addition to a high 
deductible health plan is still eligible for an HSA if such 
other coverage is certain permitted insurance or permitted 
coverage. Permitted insurance is: (1) insurance if 
substantially all of the coverage provided under such insurance 
relates to (a) liabilities incurred under worker's compensation 
law, (b) tort liabilities, (c) liabilities relating to 
ownership or use of property (e.g., auto insurance), or (d) 
such other similar liabilities as the Secretary of Treasury may 
prescribe by regulations; (2) insurance for a specified disease 
or illness; and (3) insurance that provides a fixed payment for 
hospitalization. Permitted coverage is coverage (whether 
provided through insurance or otherwise) for accidents, 
disability, dental care, vision care, or long-term care.
    A high deductible health plan is a health plan that, for 
2007, has a deductible that is at least $1,100 for self-only 
coverage or $2,200 for family coverage and that has an out-of-
pocket expense limit that is no more than $5,500 in the case of 
self-only coverage and $11,000 in the case of family 
coverage.\1084\ Out-of-pocket expenses include deductibles, co-
payments, and other amounts (other than premiums) that the 
individual must pay for covered benefits under the plan. A plan 
is not a high deductible health plan if substantially all of 
the coverage is for permitted coverage or coverage that may be 
provided by permitted insurance, as described above. A plan 
does not fail to be a high deductible health plan by reason of 
failing to have a deductible for preventive care.
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    \1084\ The limits are indexed for inflation. For 2006, a high 
deductible plan is a health plan that has a deductible that is at least 
$1,050 for self-only coverage or $2,100 for family coverage and that 
has an out-of-pocket expense limit that is no more than $5,250 in the 
case of self-only coverage and $10,500 in the case of family coverage. 
The family coverage limits always will be twice the self-only coverage 
limits (as indexed for inflation). In the case of the plan using a 
network of providers, the plan does not fail to be a high deductible 
health plan (if it would otherwise meet the requirements of a high 
deductible health plan) solely because the out-of-pocket expense limit 
for services provided outside of the network exceeds the out-of-pocket 
expense limits. In addition, such plan's deductible for out-of-network 
services is not taken into account in determining the annual 
contribution limit (i.e., the deductible for services within the 
network is used for such purpose).
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    Health flexible spending arrangements (``FSAs'') and health 
reimbursement arrangements (``HRAs'') are health plans that 
constitute other coverage under the HSA rules. These 
arrangements are discussed in more detail, below. An individual 
who is covered by a high deductible health plan and a health 
FSA or HRA generally is not eligible to make contributions to 
an HSA. An individual is eligible to make contributions to an 
HSA if the health FSA or HRA is: (1) a limited purpose health 
FSA or HRA; (2) a suspended HRA; (3) a post-deductible health 
FSA or HRA; or (4) a retirement HRA.\1085\
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    \1085\ Rev. Rul. 2004-45, 2004-22 I.R.B. 1. A limited purpose 
health FSA pays or reimburses benefits for permitted coverage and a 
limited purpose HRA pays or reimburses benefits for permitted insurance 
or permitted coverage. A limited purpose health FSA or HRA may also pay 
or reimburse preventive care benefits. A suspended HRA does not pay 
medical expense incurred during a suspension period except for 
preventive care, permitted insurance and permitted coverage. A post-
deductible health FSA or HRA does not pay or reimburse any medical 
expenses incurred before the minimum annual deductible under the HSA 
rules is satisfied. A retirement HRA pays or reimburses only medical 
expenses incurred after retirement.
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            Tax treatment of and limits on contributions
    Contributions to an HSA by or on behalf of an eligible 
individual are deductible (within limits) in determining 
adjusted gross income (i.e., ``above-the-line'') of the 
individual. In addition, employer contributions to HSAs 
(including salary reduction contributions made through a 
cafeteria plan) are excludable from gross income and wages for 
employment tax purposes. In the case of an employee, 
contributions to an HSA may be made by both the individual and 
the individual's employer. All contributions are aggregated for 
purposes of the maximum annual contribution limit. 
Contributions to Archer MSAs reduce the annual contribution 
limit for HSAs.
    The maximum aggregate annual contribution that can be made 
to an HSA is the lesser of (1) 100 percent of the annual 
deductible under the high deductible health plan, or (2) (for 
2007) $2,850 in the case of self-only coverage and $5,650 in 
the case of family coverage.\1086\ The annual contribution 
limit is the sum of the limits determined separately for each 
month, based on the individual's status and health plan 
coverage as of the first day of the month. The annual 
contribution limits are increased for individuals who have 
attained age 55 by the end of the taxable year. In the case of 
policyholders and covered spouses who are age 55 or older, the 
HSA annual contribution limit is greater than the otherwise 
applicable limit by $700 in 2006, $800 in 2007, $900 in 2008, 
and $1,000 in 2009 and thereafter. As in determining the 
general annual contribution limit, the increase in the annual 
contribution limit for individuals who have attained age 55 is 
also determined on a monthly basis. As previously discussed, 
contributions, including catch-up contributions, cannot be made 
once an individual is enrolled in Medicare.
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    \1086\ These amounts are indexed for inflation. For 2006, the 
dollar limits are $2,700 in the case of self-only coverage and $5,450 
in the case of family coverage.
---------------------------------------------------------------------------
    In the case of individuals who are married to each other 
and either spouse has family coverage, both spouses are treated 
as having only the family coverage with the lowest annual 
deductible. The annual contribution limit (without regard to 
the catch-up contribution amounts) is divided equally between 
the spouses unless they agree on a different division (after 
reduction for amounts paid from any Archer MSA of the spouses).
    An excise tax applies to contributions in excess of the 
maximum contribution amount for the HSA. The excise tax 
generally is equal to six percent of the cumulative amount of 
excess contributions that are not distributed from the HSA.
    Amounts can be rolled over into an HSA from another HSA or 
from an Archer MSA.
            Comparable contributions
    If an employer makes contributions to employees' HSAs, the 
employer must make available comparable contributions on behalf 
of all employees with comparable coverage during the same 
period. Contributions are considered comparable if they are 
either of the same amount or the same percentage of the 
deductible under the plan. If employer contributions do not 
satisfy the comparability rule during a period, then the 
employer is subject to an excise tax equal to 35 percent of the 
aggregate amount contributed by the employer to HSAs for that 
period. The comparability rule does not apply to contributions 
made through a cafeteria plan.
            Taxation of distributions
    Distributions from an HSA for qualified medical expenses of 
the individual and his or her spouse or dependents generally 
are excludable from gross income. In general, amounts in an HSA 
can be used for qualified medical expenses even if the 
individual is not currently eligible for contributions to the 
HSA.
    Qualified medical expenses generally are defined as under 
section 213(d) and include expenses for diagnosis, cure, 
mitigation, treatment, or prevention of disease. Qualified 
medical expenses do not include expenses for insurance other 
than for (1) long-term care insurance, (2) premiums for health 
coverage during any period of continuation coverage required by 
Federal law, (3) premiums for health care coverage while an 
individual is receiving unemployment compensation under Federal 
or State law, or (4) in the case of an account beneficiary who 
has attained the age of Medicare eligibility, health insurance 
premiums for Medicare, other than premiums for Medigap 
policies. Such qualified health insurance premiums include, for 
example, Medicare Part A and Part B premiums, Medicare HMO 
premiums, and the employee share of premiums for employer-
sponsored health insurance including employer-sponsored retiree 
health insurance. Whether the expenses are qualified medical 
expenses is determined as of the time the expenses were 
incurred.
    For purposes of determining the itemized deduction for 
medical expenses, distributions from an HSA for qualified 
medical expenses are not treated as expenses paid for medical 
care under section 213. Distributions from an HSA that are not 
for qualified medical expenses are includible in gross income. 
Distributions includible in gross income also are subject to an 
additional 10-percent tax unless made after death, disability, 
or the individual attains the age of Medicare eligibility 
(i.e., age 65).
            Reporting requirements
    Employer contributions are required to be reported on the 
employee's Form W-2. Trustees of HSAs may be required to report 
to the Secretary of the Treasury amounts with respect to 
contributions, distributions, the return of excess 
contributions, and other matters as determined appropriate by 
the Secretary. In addition, the Secretary may require providers 
of high deductible health plans to make reports to the 
Secretary and to account beneficiaries as the Secretary 
determines appropriate.

Health flexible spending arrangements and health reimbursement 
        arrangements

    Arrangements commonly used by employers to reimburse 
medical expenses of their employees (and their spouses and 
dependents) include health flexible spending arrangements 
(''FSAs'') and health reimbursement accounts (``HRAs''). Health 
FSAs typically are funded on a salary reduction basis, meaning 
that employees are given the option to reduce current 
compensation and instead have the compensation used to 
reimburse the employee for medical expenses. If the health FSA 
meets certain requirements, then the compensation that is 
forgone is not includible in gross income or wages and 
reimbursements for medical care from the health FSA are 
excludable from gross income and wages. Health FSAs are subject 
to the general requirements relating to cafeteria plans, 
including a requirement that a cafeteria plan generally may not 
provide deferred compensation.\1087\ This requirement often is 
referred to as the ``use-it-or-lose-it-rule.'' Until May of 
2005, this requirement was interpreted to mean that amounts 
available from a health FSA as of the end of a plan year must 
be forfeited by the employee. In May 2005, the Treasury 
Department issued a notice that allows a grace period not to 
exceed two and one-half months immediately following the end of 
the plan year during which unused amounts may be used.\1088\ An 
individual participating in a health FSA that allows 
reimbursements during a grace period is generally not eligible 
to make contributions to the HSA until the first month 
following the end of the grace period even if the individual's 
health FSA has no unused benefits as of the end of the prior 
plan year.\1089\ Health FSAs are subject to certain other 
requirements, including rules that require that the FSA have 
certain characteristics similar to insurance.
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    \1087\  Sec. 125(d)(2).
    \1088\ Notice 2005-42, 2005-23 I.R.B. 1204.
    \1089\ Notice 2005-86, 2005-49 I.R.B. 1075.
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    HRAs operate in a manner similar to health FSAs, in that 
they are an employer-maintained arrangement that reimburses 
employees for medical expenses. Some of the rules applicable to 
HRAs and health FSAs are similar, e.g., the amounts in the 
arrangements can only be used to reimburse medical expenses and 
not for other purposes. Some of the rules are different. For 
example, HRAs cannot be funded on a salary reduction basis and 
the use-it-or lose-it rule does not apply. Thus, amounts 
remaining at the end of the year may be carried forward to be 
used to reimburse medical expenses in the next year.\1090\ 
Reimbursements for insurance covering medical care expenses are 
allowable reimbursements under an HRA, but not under a health 
FSA.
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    \1090\ Guidance with respect to HRAs, including the interaction of 
health FSAs and HRAs in the case an individual is covered under both, 
is provided in Notice 2002-45, 2002-2 C.B. 93.
---------------------------------------------------------------------------
    As mentioned above, subject to certain limited exceptions, 
health FSAs and HRAs constitute other coverage under the HSA 
rules.

                        Explanation of Provision


Allow rollovers from health FSAs and HRAs into HSAs for a limited time

    The provision allows certain amounts in a health FSA or HRA 
to be distributed from the health FSA or HRA and contributed 
through a direct transfer to an HSA without violating the 
otherwise applicable requirements for such arrangements. The 
amount that can be distributed from a health FSA or HRA and 
contributed to an HSA may not exceed an amount equal to the 
lesser of (1) the balance in the health FSA or HRA as of 
September 21, 2006 or (2) the balance in the health FSA or HRA 
as of the date of the distribution. The balance in the health 
FSA or HRA as of any date is determined on a cash basis (i.e., 
expenses incurred that have not been reimbursed as of the date 
the determination is made are not taken into account). Amounts 
contributed to an HSA under the provision are excludable from 
gross income and wages for employment tax purposes, are not 
taken into account in applying the maximum deduction limitation 
for other HSA contributions, and are not deductible. 
Contributions must be made directly to the HSA before January 
1, 2012. The provision is limited to one distribution with 
respect to each health FSA or HRA of the individual.
    The provision is designed to assist individuals in 
transferring from another type of health plan to a high 
deductible health plan. Thus, if an individual for whom a 
contribution is made under the provision does not remain an 
eligible individual during the testing period, the amount of 
the contribution is includible in gross income of the 
individual. An exception applies if the employee ceases to be 
an eligible individual by reason of death or disability. The 
testing period is the period beginning with the month of the 
contribution and ending on the last day of the 12th month 
following such month. The amount is includible for the taxable 
year of the first day during the testing period that the 
individual is not an eligible individual. A 10-percent 
additional tax also applies to the amount includible.
    A modified comparability rule applies with respect to 
contributions under the provision. If the employer makes 
available to any employee the ability to make contributions to 
the HSA from distributions from a health FSA or HRA under the 
provision, all employees who are covered under a high 
deductible plan of the employer must be allowed to make such 
distributions and contributions. The present-law excise tax 
applies if this requirement is not met.
    For example, suppose the balance in a health FSA as of 
September 21, 2006, is $2,000 and the balance in the account as 
January 1, 2008 is $3,000. Under the provision, a health FSA 
will not be considered to violate applicable rules if, as of 
January 1, 2008, an amount not to exceed $2,000 is distributed 
from the health FSA and contributed to an HSA of the 
individual. The $2,000 distribution would not be includible in 
income, and the subsequent contribution would not be deductible 
and would not count against the annual maximum tax deductible 
contribution that can be made to the HSA. If the individual 
ceases to be an eligible individual as of June 1, 2008, the 
$2,000 contribution amount is included in gross income and 
subject to a 10- percent additional tax. If instead the 
distribution and contribution are made as of June 30, 2008, 
when the balance in the health FSA is $1,500, the amount of the 
distribution and contribution is limited to $1,500.
    The present law rule that an individual is not an eligible 
individual if the individual has coverage under a general 
purpose health FSA or HRA continues to apply. Thus, for 
example, if the health FSA or HRA from which the contribution 
is made is a general purpose health FSA or HRA and the 
individual remains eligible under such arrangement after the 
distribution and contribution, the individual is not an 
eligible individual.

Certain FSA coverage treated as disregarded coverage

    The provision provides that, for taxable years beginning 
after December 31, 2006, in certain cases, coverage under a 
health flexible spending arrangement (``FSA'') during the 
period immediately following the end of a plan year during 
which unused benefits or contributions remaining at the end of 
such plan year may be paid or reimbursed to plan participants 
for qualified expenses is disregarded coverage. Such coverage 
is disregarded if (1) the balance in the health FSA at the end 
of the plan year is zero, or (2) in accordance with rules 
prescribed by the Secretary of Treasury, the entire remaining 
balance in the health FSA at the end of the plan year is 
contributed to an HSA as provided under another provision of 
the Act.\1091\
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    \1091\ The amount that can be contributed is limited to the balance 
in the health FSA as of September 21, 2006.
---------------------------------------------------------------------------
    Thus, for example, if as of December 31, 2006, a 
participant's health FSA balance is zero, coverage under the 
health FSA during the period from January 1, 2007, until March 
15, 2007 (i.e., the ``grace period'') is disregarded in 
determining if tax deductible contributions can be made to an 
HSA for that period. Similarly, if the entire balance in an 
individual's health FSA as of December 31, 2006, is distributed 
and contributed to an HSA (as under another provision of the 
Act) coverage during the health FSA grace period is 
disregarded.
    It is intended that the Secretary will provide guidance 
under the provision with respect to the timing of health FSA 
distributions contributed to an HSA in order to facilitate such 
rollovers and the establishment of HSAs in connection with high 
deductible plans. For example, it is intended that the 
Secretary would provide rules under which coverage is 
disregarded if, before the end of a year, an individual elects 
high deductible plan coverage and to contribute any remaining 
FSA balance to an HSA in accordance with the provision even if 
the trustee-to-trustee transfer cannot be completed until the 
following plan year. Similar rules apply for the general 
provision allowing amounts from a health FSA or HRA to be 
contributed to an HSA in order to facilitate such contributions 
at the beginning of an employee's first year of HSA 
eligibility.
    The provision does not modify the permitted health FSA 
grace period allowed under existing Treasury guidance.

Repeal of annual plan deductible limitation on HSA contribution 
        limitation

    The provision modifies the limit on the annual deductible 
contributions that can be made to an HSA so that the maximum 
deductible contribution is not limited to the annual deductible 
under the high deductible health plan. Thus, under the 
provision, the maximum aggregate annual contribution that can 
be made to an HSA is $2,850 (for 2007) in the case of self-only 
coverage and $5,650 (for 2007) in the case of family coverage.

Earlier indexing of cost of living adjustments

    Under the provision, in the case of adjustments made for 
any taxable year beginning after 2007, the Consumer Price Index 
for a calendar year is determined as of the close of the 12-
month period ending on March 31 of the calendar year (rather 
than August 31 as under present law) for the purpose of making 
cost-of-living adjustments for the HSA dollar amounts that are 
indexed for inflation (i.e., the contribution limits and the 
high-deductible health plan requirements). The provision also 
requires the Secretary of Treasury to publish the adjusted 
amounts for a year no later than June 1 of the preceding 
calendar year.

Allow full contribution for months preceding month that taxpayer is an 
        eligible individual

    In general, the provision allows individuals who become 
covered under a high deductible plan in a month other than 
January to make the full deductible HSA contribution for the 
year. Under the provision, an individual who is an eligible 
individual during the last month of a taxable year is treated 
as having been an eligible individual during every month during 
the taxable year for purposes of computing the amount that may 
be contributed to the HSA for the year. Thus, such individual 
is allowed to make contributions for months before the 
individual was enrolled in a high deductible health plan. For 
the months preceding the last month of the taxable year that 
the individual is treated as an eligible individual solely by 
reason of the provision, the individual is treated as having 
been enrolled in the same high deductible health plan in which 
the individual was enrolled during the last month of the 
taxable year.
    If an individual makes contributions under the provision 
and does not remain an eligible individual during the testing 
period, the amount of the contributions attributable to months 
preceding the month in which the individual was an eligible 
individual which could not have been made but for the provision 
are includible in gross income. An exception applies if the 
employee ceases to be an eligible individual by reason of death 
or disability. The testing period is the period beginning with 
the last month of the taxable year and ending on the last day 
of the 12th month following such month. The amount is 
includible for the taxable year of the first day during the 
testing period that the individual is not an eligible 
individual. A 10-percent additional tax also applies to the 
amount includible.
    For example, suppose individual ``A'' enrolls in high 
deductible plan ``H'' in December of 2007 and is otherwise an 
eligible individual in that month. A was not an eligible 
individual in any other month in 2007. A may make HSA 
contributions as if she had been enrolled in plan H for all of 
2007. If A ceases to be an eligible individual (e.g., if she 
ceases to be covered under the high deductible health plan) in 
June 2008, an amount equal to the HSA deduction attributable to 
treating A as an eligible individual for January through 
November 2007 is included in income in 2008. In addition, a 10-
percent additional tax applies to the amount includible.

Modify employer comparable contribution requirements for contributions 
        made to nonhighly compensated employees

    The provision provides an exception to the comparable 
contribution requirements which allows employers to make larger 
HSA contributions for nonhighly compensated employees than for 
highly compensated employees. Highly compensated employees are 
defined as under section 414(q) and include any employee who 
was (1) a five-percent owner at any time during the year or the 
preceding year; or (2) for the preceding year, (A) had 
compensation from the employer in excess of $100,000 \1092\ 
(for 2007) and (B) if elected by the employer, was in the group 
consisting of the top-20 percent of employees when ranked based 
on compensation. Nonhighly compensated employees are employees 
not included in the definition of highly compensated employee 
under section 414(q).
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    \1092\ This amount is indexed for inflation.
---------------------------------------------------------------------------
    The comparable contribution rules continue to apply to the 
contributions made to nonhighly compensated employees so that 
the employer must make available comparable contributions on 
behalf of all nonhighly compensated employees with comparable 
coverage during the same period.
    For example, an employer is permitted to make a $1,000 
contribution to the HSA of each nonhighly compensated employee 
for a year without making contributions to the HSA of each 
highly compensated employee.

One-time rollovers from IRAs into HSAs

    The provision allows a one-time contribution to an HSA of 
amounts distributed from an individual retirement arrangement 
(``IRA''). The contribution must be made in a direct trustee- 
to-trustee transfer. Amounts distributed from an IRA under the 
provision are not includible in income to the extent that the 
distribution would otherwise be includible in income. In 
addition, such distributions are not subject to the 10-percent 
additional tax on early distributions.
    In determining the extent to which amounts distributed from 
the IRA would otherwise be includible in income, the aggregate 
amount distributed from the IRA is treated as includible in 
income to the extent of the aggregate amount which would have 
been includible if all amounts were distributed from all IRAs 
of the same type (i.e., in the case of a traditional IRA, there 
is no pro-rata distribution of basis). As under present law, 
this rule is applied separately to Roth IRAs and other IRAs.
    The amount that can be distributed from the IRA and 
contributed to an HSA is limited to the otherwise maximum 
deductible contribution amount to the HSA computed on the basis 
of the type of coverage under the high deductible health plan 
at the time of the contribution. The amount that can otherwise 
be contributed to the HSA for the year of the contribution from 
the IRA is reduced by the amount contributed from the IRA. No 
deduction is allowed for the amount contributed from an IRA to 
an HSA.
    Under the provision, only one distribution and contribution 
may be made during the lifetime of the individual, except that 
if a distribution and contribution are made during a month in 
which an individual has self-only coverage as of the first day 
of the month, an additional distribution and contribution may 
be made during a subsequent month within the taxable year in 
which the individual has family coverage. The limit applies to 
the combination of both contributions.
    If the individual does not remain an eligible individual 
during the testing period, the amount of the distribution and 
contribution is includible in gross income of the individual. 
An exception applies if the employee ceases to be an eligible 
individual by reason of death or disability. The testing period 
is the period beginning with the month of the contribution and 
ending on the last day of the 12th month following such month. 
The amount is includible for the taxable year of the first day 
during the testing period that the individual is not an 
eligible individual. A 10-percent additional tax also applies 
to the amount includible.
    The provision does not apply to simplified employee 
pensions (``SEPs'') or to SIMPLE retirement accounts.

                             Effective Date

    The provision allowing rollovers from heath FSAs and HRAs 
into HSAs is effective for distributions and contributions on 
or after the date of enactment and before January 1, 2012. The 
provision disregarding certain FSA coverage is effective after 
the date of enactment with respect to coverage for taxable 
years beginning after December 31, 2006. The provision 
repealing the annual plan limitation on the HSA contribution 
limitation is effective for taxable years beginning after 
December 31, 2006. The provision relating to cost-of-living 
adjustments is effective for adjustments made for taxable years 
beginning after 2007. The provision allowing contributions for 
months preceding the month that the taxpayer is an eligible 
individual is effective for taxable years beginning after 
December 31, 2006. The provision modifying the comparability 
rule is effective for taxable years beginning after December 
31, 2006. The provision allowing one-time rollovers from an IRA 
into an HSA is effective for taxable years beginning after 
December 31, 2006.

                     TITLE IV--OTHER TAX PROVISIONS

1. Deduction allowable with respect to income attributable to domestic 
        production activities in Puerto Rico (sec. 401 of the Act and 
        sec. 199 of the Code)

                              Present Law

In general
    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to a portion of the taxpayer's qualified production 
activities income. For taxable years beginning after 2009, the 
deduction is nine percent of such income. For taxable years 
beginning in 2005 and 2006, the deduction is three percent of 
income and, for taxable years beginning in 2007, 2008 and 2009, 
the deduction is six percent of income. For taxpayers subject 
to the 35-percent corporate income tax rate, the 9-percent 
deduction effectively reduces the corporate income tax rate to 
just under 32 percent on qualified production activities 
income.
Qualified production activities income
    In general, ``qualified production activities income'' is 
equal to domestic production gross receipts (defined by section 
199(c)(4)), reduced by the sum of: (1) the costs of goods sold 
that are allocable to such receipts; and (2) other expenses, 
losses, or deductions which are properly allocable to such 
receipts.
Domestic production gross receipts
    ``Domestic production gross receipts'' generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange or other disposition, or any lease, rental or license, 
of qualifying production property \1093\ that was manufactured, 
produced, grown or extracted by the taxpayer in whole or in 
significant part within the United States; (2) any sale, 
exchange or other disposition, or any lease, rental or license, 
of qualified film \1094\ produced by the taxpayer; (3) any 
sale, exchange or other disposition of electricity, natural 
gas, or potable water produced by the taxpayer in the United 
States; (4) construction activities performed in the United 
States; or (5) engineering or architectural services performed 
in the United States for construction projects located in the 
United States.
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    \1093\ ``Qualifying production property'' generally includes any 
tangible personal property, computer software, or sound recordings.
    \1094\ ``Qualified film'' includes any motion picture film or 
videotape (including live or delayed television programming, but not 
including certain sexually explicit productions) if 50 percent or more 
of the total compensation relating to the production of such film 
(including compensation in the form of residuals and participations) 
constitutes compensation for services performed in the United States by 
actors, production personnel, directors, and producers.
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    For purposes of section 199, the United States does not 
include Puerto Rico or other U.S. possessions.\1095\
---------------------------------------------------------------------------
    \1095\ Sec. 7701(a)(9) (``the term `United States' when used in a 
geographical sense includes only the States and the District of 
Columbia'').
---------------------------------------------------------------------------
Wage limitation
    For taxable years beginning after May 17, 2006, the amount 
of the deduction for a taxable year is limited to 50 percent of 
the wages paid by the taxpayer, and properly allocable to 
domestic production gross receipts, during the calendar year 
that ends in such taxable year.\1096\ Wages paid to bona fide 
residents of Puerto Rico generally are not included in the wage 
limitation amount.\1097\
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    \1096\ For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year. For taxable years beginning before May 18, 2006, the limitation 
is based upon all wages paid by the taxpayer, rather than only wages 
properly allocable to domestic production gross receipts.
    \1097\ Sec. 3401(a)(8)(C).
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                        Explanation of Provision

    The provision amends section 199 of the Code to include 
Puerto Rico within the definition of the United States for 
purposes of determining the domestic production gross receipts 
of eligible taxpayers. Under the provision, a taxpayer is 
allowed to treat Puerto Rico as part of the United States for 
purposes of section 199 (thus allowing the taxpayer to take 
into account its Puerto Rico business activity for purposes of 
calculating its domestic production gross receipts and 
qualified production activities income), but only if all of the 
taxpayer's gross receipts from sources within Puerto Rico are 
currently taxable for U.S. Federal income tax purposes. 
Consequently, a controlled foreign corporation is not eligible 
for the section 199 deduction made available by the provision. 
In addition, any such taxpayer is also allowed to take into 
account wages paid to bona fide residents of Puerto Rico for 
purposes of calculating the 50-percent wage limitation.

                             Effective Date

    The provision is effective for the first two taxable years 
beginning after December 31, 2005, and before January 1, 2008.
2. Alternative minimum tax credit relief for individuals; returns 
        required for certain options (secs. 402 and 403 of the Act and 
        secs. 53 and 6039 of the Code)

                              Present Law

In general
    Present law imposes an alternative minimum tax (``AMT'') on 
an individual taxpayer to the extent the taxpayer's tentative 
minimum tax liability exceeds his or her regular income tax 
liability. An individual's tentative minimum tax is the sum of 
(1) 26 percent of so much of the taxable excess as does not 
exceed $175,000 ($87,500 in the case of a married individual 
filing a separate return) and (2) 28 percent of the remaining 
taxable excess. The taxable excess is the amount by which the 
alternative minimum taxable income (``AMTI'') exceeds an 
exemption amount.
    An individual's AMTI is the taxpayer's taxable income 
increased by certain preference items and adjusted by 
determining the tax treatment of certain items in a manner that 
negates the deferral of income resulting from the regular tax 
treatment of those items.
    The individual AMT attributable to deferral adjustments 
generates a minimum tax credit that is allowable to the extent 
the regular tax (reduced by other nonrefundable credits) 
exceeds the tentative minimum tax in a future taxable year. 
Unused minimum tax credits are carried forward indefinitely.
AMT treatment of incentive stock options
    One of the adjustments in computing AMTI is the tax 
treatment of the exercise of an incentive stock option. An 
incentive stock option is an option granted by a corporation in 
connection with an individual's employment, so long as the 
option meets certain specified requirements.\1098\ Under the 
regular tax, the exercise of an incentive stock option is tax-
free if the stock is not disposed of within one year of 
exercise of the option or within two years of the grant of the 
option.\1099\ The individual then computes the long-term 
capital gain or loss on the sale of the stock using the amount 
paid for the stock as the cost basis. If the holding period 
requirements are not satisfied, the individual generally takes 
into account at the exercise of the option an amount of 
ordinary income equal to the excess of the fair market value of 
the stock on the date of exercise over the amount paid for the 
stock. The cost basis of the stock is increased by the amount 
taken into account.\1100\
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    \1098\ Sec. 422.
    \1099\ Sec. 421.
    \1100\ If the stock is sold at a loss before the required holding 
periods are met, the amount taken into account may not exceed the 
amount realized on the sale over the adjusted basis of the stock. If 
the stock is sold after the taxable year in which the option was 
exercised but before the required holding periods are met, the required 
inclusion is made in the year the stock is sold.
---------------------------------------------------------------------------
    Under the individual alternative minimum tax, the exercise 
of an incentive stock option is treated as the exercise of an 
option other than an incentive stock option. Under this 
treatment, generally the individual takes into account as 
ordinary income for purposes of computing AMTI the excess of 
the fair market value of the stock at the date of exercise over 
the amount paid for the stock.\1101\ When the stock is later 
sold, for purposes of computing capital gain or loss for 
purposes of AMTI, the adjusted basis of the stock includes the 
amount taken into account as AMTI.
---------------------------------------------------------------------------
    \1101\ If the stock is sold in the same taxable year the option is 
exercised, no adjustment in computing AMTI is required.
---------------------------------------------------------------------------
    The adjustment relating to incentive stock options is a 
deferral adjustment and therefore generates an AMT credit in 
the year the stock is sold.\1102\
---------------------------------------------------------------------------
    \1102\ If the stock is sold for less than the amount paid for the 
stock, the loss may not be allowed in full in computing AMTI by reason 
of the $3,000 limit on the deductibility of net capital losses. Thus, 
the excess of the regular tax over the tentative minimum tax may not 
reflect the full amount of the loss.
---------------------------------------------------------------------------

Furnishing of information

    Under present law,\1103\ employers are required to provide 
to employees information regarding the transfer of stock 
pursuant to the exercise of an incentive stock option and to 
transfers of stock under an employee stock purchase plan where 
the option price is between 85 percent and 100 percent of the 
value of the stock.\1104\
---------------------------------------------------------------------------
    \1103\ Sec. 6039.
    \1104\ Sec. 423(c).
---------------------------------------------------------------------------

                        Explanation of Provision


Allowance of credit

    Under the provision, an individual's minimum tax credit 
allowable for any taxable year beginning before January 1, 
2013, is not less than the ``AMT refundable credit amount''. 
The ``AMT refundable credit amount'' is the greater of (1) the 
lesser of $5,000 or the long-term unused minimum tax credit, or 
(2) 20 percent of the long-term unused minimum tax credit. The 
long-term unused minimum tax credit for any taxable year means 
the portion of the minimum tax credit attributable to the 
adjusted net minimum tax for taxable years before the 3rd 
taxable year immediately preceding the taxable year (assuming 
the credits are used on a first-in, first-out basis). In the 
case of an individual whose adjusted gross income for a taxable 
year exceeds the threshold amount (within the meaning of 
section 151(d)(3)(C)), the AMT refundable credit amount is 
reduced by the applicable percentage (within the meaning of 
section 151(d)(3)(B)). The additional credit allowable by 
reason of this provision is refundable.
    Example.--Assume in 2010 an individual has an adjusted 
gross income that results in an applicable percentage of 50 
percent under section 151(d)(3)(B), a regular tax of $45,000, a 
tentative minimum tax of $40,000, no other credits allowable, 
and a minimum tax credit for the taxable year (before 
limitation under section 53(c)) of $1.1 million of which $1 
million is a long-term unused minimum tax credit.)
    The AMT refundable credit amount for the taxable year is 
$100,000 (20 percent of the $1 million long-term unused minimum 
tax credit reduced by an applicable percentage of 50 percent). 
The minimum tax credit allowable for the taxable year is 
$100,000 (the greater of the AMT refundable credit amount or 
the amount of the credit otherwise allowable). The $5,000 
credit allowable without regard to this provision is 
nonrefundable and the additional $95,000 of credit allowable by 
reason of this provision is treated as a refundable credit. 
Thus, the taxpayer has an overpayment of $55,000 ($45,000 
regular tax less $5,000 nonrefundable AMT credit less $95,000 
refundable AMT credit). The $55,000 overpayment is allowed as a 
refund or credit to the taxpayer. The remaining $1 million 
minimum tax credit is carried forward to future taxable years.
    If, in the above example, the adjusted gross income did not 
exceed the threshold amount under section 151(d)(3)(C), the AMT 
refundable credit amount for the taxable year would be 
$200,000, and the overpayment would be $155,000.

Information returns

    The provision requires an employer to make an information 
return with the IRS, in addition to providing information to 
the employee, regarding the transfer of stock pursuant to 
exercise of an incentive stock option, and to certain stock 
transfers regarding employee stock purchase plans.

                             Effective Date

    The provision relating to the minimum tax credit applies to 
taxable years beginning after the date of enactment.
    The provision relating to returns applies to calendar years 
beginning after the date of enactment.

3. Partial expensing for advanced mine safety equipment (sec. 404 of 
        the Act and new sec. 179E of the Code)

                              Present Law

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the Modified 
Accelerated Cost Recovery System (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168).
    Personal property is classified under MACRS based on the 
property's class life unless a different classification is 
specifically provided in section 168. The class life applicable 
for personal property is the asset guideline period (midpoint 
class life as of January 1, 1986). Based on the property's 
classification, a recovery period is prescribed under MACRS. In 
general, there are six classes of recovery periods to which 
personal property can be assigned. For example, personal 
property that has a class life of four years or less has a 
recovery period of three years, whereas personal property with 
a class life greater than four years but less than 10 years has 
a recovery period of five years. The class lives and recovery 
periods for most property are contained in Revenue Procedure 
87-56.\1105\
---------------------------------------------------------------------------
    \1105\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs. Present law provides that the maximum 
amount a taxpayer may expense, for taxable years beginning in 
2003 through 2009, is $100,000 of the cost of qualifying 
property placed in service for the taxable year. In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business. The $100,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$400,000.

                        Explanation of Provision

    Under the provision, a taxpayer may elect to treat 50 
percent of the cost of any qualified advanced mine safety 
equipment property as a deduction in the taxable year in which 
the equipment is placed in service.
    Advanced mine safety equipment property means any of the 
following: (1) emergency communication technology or devices 
used to allow a miner to maintain constant communication with 
an individual who is not in the mine; (2) electronic 
identification and location devices that allow individuals not 
in the mine to track at all times the movements and location of 
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at 
least 90 minutes; (4) pre-positioned supplies of oxygen 
providing each miner on a shift the ability to survive for at 
least 48 hours; and (5) comprehensive atmospheric monitoring 
systems that monitor the levels of carbon monoxide, methane and 
oxygen that are present in all areas of the mine and that can 
detect smoke in the case of a fire in a mine.
    To be treated as qualified advanced mine safety equipment 
property under the provision, the original use of the property 
must have commenced with the taxpayer, and the taxpayer must 
have placed the property in service after the date of 
enactment.
    The portion of the cost of any property with respect to 
which an expensing election under section 179 is made may not 
be taken into account for purposes of the 50-percent deduction 
allowed under this provision. For Federal tax purposes, the 
basis of property is reduced by the portion of its cost that is 
taken into account for purposes of the 50-percent deduction 
allowed under the provision.
    The provision requires the taxpayer to report information 
required by the Treasury Secretary with respect to the 
operation of mines of the taxpayer, in order for the deduction 
to be allowed for the taxable year.
    An election made by the taxpayer under the provision may 
not be revoked except with the consent of the Secretary.
    The provision includes a termination rule providing that it 
does not apply to property placed in service after December 31, 
2008.

                             Effective Date

    The provision applies to costs paid or incurred after the 
date of enactment, with regard to property placed in service on 
or before December 31, 2008.

4. Mine rescue team training credit (sec. 405 of the Act and new sec. 
        45N of the Code)

                              Present Law

    There is no present law credit for expenditures incurred by 
a taxpayer to train mine rescue workers. In general, a 
deduction is allowed for all ordinary and necessary expenses 
that are paid or incurred by the taxpayer during the taxable 
year in carrying on any trade or business.\1106\ A taxpayer 
that employs individuals as miners in underground mines will 
generally be permitted to deduct as ordinary and necessary 
expenses the educational expenditures such taxpayer incurs to 
train its employees in the principles, procedures, and 
techniques of mine rescue, as well as the wages paid by the 
taxpayer for the time its employees were engaged in such 
training.
---------------------------------------------------------------------------
    \1106\ Sec. 162(a).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a taxpayer which is an eligible 
employer may claim a credit with respect to each qualified mine 
rescue team employee equal to the lesser of (1) 20 percent of 
the amount paid or incurred by the taxpayer during the taxable 
year with respect to the training program costs of such 
qualified mine rescue team employee (including wages of the 
employee while attending the program), or (2) $10,000.\1107\ 
For purposes of the provision, ``wages'' has the meaning given 
to such term by sec. 3306(b) (determined without regard to any 
dollar limitation contained in that section). An eligible 
employer is any taxpayer which employs individuals as miners in 
underground mines in the United States. No deduction is allowed 
for the amount of the expenses otherwise deductible which is 
equal to the amount of the credit.
---------------------------------------------------------------------------
    \1107\ The credit is part of the general business credit (sec. 38).
---------------------------------------------------------------------------
    A qualified mine rescue team employee is any full-time 
employee of the taxpayer who is a miner eligible for more than 
six months of a taxable year to serve as a mine rescue team 
member by virtue of either having completed the initial 20-hour 
course of instruction prescribed by the Mine Safety and Health 
Administration's Office of Educational Policy and Development, 
or receiving at least 40 hours of refresher training in such 
instruction.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005, and before January 1, 2009.

5. Whistleblower reforms (sec. 406 of the Act and sec. 7623 of the 
        Code)

                              Present Law

    The Code authorizes the IRS to pay such sums as deemed 
necessary for: ``(1) detecting underpayments of tax; and (2) 
detecting and bringing to trial and punishment persons guilty 
of violating the internal revenue laws or conniving at the 
same.'' \1108\ Amounts are paid based on a percentage of tax, 
fines, and penalties (but not interest) actually collected 
based on the information provided. For specific information 
that caused the investigation and resulted in recovery, the IRS 
administratively has set the reward in an amount not to exceed 
15 percent of the amounts recovered. For information, although 
not specific, that nonetheless caused the investigation and was 
of value in the determination of tax liabilities, the reward is 
not to exceed 10 percent of the amount recovered. For 
information that caused the investigation, but had no direct 
relationship to the determination of tax liabilities, the 
reward is not to exceed one percent of the amount recovered. 
The reward ceiling is $10 million (for payments made after 
November 7, 2002), and the reward floor is $100. No reward will 
be paid if the recovery was so small as to call for payment of 
less than $100 under the above formulas. Both the ceiling and 
percentages can be increased with a special agreement. The Code 
permits the IRS to disclose return information pursuant to a 
contract for tax administration services.\1109\
---------------------------------------------------------------------------
    \1108\ Sec. 7623.
    \1109\ Sec. 6103(n).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision reforms the reward program for individuals 
who provide information regarding violations of the tax laws to 
the Secretary. Generally, the provision establishes a reward 
floor of 15 percent of the collected proceeds (including 
penalties, interest, additions to tax and additional amounts) 
if the IRS moves forward with an administrative or judicial 
action based on information brought to the IRS's attention by 
an individual. The provision caps the available reward at 30 
percent of the collected proceeds. The provision permits awards 
of lesser amounts (but no more than 10 percent) if the action 
was based principally on allegations (other than information 
provided by the individual) resulting from a judicial or 
administrative hearing, government report, hearing, audit, 
investigation, or from the news media.
    The provision requires the Secretary to issue guidance 
within one year of the date of enactment for the operation of a 
Whistleblower Office within the IRS to administer the reward 
program. To the extent possible, it is expected that such 
guidance will address the recommendations of the Treasury 
Inspector General for Tax Administration regarding the 
informant's reward program, including the recommendations to 
centralize management of the reward program and to reduce the 
processing time for claims.\1110\ Under the provision, the 
Whistleblower Office may seek assistance from the individual 
providing information or from his or her legal representative, 
and may reimburse the costs incurred by any legal 
representative out of the amount of the reward. To the extent 
the disclosure of returns or return information is required to 
render such assistance, the disclosure must be pursuant to an 
IRS tax administration contract. It is expected that such 
disclosures will be infrequent and will be made only when the 
assigned task cannot be properly or timely completed without 
the return information to be disclosed.
---------------------------------------------------------------------------
    \1110\ Treasury Inspector General for Tax Administration, The 
Informants' Rewards Program Needs More Centralized Management 
Oversight, 2006-30-092 (June 2006).
---------------------------------------------------------------------------
    The provision also provides an above-the-line deduction for 
attorneys' fees and costs paid by, or on behalf of, the 
individual in connection with any award for providing 
information regarding violations of the tax laws. The amount 
that may be deducted above-the-line may not exceed the amount 
includible in the taxpayer's gross income for the taxable year 
on account of such award (whether by suit or agreement and 
whether as lump sum or periodic payments).
    The provision permits an individual to appeal the amount or 
a denial of an award determination to the United States Tax 
Court (the ``Tax Court'') within 30 days of such determination. 
Under the provision, Tax Court review of an award determination 
may be assigned to a special trial judge.
    In addition, the provision requires the Secretary to 
conduct a study and report to Congress on the effectiveness of 
the whistleblower reward program and any legislative or 
administrative recommendations regarding the administration of 
the program.

                             Effective Date

    The provision generally is effective for information 
provided on or after the date of enactment.

6. Frivolous tax submissions (sec. 407 of the Act and sec. 6702 of the 
        Code)

                              Present Law

    The Code provides that an individual who files a frivolous 
income tax return is subject to a penalty of $500 imposed by 
the IRS (sec. 6702). The Code also permits the Tax Court \1111\ 
to impose a penalty of up to $25,000 if a taxpayer has 
instituted or maintained proceedings primarily for delay or if 
the taxpayer's position in the proceeding is frivolous or 
groundless (sec. 6673(a)).
---------------------------------------------------------------------------
    \1111\ Because in general the Tax Court is the only pre-payment 
forum available to taxpayers, it deals with most of the frivolous, 
groundless, or dilatory arguments raised in tax cases.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the IRS-imposed penalty by 
increasing the amount of the penalty to up to $5,000 and by 
applying it to all taxpayers and to all types of Federal taxes.
    The provision also modifies present law with respect to 
certain submissions that raise frivolous arguments or that are 
intended to delay or impede tax administration. The submissions 
to which the provision applies are requests for a collection 
due process hearing, installment agreements, and offers-in-
compromise. First, the provision permits the IRS to disregard 
such requests. Second, the provision permits the IRS to impose 
a penalty of up to $5,000 for such requests, unless the 
taxpayer withdraws the request after being given an opportunity 
to do so.
    The provision requires the IRS to publish a list of 
positions, arguments, requests, and submissions determined to 
be frivolous for purposes of these provisions.

                             Effective Date

    The provision applies to submissions made and issues raised 
after the date on which the Secretary first prescribes the 
required list of frivolous positions.

7. Addition of meningococcal and human papillomavirus vaccines to the 
        list of taxable vaccines (sec. 408 of the Act and sec. 4132 of 
        the Code)

                              Present Law

    A manufacturer's excise tax is imposed at the rate of 75 
cents per dose \1112\ on the following vaccines routinely 
recommended for administration to children: diphtheria, 
pertussis, tetanus, measles, mumps, rubella, polio, HIB 
(haemophilus influenza type B), hepatitis A, hepatitis B, 
varicella (chicken pox), rotavirus gastroenteritis, 
streptococcus pneumoniae and trivalent vaccines against 
influenza. The tax applied to any vaccine that is a combination 
of vaccine components equals 75 cents times the number of 
components in the combined vaccine.
---------------------------------------------------------------------------
    \1112\ Sec. 4131.
---------------------------------------------------------------------------
    Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund to 
finance compensation awards under the Federal Vaccine Injury 
Compensation Program for individuals who suffer certain 
injuries following administration of the taxable vaccines. This 
program provides a Federal ``no fault'' insurance system 
substitute for the State-law tort and private liability 
insurance systems otherwise applicable to vaccine 
manufacturers. All persons immunized after September 30, 1988, 
with covered vaccines must pursue compensation under this 
Federal program before bringing civil tort actions under State 
law.

                        Explanation of Provision

    The provision adds meningococcal vaccines and human 
papillomavirus vaccines to the list of taxable vaccines.

                             Effective Date

    The provision is effective for vaccines sold or used on or 
after the first day of the first month beginning more than four 
weeks after the date of enactment.
    In the case of sales on or before the effective date for 
which delivery is made after such date, the delivery date shall 
be considered the sale date.

8. Make permanent the tax treatment of certain settlement funds (sec. 
        409 of the Act and sec. 468B of the Code)

                              Present Law

    The cleanup of hazardous waste sites is sometimes funded by 
environmental ``settlement funds'' or escrow accounts. These 
escrow accounts are established in consent decrees between the 
Environmental Protection Agency (``EPA'') and the settling 
parties under the jurisdiction of a Federal district court. The 
EPA uses these accounts to resolve claims against private 
parties under Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (``CERCLA'').
    Present law provides that certain settlement funds 
established in consent decrees for the sole purpose of 
resolving claims under CERCLA are to be treated as beneficially 
owned by the United States government and therefore, not 
subject to Federal income tax.
    To qualify the settlement fund must be: (1) established 
pursuant to a consent decree entered by a judge of a United 
States District Court; (2) created for the receipt of 
settlement payments for the sole purpose of resolving claims 
under CERCLA; (3) controlled (in terms of expenditures of 
contributions and earnings thereon) by the government or an 
agency or instrumentality thereof; and (4) upon termination, 
any remaining funds will be disbursed to such government entity 
and used in accordance with applicable law. For purposes of the 
provision, a government entity means the United States, any 
State of political subdivision thereof, the District of 
Columbia, any possession of the United States, and any agency 
or instrumentality of the foregoing.
    The provision does not apply to accounts or funds 
established after December 31, 2010.

                        Explanation of Provision

    The provision permanently extends to funds and accounts 
established after December 31, 2010, the treatment of certain 
settlement funds as beneficially owned by the United States 
government and therefore, not subject to Federal income tax.

                             Effective Date

    The provision is effective as if included in section 201 of 
the Tax Increase Prevention and Reconciliation Act of 2005 
(``TIPRA'').

9. Make permanent the active business rules relating to taxation of 
        distributions of stock and securities of a controlled 
        corporation (sec. 410 of the Act and sec. 355 of the Code)

                              Present Law

    A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
to its shareholders as if the corporation had sold such 
property for its fair market value. In addition, the 
shareholders receiving the distributed property are ordinarily 
treated as receiving a dividend of the value of the 
distribution (to the extent of the distributing corporation's 
earnings and profits), or capital gain in the case of a stock 
buyback that significantly reduces the shareholder's interest 
in the parent corporation.
    An exception to these rules applies if the distribution of 
the stock of a controlled corporation satisfies the 
requirements of section 355 of the Code. If all the 
requirements are satisfied, there is no tax to the distributing 
corporation or to the shareholders on the distribution.
    One requirement to qualify for tax-free treatment under 
section 355 is that both the distributing corporation and the 
controlled corporation must be engaged immediately after the 
distribution in the active conduct of a trade or business that 
has been conducted for at least five years and was not acquired 
in a taxable transaction during that period (the ``active 
business test'').\1113\ For this purpose, prior to the 
enactment of TIPRA, if the distributing or the controlled 
corporation to which the test was being applied was itself the 
parent of other subsidiary corporations, the determination 
whether such parent corporation was considered engaged in the 
active conduct of a trade or business was made only at that 
parent corporation level. The test would be satisfied only if 
(1) that corporation itself was directly engaged in the active 
conduct of a trade or business, or (2) that corporation was not 
directly engaged in the active conduct of a trade or business, 
but substantially all its assets consisted of stock and 
securities of one or more corporations that it controls that 
are engaged in the active conduct of a trade or business.\1114\ 
Thus, different tests applied, depending upon whether the 
corporation being tested itself was engaged in the active 
conduct of a trade or business, or whether it was a holding 
company holding stock of other corporations that were engaged 
in the active conduct of a trade or business.
---------------------------------------------------------------------------
    \1113\ Sec. 355(b). In determining whether a corporation is engaged 
in an active trade or business that satisfies the requirement, old IRS 
guidelines for advance ruling purposes required that the value of the 
gross assets of the trade or business being relied on must ordinarily 
constitute at least five percent of the total fair market value of the 
gross assets of the corporation directly conducting the trade or 
business. Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113. More 
recently, the IRS suspended this specific rule in connection with its 
general administrative practice of moving IRS resources away from 
advance rulings on factual aspects of section 355 transactions in 
general. Rev. Proc. 2003-48, 2003-29 I.R.B. 86.
    \1114\ Section 355(b)(2)(A). The IRS position has been that the 
statutory ``substantially all'' test has required that at least 90 
percent of the fair market value of the corporation's gross assets 
consist of stock and securities of a controlled corporation that is 
engaged in the active conduct of a trade or business. Rev. Proc. 96-30, 
sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc. 77-37, sec. 3.04, 1977-2 C.B. 
568.
---------------------------------------------------------------------------
    TIPRA provided that the active trade or business test is 
always determined by reference to the relevant affiliated 
group. For the distributing corporation, the relevant 
affiliated group consists of the distributing corporation as 
the common parent and all corporations affiliated with the 
distributing corporation through stock ownership described in 
section 1504(a)(1)(B) (regardless of whether the corporations 
are includible corporations under section 1504(b)), immediately 
after the distribution. The relevant affiliated group for a 
controlled corporation is determined in a similar manner (with 
the controlled corporation as the common parent).
    The provision enacted in TIPRA applies to distributions 
after the date of enactment (May 17, 2006) and on or before 
December 31, 2010, with three exceptions. The provision does 
not apply to distributions (1) made pursuant to an agreement 
which is binding on the date of enactment and at all times 
thereafter, (2) described in a ruling request submitted to the 
IRS on or before the date of enactment, or (3) described on or 
before the date of enactment in a public announcement or in a 
filing with the Securities and Exchange Commission. The 
distributing corporation may irrevocably elect not to have the 
exceptions described above apply.
    The provision also applies, solely for the purpose of 
determining whether, after the date of enactment, there is 
continuing qualification under the requirements of section 
355(b)(2)(A) of distributions made before such date, as a 
result of an acquisition, disposition, or other restructuring 
after such date and on or before December 31, 2010.\1115\
---------------------------------------------------------------------------
    \1115\ For example, a holding company taxpayer that had distributed 
a controlled corporation in a spin-off prior to the date of enactment, 
in which spin-off the taxpayer satisfied the ``substantially all'' 
active business stock test of prior law section 355(b)(2)(A) 
immediately after the distribution, would not be deemed to have failed 
to satisfy any requirement that it continue that same qualified 
structure for any period of time after the distribution, solely because 
of a restructuring that occurred after the date of enactment and before 
January 1, 2011, and that would satisfy the requirements of new section 
355(b)(2)(A).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision deletes the sunset date of December 31, 2010, 
for all purposes of the provision enacted in TIPRA. Thus, that 
provision is made permanent.

                             Effective Date

    The provision is effective as if included in section 202 of 
TIPRA.

10. Make permanent the modifications to qualified veterans' mortgage 
        bonds (sec. 411 of the Act and sec. 143 of the Code)

                              Present Law

    Private activity bonds are bonds that nominally are issued 
by States or local governments, but the proceeds of which are 
used (directly or indirectly) by a private person and payment 
of which is derived from funds of such private person. The 
exclusion from income for State and local bonds does not apply 
to private activity bonds, unless the bonds are issued for 
certain permitted purposes (``qualified private activity 
bonds''). The definition of a qualified private activity bond 
includes both qualified mortgage bonds and qualified veterans' 
mortgage bonds.
    Qualified mortgage bonds are issued to make mortgage loans 
to qualified mortgagors for owner-occupied residences. The Code 
imposes several limitations on qualified mortgage bonds, 
including income limitations for homebuyers and purchase price 
limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).
    Qualified veterans'' mortgage bonds are private activity 
bonds the proceeds of which are used to make mortgage loans to 
certain veterans. Authority to issue qualified veterans' 
mortgage bonds is limited to States that had issued such bonds 
before June 22, 1984. Qualified veterans' mortgage bonds are 
not subject to the State volume limitations generally 
applicable to private activity bonds. Instead, annual issuance 
in each State is subject to a separate State volume limitation. 
The five States eligible to issue these bonds are Alaska, 
California, Oregon, Texas, and Wisconsin. Loans financed with 
qualified veterans' mortgage bonds can be made only with 
respect to principal residences and can not be made to acquire 
or replace existing mortgages. Under prior law, mortgage loans 
made with the proceeds of bonds issued by the five States could 
be made only to veterans who served on active duty before 1977 
and who applied for the financing before the date 30 years 
after the last date on which such veteran left active service 
(the ``eligibility period''). However, in the case of qualified 
veterans'' mortgage bonds issued by the States of Alaska, 
Oregon, and Wisconsin, TIPRA repealed the requirement that 
veterans receiving loans financed with qualified veterans' 
mortgage bonds must have served before 1977 and reduced the 
eligibility period to 25 years (rather than 30 years) following 
release from the military service.
    In addition, TIPRA provided new State volume limits for 
qualified veterans' mortgage bonds issued in the States of 
Alaska, Oregon and Wisconsin. In 2010, the new annual limit on 
the total volume of veterans' bonds that can be issued in each 
of these three States is $25 million. These volume limits are 
phased-in over the four-year period immediately preceding 2010 
by allowing the applicable percentage of the 2010 volume 
limits. The following table provides those percentages.

 
------------------------------------------------------------------------
                                                             Applicable
                      Calendar year:                         percentage
                                                                 is:
------------------------------------------------------------------------
2006......................................................           20
2007......................................................           40
2008......................................................           60
2009......................................................           80
------------------------------------------------------------------------

    The volume limits are zero for 2011 and each year 
thereafter. Unused allocation cannot be carried forward to 
subsequent years.

                        Explanation of Provision

    The provision makes permanent TIPRA's changes to the 
definition of an eligible veteran and the State volume limits 
for qualified veterans' mortgage bonds issued by the States of 
Alaska, Oregon, and Wisconsin. The total volume of veterans' 
bonds that can be issued in each of these three States is $25 
million for 2010 and each calendar year thereafter.

                             Effective Date

    The provision is effective as if included in section 203 of 
TIPRA.

11. Make permanent the capital gains treatment for certain self-created 
        musical works (sec. 412 of the Act and sec. 1221 of the Code)

                              Present Law


Capital gains

    The maximum tax rate on the net capital gain income of an 
individual is 15 percent for taxable years beginning in 2006. 
By contrast, the maximum tax rate on an individual's ordinary 
income is 35 percent. The reduced 15-percent rate generally is 
available for gain from the sale or exchange of a capital asset 
for which the taxpayer has satisfied a holding-period 
requirement. Capital assets generally include all property held 
by a taxpayer with certain specified exclusions.
    An exclusion from the definition of a capital asset applies 
to inventory property or property held by a taxpayer primarily 
for sale to customers in the ordinary course of the taxpayer's 
trade or business.\1116\ Another exclusion from capital asset 
status applies to copyrights, literary, musical, or artistic 
compositions, letters or memoranda, or similar property held by 
a taxpayer whose personal efforts created the property (or held 
by a taxpayer whose basis in the property is determined by 
reference to the basis of the taxpayer whose personal efforts 
created the property).\1117\ Under a provision included in 
TIPRA,\1118\ at the election of a taxpayer, the section 
1221(a)(1) and (a)(3) exclusions from capital asset status do 
not apply to musical compositions or copyrights in musical 
works sold or exchanged before January 1, 2011 by a taxpayer 
described in section 1221(a)(3).\1119\ Thus, if a taxpayer who 
owns musical compositions or copyrights in musical works that 
the taxpayer created (or if a taxpayer to which the musical 
compositions or copyrights have been transferred by the works' 
creator in a substituted basis transaction) elects the 
application of this provision, gain from a sale of the 
compositions or copyrights is treated as capital gain, not 
ordinary income.
---------------------------------------------------------------------------
    \1116\ Sec. 1221(a)(1).
    \1117\ Sec. 1221(a)(3).
    \1118\ Pub. L. No. 109-222, sec. 204(a) (2006).
    \1119\ Sec. 1221(b)(3).
---------------------------------------------------------------------------

Charitable contributions

    A taxpayer generally is allowed a deduction for the fair 
market value of property contributed to a charity. If a 
taxpayer makes a contribution of property that would have 
generated ordinary income (or short-term capital gain), the 
taxpayer's charitable contribution deduction generally is 
limited to the property's adjusted basis.\1120\ The 
determination whether property would have generated ordinary 
income (or short-term capital gain) is made without regard to 
new section 1221(b)(3) described above.\1121\
---------------------------------------------------------------------------
    \1120\ Sec. 170(e)(1)(A).
    \1121\ Sec. 170(e)(1)(A), as modified by TIPRA, Pub. L. No. 109-
222, sec. 204(b) (2006).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision makes permanent the availability of the 
section 1221(b)(3) election to treat certain sales of musical 
compositions or copyrights in musical works as being sales of 
capital assets (and therefore as generating capital gain). The 
provision also makes permanent the accompanying rule limiting 
to adjusted basis the amount of a charitable contribution 
deduction allowed for musical compositions or copyrights in 
musical works to which a taxpayer has elected the application 
of section 1221(b)(3).

                             Effective Date

    The provision is effective as if included in section 204 of 
TIPRA.

12. Make permanent the decrease in minimum vessel tonnage limit to 
        6,000 deadweight tons (sec. 413 of the Act and sec. 1355 of the 
        Code)

                              Present Law

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
including income from shipping operations, whether derived in 
the United States or abroad. In order to mitigate double 
taxation, a foreign tax credit for income taxes paid to foreign 
countries is provided to reduce or eliminate the U.S. tax owed 
on such income, subject to certain limitations.
    Generally, the United States taxes foreign corporations 
only on income that has a sufficient nexus to the United 
States. Thus, a foreign corporation is generally subject to 
U.S. tax only on income, including income from shipping 
operations, which is ``effectively connected'' with the conduct 
of a trade or business in the United States (sec. 882). Such 
``effectively connected income'' generally is taxed in the same 
manner and at the same rates as the income of a U.S. 
corporation.
    The United States imposes a four percent tax on the amount 
of a foreign corporation's U.S. source gross transportation 
income (sec. 887). Transportation income includes income from 
the use (or hiring or leasing for use) of a vessel and income 
from services directly related to the use of a vessel. Fifty 
percent of the transportation income attributable to 
transportation that either begins or ends (but not both) in the 
United States is treated as U.S. source gross transportation 
income. The tax does not apply, however, to U.S. source gross 
transportation income that is treated as income effectively 
connected with the conduct of a U.S. trade or business. U.S. 
source gross transportation income is not treated as 
effectively connected income unless (1) the taxpayer has a 
fixed place of business in the United States involved in 
earning the income, and (2) substantially all the income is 
attributable to regularly scheduled transportation.
    The tax imposed by section 882 or 887 on income from 
shipping operations may be limited by an applicable U.S. income 
tax treaty or by an exemption of a foreign corporation's 
international shipping operations income in instances where a 
foreign country grants an equivalent exemption (sec. 883).
    Notwithstanding the general rules described above, the 
American Jobs Creation Act of 2004 (``AJCA'')\1122\ generally 
allows corporations that are qualifying vessel operators \1123\ 
to elect a ``tonnage tax'' in lieu of the corporate income tax 
on taxable income from certain shipping activities. 
Accordingly, an electing corporation's gross income does not 
include its income from qualifying shipping activities (and 
items of loss, deduction, or credit are disallowed with respect 
to such excluded income), and electing corporations are only 
subject to tax on these activities at the maximum corporate 
income tax rate on their notional shipping income, which is 
based on the net tonnage of the corporation's qualifying 
vessels.\1124\ No deductions are allowed against the notional 
shipping income of an electing corporation, and no credit is 
allowed against the notional tax imposed under the tonnage tax 
regime. In addition, special deferral rules apply to the gain 
on the sale of a qualifying vessel, if such vessel is replaced 
during a limited replacement period.
---------------------------------------------------------------------------
    \1122\ Pub. L. No. 108-357, sec. 248. The tonnage tax regime is 
effective for taxable years beginning after the date of enactment of 
AJCA (October 22, 2004).
    \1123\ Generally, a qualifying vessel operator is a corporation 
that (1) operates one or more qualifying vessels and (2) meets certain 
requirements with respect to its shipping activities.
    \1124\ An electing corporation's notional shipping income for the 
taxable year is the product of the following amounts for each of the 
qualifying vessels it operates: (1) the daily notional shipping income 
from the operation of the qualifying vessel, and (2) the number of days 
during the taxable year that the electing corporation operated such 
vessel as a qualifying vessel in the United States foreign trade. The 
daily notional shipping income from the operation of a qualifying 
vessel is (1) 40 cents for each 100 tons of so much of the net tonnage 
of the vessel as does not exceed 25,000 net tons, and (2) 20 cents for 
each 100 tons of so much of the net tonnage of the vessel as exceeds 
25,000 net tons. ``United States foreign trade'' means the 
transportation of goods or passengers between a place in the United 
States and a foreign place or between foreign places. The temporary use 
in the United States domestic trade (i.e., the transportation of goods 
or passengers between places in the United States) of any qualifying 
vessel or the temporary ceasing to use a qualifying vessel may be 
disregarded, under special rules.
---------------------------------------------------------------------------
    Prior to the enactment of TIPRA,\1125\ a ``qualifying 
vessel'' was defined as a self-propelled (or a combination of 
self-propelled and non-self-propelled) United States flag 
vessel of not less than 10,000 deadweight tons \1126\ that is 
used exclusively in the United States foreign trade. TIPRA 
expands the definition of ``qualifying vessel'' to include 
self-propelled (or a combination of self-propelled and non-
self-propelled) United States flag vessels of not less than 
6,000 deadweight tons used exclusively in the United States 
foreign trade. The modified definition of TIPRA applies for 
taxable years beginning after December 31, 2005 and ending 
before January 1, 2011.
---------------------------------------------------------------------------
    \1125\ Pub. L. No. 109-222, sec. 205 (May 17, 2006).
    \1126\ Deadweight measures the lifting capacity of a ship expressed 
in long tons (2,240 lbs.), including cargo, crew, and consumables such 
as fuel, lube oil, drinking water, and stores. It is the difference 
between the number of tons of water a vessel displaces without such 
items on board and the number of tons it displaces when fully loaded.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision makes permanent the minimum 6,000 deadweight 
tons threshold.

                             Effective Date

    The provision is effective as if included in section 205 of 
TIPRA.

13. Make permanent the modification of special arbitrage rule for 
        certain funds (sec. 414 of the Act)

                              Present Law

    In general, present-law tax-exempt bond arbitrage 
restrictions provide that interest on a State or local 
government bond is not eligible for tax-exemption if the 
proceeds are invested, directly or indirectly, in materially 
higher yielding investments or if the debt service on the bond 
is secured by or paid from (directly or indirectly) such 
investments. An exception to the arbitrage restrictions, 
enacted in 1984, provides that the pledge of income from 
investments in the Texas Permanent University Fund (the 
``Fund'') as security for a limited amount of tax-exempt bonds 
will not cause interest on those bonds to be taxable. The terms 
of this exception are limited to State constitutional or 
statutory restrictions continuously in effect since October 9, 
1969. In addition, the exception only applies to an amount of 
tax-exempt bonds that does not exceed 20 percent of the value 
of the Fund.
    The Fund consists of certain State lands that were set 
aside for the benefit of higher education, the income from 
mineral rights to these lands, and certain other earnings on 
Fund assets. The Texas constitution directs that monies held in 
the Fund are to be invested in interest-bearing obligations and 
other securities. Income from the Fund is apportioned between 
two university systems operated by the State. Tax-exempt bonds 
issued by the university systems to finance buildings and other 
permanent improvements were secured by and payable from the 
income of the Fund.
    Prior to 1999, the constitution did not permit the 
expenditure or mortgage of the Fund for any purpose. In 1999, 
the State constitutional rules governing the Fund were modified 
with regard to the manner in which amounts in the Fund are 
distributed for the benefit of the two university systems. The 
State constitutional amendments allow for the possibility that 
in the event investment earnings are less than annual debt 
service on the bonds some of the debt service could be 
considered as having been paid with the Fund corpus. The 1984 
exception refers only to bonds secured by investment earnings 
on securities or obligations held by the Fund. Despite the 
constitutional amendments, the IRS has agreed to continue to 
apply the 1984 exception to the Fund through August 31, 2007, 
if clarifying legislation is introduced in the 109th Congress 
prior to August 31, 2005. Clarifying legislation was introduced 
in the 109th Congress on May 26, 2005.\1127\
---------------------------------------------------------------------------
    \1127\ H.R. 2661.
---------------------------------------------------------------------------
    TIPRA codified and extended the IRS agreement until August 
31, 2009. TIPRA conformed the 1984 exception to the State 
constitutional amendments to permit its continued applicability 
to bonds of the two university systems. The limitation on the 
aggregate amount of bonds which may benefit from the exception 
was not modified, and remains at 20 percent of the value of the 
Fund.

                        Explanation of Provision

    The provision makes permanent TIPRA's changes to the Fund's 
arbitrage exception.

                             Effective Date

    The provision is effective as if included in section 206 of 
TIPRA.

14. Great Lakes domestic shipping to not disqualify vessel from tonnage 
        tax (sec. 415 of the Act and sec. 1355 of the Code)

                              Present Law

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
including income from shipping operations, whether derived in 
the United States or abroad. In order to mitigate double 
taxation, a foreign tax credit for income taxes paid to foreign 
countries is provided to reduce or eliminate the U.S. tax owed 
on such income, subject to certain limitations.
    Generally, the United States taxes foreign corporations 
only on income that has a sufficient nexus to the United 
States. Thus, a foreign corporation is generally subject to 
U.S. tax only on income, including income from shipping 
operations, which is ``effectively connected'' with the conduct 
of a trade or business in the United States (sec. 882). Such 
``effectively connected income'' generally is taxed in the same 
manner and at the same rates as the income of a U.S. 
corporation.
    The United States imposes a four percent tax on the amount 
of a foreign corporation's U.S. source gross transportation 
income (sec. 887). Transportation income includes income from 
the use (or hiring or leasing for use) of a vessel and income 
from services directly related to the use of a vessel. Fifty 
percent of the transportation income attributable to 
transportation that either begins or ends (but not both) in the 
United States is treated as U.S. source gross transportation 
income. The tax does not apply, however, to U.S. source gross 
transportation income that is treated as income effectively 
connected with the conduct of a U.S. trade or business. U.S. 
source gross transportation income is not treated as 
effectively connected income unless (1) the taxpayer has a 
fixed place of business in the United States involved in 
earning the income, and (2) substantially all the income is 
attributable to regularly scheduled transportation.
    The tax imposed by section 882 or 887 on income from 
shipping operations may be limited by an applicable U.S. income 
tax treaty or by an exemption of a foreign corporation's 
international shipping operations income in instances where a 
foreign country grants an equivalent exemption (sec. 883).
    Notwithstanding the general rules described above, the 
American Jobs Creation Act of 2004 (``AJCA'') \1128\ generally 
allows corporations that are qualifying vessel operators \1129\ 
to elect a ``tonnage tax'' in lieu of the corporate income tax 
on taxable income from certain shipping activities. 
Accordingly, an electing corporation's gross income does not 
include its income from qualifying shipping activities (and 
items of loss, deduction, and credit are disallowed with 
respect to such excluded income),\1130\ and electing 
corporations are only subject to tax on these activities at the 
maximum corporate income tax rate on their notional shipping 
income, which is based on the net tonnage of the corporation's 
qualifying vessels operated in the United States foreign 
trade.\1131\ ``United States foreign trade'' means the 
transportation of goods or passengers between a place in the 
United States and a foreign place or between foreign places. No 
deductions are allowed against the notional shipping income of 
an electing corporation, and no credit is allowed against the 
notional tax imposed under the tonnage tax regime. In addition, 
special deferral rules apply to the gain on the sale of a 
qualifying vessel, if such vessel is replaced during a limited 
replacement period.
---------------------------------------------------------------------------
    \1128\ Pub. L. No. 108-357, sec. 248. The tonnage tax regime is 
effective for taxable years beginning after the date of enactment of 
AJCA (October 22, 2004).
    \1129\ Generally, a qualifying vessel operator is a corporation 
that (1) operates one or more qualifying vessels and (2) meets certain 
requirements with respect to its shipping activities.
    \1130\ Sec. 1357.
    \1131\ An electing corporation's notional shipping income for the 
taxable year is the product of the following amounts for each of the 
qualifying vessels it operates: (1) the daily notional shipping income 
from the operation of the qualifying vessel, and (2) the number of days 
during the taxable year that the electing corporation operated such 
vessel as a qualifying vessel in the United States foreign trade. The 
daily notional shipping income from the operation of a qualifying 
vessel is (1) 40 cents for each 100 tons of so much of the net tonnage 
of the vessel as does not exceed 25,000 net tons, and (2) 20 cents for 
each 100 tons of so much of the net tonnage of the vessel as exceeds 
25,000 net tons.
---------------------------------------------------------------------------
    A ``qualifying vessel'' is defined as a self-propelled (or 
a combination of self-propelled and non-self-propelled) United 
States flag vessel of not less than 6,000 deadweight tons 
\1132\ that is used exclusively in the United States foreign 
trade. Notwithstanding the ``exclusively in the United States 
foreign trade'' requirement, the temporary use of any 
qualifying vessel in the United States domestic trade (i.e., 
the transportation of goods or passengers between places in the 
United States) may be disregarded, and treated as the continued 
use of such vessel in the United States foreign trade, if the 
electing corporation provides timely notice of such temporary 
use to the Secretary. However, if a qualifying vessel is 
operated in the United States domestic trade for more than 30 
days during the taxable year, then no usage in the United 
States domestic trade during such year may be disregarded (and 
the vessel is thereby disqualified). The Secretary has the 
authority to prescribe regulations as may be necessary or 
appropriate to carry out the purposes of the statutory rules 
relating to the temporary domestic use of vessels.\1133\
---------------------------------------------------------------------------
    \1132\ Prior to the enactment on May 17, 2006 of Pub. L. No. 109-
222, TIPRA, ``qualifying vessel'' meant a self-propelled (or a 
combination of self-propelled and non-self-propelled) United States 
flag vessel of not less than 10,000 deadweight tons used exclusively in 
the United States foreign trade. TIPRA changed the threshold to 6,000 
deadweight tons, effective for taxable years beginning after December 
31, 2005 and ending before January 1, 2011. Section 413 of this Act 
permanently extends the 6,000 deadweight tons threshold.
    \1133\ Sec. 1355(g).
---------------------------------------------------------------------------

                        Explanation of Provision

    Under the provision, a corporation for which a tonnage tax 
election is in effect (``electing corporation'') may make a 
further election with respect to a qualifying vessel used 
during a taxable year in ``qualified zone domestic trade.'' The 
term ``qualified zone domestic trade'' means the transportation 
of goods or passengers between places in the ``qualified zone'' 
if such transportation is in the United States domestic trade. 
The transportation of goods or passengers between a U.S. port 
in the qualified zone and a U.S. port outside the qualified 
zone (in either direction) is United States domestic trade that 
is not qualified zone domestic trade.
    The term ``qualified zone'' means the Great Lakes Waterway 
and the St. Lawrence Seaway. This area consists of the deep-
draft waterways of Lake Superior, Lake Michigan, Lake Huron 
(including Lake St. Clair), Lake Eire, and Lake Ontario, 
connecting deep-draft channels, including the Detroit River, 
the St. Clair River, the St. Marys River, and the Welland 
Canal, and the waterway between the port of Sept-Iles, Quebec 
and Lake Ontario, including all locks, canals, and connecting 
and contiguous waters that are part of these deep-draft 
waterways.
    Activities in qualified zone domestic trade are not 
qualifying shipping activities and, therefore, do not qualify 
for the tonnage tax regime. In the case of a qualifying vessel 
for which an election under this provision (``qualified zone 
domestic trade election'') is in force, the Secretary is to 
prescribe rules for the proper allocation of income, expenses, 
losses, and deductions between the qualified shipping 
activities and the other activities of such vessel. These rules 
may include intra-vessel allocation rules that are different 
than the rules pertaining to allocations of items between 
qualifying vessels and other vessels.
    An electing corporation making a qualified zone domestic 
trade election with respect to a vessel is not required to give 
notice to the Secretary of the use of such vessel in qualified 
zone domestic trade, and an otherwise qualifying vessel does 
not cease to be a qualifying vessel solely due to such use when 
such election is in effect, even if such use exceeds 30 days 
during the taxable year. An electing corporation making a 
qualified zone domestic trade election with respect to a vessel 
is treated as using such vessel in qualified zone domestic 
trade during any period of temporary use in the United States 
domestic trade (other than qualified zone domestic trade) if 
such electing corporation gives timely notice to the Secretary 
stating that it temporarily operates or has operated in the 
United States domestic trade (other than qualified zone 
domestic trade) a qualifying vessel which had been used in the 
United States foreign trade or qualified zone domestic trade, 
and that it intends to resume operating such vessel in the 
United States foreign trade or qualified zone domestic trade. 
The period of such permissible temporary use of such vessel in 
such United States domestic trade continues until the earlier 
of the date on which the electing corporation abandons its 
intention to resume operation of the vessel in the United 
States foreign trade or qualified zone domestic trade, or the 
electing corporation resumes operation of the vessel in the 
United States foreign trade or qualified zone domestic trade. 
However, if a qualifying vessel is operated in the United 
States domestic trade (other than qualified zone domestic 
trade) for more than 30 days during the taxable year, then no 
usage in the United States domestic trade (other than qualified 
zone domestic trade) during such year may be disregarded (and 
the vessel is thereby disqualified). Thus, a vessel used for 
120 days in the taxable year in qualified zone domestic trade 
and 180 days in the taxable year in the United States foreign 
trade is not a qualifying vessel if it is used for over 30 days 
in the taxable year in the United States domestic trade that is 
not qualified zone domestic trade.
    Under the provision, the Secretary may specify the time, 
manner and other conditions for making, maintaining, and 
terminating the qualified zone domestic trade election.

                             Effective Date

    The provision is effective for taxable years beginning 
after date of enactment.

15. Expansion of the qualified mortgage bond program (sec. 416 of the 
        Act and sec. 143 of the Code)

                              Present Law

    Private activity bonds are bonds that nominally are issued 
by States or local governments, but the proceeds of which are 
used (directly or indirectly) by a private person and payment 
of which is derived from funds of such private person. The 
exclusion from income for State and local bonds does not apply 
to private activity bonds, unless the bonds are issued for 
certain permitted purposes (``qualified private activity 
bonds''). The definition of a qualified private activity bond 
includes both qualified mortgage bonds and qualified veterans' 
mortgage bonds.
    Qualified mortgage bonds are issued to make mortgage loans 
to qualified mortgagors for owner-occupied residences. The Code 
imposes several limitations on qualified mortgage bonds, 
including income limitations for homebuyers and purchase price 
limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).
    Qualified veterans' mortgage bonds are private activity 
bonds the proceeds of which are used to make mortgage loans to 
certain veterans. Authority to issue qualified veterans' 
mortgage bonds is limited to States that had issued such bonds 
before June 22, 1984. Qualified veterans' mortgage bonds are 
not subject to the State volume limitations generally 
applicable to private activity bonds. Instead, annual issuance 
in each State is subject to a separate State volume limitation. 
The five States eligible to issue these bonds are Alaska, 
California, Oregon, Texas, and Wisconsin. Loans financed with 
qualified veterans' mortgage bonds can be made only with 
respect to principal residences and can not be made to acquire 
or replace existing mortgages. Under prior law, mortgage loans 
made with the proceeds of bonds issued by the five States could 
be made only to veterans who served on active duty before 1977 
and who applied for the financing before the date 30 years 
after the last date on which such veteran left active service 
(the ``eligibility period''). However, in the case of qualified 
veterans' mortgage bonds issued by the States of Alaska, 
Oregon, and Wisconsin, TIPRA repealed the requirement that 
veterans receiving loans financed with qualified veterans' 
mortgage bonds must have served before 1977 and reduced the 
eligibility period to 25 years (rather than 30 years) following 
release from the military service. In addition, TIPRA provided 
new State volume limits for qualified veterans' mortgage bonds 
issued in the States of Alaska, Oregon and Wisconsin, phased-in 
over a four- year period.

                        Explanation of Provision

    Under the provision, qualified mortgage bonds may be issued 
to finance mortgages for veterans who served in the active 
military without regard to the first-time homebuyer 
requirement. Present-law income and purchase price limitations 
apply to loans to veterans financed with the proceeds of 
qualified mortgage bonds. Veterans are eligible for the 
exception from the first-time homebuyer requirement without 
regard to the date they last served on active duty or the date 
they applied for a loan after leaving active duty. However, 
veterans may only use the exception one time.

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment and before January 1, 2008.

16. Exclusion of gain on sale of a principal residence by certain 
        employees of the intelligence community (sec. 417 of the Act 
        and sec. 121 of the Code)

                              Present Law

    Under present law, an individual taxpayer may exclude up to 
$250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence as a principal residence for at least two of 
the five years ending on the sale or exchange. A taxpayer who 
fails to meet these requirements by reason of a change of place 
of employment, health, or, to the extent provided under 
regulations, unforeseen circumstances is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) that is equal to the fraction of 
the two years that the ownership and use requirements are met.
    Present law also contains special rules relating to members 
of the uniformed services or the Foreign Service of the United 
States. An individual may elect to suspend for a maximum of 10 
years the five-year test period for ownership and use during 
certain absences due to service in the uniformed services or 
the Foreign Service of the United States. The uniformed 
services include: (1) the Armed Forces (the Army, Navy, Air 
Force, Marine Corps, and Coast Guard); (2) the commissioned 
corps of the National Oceanic and Atmospheric Administration; 
and (3) the commissioned corps of the Public Health Service. If 
the election is made, the five-year period ending on the date 
of the sale or exchange of a principal residence does not 
include any period up to 10 years during which the taxpayer or 
the taxpayer's spouse is on qualified official extended duty as 
a member of the uniformed services or in the Foreign Service of 
the United States. For these purposes, qualified official 
extended duty is any period of extended duty while serving at a 
place of duty at least 50 miles away from the taxpayer's 
principal residence or under orders compelling residence in 
government furnished quarters. Extended duty is defined as any 
period of duty pursuant to a call or order to such duty for a 
period in excess of 90 days or for an indefinite period. The 
election may be made with respect to only one property for a 
suspension period.

                        Explanation of Provision

    Under the provision, specified employees of the 
intelligence community may elect to suspend the running of the 
five-year test period during any period in which they are 
serving on extended duty. The term ``employee of the 
intelligence community'' means an employee of the Office of the 
Director of National Intelligence, the Central Intelligence 
Agency, the National Security Agency, the Defense Intelligence 
Agency, the National Geospatial-Intelligence Agency, or the 
National Reconnaissance Office. The term also includes 
employment with: (1) any other office within the Department of 
Defense for the collection of specialized national intelligence 
through reconnaissance programs; (2) any of the intelligence 
elements of the Army, the Navy, the Air Force, the Marine 
Corps, the Federal Bureau of Investigation, the Department of 
the Treasury, the Department of Energy, and the Coast Guard; 
(3) the Bureau of Intelligence and Research of the Department 
of State; and (4) the elements of the Department of Homeland 
Security concerned with the analyses of foreign intelligence 
information. To qualify, a specified employee must move from 
one duty station to another and the new duty station must be 
located outside of the United States. As under present law, the 
five-year period may not be extended more than 10 years.

                             Effective Date

    The provision is effective for sales and exchanges after 
the date of enactment and before January 1, 2011.

17. Sale of property to comply with conflict-of-interest requirements 
        (sec. 418 of the Act and sec. 1043 of the Code)

                              Present Law

    Present law provides special rules for deferring the 
recognition of gain on sales of property which are required in 
order to comply with certain conflict of interest requirements 
imposed by the Federal government. Certain executive branch 
Federal employees (and their spouses and minor or dependent 
children) who are required to divest property in order to 
comply with conflict of interest requirements may elect to 
postpone the recognition of resulting gains by investing in 
certain replacement property within a 60-day period. The basis 
of the replacement property is reduced by the amount of the 
gain not recognized. Permitted replacement property is limited 
to any obligation of the United States or any diversified 
investment fund approved by regulations issued by the Office of 
Government Ethics. The rule applies only to sales under 
certificates of divestiture issued by the President or the 
Director of the Office of Government Ethics.

                        Explanation of Provision

    The provision extends the provision deferring recognition 
of gain to a judicial officer who receives a certificate of 
divestiture from the Judicial Conference of the United States 
(or its designee) regarding the divestiture of certain property 
reasonably necessary to comply with conflict of interest rules 
or the judicial canon. For purposes of this provision, a 
judicial officer means the Chief Justice of the United States, 
the Associate Justices of the Supreme Court, and the judges of 
the United States courts of appeals, United States district 
courts, including the district courts in Guam, the Northern 
Mariana Islands, and the Virgin Islands, Court of Appeals for 
the Federal Circuit, Court of International Trade, Tax Court, 
Court of Federal Claims, Court of Appeals for Veterans Claims, 
United States Court of Appeals for the Armed Forces, and any 
court created by Act of Congress, the judges of which are 
entitled to hold office during good behavior.

                             Effective Date

    The provision applies to sales after the date of enactment.

18. Establish deduction for private mortgage insurance (sec. 419 of the 
        Act and sec. 163 of the Code)

                              Present Law

    Present law provides that qualified residence interest is 
deductible notwithstanding the general rule that personal 
interest is nondeductible (sec. 163(h)).
    Qualified residence interest is interest on acquisition 
indebtedness and home equity indebtedness with respect to a 
principal and a second residence of the taxpayer. The maximum 
amount of home equity indebtedness is $100,000. The maximum 
amount of acquisition indebtedness is $1 million. Acquisition 
indebtedness means debt that is incurred in acquiring 
constructing, or substantially improving a qualified residence 
of the taxpayer, and that is secured by the residence. Home 
equity indebtedness is debt (other than acquisition 
indebtedness) that is secured by the taxpayer's principal or 
second residence, to the extent the aggregate amount of such 
debt does not exceed the difference between the total 
acquisition indebtedness with respect to the residence, and the 
fair market value of the residence.

                        Explanation of Provision

    The provision provides that premiums paid or accrued for 
qualified mortgage insurance by a taxpayer during the taxable 
year in connection with acquisition indebtedness on a qualified 
residence of the taxpayer are treated as interest that is 
qualified residence interest and thus deductible. The amount 
allowable as a deduction under the provision is phased out 
ratably by 10 percent for each $1,000 by which the taxpayer's 
adjusted gross income exceeds $100,000 ($500 and $50,000, 
respectively, in the case of a married individual filing a 
separate return). Thus, the deduction is not allowed if the 
taxpayer's adjusted gross income exceeds $109,000 ($54,500 in 
the case of married individual filing a separate return).
    For this purpose, qualified mortgage insurance means 
mortgage insurance provided by the Veterans Administration, the 
Federal Housing Administration, or the Rural Housing 
Administration, and private mortgage insurance (defined in 
section 2 of the Homeowners Protection Act of 1998 as in effect 
on the date of enactment of the provision).
    Amounts paid for qualified mortgage insurance that are 
properly allocable to periods after the close of the taxable 
year are treated as paid in the period to which they are 
allocated. No deduction is allowed for the unamortized balance 
if the mortgage is paid before its term (except in the case of 
qualified mortgage insurance provided by the Department of 
Veterans Affairs or Rural Housing Administration).
    The provision does not apply with respect to any mortgage 
insurance contract issued before January 1, 2007. The provision 
terminates for any amount paid or accrued after December 31, 
2007, or properly allocable to any period after that date.
    Reporting rules apply under the provision.

                             Effective Date

    The provision is effective for amounts paid or accrued 
after December 31, 2006.

19. Modification of refunds for kerosene used in aviation (sec. 420 of 
        the Act and sec. 6427 of the Code)

                              Present Law


Nontaxable uses of kerosene

    In general, if kerosene on which tax has been imposed is 
used by any person for a nontaxable use, a refund in an amount 
equal to the amount of tax imposed may be obtained either by 
the purchaser, or in specific cases, the registered ultimate 
vendor of the kerosene.\1134\ However, the 0.1 cent per gallon 
representing the Leaking Underground Storage Tank Trust Fund 
financing rate generally is not refundable, except for 
exports.\1135\
---------------------------------------------------------------------------
    \1134\ Sec. 6427(l).
    \1135\ Sec. 6430.
---------------------------------------------------------------------------
    A nontaxable use is any use which is exempt from the tax 
imposed by section 4041(a)(1) other than by reason of a prior 
imposition of tax.\1136\ Nontaxable uses of kerosene include:
---------------------------------------------------------------------------
    \1136\ Sec. 6427(l)(2).
---------------------------------------------------------------------------
           Use on a farm for farming purposes; \1137\
---------------------------------------------------------------------------
    \1137\ Sec. 4041(f).
---------------------------------------------------------------------------
           Use in foreign trade or trade between the 
        United States and any of its possessions; \1138\
---------------------------------------------------------------------------
    \1138\ Sec. 4041(g)(1).
---------------------------------------------------------------------------
           Use as a fuel in vessels and aircraft owned 
        by the United States or any foreign nation and 
        constituting equipment of the armed forces thereof; 
        \1139\
---------------------------------------------------------------------------
    \1139\ Id.
---------------------------------------------------------------------------
           Exclusive use of a state or local 
        government; \1140\
---------------------------------------------------------------------------
    \1140\ Sec. 4041(g)(2).
---------------------------------------------------------------------------
           Export or shipment to a possession of the 
        United States; \1141\
---------------------------------------------------------------------------
    \1141\ Sec. 4041(g)(3).
---------------------------------------------------------------------------
           Exclusive use of a nonprofit educational 
        organization; \1142\
---------------------------------------------------------------------------
    \1142\ Sec. 4041(g)(4).
---------------------------------------------------------------------------
           Use as a fuel in an aircraft museum for the 
        procurement, care, or exhibition of aircraft of the 
        type used for combat or transport in World War II; 
        \1143\ and
---------------------------------------------------------------------------
    \1143\ Sec. 4041(h).
---------------------------------------------------------------------------
           Use as a fuel in (a) helicopters engaged in 
        the exploration for or the development or removal of 
        hard minerals, oil, or gas and in timber (including 
        logging) operations if the helicopters neither take off 
        from nor land at a facility eligible for Airport Trust 
        Fund assistance or otherwise use federal aviation 
        services during flights or (b) any air transportation 
        for the purpose of providing emergency medical services 
        (1) by helicopter or (2) by a fixed-wing aircraft 
        equipped for and exclusively dedicated on that flight 
        to acute care emergency medical services.\1144\
---------------------------------------------------------------------------
    \1144\ Secs. 4041(l), 4261(f) and (g).
---------------------------------------------------------------------------
           Off-highway business use.
    Since 4041(a) is limited to the delivery into the fuel 
supply tank of a diesel-powered highway vehicle or train, 
kerosene delivered into the fuel supply tank of aircraft is a 
nontaxable use for purposes of section 4041(a).

Claims for refund of kerosene used in aviation

    ``Commercial aviation'' is the use of an aircraft in a 
business of transporting persons or property for compensation 
or hire by air, with certain exceptions.\1145\ All other 
aviation is noncommercial aviation.
---------------------------------------------------------------------------
    \1145\ ``Commercial aviation'' does not include aircraft used for 
skydiving, small aircraft on nonestablished lines or transportation for 
affiliated group members.
---------------------------------------------------------------------------
    For fuel not removed directly into the wing of an airplane, 
the Safe, Accountable, Flexible, Efficient, Transportation 
Equity Act: A Legacy for Users (``SAFETEA'') changed the rate 
of taxation for aviation-grade kerosene from 21.8 cents per 
gallon to the general kerosene and diesel rate of 24.3 cents 
per gallon.\1146\ In order to preserve the aviation rate for 
fuel actually used in aviation, the 21.8 cent rate of taxation 
(or as the case may be, the 4.3 cent commercial aviation rate, 
or the nontaxable use rate) is achieved through a refund when 
the fuel is used in aviation (a refund of 2.5 cents for taxable 
noncommercial aviation, 20 cents in the case of commercial 
aviation, and 24.3 cents for nontaxable uses).\1147\ These 
changes became effective on October 1, 2005.
---------------------------------------------------------------------------
    \1146\ Sec. 11161 of Pub. L. No. 109-59 (2005).
    \1147\ Sec. 6427(l)(1), (4) and (5).
---------------------------------------------------------------------------
    Prior to October 1, 2005, if fuel that was previously taxed 
was used in noncommercial aviation for a nontaxable use, 
generally, the ultimate purchaser of such fuel (other than for 
the exclusive use of a State or local government, or for use on 
a farm for farming purposes) could claim a refund for the tax 
that was paid. SAFETEA eliminated the ability of a purchaser to 
file for a refund with respect to fuel used in noncommercial 
aviation. Instead, the registered ultimate vendor is the 
exclusive party entitled to a refund with respect to kerosene 
used in noncommercial aviation.\1148\ An ultimate vendor is the 
person who sells the kerosene to an ultimate purchaser for use 
in noncommercial aviation. If the fuel was used for a 
nontaxable use, the vendor may make a claim for 24.3 cents per 
gallon, otherwise, the vendor is permitted to claim 2.5 cents 
per gallon for kerosene sold for use in noncommercial 
aviation.\1149\
---------------------------------------------------------------------------
    \1148\ Sec. 6427(l)(5)(B).
    \1149\ Sec. 6427(l)(5)(A). Under this provision, of the 24.4 cents 
of tax imposed on kerosene used in taxable noncommercial aviation, the 
0.1 cent for the Leaking Underground Storage Tank Trust Fund financing 
rate and 21.8 cents of the tax imposed on kerosene cannot be refunded. 
The limitations of sec. 6427(l)(5)(A) on the amount that cannot be 
refunded do not apply to uses exempt from tax. However, sec. 6430 
prevents a refund of the Leaking Underground Storage Tank Trust Fund 
financing rate in all cases except export. Sec. 6427(l)(5)(B) requires 
that all amounts that would have been paid to the ultimate purchaser 
pursuant to sec. 6427(l)(1) are to be paid to the ultimate registered 
vendor, therefore the ultimate registered vendor is the only claimant 
for both nontaxable and taxable use of kerosene in noncommercial 
aviation.
---------------------------------------------------------------------------
    For commercial aviation, the ultimate purchaser has the 
option of filing a claim itself, or waiving the right to refund 
to its ultimate vendor, if the vendor agrees to file on behalf 
of the purchaser.\1150\
---------------------------------------------------------------------------
    \1150\ Sec. 6427(l)(4)(B).
---------------------------------------------------------------------------
    A separate special rule also applies to kerosene sold to a 
State or local government, regardless of whether the kerosene 
was sold for aviation or other purposes.\1151\ In general, this 
rule makes the registered ultimate vendor the appropriate party 
for filing refund claims on behalf of a State or local 
government. Special rules apply for credit card sales.\1152\
---------------------------------------------------------------------------
    \1151\ Sec. 6427(l)(6).
    \1152\ If certain conditions are met, a registered credit card 
issuer may make the claim for refund in place of the ultimate vendor. 
If the diesel fuel or kerosene is purchased with a credit card issued 
to a State but the credit card issuer is not registered with the IRS 
(or does not meet certain other conditions) the credit card issuer must 
collect the amount of the tax and the State is the proper claimant.
---------------------------------------------------------------------------

                        Explanation of Provision


In general

    The provision allows purchasers that use kerosene for an 
exempt aviation purpose (other than in the case of a State or 
local government) to make a claim for refund of the tax that 
was paid on such fuel or waive their right to claim a refund to 
their registered ultimate vendors. As a result, under the 
provision, crop-dusters, air ambulances, aircraft engaged in 
foreign trade and other exempt users may either make the claim 
for refund of the 24.3 cents per gallon themselves or waive the 
right to their vendors.
    General noncommercial aviation use (which is entitled to a 
refund of 2.5 cents-per-gallon) remains an exclusive ultimate 
vendor rule. The rules for State and local governments also are 
unchanged.

Special rule for purchases of kerosene used in aviation on a farm for 
        farming purposes

    For kerosene used in aviation on a farm for farming 
purposes that was purchased after December 31, 2004, and before 
October 1, 2005, the Secretary is to pay to the ultimate 
purchaser (without interest) an amount equal to the aggregate 
amount of tax imposed on such fuel, reduced by any payments 
made to the ultimate vendor of such fuel. Such claims must be 
filed within 3 months of the date of enactment and may not 
duplicate claims filed under section 6427(l).

                             Effective Date

    In general, the provision is effective for kerosene sold 
after September 30, 2005. For kerosene used for an exempt 
aviation purpose eligible for the waiver rule created by the 
provision, the ultimate purchaser is treated as having waived 
the right to payment and as having assigned such right to the 
ultimate vendor if the vendor meets the requirements of 
subparagraph (A), (B) or (D) of section 6416(a)(1). The rule of 
the preceding sentence applies to kerosene sold after September 
30, 2005, and before the date of enactment.
    The special rule for kerosene used in aviation on a farm 
for farming purposes is effective on the date of enactment.

20. Regional income tax agencies treated as States for purposes of 
        confidentiality and disclosure requirements (sec. 421 of the 
        Act and sec. 6103 of the Code)

                              Present Law

    Generally, tax returns and return information (``tax 
information'') is confidential and may not be disclosed unless 
authorized in the Code. One exception to the general rule of 
confidentiality is the disclosure of the tax information to 
States.
    Tax information with respect to certain taxes is open to 
inspection by State agencies, bodies, commissions, or its legal 
representatives, charged under the laws of the State with tax 
administration responsibilities.\1153\ Such inspection is 
permitted only to the extent necessary for State tax 
administration proposes. The Code requires a written request 
from the head of the agency, body or commission as a 
prerequisite for disclosure. State officials who receive this 
information may redisclose it to the agency's contractors but 
only for State tax administration purposes.\1154\
---------------------------------------------------------------------------
    \1153\ Sec. 6103(d)(1).
    \1154\ Sec. 6103(n).
---------------------------------------------------------------------------
    The term ``State'' includes the 50 States, the District of 
Columbia, and certain territories.\1155\ In addition, cities 
with populations in excess of 250,000 that impose a tax or 
income or wages and with which the IRS is entered into an 
agreement regarding disclosure also are treated as 
States.\1156\
---------------------------------------------------------------------------
    \1155\ Sec. 6103(b)(5)(A).
    \1156\ Sec. 6103(b)(5)(B).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision broadens the definition of ``State'' to 
include a regional income tax agency administering the tax laws 
of municipalities which have a collective population in excess 
of 250,000. Specifically, under the provision, the term 
``State'' includes any governmental entity (1) that is formed 
and operated by a qualified group of municipalities, and (2) 
with which the Secretary (in his sole discretion) has entered 
into an agreement regarding disclosure. The term ``qualified 
group of municipalities'' means, with respect to any 
governmental entity, two or more municipalities: (1) each of 
which imposes a tax on income or wages, (2) each of which, 
under the authority of a State statute, administers the laws 
relating to the imposition of such taxes through such entity, 
and (3) which collectively have a population in excess of 
250,000 (as determined under the most recent decennial United 
States census data available).
    The regional income tax agency is treated as a State for 
purposes of applying the confidentiality and disclosure 
provisions for State tax officials, determining the scope of 
tax administration, applying the rules governing disclosures in 
judicial and administrative tax proceedings, and applying the 
safeguard procedures. Because a regional income tax agency 
administers the laws of its member municipalities, the 
provision provides that references to State law, State 
proceedings or State tax returns should be treated as 
references to the law, proceedings or tax returns of the 
municipalities which form and operate the regional income tax 
agency.
    Inspection by or disclosure to an entity described above 
shall be only for the purpose of and to the extent necessary in 
the administration of the tax laws of the member municipalities 
in such entity relating to the imposition of a tax on income or 
wages. Such entity may not redisclose tax information to its 
member municipalities. This rule does not preclude the entity 
from disclosing data in a form which cannot be associated with 
or otherwise identify directly or indirectly a particular 
taxpayer.\1157\
---------------------------------------------------------------------------
    \1157\ By definition ``return information'' does not include data 
in a form which cannot be associated with or otherwise identify 
directly or indirectly a particular taxpayer (sec. 6103(b)(2)).
---------------------------------------------------------------------------
    The provision requires that a regional income tax agency 
conduct on-site reviews every three years of all of its 
contractors or other agents receiving Federal returns and 
return information. If the duration of the contract or 
agreement is less than three years, a review is required at the 
mid-point of the contract. The purpose of the review is to 
assess the contractor's efforts to safeguard Federal tax 
information. This review is intended to cover secure storage, 
restricting access, computer security, and other safeguards 
deemed appropriate by the Secretary. Under the provision, the 
regional income tax agency is required to submit a report of 
its findings to the IRS and certify annually that such 
contractors and other agents are in compliance with the 
requirements to safeguard the confidentiality of Federal tax 
information. The certification is required to include the name 
and address of each contractor or other agent with the agency, 
the duration of the contract, and a description of the contract 
or agreement with the regional income tax agency.
    This provision does not alter or affect in any way the 
right of the IRS to conduct safeguard reviews of regional 
income tax agency contractors or other agents. It also does not 
affect the right of the IRS to approve initially the safeguard 
language in the contract or agreement and the safeguards in 
place prior to any disclosures made in connection with such 
contracts or agreements.

                             Effective Date

    The provision is effective for disclosures made after 
December 31, 2006.

21. Semi-generic wine names (sec. 422 of the Act and sec. 5388 of the 
        Code)

                              Present Law

    The Code contains certain provisions with respect to wine 
relating to consumer protection and trade. Section 5388(c) 
allows a semi-generic wine name to be used to designate wine of 
an origin other than that indicated by its name only if the 
label discloses the place of origin and the wine conforms to 
the standard of identity contained in regulations (or, if there 
is no such standard, to the trade understanding of such class 
or type). The Code specifies that the following names shall be 
treated as semi-generic: Angelica, Burgundy, Claret, Chablis, 
Champagne, Chianti, Malaga, Marsala, Madeira, Moselle, Port, 
Rhine Wine or Hock, Sauterne, Haut Sauterne, Sherry, and Tokay. 
Other names of geographic significance, which are also 
designations of a class and type of wine, shall be deemed to 
have become semi-generic only if so found by the Secretary of 
the Treasury.\1158\
---------------------------------------------------------------------------
    \1158\ See 27 C.F.R. sec. 4.24(b).
---------------------------------------------------------------------------
    On March 10, 2006, the United States signed the Agreement 
between the United States of America and the European Community 
on Trade in Wine (the ``Agreement'') under which, among other 
things, the United States entered into certain obligations with 
respect to certain semi-generic wine names of European origin.

                        Explanation of Provision

    The provision implements the obligations of the United 
States under the Agreement with respect to certain semi-generic 
wine names of European origin.
    Accordingly, the provision amends section 5388(c) to limit 
the use of semi-generic names specified in the Code to wine 
originating in the European Community (``EC'') and to certain 
non-EC wine. EC wine may bear a specified semi-generic name if 
the wine so designated conforms to the standard of identity 
contained in regulations (or, if there is no such standard, to 
the trade understanding of such class or type). Non-EC wine 
that bears a brand name, or a brand name and fanciful name, may 
bear a specified semi-generic name only if: (1) the label 
discloses the place of origin; (2) the wine conforms to the 
standard of identity contained in regulations (or, if there is 
no such standard, to the trade understanding of such class or 
type); and (3) the person or its successor in interest held a 
Certificate of Label Approval or a Certificate of Exemption 
from Label Approval for a wine label bearing such brand name 
prior to March 10, 2006, on which such semi-generic designation 
appeared.
    In addition, the provision adds Retsina to the statutory 
list of names treated as semi-generic for the purposes of these 
new rules and does not include Angelica on such list.
    The provision does not apply to wine that (1) contains less 
than seven percent or more than 24 percent alcohol by volume; 
(2) does not bear a brand name; or (3) is intended for sale 
outside the United States. Such wine continues to be governed 
by present law.

                             Effective Date

    The provision applies to wine imported or bottled in the 
United States on or after the date of enactment.

22. Railroad track maintenance credit (sec. 423 of the Act and sec. 45G 
        of the Code)

                              Present Law

    Present law provides a 50-percent business tax credit for 
qualified railroad track maintenance expenditures paid or 
incurred by an eligible taxpayer during the taxable year. The 
credit is limited to the product of $3,500 times the number of 
miles of railroad track (1) owned or leased by an eligible 
taxpayer as of the close of its taxable year, and (2) assigned 
to the eligible taxpayer by a Class II or Class III railroad 
that owns or leases such track at the close of the taxable 
year. Each mile of railroad track may be taken into account 
only once, either by the owner of such mile or by the owner's 
assignee, in computing the per-mile limitation. Under the 
provision, the credit is limited in respect of the total number 
of miles of track (1) owned or leased by the Class II or Class 
III railroad and (2) assigned to the Class II or Class III 
railroad for purposes of the credit.
    Qualified railroad track maintenance expenditures are 
defined as expenditures (whether or not otherwise chargeable to 
capital account) for maintaining railroad track (including 
roadbed, bridges, and related track structures) owned or leased 
as of January 1, 2005, by a Class II or Class III railroad.
    An eligible taxpayer means any Class II or Class III 
railroad, and any person who transports property using the rail 
facilities of a Class II or Class III railroad or who furnishes 
railroad-related property or services to a Class II or Class 
III railroad, but only with respect to miles of railroad track 
assigned to such person by such railroad under the provision.
    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.
    The provision applies to qualified railroad track 
maintenance expenditures paid or incurred during taxable years 
beginning after December 31, 2004, and before January 1, 2008.

                        Explanation of Provision

    The provision modifies the definition of qualified railroad 
track expenditures, so that the term means gross expenditures 
(whether or not otherwise chargeable to capital account) for 
maintaining railroad track (including roadbed, bridges, and 
related track structures) owned or leased as of January 1, 
2005, by a Class II or Class III railroad (determined without 
regard to any consideration for such expenditures given by the 
Class II or Class III railroad which made the assignment of 
such track).
    Thus, for example, under the provision, qualified railroad 
track maintenance expenditures are not reduced by the discount 
amount in the case of discounted freight shipping rates, the 
increment in a markup of the price for track materials, or by 
debt forgiveness or by cash payments made by the Class II or 
Class III railroad to the assignee as consideration for the 
expenditures. Consideration received directly or indirectly 
from persons other that the Class II or Class III railroad, 
however, does reduce the amount of qualified railroad track 
maintenance expenditures. No inference is intended under the 
provision as to whether or not any such consideration is or is 
not includable in the assignee's income for Federal tax 
purposes.

                             Effective Date

    The provision is effective for expenditures paid or 
incurred during taxable years beginning after December 31, 
2004, and before January 1, 2008.

23. Modify tax on unrelated business taxable income of charitable 
        remainder trusts (sec. 424 of the Act and sec. 664 of the Code)

                              Present Law

    A charitable remainder annuity trust is a trust that is 
required to pay, at least annually, a fixed dollar amount of at 
least five percent of the initial value of the trust to a 
noncharity for the life of an individual or for a period of 20 
years or less, with the remainder passing to charity. A 
charitable remainder unitrust is a trust that generally is 
required to pay, at least annually, a fixed percentage of at 
least five percent of the fair market value of the trust's 
assets determined at least annually to a noncharity for the 
life of an individual or for a period 20 years or less, with 
the remainder passing to charity.\1159\
---------------------------------------------------------------------------
    \1159\ Sec. 664(d).
---------------------------------------------------------------------------
    A trust does not qualify as a charitable remainder annuity 
trust if the annuity for a year is greater than 50 percent of 
the initial fair market value of the trust's assets. A trust 
does not qualify as a charitable remainder unitrust if the 
percentage of assets that are required to be distributed at 
least annually is greater than 50 percent. A trust does not 
qualify as a charitable remainder annuity trust or a charitable 
remainder unitrust unless the value of the remainder interest 
in the trust is at least 10 percent of the value of the assets 
contributed to the trust.
    Distributions from a charitable remainder annuity trust or 
charitable remainder unitrust are treated in the following 
order as: (1) ordinary income to the extent of the trust's 
undistributed ordinary income for that year and all prior 
years; (2) capital gains to the extent of the trust's 
undistributed capital gain for that year and all prior years; 
(3) other income (e.g., tax-exempt income) to the extent of the 
trust's undistributed other income for that year and all prior 
years; and (4) corpus.\1160\
---------------------------------------------------------------------------
    \1160\ Sec. 664(b).
---------------------------------------------------------------------------
    In general, distributions to the extent they are 
characterized as income are includible in the income of the 
beneficiary for the year that the annuity or unitrust amount is 
required to be distributed even though the annuity or unitrust 
amount is not distributed until after the close of the trust's 
taxable year.\1161\
---------------------------------------------------------------------------
    \1161\ Treas. Reg. sec. 1.664-1(d)(4).
---------------------------------------------------------------------------
    Charitable remainder annuity trusts and charitable 
remainder unitrusts are exempt from Federal income tax for a 
tax year unless the trust has any unrelated business taxable 
income for the year. Unrelated business taxable income includes 
certain debt financed income. A charitable remainder trust that 
loses exemption from income tax for a taxable year is taxed as 
a regular complex trust. As such, the trust is allowed a 
deduction in computing taxable income for amounts required to 
be distributed in a taxable year, not to exceed the amount of 
the trust's distributable net income for the year.

                        Explanation of Provision

    The provision imposes a 100-percent excise tax on the 
unrelated business taxable income of a charitable remainder 
trust. This replaces the present-law rule that takes away the 
income tax exemption of a charitable remainder trust for any 
year in which the trust has any unrelated business taxable 
income. Consistent with present law, the tax is treated as paid 
from corpus. The unrelated business taxable income is 
considered income of the trust for purposes of determining the 
character of the distribution made to the beneficiary.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2006.

24. Make permanent the special rule regarding treatment of loans to 
        qualified continuing care facilities (sec. 425 of the Act and 
        sec. 7872(h) of the Code)

                              Present Law


In general

    Present law provides generally that certain loans that bear 
interest at a below-market rate are treated as loans bearing 
interest at the market rate, accompanied by imputed payments 
characterized in accordance with the substance of the 
transaction (for example, as a gift, compensation, a dividend, 
or interest).\1162\
---------------------------------------------------------------------------
    \1162\ Sec. 7872.
---------------------------------------------------------------------------
    For calendar years beginning before January 1, 2006, an 
exception to this imputation rule is provided for any calendar 
year for a below-market loan made by a lender to a qualified 
continuing care facility pursuant to a continuing care 
contract, if the lender or the lender's spouse attains age 65 
before the close of the calendar year.\1163\
---------------------------------------------------------------------------
    \1163\ Sec. 7872(g).
---------------------------------------------------------------------------
    The exception applies only to the extent the aggregate 
outstanding loans by the lender (and spouse) to any qualified 
continuing care facility do not exceed $163,300 (for 
2006).\1164\
---------------------------------------------------------------------------
    \1164\ Rev. Rul. 2005-75, 2005-49 I.R.B. 1073.
---------------------------------------------------------------------------
    For this purpose, a continuing care contract means a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for the life or lives of one or both individuals; (2) 
the individual or the individual's spouse will first reside in 
a separate, independent living unit with additional facilities 
outside such unit for the providing of meals and other personal 
care and will not require long-term nursing care, and then will 
be provided long-term and skilled nursing care as the health of 
the individual or the individual's spouse requires; and (3) no 
additional substantial payment is required if the individual or 
the individual's spouse requires increased personal care 
services or long-term and skilled nursing care.\1165\
---------------------------------------------------------------------------
    \1165\ Sec. 7872(g)(3).
---------------------------------------------------------------------------
    For this purpose, a qualified continuing care facility 
means one or more facilities that are designed to provide 
services under continuing care contracts, and substantially all 
of the residents of which are covered by continuing care 
contracts. A facility is not treated as a qualified continuing 
care facility unless substantially all facilities that are used 
to provide services required to be provided under a continuing 
care contract are owned or operated by the borrower. For these 
purposes, a nursing home is not a qualified continuing care 
facility.\1166\
---------------------------------------------------------------------------
    \1166\ Sec. 7872(g)(4).
---------------------------------------------------------------------------

Special rule for calendar years beginning after 2005 and before 2011

    TIPRA includes a provision modifying the exception under 
section 7872 relating to loans to continuing care facilities. 
Among other things, the modification eliminates the dollar cap 
on aggregate outstanding loans.\1167\
---------------------------------------------------------------------------
    \1167\ Sec. 7872(h).
---------------------------------------------------------------------------
    Under the TIPRA provision, a continuing care contract is a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for the life or lives of one or both individuals; (2) 
the individual or the individual's spouse will be provided with 
housing, as appropriate for the health of such individual or 
individual's spouse, (i) in an independent living unit (which 
has additional available facilities outside such unit for the 
provision of meals and other personal care), and (ii) in an 
assisted living facility or a nursing facility, as is available 
in the continuing care facility; and (3) the individual or the 
individual's spouse will be provided assisted living or nursing 
care as the health of the individual or the individual's spouse 
requires, and as is available in the continuing care facility. 
The Secretary is required to issue guidance that limits the 
term ``continuing care contract'' to contracts that provide 
only facilities, care, and services described in the preceding 
sentence.\1168\
---------------------------------------------------------------------------
    \1168\ Sec. 7872(h)(2).
---------------------------------------------------------------------------
    For purposes of defining the terms ``continuing care 
contract'' and ``qualified continuing care facility,'' the term 
``assisted living facility'' is intended to mean a facility at 
which assistance is provided (1) with activities of daily 
living (such as eating, toileting, transferring, bathing, 
dressing, and continence) or (2) in cases of cognitive 
impairment, to protect the health or safety of an individual. 
The term ``nursing facility'' is intended to mean a facility 
that offers care requiring the utilization of licensed nursing 
staff.
    The TIPRA modifications generally are effective for 
calendar years beginning after December 31, 2005, with respect 
to loans made before, on, or after such date. The TIPRA 
modifications do not apply to any calendar year after 2010. 
Thus, the TIPRA modifications do not apply with respect to 
interest imputed after December 31, 2010. After such date, the 
law as in effect prior to enactment applies.

                        Explanation of Provision

    The provision makes permanent the TIPRA modifications to 
section 7872 regarding below-market loans to qualified 
continuing care facilities.

                             Effective Date

    The provision is effective as if included in section 209 of 
the TIPRA.

25. Tax technical corrections (sec. 426 of the Act)

In general

    The Act includes technical corrections to recently enacted 
tax legislation. Except as otherwise provided, the amendments 
made by the technical corrections contained in the Act take 
effect as if included in the original legislation to which each 
amendment relates.

Amendment related to the Tax Increase Prevention and Reconciliation Act 
        of 2005

    Look-through treatment and regulatory authority (Act sec. 
103(b)).-Under the Act, for taxable years beginning after 2005 
and before 2009, dividends, interest (including factoring 
income which is treated as equivalent to interest under sec. 
954(c)(1)(E)), rents, and royalties received by one controlled 
foreign corporation (``CFC'') from a related CFC are not 
treated as foreign personal holding company income to the 
extent attributable or properly allocable to non-subpart F 
income of the payor (the ``TIPRA look-through rule''). The Act 
further provides that the Secretary shall prescribe such 
regulations as are appropriate to prevent the abuse of the 
purposes of the rule.
    Section 952(b) provides that subpart F income of a CFC does 
not include any item of income from sources within the United 
States which is effectively connected with the conduct by such 
CFC of a trade or business within the United States (``ECI'') 
unless such item is exempt from taxation (or is subject to a 
reduced rate of tax) pursuant to a tax treaty. Thus, for 
example, a payment of interest from a CFC all of the income of 
which is U.S.-source ECI (and therefore not subpart F income) 
may receive the unintended benefit of the TIPRA look-through 
rule under the Act, even though the payment may be deductible 
for U.S. tax purposes.
    The provision conforms the TIPRA look-through rule to the 
rule's purpose of allowing U.S. companies to redeploy their 
active foreign earnings (i.e., CFC earnings subject to U.S. tax 
deferral) without an additional tax burden in appropriate 
circumstances. Under the provision, in order to be excluded 
from foreign personal holding company income under the TIPRA 
look-through rule, the dividend, interest, rent, or royalty 
also must not be attributable or properly allocable to income 
of the related party payor that is treated as ECI. Thus, for 
example, a payment of interest made by a CFC does not qualify 
under the TIPRA look-through rule to the extent that the 
interest payment is allocated to the CFC's ECI. This is the 
case even if the interest payment creates or increases a net 
operating loss of the CFC. The rule applies to dividends, 
notwithstanding that dividends are not deductible.
    The provision clarifies the authority of the Secretary to 
issue regulations under the TIPRA look-through rule, as amended 
by this provision. It is intended that the Secretary will 
prescribe regulations that are necessary or appropriate to 
carry out the amended TIPRA look-through rule, including, but 
not limited to, regulations that prevent the inappropriate use 
of the amended TIPRA look-through rule to strip income from the 
U.S. income tax base. Regulations issued pursuant to this 
authority may, for example, include regulations that prevent 
the application of the amended TIPRA look-through rule to 
interest deemed to arise under certain related party factoring 
arrangements pursuant to section 864(d), or under other 
transactions the net effect of which is the deduction of a 
payment, accrual, or loss for U.S. tax purposes without a 
corresponding inclusion in the subpart F income of the CFC 
income recipient, where such inclusion would have resulted in 
the absence of the amended TIPRA look-through rule.

Amendment related to the American Jobs Creation Act of 2004

    Modification of effective date of exception from interest 
suspension rules for certain listed and reportable transactions 
(Act sec. 903).-Section 903 of the American Jobs Creation Act 
of 2004 (``AJCA''), as modified by section 303 of the Gulf 
Opportunity Zone Act of 2005, provides that the Secretary of 
the Treasury may permit interest suspension where taxpayers 
have acted reasonably and in good faith. For provisions that 
are included in the Code, section 7701(a)(11) provides that the 
term ``Secretary of the Treasury'' means the Secretary in his 
non-delegable capacity, and the term ``Secretary'' means the 
Secretary or his delegate. However, section 903 of AJCA (as 
modified) is not included in the Code. To clarify that the 
Secretary may delegate authority under section 903 of AJCA (as 
modified), the provision adds the words ``or the Secretary's 
delegate'' following the reference to the Secretary of the 
Treasury.

                    II. DIVISION C--OTHER PROVISIONS

TITLE II--SURFACE MINING CONTROL AND RECLAMATION ACT AMENDMENTS OF 2006 
                                 \1169\

1. Coal Industry Retiree Health Benefit Act
            (a) Prepayment of premium liability for coal industry 
                    health benefits and modification to definition of 
                    successor in interest (sec. 211 of the Act and 
                    secs. 9701, 9704, 9711, and 9712 of the Code)

                              Present Law

    The United Mine Workers of America (``UMWA'') Combined 
Benefit Fund was established by the Coal Industry Retiree 
Health Benefit Act of 1992 (the ``Coal Act'') to assume 
responsibility of payments for medical care expenses of retired 
miners and their dependents who were eligible for health care 
from the private 1950 and 1974 UMWA Benefit Plans. The Combined 
Benefit Fund is financed by assessments on current and former 
signatories to labor agreements with the UMWA, past transfers 
from an overfunded United Mine Workers pension fund, and 
transfers from the Abandoned Mine Reclamation Fund. The Social 
Security Administration is responsible for assigning eligible 
retired miners and their dependents to current and former 
signatories to labor agreements with the UMWA and calculating 
annual contributions to be paid by each such signatory for each 
beneficiary assigned to the signatory. The Coal Act uses the 
term ``assigned operator'' to refer to the signatory to which 
liability for a particular beneficiary of the Combined Benefit 
Fund has been assigned. Under the Coal Act, related persons 
\1170\ to signatories to the relevant labor agreements may have 
joint and several liability for premium payments. A related 
person operator includes a member of the same controlled group 
of corporations as a signatory, a trade or business which is 
under common control with such signatory, any other person who 
is identified as having a partnership interest or joint venture 
with a signatory. A successor in interest to a related person 
is considered a related person with respect to the signatory 
operator.
---------------------------------------------------------------------------
    \1169\ Subtitle A (secs. 201-209 of the bill) includes changes to 
the Surface Mining Control and Reclamation Act and other non-tax 
changes not described in this explanation.
    \1170\ Sec. 9701(c)(2).
---------------------------------------------------------------------------
    In addition, continuation of certain individual coal 
industry employer plans is required under the Coal Act. The 
most recent coal industry employer (the ``last signatory 
operator'') of a coal industry retiree who, as of February 1, 
1993, was receiving retiree health benefits from an individual 
employer plan maintained pursuant to a 1978 or subsequent coal 
wage agreement is required to continue to provide health 
benefits coverage to such individual and his or her eligible 
beneficiaries which is substantially the same as (and subject 
to all the limitations of) the coverage provided by such plan 
as of January 1, 1992.\1171\ The related persons of a last 
signatory operator which is required to provide such health 
benefits coverage is jointly and severally liable with the last 
signatory operator for such coverage.
---------------------------------------------------------------------------
    \1171\ Sec. 9711(a).
---------------------------------------------------------------------------
    The Coal Act also established the 1992 UMWA Benefit Plan to 
provide health benefits to individuals not receiving benefits 
from either the Combined Benefit Fund or individual employer 
plans.\1172\ Joint and several liability also applies to 
related persons of last signatory operators for amounts 
required to be paid to the 1992 UMWA Benefit Plan.
---------------------------------------------------------------------------
    \1172\ Sec. 9712.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision allows certain assigned operators to prepay 
their premium liability to the Combined Benefit Fund. The 
prepayment is available only if (1) the assigned operator (or a 
related person) made contributions to the 1950 UMWA Benefit 
Plan and the 1974 UMWA Benefit Plan for employment during the 
period covered by an 1988 agreement and is not a 1988 agreement 
operator; (2) the assigned operator and all related persons are 
not actively engaged in the production of coal as of July 1, 
2005; and (3) the assigned operator was, as of July 20, 1992, a 
member of a controlled group of corporations the common parent 
of which is publicly traded. For purposes of this description, 
an operator that meets these requirements is referred to as an 
``eligible operator''. Under the provision, only the parent 
(and no other person) is liable for the premiums of an assigned 
operator which is a member of the parent's controlled group if: 
(1) a payment to the Combined Benefit Fund meeting certain 
requirements is made; and (2) the parent is jointly and 
severally liable for any premium which would otherwise be 
required to be paid by the operator.
    Under the provision, in order for the relief from liability 
to apply: (1) the payment by the assigned operator (or any 
related person on behalf of the assigned operator) must be no 
less than the present value of the total premium liability of 
the assigned operator (or related persons or their assignees), 
as determined by the operator's (or related person's) enrolled 
actuary, using actuarial methods and assumptions each of which 
is reasonable and which are reasonable in the aggregate (as 
determined by such actuary); and (2) the enrolled actuary must 
file with the Department of Labor an actuarial report regarding 
the valuation made by the actuary. The report must contain the 
date of the actuarial valuation and a statement by the enrolled 
actuary signing the report that, to the best of the actuary's 
knowledge, the report is complete and accurate and that in the 
actuary's opinion the actuarial assumptions used are in the 
aggregate reasonably related to the experience of the operator 
and to reasonable expectations. The Secretary of Labor has 90 
days after the filing of the report to notify the operator in 
writing if the Secretary believes the applicable requirements 
have not been satisfied.
    The Combined Fund must establish and maintain an account 
for each assigned operator making a qualified prepayment and 
must use all amounts in such account exclusively to pay 
premiums that would otherwise be required to be paid by the 
assigned operator. Upon termination of the obligations for 
premium liability of any assigned operator (or related person) 
for which such account is maintained, all funds remaining the 
in account (and earning thereon) shall be refunded to the 
entity as designated by the parent of the controlled group.
    The provision also modifies the rules for joint and several 
liability of last signatory operators, and related parties to 
such operators, in the case of individual employer plans under 
Code section 9711. Under the provision, if security meeting 
certain requirements is provided on behalf of an assigned 
operator who meets the requirements for an eligible operator, 
then, as of the date that security is required, the last 
signatory operator and related persons are relieved of joint 
and several liability with respect to such last signatory 
operator if the common parent of the controlled group remains 
liable for the provision of benefits otherwise required.
    The security must be provided to the trustees of the 1992 
UMWA Benefit Plan, solely for the purpose of paying premiums 
for eligible beneficiaries, and must be equal to one year's 
premium liability of the last signatory operator (determined 
using the average cost of the operator's liability during the 
prior three years). The security must remain in place for five 
years. The remaining amount of any security must be returned 
upon the earlier of (1) termination of the obligations of the 
last signatory operator or (2) five years. The security must be 
in the form of a bond, letter of credit, or cash escrow and 
must be in addition to any otherwise required security.
    Similar rules apply in the case of joint and several 
liability obligations under the 1992 UMWA benefit plan.
    Under the provision, successors in interest do not include 
any person (1) who is an unrelated person to a seller who is an 
eligible operator (or a related person), and (2) who purchases 
from such seller, assets, or all of the stock of a related 
person to such seller, for fair market value in a bona fide, 
arm's-length sale. Thus, such persons are not subject to joint 
and several liability.

                             Effective Date

    The provisions are generally effective on the date of 
enactment except that the changes to the definition of 
successor in interest are effective for transactions after the 
date of enactment.
            (b) Other provisions (secs. 212 and 213 of the Act and 
                    secs. 9702, 9704, 9705, 9706, 9712 and 9721 of the 
                    Code)
    The provision makes other changes to the Internal Revenue 
Code, including changes relating to certain premium 
adjustments, transfers of certain amounts, and the board of 
trustees of the Combined Fund.

                       TITLE IV--OTHER PROVISIONS

1. Clarification of prohibition of delivery sales of tobacco products 
        (sec. 401 of the Act and sec. 5761 of the Code)

                              Present Law

    Tobacco products are subject to Federal excise tax on their 
manufacture or importation into the United States.\1173\ The 
tax is imposed on the manufacturer or importer and is 
determined at the time of removal.\1174\ Personal use 
quantities exempt from payment of customs duty under certain 
portions of the Harmonized Tariff Schedule (``HTS'') are also 
exempt from payment of internal revenue tax imposed by reason 
of importation.\1175\ In general, entry of 200 cigarettes 
(i.e., one carton) is permitted free of duty and tax, but only 
if the article is accompanying the person arriving in the 
United States.\1176\
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    \1173\ While excise tax rates vary by tobacco product, the most 
common product, cigarettes weighing not more than 3 pounds per 
thousand, is taxed at a rate of $19.50 per thousand (i.e., 39 cents per 
pack of 20 cigarettes). Sec. 5701(b)(1).
    \1174\ Sec. 5703(b).
    \1175\ Harmonized Tariff Schedule of the United States (2005) 
(``HTS''), Chapter 98, U.S. Note 1. The HTS has the status of a statute 
of the United States. 19 U.S.C. sec. 3004(c)(1).
    \1176\ HTS, chapter 98, subchapter IV, sec. 9804.00.72.
---------------------------------------------------------------------------
    Tobacco products may be removed without payment of tax for 
shipment to a foreign country or a possession of the United 
States or for consumption outside the United States.\1177\ Such 
tobacco products must be labeled for export, and may not be 
sold or held for sale in the United States unless repackaged 
into new packaging that does not contain an export label.\1178\ 
There are penalties for violation of these rules. In general, 
every person who sells, relands, or receives within the 
jurisdiction of the United States any tobacco products which 
have been labeled or shipped for exportation, and every person 
who sells or receives such relanded tobacco products or who 
aids or abets in such selling, relanding or receiving, is 
liable for a penalty equal to the greater of $1,000 or 5 times 
the amount of excise tax imposed under the law, in addition to 
the excise tax. All tobacco products so relanded are to be 
forfeited to the United States and destroyed. In addition, all 
vessels, vehicles and aircraft used in such relanding or in 
removing such products from the place where relanded are to be 
forfeited to the United States. However, quantities allowed 
entry free of tax and duty under Subchapter IV of chapter 98 of 
the HTS are exempt from these rules.\1179\
---------------------------------------------------------------------------
    \1177\ Sec. 5704(b).
    \1178\ Sec. 5754(a)(1)(C).
    \1179\ Sec. 5761(c).
---------------------------------------------------------------------------
    Subject to certain exemptions, including an exemption for 
personal use quantities that are allowed entry free of tax and 
duty under the HTS, imported cigarettes are subject to certain 
labeling, trademark, and certification requirements under 
applicable customs law.\1180\ Customs law also provides for 
penalties, forfeiture, and destruction of noncompliant 
products.\1181\
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    \1180\ 19 U.S.C. sec. 1681a.
    \1181\ 19 U.S.C. sec. 1681b.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies that, for purposes of the penalties 
with respect to the reimportation of exported tobacco products, 
the personal use exemption from the Federal excise tax on 
imports of tobacco products does not apply to any tobacco 
product sold in connection with a delivery sale. A ``delivery 
sale'' is any sale of a tobacco product to a consumer (1) if 
the consumer submits the order by telephone, other voice 
transmission, internet or other online service, or if the 
seller is not in the physical presence of the buyer when the 
request for purchase is made, or (2) if the product is 
delivered by common carrier, private delivery service, or the 
mail, or if the seller is not in the physical presence of the 
buyer when the buyer obtains physical possession of the 
product. The provision clarifies that any delivery sale of a 
tobacco product is subject to Federal excise tax upon its 
reimportation, regardless of the quantity sold.
    The provision also covers smokeless tobacco under the 
labeling, trademark, and certification requirements, and the 
related enforcement provisions, which generally apply under 
applicable customs law to imported cigarettes. In addition, the 
provision clarifies that delivery sales of personal use 
quantities of cigarettes and smokeless tobacco are not exempt 
from the customs requirements and enforcement rules.
    The provision also grants the States access to customs 
certifications and the power to cause the forfeiture and 
destruction of noncompliant tobacco products.

                             Effective Date

    The provision applies to goods entered, or withdrawn from a 
warehouse for consumption, on or after the 15th day after the 
date of enactment.
2. Exclusion of 25 percent of capital gain for certain sales of mineral 
        and oil leases for conservation purposes (sec. 403 of the Act)

                              Present Law

    Gain from the sale or exchange of land held more than one 
year generally is treated as long-term capital gain. Generally, 
the net capital gain of an individual is subject to a maximum 
tax rate of 15 percent. The net capital gain of a corporation 
is subject to tax at the same rate as ordinary income.

                        Explanation of Provision


In general

    The provision provides a 25-percent exclusion from gross 
income of long-term capital gain from the conservation sale of 
a qualifying mineral or geothermal interest.\1182\ The 
conservation sale must be made to an eligible entity that 
intends that the acquired property be used for qualified 
conservation purposes in perpetuity.\1183\
---------------------------------------------------------------------------
    \1182\ In a non tax-related provision, the provision also provides 
that, subject to valid existing rights, eligible Federal land 
(including any interest in eligible Federal land) is withdrawn from: 
(1) all forms of location, entry, and patent under the mining laws; and 
(2) disposition under all laws relating to mineral and geothermal 
leasing.
    \1183\ The exclusion is mandatory if all of the requirements of the 
provision are satisfied, and a taxpayer need not file an election to 
take advantage of the exclusion. A taxpayer who transfers qualifying 
property to a qualified organization may opt out of the 25-percent 
exclusion by choosing not to satisfy one or more of the provision's 
requirements without having to file a formal election with the 
Secretary, such as by failing to obtain the requisite letter of intent 
from the qualified organization.
---------------------------------------------------------------------------

Qualifying interests

    A qualifying mineral or geothermal interest means an 
interest in any mineral or geothermal deposit located on 
eligible Federal land which constitutes a taxpayer's entire 
interest in such deposit. Eligible Federal land means (1) 
Bureau of Land Management land and any Federally-owned minerals 
located south of the Blackfeet Indian Reservation and East of 
the Lewis and Clark national Forest to the Eastern edge of R. 8 
W., beginning in T. 29 N. down to and including T. 19 N. and 
all of T. 18 N., R. 7 W, (2) the Forest Service land and any 
Federally-owned minerals located in the Rocky Mountain Division 
of the Lewis and Clark National Forest, including the 
approximately 356,111 acres of land made unavailable for 
leasing by the August 28, 1997, Record of Decision for the 
Lewis and Clark National Forest Oil and Gas Leasing 
Environmental Impact Statement and that is located form T. 31 
N. to T. 16 N. and R. 13 W. to R. 7 W., and (3) the Forest 
Service land and any Federally-owned minerals located within 
the Badger Two Medicine area of the Flathead National Forest, 
including the land located in T. 29 N. from the Western edge of 
R. 16 W. to the Eastern edge of R. 13 W. and the land located 
in T. 28 N., R. 13 and 14 W. All such land is as generally 
depicted on the map entitled ``Rocky Mountain Front Mineral 
Withdrawal Area'' and dated December 31, 2006. The map shall be 
on file and available for inspection in the Office of the Chief 
of the Forest Service.
    An interest in property is not the entire interest of the 
taxpayer if such interest was divided in an attempt to avoid 
the requirement that the taxpayer sell the taxpayer's entire 
interest in the property. An interest may be considered the 
taxpayer's entire interest notwithstanding that the taxpayer 
retains an interest in other deposits, even if the other 
deposits are contiguous with the sold deposit and were acquired 
by the taxpayer along with such deposit in a single conveyance. 
It is intended that the partial interest rules contained in 
Treasury Regulations section 1.170A-7(a)(2)(i) and generally 
applicable to charitable contributions of partial interests be 
applied similarly for purposes of this provision.

Conservation sales

    A conservation sale is a sale (excluding a transfer made by 
order of condemnation or eminent domain) to an eligible entity, 
defined as a Federal, State, or local government, or an agency 
or department thereof or a section 501(c)(3) organization that 
is organized and operated primarily to meet a qualified 
conservation purpose. In addition, to be a conservation sale, 
the organization acquiring the property interest must provide 
the taxpayer with a written letter stating that the acquisition 
will serve one or more qualified conservation purposes, that 
the use of the deposits will be exclusively for conservation 
purposes, and that such use will continue in the event of a 
subsequent transfer of the acquired interest. A qualified 
conservation purpose is: (1) the preservation of land areas for 
outdoor recreation by, or the education of, the general public; 
(2) the protection of a relatively natural habitat of fish, 
wildlife, or plants, or similar ecosystem; or (3) the 
preservation of open space (including farmland and forest land) 
where the preservation is for the scenic enjoyment of the 
general public or pursuant to a clearly delineated Federal, 
State, or local governmental conservation policy and will yield 
a significant public benefit. Use of property is not considered 
to be exclusively for conservation purposes unless the 
conservation purpose is protected in perpetuity and no surface 
mining is permitted with respect to the property (sec. 
170(h)(5)).

Protection of conservation purposes

    The provision provides for the imposition of penalty excise 
taxes if an eligible entity fails to take steps consistent with 
the protection of conservation purposes. If ownership or 
possession of the property is transferred by a qualified 
organization, then: (1) a 20-percent excise tax applies to the 
fair market value of the property, and (2) any realized gain or 
income is subject to an additional excise tax imposed at the 
highest income tax rate applicable to C corporations. In the 
case of a transfer by an eligible entity to another eligible 
entity, the excise tax does not apply if the transferee 
provides the transferor at the time of the transfer a letter of 
intent (as described above). In the case of a transfer by an 
eligible entity to a transferee that is not an eligible entity, 
the excise tax does not apply if it is established to the 
satisfaction of the Secretary that the transfer is exclusively 
for conservation purposes (as provided in section 170(h)(5)) 
and the transferee provides the transferor a letter of intent 
(as described above) at the time of the transfer. Once a 
transfer has been subject to the excise tax, the excise tax may 
not apply to any subsequent transfers. The provision provides 
that the Secretary may require such reporting as may be 
necessary or appropriate to further the purpose that any 
conservation use be in perpetuity.

                             Effective Date

    The provision is effective for sales occurring on or after 
the date of enactment.

3. Tax court review of requests for equitable relief from joint and 
        several liability (sec. 408 of the Act and sec. 6015 of the 
        Code)

                              Present Law


In general

    Generally, a husband and wife are liable jointly and 
individually for the entire tax on a joint return. Under 
certain circumstances, a spouse may be entitled to relief from 
joint and several liability, ``innocent spouse relief.'' \1184\ 
Generally, the spouse must elect the form of innocent spouse 
relief no later than two years after the date the IRS began 
collection activities against the electing spouse.
---------------------------------------------------------------------------
    \1184\ Sec. 6015.
---------------------------------------------------------------------------
    There are three types of relief, general innocent spouse 
relief, relief for spouses no longer married or legally 
separated (separation of liabilities), and equitable relief.
    For general relief, the electing spouse must
           Have filed a joint return that has an 
        understatement of tax due to the erroneous items of the 
        other spouse,
           Establish that at the time of signing the 
        return the electing spouse did not know or have reason 
        to know there was an understatement of tax, and
           Taking into account all the facts and 
        circumstances, show that it is inequitable to hold the 
        electing spouse liable for the deficiency in tax.\1185\
---------------------------------------------------------------------------
    \1185\ Sec. 6015(b).
---------------------------------------------------------------------------
    For separation of liabilities relief, the electing spouse
           Must have filed a joint return and,
           Either (1) is no longer married to or is 
        legally separated from the spouse with whom the return 
        was filed or (2) must not have been a member of the 
        same household with the spouse for a 12-month 
        period.\1186\
---------------------------------------------------------------------------
    \1186\ Sec. 6015(c).
---------------------------------------------------------------------------
    If an individual fails to qualify under the preceding two 
options, such individual may still be able to obtain equitable 
relief.\1187\ To obtain equitable relief, the IRS must 
determine that taking into account all of the facts and 
circumstances, it is inequitable to hold the electing spouse 
liable for any unpaid tax or any deficiency in tax (or any 
portion of either).
---------------------------------------------------------------------------
    \1187\ Sec. 6015(f).
---------------------------------------------------------------------------
    In the case of an individual against whom a deficiency has 
been asserted and elects to have the general relief provisions 
or the separation of liabilities relief provisions apply, such 
individual may petition the Tax Court to review the IRS's 
determinations.
    Some courts have noted the absence of an express statement 
of Tax Court jurisdiction over equitable relief claims in the 
statute.\1188\ Other courts have rejected Tax court 
jurisdiction over such claims on the basis that a deficiency 
has not been asserted against the claimant.\1189\ Recently, the 
United States Tax Court revisited its prior ruling that it had 
jurisdiction over nondeficiency stand-alone petitions for 
equitable relief. In light of adverse rulings in the Eighth and 
Ninth Circuits this year, the Tax Court in Billings vs. 
Commissioner, recently held that it does not have jurisdiction 
over such claims in the absence of a deficiency.\1190\
---------------------------------------------------------------------------
    \1188\ The Second Circuit has noted that the question of the Tax 
Court's jurisdiction over an appeal of an adverse determination under 
section 6015(f) is ``not free from doubt.'' Maier v. Comm'r, 360 F.3d 
361, 363 n. 1 (2d cir. 2004). The court pointed out that ``only 
petitions to review IRS determinations under subsections (b) and (c) 
are expressly enumerated in section 6015(e) and (h).'' Id.; see also 
French v. United States (In re French), 255 B.R. 1, 2 (Bankr.N.D.Ohio 
2000) (dismissing for lack of jurisdiction the debtor's claim that she 
was entitled to relief under Sec. 6015(f) because ``Congress chose to 
exclude from judicial review the issue of whether a taxpayer is 
entitled to equitable relief under Sec. 6015(f)''); Mira v. United 
States (In re Mira), 245 B.R. 788, 791-92 (Bankr.M.D.Pa.1999) 
(reasoning that sec. 6015(f) grants the Secretary of the Treasury 
discretion to grant equitable relief and, as a decision ``committed to 
agency discretion by law,'' 5 U.S.C. sec. 701, it was not reviewable by 
the court).
    \1189\ Comm'r v. Ewing, 439 F.3d 1009, 1012-14 (9th Cir. 2006) 
rev'g Ewing v. Comm'r., 118 T.C. 494 (2002); and Bartman v. Comm'r, 446 
F.3d 785, 787 (8th Cir. 2006).
    \1190\ Billings v. Commissioner, 127 T.C. No. 2 (July 25, 2006) 
(holding that the Court lacks jurisdiction to review the Commissioner's 
decisions to deny relief under section 6015(f) when there is no 
deficiency but tax went unpaid). In Billings, the IRS had accepted the 
petitioner's amended return as filed and asserted no deficiency against 
him. His request for equitable relief from the unpaid tax arising from 
his wife's embezzlement was denied by the IRS.
---------------------------------------------------------------------------

Restrictions on collection and suspension of the running of the period 
        of limitations

    Unless the IRS determines that collection will be 
jeopardized by delay, no levy or proceeding in court is to be 
made, begun or prosecuted against a spouse seeking general 
innocent spouse relief or separation of liabilities relief for 
the collection of any assessment to which the election relates 
until (1) the expiration of the 90-day period following the 
date of mailing of the Service's final determination letter, or 
(2) if a petition is filed with the Tax Court, until the 
decision of the Tax Court becomes final.\1191\
---------------------------------------------------------------------------
    \1191\ Sec. 6015(e)(1)(B) and Treas. Reg. sec. 1.6015-1(c)(1).
---------------------------------------------------------------------------
    For the spouse seeking general or separation of liabilities 
relief, the running of the period of limitations on collections 
of the assessment to which the election relates is suspended 
for the period during which the IRS is prohibited from 
collecting by levy or proceeding in court and for 60 days 
thereafter. However, the requesting spouse may waive the 
restrictions on collection and the suspension of the period of 
limitations against collection will terminate 60 days after the 
date the waiver is filed with the IRS.\1192\
---------------------------------------------------------------------------
    \1192\ Sec. 6015(e)(2) and (5); and Treas. Reg. sec. 1.6015-
1(c)(3).
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision clarifies that the Tax Court has jurisdiction 
over equitable relief claims, even if the individual does not 
elect to have the general relief or separation of liabilities 
relief provisions apply and no deficiency is asserted. The 
provision also extends the present law suspension of collection 
activity and tolling of the period of limitations provisions to 
equitable relief claims.

                             Effective Date

    The provision applies to requests for equitable relief with 
respect to liability for taxes arising or remaining unpaid on 
or after the date of enactment.

              PART FIFTEEN: FALLEN FIREFIGHTERS ASSISTANCE

                     TAX CLARIFICATION ACT OF 2006

                      (PUBLIC LAW 109-445) \1193\

  A. Payments by Certain Charitable Organizations for the Benefit of 
  Firefighters Who Died as a Result of the Esperanza Fire Treated as 
                  Exempt Payments (sec. 2 of the Act)

                              Present Law

    In general, organizations described in section 501(c)(3) 
are exempt from taxation. Such organizations are classified 
either as private foundations or non private foundations 
(generally referred to as public charities). Public charities 
include organizations that receive broad public support (sec. 
509(a)(1) or sec. 509(a)(2)), supporting organizations (sec. 
509(a)(3)), and organizations organized and operated for 
testing for public safety (sec. 509(a)(4)).
---------------------------------------------------------------------------
    \1193\ H.R. 6429. The House passed the bill without objection on 
December 8, 2006. The Senate passed the bill by unanimous consent on 
the same date. The President signed the bill on December 21, 2006.
---------------------------------------------------------------------------
    Contributions to section 501(c)(3) organizations generally 
are tax deductible (sec. 170). Section 501(c)(3) organizations 
must be organized and operated exclusively for exempt purposes 
and no part of the net earnings of such organizations may inure 
to the benefit of any private shareholder or individual. An 
organization is not organized or operated exclusively for one 
or more exempt purposes unless the organization serves a public 
rather than a private interest. Thus, an organization described 
in section 501(c)(3) generally must serve a charitable class of 
persons that is indefinite or of sufficient size.

                        Explanation of Provision

    Under the provision, payments made on behalf of any 
firefighter who died as the result of the October 2006 
Esperanza Incident fire in southern California to any family 
member of such a firefighter by a public charity (as described 
in section 509(a)(1) and (a)(2)) are treated as related to the 
purpose or function constituting the basis for the 
organization's exempt status, if the payments are made in good 
faith using a reasonable and objective formula that is 
consistently applied.

                             Effective Date

    The provision applies to payments made on or after October 
26, 2006, and before June 1, 2007.


=======================================================================


                               APPENDIX:

              ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION

                     ENACTED IN THE 109TH CONGRESS

=======================================================================

      


=======================================================================


                               APPENDIX:

              ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION

                     ENACTED IN THE 109TH CONGRESS

=======================================================================

      

                                                                                                                APPENDIX:
                                                                                ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE 109TH CONGRESS
                                                                                                         Fiscal Years 2005-2016
                                                                                                          [Millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                  Provision                               Effective               2005       2006        2007       2008        2009        2010        2011        2012        2013        2014        2015        2016       2005-16
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
PART ONE: TSUNAMI RELIEF--Acceleration of      DOE...........................         -1          -1  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........           -2
PART TWO: EXTENSION OF LEAKING UNDERGROUND     DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 STORAGE TANK TRUST FUND FINANCING RATE
 (SUNSET 9/30/05) (P.L. 109-6, signed into
 law by the President on March 31, 2005).
PART THREE: TAX TREATMENT OF CERTAIN DISASTER  arbo/a DOE....................  .........          -6         -7          -6          -8         -10         -12         -14         -15         -16         -16  ..........         -109
 MITIGATION PAYMENTS (P.L. 109-7, signed into
 law by the President on April 15, 2005).
PART FOUR: SURFACE TRANSPORTATION EXTENSION    DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 ACT OF 2005, PARTS I-IV--Extensions of
 Surface Transportation Act (P.L. 109-14,
 signed into law by the President on May 31,
 2005; P.L. 109-20, signed into law by the
 President on July 1, 2005; P.L. 109-35,
 signed into law by the President on July 20
 2005; P.L. 109-37, signed into law by the
 President on July 22, 2005; P.L. 109-40,
 signed into law by the President on July 28,
 2005; and P.L. 109-42, signed into law by
 the President on July 30, 2005).
PART FIVE: THE ENERGY POLICY ACT OF 2005
 (P.L. 109-58, signed into law by the
 President on August 8, 2005):
A. Energy Tax Policy Incentives:
1. Extend and modify section 45 credit         DOE & tyea DOE................         -1         -35       -134        -256        -314        -328        -342        -351        -334        -326        -327  ..........       -2,747
 through 12/31/07 (allow pass through of
 credit to cooperative patrons) (\1\).
2. Clean renewable energy bonds ($800 million  bia 12/31/05..................  .........          -9        -25         -42         -48         -48         -48         -48         -48         -48         -48  ..........         -411
 aggregate issuance limitation through 12/31/
 07).
3. Treatment of certain income of electric     DOE...........................  .........  ..........        -14         -24         -26         -29         -32         -34         -37         -39         -42  ..........         -277
 cooperatives.
4. Dispositions of transmission property to    DOE...........................        -37        -105       -237         -73          43          43          44          45          82         150          64  ..........           19
 implement FERC restructuring policy (applies
 to sales or dispositions completed prior to
 1/1/08).
5. Credit for production from advanced         tybia DOE.....................  .........  ..........  .........  ..........  ..........  ..........  ..........  ..........         -41         -83        -155  ..........         -278
 nuclear power facilities.
6. Credit for investment in clean coal         pa DOE(\2\)...................  .........         -26        -55        -101        -151        -212        -254        -260        -238        -178        -136  ..........       -1,612
 facilities.
7. Electricity transmission property rated     ppisa 4/11/05.................  .........          -3        -18         -45         -78        -110        -140        -166        -194        -225        -261  ..........       -1,239
 69kV or greater treated as 15-year property
 (\3\).
8. 84-month amortization of qualified air      ppisa 4/11/05.................         -2         -10        -30         -58         -89        -123        -154        -177        -187        -173        -144  ..........       -1,147
 pollution control facilities installed in
 post-1975 coal-fired electric generation
 plants.
 
9. Modification to special rules for nuclear   tyba 12/31/05.................  .........        -120       -199        -187        -168        -126        -116        -107         -97         -90         -83  ..........       -1,293
 decommissioning costs--eliminate cost of
 service requirement, permit transfer for pre-
 1984 decommissioning costs to qualified fund
 (seller gets deduction on sale of plant),
 and permit full funding in qualified fund.
10. Temporary 5-year net operating loss        (\4\).........................  .........         -72        -43         -19          19          16          12          10           8           8           8  ..........          -52
 carryover for certain electric companies
 limited to 20% of combined qualifying
 investment in transmission and pollution
 control equipment.
11. Extension of credit for producing fuel     pa 12/31/05...................  .........          -5        -12         -17         -23         -19         -13          -8          -2  ..........  ..........  ..........         -101
 from a nonconventional source for facilities
 producing coke or coke gas (sunset for
 facilities placed in service after 12/31/09).
12. Allow section 29 credit to be component    (\5\).........................  .........  ..........       -275        -301          24          46          66          88          88          88          88  ..........          -88
 of general business credit (produced and
 sold through 12/31/07).
13. Temporary 50% expensing for equipment      ppisa DOE.....................  .........         -12        -31        -119        -238        -259        -183          49         156         126         105  ..........         -406
 used in the refining of liquid fuels (and
 allow pass through to cooperative owners)
 (sunset 12/31/11) (\6\).
14. Pass through low sulfur diesel expensing   (\7\).........................        -42          -3          5           4           4           4           4           4           4           4           4  ..........           -7
 to cooperative owners.
15. Natural gas distribution pipelines         ppisa 4/11/05.................         -1         -13        -43         -78        -110        -139        -152        -137        -120        -114        -112  ..........       -1,019
 treated as 15-year property (sunset after 12/
 31/10) (\3\).
16. Natural gas gathering pipelines treated    ppisa 4/11/05.................  .........          -1         -3          -2          -2          -2          -1          -1          -1          -1          -1  ..........          -16
 as 7-year property with AMT relief (\3\).
17. Exempt certain prepayments for natural     bia DOE.......................      (\8\)          -1         -2          -3          -4          -4          -5          -7          -8          -9         -10  ..........          -53
 gas from tax-exempt bond arbitrage rules.
18. Determination of small refiner exception   tyea DOE......................         -2         -14        -14         -15         -15         -15         -16         -16         -16         -17         -18  ..........         -158
 to oil depletion deduction--modify
 definition of independent refiner from daily
 maximum run less than 50,000 barrels to
 average daily run less than 75,000 barrels.
19. Amortize all geological and geophysical    apoil tyba DOE................        127         165        -59        -201        -218        -151        -122        -131        -125        -125        -134  ..........         -974
 expenditures over 2 years.
20. Allowance of deduction for certain energy  ppisa 12/31/05................  .........         -81       -141         -48           6           5           5           4           4           3           3  ..........         -243
 efficient commercial building property
 (sunset 12/31/07).
21. Credit for construction of new energy      hpa 12/31/05..................  .........          -6         -9          -5          -3          -3          -2          -2          -1       (\9\)  ..........  ..........          -28
 efficient homes (sunset 12/31/07).
22. Credit for energy efficiency improvements  ppisa 12/31/05................  .........         -55       -275        -226  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -556
 to existing homes (sunset 12/31/07).
23. Credit for energy efficient appliances     apa 12/31/05..................  .........        -117        -63  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -180
 (sunset 12/31/07) (\10\).
24. 30% credit for residential purchase/       ppisa 12/31/05................  .........          -2        -13         -16  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -31
 installations of solar (pv and hot water)
 and fuel cells (sunset 12/31/07).
25. Credit for business installation of        (\11\)........................  .........         -19        -82        -110         -30         -18          -7           6          10          15          12  ..........         -222
 qualified fuel cells and stationary
 microturbine power plants (sunset 12/31/07).
26. Business solar investment tax credit       (\12\)........................  .........          -4         -7          -5          -3          -2          -2          -1  ..........  ..........  ..........  ..........          -24
 (generally sunset 12/31/07).
27. Alternative motor vehicle credit.........  ppisa 12/31/05................  .........        -283       -254        -142        -110         -19         -12         -11         -15         -19         -10  ..........         -874
28. Sunset of deduction for clean-fuel         1/1/06........................  .........           8          2          -3          -2          -2          -1  ..........  ..........  ..........  ..........  ..........            2
 vehicles and certain refueling property 12/
 31/05.
28. Credit for installation of alternative     ppisa 12/31/05................  .........          -3         -9         -13         -19         -14          -6          -5          -2      (\13\)           2  ..........          -71
 fueling stations for property placed in
 service before 1/1/10 (1/1/15 for hydrogen
 property).
29. Reduced motor fuel excise tax rate for     1/1/06........................  .........       (\9\)      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)  ..........        (\9\)
 diesel fuel blended with water (\14\).
30. Extend excise tax provisions and income    DOE & fsoua 12/31/05..........  .........  ..........        -67        -101         -26  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -194
 tax credit for biodiesel and create similar
 incentives for renewable diesel (sunset 12/
 31/08).
 
 31. Establish small agri-biodiesel producer    tyea DOE.....................         -1         -22        -24         -28         -26         -26         -23         -14         -11          -5  ..........  ..........         -181
 credit (sunset 12/31/08) and expand
 eligibility for small ethanol producer
 credit (increase productive capacity to 60
 million gallons).
32. R&E tax credit for energy research         epoia DOE.....................         -3         -10        -35         -21         -11          -8          -4          -1  ..........  ..........  ..........  ..........          -92
 (sunset 12/31/05).
33. National Academy of Sciences study.......  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
34. Recycling study..........................  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
35. Oil Spill Liability Trust Fund financing   (\15\)........................  .........         150        254         276         282         285         290         293         298         303          76  ..........        2,508
 rate (sunset 12/31/14).
36. Extend Leaking Underground Storage Tank    10/1/05 & freosa..............  .........          33         34          34          35          35          35          35          35          36          36  ..........          349
 (``LUST'') Trust Fund financing rate (sunset  9/30/05.......................
 9/30/11), expand to apply financing rate to
 all fuels, and repeal LUST refunds.
37. Modify recapture of section 197            dopa DOE......................          2          12         13          14          15          16          17          19          20          21          23  ..........          171
 amortization.
38. Clarify definition of super single tire..  (\16\)........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
TOTAL OF PART FIVE                             ..............................        -40        -663     -1,865      -1,931      -1,286      -1,207      -1,162        -924        -772        -698       -1060  ..........      -11,525
 
PART SIX: SAFE, ACCOUNTABLE, FLEXIBLE,
 EFFICIENT TRANSPORTATION EQUITY ACT: A
 LEGACY FOR USERS; TITLE XI--HIGHWAY
 REAUTHORIZATION AND EXCISE TAX
 SIMPLIFICATION (P.L. 109-59, signed into law
 by the President on August 10, 2005):.
I. Trust Fund Reauthorization:
A. Extend Highway Trust Fund and Aquatic       DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Resources Trust Fund Expenditure Authority
 Through September 29, 2009, and Related
 Taxes Through September 30, 2011.
B. No Extension of General Fund Retention of   10/1/05.......................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 4.8 Cents/Gallon of Taxes on Motorboat and
 Small Engine Gasoline (\17\).
II. Excise Tax Reform and Simplification:
A. Highway Excise Taxes......................
1. Modify gas guzzler tax....................  10/1/05.......................  .........          -3         -4          -4          -4          -5          -5          -5          -5          -5          -6  ..........          -46
2. Exclusion for tractors with a gross         sa 9/30/05....................         -1          -2         -2          -3          -3          -3          -3          -3          -3          -3          -3  ..........          -31
 vehicle weight rating of 19,500 pounds or
 less from Federal excise tax on heavy trucks
 and trailers.
3. Excise tax credit and imposition of tax on  suora 9/30/06.................  .........  ..........       -162        -175          46          25          39          42          44          47          49  ..........          -44
 alternative fuels (\18\).
B. Aquatic Excise Taxes......................
1. Eliminate Aquatic Resources Trust Fund and  10/1/05.......................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 transform Sport Fish Restoration Account.
2. Repeal harbor maintenance tax on exports    boaa DOE......................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 (\19\).
3. Cap excise tax on certain fishing           (\21\)........................  .........          -3         -3          -4          -4          -4          -4          -4          -5          -5          -5           -          -41
 equipment (\20\).
C. Aerial Excise Taxes.......................
1. Clarify excise tax exemptions for           fuoata 9/30/05................  .........          -4         -4          -4          -4          -4          -4          -4          -4          -4          -4           -          -40
 agricultural aerial applicators and exempt
 certain fixed-wing aircraft engaged in
 forestry operations.
2. Modify the definition of rural airport....  10/1/05.......................  .........          -3         -3          -4          -4          -4          -4          -4          -4          -5          -5           -          -40
3. Exempt from ticket taxes transportation     ta 9/30/05....................  .........          -1         -1          -1          -1          -1          -1          -1          -1          -1          -1           -          -11
 provided by seaplanes.
4. Exempt certain sightseeing flights from     (\22\)........................  .........          -7         -7          -7          -7          -8          -8          -8          -9          -9          -9           -          -79
 taxes on air transportation.
D. Taxes Relating to Alcohol.................
1. Repeal special occupational taxes on        7/1/08........................  .........  ..........  .........         -50         -59         -59         -59         -59         -59         -59         -59           -         -459
 producers and marketers of alcoholic
 beverages.
2. Provide income tax credit for cost of       tyba 9/30/05..................  .........          -9        -17         -19         -20         -20         -20         -20         -21         -21         -21           -         -188
 carrying tax-paid distilled spirits in
 wholesale inventories and in control State
 bailment warehouses.
 
3. Quarterly filing by small alcohol           qpboaa 1/1/06.................  .........          -5     (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)  ..........           -6
 producers.
E. Sports Excise Taxes--Provide Exemption for  (\21\)........................  .........          -1         -1          -1          -1          -1          -1          -1          -1          -1          -1  ..........           -8
 Certain Custom Gunsmiths (\24\).
III. Miscellaneous Provisions:
A. Establish a Motor Fuel Tax Enforcement      DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Advisory Commission.
B. Establish a National Surface                DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Transportation Infrastructure Financing
 Commission.
C. Tax-Exempt Financing of Highway Projects    bia DOE.......................     (\23\)          -5        -14         -25         -36         -50         -72         -97        -122        -146        -170  ..........         -738
 and Rail-Truck Transfer Facilities.
D. Treasury Study of Highway Fuels Used by     DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Trucks for Non-Transportation Purposes.
E. Diesel Fuel Tax Evasion Report............  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
F. State Acquisition of Real Estate            (\25\)........................     (\23\)      (\23\)     (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)      (\23\)  ..........           -2
 Investment Trust Interests.
G. Limitation on Transfers to the Leaking      DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Underground Storage Tank Trust Fund.
IV. Provisions to Combat Fuel Fraud:
A. Treatment of Kerosene Used in Aviation....  (\26\)........................  .........          48         49          50          50          50          50          50          50          49          49  ..........          495
B. Repeal of Ultimate Vendor Refund Claims     sa 9/30/05....................  .........      (\13\)     (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)  ..........       (\13\)
 With Respect to Farming.
C. Refunds of Excise Taxes on Exempt Sales of  sa 12/31/05...................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Fuel by Credit Card.
D. Reregistration in Event of Change in        aoftaa DOE....................     (\13\)           4          4           4           4           4           4           5           5           5           5  ..........           45
 Ownership.
E. Reconciliation of On-Loaded Cargo to        DOE...........................  .........      (\13\)          4           4           4           4           4           5           5           5           5  ..........           41
 Entered Cargo.
F. Treatment of Deep-Draft Vessels...........  DOE...........................     (\13\)           3          2           2           2           2           3           3           3           3           3  ..........           26
G. Penalty With Respect to Certain             tsohofsoa DOE.................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Adulterated Fuels.
V. Fuels-Related Technical Corrections         (\27\)........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 
TOTAL OF PART SIX............................  ..............................         -1          12       -159        -237         -37         -74         -81        -101        -127        -150        -173  ..........       -1,126
PART SEVEN: THE KATRINA EMERGENCY TAX RELIEF
 ACT OF 2005 (\28\) (P.L. 109-73, signed into
 law by the President on September 23, 2005):
I. Special Rules for Use of Retirement Funds
 for Relief Relating to Hurricane Katrina:
A. Penalty-Free Withdrawals From Retirement    dma 8/24/05 & before..........  .........         -71        -14          13           9          -2          -1          -1          -1          -1          -1  ..........          -71
 Plans for Qualified Hurricane Katrina         1/1/07........................
 Distributions (capped at $100,000 per
 taxpayer); Allow Amount of Distribution to
 be Repaid to an Eligible Retirement Plan
 Within Three Years and to be Included in
 Income Ratably Over Three Years.
B. Recontributions of Withdrawals for Home     dra 2/28/05 & before 8/29/05..  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Purchases Cancelled Due to Hurricane Katrina.
C. Loans from Qualified Plans for Relief       (\29\)........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Relating to Hurricane Katrina.
II. Employment Relief:
A. Work Opportunity Tax Credit for Certain     wpoio/a.......................  .........         -12        -30         -28         -12          -6          -3          -1  ..........  ..........  ..........  ..........          -93
 Individuals Affected by Hurricane Katrina     8/28/05.......................
 (sunset 12/31/05 for employers outside
 disaster areas, and 8/28/07 for employers
 inside disaster areas).
B. Employee Retention Credit for Employers of  wpoia 8/28/05 & before........  .........         -23         -8          -4          -2  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -38
 No More Than 200 Employees Affected by        1/1/06........................
 Hurricane Katrina.
III. Charitable Giving Incentives:
A. Temporary Suspension of Limitations for     (\30\)........................  .........        -819         56          17          -3          -4         -14         -26         -26         -26         -26  ..........         -871
 Qualified Corporate and Individual
 Charitable Contributions (qualified
 corporate contributions must be for relief
 efforts related to Hurricane Katrina.
 
B. Additional $500 Personal Exemption for      tybi 2005 & 2006..............  .........         -96        -32  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -128
 Hurricane Katrina Displaced Individuals
 (staying as houseguests for at least 60
 days) subject to maximum additional
 exemptions of $2,000 (\31\).
C. Increase in Standard Mileage Rate for       cmo/a 8/25/05 & before........  .........         -17        -12  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -29
 Charitable Use of a Vehicle for Providing     1/1/07........................
 Relief Related to Hurricane Katrina.
D. Mileage Reimbursements to Charitable        uopao/a 8/25/05 & before......  .........          -1         -1  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........           -2
 Volunteers Excluded from Gross Income for     1/1/07........................
 Providing Relief Related to Hurricane
 Katrina up to Standard Business Mileage Rate.
E. Extend Enhanced Deduction for               cmo/a 8/28/05 &...............  .........         -20  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -20
 Contributions of Food Inventory to            before 1/1/06.................
 Individuals.
F. Extend Enhanced Deduction for               cmo/a 8/28/05 & before........  .........          -5  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........           -5
 Contributions of Book Inventory to Include    1/1/06........................
 Contributions to Public Schools.
IV. Additional Tax Relief Provisions:
A. Exclusions of Certain Cancellations of      dmo/a 8/25/05 & before........  .........        -190       -103  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -293
 Indebtedness for Certain Taxpayers Affected   1/1/07........................
 by Hurricane Katrina.
B. Suspend the 10% and $100 Thresholds on      lao/a 8/25/05.................  .........      -1,089     -1,259         -73      (\23\)  ..........  ..........  ..........  ..........  ..........  ..........  ..........       -2,420
 Personal Casualty Losses for Losses Which
 Arise in the Hurricane Katrina Disaster Area.
C. Required Exercise of IRS Administrative
 Authority;
1. Required exercise of authority under        DOE...........................  .........         -10  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -10
 section 7508A for tax relief for certain
 taxpayers affected by Hurricane Katrina.
2. Tax relief under section 7508 by reason of  aro/a 8/25/05.................  .........          -2         -2          -2          -2          -2          -2          -2          -2          -2          -2  ..........          -20
 service in a combat zone and under section
 7508A for taxpayers affected by natural
 disasters, terrorist, or military actions.
D. Special Mortgage Financing Rules for        fpb 1/1/08....................  .........          -2         -7         -14         -18         -19         -19         -19         -19         -19         -19  ..........         -154
 Residences Located in Hurricane Katrina
 Disaster Area.
E. Extend Replacement Period for                DOE..........................  .........        -837     -1,151        -102           8          15          25          42          53          56          60  ..........       -1,831
 Nonrecognition of Gain for Property Located
 in Hurricane Katrina Disaster Area.
F. Allow Residents of Hurricane Katrina        tyi 8/25/05...................  .........        -125  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -125
 Disaster Area as of August 25, 2005 Who
 Experienced a Loss of Income Due to
 Hurricane Katrina to Elect to Use Prior
 Year's Income in the Calculation of the
 Earned Income Credit and the Refundable
 Child Tax Credit (\32\).
G. Secretarial Authority to Make Adjustments   tybi 2005 or 2006.............  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Regarding Taxpayer and Dependency Status for
 Taxpayers Affected by Hurricane Katrina.
TOTAL OF PART SEVEN..........................  ..............................  .........      -3,319     -2,563        -193         -20         -18         -14          -7           5           8          12  ..........       -6,110
 
PART EIGHT: THE SPORTFISHING AND RECREATIONAL  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 BOATING SAFETY AMENDMENTS ACT OF 2005 (P.L.
 109-74, signed into law by the President on
 September 29, 2005).
PART NINE: THE GULF OPPORTUNITY ZONE ACT OF
 2005 (P.L. 109-135, Signed into law by the
 President on December 21, 2005):
1. Establishment of the Gulf Opportunity Zone
 (33):
A. Tax Benefits for the Gulf Opportunity
 Zone:
1. Special allocation of private activity      bia DOE & before 1/1/11.......  .........         -15        -51         -94        -137        -181        -210        -217        -217        -217        -217  ..........       -1,556
 bond financing ($2,500 per capita).
2. Advance refundings of certain tax-exempt    ara DOE & before 1/1/11.......  .........         -54       -104        -119        -113        -101         -89         -69         -45         -29         -16  ..........         -741
 bonds ($7,875 billion of bonds) (\34\).
 
3. Low-income housing credit (additional       tyea 8/27/05..................  .........          -6        -29         -71        -123        -149        -149        -149        -149        -149        -149  ..........       -1,123
 credit cap, no carryforward of additional
 credit cap and other modifications) (sunset
 12/31/08).
4. Special allowance for certain property
 acquired on or after 8/28/05: (35)
a. Equipment (sunset 12/31/07)...............  ppisa 8/27/05.................  .........        -785       -696          59         355         267         217         163         111          72          43  ..........         -194
b. Structures (sunset 12/31/07)..............  ppisa 8/27/05.................  .........        -542       -588        -655        -259         -16           9          31          47          58          64  ..........       -1,850
5. Increase expensing under section 179        ppisa 8/27/05.................  .........         -31        -27          -2          17          12           9           7           5           3           2  ..........           -7
 (sunset 12/31/07) (35).
6. Partial expensing for certain demolition    ppisa 8/27/05.................  .........         -84        -39          -5           3           3           3           3           3           3           3  ..........         -105
 and clean-up costs (sunset 12/31/07).
7. Extend and expand to petroleum products     Epoia 8/27/05.................  .........         -26        -44         -15           6           6           7           6           5           4           4  ..........          -48
 expensing for environmental remediation
 costs (sunset 12/31/07).
8. Increase rehabilitation credit (sunset 12/  Epoia 8/27/05.................  .........         -11        -24         -21         -10          -3          -2          -2          -2          -1          -1  ..........          -78
 31/08).
9. Increase reforestation expensing from       potya 10/23/05................  .........          -2         -1        (23)           1           1           1           1           1        (13)        (13)  ..........         (23)
 $10,000 to $20,000 for expenses incurred in
 the GO Zone and the Rita GO Zone (36) and
 Wilma GO Zone (sunset 12/31/07) (37).
10. Treat small timber growers as farmers for  potya 8/27/05 & potya 9/23/05.  .........          -1       (23)        (13)        (13)        (13)        (13)        (13)        (13)        (13)        (13)  ..........         (23)
 purposes of the 5-year NOL carryback in
 section 172(b)(1)(G) for losses incurred in
 the GO Zone and the Rita GO Zone (36) and
 Wilma GO Zone  (37) (sunset 12/31/06).
11. 10-year NOL carryback for certain GO Zone  tyiwelo.......................  .........        -221        -40          39          33          28          24          20          17          15          13  ..........          -71
 related public tuility casualty losses.
12. Treatment of net operating losses          DOE...........................  .........      -1,003       -319          92         166         160         136         115          98          83          71  ..........         -401
 attributable to GO Zone losses (35).
13. Credit to holders of Gulf Tax Credit       bia 12/31/05 & before 1/1/07..  .........          -7        -17         -14          -3          -3          -3          -3          -3          -3          -3  ..........          -57
 Bonds.
14. Application of New Markets Tax Credit to   tyea 8/27/05..................  .........  ..........        -20         -43         -50         -54         -59         -59         -59         -36          -8  ..........         -387
 investments in community development
 entities serving GO Zone.
15. Treatment of representations regarding     DOE...........................  .........  ..........  .........  ..........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ...........
 income eligibility for purposes of qualified
 residential rental project requirements.
16. Treatment of public utility property       DOE...........................  .........        -128        -17          29          23          19          15          12          10           8           6  ..........          -24
 disaster losses.
17. Expansion of Hope Scholarship and          tyba 12/31/04 & before........  .........         -38        -17  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -55
 Lifetime Learning Credits for students in     1/1/07........................
 the GO Zone.
18. Temporary income exclusion of $600         (38)..........................  .........         -99       -146  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -246
 monthly for employer-provided lodging in GO
 Zone; employer credit of 30 percent of
 excluded amount.
19. Extension of special rules for mortgage    fpb 1/1/11....................  .........  ..........  .........          -2          -7         -11         -15         -15         -15         -15         -15  ..........          -96
 revenue bonds in the Katrina disaster area.
20. Special extension of bonus dpreciation     DOE...........................  .........         -58        -18           8           7           6           6           5           5           5           5  ..........          -29
 placed in service date for taxpayers
 affected by Hurricanes Katrina, Rita and
 Wilma.
II. Tax Benefits Related to Hurricanes Rita
 and Wilma (36) (37):
A. Special Rules for Use of Retirement Funds
 for Relief Relating to Hurricanes Rita and
 Wilma:
1. Penalty-free withdrawals from retirement    dma 9/22/05 & dma.............  .........        -173        -41          34          23          -5          -3          -3          -2          -2          -2  ..........         -174
 plans for qualified Hurricane Rita and Wilma  10/22/05 & before.............
 Distributions (capped at $100,000 per         1/1/07........................
 taxpayer); allow amount of distribution to
 be repaid to an eligible retirement plan
 within three years and to be included in
 income ratably over three years.
2. Recontributions of withdrawals for home     dra 2/28/05 & before 9/24/05 &  .........  ..........  .........  ..........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ...........
 purchases cancelled due to Hurricanes Rita     10/24/05.
 and Wilma.
3. Loans from qualified plans to individuals   (39)..........................  .........  ..........  .........  ..........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ...........
 sustaining an economic loss due to Hurricane
 Rita or Wilma.
B. Employee Retention Credit:
1. Removal of employer size limiation for      wpoia 8/28/05 & before........  .........         -56        -18          -9          -4          -2  ..........  ..........  ..........  ..........  ..........  ..........          -90
 Hurricane Katrina employee retention credit.  1/1/06........................
 
2. Employee retention credit for employers of  wpoia 9/23/05 & wpoia.........  .........         -15         -5          -3          -1      (\36\)  ..........  ..........  ..........  ..........  ..........  ..........          -24
 employees affected by Hurricanes Rita and     10/23/05 & before 1/1/06......
 Wilma (no employer size limitation).
C. Temporary Suspension of Limitations on      (\40\)........................  .........         -85          5           1      (\23\)      (\23\)          -1          -3          -3          -3          -3  ..........          -91
 Qualified Charitable Contributions for
 Relief Efforts Related to Hurricanes Rita or
 Wilma.
D. Suspension of the 10% and $100 Thresholds   lao/a 9/23/05 & lao/a.........  .........        -528       -611         -35      (\23\)  ..........  ..........  ..........  ..........  ..........  ..........  ..........       -1,174
 on Personal Casually Losses for Losses Which  10/23/05......................
 Arise in the Hurricanes Rita and Wilma
 Disaster Areas.
E. Required Exercise of IRS Administrative     DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Authority Under Code Section 7508A for Tax
 Relief for Certain Taxpayers Affected by
 Hurricanes Rita, Katrina and Wilma.
F. Special Look-Back Rules for Determining     tyi 9/23/05 & tyi 10/23/05....  .........         -28  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -28
 EIC and Refundable Child Credit--allow
 residents of Rita and Wilma GO Zones (and
 displaced residents of Hurricanes Rita and
 Wilma disaster areas) as of September 23,
 2005 and October 23, 2005 who experienced a
 loss of income due to Hurricanes Rita and
 Wilma to elect to use prior year's income in
 the calculation of the earned income credit
 and the refundable child tax credit.
G. Secretarial Authority to Make Adjustments   tybi 2005 or 2006.............  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Regarding Taxpayer and Dependency Status.
H. Special Rules for Mortgage Revenue Bonds    fpb 1/1/11....................  .........          -1         -3          -4          -5          -7          -7          -7          -7          -7          -7  ..........          -55
 in the GO Zone, Rita GO Zone, and Wilma GO
 Zone.
III. Other Provisions:
A. Designation of Certain Public Debt as Gulf  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Coast Recovery Bonds.
B. Election to Include Combat Pay in Earned    tyba 12/31/05.................  .........  ..........        -14  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -14
 Income for Purposes of the Earned Income
 Credit (sunset 12/31/06).
C. Modifications of Suspension of Interest     (\41\) & dpo/a DOE............  .........          50  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........           50
 and Penalties Where the IRS Fails to Contact
 Taxpayer.
D. Authority for Undercover Operations         DOE...........................  .........      (\13\)  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........       (\13\)
 (sunset 12/31/06).
E. Disclosures of Certain Tax Return
 Information:
1. Disclosure of tax return information to     da 12/31/05...................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 facilitate combined employment tax reporting
 (sunset 12/31/06).
2. Extension of authority to make disclosures  da 12/31/05...................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 regarding terrorist activities (sunset 12/31/
 06).
3. Disclosure of tax return information to     na 12/31/05...................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 carry out administration of income
 contingent repayment of student loans
 (sunset 12/31/06).
IV. Technical Corrections....................  (\42\)........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
TOTAL OF PART NINE...........................  ..............................     -3,947      -2,884       -830         -77         -30        -111        -164        -201        -211        -210  ..........      -8,668
 
PART TEN: ONE-YEAR EXTENSION OF PARITY IN THE  bfsfa.........................  .........          -3        -45         -10  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -58
 APPLICATION OF CERTAIN LIMITS TO MENTAL       12/31/05......................
 HEALTH BENEFITS (\19\) (P.L. 109-151, SIGNED
 INTO LAW BY THE PRESIDENT ON DECEMBER 30,
 2005).
 
PART ELEVEN: THE TAX INCREASE PREVENTION AND
 RECONCILIATION ACT OF 2005 (P.L. 109-222,
 signed into law by the President on May 17,
 2006):
I. Extension and Modification of Certain
 Provisions:
A. Extension of Increased Expensing for Small  tyba 12/31/07.................  .........  ..........  .........      -2,605      -4,459        -209       2,707       1,772       1,222         826         476  ..........         -271
 Business-increase section 179 expensing from
 $25,000 to $100,000 and increase the
 phaseout threshold amount from $200,000 to
 $400,000; include software in section 179
 property; and extend indexing of both the
 deduction limit and the phaseout threshold
 (sunset 12/31/09).
B. Tax Capital Gains and Dividends With a 15%/
 0% Rate Structure:
1. Capital gains (sunset 12/31/10)...........  tyba 12/31/08.................  .........  ..........  .........      -1,549      -8,375       2,672         -54     -12,698      (\23\)      (\23\)  ..........  ..........      -20,004
2. Dividends (sunset 12/31/10)...............  tyba 12/31/08.................  .........  ..........  .........        -860      -4,431      -8,008      -9,368      -6,326      -1,224        -450        -112           -      -30,779
C. Controlled Foreign Corporations:
1. Exception under subpart F for active        (\43\)........................  .........  ..........       -775      -2,339      -1,682  ..........  ..........  ..........  ..........  ..........  ..........  ..........       -4,796
 financing income (sunset 12/31/08).
2. Look-through treatment of payments between  (\44\)........................  .........         -82       -237        -260        -167  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -746
 related CFCs under foreign personal holding
 company income rules (sunset 12/31/08).
II. Other Provisions:
A. Clarification of Taxation of Certain        aafea DOE generally...........  .........          -2         -9         -10         -11         -12         -13         -14         -15         -15         -15  ..........         -116
 Settlement Funds (sunset 12/31/10).
B. Modify Active Business Definition Under     Da DOE........................  .........          -1         -7          -8          -8          -9          -9          -5          -3          -1  ..........  ..........          -51
 Section 355 (sunset 12/31/10).
C. Expand the Qualified Veterans' Mortgage     (\45\)........................  .........      (\23\)     (\23\)          -1          -2          -3          -5          -5          -5          -5          -5  ..........          -32
 Bond Program (sunset 12/31/10).
D. Provide Capital Gains Treatment for         soei tyba DOE.................  .........  ..........         -1          -5          -5          -4          -2          -4  ..........  ..........  ..........  ..........          -20
 Certain Self-Created Musical Works (sunset
 12/31/10).
E. Expand the Eligibility for the Tonnage Tax  tyba 12/31/05.................  .........          -2         -3          -4          -4          -4          -3  ..........  ..........  ..........  ..........  ..........          -20
 Election (minimum of 6,000 deadweight tons)
 (sunset taxable years ending before 1/1/11).
F. Modification of Certain Arbitrage Rule for  bia DOE.......................  .........  ..........  .........          -1          -2          -1      (\23\)      (\23\)  ..........  ..........  ..........  ..........           -5
 Certain Funds (include 20% State limitation)
 (sunset 8/31/09).
G. Amortization of Expenses incurred in        ppisi tyba....................  .........           1          3           2           1          -1          -3          -6          -5          -2          -3  ..........          -13
 Creating or Acquiring Song Rights (sunset 12/ 12/31/05......................
 31/10).
H. Modification to Small Issue Bonds--         bia 12/31/06..................  .........  ..........         -2          -9         -15         -18         -18         -18         -18         -18         -18  ..........         -136
 accelerate effective date for increase in
 capital expenditure limit.
I. Modification of Treatment of Loans to       (\46\)........................  .........      (\23\)         -3          -2          -2          -2          -1  ..........  ..........  ..........  ..........  ..........          -10
 Qualified Continuing Care Facilities (sunset
 12/31/10).
III. Individual AMT Provisions:
A. Extend and Increase Individual AMT          tyba 12/31/05.................  .........     -12,419    -18,628  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........      -31,047
 Exemption Amount for 2006 to $42,500
 ($62,550 Joint) (sunset 12/31/06).
B. Treatment of Nonrefundable Personal         tyba 12/31/05.................  .........        -565     -2,260  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........       -2,825
 Credits Under the Individual Alternative
 Minimum Tax (sunset 12/31/06) [47].
IV. Corporate Estimated Tax Provisions:
A. Modifications to Corporate Estimated Tax
 Payments
1. Increase corporate estimated tax payments   DOE...........................  .........       2,209     -2,209  ..........  ..........  ..........  ..........       3,189      -2,793        -396  ..........  ..........  ...........
 due July through September for corporations
 with assets in excess of $1 billion in
 certain years (increase to 105% in 2006,
 106.25% in 2012, and 100.75% in 2013 of the
 otherwise required amount).
2. Delay due date until October 1 for a        DOE...........................  .........  ..........  .........  ..........  ..........      -5,640      -2,541       8,182  ..........  ..........  ..........  ..........  ...........
 percentage of corporate estimated taxes that
 are otherwise due on September 15 in certain
 years (20.5% in 2010 and 27.5% in 2011).
V. Revenue Offset Provisions:
A. Application of Earnings Stripping Rules to  tybo/a DOE....................  .........           2         23          25          27          29          81          33          35          38          41  ..........          284
 Partners Which are Corporations.
B. Reporting of Interest on Tax-Exempt Bonds.  ipa 12/31/05..................  .........      (\13\)          2           2           2           2           3           3           3           3           3  ..........           24
C. 5-Year Amortization of Geological and       apoia DOE.....................  .........           5         28          49          48          30          10           3           4           6           6  ..........          189
 Geophysical Costs for Major Integrated Oil
 Companies.
D. Treatment of Distributions Attributable to  various.......................  .........           1          3           3           3           3           3           3           3           3           3  ..........           28
 FIRPTA Gains (including application of
 FIRPTA to RICs, and prevention of avoidance
 through wash sales) (\48\).
E. Section 355 Not to Apply to Distributions   Da DOE........................  .........           2          9          11          12          12          12          12          15          15          16  ..........          116
 Involving Disqualified Investment Companies.
F. Loan and Redemption Requirements on Pooled  bia DOE.......................  .........          16         35          39          40          42          44          46          49          52          54  ..........          417
 Financings (30% first-year loan origination
 requirement).
G. Require Partial Payments With Submissions   osoaa 60da DOE................  .........  ..........        160         172         185         199         214         230         247         265         285  ..........        1,955
 of Offers-in-Compromise (permanent 24-month
 rule).
H. Increase in Age of Minor Children Whose     tyba 12/31/05.................  .........          56        145         203         219         153         204         242         260         298         349  ..........        2,128
 Unearned Income is Taxed as if Parent's
 Income.
I. Withholding on Government Payments          pma 12/31/10..................  .........  ..........  .........  ..........  ..........  ..........       6,079         215         220         228         235  ..........        6,977
 (including payments under certificate or
 voucher programs) for property and services.
J. Eliminate the Income Limitations on Roth    tyba 12/31/09.................  .........  ..........  .........  ..........        -154        -293       2,541       4,929       1,756      -1,080      -1,267  ..........        6,432
 IRA Conversations; Taxpayers Can Elect to
 Pay Tax on Amounts Converted in 2010 in
 Equal Installments in 2011 and 2012.
K. Repeal of FSC/ETI Binding Contract Relief.  tyba DOE......................  .........           6        209         144          72          36          18           9           5           2           1  ..........          502
L. Modify Wage Limitation for Section 199 to   tyba DOE......................  .........           1          7           8           9          19          24          26          28          29          31  ..........          181
 Include Only Wages Allocable to Domestic
 Production Gross Receipts and Repeal Special
 Rule Limiting Amount of W-2 Wages Allocated
 by Pass-Thru Entities.
M. Amend Section 911 Housing Exclusion and     tyba 2005.....................  .........          15        261         199         206         222         228         234         239         254         268  ..........        2,126
 Impose a Stacking Rule and Provide
 Regulatory Authority to Allow for Geographic
 Differences.
N. Tax Involvement of Accommodation Parties    (\49\)........................  .........  ..........         18          31          35          40          46          53          62          69          75  ..........          428
 in Tax Shelter Transactions.
TOTAL OF PART ELEVEN.........................  ..............................    -10,757     -23,231     -6,765     -18,458     -10,745         147         105          85         121         423  ..........  ..........      -69,084
 
PART TWELVE: THE HEROES EARNED RETIREMENT      tyba 12/31/03.................  .........          -1         -4          -4          -6          -6          -7          -7          -8          -8          -9          -9          -70
 OPPORTUNITIES ACT--Combat Zone Compensation
 Taken into Account for Purposes of
 Determining Limitation and Deductibility of
 Contributions to Individuals Retirement
 Plans (P.L. 109-227, signed into law by the
 President on May 29, 2006).
 
PART THIRTEEN: THE PENSION PROTECTION OF ACT
 2006 (P.L. 109-280, signed into law by the
 President on August 17, 2006):
I. Reform of Funding Rules for Single-
 Employer Defined Benefit Pension Plans:
A. Funding Rules for Single-Employer Defined   (\51\)........................  .........  ..........      1,519       2,121         910         273         -84        -779      -1,685      -2,126      -1,690        -915       -2,456
 Benefit Pension Plans (\50\).
B. Benefit Limitations Under Single-Employer   generally pyba 12/31/07.......  .........  ..........  .........  ..........  ..........    Estimate Included in Item I.1.    ..........  ..........  ..........  ..........  ...........
 Defined Benefit Pension Plans.
C. Special Rules for Multiple-Employer Plans   DOE...........................  .........  ..........  .........  ..........  ..........    Estimate Included in Item I.1.    ..........  ..........  ..........  ..........  ...........
 of Certain Cooperatives.
D. Temporary Relief for Certain PBGC           DOE...........................  .........  ..........  .........  ..........  ..........    Estimate Included in Item I.1.    ..........  ..........  ..........  ..........  ...........
 Settlement Plans.
E. Special Rules for Plans of Certain          DOE...........................  .........  ..........  .........  ..........  ..........    Estimate Included in Item I.1.    ..........  ..........  ..........  ..........  ...........
 Government Contractors.
F. Modification of Pension Funding             pyba 12/31/05.................  .........  ..........  .........  ..........  ..........    Estimate Included in Item I.1.    ..........  ..........  ..........  ..........  ...........
 Requirement for Plans Subject to Current
 Transition Rule.
 
G. Restrictions on Funding of Nonqualified     tooroaa DOE...................  .........  ..........          7           6           6           6           9           9           8           6           5           3           64
 Deferred Compensation Plans by Employers
 Maintaining Underfunded or Terminated Single-
 Employer Plans.
II. Funding Rules for Multiemployer Defined
 Benefit Plans and Related Provisions:
A. Funding Rules for Multiemployer Plans and   pyba 12/31/07.................  .........  ..........         -1          -6         -14         -22         -28         -34         -41         -47         -53         -59         -306
 Additional Funding Rules for Plans in
 Endangered or Critical Status (\53\).
B. Measures to Forestall Insolvency of         dmi pyba......................  .........  ..........  .........  ..........  ..........    Estimate Included in Item II.1.   ..........  ..........  ..........  ..........  ...........
 Multiemployer Plans.                          12/31/07......................
C. Withdrawal Liability Reforms..............  various.......................  .........  ..........  .........  ..........  ..........    Estimate Included in Item II.1.   ..........  ..........  ..........  ..........  ...........
D. Procedures Applicable to Withdrawal         nowlo/a DOE...................  .........  ..........  .........  ..........  ..........    Estimate Included in Item II.1.   ..........  ..........  ..........  ..........  ...........
 Liability Disputes.
E. Prohibition on Retaliation Against          DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Employers Exercising Their Rights to
 Petition the Federal Government.
F. Special Rule for Certain Benefits Funded    DOE...........................  .........  ..........  .........  ..........  ..........    Estimate Included in Item II.1.   ..........  ..........  ..........  ..........  ...........
 Under an Agreement Approved by the PBGC.
G. Exemption From Excise Tax for Certain       DOE...........................  .........  ..........      (\9\)       (\9\)       (\9\)  ..........  ..........  ..........  ..........  ..........  ..........  ..........        (\9\)
 Plans.
III. Interest Rate Assumptions:                ..............................  .........  ..........  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ...........
A. Interest Rate Assumption for Lump-Sum       pyba 12/31/07.................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Distributions.
B. Interest Rate Assumption for Applying       yba 12/31/05..................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Benefit Limitations to Lump-Sum
 Distributions.
IV. PBGC Guarantee and Related Provisions:
A. PBGC Premiums.............................  generally pyba 12/31/07 &       .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
                                                (\54\).
B. Special Funding Rules for Plans Maintained  generally pye DOE.............  .........  ..........         55          11          -5          -7          -7          -7          -7          -7         -51         -81         -104
 by Commercial Airlines (\50\) (\55\).
C. Limitation on PBGC Guarantee of Shutdown    (\56\)........................  .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
 and Other Benefits.
D. Rules Relating to Bankruptcy of Employer..  (\57\)........................  .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
E. PBGC Variable Rate Premiums for Small       pyba 12/31/06.................  .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
 Plans.
F. Authorization for PBGC to Pay Interest on   iafpbnet DOE..................  .........  ..........         -3          -3          -3          -3          -3          -3          -3          -3          -3          -4          -31
 Premium Overpayment Refunds (\58\).
G. Rules for Substantial Owner Benefits in     (\59\)........................  .........  ..........  .........                               Negligible Outlay Effect                               ..........  ..........  ...........
 Terminated Plans (\58\).
H. Acceleration of PBGC Computation of         noitto/a 30da DOE.............  .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
 Benefits Attributable to Recoveries From
 Employers.
I. Treatment of Certain Plans Where Cessation  atosotoo/a DOE................  .........  ..........  .........              Estimate to be Provided by the Congressional Budget Office              ..........  ..........  ...........
 or Change in Membership of Controlled Group.
J. Missing Participants (\58\)...............  dma fripp.....................  .........  ..........  .........  ..........  ..........       Negligible Outlay Effect       ..........  ..........  ..........  ..........  ...........
K. Director of the PBGC......................  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
L. Inclusion of Information in the PBGC        DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Annual Report.
V. Disclosure:
A. Defined Benefit Plan Funding Notice.......  pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
B. Access to Multiemployer Pension Plan        pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Information.
C. Additional Annual Reporting Requirements..  pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
D. Electronic Display of Annual Report         pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Information.
E. Section 4010 Filings With the PBGC........  yba 12/31/07..................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
F. Disclosure of Termination Information to    noitta DOE....................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Plan Participants.
G. Notice of Freedom to Divest Employer        generally pyba 12/31/06.......  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Securities.
H. Periodic Pension Benefit Statements.......  generally pyba 12/31/06.......  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
I. Notice to Participants or Beneficiaries of  (\60\)........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Blackout Periods.
VI. Investment Advice, Prohibited              ..............................  .........  ..........  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ...........
 Transaction, and Fiduciary Rules:
A. Prohibited Transaction Exemption for        (\61\)........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Provision of Investment Advice.
B. Prohibited Transaction Rules Relating to    generally Ta DOE..............  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Financial Investments.
C. Correction Period for Certain Transactions  (\62\)........................  .........  ..........  .........                               Negligible Revenue Effect                              ..........  ..........  ...........
 Involving Securities and Commodities.
 
D. Inapplicability of Relief From Fiduciary    pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Liability During Suspension of Ability of
 Participants or Beneficiary to Direct
 Investments.
E. Increase in Maximum Bond Amount...........  pyba 12/31/07.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
F. Increase in Penalties for Coercive          voo/a DOE.....................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Interference With Exercise of ERISA Rights.
G. Treatment of Investment of Assets by Plan   pyba 12/31/06.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Where Participant Fails to Exercise
 Investment Election.
H. Clarification of Fiduciary Rules..........  DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
VII. Benefit Accrual Standards...............  generally.....................  .........  ..........        -10         -17         -23         -31         -40         -29           7          47          80          94           79
                                               pbo/a 6/29/05.................
VIII. Pension Related Revenue Provisions:
A. Deduction Limitations.....................  (\63\)........................  .........  ..........  .........  ..........                   Estimate Included in Items I. and II.                  ..........  ..........  ...........
B. Certain Pension Provisions Made Permanent:
1. Permanency of EGTRRA pension and IRA
 provisions:
a. EGTRRA pension provisions.................  generally yba 12/31/10........  .........  ..........  .........  ..........  ..........  ..........      -1,856      -3,038      -3,321      -3,675      -4,097      -4,471      -20,460
b. EGTRRA IRA provisions.....................  generally yba 12/31/10........  .........  ..........  .........  ..........  ..........  ..........        -786      -1,819      -2,384      -3,002      -3,589      -4,157      -15,737
2. Permanent extension of the Saver's credit,  tyba 12/31/06.................  .........  ..........       -245        -989      -1,010      -1,014      -1,071      -1,142      -1,147      -1,163      -1,153      -1,142      -10,076
 with indexing of income threshold beginning
 in 2007.
C. Improvements in Portability, Distribution,
 and Contribution Rules:
1. Clarifications regarding purchase of        (\64\)........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 permissive service credit.
2. Rollover of after-tax amounts in annuity    tyba 12/31/06.................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 contracts.
3. Clarification of minimum distribution       DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 rules to governmental plans.
4. Allow direct rollovers from retirement      dma 12/31/07..................  .........  ..........  .........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ..........  ...........
 plans to Roth IRAs.
5. Eligibility for participation in eligible   DOE...........................  .........  ..........         -1          -1          -1          -1          -1          -1          -2          -2          -2          -2          -14
 deferred compensation plans.
6. Modifications of rules governing hardships  DOE...........................  .........  ..........     (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)       (\13\)
 and unforeseen financial emergencies.
7. Treatment of distributions to reservists    dma 9/11/01...................  .........  ..........         -1          -1          -1       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)           -5
 called to active duty.
8. Inapplicability of 10-percent early         dma DOE.......................  .........  ..........         -2          -5          -5          -5          -6          -6          -7          -7          -7          -8          -58
 withdrawal tax on certain distributions of
 public safety employees.
9. Rollovers by nonspouse beneficiaries of     dma 12/31/06..................  .........  ..........        -20         -31         -37         -35         -33         -31         -29         -27         -24         -22         -291
 certain retirement plan distributions.
10. Direct deposit of tax refunds in an IRA..  tyba 12/31/06.................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
11. Allowance of additional IRA payments for   tyba 12/31/06.................  .........  ..........         -5          -8          -6          -4          -2          -2          -2          -2          -2          -2          -36
 certain individuals (sunset taxable years
 beginning after 12/31/09).
12. Determination of average compensation for  yba 12/31/05..................  .........  ..........      (\9\)          -3          -5          -6          -5          -5          -4          -4          -4          -4          -40
 section 415 limits.
13. Inflation indexing of certain income       tyba 12/31/06.................                    -22        -68        -106        -136        -172        -212        -264        -340        -415        -476      -2,212
 limits for IRA contributions.
D. Health and Medical Benefits:
1. Use of excess pension assets for future     TA DOE........................                    -23        -31         -22         -15          -5          10          13          16          10  ..........         -47
 retiree health benefits and collectively
 bargained retiree health benefits (with 120%
 threshold).
2. Transfer of excess pension assets to        tmi tyba......................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 multiemployer health plans.                   12/31/06......................
3. Allowance of reserve for medical benefits   tyba 12/31/06.................  .........  ..........        -16         -27         -31         -35         -40         -45         -50         -56         -62         -69         -430
 of plans sponsored by bona fide associations.
4. Treatment of annuity and life insurance     (\65\)........................  .........  ..........  .........  ..........  ..........         -49        -239        -540        -873      -1,214      -1,551      -1,882       -6,348
 contracts with a long-term care insurance
 feature.
5. Permit tax-free distributions of up to      Dmi tyba......................  .........  ..........       -253        -245        -278        -313        -340        -384        -391        -398        -405        -412       -3,419
 $3,000 from governmental retirement plans     12/31/06......................
 for premiums for health and long-term care
 insurance for public safety officers.
E. United States Tax Court Modernization       generally DOE.................  .........  ..........      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)           -1
 (\66\).
 
F. Other Provisions:
1. Extension to all governmental plans of      ybbo/a DOE....................  .........  ..........      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)           -1
 current moratorium on application of certain
 nondiscrimination rules applicable to State
 and local plans.
2. Eliminate aggregate limit for usage of      tyba 12/31/06.................  .........  ..........          9          16          18          10           2           1           1           1           1           1           59
 excess funds from black lung disability
 trusts to pay for retiree health.
3. Treatment of death benefits from corporate- generally cia DOE.............  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 owned life insurance.
4. Treatment of test room supervisors and      rfspa 12/31/06................  .........  ..........         -6          -4          -4          -4          -4          -4          -4          -4          -5          -5          -45
 proctors who assist in the administration of
 college entrance and placement exams.
5. Grandfather rule for church plans which     DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 self-annuitize.
6. Exemption for income from leveraged real    tybo/a DOE....................  .........  ..........      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)          -1          -1          -1          -1           -5
 estate held by church plans.
7. Church plan rule for benefit limitations..  yba 12/31/06..................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
8. Gratuitous transfers for the benefit of     DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 employees.
IX. Increase in Pension Plan Diversification
 and Participation and Other Pension
 Provisions:
A. Defined Contribution Plans Required to      generally pyba 12/31/06.......  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Provide Employees With Freedom to Invest
 Their Plan Assets.
B. Increase Participation Through Automatic    generally pyba 12/31/07 &       .........  ..........  .........        -139        -333        -491        -615        -698        -750        -800        -845        -915       -5,586
 Enrollment Arrangements (\67\).                (\68\).
C. Treatment of Eligible Combined Defined      pyba 12/31/09.................  .........  ..........  .........  ..........  ..........         -31         -78        -129        -172        -216        -259        -304       -1,189
 Benefit Plans and Qualified Cash or Deferred
 Arrangements.
D. Faster Vesting of Employer Nonelective      generally cf pyba 12/31/06....  .........  ..........         -3          -7          -7          -7          -7          -8          -8          -8          -8          -9          -71
 Contributions.
E. Distributions During Working Retirement...  Dmi pyba......................  .........  ..........          3           9          19          28          32          33          33          32          32          32          255
                                               12/31/06......................
F. Treatment of Certain Pension Plans of       ybo/a DOE.....................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Indian Tribal Governments.
X. Provisions Relating to Spousal Pension
 Protection:
A. Regulations on Time and Order of Issuance   DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 of Domestic Relations Orders.
B. Entitlement of Divorced Spouses to          1ya DOE.......................  .........  ..........  .........  ..........  ..........       Negligible Outlay Effect       ..........  ..........  ..........  ..........  ...........
 Railroad Retirement Annuities Independent of
 Actual Entitlement of Employee (\58\).
C. Extension of Tier II Railroad Retirement    1ya DOE.......................  .........  ..........      (\9\)       (\9\)          -1          -1          -1          -1          -2          -2          -2          -3          -12
 Benefits to Surviving Former Spouses
 Pursuant to Divorce Agreements (\58\).
D. Requirement for Additional Survivor         generally pyba 12/31/07.......  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Annuity Option.
XI. Administrative Provisions:
A. Updating of Employee Plan Compliance        DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Resolution System.
B. Notice and Consent Period Regarding         yba 12/31/06..................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Distributions.
C. Pension Plan Reporting Simplification.....  pybo/a 1/1/07 & DOE...........  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
D. Voluntary Early Retirement Incentive and    generally DOE.................  .........  ..........         -1          -1          -4         -10         -14         -16         -14         -12          -9          -7          -87
 Employment Retention Plans Maintained by
 Local Educational Agencies and Other
 Entities.
E. No Reduction in Unemployment Compensation   wbo/a DOE.....................  .........  ..........        -15         -24         -29         -20         -12          -6          -2       (\9\)           1      (\13\)         -107
 as a Result of Pension Rollovers (\70\).
F. Revocation of Election to be Treated as     DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Multiemployer Plan.
G. Provisions Relating to Plan Amendments....  DOE...........................  .........  ..........  .........            Estimate Included in the Provisions to Which the Change Relates           ..........  ..........  ...........
XII. Provisions Relating to Exempt
 Organizations:
A. Charitable Giving Incentives:
1. Tax-free distributions from IRAs to         tyba..........................  .........  ..........       -238         -93         -36         -44         -60         -73         -74         -78         -79         -81         -856
 certain public charities from age 70\1/2\ or  12/31/05 & tybb 1/1/08; rf
 older, not to exceed $100,000 per taxpayer     tyba 12/31/06.
 per year; modify return requirements of
 split-interest trusts.
 
2. Extend and modify present-law special rule  cma 12/31/05 & before.........  .........  ..........        -68        -100         -83  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -251
 for enhanced deduction for food inventory.    1/1/08........................
3. Adjustment to basis of S corporation stock  cmi tyba......................  .........  ..........        -49         -20          -5          -5          -5          -5          -5          -5          -5          -5         -109
 for certain charitable contributions.         12/31/05 & tybb 1/1/08........
4. Extend and modify present-law special rule  cma 12/31/05 & before.........  .........  ..........        -27         -10  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -37
 for enhanced deduction for book inventory to  1/1/08........................
 public schools.
5. Modify tax treatment of certain payments    (\71\)........................  .........  ..........        -32          -6  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -38
 under existing arrangements to controlling
 exempt organizations; require reporting
 regard controlled organizations and a
 Treasury study.
6. Encourage contributions of property         cmi tyba......................  .........  ..........        -33         -18          -5  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -56
 interests made for conservation purposes.     12/31/05 & tybb 1/1/08........
7. Federal excise tax exemptions for blood     (\72\)........................  .........  ..........         -1          -1          -1          -1          -1          -1          -1          -1          -1          -1          -12
 collector organizations.
B. Reforming Exempt organizations:
1. Temporarily require reporting of certain    generally DOE & (\73\)........  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 acquisitions of interests in insurance
 contracts in which certain exempt
 organizations hold an interest; require
 Treasury study.
2. Increase penalty excise taxes relating to   tyba DOE......................  .........  ..........          6           7           7           6           6           7           7           7           8           8           69
 public charities, social welfare
 organizations, and private foundations.
3. Limitations of charitable donations of      generally cma 7/25/06.........  .........  ..........          3           5           7           8           8           8           8           9           9           9           72
 easements in registered historic districts
 and reduction of deduction to take account
 of any rehabilitation credit.
4. Modification of rules regarding donation    (\74\)........................  .........  ..........          2           5           5           5           5           5           5           5           6           6           49
 of self-created taxidermy, and exempt use
 property.
5. Allow deduction for charitable              cma DOE & Cmi tyba DOE........  .........  ..........         12          49          50          51          52          52          52          53          54          55          480
 contributions of clothing and household
 items only if in good used condition or
 better, and increased substantiation
 required for charitable contributions
 (receipts for all cash gifts).
6. Modification of rules regarding donations   cbagma DOE....................  .........  ..........          4           6           6           6           6           7           7           7           7           7           63
 of fractional interests in tangible personal
 property.
7. Provisions relating to appraisers and
 substantial:
a. Substantial and gross overstatements of     rfa DOE & (\75\)..............  .........  ..........          2           2           2           2           2           2           3           4           4           5           28
 valuations of property.
b. Penalty on appraisers whose appraisals      rfa DOE & (\75\)..............  .........  ..........     (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)            3
 result in substantial or gross valuation
 misstatements.
8. Establish additional exemption standards    generally tyba DOE............  .........  ..........          1           2           3           4           5           6           7           8           9          10           54
 for credit counseling organizations.
9. Expand the base of the tax on private       tyba DOE......................  .........  ..........         19          19          20          20          21          22          23          24          25          25          218
 foundation net investment income.
10. Definition of convention or association    DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 of churches.
11. Notification requirement for exempt        fapba.........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 entities not currently required to file an    12/31/06......................
 annual information return.
12. Disclosure to State officials of tax       DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 information related to section 501(c)
 organizations.
13. Require that Form 990-T of section         tyba DOE......................  .........  ..........     (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)      (\13\)            9
 501(c)(3) organizations be made publicly
 available.
14. Treasury study of donor advised funds and  DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 supporting organizations.
15. Define donor advised fund and, in          generally tyba DOE............  .........  ..........          1           1           2           2           2           2           2           2           2           2           17
 general, provide rules relating to excess
 business holdings and certain prohibited
 transactions (\76\).
16. Provide for prohibited transactions and    generally tyba DOE............  .........  ..........          4           4           5           5           5           6           6           6           7           7           56
 additional reporting by all supporting
 organizations, limit business holdings, and
 improve accountability of Type III
 supporting organizations (\77\).
 
XII. Other Provisions:
A. Exception From Local Furnishing             DOE...........................  .........  ..........      (\9\)          -1          -2          -2          -2          -2          -2          -2          -2          -2          -18
 Requirements for Certain Bonds Issued Before
 5/31/06.
B. Permanently Extend the Enhanced Education   DOE...........................  .........  ..........  .........  ..........  ..........  ..........        -273        -583        -660        -748        -847        -959       -4,071
 Savings Provisions Under Section 529, With
 Regulatory Authority to Prevent Abuses.
 
TOTAL OF PART THIRTEEN.......................  ..............................  .........  ..........        572         404        -997      -1,866      -5,635      -9,433     -11,723     -13,723     -14,911     -15,734      -73,047
PART FOURTEEN: TAX RELIEF AND HEALTH CARE ACT
 OF 2006 (P.L. 109-432, signed into law by
 the President on December 20, 2006):
Division A:
I. Extension and Modification of Certain
 Provisions:
A. Deduction for Qualified Tuition and         tyba 12/31/05.................  .........      -1,621     -1,671  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........      -3,292       -3,292
 Related Expenses (sunset 12/31/07).
B. Extend and Modify the New Markets Tax       DOE...........................  .........  ..........       -106        -168        -170        -192        -205        -202        -202         -77  ..........        -637       -1,322
 Credit (sunset 12/31/08).
C. Deduction of State and Local General Sales  tyba 12/31/05.................  .........      -2,985     -2,145        -401  ..........  ..........  ..........  ..........  ..........  ..........  ..........      -5,531       -5,531
 Taxes (sunset 12/31/07).
D. Extend and Modify the Research Credit       apoia 12/31/05 &..............  .........      -7,520     -4,168      -2,204      -1,583        -858        -188  ..........  ..........  ..........  ..........     -16,333      -16,522
 (sunset 12/31/07) (\83\).                     tyea 12/31/06.................
E. Extend Current Work Opportunity Tax Credit  wpoifibwa.....................  .........        -392       -317        -155         -73         -42         -19          -4         [9]  ..........  ..........        -979       -1,002
 and Welfare-to-Work Tax Credit for 2006; and  12/31/05......................
 Combine the Two Credits and Modify the Food-
 Stamp Recipient and Ex-Felon Categories for
 2007 (sunset 12/31/07).
F. Extend Election to Include Combat Pay in    tyba 12/31/06.................  .........  ..........        -12  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -12          -12
 Earned Income for Purposes of the Earned
 Income Credit (sunset 12/31/07).
G. Extend and Modify Qualified Zone Academy    oia 12/31/05 & (\84\).........  .........          -7        -17         -30         -38         -40         -40         -40         -40         -40         -40        -132         -330
 Bonds (arbitrage restrictions and spending
 requirements) (sunset 12/31/07).
H. Above-the-Line Deduction of up to $250 for  epoii tyba....................  .........        -226       -153  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........        -379         -379
 Teacher Classroom Expenses (sunset 12/31/07). 12/31/05......................
I. Extend and Expand to Petroleum Products     Epoia.........................  .........        -557       -123          44          52          53          47          42          36          30          27        -531         -349
 the Expensing of ``Brownfields''              12/31/05......................
 Environmental Remedation Costs (sunset 12/31/
 07).
J. Tax Incentives for Investment in the        tyba 12/31/05.................  .........         -96        -24          -5          -9         -16         -48         -70         -46         -41         -36        -150         -392
 District of Columbia (sunset 12/31/07).
K. Indian Employment Tax Credit (sunset 12/31/ tyba 12/31/05.................  .........         -67        -38         -10          -1  ..........  ..........  ..........  ..........  ..........  ..........        -117         -117
 07).
L. Accelerated Depreciation for Business       ppisa.........................  .........        -465       -301         -65          76         152         169         117          46          -3         -13        -602         -288
 Property on Indian Reservations (sunset 12/   12/31/05......................
 31/07).
M. 15-Year Straight-Line Cost Recovery for     ppisa.........................  .........        -394       -536        -600        -588        -560        -527        -524        -529        -514        -453      -2,678       -5,225
 Qualified Leasehold Improvements and          12/31/05......................
 Qualified Restaurant Property (sunset 12/31/
 07).
N. Increase in Limit on Cover Over of Rum      abiUSa........................  .........        -165        -19  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........        -184         -184
 Excise Tax Revenues (from $10.50 to $13.25    12/31/05......................
 per proof gallon) to Puerto Rico and the
 Virgin Islands (sunset 12/31/07) (\85\).
O. Parity in the Application of Certain        DOE...........................  .........          -5        -25          -5  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -35          -35
 Limits to Mental Health Benefits (sunset 12/
 31/07) (\86\).
P. Charitable Contributions of Scientific and
 Computer Property:
1. Expand charitable contribution allowed for  tyba 12/31/05.................  .........         -33        -20          -5          -1          -1          -1          -1          -1          -1          -1         -60          -65
 scientific property used for research and
 for computer technology and equipment to
 include property assembled by the taxpayer
 (\87\).
 
2. Extend enhanced deduction for qualified     cmd tyba......................  .........        -136        -68         -11  ..........  ..........  ..........  ..........  ..........  ..........  ..........        -215         -215
 computer contributions (sunset for taxable    12/31/05......................
 years beginning after 12/31/07).
Q. Availability of Medical Savings Accounts    DOE...........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 (sunset 12/31/07).
R. Suspension of 100 Percent-of-Net-Income     tyba 12/31/05.................  .........        -146        -30  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........        -176         -176
 Limitation on Percentage Depletion for Oil
 and Natural Gas from Marginal Properties
 (sunset 12/31/07).
S. Economic Development Credit for American    tyba 12/31/05.................  .........         -17         -8  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -25          -25
 Samoa (sunset taxable years beginning after
 12/31/07).
T. Extend Placed-in-Service Date Requirement   (\88\)........................  .........  ..........        -28        -194        -238         -80           5          13          17          19          20        -539         -465
 to 12/31/10 for Nonresidential Real and
 Residential Rental Property That Qualifies
 for GO Zone Bonus Depreciation for Counties
 or Parishes in Which Greater Than 60 Percent
 of the Housing Units were Damaged by
 Hurricanes in 2005, Limited to Progress
 Expenditures Made Prior to 1/1/10; Include
 Certain Other Bonus Depreciation Property
 Placed in Service in Qualified GO Zone
 Extension Property.
U. Authority for Undercover Operations         DOE...........................  .........      (\13\)  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........      (\13\)       (\13\)
 (sunset 12/31/07).
V. Disclosures of Certain Tax Return
 Information:
1. Extend disclosure of tax return             da 12/31/06...................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 information to facilitate combined
 employment tax reporting (sunset 12/31/07).
2. Extend authority to make disclosures        da 12/31/06...................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 regarding terrorist activities (sunset 12/31/
 07).
3. Extend disclosure of tax return             rma 12/31/06..................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 information to carry out administration of
 income contingent repayment of student loans
 (sunset 12/31/07) (\86\).
II. Energy Tax Provisions:
A. Credit for Electricity Produced From        fpisa 12/31/07................  .........  ..........        -95        -263        -345        -365        -373        -367        -358        -361        -363      -1,069       -2,893
 Certain Renewable Resources--Extend Placed-
 in-Service Date for Tax Credit for
 Electricity Produced at Wind, Closed-Loop
 Biomass, Open-Loop Biomass, Geothermal
 Energy, Small Irrigation Power, Landfill
 Gas, Trash Combustion, or Qualified
 Hydropower Facilities (sunset 12/31/08).
B. Clean Renewable Energy Bonds ($400 million  bia 12/31/06..................  .........  ..........         -7         -18         -24         -24         -23         -22         -20         -19         -17         -73         -174
 additional issuance authority through 12/31/
 08).
C. Modification of Advanced Coal Credit With   casa 10/2/06..................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Respect to Subbituminous Coal.
D. Allowance of Deduction for Certain Energy   ppisa.........................  .........  ..........       -117         -61           4           4           3           3           2           2           2        -171         -159
 Efficient Commercial Building Property        12/31/07......................
 (sunset 12/31/08).
E. Credit for Construction of New Energy       hpa 12/31/07..................  .........  ..........        -20         -15          -5          -5          -4          -4          -3          -1  ..........         -45          -56
 Efficient Homes (sunset 12/31/08).
F. 30% Credit for Residential Purchases/       ppisa.........................  .........  ..........         -7         -29  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -37          -37
 Installations of Solar (electric and hot      12/31/07......................
 water) and Fuel Cells (sunset 12/31/08).
G. Energy Credit Provisions:
1. Business solar investment tax credit        (\89\)........................  .........  ..........        -38         -13          -6          -6          -3      (\13\)      (\13\)      (\13\)           1         -64          -65
 (generally sunset 12/31/08).
2. Credit for business installation of         (\90\)........................  .........  ..........  .........  ..........               Estimate Contained in Item Above               ..........  ..........  ..........  ...........
 qualified fuel cells and stationary
 microturbine power plants (sunset 12/31/08).
H. Special Rule for Qualified Methanol or      10/1/07.......................  .........  ..........      (\9\)       (\9\)  ..........  ..........  ..........  ..........  ..........  ..........  ..........       (\9\)        (\9\)
 Ethanol Fuel Produced from Coal (sunset 12/
 31/08).
I. Special Depreciation Allowance for          (\91\)........................  .........  ..........         -1          -5          -5          -7         -12  ..........           8           6           5         -17           -9
 Cellulosic Biomass Ethanol Plant Property
 (sunset 12/31/12).
J. Expenditures Permitted from the Leaking     DOE...........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Underground Storage Tank Trust Fund (\92\).
 
K. Section 45K as Applied to Coke: Repeal      (\93\)........................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Phaseout of the Coke Credit and Clarify That
 Petroleum Coke Does Not Qualify for the
 Credit.
III. Health Savings Accounts Provisions:
A. Allow a One-Time Rollover of HRA and        do/a DOE......................  .........          -2         -4          -4          -4          -5          -2  ..........  ..........  ..........  ..........         -19          -21
 Health FSA Funds into an HSA (Sunset for
 taxable years beginning after 12/31/11)
 (\94\).
B. Disregard Grace Period Health FSA Coverage  (\95\)........................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 for Purposes of Eligibility for Deductible
 HSA Contributions if FSA has Zero Balance at
 End of Prior Plan Year or Remaining Balance
 from Prior Plan Year is Transferred to an
 HSA.
C. Repeal the Limitation on HSA Contributions  tyba 12/31/06.................  .........         -10        -17         -27         -30         -38         -50         -66        -115        -170        -190        -121         -712
 That Corresponds to the Annual Deductible
 Under the High-Deductible Insurance Policy
 (\96\).
D. Compute Cost-of-Living Adjustments for HSA  afya 2007.....................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Provisions Earlier in the Calendar Year
 (March in lieu of August).
E. Allow Full Deductible Contribution for      tyba 12/31/06.................  .........         -11        -29         -33         -36         -37         -37         -35         -33         -28         -22        -147         -302
 Months Preceding Month That Taxpayer is in
 High Deductible Plan.
F. Modify Comparability Rules so That          tyba 12/31/06.................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Employers May Make Larger Contributions to
 HSAs of Non-Highly Compensated Employees
 Than to HSAs of Highly Compensated Employees.
H. Allow a One-Time Rollover of IRA Funds to   tyba 12/31/06.................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 an HSA (\97\).
IV. Other Tax Provisions:
A. Expand Section 199 Manufacturing Deduction  tyba 2005.....................  .........        -107        -55  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........        -162         -162
 to Puerto Rico (sunset after two taxable
 years).
B. Refundable Long-Term Individual AMT         tyba DOE & cyba DOE...........  .........        -417       -519        -373        -245        -134         -30         274         455         464         474      -1,688          -51
 Credits (phased out using PEP phase out)
 (sunset 12/31/12); Stock Option Reporting
 (\98\).
C. Partial Expensing for Advanced Mine Safety  cpoia DOE.....................  .........         -14        -18           1           8           6           5           4           4           2           1         -17           -1
 Equipment (sunset for property placed in
 service after 12/31/08).
D. Mine Rescue Team Training Credit (sunset    tyba 12/31/05.................  .........          -1         -1          -1          -1          -1          -1          -1          -1          -1          -1          -4           -9
 12/31/08).
E. Whistleblower Reforms (above-the-line       ipo/a DOE.....................  .........           2          3           7          11          15          20          25          30          33          36          38          182
 deduction for costs) (\99\).
F. Frivolous Tax Submissions.................  (\100\).......................  .........           3          3           3           3           3           3           3           3           3           3          15           30
G. Addition of Certain Vaccines to the List
 of Taxable Vaccines:
1. Permanently add the meningococcal vaccine   1ma DOE.......................  .........           1    (\102\)     (\102\)     (\102\)     (\102\)     (\102\)          -1          -1          -1          -1          -1           -5
 to the list of taxable vaccines (\101\).
2. Permanently add the vaccine against human   1ma DOE.......................  .........           2          2           2           1           1           1           1           1           1           1           8           12
 papillomavirus (``HPV'') to list of taxable
 vaccines (\101\).
H. Clarification of Taxation of Certain        (\103\).......................  .........  ..........  .........  ..........  ..........          -2          -5          -8          -9         -10         -11          -2          -45
 Settlement Funds Made Permanent.
I. Modification of Active Business Definition  (\103\).......................  .........  ..........  .........  ..........  ..........          -2          -7         -11         -15         -17         -19          -2          -71
 Under Section 355 Made Permanent.
J. Revision of the Qualified Veterans'         (\103\).......................  .........  ..........  .........  ..........  ..........       (\9\)          -1          -2          -4          -5          -6       (\9\)          -19
 Mortgage Bond Program Made Permanent.
K. Capital Gains Treatment for Certain Self-   (\103\).......................  .........  ..........  .........  ..........       (\9\)          -2          -2          -6          -6          -6          -7          -3          -29
 Created Musical Works Made Permanent.
L. Reduction in Minimum Vessel Tonnage Limit   (\103\).......................  .........  ..........  .........  ..........  ..........          -3         -15         -18         -21         -24         -27          -3         -108
 to 6,000 Deadweight Tons Made Permanent.
M. Modification of Special Arbitrage Rules     (\103\).......................  .........  ..........  .........       (\9\)          -1          -2          -2          -3          -3          -4          -5          -3          -20
 for Certain Funds (20% State limitation)
 Made Permanent.
N. Great Lakes Domestic Shipping to not        tyba DOE......................  .........          -2         -4          -4          -5          -5          -6          -6          -6          -7          -7         -20          -52
 Disqualify Vessel From Tonnage Tax.
O. Expand the Qualified Mortgage Bond Program  bia DOE & before 1/1/08.......  .........         -16        -30         -37         -37         -37         -37         -37         -37         -37         -37        -156         -339
 (waive first-time homebuyer requirement for
 veterans; restrict to one exemption per
 person).
 
P. Exclusion of Gain From Sale of a Principal  soea DOE......................  .........       (\9\)      (\9\)       (\9\)       (\9\)       (\9\)  ..........  ..........  ..........  ..........  ..........          -1           -1
 Residence by Certain Employees of the
 Intelligence Community (sunset 12/31/10).
Q. Nonrecognition of Capital Gains for         sa DOE........................  .........       (\9\)      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)          -1           -3
 Federal Judges Who Sell Property to Avoid
 Conflicts of Interest.
R. Establish Deduction for Private Mortgage    apoaa 12/31/06................  .........         -14        -77  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -91          -91
 Insurance (sunset 12/31/07).
S. Modification of Refunds for Kerosene Used   (\104\).......................  .........       (\9\)      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)        (\9\)
 in Aviation.
T. Regional Income Tax Agencies Treated as     Dma 12/31/06..................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 States for Purposes of Confidentiality and
 Disclosure Requirements.
U. Limit the Use of Names on Certain Wines     wiobiUSo/a DOE................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Sold in the United States.
V. Treat Reimbursed Amounts as Eligible for    tyba..........................  .........         -22        -27       (\9\)  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -49          -49
 Railroad Track Maintenance Credit.            12/31/04 & before 1/1/08......
W. Modify Excise Tax on Unrelated Business     tyba 12/31/06.................  .........  ..........         -3          -6          -7          -7          -7          -8          -8          -8          -8         -23          -62
 Taxable Income of Charitable Remainder
 Trusts.
X. Make Permanent Special Rule Regarding       (\103\).......................  .........  ..........  .........  ..........  ..........          -1          -2          -2          -2          -3          -3          -1          -14
 Treatment of Loans to Qualified Continuing
 Care Facilities made Permanent.
Y. Tax Technical Corrections:
1. Technical correction relating to TIPRA CFC  (\105\).......................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 look-through.
2. Modification of exception from interest     (\106\).......................  .........  ..........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 suspension rules for certain listed and
 reportable transactions.
Division C:
V. Miscellaneous Provisions:
A. Surface Mining Control and Reclamation Act  generally DOE.................  .........         -10       -290        -330        -450        -490        -530        -570        -540        -330        -340      -1,570       -3,880
 Amendments of 2006 (\86\) (\107\).
B. Clarify That the Personal Use Exemption     15da DOE......................  .........           1          1           1           1           1           1           1           1           1           1           4            9
 for Tobacco Products Does Not Apply to
 Delivery Sales (\108\).
C. Provide a 25% Exclusion From Income for     soo/a DOE.....................  .........       (\9\)      (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)       (\9\)          -1           -1
 Certain Conservation Sales of Mineral or
 Geothermal Interests on Eligible Federal
 Land.
D. Tax Court Review of Requests for Equitable  taoruo/a DOE..................  .........  ..........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Relief From Joint and Several Liability.
                                                                              ----------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL OF PART FOURTEEN.......................  ..............................  .........     -15,449    -11,159      -5,014      -3,746      -2,727      -1,923      -1,525      -1,397      -1,147      -1,036     -38,103      -45,133
 
PART FIFTEEN: RELIEF FOR ESPERANZA             pmo/a.........................  .........       (\9\)  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........        (\9\)
 FIREFIGHTERS--Payments by Certain Charitable  10/26/06......................
 Organizations for the Benefit of              & before......................
 Firefighters Who Died as a Result of the      1/1/07........................
 Esperanza Fire Treated as Exempt Payments
 (P.L. 109-445, signed into law by the
 President on December 21, 2006).
========================================================================================================================================================================================================================================
Note: Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.


 
Legend and Footnotes for the Appendix:
 
Legend for ``Effective'' column:
  aafea = accounts and funds established after            epoia = expenses paid or incurred after                   soo/a = sales occurring on or after
  abiUSa = articles brought into the United States after  Epoia = expenditures paid or incurred after               suora = sale, use or removal after
  afya = adjustments for years after                      epoii = expenses paid or incurred in                      ta = transportation after
  aoftaa = actions, or failures to act, after             fapba = for annual periods beginning after                Ta = transactions after
  apa = appliances produced after                         fpb = financing provided before                           TA = transfers after
  apoaa = amounts paid or accrued after                   fpisa = facilities placed in service after                tmi = transfers made in
  apoia = amounts paid or incurred after                  freosa = fuel removed, entered or sold after              tooroaa = transfers or other
                                                                                                                     reservations of assets after
  apoii = amounts paid or incurred in                     fripp = final regulations implementing the provision are  tsohofsoa = transfer, sale, or
                                                           prescribed                                                holding out for sale occurring
                                                                                                                     after
  ara = advance refundings after                          fsoua = fuel sold or used after                           taoruo/a = taxes arising or
                                                                                                                     remaining unpaid on or after
  arbo/a = amounts received before, on, or after          fuoata = fuel use or air transportation after             tyba = taxable years beginning after
  aro/a = actions required on or after                    hpa = homes purchased after                               tybb = taxable years beginning
                                                                                                                     before
  atosotoo/a = any transaction or series of transactions  iafpbnet = interest accruing for periods beginning not    tybi = taxable years beginning in
   occurring on or after                                   earlier than
  bia = bonds issued after                                ipa= interest paid after                                  tybo/a = taxable years beginning on
                                                                                                                     or after
  boaa = before, on, and after                            ipo/a = information provided on or after                  tyea = taxable years ending after
  bfsfa = benefits for services furnished after           lao/a = losses arising on or after                        tyi = taxable years including
  casa = certification applications submitted after       noitta = notice of intent to terminate after              tyiwelo = taxable years in which
                                                                                                                     eligible losses occur
  cbagma = contributions, bequests, and gifts made after  noitto/a = notice of intent to terminate on or after      uopao/a = use of passenger
                                                                                                                     automobile on or after
  cf = contributions for                                  nowlo/a = notification of withdrawal liability on or      voo/a = violations occurring on or
                                                           after                                                     after
  cia = contracts issued after                            oia = obligations issued after                            wbo/a = weeks beginning on or after
  cma = contributions made after                          osoaa = offers submitted on and after                     wiobiUSo/a = wine imported or
                                                                                                                     bottled in the United States on or
                                                                                                                     after
  cmd = contributions made during                         pa = periods after                                        wpoia = wages paid or incurred after
  cmi = contributions made in                             pbo/a = periods beginning on or after                     wpoifibwa = wages paid or incurred
                                                                                                                     for individuals beginning work
                                                                                                                     after
  cmo/a = contributions made on or after                  pma = payments made after                                 wpoio/a = wages paid or incurred on
                                                                                                                     or after
  cpoia = costs paid or incurred after                    pmo/a = payments made on or after                         yba = years beginning after
  cyba = calendar years beginning after                   potya = portion of taxable year after                     ybbo/a = years beginning before, on,
                                                                                                                     or after
  da = disclosures after                                  ppisa = property placed in service after                  ybo/a = years beginning on or after
  Da = distributions after                                ppisi = property placed in service in                     30da = 30 days after
  dma = distributions made after                          pyba = plan years beginning after                         15da = 15 days after
  Dma = disclosures made after                            pybo/a = plan years beginning on or after                 60da = 60 days after
  dmi = determinations made in                            pyea = plan years ending after                            1ma = one month after
  Dmi = distributions made in                             qpboaa = quarterly periods beginning on and after         1ya = 1 year after
  dmo/a = discharges made on or after                     rf = returns for                                          ....................................
  do/a = distributions on or after                        rfa = returns filed after                                 ....................................
  DOE = date of enactment                                 rma = requests made after                                 ....................................
  dopa = dispositions of property after                   rfspa = remuneration for services performed after         ....................................
  dpo/a = documents provided on or after                  sa = sales after                                          ....................................
  dra = distributions received after                      soei = sales or exchanges in                              ....................................
 
\1\ Estimate includes interaction effect with the clean renewable energy bond provision (Part Five, item A.2.).
\2\ Subject to rules similar to those of section 48(m) (as in effect before its repeal).
\3\ Excluding assets subject to binding contracts entered into on or before April 11, 2005, and restricted to original-use property.
\4\ Effective for net operating losses generated in tax years ending in 2003, 2004, and 2005.
\5\ Effective for credits earned after December 31, 2005. No carryback of unused credit for taxes paid prior to January 1, 2006.
\6\ Excluding assets subject to binding contracts entered into on or before June 14, 2005, and restricted to original-use property.
\7\ Effective as if included in the American Jobs Creation Act of 2004.
\8\ Loss of less than $1 million.
\9\ Loss of less than $500,000.
\10\ Estimate is based upon proposed Energy Star standards for 2007.
\11\ Effective for periods after December 31, 2005, and before January 1, 2008, for property placed in service in taxable years ending after December
  31, 2005.
\12\ Effective for periods after December 31, 2005 (and before January 1, 2008 in the case of the 30 percent credit and fiber optic distributed
  sunlight), for property placed in service in taxable years ending after December 31, 2005.
\13\ Gain of less than $500,000.

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