JOINT COMMITTEE PRINT] GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 110TH CONGRESS

[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]

[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 110TH CONGRESS

----------

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

March 2009

GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 110TH CONGRESS

[JOINT COMMITTEE PRINT]

GENERAL EXPLANATION OF

TAX LEGISLATION

ENACTED IN THE 110TH CONGRESS

__________

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

March 2009

----------
U.S. GOVERNMENT PRINTING OFFICE

46-159 PDF WASHINGTON : 2009

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Washington, DC 20402-0001

JOINT COMMITTEE ON TAXATION

111th Congress, 1st Session
------
HOUSE SENATE
CHARLES B. RANGEL, New York, MAX BAUCUS, Montana,
Chairman Vice Chairman
FORTNEY PETE STARK, California JOHN D. ROCKEFELLER IV, West
SANDER M. LEVIN, Michigan Virginia
DAVE CAMP, Michigan KENT CONRAD, North Dakota
WALLY HERGER, California CHUCK GRASSLEY, Iowa
ORRIN G. HATCH, Utah
Edward D. Kleinbard, Chief of Staff
Thomas A. Barthold, Deputy Chief of Staff
Emily S. McMahon, Deputy Chief of Staff
Bernard A. Schmitt, Deputy Chief of Staff
SUMMARY CONTENTS

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Page
Part One: U.S. Troop Readiness Veterans' Care, Katrina Recovery,
and Iraq Accountability Appropriations Act, 2007 (Public Law
110-28)........................................................ 4

Part Two: Revenue Provisions of Energy Independence and Security
Act of 2007 (Public Law 110-140)............................... 44

Part Three: Hokie Spirit Memorial Fund (Public Law 110-141)...... 46

Part Four: Mortgage Forgiveness Debt Relief Act of 2007 (Public
Law 110-142)................................................... 48

Part Five: Airport and Airway Trust Fund Extensions (Public Laws
110-92, 110-161, 110-190, 110-253, and 110-330)................ 58

Part Six: Tax Increase Prevention Act of 2007 (Public Law 110-
166)........................................................... 60

Part Seven: Tax Technical Corrections Act of 2007 (Public Law
110-172)....................................................... 62

Part Eight: Term of IRS Commissioner (Public Law 110-176)........ 74

Part Nine: Economic Stimulus Act of 2008 (Public Law 110-185).... 75

Part Ten: Genetic Information Nondiscimination Act of 2008
(Public Law 110-233)........................................... 85

Part Eleven: Food, Conservation, and Energy Act of 2008 (Public
Laws 110-234 and 110-246)...................................... 89

Part Twelve: Heroes Earnings Assistance and Relief Tax Act of
2008 (Public Law 110-245)...................................... 148

Part Thirteen: Housing and Economic Recovery Act of 2008 (Public
Law 110-289)................................................... 192

Part Fourteen: Revenue Provision Relating to Funeral Trusts
(Public Law 110-317)........................................... 260

Part Fifteen: Highway Trust Fund Restoration (Public Law 110-318) 261

Part Sixteen: SSI Extension for Elderly and Disabled Refugees Act
(Public Law 110-328)........................................... 262

Part Seventeen: Emergency Economic Stabilization Act of 2008,
Energy Improvement and Extension Act of 2008, and Tax Extenders
and the Alternative Minimum Tax Relief Act of 2008 (Public Law
110-343)....................................................... 264

Part Eighteen: Fostering Connections to Success and Increasing
Adoptions Act of 2008 (Public Law 110-351)..................... 535

Part Nineteen: Michelle's Law (Public Law 110-381)............... 539

Part Twenty: Inmate Tax Fraud Prevention Act of 2008 (Public Law
110-428)....................................................... 542

Part Twenty-One: Worker, Retiree, and Employer Recovery Act of
2008 (Public Law 110-458)...................................... 544

Part Twenty-Two: Custom User Fees and Corporate Estimated Taxes.. 581

Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 110th Congress............................................. 585

C O N T E N T S

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Page
Summary Contents................................................. III
Introduction..................................................... 1

Part One: U.S. Troop Readiness Veterans' Care, Katrina Recovery,
and Iraq Accountability Appropriations Act, 2007 (Public Law
110-28)........................................................ 4

TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS.................... 4

General Provisions............................................. 4

A. General Provisions................................. 4

1. Extension and modification of work opportunity
tax credit (sec. 8211 of the Act and sec. 51 of
the Code)...................................... 4
2. Increase and extension of expensing for small
business (sec. 8212 of the Act and sec. 179 of
the Code)...................................... 10
3. Determination of credit for certain taxes paid
with respect to employee cash tips (sec. 8213
of the Act and sec. 45B of the Code)........... 11
4. Waiver of individual and corporate alternative
minimum tax limits on work opportunity credit
and credit for taxes paid with respect to
employee cash tips (sec. 8214 of the Act and
sec. 38 of the Code)........................... 12
5. Family business tax simplification (sec. 8215 of
the Act and sec. 761 of the Code).............. 13

B. Gulf Opportunity Zone Tax Incentives................ 15

1. Extension of increased expensing for qualified
section 179 Gulf Opportunity Zone property
(sec. 8221 of the Act and sec. 1400N(e) of the
Code).......................................... 15
2. Extension and expansion of low-income housing
credit rules for buildings in the GO Zones
(sec. 8222 of the Act and 1400N(c) of the Code) 17
3. Special tax-exempt bond financing rule for
repairs and reconstructions of residences in
the GO Zones (sec. 8223 of the Act and secs.
143 and 1400N(a) of the Code).................. 22
4. GAO study of practices employed by State and
local governments in allocating and utilizing
tax incentives provided pursuant to the Gulf
Opportunity Zone Tax Act of 2005 (sec. 8224 of
the Act)....................................... 24
C. Subchapter S Provisions (secs. 8231-8236 of the Act
and secs. 641, 1361 and 1362 of the Code).......... 25

1. Capital gain not treated as passive investment
income......................................... 25
2. Treatment of bank director shares............... 26
3. Treatment of banks changing from reserve method
of accounting.................................. 27
4. Treatment of sale of an interest in a qualified
subchapter S subsidiary........................ 28
5. Elimination of earnings and profits attributable
to pre-1983 years.............................. 29
6. Deductibility of interest expense of an ESBT on
indebtedness incurred to acquire S corporation
stock.......................................... 29

TITLE II--REVENUE PROVISIONS..................................... 30

A. Increase in Age of Children Whose Unearned Income is
Taxed as if Parents' income (sec. 8241 of the Act
and sec. 1(g) of the Code)......................... 30

B. Suspension of Penalties and Interest (sec. 8242 of
the Act and sec. 6404(g) of the Code).............. 31

C. Modification of Collection Due Process Procedures
for Employment Tax Liabilities (sec. 8243 of the
Act and sec. 6330 of the Code)..................... 32

D. Permanent Extension of IRS User Fees (sec. 8244 of
the Act and sec. 7528 of the Code)................. 34

E. Increase in Penalty for Bad Checks and Money Orders
(sec. 8245 of the Act and sec. 6657 of the Code)... 34

F. Understatement of Taxpayer's Liability by Tax Return
Preparers (sec. 8246 of the Act and secs. 6694 and
7701 of the Code).................................. 35

G. Penalty for Filing Erroneous Refund Claims (sec.
8247 of the Act and new sec. 6676 of the Code)..... 36

H. Time for Payment of Corporate Estimated Tax (sec.
8248 of the Act and sec. 6655 of the Code)......... 37

TITLE III--PENSION RELATED PROVISIONS............................ 37

A. Revocation of Election Relating to Treatment as
Multiemployer Plan (sec. 6611 of the Act and sec.
414(f) of the Code)................................ 37

B. Modification of Requirements for Qualified Transfers
(secs. 6612 and 6613 of the Act and sec. 420 of the
Code).............................................. 39

C. Extension of Alternative Deficit Reduction
Contribution Rules (sec. 6614 of the Act and sec.
402(i) of the Pension Protection Act of 2006)...... 40

D. Modification of the Interest Rate for Pension
Funding Rules (sec. 6615 of the Act and sec. 402(a)
of the Pension Protection Act of 2006)............. 41

Part Two: Revenue Provisions of Energy Independence and Security
Act of 2007 (Public Law 110-140)............................... 44

A. Extension of Additional 0.2 Percent FUTA Surtax
(sec. 1501 of the Act)............................. 44
B. 7-Year Amortization of Geological and Geophysical
Expenditures for Certain Major Integrated Oil
Companies (sec. 1502 of the Act and sec. 167(h) of
the Code).......................................... 45

Part Three: Hokie Spirit Memorial Fund (Public Law 110-141)...... 46

A. Exclusion from Income of Payments from the Hokie
Spirit Memorial Fund (sec. 1 of the Act)........... 46

B. Increase in Penalty for Failure to File Partnership
Returns (sec. 2 of the Act and sec. 6698(b) of the
Code).............................................. 47

Part Four: Mortgage Forgiveness Debt Relief Act of 2007 (Public
Law 110-142)................................................... 48

A. Exclude Discharges of Acquisition Indebtedness on
Principal Residences from Gross Income (sec. 2 of
the Act and sec. 108 of the Code).................. 48

B. Extend the Deduction for Private Mortgage Insurance
(sec. 3 of the Act and sec. 163 of the Code)....... 50

C. Alternative Tests for Qualifying as Cooperative
Housing Corporation (sec. 4 of the Act and sec. 216
of the Code)....................................... 51

D. Exclusion of Income for Benefits Provided to
Volunteer Firefighters and Emergency Medical
Responders (sec. 5 of the Act and sec. 139B of the
Code).............................................. 52

E. Clarification of Student Housing Eligible for Low-
Income Housing Credit (sec. 6 of the Act and sec.
42(i) of the Code)................................. 54

F. Application of Joint Return Limitation for Capital
Gains Exclusion to Certain Post-Marriage Sales of
Principal Residences by Surviving Spouses (sec. 7
of the Act and sec. 121 of the Code)............... 54

G. Modification of Penalty for Failure to File
Partnership Returns; Limitation on Disclosure (sec.
8 of the Act and secs. 6098 and 6103(e) of the
Code).............................................. 55

H. Penalty for Failure to File S Corporation Returns
(sec. 9 of the Act and new sec. 6699 of the Code).. 56

I. Modifications to Corporate Estimated Tax Payments
(sec. 10 of the Act and sec. 6655 of the Code)..... 57

Part Five: Airport and Airway Trust Fund Extensions (Public Laws
110-92, 110-161, 110-190, 110-253, and 110-330)................ 58

Part Six: Tax Increase Prevention Act of 2007 (Public Law 110-
166)........................................................... 60

A. Extension of Alternative Minimum Relief for
Nonrefundable Personal Credits and Extension of
Increased Alternative Minimum Tax Exemption Amounts
(secs. 101 and 102 of the Act and secs. 26 and 55
of the Code)....................................... 60

Part Seven: Tax Technical Corrections Act of 2007 (Public Law
110-172)....................................................... 62

Part Eight: Term of IRS Commissioner (Public Law 110-176)........ 74

A. Clarify Term of IRS Commissioner (sec. 7803)........ 74

Part Nine: Economic Stimulus Act of 2008 (Public Law 110-185).... 75

A. Recovery Rebates for Individual Taxpayers (sec. 101
of the Act and sec. 6428 of the Code).............. 75

B. Temporary Increase in Limitations on Expensing of
Certain Depreciable Business Assets (sec. 102 of
the Act and sec. 179 of the Code).................. 80

C. Special Depreciation Allowance for Certain Property
(sec. 103 of the Act and sec. 168(k) of the Code).. 81

Part Ten: Genetic Information Nondiscrimination Act of 2008
(Public Law 110-233)........................................... 85

A. Prohibition of Discrimination Based on Genetic
Testing (sec. 103 of the Act and sec. 9802 and 9832
of the Code)....................................... 85

Part Eleven: Food, Conservation, and Energy Act of 2008 (Public
Laws 110-234 and 110-246)...................................... 89

TITLE I--REVENUE PROVISIONS FOR AGRICULTURE PROGRAMS............. 89

A. Extension of Custom User Fees (sec. 15201 of the
Act)............................................... 89

B. Modifications to Corporate Estimated Tax Payments
(sec. 15202 of the Act)............................ 90

TITLE II--TAX PROVISIONS......................................... 92

A. Conservation Provisions............................. 92

1. Exclusion of Conservation Reserve Program
Payments from SECA tax for individuals
receiving Social Security retirement or
disability payments (sec. 15301 of the Act and
sec. 1402(a) of the Code)...................... 92
2. Extend the special rule encouraging
contributions of capital gain real property for
conservation purposes (sec. 15302 of the Act
and sec. 170 of the Code)...................... 92
3. Deduction for endangered species recovery
expenditures (sec. 15303 of the Act and sec.
175 of the Code)............................... 96
4. Temporary reduction in corporate tax rate for
qualified timber gain; timber REIT provisions
(secs. 15311-15315 of the Act and secs. 856,
857, and 1201 of the Code)..................... 97
5. Qualified forestry conservation bonds (sec.
15316 of the Act and new secs. 54A and 54B of
the Code)...................................... 102

B. Energy Provisions................................... 108

1. Credit for production of cellulosic biofuel
(sec. 15321 of the Act and sec. 40 of the Code) 108
2. Comprehensive study of biofuels (sec. 15322 of
the Act)....................................... 110
3. Modification of alcohol credit (sec. 15331 of
the Act and secs. 40 and 6426 of the Code)..... 111
4. Calculation of volume of alcohol for fuel
credits (sec. 15332 of the Act and sec. 40 of
the Code)...................................... 113
5. Ethanol tariff extension (sec. 15333 of the Act) 113
6. Limitations on duty drawback on certain imported
ethanol (sec. 15334 of the Act)................ 114

C. Agricultural Provisions............................. 115

1. Qualified small issue bonds for farming (sec.
15341 of the Act and sec. 144 of the Code)..... 115
2. Allowance of section 1031 for exchanges
involving certain mutual ditch, reservoir, or
irrigation company stock (sec. 15342 of the Act
and sec. 1031 of the Code)..................... 116
3. Agricultural chemicals security tax credit (sec.
15343 of the Act and new sec. 45O of the Code). 117
4. Three-year depreciation for all race horses
(sec. 15344 of the Act and sec. 168 of the
Code).......................................... 118
5. Temporary relief for Kiowa County, Kansas and
surrounding area (sec. 15345 of the Act and
sec. 1400N, 1400Q, 1400R and 1400S)............ 119
6. Modification of the advanced coal project credit
and the gasification project credit (sec. 15346
of the Act and secs. 48A and 48B of the Code).. 138

D. Other Revenue Provisions............................ 141

1. Limitation on farming losses of certain
taxpayers (sec. 15351 of the Act and sec. 461
of the Code)................................... 141
2. Increase and index dollar thresholds for farm
optional method and nonfarm optional method for
computing net earnings from self-employment
(sec. 15352 of the Act and sec. 1402(a) of the
Code).......................................... 143
3. Information reporting for commodity credit
corporation transactions (sec. 15353 of the Act
and new sec. 6039J of the Code)................ 146

Part Twelve: Heroes Earnings Assistance and Relief Tax Act of
2008 (Public Law 110-245)...................................... 148

TITLE I--BENEFITS FOR MILITARY................................... 148

A. Recovery Rebate Provided for Military Families (sec.
101 of the Act and sec. 6428 of the Code).......... 148

B. Make Permanent the Election to Treat Combat Pay as
Earned Income for Purposes of the Earned Income Tax
Credit (sec. 102 of the Act and secs. 32 and 112 of
the Code).......................................... 150

C. Modification of Qualified Mortgage Bond Program
Rules for Veterans (sec. 103 of the Act and sec.
143 of the Code)................................... 151

D. Survivor and Disability Payments with Respect to
Qualified Military Service (sec. 104 of the Act and
secs. 401(a), 414(u), 403(b), and 457(g) of the
Code).............................................. 153

E. Treatment of Differential Military Pay as Wages
(sec. 105 of the Act and secs. 3401 and 414(u) of
the Code).......................................... 156

F. Extension of the Statute of Limitations to File
Claims for Refunds Relating to Disability
Determinations by the Department of Veterans
Affairs (sec. 106 of the Act and sec. 6511(d) of
the Code).......................................... 160

G. Treatment of Distributions to Individuals Called to
Active Duty for at Least 180 Days (sec. 107 of the
Act and sec. 72(t) of the Code).................... 161

H. Authority to Disclose Return Information for Certain
Veterans Programs Made Permanent (sec. 108 of the
Act and sec. 6103 of the Code)..................... 162

I. Contributions of Military Death Gratuities to
Certain Tax-Favored Accounts (sec. 109 of the Act
and secs. 408A and 530 of the Code)................ 163

J. Suspension of Five-year Period for the Exclusion of
Gain on Sale of a Principal Residence by Certain
Peace Corps Volunteers (sec. 110 of the Act and
sec. 121(d) of the Code)........................... 165

K. Employer Wage Credit for Activated Military
Reservists (sec. 111 of the Act and new sec. 45P of
the Code).......................................... 167

L. Exclusion of Certain State Payments to Military
Personnel (sec. 112 of the Act and sec. 134 of the
Code).............................................. 168

M. Exclusion of Gain on Sale of a Principal Residence
by Certain Employees of the Intelligence Community
(sec. 113 of the Act and sec. 121 of the Code)..... 169

N. Disposition of Unused Health Benefits in Flexible
Spending Arrangements (sec. 114 of the Act and sec.
125 of the Code)................................... 170

O. Clarification Related to the Exclusion of Certain
Benefits Provided to Volunteer Firefighters and
Emergency Medical Responders (sec. 115 of the Act
and secs. 3121, 3306, and 3401 of the Code)........ 172

TITLE III--REVENUE PROVISIONS.................................... 174

A. Revision of Tax Rules on Expatriation of Individuals
(sec. 301 of the Act and new secs. 877A and 2801 of
the Code).......................................... 174

B. Certain Domestically Controlled Foreign Persons
Performing Services Under Contract with United
States Government Treated as American Employers
(sec. 302 of the Act and sec. 3121 of the Code).... 185

C. Minimum Failure to File Penalty (sec. 303 of the Act
and sec. 6651 of the Code)......................... 188

TITLE IV--PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL
HEALTH BENEFITS................................................ 190

A. Extension of Parity in the Application of Certain
Limits to Mental Health Benefits (sec. 401 of the
Act and sec. 9812(f) of the Code).................. 190

Part Thirteen: Housing and Economic Recovery Act of 2008 (Public
Law 110-289)................................................... 192

TITLE I--BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING............ 192

A. Low-Income Housing Credit........................... 193

1. Temporary increase in the low-income housing
credit volume limits (sec. 3001 of the Act and
sec. 42 of the Code)........................... 193
2. Determination of credit rate (sec. 3002 of the
Act and sec. 42 of the Code)................... 194
3. Modifications to definition of eligible basis
(sec. 3003 of the Act and sec. 42 of the Code). 196
4. Other simplification and reform of low-income
housing tax incentives (sec. 3004 of the Act
and sec. 42 of the Code)....................... 201
5. Treatment of basic housing allowances for
purposes of income eligibility rules (sec. 3005
of the Act and sec. 42 of the Code)............ 206
6. Refunding treatment for certain multi-family
housing bonds (sec. 3007 of the Act and sec.
146 of the Code)............................... 207
7. Coordination of certain rules applicable to the
low-income housing credit and qualified
residential rental project exempt facility
bonds (sec. 3008 of the Act and sec. 142 of the
Code).......................................... 209
8. Hold harmless for reductions in area median
gross income (sec. 3009 of the Act and sec. 42
of the Code)................................... 211
9. Exception from the annual recertification
requirement for projects which are entirely
low-income use (sec. 3010 of the Act and sec.
142 of the Code)............................... 212

B. Single Family Housing............................... 214

1. First-time homebuyer credit (sec. 3011 of the
Act and sec. 36 of the Code)................... 214
2. Additional standard deduction for state and
local real property taxes (sec. 3012 of the Act
and sec. 63 of the Code)....................... 216

C. General Provisions.................................. 217

1. Modifications to qualified private activity bond
rules for housing (sec. 3021 of the Act and
secs. 142, 143, and 146 of the Code)........... 217
2. Alternative minimum tax treatment of interest on
certain bonds, the low-income housing credit,
and the rehabilitation credit (sec. 3022 of the
Act and secs. 38, 56 and 57 of the Code)....... 219
3. Bonds guaranteed by Federal Home Loan Banks
eligible for treatment as tax-exempt bonds
(sec. 3023 of the Act and sec. 149 of the Code) 220
4. Modification of rules pertaining to FIRPTA
nonforeign affidavits (sec. 3024 of the Act and
sec. 1445 of the Code)......................... 222
5. Modify rehabilitation credit tax-exempt use safe
harbor and definition of disqualified lease
(sec. 3025 of the House Act and sec. 47 of the
Code).......................................... 224
6. Special rules for mortgage revenue bonds in
Presidentially declared disaster areas (sec.
3026 of the Act and sec. 143 of the Code)...... 225
7. Transfer of funds appropriated to carry out 2008
recovery rebates to individuals (sec. 3027 of
the Act)....................................... 226

TITLE II--REFORMS RELATED TO REAL ESTATE INVESTMENT TRUSTS
(``REITS'') (SECS. 3031-3071 OF THE ACT AND SECS. 856 AND 857
OF THE CODE)................................................... 228

TITLE III--REVENUE PROVISIONS.................................... 242

A. General Provisions.................................. 242

1. Election to accelerate AMT and research credits
in lieu of bonus depreciation (sec. 3081 of the
Act and sec. 168(k) of the Code)............... 242
2. Certain GO Zones incentives (sec. 3082 of the
Act)........................................... 244

B. Revenue Offsets..................................... 249

1. Require information reporting on payment card
and third party payment transactions (sec. 3091
of the Act and new sec. 6050(W) of the Code)... 249
2. Exclusion of gain on sale of a principal
residence not to apply to nonqualified use
(sec. 3092 of the Act and sec. 121 of the Code) 252
3. Delay implementation of worldwide interest
allocation (sec. 3093 of the Act and sec.
864(f) of the Code)............................ 254
4. Modifications to corporate estimated tax
payments (sec. 3094 of the Act)................ 258

Part Fourteen: Revenue Provision Relating to Funeral Trusts
(Public Law 110-317)........................................... 260

Part Fifteen: Highway Trust Fund Restoration (Public Law 110-318) 261

Part Sixteen: SSI Extension for Elderly and Disabled Refugees Act
(Public Law 110-328)........................................... 262

A. Collection of Unemployment Compensation Debts
Resulting from Fraud (sec. 3 of the Act and sec.
6402 and 6103 of the Code)......................... 262

Part Seventeen: Emergency Economic Stabilization Act of 2008,
Energy Improvement and Extension Act of 2008, and Tax Extenders
and the Alternative Minimum Tax Relief Act of 2008 (110-343)... 264

DIVISION A--EMERGENCY ECONOMIC STABILIZATION ACT OF 2008......... 264

A. Treat Gain or Loss from Sale or Exchange of Certain
Preferred Stock by Applicable Financial
Institutions as Ordinary Income or Loss (sec. 301
of the Act)........................................ 264

B. Special Rules for Tax Treatment of Executive
Compensation of Employers Participating in the
Troubled Assets Relief Program (sec. 302 of the Act
and secs. 162(m) and 280G of the Code)............. 267

C. Exclude Discharges of Acquisition Indebtedness on
Principal Residences from Gross Income (sec. 303 of
the Act and sec. 108 of the Code).................. 275

DIVISION B--ENERGY IMPROVEMENT AND EXTENSION ACT OF 2008......... 277

TITLE I--ENERGY PRODUCTION INCENTIVES............................ 277

A. Renewable Energy Incentives......................... 277

1. Extension and modification of the renewable
electricity and coal production credits (secs.
101, 102, and 108 of the Act and sec. 45 of the
Code).......................................... 277
2. Extension and modification of energy credit
(secs. 103, 104 and 105 of the Act and sec. 48
of the Code)................................... 287
3. Credit for residential energy efficient property
(sec. 106 of the Act and sec. 25D of the Code). 290
4. New clean renewable energy bonds (sec. 107 of
the Act and new sec. 54C of the Code).......... 292
5. Special rule to implement FERC and State
electric restructuring policy (sec. 109 of the
Act and sec. 451(i) of the Code)............... 296

B. Carbon Mitigation and Coal Provisions............... 298

1. Expansion and modification of the advanced coal
project credit (sec. 111 of the Act and sec.
48A of the Code)............................... 298
2. Expansion and modification of the coal
gasification investment credit (sec. 112 of the
Act and sec. 48B of the Code).................. 300
3. Extend excise tax on coal at current rates (sec.
113 of the Act and sec. 4121 of the Code)...... 301
4. Temporary procedures for excise tax refunds on
exported coal (sec. 114 of the Act)............ 304
5. Credit for carbon dioxide sequestration (sec.
115 of the Act and new sec. 45Q of the Code)... 308
6. Certain income and gains relating to industrial
source carbon dioxide and to alcohol fuels and
mixtures, biodiesel fuels and mixtures, and
alternative fuels and mixtures treated as
qualifying income for purposes of the exception
from treatment of publicly traded partnerships
as corporations (secs. 116 and 208 of the Act
and sec. 7704 of the Code)..................... 309
7. Carbon audit of provisions of the Internal
Revenue Code of 1986 (sec. 117 of the Act)..... 311

TITLE II--TRANSPORTATION AND DOMESTIC FUEL SECURITY PROVISIONS... 313

A. Inclusion of Cellulosic Biofuel in Bonus
Depreciation for Biomass Ethanol Plant Property
(sec. 201 of the Act and sec. 168(l) of the Code).. 313

B. Credits for Biodiesel and Renewable Diesel (sec. 202
of the Act and secs. 40A, 6426, and 6427 of the
Code).............................................. 314

C. Clarification that Credits for Fuel are Designed to
Provide an Incentive for United States production
(sec. 203 of the Act and secs. 40, 40A, 6426 and
6427 of the Code).................................. 318

D. Extension and Modification of Alternative Fuel
Credit (sec. 204 of the Act and secs. 6426 and 6427
of the Code)....................................... 319

E. Alternative Motor Vehicle Credit and Plug-In
Electric Vehicle Credit (sec. 205 of the Act and
sec. 30B and new sec. 30D of the Code)............. 320

F. Exclusion from Heavy Vehicle Excise Tax for Idling
Reduction Units and Advanced Insulation (sec. 206
of the Act and sec. 4053 of the Code).............. 327

G. Extension and Modification of Alternative Fuel
Vehicle Refueling Property Credit (sec. 207 of the
Act and sec. 30C of the Code)...................... 328

H. Extension and Modification of Election to Expense
Certain Refineries (sec. 209 of the Act and sec.
179C of the Code).................................. 329

I. Extension of Suspension of Taxable Income Limit on
Percentage Depletion for Oil and Natural Gas
Produced from Marginal Properties (sec. 210 of the
Act and sec. 613A of the Code)..................... 331

J. Extension of Transportation Fringe Benefit to
Bicycle Commuters (sec. 211 of the Act and sec.
132(f) of the Code)................................ 332

TITLE III--ENERGY CONSERVATION AND EFFICIENCY PROVISIONS......... 334

A. Qualified Energy Conservation Bonds (sec. 301 of the
Act and new sec. 54D of the Code).................. 334

B. Extension and Modification of Credit for Nonbusiness
Energy Property (sec. 302 of the Act and sec. 25C
of the Code)....................................... 341

C. Energy Efficient Commercial Buildings Deduction
(sec. 303 of the Act and sec. 179D of the Code).... 343

D. New Energy Efficient Home Credit (sec 304 of the Act
and sec 45L of the Code)........................... 345

E. Extension and Modification of Energy Efficient
Appliance Credit (sec. 305 of the Act and sec. 45M
of the Code)....................................... 346

F. Accelerated Recovery Period for Depreciation of
Smart Meters and Smart Grid Systems (sec. 306 of
the Act and sec. 168 of the Code).................. 348

G. Extension of Issuance Authority for Qualified Green
Building and Sustainable Design Project Bonds (sec.
307 of the Act and sec. 142 of the Code)........... 349

H. Special Depreciation Allowance for Certain Reuse and
Recycling Property (sec. 308 of the Act and sec.
168 of the Code)................................... 351

TITLE IV--REVENUE PROVISIONS..................................... 354

A. Limitation of Deduction for Income Attributable to
Domestic Production of Oil, Gas, or Primary
Products Thereof (sec. 401 of the Act and sec. 199
of the Code)....................................... 354

B. Eliminate the Distinction Between FOGEI and FORI and
Apply Present-Law FOGEI Rules to All Foreign Income
from the Production and Sale of Oil and Gas Product
(sec. 402 of the Act and sec. 907 of the Code)..... 357

C. Broker Reporting of Customer's Basis in Securities
Transactions (sec. 403 of the Act and sec. 6045 and
new secs. 6045A and 6045B of the Code)............. 361

D. One-Year Extension of Additional 0.2 Percent FUTA
Surtax (sec. 404 of the Act and sec. 3301 of the
Code).............................................. 368

E. Oil Spill Liability Trust Fund Tax (sec. 405 of the
Act and sec. 4611 of the Code)..................... 369

DIVISION C TAX EXTENDERS AND ALTERNATIVE MINIMUM TAX RELIEF...... 370

TITLE I--ALTERNATIVE MINIMUM TAX RELIEF.......................... 370

A. Extend Alternative Minimum Tax Relief for
Individuals (secs. 101 and 102 of the Act and secs.
26 and 55 of the Code)............................. 370

B. Increase in AMT Refundable Credit Amount for
Individuals With Long-Term Unused Credits for Prior
Year Minimum Tax Liability, Etc. (sec. 103 of the
Act and sec. 53 of the Code)....................... 371

TITLE II--EXTENSION OF INDIVIDUAL TAX PROVISIONS................. 375

A. Deduction of State and Local General Sales Taxes
(sec. 201 of the Act and sec. 164 of the Code)..... 375

B. Above-the-Line Deduction for Higher Education
Expenses (sec. 202 of the Act and sec. 222 of the
Code).............................................. 376

C. Educator Expense Deduction (sec. 203 of the Act and
sec. 62(a)(2)(D) of the Code)...................... 377

D. Additional Standard Deduction for State and Local
Real Property Taxes (sec. 204 of the Act and sec.
63 of the Code).................................... 379

E. Tax-Free Distributions from Individual Retirement
Plans for Charitable Purposes (sec. 205 of the Act
and sec. 408 of the Code).......................... 380

F. Extension of Special Withholding Tax Rule for
Interest-Related Dividends Paid by Regulated
Investment Companies (sec. 206 of the Act and sec.
871(k) of the Code)................................ 384

G. Extension of Special Rule for Regulated Investment
Company\Stock Held in the Estate of a Nonresident
Non-Citizen (sec. 207 of the Act and sec. 2105 of
the Code).......................................... 386

H. Extend RIC ``Qualified Investment Entity'' Treatment
Under FIRPTA (sec. 208 of the Act and sec. 897 of
the Code).......................................... 387

TITLE III--EXTENSION OF BUSINESS TAX PROVISIONS.................. 389

A. Extend the Research and Experimentation Tax Credit
(sec. 301 of the Act and sec. 41 of the Code)...... 389

B. Extend the New Markets Tax Credit (sec. 302 of the
Act and sec. 45D of the Code)...................... 393

C. Subpart F Exception for Active Financing Income
(sec. 303 of the Act and secs. 953 and 954 of the
Code).............................................. 395

D. Look-Through Treatment of Payments Between Related
Controlled Foreign Corporations Under Foreign
Personal Holding Company Income Rules (sec. 304 of
the Act and sec. 954(c)(6) of the Code)............ 398

E. Extension of 15-Year Straight-Line Cost Recovery for
Qualified Leasehold Improvements and Qualified
Restaurant Improvements; 15-Year Straight-Line Cost
Recovery for Certain Improvements to Retail Space
(sec. 305 of the Act and sec. 168 of the Code)..... 399

F. Modification of Tax Treatment of Certain Payments to
Controlling Exempt Organizations (sec. 306 of the
Act and sec. 512 of the Code)...................... 402

G. Basis Adjustment to Stock of S Corporations Making
Charitable Contributions of Property (sec. 307 of
the Act and sec. 1367 of the Code)................. 404

H. Suspend Limitation on Rate of Rum Excise Tax Cover
Over to Puerto Rico and Virgin Islands (sec. 308 of
the Act and sec. 7652(f) of the Code).............. 405

I. Extension of Economic Development Credit for
American Samoa (sec. 309 of the Act and sec. 119 of
Pub. L. No. 109-432)............................... 406

J. Extension of Mine Rescue Team Training Credit (sec.
310 of the Act and sec. 45N of the Code)........... 409

K. Extension of Election to Expense Advanced Mine
Safety Equipment (sec. 311 of the Act and sec. 179E
of the Code)....................................... 409

L. Extension of Deduction for Income Attributable to
Domestic Production Activities in Puerto Rico (sec.
312 of the Act and sec. 199 of the Code)........... 411

M. Extend and Modify Qualified Zone Academy Bonds (sec.
313 of the Act and new sec. 54E of the Code)....... 413

N. Indian Employment Tax Credit (sec. 314 of the Act
and sec. 45A of the Code).......................... 416

O. Accelerated Depreciation for Business Property on
Indian Reservations (sec. 315 of the Act and sec.
168(j) of the Code)................................ 417

P. Railroad Track Maintenance (sec. 316 of the Act and
sec. 45G of the Code).............................. 418

Q. Seven-Year Cost Recovery Period for Motorsports
Racing Track Facility (sec. 317 of the Act and sec.
168 of the Code)................................... 419

R. Expensing of Environmental Remediation Costs (sec.
318 of the Act and sec. 198 of the Code)........... 420

S. Extension of the Hurricane Katrina Work Opportunity
Tax Credit (sec. 319 of the bill).................. 422

T. Extension of Increased Rehabilitation Credit for
Structures in the Gulf Opportunity Zone (sec. 320
of the bill and sec. 1400N(h) of the Code)......... 425

U. Extension of the Enhanced Charitable Deduction for
Contributions of Computer Technology and Equipment
(sec. 321 of the Act and sec. 170 of the Code)..... 426

V. Tax Incentives for Investment in the District of
Columbia (sec. 322 of the Act and secs. 1400,
1400A, 1400B, and 1400C of the Code)............... 428

W. Extension of the Enhanced Charitable Deduction for
Contributions of Food Inventory; Suspension of
Percentage Limits on Certain Contributions of Food
Inventory (sec. 323 of the Act and sec. 170 of the
Code).............................................. 431

X. Extension of the Enhanced Charitable Deduction for
Contributions of Book Inventory (sec. 324 of the
Act and sec. 170 of the Code)...................... 435

TITLE IV--EXTENSION OF TAX ADMINISTRATION PROVISIONS............. 438

A. Extension of IRS Authority to Fund Undercover
Operations (sec. 401 of the Act and sec. 7608 of
the Code).......................................... 438

B. Authority to Disclose Information Related to
Terrorist Activity Made Permanent (sec. 402 of the
Act and sec. 6103 of the Code)..................... 438

TITLE V--ADDITIONAL TAX RELIEF AND OTHER TAX PROVISIONS.......... 443

SUBTITLE A--GENERAL PROVISIONS................................... 443

A. Refundable Child Credit (sec. 501 of the Act and
sec. 24(d) of the Code)............................ 443

B. Provisions Related to Film and Television
Productions (sec. 502 of the Act and secs. 181 and
199 of the Code)................................... 444

C. Exemption from Excise Tax for Certain Wooden Arrows
Designed for Use by Children (sec. 503 of the Act
and sec. 4161 of the Code)......................... 449

D. Treatment of Amounts Received in Connection with the
Exxon Valdez litigation (sec. 504 of the Act)...... 449

E. Certain Farming Business Machinery and Equipment
Treated as 5-Year Property (sec. 505 of the Act and
sec. 168 of the Code).............................. 452

F. Modified Standard for Imposition of Tax Return
Preparer Penalties (sec. 506 of the Act and sec.
6694 of the Code).................................. 453

SUBTITLE B--MENTAL HEALTH PARITY PROVISIONS...................... 454

A. Modification of Parity Rules for Mental Health
Benefits (secs. 511-512 of the Act and sec. 9812 of
the Code).......................................... 454

TITLE VI--DISASTER RELIEF........................................ 457

SUBTITLE A--HEARTLAND AND HURRICANE IKE DISASTER RELIEF.......... 457

A. Tax Benefits for Midwestern and Hurricane Ike Areas. 457

1. Definition of ``Midwestern disaster area,''
``applicable disaster date,'' ``Hurricane Ike
disaster area,'' Gulf Opportunity Zones, and
Hurricane Katrina, Rita, and Wilma disaster
areas (secs. 702 and 704 of the Act and sec.
1400M of the Code)............................. 457
2. Tax-exempt bond financing for the Midwestern
disaster area (sec. 702 of the Act)............ 458
3. Low-income housing tax relief for the Midwestern
disaster Area (sec. 702 of the Act)............ 460
4. Expensing for certain demolition and clean-up
costs (sec. 702 of the Act).................... 461
5. Extension of expensing for environmental
remediation costs (sec. 702 of the Act)........ 462
6. Increase in rehabilitation credit for certain
areas damaged by 2008 Midwestern severe storms,
tornados, and flooding (sec. 702 of the bill
and sec. 1400N(h) of the Code)................. 464
7. Treatment of net operating losses attributable
to disaster losses (sec. 702 of the Act)....... 465
8. Tax credit bonds (sec. 702 of the Act)......... 468
9. Representations regarding income eligibility
for purposes of qualified residential rental
project requirements (sec. 702 of the Act)..... 470
10. Expansion of the Hope and Lifetime Learning
credits for students in any Midwestern disaster
area (sec. 702 of the Act)..................... 471
11. Housing relief for individuals affected by 2008
Midwestern severe storms, tornados, and
flooding (sec. 702 of the Act)................. 476
12. Use of retirement funds from retirement plans
relating to the Midwest disaster area (sec. 702
of the Act).................................... 477
13. Employee retention credit (sec. 702 of the Act
).............................................. 483
14. Suspension of limitations on charitable
contributions for disaster relief (sec. 702 of
the Act and sec. 170 of the Code).............. 484
15. Suspension of certain limitations on personal
casualty losses (sec. 702 of the Act).......... 489
16. Special look-back rule for determining earned
income credit and refundable child credit (sec.
702 of the Act)................................ 490
17. Secretarial authority to make adjustments
regarding taxpayer and dependency status (sec.
702 of the Act)................................ 491
18. Special rules for mortgage revenue bonds (sec.
702 of the Act)................................ 492
19. Additional personal exemption for housing
Hurricane Katrina displaced individuals (sec.
702 of the Act)................................ 494
20. Increase in standard mileage rate for
charitable use of a vehicle (sec. 702 of the
Act)........................................... 495
21. Mileage reimbursements to charitable volunteers
excluded from gross income (sec. 702 of the
Act)........................................... 497
22. Exclusion for certain cancellations of
indebtedness by reason of Midwestern disasters
(sec. 702 of the Act).......................... 499
23. Extension of replacement period for
nonrecognition of gain (sec. 702 of the Act)... 501

B. Reporting Requirements Relating to Disaster Relief
Contributions (sec. 703 of the Act and sec. 6033 of
the Code).......................................... 502

C. Temporary Tax-Exempt Bond Financing and Low-Income
Housing Tax Relief for Areas Damaged by Hurricane
Ike (sec. 704 of the Act and secs. 41 and 144 of
the Code).......................................... 503

SUBTITLE B--NATIONAL DISASTER RELIEF............................. 505

A. Losses Attributable to Federally Declared Disasters
(sec. 706 of the Act and secs. 63 and 165 of the
Code).............................................. 505

B. Expensing of Qualified Disaster Expenses (sec. 707
of the Act and new sec. 198A of the Code).......... 507

C. Net Operating Losses Attributable to Federally
Declared Disasters (sec. 708 of the Act and sec.
172 of the Code)................................... 511

D. Special Rules for Mortgage Revenue Bonds in
Federally Declared Disaster Areas (sec. 709 of the
bill and sec. 143 of the Code)..................... 512

E. Special Depreciation Allowance for Qualified
Disaster Property (sec. 710 of the Act and new sec.
168(n) of the Code)................................ 515

F. Increased Expensing for Qualified Disaster
Assistance Property (sec. 711 of the Act and sec.
179 of the Code)................................... 517

TITLE VII--REVENUE RAISERS....................................... 521

A. Modify Tax Treatment of Offshore Nonqualified
Deferred Compensation (sec. 801 of the Act and new
sec. 457A of the Code)............................. 521

Part Eighteen: Fostering Connections to Success and Increasing
Adoptions Act of 2008 (Public Law 110-351)..................... 535

A. Clarify Uniform Definition of Child (sec. 501 of the
Act and secs. 24 and 152 of the Code).............. 535

Part Nineteen: Michelle's Law (Public Law 110-381)............... 539

Part Twenty: Inmate Tax Fraud Prevention Act of 2008 (Public Law
110-428)....................................................... 542

Part Twenty-One: Worker, Retiree, and Employer Recovery Act of
2008 (Public Law 110-458)...................................... 544

TITLE I--TECHNICAL CORRECTIONS RELATED TO THE PENSION PROTECTION
ACT OF 2006 (``PPA'').......................................... 544

A. Technical Corrections to the PPA (secs. 101 through
112 of the PPA).................................... 544

1. Amendments relating to Title I of the PPA:
Reform of the Funding Rules for Single-Employer
Defined Benefit Pension Plans.................. 544
2. Amendments relating to Title II of the PPA:
Funding Rules for Multiemployer Defined Benefit
Plans.......................................... 547
3. Amendments relating to Title III of the PPA:
Interest Rate Provisions....................... 548
4. Amendments relating to Title IV of the PPA: PBGC
Guarantee and Related Provisions............... 549
5. Amendments relating to Title V of the PPA:
Disclosure..................................... 549
6. Amendments relating to Title VI of the PPA:
Investment Advice, Prohibited Transactions, and
Fiduciary Rules................................ 551
7. Amendments relating to Title VII of the PPA:
Benefit Accrual Standards...................... 551
8. Amendments relating to Title VIII of the PPA:
Pension Related Revenue Provisions............. 552
9. Amendments relating to Title IX of the PPA:
Increase in Pension Plan Diversification and
Participation and Other Pension Provisions..... 555
10. Amendments relating to Title X of the PPA:
Spousal Pension Protection Provisions.......... 556
11. Amendments relating to Title XI of the PPA:
Administrative Provisions...................... 556

B. Other Provisions.................................... 556

1. Amendments Related to Sections 102 and 112 of
the Pension Protection Act of 2006 (sec. 121 of
the Act and sec. 430(g)(3)(B) of the Code)..... 556
2. Modification of interest rate assumption
required with respect to certain small employer
plans (sec. 122 of the Act and sec.
415(b)(2)(E) of the Code)...................... 558
3. Determination of market rate of return for
governmental plans (sec. 123 of the Act and
sec. 4(i) of ADEA)............................. 559
4. Treatment of certain reimbursements from
governmental plans for medical care (sec. 124
of the Act and sec. 105 of the Code)........... 560
5. Rollover of amounts received in airline carrier
bankruptcy to Roth IRAs (sec. 125 of the Act).. 561
6. Determination of asset value for special airline
funding rules (sec. 126 of the Act and sec. 402
of the PPA).................................... 563
7. Modification of penalty for failure to file
partnership returns (sec. 127 of the Act and
sec. 6698 of the Code)......................... 564
8. Modification of penalty for failure to file S
corporation returns (sec. 128 of the Act and
sec. 6699 of the Code)......................... 564

TITLE II--PENSION PROVISIONS RELATING TO ECONOMIC CRISIS......... 566

A. Temporary Waiver of Required Minimum Distribution
Rules for Certain Retirement Plans and Accounts
(sec. 201 of the Act and sec. 401(a)(9) of the
Code).............................................. 566

B. Transition Rule Clarification (sec. 202 of the Act
and sec. 430 of the Code).......................... 569

C. Temporary Modification of Application of Limitation
on Benefit Accruals (sec. 203 of the Act).......... 570

D. Temporary Delay of Designation of Multiemployer
Plans as in Endangered or Critical Status (sec. 204
of the Act)........................................ 572

E. Temporary Extension of the Funding Improvement and
Rehabilitation Periods for Multiemployer Pension
Plans in Critical and Endangered Status for 2008 or
2009 (sec. 205 of the Act)......................... 579

Part Twenty-Two: Custom User Fees and Corporate Estimated Taxes.. 581

A. Extension of Customs User Fees...................... 581

B. Modifications to Corporate Estimated Tax Payments
Due in July, August, and September, 2012........... 582

C. Modifications to Corporate Estimated Tax Payments
Due in July, August, and September, 2013........... 584

Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 110th Congress............................................. 585

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 110th 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 110th
Congress (JCS-1-09), March 2009.
---------------------------------------------------------------------------
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 110th 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. Section references are to
the Internal Revenue Code unless otherwise indicated.
Part One of this document is an explanation of the
provisions of the U.S. Troop Readiness, Veterans' Care, Katrina
Recovery, and Iraq Accountability Appropriations Act, 2007
(Pub. L. No. 110-28) relating to tax relief for small business
and revenue offsets.
Part Two is an explanation of the provisions of the Energy
Independence and Security Act of 2007 (Pub. L. No. 110-140)
relating to the extension of the FUTA surtax and the
amortization of geological and geophysical expenditures.
Part Three is an explanation of the provisions of the Act
to exclude from gross income payments from the Hokie Spirit
Memorial Fund to the victims of the tragic event at Virginia
Polytechnic Institute & State University (Pub. L. No. 110-141).
Part Four is an explanation of the provisions of the
Mortgage Forgiveness Debt Relief Act of 2007 (Pub. L. No. 110-
142) relating to housing tax benefits, tax relief for volunteer
firefighters and emergency medical responders, and revenue
offsets.
Part Five is an explanation of the provisions relating to
the extension of the Airport and Airway Trust Fund excise taxes
and expenditure authority (Pub. L. Nos. 110-92, 110-161, 110-
190, 110-253, and 110-330).
Part Six is an explanation of the provisions of the Tax
Increase Prevention Act of 2007 (Pub. L. No. 110-166) relating
to extension of alternative minimum tax relief.
Part Seven is an explanation of the provisions of the Tax
Technical Corrections Act of 2007 (Pub. L. No. 110-172)
relating to amendments to recently enacted tax legislation to
make technical corrections.
Part Eight is an explanation of the provision of the Act to
amend the Internal Revenue Code of 1986 to clarify the term of
the Commissioner of Internal Revenue (Pub. L. No. 110-176).
Part Nine is an explanation of the provisions of the
Economic Stimulus Act of 2008 (Pub. L. No. 110-185) relating to
recovery rebates for individuals and incentives for business
investment.
Part Ten is an explanation of the provisions of the Genetic
Information Nondiscrimination Act of 2008 (Pub. L. No. 110-233)
relating to genetic nondiscrimination in group health plans.
Part Eleven is an explanation of the provisions of the
Food, Conservation, and Energy Act of 2008 (Pub. L. Nos. 110-
234 and 110-246) relating to tax benefits for land and species
conservation, cellulosic biofuel production, and certain
agricultural activities, other tax benefits, and revenue
offsets.
Part Twelve is an explanation of the provisions of the
Heroes Earnings Assistance and Relief Tax Act of 2008 (Pub. L.
No. 110-245) relating to tax benefits for military, revenue
offsets, and parity in the application of certain limits to
mental health benefits.
Part Thirteen is an explanation of the provisions of the
Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-289)
relating to housing tax incentives, real estate investment
trust reforms, and revenue offsets.
Part Fourteen is an explanation of the provision of the
Hubbard Act (Pub. L. No. 110-317) relating to the repeal of the
dollar limitation on contributions to funeral trusts.
Part Fifteen is an explanation of the provision of the Act
to amend the Internal Revenue Code of 1986 to restore the
Highway Trust Fund balance (Pub. L. No. 110-318).
Part Sixteen is an explanation of the provision of the SSI
Extension for Elderly and Disabled Refugees Act (Pub. L. No.
110-328) relating to the collection of unemployment
compensation debts resulting from fraud.
Part Seventeen is an explanation of the provisions of the
Emergency Economic Stabilization Act of 2008, the Energy
Improvement and Extension Act of 2008, and the Tax Extenders
and Alternative Minimum Tax Relief Act of 2008 (Pub. L. No.
110-343) relating to the tax treatment of sales or exchanges of
certain preferred stock by certain financial institutions,
limitations on executive compensation of certain employers,
energy production incentives, transportation and domestic fuel
security, energy conservation and efficiency, alternative
minimum tax relief, extension of certain tax provisions,
disaster relief, other tax benefits, and revenue offsets.
Part Eighteen is an explanation of the provision of the
Fostering Connections to Success and Increasing Adoptions Act
of 2008 (Pub. L. No. 110-351) relating to the clarification of
the uniform definition of qualifying child.
Part Nineteen is an explanation of the provision of
Michelle's Law (Pub. L. No. 110-381) relating to group health
plan coverage of dependent students on medically necessary
leaves of absence.
Part Twenty is an explanation of the provision of the
Inmate Tax Fraud Prevention Act of 2008 (Pub. L. No. 110-428)
relating to the disclosure of prisoner return information to
the Federal Bureau of Prisons.
Part Twenty-One is an explanation of the provisions Worker,
Retiree, and Employer Recovery Act of 2008 (Pub. L. No. 110-
458) relating to technical corrections of the Pension
Protection Act of 2006 (Pub. L. No. 109-280), modifications to
the required minimum distribution rules and the minimum funding
rules for defined benefit pension plans, and other tax benefits
and offsets.
Part Twenty-Two is an explanation of the provisions
relating to the extension of custom user fees and the
modification of corporate estimated tax payments (Pub. L. Nos.
110-42, 110-52, 110-89, 110-138, 110-191, 110-287, and 110-
436).
The Appendix provides the estimated budget effects of tax
legislation enacted in the 110th Congress.
The first footnote in each Part gives the legislative
history of each of the Acts of the 110th Congress discussed.
PART ONE: U.S. TROOP READINESS VETERANS' CARE, KATRINA RECOVERY, AND
IRAQ ACCOUNTABILITY APPROPRIATIONS ACT, 2007 (PUBLIC LAW 110-28) \2\

---------------------------------------------------------------------------
\2\ H.R. 2206. The House Committee on Ways and Means reported H.R.
976 on February 15, 2007 (H.R. Rep. 110-14). H.R. 2206 passed the House
on February 16, 2007. The Senate Committee on Finance reported S. 349
on January 22, 2007 (S. Rep. 110-1). The text of H.R. 976 was added to
H.R. 1591 as chapter 2 of Title VII. The House passed H.R. 1591 on
March 23, 2007. The Senate passed H.R. 1591 with an amendment on March
29, 2007. The conference report was filed on April 24, 2007 (H. Rep.
110-107) and was passed by the House on April 25, 2007, and the Senate
on April 26, 2007. The President vetoed the bill on May 1, 2007, and
the House failed to override the veto on May 2, 2007. H.R. 2206, which
contained the tax provisions of H.R. 1591, was passed by the House on
May 10, 2007, and was passed by the Senate on May 17, 2007. On May 24,
the House agreed to the Senate amendment with an amendment, and on May
24, 2007, the Senate agreed to the House amendment. The President
signed the bill on May 25, 2007. For a technical explanation of the
bill prepared by the staff of the Joint Committee on Taxation, see
Technical Explanation of the ``Small Business And Work Opportunity Tax
Act of 2007'' and Pension Related Provisions Contained in H.R. 2206 As
Considered By The House of Representatives on May 24, 2007 (JCX 29-07,
May 24, 2007).
---------------------------------------------------------------------------

TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS GENERAL PROVISIONS

A. General Provisions

1. Extension and modification of work opportunity tax credit (sec. 8211
of the Act and sec. 51 of the Code \3\)
---------------------------------------------------------------------------

\3\ Unless otherwise stated, all section references are to the
Internal Revenue Code of 1986, as amended (the ``Code'').
---------------------------------------------------------------------------

Present Law

In general

The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of nine
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).

Targeted groups eligible for the credit

Generally an employer is eligible for the credit only for
qualified wages paid to members of a targeted group.
(1) Families receiving TANF
An eligible recipient is an individual certified by a
designated local employment agency (e.g., a State employment
agency) as being a member of a family eligible to receive
benefits under the Temporary Assistance for Needy Families
Program (``TANF'') for a period of at least nine months during
the 18-month period ending on the hiring date. For these
purposes, members of the family are defined to include only
those individuals taken into account for purposes of
determining eligibility for the TANF.
(2) Qualified veteran
A qualified veteran is a veteran who is certified by the
designated local agency as a member of a family certified as
receiving assistance under a food stamp program under the Food
Stamp Act of 1977 for a period of at least three months ending
during the 12-month period ending on the hiring date. For these
purposes, members of a family are defined to include only those
individuals taken into account for purposes of determining
eligibility for a food stamp program under the Food Stamp Act
of 1977.
For these purposes, a veteran is an individual who has
served on active duty (other than for training) in the Armed
Forces for more than 180 days or who has been discharged or
released from active duty in the Armed Forces for a service-
connected disability. However, any individual who has served
for a period of more than 90 days during which the individual
was on active duty (other than for training) is not a qualified
veteran if any of this active duty occurred during the 60-day
period ending on the date the individual was hired by the
employer. This latter rule is intended to prevent employers who
hire current members of the armed services (or those departed
from service within the last 60 days) from receiving the
credit.
(3) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law, and (2) having a hiring date within one year of release
from prison or date of conviction.
(4) High-risk youth
A high-risk youth is an individual certified as being at
least age 18 but not yet age 25 on the hiring date and as
having a principal place of abode within an empowerment zone,
enterprise community, or renewal community (as defined under
Subchapter X of Subtitle A, Chapter 1 of the Internal Revenue
Code (the (``Code'')). Qualified wages do not include wages
paid or incurred for services performed after the individual
moves outside an empowerment zone, enterprise community, or
renewal community.
(5) Vocational rehabilitation referral
A vocational rehabilitation referral is an individual who
is certified by a designated local agency as an individual who
has a physical or mental disability that constitutes a
substantial handicap to employment and who has been referred to
the employer while receiving, or after completing: (a)
vocational rehabilitation services under an individualized,
written plan for employment under a State plan approved under
the Rehabilitation Act of 1973; or (b) under a rehabilitation
plan for veterans carried out under Chapter 31 of Title 38,
U.S. Code. Certification will be provided by the designated
local employment agency upon assurances from the vocational
rehabilitation agency that the employee has met the above
conditions.
(6) Qualified summer youth employee
A qualified summer youth employee is an individual: (1) who
performs services during any 90-day period between May 1 and
September 15, (2) who is certified by the designated local
agency as being 16 or 17 years of age on the hiring date, (3)
who has not been an employee of that employer before, and (4)
who is certified by the designated local agency as having a
principal place of abode within an empowerment zone, enterprise
community, or renewal community (as defined under Subchapter X
of Subtitle A, Chapter 1 of the Internal Revenue Code). As with
high-risk youths, no credit is available on wages paid or
incurred for service performed after the qualified summer youth
moves outside of an empowerment zone, enterprise community, or
renewal community. If, after the end of the 90-day period, the
employer continues to employ a youth who was certified during
the 90-day period as a member of another targeted group, the
limit on qualified first year wages will take into account
wages paid to the youth while a qualified summer youth
employee.
(7) Qualified food stamp recipient
A qualified food stamp recipient is an individual aged 18
but not yet 40 certified by a designated local employment
agency as being a member of a family receiving assistance under
a food stamp program under the Food Stamp Act of 1977 for a
period of at least six months ending on the hiring date. In the
case of families that cease to be eligible for food stamps
under section 6(o) of the Food Stamp Act of 1977, the six-month
requirement is replaced with a requirement that the family has
been receiving food stamps for at least three of the five
months ending on the date of hire. For these purposes, members
of the family are defined to include only those individuals
taken into account for purposes of determining eligibility for
a food stamp program under the Food Stamp Act of 1977.
(8) Qualified SSI recipient
A qualified SSI recipient is an individual designated by a
local agency as receiving supplemental security income
(``SSI'') benefits under Title XVI of the Social Security Act
for any month ending within the 60-day period ending on the
hiring date.
(9) Long-term family assistance recipients
A qualified long-term family assistance recipient is an
individual certified by a designated local agency as being: (1)
a member of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2) a
member of a family that has 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) \4\ if the individual is hired within two
years after the date that the 18-month total is reached; or (3)
a member of a family who is no longer eligible for family
assistance because of either Federal or State time limits, if
the individual is hired within two years after the Federal or
State time limits made the family ineligible for family
assistance.
---------------------------------------------------------------------------
\4\ The welfare-to-work tax credit was consolidated into the work
opportunity tax credit in the Tax Relief and Health Care Act of 2006,
for qualified individuals who begin to work for an employer after
December 31, 2006.
---------------------------------------------------------------------------

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.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.

Calculation of the credit

The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients 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). Except for long-term family assistance
recipients, no credit is allowed for second-year wages.
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-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 28th 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. For these
purposes, a pre-screening notice is a document (in such form as
the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.

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.

Other rules

The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than
fifty-percent owner of the entity. 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,
2007.

Reasons for Change

The Congress believes that the experience with the credit
has been positive and wishes to extend and expand the credit.
In particular, the Congress believes that the credit can be
used to improve employment opportunities for broader classes of
qualified veterans and designated community residents. Also,
the Congress believes that the expansion of the vocational
rehabilitation referral group appropriately conforms
availability of the credit to a previous expansion of the
vocational rehabilitation referral program.

Explanation of Provision

Extension

The Act extends the work opportunity tax credit for 44
months (for qualified individuals who begin work for an
employer after December 31, 2007, and before September 1,
2011).

Qualified veterans targeted group

The Act expands the qualified veterans' targeted group to
include an individual who is certified as entitled to
compensation for a service-connected disability and: (1) having
a hiring date which is not more than one year after having been
discharged or released from active duty in the Armed Forces of
the United States, or (2) having been unemployed for six months
or more (whether or not consecutive) during the one-year period
ending on the date of hiring. Being entitled to compensation
for a service-connected disability is defined with reference to
section 101 of Title 38, U.S.C., which means having a
disability rating of 10-percent or higher for service connected
injuries.

Qualified first-year wages

The Act expands the definition of qualified first-year
wages from $6,000 to $12,000 in the case of individuals who
qualify under either of the new expansions of the qualified
veteran group, above. The expanded definition of qualified
first-year wages does not apply to the veterans qualified with
reference to a food stamp program, as defined under present
law.

High-risk youth targeted group

The Act expands the definition of high-risk youths to
include otherwise qualifying individuals age 18 but not yet age
40 on the hiring date. Also, the Act expands the definition of
eligible individuals under this category to include otherwise
qualifying individuals from rural renewal counties. For these
purposes, a rural renewal county is a county outside a
metropolitan statistical area (as defined the Office of
Management and Budget) which had a net population loss during
the five-year periods 1990-1994 and 1995-1999. Finally, the Act
changes the name of the category to the ``designated community
residents'' targeted group.

Vocational rehabilitation referral targeted group

The Act expands the definition of vocational rehabilitation
referral to include any individual who is certified by a
designated local agency as an individual who has a physical or
mental disability that constitutes a substantial handicap to
employment and who has been referred to the employer while
receiving, or after completing, an individual work plan
developed and implemented by an employment network pursuant to
subsection (g) of section 1148 of the Social Security Act.

Certification

Under present law, designated local employment agencies may
enter into information sharing agreements to facilitate
certification for purposes of WOTC eligibility. Such agreements
are subject to confidentiality requirements. The Congress
expects that the Department of Defense, the Department of
Veterans Affairs, and the Social Security Administration will
work with the designated local agencies to facilitate
certification of the expansions of the qualified veteran
category and the SSI recipient category. Finally, the Congress
expects that the Internal Revenue Service will develop
procedures to allow (in addition to original documents) paper
versions of electronically completed pre-screening notices and
photographic copies of hand signed original pre-screening
notices for purposes of the credit. This allowance of pre-
screening notices which are not original documents should be
allowed only to the extent it does not foster incorrect or
fraudulent filings.

Effective Date

The provisions are effective for individuals who begin work
for an employer after the date of enactment (May 25, 2007).

2. Increase and extension of expensing for small business (sec. 8212 of
the Act and sec. 179 of the Code)

Present Law

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 2006,
Congress acted to extend the increased value of these benefits
and the increased number of taxpayers eligible for these
benefits for taxable years through 2009. 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 year. Furthermore, the
Congress believes that the dollar limits on expensing should be
increased in order to further lower the cost of capital for
small businesses, and to make this benefit available for a
greater number of small businesses.

Explanation of Provision \9\

---------------------------------------------------------------------------
\9\ The provision was subsequently modified to increase the annual
limitation on investment and the phase-out amounts for taxable years
beginning in 2008. See Part Nine, B.
---------------------------------------------------------------------------
The Act increases the $100,000 and $400,000 amounts to
$125,000 and $500,000, respectively, for taxable years
beginning in 2007 through 2010. These amounts are indexed for
inflation in taxable years beginning after 2007 and before
2011.
In addition, the Act extends for one year the increased
amount that a taxpayer may deduct and the other section 179
rules applicable in taxable years beginning before 2010. Thus,
under the Act, these rules continue in effect for taxable years
beginning after 2009 and before 2011.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2006.

3. Determination of credit for certain taxes paid with respect to
employee cash tips (sec. 8213 of the Act and sec. 45B of the
Code)

Present Law \10\

---------------------------------------------------------------------------
\10\ A separate provision of Pub. L. No. 110-28 increases the
Federal minimum wage (to $7.25 per hour over a transition period).
---------------------------------------------------------------------------
The Federal minimum wage under the Fair Labor Standards Act
(the ``FLSA'') is $5.15 per hour. In the case of tipped
employees, the FLSA provides that the minimum wage may be
reduced to $2.13 per hour (that is, the employer is only
required to pay cash equal to $2.13 per hour) if the
combination of tips and cash income equals the Federal minimum
wage.\11\
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\11\ Some States require the payment of cash wages to tipped
employees in excess of the Federal minimum of $2.13 per hour. For a
history of the tip provisions under the FLSA and a description of
relevant State laws, see William G. Whittaker, Congressional Research
Service, The Tip Credit Provisions of the Fair Labor Standards Act
(Order Code RL33348), March 24, 2006.
---------------------------------------------------------------------------
Under present law, employee tip income is treated as
employer-provided wages for purposes of the Federal Insurance
Contributions Act (``FICA''). Employees are required to report
the amount of tips received.
A business tax credit is provided equal to an employer's
FICA taxes paid on tips in excess of those treated as wages for
purposes of meeting the minimum wage requirements of the FLSA.
The credit applies only with respect to FICA taxes paid on tips
received from customers in connection with the providing,
delivering, or serving of food or beverages for consumption if
the tipping of employees delivering or serving food or
beverages by customers is customary. The credit is available
whether or not the employee reports the tips on which the
employer FICA taxes were paid. No deduction is allowed for any
amount taken into account in determining the tip credit. A
taxpayer may elect not to have the credit apply for a taxable
year.

Reasons for Change

Under present law, because the amount of tips eligible for
the FICA tip credit is tied to the minimum wage under the FLSA,
if the minimum wage increases above $5.15 per hour, the amount
of the FICA tip credit will automatically be reduced. The
Congress believes that the increase in the minimum wage should
not result in an increase in taxes for employers in the
restaurant industry. Thus, the Committee bill freezes the tip
credit based on the current minimum wage so that, when the
minimum wage is increased, the tip credit will not be affected.

Explanation of Provision

The Act provides that the amount of the tip credit is based
on the amount of tips in excess of those treated as wages for
purposes of the FLSA as in effect on January 1, 2007. That is,
under the provision, the tip credit is determined based on a
minimum wage of $5.15 per hour. Therefore, if the amount of the
minimum wage increases, the amount of the FICA tip credit will
not be reduced.

Effective Date

The provision applies with respect to tips received for
services performed after December 31, 2006.

4. Waiver of individual and corporate alternative minimum tax limits on
work opportunity credit and credit for taxes paid with respect
to employee cash tips (sec. 8214 of the Act and sec. 38 of the
Code)

Present Law

Under present law, business tax credits generally may not
exceed the excess of the taxpayer's income tax liability over
the tentative minimum tax (or, if greater, 25 percent of the
regular tax liability in excess of $25,000). Credits in excess
of the limitation may be carried back one year and carried over
for up to 20 years.
The tentative minimum tax is an amount equal to specified
rates of tax imposed on the excess of the alternative minimum
taxable income over an exemption amount. To the extent the
tentative minimum tax exceeds the regular tax, a taxpayer is
subject to the alternative minimum tax.
Thus, business tax credits generally cannot offset the
alternative minimum tax liability.

Reasons for Change

The alternative minimum tax limits the intended effects of
the work opportunity tax credit and the credit for taxes paid
with respect to cash tips for some taxpayers. The Congress
believes that the incentive effects of work opportunity credit
and credit for taxes paid with respect to employee cash tips
should be available to taxpayers regardless of their
alternative minimum tax status. Accordingly, the Act provides
that these credits can be utilized by offsetting both the
regular tax and the alternative minimum tax.

Explanation of Provision

The Act treats the tentative minimum tax as being zero for
purposes of determining the tax liability limitation with
respect to the work opportunity credit and the credit for taxes
paid with respect to employee cash tips.
Thus, the work opportunity tax credit and the credit for
taxes paid with respect to cash tips may offset the alternative
minimum tax liability.

Effective Date

The provision applies to credits determined in taxable
years beginning after December 31, 2006.

5. Family business tax simplification (sec. 8215 of the Act and sec.
761 of the Code)

Present Law

Under present law, a partnership is defined to include a
syndicate, group, pool, joint venture, or other unincorporated
organization through or by means of which any business,
financial operation or venture is carried on, and which is not
a trust or estate or a corporation (sec. 7701(a)(2)). A
partnership is treated as a pass-through entity, and income
earned by the partnership, whether distributed or not, is taxed
to the partners. The income of a partnership and its partners
is determined under subchapter K of the Code. An election not
to be subject to the rules of subchapter K is provided for
certain partnerships that meet specified criteria (e.g., the
partnership is for investment purposes only, is for the joint
production, extraction or use of property but not for selling
services or property produced or extracted, or is used by
securities dealers for short periods to underwrite, sell or
distribute securities). Otherwise, the rules of subchapter K
apply to a venture that is treated as a partnership for Federal
tax purposes.
In the case of an individual with self-employment income,
the income subject to self-employment tax is the net earnings
from self-employment (sec. 1402(a)). Net earnings from self-
employment is the gross income derived by an individual from
any trade or business carried on by the individual, less the
deductions attributable to the trade or business that are
allowed under the self-employment tax rules. If the individual
is a partner in a partnership, the net earnings from self-
employment generally include his or her distributive share
(whether or not distributed) of income or loss from any trade
or business carried on by the partnership.

Reasons for Change

The Congress is concerned that certain business ventures
whose sole members are a husband and wife filing a joint return
may be subject to unnecessary complexity under present law.\12\
In the situation in which the spouses share all items of
income, gain, loss, deduction and credit from the venture, the
venture should not be required to file a partnership return if
each of the two spouses' income can be accurately recorded on
Schedule C (or F, in the case of a farm) filed with the joint
return. The reported income would be the same on the joint
return, whether or not a partnership return is filed. Further,
the Congress is concerned that if only one spouse is treated as
having net earnings from self-employment from the venture, when
in fact both spouses materially participate in it, only the
spouse that is treated as having net earnings from self-
employment from the venture will receive credit for purposes of
Social Security benefits. The Congress believes that, therefore
in this situation, both spouses, not just one, should be
treated as having net earnings from self-employment from the
venture in accordance with their respective interests, and
should receive credit for the appropriate net earnings from
self-employment for purposes of Social Security benefits.
---------------------------------------------------------------------------
\12\ See National Taxpayer Advocate FY 2002 Annual Report to
Congress, ``Married Couples as Business Co-owners,'' at 172,
recommending a similar change for this reason as well as other reasons.
This recommendation was also included in the National Taxpayer Advocate
FY 2004 Annual Report to Congress.
---------------------------------------------------------------------------

Explanation of Provision

The Act generally permits a qualified joint venture whose
only members are a husband and wife filing a joint return not
to be treated as a partnership for Federal tax purposes. A
qualified joint venture is a joint venture involving the
conduct of a trade or business, if (1) the only members of the
joint venture are a husband and wife, (2) both spouses
materially participate in the trade or business, and (3) both
spouses elect such treatment.
Under the Act, a qualified joint venture conducted by a
husband and wife who file a joint return is not treated as a
partnership for Federal tax purposes. All items of income,
gain, loss, deduction and credit are divided between the
spouses in accordance with their respective interests in the
venture. Each spouse takes into account his or her respective
share of these items as a sole proprietor. Thus, it is
anticipated that each spouse would account for his or her
respective share on the appropriate form, such as Schedule C.
The Act is not intended to change the determination under
present law of whether an entity is a partnership for Federal
tax purposes (without regard to the election provided by the
provision).
For purposes of determining net earnings from self-
employment, each spouse's share of income or loss from a
qualified joint venture is taken into account just as it is for
Federal income tax purposes under the Act (i.e., in accordance
with their respective interests in the venture). A
corresponding change is made to the definition of net earnings
from self-employment under the Social Security Act. The Act is
not intended to prevent allocations or reallocations, to the
extent permitted under present law, by courts or by the Social
Security Administration of net earnings from self-employment
for purposes of determining Social Security benefits of an
individual.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2006.

B. Gulf Opportunity Zone Tax Incentives

1. Extension of increased expensing for qualified section 179 Gulf
Opportunity Zone property (sec. 8221 of the Act and sec.
1400N(e) of the Code)

Present Law

In general

Present law provides that, in lieu of depreciation, a
taxpayer with a sufficiently small amount of annual investment
may elect to deduct (``or expense'') such costs under section
179. 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.\13\ 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 2010 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 2010. For taxable years beginning in
2007, the inflation-adjusted amounts are $112,000 and $450,000,
respectively.\14\
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\13\ Additional section 179 incentives are provided with respect to
qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A), or a renewal community
(sec. 1400J).
\14\ Rev. Proc. 2006-53, sec. 2.19, 2006-2 C.B. 996.
---------------------------------------------------------------------------
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.\15\
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\15\ Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, 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.
---------------------------------------------------------------------------
For taxable years beginning in 2010 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.\16\
---------------------------------------------------------------------------
\16\ Sec. 179(c)(2).
---------------------------------------------------------------------------

Increase for Gulf Opportunity Zone Property

Under section 1400N(e), 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 Act
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 2010, 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.
There is 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
2010, 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.
Qualified section 179 Gulf Opportunity Zone property means
section 179 property (as defined in section 179(d)) 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.
These rules are coordinated with 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 property
into account for purposes of the increased section 179
expensing. 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 to this property if recapture applies
under section 179(d)(10) or if the property ceases to be
qualified section 179 Gulf Opportunity Zone property.

Explanation of Provision

The Act extends the increased expensing amount for property
substantially all of the use of which is in one or more
specified portions of the GO Zone to property placed in service
by the taxpayer on or before December 31, 2008. The specified
portions of the Go Zone include the Louisiana parishes of
Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St.
Tammany, and Washington, and the Mississippi counties of
Hancock, Harrison, Jackson, Pearl River, and Stone.\17\
---------------------------------------------------------------------------
\17\ The ``specified portions of the Go Zone'' as defined by
section 1400N(d)(6) are identified by the Secretary in Notice 2007-36,
2007-17 I.R.B 1000.
---------------------------------------------------------------------------

Effective Date

The provision is effective for taxable years beginning
after the date of enactment (May 25, 2007).

2. Extension and expansion of low-income housing credit rules for
buildings in the GO Zones (sec. 8222 of the Act and 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 building 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 of the credit 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.

Credit cap

A low-income housing credit is allowable only if the owner
of a qualified building receives a housing credit allocation
from the State or local housing credit agency. Credit cap is
provided to the States annually. For 2006, the amount 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.
Under the Gulf Opportunity Zone Act of 2005, the otherwise
applicable housing credit ceiling amount is increased for each
of the States within the Gulf Opportunity Zone (Alabama,
Louisiana, and Mississippi). 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
increase applies to calendar years 2006, 2007, and 2008. This
amount is not adjusted for inflation. For purposes of the
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, under the Gulf Opportunity
Zone Act of 2005, the otherwise applicable housing credit
ceiling amount is increased for Florida and Texas by $3,500,000
per State. This increase applies only to calendar year 2006.

Carryover allocation rule

A low-income housing credit is allowable only if the owner
of a qualified building receives a housing credit allocation
from the State or local housing credit agency. In general, the
allocation must be made not later than the close of the
calendar year in which the building is placed in service. One
exception to this rule is a carryover allocation. In the case
of a carryover allocation, an allocation may be made to a
building that has not yet been placed in service, provided
that: (1) more than ten percent of the taxpayer's reasonably
expected basis in the project (as of the close of the second
calendar year following the calendar year of the allocation) is
incurred as of the later of six months after the allocation is
made or the end of the calendar year in which the allocation is
made; and (2) the building is placed in service not later than
the close of the second calendar year following the calendar
year of the allocation.

Enhanced credit

Generally, 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 area having more
than 20 percent of the population of each metropolitan
statistical area or nonmetropolitan statistical area can be a
difficult to develop area and therefore a high cost area
eligible for this treatment.
Under the Gulf Opportunity Zone Act of 2005, the Gulf
Opportunity Zone, the Rita GO Zone, and the Wilma GO Zone (the,
``Go Zones'') 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 GO Zones 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 provided under the Gulf
Opportunity Zone Act of 2005 The Act to treat the GO Zones as a
high-cost area is generally effective for calendar years
beginning after 2005 and before 2009, and for 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
after December 31, 2005.

Definition of Federally subsidized

In general, any newly constructed or substantially
rehabilitated building is treated as Federally subsidized for
any taxable year if, at any time during such taxable year or
prior taxable year, there is or was outstanding any obligation
the interest on which is exempt under section 103, or any below
market Federal loan, the proceeds of which are or were used
(directly or indirectly) with respect to such building or the
operation thereof. Exceptions are provided from this general
rule: (1) if the taxpayer elects to reduce eligible basis; and
(2) for certain subsidized construction financing. For purposes
of this rule, a below market Federal loan generally is defined
as a loan funded, in whole or in part, with Federal funds if
the interest payable on such loan is less than the applicable
Federal rate in effect under section 1274(d)(1) (as of the date
the loan was made). A loan is not treated as a below market
Federal loan for these purposes, if it is below market solely
by reason of assistance provided under section 106, 107, or 108
of the Housing and Community Development Act of 1974, as in
effect on December 19, 1989 (the date of enactment of the
Omnibus Budget Reconciliation Act of 1989).

Rehabilitation expenditures

Rehabilitation expenditures paid or incurred by the
taxpayer with respect to any building shall be treated as a
separate new building for purposes of the credit. In general,
rehabilitation expenditures are amounts chargeable to a capital
account and incurred for property (or additions or improvements
to property) of a character subject to depreciation in
connection with the rehabilitation of a building. Such term
does not include the cost of acquiring a building (or interest
therein). Other rules, including a minimum expenditure
requirement, apply.

Reasons for Change \18\

---------------------------------------------------------------------------
\18\ See H.R. 1562, the ``Katrina Housing Tax Relief Act of 2009,''
which was reported by the House Committee on Ways and Means on March
23, 2007 (H.R. Rep. No. 110-66).
---------------------------------------------------------------------------
The Congress believes that it is appropriate to respond to
the extended recovery period currently being experienced in the
GO Zones. Further, the Congress believes that a temporary
extension of certain tax incentives for housing construction is
necessary to accommodate the recovery effort. The extension of
the time period within which certain tax incentives must be
utilized will help provide thousands of additional units of low
income rental housing in the affected areas.

Explanation of Provision

Carryover allocation rule

The Act makes two modifications to the carryover allocation
rule for otherwise qualifying buildings located in the GO Zones
placed in service before January 1, 2011. First, it repeals the
requirement that 10 percent of the taxpayer's reasonably
expected basis in the project (as of the close of the second
calendar year following the calendar year of the allocation)
must be incurred as of the later of six months after the
allocation is made or the end of the calendar year in which the
allocation is made (the ``10-percent rule''). Second, it
repeals the requirement that such building be placed in service
not later than the close of the second calendar year following
the calendar year of the allocation (the ``second-year placed
in service rule''). These changes apply only to allocations
made in 2006, 2007, or 2008 whether made out of the regular
credit cap or the additional Gulf Opportunity Zone credit cap.
Therefore, an otherwise qualifying building is treated as a
qualifying for the credit regardless of whether the 10-percent
rule or the second-year placed in service rule are satisfied if
such building in one of the GO Zones: (1) receives an
allocation in 2006, 2007, or 2008; and (2) is placed in service
before January 1, 2011.

Enhanced credit

The Act extends the placed in service dates for buildings
eligible for the enhanced credit available under the Gulf
Opportunity Zone Act of 2005 for two additional years (2009 and
2010) for allocations made in 2006, 2007, or 2008. The Act to
treat the GO Zones as a high-cost area is generally effective
for calendar years beginning after December 31, 2008 and before
January 1, 2011, and for 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.
Therefore, otherwise qualifying buildings located in the GO
Zones generally are eligible for the enhanced credit for
allocations made in 2006, 2007, or 2008, if placed in service
after December 31, 2005 and before January 1, 2011.

Definition of Federally subsidized

The Act modifies the definition of below market Federal
loan for otherwise qualifying buildings located in the GO Zones
that are placed in service during the period beginning on
January 1, 2006 and ending on December 31, 2010. Under the Act,
a loan is not treated as a below market Federal loan solely by
reason of assistance provided under section 106, 107, or 108 of
the Housing and Community Development Act of 1974 by reason of:
(1) section 122 of that Act; (2) any provision of the
Department of Defense Appropriations Act, 2006 (Pub. L. No.
109-141); or (3) the Emergency Supplemental Appropriations Act
for Defense, the Global War on Terror, and Hurricane Recovery,
2006 (Pub. L. No. 109-234). Therefore, such assistance will not
cause an otherwise qualifying building receiving such
assistance to be treated as Federally subsidized for purposes
of the low income housing credit.

Rehabilitation expenditures

The Congress expects that the present law rules treating
rehabilitation expenses as a separate new building for purposes
of the low-income housing credit will apply in the case of
buildings in the GO Zones which have been destroyed and,
therefore, must be rehabilitated. For example, if a building
receiving the low-income housing credit (with an eligible basis
of $100 for credit purposes) was destroyed and the cost of
replacing the building is $150, then the Congress expects that
present law rules may allow the expenditures that exceed $100
but do not exceed $150 to be treated as a separate building
with separate credit and compliance periods, assuming the
rehabilitation expenditure receives a credit allocation and
meets the otherwise applicable low income housing tax credit
requirements.

Effective Date

The provisions are effective upon enactment (May 25, 2007).

3. Special tax-exempt bond financing rule for repairs and
reconstructions of residences in the GO Zones (sec. 8223 of the
Act and secs. 143 and 1400N(a) of the Code)

Present Law

In general

Under present law, gross income does not include interest
on State or local bonds. 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''). The definition
of a qualified private activity bond includes a qualified
mortgage bond.

Qualified mortgage bonds

Qualified mortgage bonds are tax-exempt bonds issued to
make mortgage loans to eligible 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. In
addition, bond proceeds generally only can be used for new
mortgages, i.e., proceeds cannot be used to acquire or replace
existing mortgages.
Exceptions to the new mortgage requirement are provided for
the replacement of construction period loans, bridge loans, and
other similar temporary initial financing. In addition,
qualified rehabilitation loans may be used, in part, to replace
existing mortgages. A qualified rehabilitation loan means
certain loans for the rehabilitation of a building if there is
a period of at least 20 years between the date on which the
building was first used (the ``20 year rule'') and the date on
which the physical work on such rehabilitation begins and the
existing walls and basis requirements are met. The existing
walls requirement for a rehabilitated building is met if 50
percent or more of the existing external walls are retained in
place as external walls, 75 percent or more of the existing
external walls are retained in place as internal or external
walls, and 75 percent or more of the existing internal
structural framework is retained in place. The basis
requirement is met if expenditures for rehabilitation are 25
percent or more of the mortgagor's adjusted basis in the
residence, determined as of the later of the completion of the
rehabilitation or the date on which the mortgagor acquires the
residence.
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, and may not be used to refinance existing mortgages.
As with most qualified private activity bonds, issuance of
qualified mortgage bonds is subject to annual State volume
limitations (the ``State volume cap''). For calendar year 2007,
the State volume cap, which is indexed for inflation, equals
the greater of $85 per resident of the State, or $256.24
million. Exceptions from the State volume cap are provided for
bonds issued 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, qualified green
building/sustainable design projects, and qualified highway or
surface freight transfer facility bonds).

Gulf Opportunity Zone Bonds

The Gulf Opportunity Zone Act of 2005 (the ``Act'')
authorizes Alabama, Louisiana, and Mississippi (or any
political subdivision of those States) to issue 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 are not subject to the
State volume cap. Rather, the maximum aggregate amount of Gulf
Opportunity Zone Bonds that may be issued in any eligible State
is limited to $2,500 multiplied by the population of the
respective State within the Gulf Opportunity Zone.
Gulf Opportunity Zone Bonds issued to finance residences
located in the Gulf Opportunity Zone are treated as qualified
mortgage bonds if the general requirements for qualified
mortgage bonds are met. The Code also provides special rules
for Gulf Opportunity Zone Bonds issued to finance residences
located in the Gulf Opportunity Zone. For example, the first-
time homebuyer rule is waived and the income and purchase price
rules are relaxed for residences financed in the GO Zone, the
Rita GO Zone, or the Wilma GO Zone. In addition, the Code
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. Gulf Opportunity Zone Bonds must be
issued before January 1, 2011.

Reasons for Change\19\

---------------------------------------------------------------------------
\19\ See H.R. 1562, the ``Katrina Housing Tax Relief Act of 2009,''
which was reported by the House Committee on Ways and Means on March
23, 2007 (H.R. Rep. No. 110-66).
---------------------------------------------------------------------------
The Congress believes that it is appropriate to respond to
the low recovery effort in the GO Zones. Further, the Congress
believes that mortgage bond proceeds could be used to help
expedite the rebuilding efforts. The Congress believes that
these additional steps will assist the effort to reconstruct
housing in the affected areas.

Explanation of Provision

Under the Act, a qualified GO Zone repair or reconstruction
loan is treated as a qualified rehabilitation loan for purposes
of the qualified mortgage bond rules. Thus, such loans financed
with the proceeds of qualified mortgage bonds and Gulf
Opportunity Zone Bonds may be used to acquire or replace
existing mortgages, without regard to the existing walls or 20
year rule under present law. The Act defines a qualified GO
Zone repair or reconstruction loan as any loan used to repair
damage caused by Hurricane Katrina, Hurricane Rita, or
Hurricane Wilma to a building located in the GO Zones (or
reconstruction of such building in the case of damage
constituting destruction) if the expenditures for such repair
or reconstruction are 25 percent or more of the mortgagor's
adjusted basis in the residence. For purposes of the Act, the
mortgagor's adjusted basis is determined as of the later of (1)
the completion of the repair or reconstruction or (2) the date
on which the mortgagor acquires the residence.

Effective Date

The provision applies to owner-financing provided after the
date of enactment and before January 1, 2011.

4. GAO study of practices employed by State and local governments in
allocating and utilizing tax incentives provided pursuant to
the Gulf Opportunity Zone Tax Act of 2005 (sec. 8224 of the
Act)

Present Law

There is no requirement under present law that the
Government Accountability Office (``GAO'') study and report on
the utilization of tax incentives in the GO Zones.

Reasons for Change \20\

---------------------------------------------------------------------------
\20\ See H.R. 1562, the ``Katrina Housing Tax Relief Act of 2009,''
which was reported by the House Committee on Ways and Means on March
23, 2007 (H.R. Rep. No. 110-66).
---------------------------------------------------------------------------
The Congress believes it is appropriate to require
oversight with respect to the tax incentives and other funds
provided to assist rebuilding efforts in the GO Zones. To
ensure that States and localities use best practices in regard
to these incentives, the Congress has requested that an
independent review be made by the GAO and a report on its
findings be made to the House Ways and Means Committee and
Senate Finance Committee.

Explanation of Provision

The Act requires the GAO to conduct a study of the
practices employed by State and local governments, and
subdivisions thereof, in allocating and utilizing tax
incentives provided pursuant to the Gulf Opportunity Act of
2005 (Pub. L. No. 109-135) and this bill.
Not more than one year after the date of enactment of this
Act, the GAO must submit a report to the House Committee on
Ways and Means and the Senate Committee on Finance on the
findings of its study and recommendations, if any, relating to
such findings. If the GAO report includes findings of
significant fraud, waste or abuse, then each of the two
committees should hold public hearings to review such findings
within 60 days of the submission of the report.

Effective Date

The provision is effective on the date of enactment (May
25, 2007).

C. Subchapter S Provisions (secs. 8231-8236 of the Act and secs. 641,
1361 and 1362 of the Code)

Overview

Reasons for Change

Many small businesses are organized as S corporations. The
Act contains a number of provisions relating to these
corporations. These provisions modernize the S corporation
rules and eliminate undue restrictions on S corporations. The
Congress believes that these changes will improve the operation
of Subchapter S and therefore will benefit small businesses.

1. Capital gain not treated as passive investment income

Present Law

Passive investment income

An S corporation is subject to corporate-level tax, at the
highest corporate tax rate, on its excess net passive income if
the corporation has (1) accumulated earnings and profits at the
close of the taxable year and (2) gross receipts more than 25
percent of which are passive investment income.
Excess net passive income is the net passive income for a
taxable year multiplied by a fraction, the numerator of which
is the amount of passive investment income in excess of 25
percent of gross receipts and the denominator of which is the
passive investment income for the year. Net passive income is
defined as passive investment income reduced by the allowable
deductions that are directly connected with the production of
that income. Passive investment income generally means gross
receipts derived from royalties, rents, dividends, interest,
annuities, and sales or exchanges of stock or securities (to
the extent of gains). Passive investment income generally does
not include interest on accounts receivable, gross receipts
that are derived directly from the active and regular conduct
of a lending or finance business, gross receipts from certain
liquidations, gain or loss from any section 1256 contract (or
related property) of an options or commodities dealer, or
certain interest and dividend income of banks and depository
institution of holding companies.
In addition, an S corporation election is terminated
whenever the S corporation has accumulated earnings and profits
at the close of each of three consecutive taxable years and has
gross receipts for each of those years more than 25 percent of
which are passive investment income.

Explanation of Provision

The Act eliminates gains from sales or exchanges of stock
or securities as an item of passive investment income.

Effective Date

The provision applies to taxable years beginning after the
date of enactment (May 25, 2007).

2. Treatment of bank director shares

Present Law

An S corporation may have no more than 100 shareholders and
may have only one outstanding class of stock.
An S corporation has one class of stock if all outstanding
shares of stock confer identical rights to distribution and
liquidation proceeds. Differences in voting rights are
disregarded.\21\
---------------------------------------------------------------------------
\21\ Sec. 1361(c)(4). Treasury regulations provide that buy-sell
and redemption agreements are disregarded in determining whether a
corporation's outstanding shares confer identical distribution and
liquidation rights unless (1) a principal purpose of the agreement is
to circumvent the one class of stock requirement and (2) the agreement
establishes a purchase price that, at the time the agreement is entered
into, is significantly in excess of, or below, the fair market value of
the stock. Treas. Reg. sec. 1.1361-1(l).
---------------------------------------------------------------------------
National banking law requires that a director of a national
bank own stock in the bank and that a bank have at least five
directors.\22\ A number of States have similar requirements for
State-chartered banks. In some cases, a bank director enters
into an agreement under which the bank (or a holding company)
will reacquire the stock upon the director's ceasing to hold
the office of director, at the price paid by the director for
the stock.\23\
---------------------------------------------------------------------------
\22\ 12 U.S.C. secs. 71-72.
\23\ See Private Letter Ruling 200217048 (January 24, 2002)
describing such an agreement and holding that it creates a second class
of stock. Nonetheless, the ruling concluded that the election to be an
S corporation was inadvertently invalid and that an amended agreement
did not create a second class of stock so that the corporation's
election was validated.
---------------------------------------------------------------------------

Explanation of Provision

Under the Act, restricted bank director stock is not taken
into account as outstanding stock in applying the provisions of
subchapter S.\24\ Thus, the stock is not treated as a second
class of stock; a director is not treated as a shareholder of
the S corporation by reason of the stock; the stock is
disregarded in allocating items of income, loss, etc. among the
shareholders; and the stock is not treated as outstanding for
purposes of determining whether an S corporation holds 100
percent of the stock of a qualified subchapter S subsidiary.
---------------------------------------------------------------------------
\24\ No inference is intended as to the proper income tax treatment
of restricted bank director stock or other similar stock under present
law.
---------------------------------------------------------------------------
Restricted bank director stock is stock in a bank (as
defined in sec. 581), or a depository institution holding
company (within the meaning of sec. 3(w)(1) of the Federal
Deposit Insurance Act), if the stock is required to be held by
an individual under applicable Federal or State law in order to
permit the individual to serve as a director of the bank or
holding company and which is subject to an agreement with the
bank or holding company (or corporation in control of the bank
or company) pursuant to which the holder is required to sell
the stock back upon ceasing to be a director at the same price
the individual acquired the stock.
A distribution (other than a payment in exchange for the
stock) with respect to the restricted stock is includible in
the gross income of the director and is deductible by the S
corporation for the taxable year that includes the last day of
the director's taxable year in which the distribution is
included in income.

Effective Date

The provision applies to taxable years beginning after
December 31, 2006.
The provision also provides that restricted bank director
stock is not treated as a second class of stock for taxable
years beginning after December 31, 1996.

3. Treatment of banks changing from reserve method of accounting

Present Law

A financial institution which uses the reserve method of
accounting for bad debts may not elect to be an S
corporation.\25\ If a financial institution changes from the
reserve method of accounting, there is taken into account for
the taxable year of the change adjustments to taxable income
necessary to prevent amounts from being duplicated or omitted
by reason of the change.\26\
---------------------------------------------------------------------------
\25\ Sec. 1361(b)(2)(A).
\26\ Sec. 481.
---------------------------------------------------------------------------
Positive adjustments (i.e., additions to taxable income)
are generally spread over four taxable years beginning in the
year of change.\27\ Negative adjustments (i.e., reductions to
taxable income) are generally taken into account entirely in
the year of change.\28\
---------------------------------------------------------------------------
\27\ Rev. Proc. 2002-19, 2002-1 C.B. 696.
\28\ Id.
---------------------------------------------------------------------------
In the case of a financial institution that changes from
the reserve method and elects to be an S corporation for the
year of change, the adjustments are both included in the income
of the shareholders and are taken into account in computing the
tax on built-in gain under section 1374. If the change in
accounting method is made for the last taxable year prior to
becoming an S corporation, any adjustments for that year are
taken into account in computing the corporation's taxable
income, but not taken into account by the shareholders.

Explanation of Provision

The Act allows a bank which changes from the reserve method
of accounting for bad debts for its first taxable year for
which it is an S corporation to elect to take into account all
adjustments under section 481 by reason of the change in the
last taxable year it was a C corporation.

Effective Date

The provision applies to taxable years beginning after
December 31, 2006.

4. Treatment of sale of an interest in a qualified subchapter S
subsidiary

Present Law

Under present law, an S corporation that owns all the stock
of a corporation may elect to treat the subsidiary corporation
as a qualified subchapter S subsidiary (``QSub''). A qualified
subchapter S subsidiary is disregarded as a separate entity for
Federal tax purposes and its items of income, deduction, loss,
and credit are treated as items of the S corporation.
If the subsidiary corporation ceases to be a QSub (e.g.,
fails to meet the wholly-owned requirement) the subsidiary is
treated as a new corporation acquiring all its assets (and
assuming all of its liabilities) immediately before such
cessation from the parent S corporation in exchange for its
stock. Under Treasury regulations,\29\ the tax treatment of the
termination of the QSub election is determined under general
principles of tax law, including the step transaction doctrine.
The regulations set forth an example \30\ in which an S
corporation sells 21 percent of the stock of a QSub to an
unrelated party. In the example, the deemed transfer of all the
assets to the QSub is treated as a taxable sale because the S
corporation was not in control of the QSub immediately after
the transfer by reason of the sale, and thus the transfer did
not qualify for nonrecognition treatment under section 351.
---------------------------------------------------------------------------
\29\ Treas. Reg. sec. 1.1361-5(b).
\30\ Example (1) of Treas. Reg. sec. 1.1361-5(b)(3).
---------------------------------------------------------------------------

Explanation of Provision

The Act provides that where the sale of stock of a QSub
results in the termination of the QSub election, the sale is
treated as a sale of an undivided interest in the assets of the
QSub (based on the percentage of the stock sold) followed by a
deemed transfer to the QSub in a transaction to which section
351 applies.
Thus, in the above example, the S corporation will be
treated as selling a 21-percent interest in all the assets of
the QSub to the unrelated party, followed by a transfer of all
the assets to a new corporation in a transaction to which
section 351 applies. Thus, the S corporation will recognize 21
percent of the gain or loss in the assets of the QSub.
The Act is not intended to change the present-law treatment
of the disposition of stock of a QSUB by an S corporation in
connection with an otherwise non-taxable transaction. For
example, the transfer of stock of a QSUB by an S corporation
pro rata to its shareholders can qualify as a distribution to
which sections 368(a)(1)(D) and 355 apply if the transaction
otherwise satisfies the requirements of those sections.\31\
---------------------------------------------------------------------------
\31\ See Example (4) of Treas. Reg. sec. 1.1361-5(b)(3).
---------------------------------------------------------------------------

Effective Date

The provision applies to taxable years beginning after
December 31, 2006.

5. Elimination of earnings and profits attributable to pre-1983 years

Present Law

The Small Business Jobs Protection Act of 1996 provided
that if a corporation was an S corporation for its first
taxable year beginning after December 31, 1996, the accumulated
earnings and profits of the corporation as of the beginning of
that year were reduced by the accumulated earnings and profits
(if any) accumulated in a taxable year beginning before January
1, 1983, for which the corporation was an electing small
business corporation under subchapter S.

Explanation of Provision

The Act provides in the case of any corporation which was
not an S corporation for its first taxable year beginning after
December 31, 1996, the accumulated earnings and profits of the
corporation as of the beginning of the first taxable year
beginning after the date of the enactment of this provision is
reduced by the accumulated earnings and profits (if any)
accumulated in a taxable year beginning before January 1, 1983,
for which the corporation was an electing small business
corporation under subchapter S.

Effective Date

The provision applies to taxable years beginning after the
date of enactment (May 25, 2007).

6. Deductibility of interest expense of an ESBT on indebtedness
incurred to acquire S corporation stock

Present Law

Under present law, an electing small business trust
(``ESBT'') is subject to a tax at the highest individual income
tax rate (currently 35 percent) on the portion of the trust
which consists of stock in one or more S corporations (``S
portion'').\32\ The income from the S portion of an ESBT is not
included in the beneficiaries' income.
---------------------------------------------------------------------------
\32\ Sec. 641(c).
---------------------------------------------------------------------------
The only items of income, loss, or deduction taken into
account in computing the taxable income of the S portion of an
ESBT are: (1) the items of income, loss or deduction allocated
to it as an S corporation shareholder under the rules of
subchapter S, (2) gain or loss from the sale of the S
corporation stock, and (3) to the extent provided in
regulations, any state or local income taxes and administrative
expenses of the ESBT properly allocable to the S corporation
stock. Under Treasury regulations,\33\ interest paid by an ESBT
to purchase stock in an S corporation is allocated to the S
portion of the ESBT but is not a deductible administrative
expense for purposes determining the taxable income of the S
portion.
---------------------------------------------------------------------------
\33\ Treas. Reg. sec. 1.641(c)-1(d)(4)(ii).
---------------------------------------------------------------------------
In determining the tax liability with regard to the
remaining portion of the trust, the items taken into account by
the subchapter S portion of the trust are disregarded.

Explanation of Provision

The Act provides that a deduction for interest paid or
accrued on indebtedness to acquire stock in an S corporation
may be taken into account in computing the taxable income of
the S portion of an ESBT.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2006.

TITLE II--REVENUE PROVISIONS

A. Increase in Age of Children Whose Unearned Income is Taxed as if
Parents' income (sec. 8241 of the Act and sec. 1(g) of the Code)

Present Law

Special rules (generally referred to as the ``kiddie tax'')
apply to the net unearned income of certain children.\34\
Generally, the kiddie tax applies to a child if: (1) the child
has not reached the age of 18 by the close of the taxable year
and either of the child's parents is alive at such time; (2)
the child's unearned income exceeds $1,700 (for 2007); and (3)
the child does not file a joint return. The kiddie tax applies
regardless of whether the child may be claimed as a dependent
by either or both parents.
---------------------------------------------------------------------------
\34\ Sec. 1(g).
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Under these rules, the net unearned income of a child (for
2007, generally unearned income over $1,700) is taxed at the
parents' tax rates if the parents' tax rates are higher than
the tax rates of the child.\35\ The remainder of a child's
taxable income (i.e., earned income, plus unearned income up to
$1,700 (for 2007), less the child's standard deduction) is
taxed at the child's rates, regardless of whether the kiddie
tax applies to the child. For these purposes, unearned income
is income other than wages, salaries, professional fees, other
amounts received as compensation for personal services actually
rendered, and distributions from qualified disability
trusts.\36\ In general, a child is eligible to use the
preferential tax rates for qualified dividends and capital
gains.\37\
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\35\ Special rules apply for determining which parent's rates apply
where a joint return is not filed.
\36\ Sec. 1(g)(4) and sec. 911(d)(2).
\37\ 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 2007), 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.\38\ A
child's net unearned income cannot exceed the child's taxable
income.
---------------------------------------------------------------------------
\38\ 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.
Generally, a child must file a separate return to report
his or her income.\39\ In such case, items on the parents'
return are not affected by the child's income, and the total
tax due from the child is the greater of:
---------------------------------------------------------------------------
\39\ In cases where the kiddie tax applies, the child must attach
to the return Form 8615, Tax for Children Under Age 18 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
2007), 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.
Under certain circumstances, a parent may elect to report a
child's unearned income on the parent's return.

Explanation of Provision

The Act expands the kiddie tax to apply to children who are
18 years old or who are full-time students over age 18 but
under age 24. The expanded provision applies only to children
whose earned income does not exceed one-half of the amount of
their support.

Effective Date

The provision is effective for taxable years beginning
after the date of enactment (May 25, 2007).

B. Suspension of Penalties and Interest (sec. 8242 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 applies only to taxpayers who are
individuals and who file a timely tax return. In addition, the
provision does not apply to the failure-to-pay penalty, in the
case of fraud, or with respect to criminal penalties.
Generally, the provision also does not apply to interest
accruing with respect to underpayments resulting from listed
transactions or undisclosed reportable transactions.

Reasons for Change

The Congress believes it is appropriate to provide the IRS
with additional time to provide taxpayers with notice that they
failed to comply with their tax obligations before the IRS is
required to suspend the imposition of interest and penalties on
underpayments. The Congress believes this change is appropriate
for effective administration of the tax system.

Explanation of Provision

The Act extends the period before which accrual of interest
and certain penalties are suspended. Under the Act, the accrual
of certain penalties and interest is suspended starting 36
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.

Effective Date

The provision is effective for IRS notices issued after the
date that is six months after the date of enactment.

C. Modification of Collection Due Process Procedures for Employment Tax
Liabilities (sec. 8243 of the Act and sec. 6330 of the Code)

Present Law

Levy is the IRS's administrative authority to seize a
taxpayer's property to pay the taxpayer's tax liability. The
IRS is entitled to seize a taxpayer's property by levy if a
Federal tax lien has attached to such property. A Federal tax
lien arises automatically when (1) a tax assessment has been
made, (2) the taxpayer has been given notice of the assessment
stating the amount and demanding payment, and (3) the taxpayer
has failed to pay the amount assessed within 10 days after the
notice and demand.
In general, the IRS is required to notify taxpayers that
they have a right to a fair and impartial collection due
process (``CDP'') hearing before levy may be made on any
property or right to property.\40\ Similar rules apply with
respect to notices of tax liens, although the right to a
hearing arises only on the filing of a notice.\41\ The CDP
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.
Under present law, taxpayers are not entitled to a pre-levy CDP
hearing if a levy is issued to collect a Federal tax liability
from a State tax refund or if collection of the Federal tax is
in jeopardy. However, levies related to State tax refunds or
jeopardy determinations are subject to post-levy review through
the CDP hearing process.
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\40\ Sec. 6330(a).
\41\ Sec. 6320.
---------------------------------------------------------------------------
Employment taxes generally consist of the taxes under the
Federal Insurance Contributions Act (``FICA''), the tax under
the Federal Unemployment Tax Act (``FUTA''), and the
requirement that employers withhold income taxes from wages
paid to employees (``income tax withholding'').\42\ Income tax
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.
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\42\ Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404
(income tax withholding). FICA taxes consist of an employer share and
an employee share, which the employer withholds from employees' wages.
---------------------------------------------------------------------------

Reasons for Change \43\

---------------------------------------------------------------------------
\43\ See S. 349, the ``Small Business and Work Opportunity Act of
2007,'' which was reported by the Senate Finance Committee on January
22, 2007 (S. Rep. No. 110-1).
---------------------------------------------------------------------------
Congress enacted the CDP hearing procedures to afford
taxpayers adequate notice of collection activity and a
meaningful hearing before the IRS deprives them of their
property. However, the Congress understands that some taxpayers
abuse the CDP procedures by raising frivolous arguments simply
for the purpose of delaying or evading collection of tax. The
opportunity to delay collection of employment tax liabilities
presents a greater risk to the government than delay may
present in other contexts because employment tax liabilities
continue to increase as ongoing wage payments are made to
employees. A Government Accountability Office study found that
businesses with employment tax liabilities were delinquent on
more than twice as many periods than individuals. On average,
businesses requesting a CDP appeal for delinquent employment
taxes had not paid for nearly 1\1/2\ years and had a median
employment tax liability of $30,000.\44\ Thus, the Congress
believes it is appropriate to revise the CDP procedures in
cases where taxpayers are liable for unpaid employment taxes.
---------------------------------------------------------------------------
\44\ Government Accountability Office, Tax Administration: Little
Evidence of Procedural Errors in Collection Due Process Appeals Cases,
but Opportunities Exist to Improve the Program, GAO-07-112, October
2006.
---------------------------------------------------------------------------

Explanation of Provision

Under the Act, a levy issued to collect Federal employment
taxes is excepted from the pre-levy CDP hearing requirement if
the taxpayer subject to the levy requested a CDP hearing with
respect to unpaid employment taxes arising in the two-year
period before the beginning of the taxable period with respect
to which the employment tax levy is served. However, the
taxpayer is provided an opportunity for a hearing within a
reasonable period of time after the levy. As the Code provides
for State tax refunds or jeopardy determinations, collection by
levy of employment tax liabilities is permitted to continue
during the CDP proceedings.

Effective Date

The provision is effective for levies issued on or after
the date that is 120 days after the date of enactment.

D. Permanent Extension of IRS User Fees (sec. 8244 of the Act and sec.
7528 of the Code)

Present Law

The IRS generally charges a fee for requests for a letter
ruling, determination letter, opinion letter, or other similar
ruling or determination.\45\ These user fees are authorized by
statute through September 30, 2014.
---------------------------------------------------------------------------
\45\ Sec. 8228.
---------------------------------------------------------------------------

Reasons for Change

The Congress believes that it is appropriate to provide an
extension of these user fees.

Explanation of Provision

The Act permanently extends the statutory authorization for
IRS user fees.

Effective Date

The provision is effective for requests made after the date
of enactment (May 25, 2007).

E. Increase in Penalty for Bad Checks and Money Orders (sec. 8245 of
the Act and sec. 6657 of the Code)

Present Law

The Code \46\ imposes a penalty on a person who tenders a
bad check or money orders. The penalty is two percent of the
amount of the bad check or money order. For checks or money
orders that are less than $750, the minimum penalty is $15 (or,
if less, the amount of the check or money order).
---------------------------------------------------------------------------
\46\ Sec. 6657.
---------------------------------------------------------------------------

Reasons for Change

The Congress believes that it is appropriate to increase
the minimum amount of this penalty so that it is more
consistent with amounts charged by the private sector for bad
checks.

Explanation of Provision

The Act increases the minimum penalty to $25 (or, if less,
the amount of the check or money order), applicable to checks
or money orders that are less than $1,250.

Effective Date

The provision is effective with respect to checks or money
orders received after the date of enactment (May 25, 2007).

F. Understatement of Taxpayer's Liability by Tax Return Preparers (sec.
8246 of the Act and secs. 6694 and 7701 of the Code)

Present Law

An income tax return preparer is defined as any person who
prepares for compensation, or who employs other people to
prepare for compensation, all or a substantial portion of an
income tax return or claim for refund.\47\ Under present law,
the definition of an income tax return preparer does not
include a person preparing non-income tax returns, such as
estate and gift, excise, or employment tax returns.
---------------------------------------------------------------------------
\47\ Sec. 7701(a)(36)(A).
---------------------------------------------------------------------------
An income tax return preparer who prepares a return with
respect to which there is an understatement of tax that is due
to an undisclosed position for which there was not a realistic
possibility of being sustained on its merits, or a frivolous
position, is liable for a first-tier penalty of $250, provided
the preparer knew or reasonably should have known of the
position.\48\ For purposes of the penalty, an understatement is
generally defined as any understatement with respect to any tax
imposed by subtitle A (i.e., income taxes). An income tax
return preparer who prepares a return and engages in specified
willful or reckless conduct with respect to preparing an income
tax return is liable for a second-tier penalty of $1,000.
---------------------------------------------------------------------------
\48\ Sec. 6694.
---------------------------------------------------------------------------

Explanation of Provision \49\

---------------------------------------------------------------------------
\49\ Subsequent amendment to this provision is described in Part
Seventeen, Division C, Title V, Subtitle A, section F.
---------------------------------------------------------------------------
The Act broadens the scope of the present-law tax return
preparer penalties to include preparers of estate and gift tax,
employment tax, and excise tax returns, and returns of exempt
organizations.
The Act also alters the standards of conduct that must be
met to avoid imposition of the penalties for preparing a return
with respect to which there is an understatement of tax. First,
the Act replaces the realistic possibility standard for
undisclosed positions with a requirement that there be a
reasonable belief that the tax treatment of the position was
more likely than not the proper treatment. The Act replaces the
not-frivolous standard accompanied by disclosure with the
requirement that there be a reasonable basis for the tax
treatment of the position accompanied by disclosure.
The Act also increases the first-tier penalty from $250 to
the greater of $1,000 or 50 percent of the income derived (or
to be derived) by the tax return preparer from the preparation
of a return or claim with respect to which the penalty is
imposed. The Act increases the second-tier penalty from $1,000
to the greater of $5,000 or 50 percent of the income derived
(or to be derived) by the tax return preparer.

Effective Date

The provision is effective for tax returns prepared after
the date of enactment (May 25, 2007).

G. Penalty for Filing Erroneous Refund Claims (sec. 8247 of the Act and
new sec. 6676 of the Code)

Present Law

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.\50\ 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.
---------------------------------------------------------------------------
\50\ 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.

Explanation of Provision

The Act imposes a penalty on any taxpayer filing an
erroneous claim for refund or credit. The penalty is equal to
20 percent of the disallowed portion of the claim for refund or
credit for which there is no reasonable basis for the claimed
tax treatment. The penalty does not apply to any portion of the
disallowed portion of the claim for refund or credit relating
to the earned income credit or any portion of the disallowed
portion of the claim for refund or credit that is subject to
accuracy-related or fraud penalties.

Effective Date

The provision is effective for claims for refund or credit
filed after the date of enactment (May 25, 2007).

H. Time for Payment of Corporate Estimated Tax (sec. 8248 of the Act
and sec. 6655 of the Code)

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. Fiscal year taxpayers make
quarterly payments on corresponding dates.
The Tax Increase Prevention and Reconciliation Act of 2005
(``TIPRA'') provided that in the case of a corporation with
assets of at least $1 billion, the payments due in July,
August, and September, 2012 (for fiscal and calendar year
taxpayers, respectively) are increased to 106.25 percent of the
payment otherwise due and the next required payment is reduced
accordingly.

Reasons for Change

The Congress believes it is appropriate to adjust the
corporate estimated tax payments.

Explanation of Provision \51\

The Act increases the corporate estimated tax payments due
in July, August, and September, 2012, from 106.25 percent to
114.25 percent of the payment otherwise due. As under present
law, the next payment is reduced accordingly.
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\51\ All the public laws enacted in the 110th Congress affecting
this provision are described in Part Twenty-Two.
---------------------------------------------------------------------------

Effective Date

The provision is effective on the date of enactment (May
25, 2007).

TITLE III--PENSION RELATED PROVISIONS

A. Revocation of Election Relating to Treatment as Multiemployer Plan
(sec. 6611 of the Act 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.\52\ 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.
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\52\ Code sec. 414(f).
---------------------------------------------------------------------------
Pursuant to the Pension Protection Act of 2006, certain
multiemployer plans are permitted under the Code 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 election in place.\53\ The revocation must be pursuant
to procedures prescribed by the Pension Benefit Guaranty
Corporation (``PBGC''). In the case of a plan to which more
than one employer is required to contribute and 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''), such plan
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 a revocation
election is also available in the case of a plan that was
established in Chicago, Illinois, on August 12, 1881, and is
sponsored by an organization described in Code section
501(c)(5). An election made under the provision is effective
beginning with the first plan year ending after the date of
enactment of the Pension Protection Act of 2006 (i.e., August
17, 2006) and is irrevocable.
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\53\ Code sec. 414(f)(6).
---------------------------------------------------------------------------

Explanation of Provision \54\

The Act modifies the effective date of the election
provided under the Code. Under the Act, a plan may elect an
effective date that is any plan year beginning on or after
January 1, 1999, and ending before January 1, 2008. The Act
also modifies the time period during which the plan must have
satisfied the criteria for the election. Under the Act, the
criteria must have been satisfied for each of the three plan
years immediately preceding the first plan year for which the
election is effective with respect to the plan. In addition,
the Act provides that a plan making the election is treated as
maintained pursuant to a collective bargaining agreement if a
collective bargaining agreement, expressly or otherwise,
provides for or permits employer contributions to the plan by
one or more employers that are signatory to such agreement, or
participation in the plan by one or more employees of an
employer that is signatory to such agreement.
---------------------------------------------------------------------------
\54\ Provisions similar to those in the Code are contained in
section 3(37) of the Employee Retirement Income Security Act of 1974
(``ERISA''). The Act makes corresponding changes to ERISA.
---------------------------------------------------------------------------
In addition, the Act makes a technical correction to the
description of one of the plans that is eligible to make the
election. Specifically, the technical correction provides that
an election is available in the case of a plan sponsored by an
organization which is described in Code section 501(c)(5) and
exempt from tax under Code section 501(a) and which was
established in Chicago, Illinois, on August 12, 1881.

Effective Date

The provision takes effect as if included in section 1106
of the Pension Protection Act of 2006.

B. Modification of Requirements for Qualified Transfers (secs. 6612 and
6613 of the Act and sec. 420 of the Code)

Present Law

A pension plan may provide medical benefits to retired
employees through a separate account that is part of such plan
(``retiree medical accounts''). Generally, defined benefit plan
assets may not revert to an employer prior to termination of
the plan and satisfaction of all plan liabilities. However,
section 420 of the Code provides that certain transfers of
excess assets of a defined benefit plan to a retiree medical
account within the plan may be made in order to fund retiree
health benefits. A transfer that qualifies under section 420
does not result in plan disqualification, is not a prohibited
transaction, and is not treated as a reversion. No transfer
pursuant to section 420 may be made after December 31, 2013.
Prior to the amendment of section 420 by the Pension
Protection Act of 2006, transferred assets (and any income
thereon) were required to be used to pay qualified current
retiree health liabilities for the taxable year of the
transfer. Among the requirements for such a transfer to be
qualified is the requirement that the employer generally must
maintain retiree health benefits at the same level for the
taxable year of the transfer and the following four years
(referred to as the minimum cost requirement).
Pursuant to changes made by the Pension Protection Act of
2006, section 420 currently permits an employer to elect to
make a ``qualified future transfer'' or a ``collectively
bargained transfer'' rather than a ``qualified transfer''
(which generally is a transfer described in section 420, prior
to amendment by the Pension Protection Act of 2006). A
qualified future transfer 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 collectively bargained transfer
permits such transfers in the case of benefits provided under a
collective bargaining agreement. Transfers must be made for at
least a two-year period (referred to as the transfer period).
In addition, a qualified future transfer or collectively
bargained transfer must meet the requirements applicable to
qualified transfers, with certain modifications to the
requirements, one of which is the minimum cost requirement.
In the case of a qualified future transfer, the minimum
cost requirement is 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
requirement 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).

Explanation of Provision

In the case of a qualified transfer, the Act permits the
transfer to satisfy the minimum cost requirement by satisfying
the minimum cost requirement applicable to a collectively
bargained transfer. This alternate method of satisfying the
minimum cost requirement is only available if the transfer
involves a plan maintained by an employer, which in its taxable
year ending in 2005, provided health benefits or coverage to
retirees and their spouses and the aggregate cost of such
benefits or coverage which would have been allowable as a
deduction to the employer is at least five percent of the gross
receipts of the employer for such taxable year (or is a plan
maintained by a successor to such employer).
In addition, the Act makes technical corrections to section
420 to correct an internal cross-reference and to reflect the
revisions made to the minimum funding requirements applicable
to defined benefit plans under the Pension Protection Act of
2006.

Effective Date

The provision is generally effective for transfers after
the date of enactment (May 25, 2007). The technical corrections
are effective as if included in the Pension Protection Act of
2006.

C. Extension of Alternative Deficit Reduction Contribution Rules (sec.
6614 of the Act and sec. 402(i) of the Pension Protection Act of 2006)

Present Law

Single-employer defined benefit pension plans are subject
to minimum funding requirements under the Code.\55\ Prior to
the enactment of the Pension Protection Act of 2006, the amount
of contributions required for a plan year under the minimum
funding rules was 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.
Additional contributions were required under the deficit
reduction contribution rules in the case of certain underfunded
plans.
---------------------------------------------------------------------------
\55\ Code sec. 412. Similar rules apply to single-employer defined
benefit pension plans under ERISA.
---------------------------------------------------------------------------
Under the Pension Protection Act of 2006, these minimum
funding rules were replaced by new funding rules. These new
rules are generally effective for plan years beginning after
December 31, 2007.
Prior to the enactment of the Pension Protection Act of
2006, certain employers (``applicable employers'') were
permitted to 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. For purposes of the
election, an applicable plan year was a plan year beginning
after December 27, 2003, and before December 28, 2005, for
which the employer elects a reduced contribution. If an
employer made such an election, the amount of the additional
deficit reduction contribution for an applicable plan year was
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 included an
employer that is a commercial passenger airline.
In the case of an employer which is a commercial passenger
airline, the Pension Protection Act of 2006 extends the
alternative deficit reduction contribution rules to plan years
beginning before December 28, 2007.

Explanation of Provision

The Act extends the alternative deficit reduction
contribution rules to plan years beginning before January 1,
2008.

Effective Date

The provision takes effect as if included in section 402 of
the Pension Protection Act of 2006.

D. Modification of the Interest Rate for Pension Funding Rules (sec.
6615 of the Act and sec. 402(a) of the Pension Protection Act of 2006)

Present Law

Single-employer defined benefit pension plans are subject
to minimum funding requirements under the Code.\56\ The Pension
Protection Act of 2006 provides for new minimum funding rules,
which are generally effective for plan years beginning after
December 31, 2007.
---------------------------------------------------------------------------
\56\ Code sec. 412. Similar rules apply to single-employer defined
benefit pension plans under ERISA.
---------------------------------------------------------------------------
Under the new minimum funding rules, 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. The 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. 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, if applicable, by any
prefunding balance and funding standard carryover balance). 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, the minimum required contribution is
generally increased by a shortfall amortization charge.
The shortfall amortization charge for a plan year is the
aggregate total 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. 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. 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, if applicable, 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. 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.
The new minimum funding rules specify the interest rates
and other actuarial assumptions that must be used in
determining a plan's target normal cost and funding target.
Under the rules, 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. In general, the
corporate bond yield curve used for this purpose is to be
prescribed on a monthly basis by the Secretary of the Treasury
and reflects 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. A special transition rule applies for
plan years beginning in 2008 and 2009 (other than for plans
first effective after December 31, 2007).
In addition to the new minimum funding rules described
above, the Pension Protection Act of 2006 also provides for
special funding rules to apply for certain eligible plans. 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. In lieu of this election, a plan
sponsor may alternatively 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 7 plan years) beginning with such plan year. Under this
alternative election, the benefit accrual and benefit increase
restrictions do not apply. This 10-year amortization election
must be made by December 31, 2007.

Explanation of Provision

The Act provides that, in the case of a plan sponsor that
elects to amortize the shortfall amortization base over a
period of 10 plan years, the plan is to use an interest rate of
8.25 percent for purposes of determining the funding target for
each of the 10 plan years during such period (instead of the
segment rates calculated on the basis of the corporate bond
yield curve).

Effective Date

The provision takes effect as if included in section 402 of
the Pension Protection Act of 2006.

PART TWO: REVENUE PROVISIONS OF ENERGY INDEPENDENCE AND SECURITY ACT OF
2007 (PUBLIC LAW 110-140) \57\

A. Extension of Additional 0.2 Percent FUTA Surtax (sec. 1501 of the
Act)

Present Law

The Federal Unemployment Tax Act (``FUTA'') imposes a 6.2
percent gross tax rate on the first $7,000 paid annually by
covered employers to each employee (sec. 3301). Employers in
States with programs approved by the Federal Government and
with no delinquent Federal loans may credit 5.4 percentage
points against the 6.2 percent tax rate, making the minimum,
net Federal unemployment tax rate 0.8 percent (sec. 3302).
Since all States have approved programs, the minimum Federal
tax rate of 0.8 percent is the Federal tax rate that generally
applies. This Federal revenue finances administration of the
unemployment system, half of the Federal-State extended
benefits program, and a Federal account for State loans. The
States use the revenue from the 5.4 percent credit to finance
their regular State programs and half of the Federal-State
extended benefits program.
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\57\ H.R. 6. H.R. 6 passed the House on January 18, 2007, and
passed the Senate on June 21, 2007. On December 6, 2007, the House
agreed to the Senate amendment with an amendment, and on December 13,
2007, the Senate agreed to the House amendment with an amendment. On
December 18, 2007, the House agreed to the Senate amendment. The
President signed the bill on December 19, 2007.
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In 1976, Congress passed a temporary surtax of 0.2 percent
of taxable wages to be added to the permanent FUTA tax rate.
Thus, the current 0.8 percent FUTA tax rate has two components:
a permanent tax rate of 0.6 percent, and a temporary surtax
rate of 0.2 percent. The temporary surtax was subsequently
extended through 2007.

Explanation of Provision \58\

The Act extends the temporary surtax rate (for one year)
through December 31, 2008.
---------------------------------------------------------------------------
\58\ The provision was subsequently extended in Division C, sec.
404 of the Emergency Economic Stabilization Act of 2008, Pub. L. No.
110-328, described in Part Seventeen.
---------------------------------------------------------------------------

Effective Date

The provision is effective for wages paid after December
31, 2007.

B. 7-Year Amortization of Geological and Geophysical Expenditures for
Certain Major Integrated Oil Companies (sec. 1502 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 by independent
producers and smaller integrated oil \59\ companies in
connection with oil and gas exploration in the United States
may generally be amortized over two years.\60\ Major integrated
oil companies are required to amortize all G&G costs over five
years.\61\ For purposes of this provision, a major integrated
oil company, with respect to any taxable year, is a producer of
crude oil which has an average daily worldwide production of
crude oil of at least 500,000 barrels for the taxable year, had
gross receipts in excess of one billion dollars for its last
taxable year ending during the calendar year 2005, and
generally has an ownership interest in a crude oil refiner of
15 percent or more.\62\
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\59\ Generally, an integrated oil company is a producer of crude
oil that engages in the refining or retail sale of petroleum products
in excess of certain threshold amounts.
\60\ Sec. 167(h)(1).
\61\ Sec. 167(h)(5).
\62\ Id.
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In the case of abandoned property, remaining basis may not
be recovered in the year of abandonment of a property because
all basis is recovered over the applicable amortization period.

Reasons for Change \63\

The Congress believes that a seven year period for
amortization of G&G costs for major integrated oil companies is
a more appropriate period for the recovery of these costs.
---------------------------------------------------------------------------
\63\ See H.R. 2776, the ``Renewable Energy and Energy Conservation
Tax Act of 2007,'' which was reported by the House Committee on Ways
and Means on June 27, 2007 (H.R. Rep. No. 110-214).
---------------------------------------------------------------------------

Explanation of Provision

The Act extends from five years to seven years the
amortization period for G&G costs for major integrated oil
companies.

Effective Date

The provision is effective for amounts paid or incurred
after the date of enactment (December 19, 2007).

PART THREE: HOKIE SPIRIT MEMORIAL FUND (PUBLIC LAW 110-141) \64\

A. Exclusion from Income of Payments from the Hokie Spirit Memorial
Fund (sec. 1 of the Act)

Present Law

Following the shooting event at Virginia Polytechnic
Institute and State University (``Virginia Tech University'')
on April 16, 2007, a payment program for victims and survivors
of the event was established. Under the program, survivors of
the murder victims and surviving victims of the event are
eligible to receive cash payments from the university. In lieu
of receipt of a cash payment, claimants under the program may
instead donate their payments to a section 501(c)(3)
organization for the purpose of funding scholarships at the
university.
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\64\ H.R. 4118. H.R. 4118 passed the House on the suspension
calendar on December 4, 2007, and passed the Senate by unanimous
consent on December 6, 2007. The President signed the bill on December
19, 2007.
---------------------------------------------------------------------------
Under section 61, gross income includes all income from
whatever source derived. The Code includes a number of
exceptions from this rule. These include exceptions for amounts
received by gift (section 102), amounts of any damages received
on account of personal physical injuries (section 104(a)(2)),
and amounts received as qualified disaster relief payments
(section 139). There is no specific exclusion from gross income
for amounts received pursuant to the Virginia Tech University
program described above.

Explanation of Provision

The Act excludes from gross income specified amounts that
an individual receives from Virginia Tech University under the
program described above. Under the Act, the exclusion applies
to any amount received from Virginia Tech University out of
amounts transferred from the Hokie Spirit Memorial Fund
established by the Virginia Tech Foundation, an organization
organized and operated as described in section 501(c)(3), if
such amount is paid on account of the tragic event on April 16,
2007, at such university.

Effective Date

The provision is effective on the date of enactment
(December 19, 2007).

B. Increase in Penalty for Failure to File Partnership Returns (sec. 2
of the Act and sec. 6698(b) of the Code)

Present Law

A partnership generally is treated as a pass-through
entity. Income earned by a partnership, whether distributed or
not, is taxed to the partners. Distributions from the
partnership generally are tax-free. The items of income, gain,
loss, deduction or credit of a partnership generally are taken
into account by a partner as allocated under the terms of the
partnership agreement. If the agreement does not provide for an
allocation, or the agreed allocation does not have substantial
economic effect, then the items are to be allocated in
accordance with the partners' interests in the partnership. To
prevent double taxation of these items, a partner's basis in
its interest is increased by its share of partnership income
(including tax-exempt income), and is decreased by its share of
any losses (including nondeductible losses).
Under present law, a partnership is required to file a tax
return for each taxable year. The partnership's tax return is
required to include the names and addresses of the individuals
who would be entitled to share in the taxable income if
distributed and the amount of the distributive share of each
individual. In addition to applicable criminal penalties,
present law imposes a civil penalty for the failure to timely
file a partnership return. The penalty is $50 per partner for
each month (or fraction of a month) that the failure continues,
up to a maximum of five months.

Explanation of Provision \65\

The Act increases the present-law failure to file penalty
for partnership returns by $1 per month.
---------------------------------------------------------------------------
\65\ This provision was subsequently amended to increase the amount
of the penalty. See Part Four, G and Part Twenty-Two, B.
---------------------------------------------------------------------------

Effective Date

The provision is effective for partnership returns required
to be filed for a taxable year beginning in 2008.

PART FOUR: MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 (PUBLIC LAW
110-142) \66\
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\66\ H.R. 3648. The House Committee on Ways and Means reported H.R.
3648 on October 1, 2007 (H.R. Rep. 110-356). H.R. 3648 passed the House
on October 4, 2007. The bill passed the Senate on December 14, 2007, by
unanimous consent, with an amendment. The House agreed to the Senate
amendment on December 18, 2007. The President signed the bill on
December 20, 2007.
---------------------------------------------------------------------------

A. Exclude Discharges of Acquisition Indebtedness on Principal
Residences from Gross Income (sec. 2 of the Act and sec. 108 of the
Code)

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 student loans, certain farm indebtedness, and
certain real property business indebtedness (secs. 61(a)(12)
and 108).\67\ In cases involving discharges of indebtedness
that are excluded from gross income under the exceptions to the
general rule, taxpayers generally reduce certain tax
attributes, including basis in property, by the amount of the
discharge of indebtedness.
---------------------------------------------------------------------------
\67\ A debt cancellation which constitutes a gift or bequest is not
treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
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. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities immediately after the discharge (sec. 1017).
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).
For example, assume a taxpayer who is not in bankruptcy and
is not insolvent owns a principal residence subject to a
$200,000 mortgage debt. If the creditor forecloses and the home
is sold for $180,000 in satisfaction of the debt, the debtor
has $20,000 income from the discharge of indebtedness which is
includible in gross income. Likewise, if the creditor
restructures the loan and reduces the principal amount to
$180,000, the debtor has $20,000 includible in gross income.

Reasons for Change

The Congress believes that where taxpayers restructure
their acquisition debt on a principal residence or lose their
principal residence in a foreclosure, that it is inappropriate
to treat discharges of acquisition indebtedness as income.

Explanation of Provision \68\

The Act excludes from the gross income of a taxpayer any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B) except that the dollar limitation is $2,000,000)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the refinancing does not exceed the amount of the
refinanced indebtedness. For these purposes the term
``principal residence'' has the same meaning as under section
121 of the Code.
---------------------------------------------------------------------------
\68\ The provision was subsequently amended in Division A, section
303 of the Emergency Economic Stabilization Act of 2008, Pub. L. No.
110-343, described in Part Seventeen.
---------------------------------------------------------------------------
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under this
provision.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the Act.
Under the Act, the exclusion does not apply to a taxpayer
in a Title 11 case; instead the present-law exclusion applies.
In the case of an insolvent taxpayer not in a Title 11 case,
the exclusion under the Act applies unless the taxpayer elects
to have the present-law exclusion apply instead.
Under the Act, the exclusion does not apply to the
discharge of a loan if the discharge is on account of services
performed for the lender or any other factor not directly
related to a decline in the value of the residence or to the
financial condition of the taxpayer.

Effective Date

The provision is effective for discharges of indebtedness
on or after January 1, 2007, and before January 1, 2010.

B. Extend the Deduction for Private Mortgage Insurance (sec. 3 of the
Act and sec. 163 of the Code)

Present Law

In general

Present law provides that qualified residence interest is
deductible notwithstanding the general rule that personal
interest is nondeductible (sec. 163(h)).

Acquisition indebtedness and home equity indebtedness

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.

Private mortgage insurance

Certain 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 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
$110,000 ($55,000 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,\69\ 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).
---------------------------------------------------------------------------
\69\ The Veterans Administration and the Rural Housing
Administration have been succeeded by the Department of Veterans
Affairs and the Rural Housing Service, respectively.
---------------------------------------------------------------------------
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 Service).
The Act 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 Act.

Reasons for Change

The Congress believes it is appropriate to extend the
present-law temporary provision. The Congress understands that
the purpose of the provisions permitting deduction of home
mortgage interest is to encourage home ownership while limiting
significant disincentives to saving. The Congress believes that
it would be consistent with the purpose of the provisions
permitting deduction of home mortgage interest to permit the
deduction of mortgage insurance premiums. While these premiums
are not in the nature of interest, the Congress notes that
purchase of such insurance is often demanded by lenders in
order for home buyers to obtain financing (depending on the
size of the buyer's down payment). The Congress believes that
permitting deductibility of premiums for this type of insurance
connected with home purchases will foster home ownership. In
the case of higher income taxpayers who may not purchase
mortgage insurance, however, the Congress believes the
incentive of deductibility becomes unnecessary, and a phase-out
is appropriate. It is not intended that prepayments be
currently deductible, but rather, that they be deductible only
in the period to which they relate. Reporting of payments is
generally necessary to administer the provision.

Explanation of Provision

The Act extends the deduction for private mortgage
insurance to amounts paid or accrued after December 31, 2007,
but only with respect to contracts entered into after December
31, 2006, and prior to January 1, 2011.

Effective Date

The provision applies to contracts entered into after
December 31, 2006, and before January 1, 2011, with respect to
amounts paid or accrued after December 31, 2007.

C. Alternative Tests for Qualifying as Cooperative Housing Corporation
(sec. 4 of the Act and sec. 216 of the Code)

Present Law

A tenant-stockholder in a cooperative housing corporation
is entitled to deduct amounts paid or accrued to the
cooperative to the extent those amounts represent the tenant-
stockholder's proportionate share of (1) real estate taxes
allowable as a deduction to the cooperative which are paid or
incurred by the cooperative on the cooperative's land or
buildings and (2) interest allowable as a deduction to the
cooperative that is paid or incurred by the cooperative on its
indebtedness contracted in the acquisition of the cooperative's
land or in the acquisition, construction, alteration,
rehabilitation, or maintenance of the cooperative's buildings.
A cooperative housing corporation generally is a
corporation (1) that has one class of stock, (2) each of the
stockholders of which is entitled, solely by reason of
ownership of stock in the corporation, to occupy a dwelling
owned or leased by the cooperative, (3) no stockholder of which
is entitled to receive any distribution not out of earnings and
profits of the cooperative, except on complete or partial
liquidation of the cooperative, and (4) 80 percent or more of
the gross income of which for the taxable year in which the
taxes and interest are paid or incurred is derived from tenant-
stockholders.

Reasons for Change

Under present law, tenant-stockholders of a cooperative
housing corporation are allowed to deduct their proportionate
shares of the cooperative's deductible real estate taxes and
mortgage interest only if the cooperative's nonmember income is
no more than 20 percent of its total gross income. To satisfy
this rule, some cooperative housing corporations have made
rentals to commercial tenants at below-market rates. The
Congress believes that the tax rules should not create an
incentive to charge below-market-rate rents. Accordingly, the
Act provides two non-income-based alternatives to the 80-
percent requirement of present law.

Explanation of Provision

The Act amends the fourth requirement listed above to
provide that the requirement is satisfied if, for the taxable
year in which the taxes and interest are paid or incurred, the
corporation meets one of the following three requirements: (1)
80 percent or more of the corporation's gross income for that
taxable year is derived from tenant-stockholders (the present
law requirement); (2) at all times during that table year 80
percent or more of the total square footage of the
corporation's property is used or available for use by the
tenant-stockholders for residential purposes or purposes
ancillary to such residential use; or (3) 90 percent or more of
the expenditures of the corporation paid or incurred during
that taxable year are paid or incurred for the acquisition,
construction, management, maintenance, or care of the
corporation's property for the benefit of tenant-stockholders.

Effective Date

The provision is effective for taxable years ending after
the date of enactment (December 20, 2007).

D. Exclusion of Income for Benefits Provided to Volunteer Firefighters
and Emergency Medical Responders (sec. 5 of the Act and sec. 139B of
the Code)

Present Law

In general

The Internal Revenue Service has concluded that a reduction
in property tax by persons who ``volunteer their services'' as
emergency responders under a State law program is includible in
the gross income.\70\
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\70\ IRS Chief Counsel Advice (``CCA'') 200302045.
---------------------------------------------------------------------------

Itemized deductions

Under present law, individuals are allowed itemized
deductions for (i) State and local income taxes, real property
taxes, and personal property taxes, and (ii) subject to certain
limitations, charitable contributions to organizations
described in section 170(c).

Explanation of Provision \71\

In general

The Act provides an exclusion from gross income to members
of qualified volunteer emergency response organizations for:
(1) any qualified State or local tax benefit; and (2) any
qualified reimbursement payment. A qualified State or local tax
benefit is any reduction or rebate of certain taxes provided by
State or local governments on account of services performed by
individuals as members of a qualified volunteer emergency
response organization. These taxes are limited to State or
local income taxes, State or local real property taxes, and
State or local personal property taxes. A qualified
reimbursement payment is a payment provided by a State or
political subdivision thereof on account of reimbursement for
expenses incurred in connection with the performance of
services as a member of a qualified volunteer emergency
response organization. The amount of such qualified
reimbursement payments is limited to $30 for each month during
which the taxpayer performs such services.
---------------------------------------------------------------------------
\71\ See section 115 of Pub. L. 110-245, related to the employment
tax treatment of these amounts, described in Part Twelve.
---------------------------------------------------------------------------
A qualified volunteer emergency response organization is
any volunteer organization: (1) which is organized and operated
to provide firefighting or emergency medical services for
persons in the State or its political subdivision; and (2)
which is required (by written agreement) by the State or
political subdivision to furnish firefighting or emergency
medical services in such State or political subdivision.

Denial of double benefits

The Act provides that the amount of State or local taxes
taken into account in determining the deduction for taxes is
reduced by the amount of any qualified State or local tax
benefit.
Also, the Act provides that expenses paid or incurred by
the taxpayer in connection with the performance of services as
a member of a qualified volunteer emergency response
organization is taken into account for purposes of the
charitable deduction only to the extent such expenses exceed
the amount of any qualified reimbursement payment excluded from
income under the Act.

Sunset

The rules related to certain tax reductions or tax rebates
provided by a State or local government provided to volunteer
firefighters and emergency medical responders do not apply to
taxable years beginning after December 31, 2010.

Effective Date

The provision is effective on the date of enactment
(December 20, 2007).

E. Clarification of Student Housing Eligible for Low-Income Housing
Credit (sec. 6 of the Act and sec. 42(i) of the Code

Present Law

Generally the credit is not available for housing units
occupied entirely by full-time students. Under one exception,
an otherwise qualifying unit which is occupied entirely by
full-time students could qualify if (1) all such students are
single parents and their children; and (2) all the single
parents and their children are not dependents of another
individual.

Explanation of Provision

The Act clarifies that an otherwise qualifying unit which
is occupied entirely by full-time students could qualify if (1)
all such students are single parents and their children; (2)
the single parents are not dependents of another individual;
and (3) the children of the single parents are not dependents
of another individual other than a parent of such children.
This allows such housing units to qualify for the credit even
though the children in the unit may be dependents of a parent
not occupying the unit.

Effective Date

The provision is effective for (1) housing credit
allocations under the State housing credit ceiling made before,
on, or after the date of the enactment of this Act (December
20, 2007), and (2) buildings placed in service before, on, or
after such date in the case of substantially tax-exempt bond-
financed projects which do not require a housing credit
allocation by reason of 42(h)(4).

F. Application of Joint Return Limitation for Capital Gains Exclusion
to Certain Post-Marriage Sales of Principal Residences by Surviving
Spouses (sec. 7 of the Act and sec. 121 of the Code)

Present Law

Explanation of Provision

The Act provides that if a married couple was otherwise
eligible for the $500,000 maximum exclusion with respect to a
principal residence immediately prior to the death of one of
the spouses then the unmarried surviving spouse is eligible for
a maximum exclusion of $500,000 on the sale of such residence
if such sale occurs not later than two years after the date of
death of such spouse.

Effective Date

The provision is effective for sales or exchanges after
December 31, 2007.

G. Modification of Penalty for Failure to File Partnership Returns;
Limitation on Disclosure (sec. 8 of the Act and secs. 6698 and 6103(e)
of the Code)

Present Law

Explanation of Provision

The Act increases the present-law failure to file penalty
for partnership returns to $85 per month, up to a maximum of 12
months.
The Act also amended the exception that permits disclosure
of the return information of a pass-through entity to a person
with a material interest. The information that may be disclosed
or inspected under that exception does not include any
supporting schedule, attachment or list that would identify a
taxpayer other than the person requesting the disclosure or the
entity that made the return.

Effective Date

The provision is effective for partnership returns required
to be filed after the date of enactment (December 20, 2007).

H. Penalty for Failure to File S Corporation Returns (sec. 9 of the Act
and new sec. 6699 of the Code)

Present Law

Certain small business corporations are entitled to elect
to be taxed as S corporations, the effect of which is to be
treated as a flow-through entity whose income is distributed to
its shareholders.\72\ The S corporation will generally not
incur an entity level tax, other than with respect to capital
gains or certain passive income. It is required to report all
income on an annual income tax return.\73\ That return must
include information identifying all shareholders, their
respective pro rata share of the corporation's income, as well
as any distributions of money or property to shareholders. The
S corporation provides each shareholder with a schedule K-1
that reflects that shareholder's pro rata share of the various
S corporation items of income.
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\72\ Section 1363.
\73\ Section 6037.
---------------------------------------------------------------------------
Each shareholder is in turn required to treat those items
consistently with the position taken on the S corporation
return. If the shareholder fails to comply with the requirement
to treat S corporate items consistently, the shareholder is
subject to an accuracy related penalty. Although a failure to
file by an S corporation could be subject to criminal penalties
under section 7203 in appropriate cases, it is not subject to a
civil penalty. Returns required by section 6037 are not within
the scope of the addition to tax imposed by section 6651 for
failure to file or pay, nor are they information returns \74\
subject to the penalties for failure to comply with information
reporting requirements.
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\74\ Section 6724(d)(1).
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Explanation of Provision

An S corporation that delinquently files its return, fails
to file a required return, or fails to supply all required
information on its return, is subject to an assessable penalty
unless it can establish reasonable cause for the failure or
delinquency. The penalty is imposed for each month or part of
the month, up to 12 months, that the failure continues. The
amount for each month is $85 multiplied by the total number of
shareholders in the corporation during the taxable year to
which the return relates.

Effective Date

This provision is effective for returns required to be
filed after date of enactment (December 20, 2007).

I. Modifications to Corporate Estimated Tax Payments (sec. 10 of the
Act and sec. 6655 of the Code)

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.
Under present law, in the case of a corporation with assets
of at least $1 billion, the payments due in July, August, and
September, 2012, shall be increased to 114.75 percent of the
payment otherwise due and the next required payment shall be
reduced accordingly.

Reasons for Change

The Congress believes it is appropriate to adjust the
corporate estimated tax payments.

Explanation of Provision \75\

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\75\ All the public laws enacted in the 110th Congress affecting
this provision are described in Part Twenty-Two.
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The Act increases the otherwise applicable percentage by
1.50 percentage points.

Effective Date

The provision is effective on the date of enactment
(December 20, 2007).

PART FIVE: AIRPORT AND AIRWAY TRUST FUND EXTENSIONS (PUBLIC LAWS 110-
92,\76\ 110-161,\77\ 110-190,\78\ 110-253,\79\ AND 110-330 \80\)
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\76\ H.J. Res. 52. The House passed H.J. Res. 52 on September 26,
2007. The Senate passed the resolution without an amendment on
September 27, 2007. The President signed the resolution on September
29, 2007.
\77\ H.R. 2764. The House passed H.R. 2764 on June 22, 2007. The
bill passed the Senate with an amendment on September 6, 2007. The
House agreed to the Senate amendment with two amendments on December
17, 2007. The Senate agreed to one House amendment and agreed to the
second House amendment with an amendment on December 18, 2007. The
House agreed to the Senate amendment on December 19, 2007. The
President signed the bill on December 26, 2007.
\78\ H.R. 5270. The House passed H.R. 5270 on February 12, 2008.
The Senate passed the bill without amendment on February 13, 2008. The
President signed the bill on February 28, 2008.
\79\ H.R. 6327. The House passed H.R. 6327 on June 24, 2008. The
Senate passed the bill without amendment on June 26, 2008. The
President signed the bill on June 30, 2008.
\80\ H.R. 6984. The House passed H.R. 6984 on September 23, 2008.
The Senate passed the bill without amendment on September 23, 2008. The
President signed the bill on September 30, 2008.
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Present Law

The Airport and Airway Trust Fund provides funding for
capital improvements to the U.S. airport and airway system and
funding for the Federal Aviation Administration (``FAA''),
among other purposes. The excise taxes imposed to finance the
Airport and Airway Trust Fund are: \81\
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\81\ Sec. 9502(b)(1). The Airport and Airway Trust Fund also is
credited with interest under sec. 9602(b).
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ticket taxes imposed on commercial, domestic
passenger transportation by air;
a use of international air facilities tax;
a cargo tax imposed on freight
transportation by air;
fuels taxes imposed on gasoline used in
commercial aviation and noncommercial aviation; and
fuels taxes imposed on jet fuel (kerosene)
and other aviation fuels used in commercial aviation
and noncommercial aviation.
In general, except for 4.3 cents of the fuel tax rates, the
excise taxes dedicated to the Airport and Airway Trust Fund do
not apply after September 30, 2007. Expenditure authority for
the Airport and Airway Trust Fund also terminates after
September 30, 2007.

Explanation of Provisions

Pub. L. No. 110-92, 110-116, 110-137, and 110-149 (making continuing
appropriations for fiscal year 2008)
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through November 15,
2007 as part of continuing appropriations for fiscal year 2008.
Public Law No. 110-116 extended this date through December 14,
2007. Public Law No. 110-137 made a further extension through
December 21, 2007, and Pub. L. No. 110-149 provided an
extension through December 31, 2007.
Pub. L. No. 110-161 (``Department of Transportation Appropriations Act,
2008'')
This provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through February 29,
2008.
Pub. L. No. 110-190 (the ``Airport and Airway Extension Act of 2008'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through June 30, 2008.
Pub. L. No. 110-253 (the ``Federal Aviation Administration Extension
Act of 2008'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through September 30,
2008.
Pub. L. No. 110-330 (the Federal Aviation Administration Extension Act
of 2008, Part II'')
The provision extended the Airport and Airway Trust Fund
excise taxes and expenditure authority through March 31, 2009.

PART SIX: TAX INCREASE PREVENTION ACT OF 2007 (PUBLIC LAW 110-166) \82\
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\82\ H.R. 3996. The House Ways and Means Committee reported H.R.
3996 on November 6, 2007 (H.R. Rep. 110-431). H.R. 3996 passed the
House on November 9, 2007. The bill passed the Senate on December 6,
2007, with an amendment. The House agreed to the Senate amendment on
December 19, 2007. The President signed the bill on December 26, 2007.
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A. Extension of Alternative Minimum Relief for Nonrefundable Personal
Credits and Extension of Increased Alternative Minimum Tax Exemption
Amounts (secs. 101 and 102 of the Act and secs. 26 and 55 of the Code)

Present Law

Present law imposes an alternative minimum tax on
individuals. 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 present exemption amount is: (1) $62,550 ($45,000 in
taxable years beginning after 2006) in the case of married
individuals filing a joint return and surviving spouses; (2)
$42,500 ($33,750 in taxable years beginning after 2006) in the
case of other unmarried individuals; (3) $31,275 ($22,500 in
taxable years beginning after 2006) in the case of married
individuals filing separate returns; 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 or an estate or a trust. These amounts are not indexed
for inflation.
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 before 2007, 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 2006, 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.\83\
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\83\ The rule applicable to the adoption credit and child credit is
subject to the EGTRRA sunset.
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Reasons for Change

The Congress is concerned about the projected increase in
the number of individuals who will be affected by the
individual alternative minimum tax for 2007. The provision will
reduce the number of individuals who would otherwise be
affected by the minimum tax.

Explanation of Provision \84\
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\84\ The provision was subsequently amended for taxable years
beginning in 2008. See Part Seventeen, Division C, Title I.
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The Act provides that the individual AMT exemption amount
for taxable years beginning in 2007 is (1) $66,250, in the case
of married individuals filing a joint return and surviving
spouses; (2) $44,350 in the case of other unmarried
individuals; and (3) $33,125 in the case of married individuals
filing separate returns.
For taxable years beginning in 2007, the Act allows an
individual to offset the entire regular tax liability and
alternative minimum tax liability by the nonrefundable personal
credits.

Effective Date

The provision is effective for taxable years beginning in
2007.

PART SEVEN: TAX TECHNICAL CORRECTIONS ACT OF 2007 (PUBLIC LAW 110-172)
\85\
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\85\ H.R. 4839. H.R. 4839 passed the House on December 19, 2007
without objection. The Senate passed the bill by unanimous consent on
December 19, 2007. The President signed the bill on December 29, 2007.
For a technical explanation of the Act prepared by the staff of the
Joint Committee on Taxation, see Description of the Tax Technical
Corrections Act of 2007, as Passed By The House of Representatives (JCX
119-07, December 18, 2007).
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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 Relief and Health Care Act of 2006
Individuals with long-term unused credits under the
alternative minimum tax (Act sec. 402 of Division A).--Under
present law, an individual's minimum tax credit allowable for
any taxable year beginning after December 20, 2006, and 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.
The provision amends the definition of the AMT refundable
credit amount. The provision provides that the AMT refundable
credit amount (before any reduction by reason of adjusted gross
income) is an amount (not in excess of the long-term unused
minimum tax credit) equal to the greater of (1) $5,000, (2) 20
percent of the long-term unused minimum tax credit, or (3) the
AMT refundable credit amount (if any) for the prior taxable
year (before any reduction by reason of adjusted gross income).
The provision may be illustrated by the following example:
Assume an individual, whose adjusted gross income for all
taxable years is less than the threshold amount, has a long-
term unused minimum tax credit for 2007 of $100,000 and has no
other minimum tax credits. The individual's AMT refundable
credit amount under present law is $20,000 in 2007, $16,000 in
2008, $10,240 in 2009, $8,192 in 2010, $6,554 in 2011, and
$5,243 in 2012. Under the provision, the individual's AMT
refundable credit amount is $20,000 for 2007 (as under present
law), and in each of the taxable years 2008 thru 2011 the AMT
refundable credit amount is also $20,000. The minimum tax
credit in 2012 is zero.

Amendments related to Title XII of the Pension Protection Act of 2006
(Provisions Relating to Exempt Organizations)

Tax-free distributions from individual retirement plans for
charitable purposes (Act sec. 1201).--Under the provision, when
determining the portion of a distribution that would otherwise
be includible in income, the otherwise includible amount is
determined as if all amounts were distributed from all of the
individual's IRAs.
Contributions of appreciated property by S corporations
(Act sec. 1203).--Under present law (sec. 1366(d)), the amount
of losses and deductions which a shareholder of an S
corporation may take into account in any taxable year is
limited to the shareholder's adjusted basis in his stock and
indebtedness of the corporation. The provision provides that
this basis limitation does not apply to a contribution of
appreciated property to the extent the shareholder's pro rata
share of the contribution exceeds the shareholder's pro rata
share of the adjusted basis of the property. Thus, the basis
limitation of section 1366(d) does not apply to the amount of
deductible appreciation in the contributed property. The
provision does not apply to contributions made in taxable years
beginning after December 31, 2007.
For example, assume that in taxable year 2007, an S
corporation with one shareholder makes a charitable
contribution of a capital asset held more than one year with an
adjusted basis of $200 and a fair market value of $500. Assume
the shareholder's adjusted basis of the stock (as determined
under section 1366(d)(1)(A)) is $300. For purposes of applying
the limitation under section 1366(d) to the contribution, the
limitation does not apply to the $300 of appreciation and since
the $300 adjusted basis of the stock exceeds the $200 adjusted
basis of the contributed property, the limitation does not
apply at all to the contribution. Thus, the shareholder is
treated as making a $500 charitable contribution. The
shareholder reduces the basis of the S corporation stock by
$200 to $100 (pursuant to section 1367(a)(2)).
Recapture of tax benefit for charitable contributions of
exempt use property not used for an exempt use (Act sec.
1215).--The Act permits a charitable deduction in the amount of
the fair market value (not the donor's basis) for tangible
personal property if an officer of the donee organization
certifies upon disposition of the donated property that the use
of the property was related to the purpose or function
constituting the basis of the donee's tax-exempt status. It was
not intended that the donee's use, though so related, not also
be substantial. The provision adds to the certification
requirement that the officer certify that use of the property
by the donee was substantial.
Contributions of fractional interests in tangible personal
property (Act sec. 1218).--The Act added an income tax
provision providing for treatment of contributions of
fractional interests in tangible personal property. A special
valuation rule is provided under this rule that creates
unintended consequences under the estate and gift tax. The
provision therefore strikes the special valuation rule for
estate and gift tax purposes.
Time for assessment of penalty relating to substantial and
gross valuation misstatements attributable to incorrect
appraisals (Act section 1219).--Section 1219 of the Act added a
penalty for substantial and gross valuation misstatements
attributable to incorrect appraisals (Code sec. 6695A). First,
the Act omitted to apply the penalty with respect to
substantial valuation misstatements for estate and gift tax
purposes, and the provision clarifies that the penalty applies
for such purposes. Second, in the cross references for the
penalty, the language of Code section 6696(d)(1), relating to
the time period for assessment of the penalty, was not properly
described. The provision adds a cross reference to section
6695A in section 6696(d).
Expansion of the base of tax on private foundation net
investment income (Act sec. 1221).--The Act expands the base of
the tax on net investment income of private foundations. The
provision clarifies that capital gains from appreciation are
included in this tax base. This clarification conforms the
statutory language to the technical explanation.
Public disclosure of information relating to unrelated
business income tax returns (Act sec. 1225).--The Act added a
provision requiring that section 501(c)(3) organizations make
publicly available their unrelated business income tax returns.
However, as drafted, the requirement that, with respect to a
Form 990, an organization make publicly available only the last
three years of returns (sec. 6104(d)(2)) does not apply to
disclosure of Form 990-T, because Form 990-T is required by
section 6011, not by section 6033. The provision clarifies that
the 3-year limitation on making returns publicly available
applies to Form 990-T. The provision clarifies that the IRS is
required to make Form 990-T publicly available, subject to
redaction procedures applicable to Form 990 under section
6104(b).
Donor advised funds (Act sec. 1231).--The Act imposed
excise taxes in the event of certain taxable distributions
(Code sec. 4966) and on the provision of certain prohibited
benefits (sec. 4967), but does not cross refer to these
provisions in the section 4962 definition of qualified first
tier taxes for purposes of tax abatement (though a cross
reference to them is included in section 4963). The provision
adds a cross reference to them in Code section 4962 (relating
to abatement).
Excess benefit transactions involving supporting
organizations (Act sec. 1242).--New Code section 4958(c)(3)
provides that certain transactions involving supporting
organizations are treated as excess benefit transactions for
purposes of the intermediate sanctions rules. Under the Code,
certain organizations described in Code sections 501(c)(4), (5)
or (6) are treated as supported organizations, although they
are not public charities or safety organizations. The provision
provides that the excess benefit transaction rules of the Act
generally do not apply to transactions between a supporting
organization and its supported organization that is described
in section 501(c)(4), (5), or (6).

Amendments 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 provision clarifies the treatment of deficits in
earnings and profits. Under the provision, the TIPRA look-
through rule does not apply to any interest, rent, or royalty
to the extent that such interest, rent, or royalty creates (or
increases) a deficit which under section 952(c) may reduce the
subpart F income of the payor or another CFC. The provision
parallels the rule applicable to interest, rents, or royalties
that would otherwise qualify for exclusion from foreign
personal holding company income under the ``same country''
exception (sec. 954(c)(3)(B)). Thus interest, rents, and
royalties will be treated as subpart F income, notwithstanding
the general TIPRA look-through rule, if the payment creates or
increases a deficit of the payor corporation and that deficit
is from an activity that could reduce the payor's subpart F
income under the accumulated deficit rule (sec. 952(c)(1)(B)),
or could reduce the income of a qualified chain member under
the chain deficit rule (sec. 952(c)(1)(C)). For example, under
the provision, items that do not qualify for the ``same
country'' exception because they meet the terms of section
954(c)(3)(B) will also not qualify under the TIPRA look-through
rule.
Modification of active business definition under section
355 (Act sec. 202).--The provision revises Code sections
355(b)(2)(A) and 355(b)(3) to reflect that the provision
modifying the active business definition that was enacted by
section 202 of the Act was made permanent by section 410 of the
Tax Relief and Health Care Act of 2006. Conforming amendments
are made as a result of this change.
The provision clarifies that if a corporation became a
member of a separate affiliated group as a result of one or
more transactions in which gain or loss was recognized in whole
or in part, any trade or business conducted by such corporation
(at the time that such corporation became such a member) is
treated for purposes of section 355(b)(2) as acquired in a
transaction in which gain or loss was recognized in whole or in
part. Accordingly, such an acquisition is subject to the
provisions of section 355(b)(2)(C), and may qualify as an
expansion of an existing active trade or business conducted by
the distributing corporation or the controlled corporation, as
the case may be.
The provision clarifies that the Treasury Department shall
prescribe regulations that provide for the proper application
of sections 355(b)(2)(B), (C), and (D) in the case of any
corporation that is tested for active business under the
separate affiliated group rule, and that modify the application
of section 355(a)(3)(B) in the case of such a corporation in a
manner consistent with the purposes of the provision.
The provision further clarifies that the rule regarding the
application of the new rules to determine the continued
qualification under section 355 of a distribution that occurred
before the effective date of the new rules, shall apply only if
such application results in continued qualification and is not
intended to require application of the new rules in a manner
that would disqualify any distribution that satisfied the
active business requirements of section 355 under prior law
that was applicable to the distribution.
Computation of tax for individuals with income excluded
under the foreign earned income exclusion (Act sec. 515).--The
provision clarifies that in computing the tentative minimum tax
on nonexcluded income, the computation of tax is made before
reduction for the alternative minimum tax foreign tax credit.
This conforms the computation of the tentative minimum tax to
the computation of the regular tax, so that both computations
are made before the application of the foreign tax credit.
The provision also corrects an error in present law in the
case where a taxpayer has net capital gain in excess of taxable
income. Under the provision, if a taxpayer's net capital gain
(within the meaning of section 1(h)) exceeds taxable income, in
computing the tax on the taxable income as increased by the
excluded income, the amount of net capital gain which otherwise
be taken into account is reduced by the amount of that excess.
The excess first reduces the amount of net capital gain without
regard to qualified dividend income, and then qualified
dividend income. Also, in computing adjusted net capital gain,
unrecaptured section 1250 gain, and 28-percent rate gain, the
amount of the excess is treated in the same manner as an
increase in the long-term capital loss carried to the taxable
year.
Similar rules apply in computing the tentative minimum tax
where a taxpayer's net capital gain exceeds the taxable excess.
The provision is effective for taxable years beginning
after December 31, 2006.
The following examples illustrate the provision:
Example 1.--For taxable year 2007, an unmarried individual
has $80,000 excluded from gross income under section 911(a),
$30,000 gain from the sale of a capital asset held more than
one year, and $20,000 deductions. The taxpayer's taxable income
is $10,000. Under the provision, the regular tax is the excess
of (i) the amount of tax computed under section 911(f)(1)(A)(i)
on taxable income of $90,000 ($10,000 taxable income plus
$80,000 excluded income), over (ii) the amount of tax computed
under section 911(f)(1)(A)(ii) on taxable income of $80,000
(excluded income). In applying section 1(h) to determine the
tax under section 911(f)(1)(A)(i), the net capital gain and the
adjusted net capital gain are each $10,000. The regular tax is
$1,500, which is equal to a tax at the rate of 15 percent on
$10,000 of adjusted net capital gain.
Example 2.--For taxable year 2007, an unmarried individual
has $90,000 excluded from gross income under section 911(a),
$5,000 gain from the sale of a capital asset held more than one
year, $25,000 unrecaptured section 1250 gain, and $20,000
deductions. The taxpayer's taxable income is $10,000. Under the
provision, the regular tax is the excess of (i) the amount of
tax computed under section 911(f)(1)(A)(i) on taxable income of
$100,000 ($10,000 taxable income plus $90,000 excluded income),
over (ii) the amount of tax computed under section
911(f)(1)(A)(ii) on taxable income of $90,000 (excluded
income). In applying section 1(h) to determine the tax under
section 911(f)(1)(A)(i), the net capital gain is $10,000.
$5,000 is unrecaptured section 1250 gain ($25,000 less $20,000)
and $5,000 is adjusted net capital gain. The regular tax is
$2,000, which is equal to a tax at the rate of 15 percent on
$5,000 of adjusted net capital gain and a tax at the rate of 25
percent on $5,000 of unrecaptured section 1250 gain.

Amendments related to the Safe, Accountable, Flexible, Efficient
Transportation Equity Act: A Legacy for Users

Timing of claims for excess alternative fuel (not in a
mixture) credit (Act sec. 11113).--Present law provides that
the alternative fuel (not in a mixture) credit is refundable.
Code section 6427(i)(3) permits claims to be filed on a weekly
basis with respect to alcohol, biodiesel, and alternative fuel
mixtures if certain requirements are met. This rule, however,
does not refer to the alternative fuel credit (for alternative
fuel not in a mixture). The provision clarifies that the same
rules for filing claims with respect to fuel mixtures apply to
the alternative fuel credit.
Definition of alternative fuel (Act sec. 11113).--Code
section 6426(d)(2) defines alternative fuel to include ``liquid
hydrocarbons from biomass'' for purposes of the alternative
fuel excise tax credit and payment provisions under sections
6426 and 6427. The statute does not define liquid hydrocarbons,
which has led to questions as to whether it is permissible for
such a fuel to contain other elements, such as oxygen, or
whether the fuel must consist exclusively of hydrogen and
carbon. It was intended that biomass fuels such as fish oil,
which is not exclusively made of hydrogen and carbon, qualify
for the credit. The provision changes the reference in section
6426 from ``liquid hydrocarbons'' to ``liquid fuel'' for
purposes of the alternative fuel excise tax credit and payment
provisions.

Amendments related to the Energy Policy Act of 2005

Credit for production from advanced nuclear power
facilities (Act sec. 1306).--The provision clarifies that the
national capacity limitation of 6,000 megawatts represents the
total number of megawatts that the Secretary has authority to
allocate under section 45J.
Clarify limitation on the credit of installing alternative
fuel refueling property (Act sec. 1342).--The present-law
credit for qualified alternative fuel vehicle refueling
property for a taxable year is limited to $30,000 per property
subject to depreciation, and $1,000 for other property (sec.
30C(b)). The provision clarifies that the $30,000 and $1,000
limitations apply to all alternative fuel vehicle refueling
property placed in service by the taxpayer at a location. The
provision is consistent with similar deduction limitations
imposed under section 179A(b)(2)(A) (relating to the deduction
for clean-fuel vehicles and certain refueling property).
In addition, Code section 30C(c)(1) provides that qualified
alternative fuel vehicle refueling property has the meaning
given to the term by section 179A(d). However, section 179A(d)
defines a different term. The provision modifies the language
of section 30C(c)(1) to refer to the correct term.
Clarify that research eligible for the energy research
credit is qualified research (Act sec. 1351).--The energy
research credit is available with respect to certain amounts
paid or incurred to an energy research consortium. The
provision clarifies that the credit is available with respect
to such amounts paid or incurred to an energy research
consortium provided they are used for energy research that is
qualified research.
Double taxation of rail and inland waterway fuel resulting
from the use of dyed fuel on which the Leaking Underground
Storage Tank Trust Fund tax has already been imposed; off-
highway business use (Act sec. 1362).--Section 4081(a)(2)(B) of
the Code imposes tax at the Leaking Underground Storage Tank
Trust Fund financing tax rate of 0.1 cent per gallon on diesel
fuel at the time it is removed from a terminal. Section 4082(a)
provides that none of the generally applicable exemptions other
than the exemption for export apply to this removal even if the
fuel is dyed. When dyed fuel is used or sold for use in a
diesel powered highway vehicle or train (sec. 4041), or such
fuel is subject to the inland waterway tax (sec. 4042), the
Code inadvertently imposes the Leaking Underground Storage Tank
Trust Fund tax a second time. Section 6430 prohibits the refund
of taxes imposed at the Leaking Underground Storage Tank Trust
Fund financing rate, except in the case of fuel destined for
export. The provision eliminates the imposition of the 0.1 cent
tax a second time if the Leaking Underground Storage Tank Trust
Fund financing tax rate previously was imposed under section
4081. The provision permits a refund in the amount of the
Leaking Underground Storage Tank Trust Fund financing rate if
such tax was imposed a second time under 4041 or 4042 from
October 1, 2005 through the date of enactment. The provision
also clarifies that off-highway business use is not exempt from
the Leaking Underground Storage Tank Trust Fund Financing rate.
For administrative reasons associated with collecting the tax,
the off-highway business use clarification is effective for
fuel sold for use or used after the date of enactment.
Exemption from the Leaking Underground Storage Tank Trust
Fund financing rate for aircraft and vessels engaged in foreign
trade (Act sec. 1362).--Fuel supplied in the United States for
use in aircraft engaged in foreign trade is exempt from U.S.
customs duties and internal revenue taxes, so long as, where
the aircraft is registered in a foreign State, the State of
registry provides substantially reciprocal privileges for U.S.-
registered aircraft. However, the Energy Policy Act of 2005
imposed, without exemption, the Leaking Underground Storage
Tank Trust Fund financing rate on all taxable fuels, except in
the case of export. As a result, aviation fuel is no longer
exempt from the Leaking Underground Storage Tank Trust Fund
financing rate. According to the State Department, almost all
of the United States bilateral air services agreements contain
provisions exempting from taxation all fuel supplied in the
territory of one party for use in the aircraft of the other
party. The United States has interpreted these provisions to
prohibit the taxation, in any form, of aviation fuel supplied
in the United States to the aircraft of airlines of the foreign
countries that are parties to these air services agreements.
The amendment provides that fuel for use in vessels (including
civil aircraft) employed in foreign trade or trade between the
United States and any of its possessions is exempt from the
Leaking Underground Storage Tank Trust Fund financing rate.

Amendments related to the American Jobs Creation Act of 2004

Interaction of rules relating to credit for low sulfur
diesel fuel (Act sec. 339).--Section 45H of the Code allows a
credit at the rate of 5 cents per gallon for low sulfur diesel
fuel produced at certain small business refineries. The
aggregate credit with respect to any refinery is limited to 25
percent of the costs of the type deductible under section 179B
of the Code. Section 179B allows a deduction for 75 percent of
certain costs paid or incurred with respect to these
refineries. The basis of the property is reduced by the amount
of any credit determined with respect to any expenditure (sec.
45H(d)). Further, no deduction is allowed for the expenses
otherwise allowable as a deduction in an amount equal to the
amount of the credit under section 45H (sec. 280C(d)). The
interaction of these provisions is unclear, and the basis
reduction and deduction denial rules may have an
unintentionally duplicative effect. Under the provision,
deductions are denied in an amount equal to the amount of the
credit under section 45H, and the provisions of present law
reducing basis and denying a deduction are repealed.
Eliminate the open-loop biomass segregation requirement in
section 45(c)(3)(A)(ii) (Act sec. 710).--For purposes of the
credit for electricity produced from certain renewable
resources, section 45(c)(3)(A)(ii) defines open-loop biomass to
include any solid, nonhazardous, cellulosic waste material or
any lignin material that is segregated from other waste
materials, and that meets other requirements. The Act added
municipal solid waste to the category of qualified energy
resources giving rise to the credit. Thus, both open-loop
biomass and municipal solid waste can be treated as qualified
energy resources. The provision therefore strikes the
requirement that open-loop biomass be segregated from other
waste materials in order to be treated as qualified energy
resources.
Clarification of proportionate limitation applicable to
closed-loop biomass (Act sec. 710).--Section 45(d)(2)(B)(ii)
provides that when closed-loop biomass is co-fired with other
fuels, the credit is limited to the otherwise allowable credit
multiplied by the ratio of the thermal content of the closed-
loop biomass to the thermal content of all fuel used. This
limitation duplicates a similar limitation in section 45(a),
which provides that the credit is equal to 1.5 cents multiplied
by the kilowatt hours of electricity produced by the taxpayer
from qualified energy resources (and meeting other criteria).
The present-law section 45(a) rule has the effect of limiting
the credit (or duration of the credit) to the appropriate
portion of the fuel that constitutes qualified energy
resources, in the situations in which qualified energy
resources are permitted to be co-fired with each other, or are
permitted to be co-fired with other fuels. The provision
clarifies that the limitation applies only once, not twice, to
closed-loop biomass co-fired with other fuels, by striking the
duplicate limitation in section 45(d)(2)(B)(ii).
Treatment of partnerships under the limitation on
deductions allocable to property used by governments or other
tax-exempt entities (Act sec. 848).--Code section 470 generally
applies loss deferral rules in the case of property leased to
tax-exempt entities. This rule applies with respect to tax-
exempt use property, which for this purpose generally has the
meaning given to the term by section 168(h) (with exceptions
specified in section 470(c)(2)). The manner of application of
section 470 in the case of property owned by a partnership in
which a tax-exempt entity is a partner is unclear.
The provision provides that tax-exempt use property does
not include any property that would be tax-exempt use property
solely by reason of section 168(h)(6). The provision refers to
section 7701(e) for circumstances in which a partnership is
treated as a lease to which section 168(h) applies. Thus, if a
partnership is recharacterized as a lease pursuant to section
7701(e), and a provision of section 168(h) (other than section
168(h)(6)) applies to cause the property characterized as
leased to be treated as tax-exempt use property, then the loss
deferral rules of section 470 apply.
Under section 7701(e)(2), a partnership may be treated as a
lease, taking into account all relevant factors, including
factors similar to those set forth in section 7701(e)(1)
(relating to service contracts treated as leases). In the case
of property of a partnership in which a tax-exempt entity is a
partner, factors similar to those in section 7701(e)(1) (and in
the legislative history of that section) that are relevant in
determining whether a partnership is properly treated as a
lease of property held by the partnership include (1) a tax-
exempt partner maintains physical possession or control or
holds the benefits and burdens of ownership with respect to
such property, (2) there is insignificant equity investment by
any taxable partner, (3) the transfer of such property to the
partnership does not result in a change in use of such
property, (4) such property is necessary for the provision of
government services, (5) a disproportionately large portion of
the deductions for depreciation with respect to such property
are allocated to one or more taxable partners relative to such
partner's risk of loss with respect to such property or to such
partner's allocation of other partnership items, and (6)
amounts payable on behalf of the tax-exempt partner relating to
the property are defeased or funded by set-asides or expected
set-asides. It is intended that Treasury regulations or
guidance may provide additional factors that can be taken into
account in determining whether a partnership with taxable and
tax-exempt partners is an arrangement that resembles a lease of
property under which section 470 defers the allowance of
losses.
The provision is effective as if included in the provision
of the American Jobs Creation Act of 2004 to which it relates.
It is not intended that the provision supercede the rules set
forth by the Treasury Department in Notice 2005-29, 2005-13
I.R.B. 796, Notice 2006-2, 2006-2 I.R.B. 1, and Notice 2007-4,
2007-1 I.R.B. 260, with respect to the application of section
470 in the case of partnerships for taxable years of
partnerships beginning in 2004, 2005, and 2006. These notices
state that the Internal Revenue Service will not apply section
470 to disallow losses associated with property that is treated
as tax-exempt use property solely as a result of the
application of section 168(h)(6), and that abusive transactions
involving partnerships an other pass-through entities remain
subject to challenge by the Internal Revenue Service under
other provisions of the tax law. Accordingly, for partnership
taxable years beginning in 2004, 2005, and 2006, the Internal
Revenue Service may apply section 470 to a partnership that
would be treated as a lease under section 7701(e)(2).
Treatment of losses on positions in identified straddles
(Act sec. 888).--Under Code section 1092, the term ``straddle''
means offsetting positions in actively traded personal
property. Generally, a loss on a position in a straddle may be
recognized only to the extent the amount of the loss exceeds
the unrecognized gain (if any) in offsetting positions in the
straddle (sec. 1092(a)(1)(A)). Special rules for identified
straddles provide a different treatment of losses and also
provide that any position that is not part of an identified
straddle is not treated as offsetting with respect to any
position that is part of the identified straddle. A taxpayer is
permitted to treat a straddle as an identified straddle only
if, among other requirements, the straddle is not part of a
larger straddle.
Before the enactment of the Act, the rules for treating a
straddle as an identified straddle required that all the
positions of the straddle were acquired on the same day and
either that all of the positions were disposed of on the same
day in a taxable year or that none of the positions were
disposed of as of the close of the taxable year. A loss on a
position in an identified straddle was not subject to the loss
deferral rule described above but instead was taken into
account when all the positions making up the straddle were
disposed of.
The Act changed the rules for identified straddles by
providing, among other things, that if there is a loss on a
position in an identified straddle, the loss is applied to
increase the basis of the offsetting positions in that
identified straddle. Under section 1092(a)(2)(A)(ii), the basis
of each offsetting position in an identified straddle is
increased by an amount that equals the product of the amount of
the loss multiplied by the ratio of the amount of unrecognized
straddle period gain in that offsetting position to the
aggregate amount of unrecognized straddle period gain in all
offsetting positions. The Act also provided that any loss
described in section 1092(a)(2)(A)(ii) is not otherwise taken
into account for Federal tax purposes.
The Act left unclear the treatment of a loss on a position
in an identified straddle in at least two circumstances: first,
when there are no offsetting positions in the identified
straddle with unrecognized straddle period gain, and, second,
when an offsetting position in the identified straddle is or
has been a liability to the taxpayer.
The provision addresses the treatment of losses in these
two circumstances. In general, the provision reaffirms that a
loss on a position in an identified straddle is not permitted
to be recognized currently and also is not permanently
disallowed.
The provision provides that if the application of section
1092(a)(2)(A)(ii) does not result in a basis increase in any
offsetting position in the identified straddle (because there
is no unrecognized straddle period gain in any offsetting
position), the basis of each offsetting position in the
identified straddle must be increased in a manner that (1) is
reasonable, is consistent with the purposes of the identified
straddle rules, and is consistently applied by the taxpayer,
and (2) allocates to offsetting positions the full amount of
the loss (but no more than the full amount of the loss). At the
time a taxpayer adopts an allocation method under this rule,
the taxpayer is expected to describe that method in its books
and records.
Under the provision, unless the Secretary of the Treasury
provides otherwise, similar rules apply for purposes of the
identified straddle rules when there is a loss on a position in
an identified straddle and an offsetting position in the
identified straddle is or has been a liability or an obligation
(including, for instance, a debt obligation issued by the
taxpayer, a written option, or a notional principal contract
entered into by the taxpayer). Under this rule, if a taxpayer,
for example, receives $1 to enter into a five-year short
forward contract and the next day $100 of loss is allocated to
that position, the resulting basis of the contract is $99.
Under present law, a straddle is treated as an identified
straddle only if, among other requirements, it is clearly
identified on the taxpayer's records as an identified straddle
before the earlier of (1) the close of the day on which the
straddle is acquired, or (2) a time that the Secretary of the
Treasury may prescribe by regulations. The provision clarifies
that for purposes of this identification requirement, a
straddle is clearly identified only if the identification
includes an identification of the positions in the straddle
that are offsetting with respect to other positions in the
straddle. Consequently, taxpayers are required to identify not
only the positions that make up an identified straddle but also
which positions in that identified straddle are offsetting with
respect to one another. The offsetting positions identification
requirement added by the provision is effective for straddles
acquired after the date of enactment.
The provision provides that regulations or other guidance
prescribed by the Secretary for carrying out the purposes of
the identified straddle rules may include the rules for the
application of section 1092 to a position that is or has been a
liability or an obligation. Regulations or other guidance also
may include safe harbor basis allocation methods that satisfy
the requirements that an allocation other than under section
1092(a)(2)(A)(ii) must be reasonable, consistent with the
purposes of the identified straddle rules, and consistently
applied by the taxpayer.

Amendments related to the Economic Growth Tax Relief Reconciliation Act
of 2001

Application of special elective deferral limit to
designated Roth contributions (Act sec. 617).--Code section
402(g)(7) provides a special rule allowing certain employees to
make additional elective deferrals to a tax-sheltered annuity,
subject to (1) an annual limit of $3,000, and (2) a cumulative
limit of $15,000 minus the amount of additional elective
deferrals made in previous years under the special rule.
Present law provides a rule to coordinate the cumulative limit
with the ability to make designated Roth contributions, but
inadvertently reduces the $15,000 amount by all designated Roth
contributions made in previous years. The provision clarifies
that the $15,000 amount is reduced only by additional
designated Roth contributions made under the special rule.
Application of FICA taxes to designated Roth contributions
(Act sec. 617).--Under Code section 3121(v)(1)(A), elective
deferrals are included in wages for purposes of social security
and Medicare taxes. The provision clarifies that wage treatment
applies also to elective deferrals that are designated as Roth
contributions.

Amendments related to the Tax Relief Extension Act of 1999

Renewable electricity sold to utilities under certain
contracts (Act sec. 507).--Code section 45(e)(7) provides that
a wind energy facility placed in service by the taxpayer after
June 30, 1999, does not qualify for the section 45 production
tax credit if the electricity generated at the facility is sold
to a utility pursuant to certain pre-1987 contracts. The
provision clarifies that facilities placed in service prior to
June 30, 1999, that sell electricity under applicable pre-1987
contracts are not denied the section 45 production tax credit
solely by reason of a change in ownership after June 30, 1999.
Treatment of income and services provided by taxable REIT
subsidiaries (Act sec. 542).--The provision clarifies that the
transient basis language in the definition of a lodging
facility applies only in determining whether an establishment
other than a hotel or motel qualifies as a lodging facility.

Amendment related to the Internal Revenue Service Restructuring and
Reform Act of 1998

Redactions for background documents related to Chief
Counsel Advice documents (Act sec. 3509).--The Internal Revenue
Service Restructuring and Reform Act of 1998 established a
structured process by which the IRS makes certain work
products, designated Chief Counsel advice (``CCA''), open to
public inspection. To afford additional protection for certain
governmental interests implicated by CCAs, section 6110(i)(3)
governs redactions that may be made to CCAs, including the
exemptions or exclusions available under the Freedom of
Information Act, 5 U.S.C. Sec. 552(b) and (c) (except that the
provision for redaction under a Federal statute excludes Title
26), as well as the exemptions pertaining to taxpayer identity
information described in section 6110(c)(1). Section 6110(i)(3)
does not expressly address redactions to the ``background file
documents'' related to a CCA. The provision clarifies that the
CCA background file documents are governed by the same
redactions as CCAs.

Clerical corrections

The Act includes a number of clerical and conforming
amendments, including amendments correcting typographical
errors.

PART EIGHT: TERM OF IRS COMMISSIONER (PUBLIC LAW 110-176) \86\
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\86\ S. 2436. S. 2436 passed the Senate on December 19, 2007, by
unanimous consent. The House passed the bill on December 19, 2007,
without objection. The President signed the bill on January 4, 2008.
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A. Clarify Term of IRS Commissioner (sec. 7803)

Present Law

Within the Treasury is a Commissioner of Internal Revenue,
who is appointed by the President, with the advice and consent
of the Senate. The Commissioner is appointed to a five-year
term. An individual appointed to fill a vacancy in the position
of Commissioner occurring before the expiration of the term for
which such individual's predecessor was appointed shall be
appointed only for the remainder of the predecessor's term.

Explanation of Provision

The Act clarifies that the term of the Commissioner of
Internal Revenue is a five-year term, beginning with a term to
commence on November 13, 1997. Each subsequent term shall begin
on the day after the date on which the previous term expires.
Thus, if the Commissioner whose term ended November 12, 2009,
left office prior to such date, a successor could be appointed
for the remainder of the term ending on such date. Moreover,
the Commissioner's term is determined by reference to the five-
year term beginning with the term commencing on November 13,
1997, even if the Commissioner is appointed after the term has
started. Thus, the term of a Commissioner appointed on February
1, 2008, would run until November 12, 2012, five years after
the term beginning November 13, 2007.

Effective Date

The provision is effective as if included in the amendment
made by section 1102(a) of the Internal Revenue Service
Restructuring and Reform Act of 1998.

PART NINE: ECONOMIC STIMULUS ACT OF 2008 (PUBLIC LAW 110-185) \87\
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\87\ H.R. 5140. H.R. 5140 passed the House on January 29, 2008. The
Senate passed the bill on February 7, 2008 with an amendment. The House
agreed to the Senate amendment on February 7, 2008. The President
signed the bill on February 13, 2008. For a technical explanation of
the bill prepared by the staff of the Joint Committee on Taxation, see
Technical Explanation of the Revenue Provisions of H.R. 5140, the
``Economic Stimulus Act of 2008'' as Passed By the House of
Representatives and the Senate on February 7, 2008 JCX-16-08 (February
8, 2008).
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A. Recovery Rebates for Individual Taxpayers (sec. 101 of the Act and
sec. 6428 of the Code)

Present Law

In general
Under the Federal individual income tax system, an
individual who is a citizen or a resident of the United States
generally is subject to tax on worldwide taxable income.
Taxable income is total gross income less certain exclusions,
exemptions, and deductions. An individual may claim either a
standard deduction or itemized deductions.
An individual's income tax liability is determined by
computing his or her regular income tax liability and, if
applicable, alternative minimum tax liability.
Income tax liability
Regular income tax liability is determined by applying the
regular income tax rate schedules (or tax tables) to the
individual's taxable income (sec. 1). This tax liability is
then reduced by any applicable tax credits. The regular income
tax rate schedules are divided into several ranges of income,
known as income brackets, and the marginal tax rate increases
as the individual's income increases. The income bracket
amounts are adjusted annually for inflation. Separate rate
schedules apply based on filing status: single individuals
(other than heads of households and surviving spouses), heads
of households, married individuals filing joint returns
(including surviving spouses), married individuals filing
separate returns, and estates and trusts. Lower rates may apply
to capital gains.
A taxpayer may also be subject to an alternative minimum
tax.
Child tax credit
An individual may claim a tax credit of $1,000 for each
qualifying child under the age of 17 (sec. 24). Generally, a
qualifying child must have the same principal place of abode as
the taxpayer for more than one-half the taxable year and
satisfy a relationship test. To satisfy the relationship test,
the child must be the taxpayer's son, daughter, stepson,
stepdaughter, brother, sister, stepbrother, stepsister, or a
descendant of any such individual. The credit is phased-out at
higher-income levels. A child who is not a citizen, national,
or resident of the United States may not be a qualifying child.
No credit is allowed unless the individual includes the name
and taxpayer identification number of each qualifying child on
the income tax return.
Earned income credit
Low and moderate-income workers may be eligible for the
refundable earned income credit (EIC). Eligibility for the EIC
is based on earned income, adjusted gross income, investment
income, filing status, and immigration and work status in the
United States. The amount of the EIC is based on the presence
and number of qualifying children in the worker's family, as
well as on adjusted gross income and earned income. Earned
income is defined as (1) wages, salaries, tips, and other
employee compensation, but only if such amounts are includible
in gross income, plus (2) the amount of the individual's net
self-employment earnings.

Explanation of Provision

In general
The provision includes a recovery rebate credit for 2008
which is refundable. The credit mechanism (and the issuance of
checks described below) is intended to deliver an expedited
fiscal stimulus to the economy.
The credit is computed with two components in the following
manner.
Basic credit
Eligible individuals receive a basic credit (for the first
taxable year beginning) in 2008 equal to the greater of the
following:
Net income tax liability not to exceed $600
($1,200 in the case of a joint return).
$300 ($600 in the case of a joint return) if: (1)
the eligible individual has qualifying income of at least
$3,000; or (2) the eligible individual has a net income tax
liability of at least $1 and gross income greater than the sum
of the applicable basic standard deduction amount and one
personal exemption (two personal exemptions for a joint
return).
An eligible individual is any individual other than: (1) a
nonresident alien; (2) an estate or trust; or (3) a dependent.
For these purposes, ``net income tax liability'' means the
excess of the sum of the individual's regular tax liability and
alternative minimum tax over the sum of all nonrefundable
credits (other than the child credit). Net income tax liability
as determined for these purposes is not reduced by the credit
added by this provision or any credit which is refundable under
present law.
Qualifying income is the sum of the eligible individual's:
(a) earned income; (b) social security benefits (within the
meaning of sec. 86(d)); and (c) veteran's payments (under
Chapters 11, 13, or 15 of title 38 of the U. S. Code). The
definition of earned income has the same meaning as used in the
earned income credit except that it includes certain combat pay
and does not include net earnings from self-employment which
are not taken into account in computing taxable income.
Qualifying child credit
If an individual is eligible for any amount of the basic
credit the individual also may be eligible for a qualifying
child credit. The qualifying child credit equals $300 for each
qualifying child of such individual. For these purposes, the
child credit definition of qualifying child applies.
Limitation based on adjusted gross income
The amount of the credit (i.e., the sum of the amounts of
the basic credit and the qualifying child credit) is phased out
at a rate of five percent of adjusted gross income above
certain income levels. The beginning point of this phase-out
range is $75,000 of adjusted gross income ($150,000 in the case
of joint returns).
Valid identification numbers
No credit is allowed to an individual who does not include
a valid identification number on the individual's income tax
return. In the case of a joint return which does not include
valid identification numbers for both spouses, no credit is
allowed. In addition, a child shall not be taken into account
in determining the amount of the credit if a valid
identification number for the child is not included on the
return. For this purpose, a valid identification number means a
social security number issued to an individual by the Social
Security Administration. A taxpayer identification number
issued by the Internal Revenue Service is not a valid
identification number for purposes of this credit (e.g., an
ITIN).
If an individual fails to provide a valid identification
number, the omission is treated as a mathematical or clerical
error. As under present law, the Internal Revenue Service (the
``IRS'') may summarily assess additional tax due as a result of
a mathematical or clerical error without sending the taxpayer a
notice of deficiency and giving the taxpayer an opportunity to
petition the Tax Court. Where the IRS uses the summary
assessment procedure for mathematical or clerical errors, the
taxpayer must be given an explanation of the asserted error and
given 60 days to request that the IRS abate its assessment.
Rebate checks
Most taxpayers will receive this credit in the form of a
check issued by the Department of the Treasury.\88\ The amount
of the payment will be computed in the same manner as the
credit, except that it will be done on the basis of tax returns
filed for 2007 (instead of 2008). It is anticipated that the
Department of the Treasury will make every effort to issue all
payments as rapidly as possible to taxpayers who timely file
their 2007 tax returns. (Taxpayers who file late or pursuant to
extensions will receive their payments later.)
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\88\ To the extent practicable, the Department of the Treasury is
expected to utilize individuals' current direct deposit information in
its possession to expedite delivery of these amounts rather than the
mailing of rebate checks.
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Taxpayers will reconcile the amount of the credit with the
payment they receive in the following manner. They will
complete a worksheet calculating the amount of the credit based
on their 2008 income tax return. They will then subtract from
the credit the amount of the payment they received in 2008. For
many taxpayers, these two amounts will be the same. If,
however, the result is a positive number (because, for example,
the taxpayer paid no tax in 2007 but is paying tax in 2008),
the taxpayer may claim that amount as a refundable credit
against 2008 tax liability. If, however, the result is negative
(because, for example, the taxpayer paid tax in 2007 but owes
no tax for 2008), the taxpayer is not required to repay that
amount to the Treasury. Otherwise, the checks have no effect on
tax returns filed for 2008; the amount is not includible in
gross income and it does not otherwise reduce the amount of
withholding.
In no event may the Department of the Treasury issue checks
after December 31, 2008. This is designed to prevent errors by
taxpayers who might claim the full amount of the credit on
their 2008 tax returns and file those returns early in 2009, at
the same time the Treasury check might be mailed to them.
Payment of the credit (or the check) is treated, for all
purposes of the Code, as a payment of tax. Any resulting
overpayment under this provision is subject to the refund
offset provisions, such as those applicable to past-due child
support under section 6402 of the Code.
Examples of rebate determination
The following examples show the rebate amounts as
calculated from the taxpayer's 2007 tax return.
Example 1.--A single taxpayer has $14,000 in Social
Security income, no qualifying children, and no net tax
liability prior to the application of refundable credits and
the child credit. The taxpayer will receive a rebate of $300
for meeting the qualifying income test.
Example 2.--A head of household taxpayer has $4,000 in
earned income, one qualifying child, and no net tax liability
prior to the application of refundable credits and the child
credit. The taxpayer will receive a rebate of $600, comprising
$300 for meeting the qualifying income test, and $300 per
child.
Example 3.--A married taxpayer filing jointly has $4,000 in
earned income, one qualifying child, and no net tax liability
prior to the application of refundable credits and the child
credit. The taxpayer will receive a rebate of $900, comprising
$600 for meeting the qualifying income test, and $300 per
child.
Example 4.--A married taxpayer filing jointly has $2,000 in
earned income, one qualifying child, and $1,100 in net tax
liability (resulting from other unearned income) prior to the
application of refundable credits and the child credit (the
taxpayer's actual liability after the child credit is $100).
The qualifying income test is not met, but the taxpayer has net
tax liability for purposes of determining the rebate of $1,100.
The taxpayer will receive a rebate of $1,400, comprising $1,100
of net tax liability, and $300 per child.
Example 5.--A married taxpayer filing jointly has $40,000
in earned income, two qualifying children, and a net tax
liability of $1,573 prior to the application of refundable
credits and child credits (the taxpayer's actual tax liability
after the child credit is -$427). The taxpayer meets the
qualifying income test and the net tax liability test. The
taxpayer will receive a rebate of $1,800, comprising $1,200
(greater of $600 or net tax liability not to exceed $1,200),
and $300 per child.
Example 6.--A married taxpayer filing jointly has $175,000
in earned income, two qualifying children, and a net tax
liability of $31,189 (the taxpayer's actual liability after the
child credit also is $31,189 as the joint income is too high to
qualify). The taxpayer meets the qualifying income test and the
net tax liability test. The taxpayer will, in the absence of
the rebate phase-out provision, receive a rebate of $1,800,
comprising $1,200 (greater of $600 or net tax liability not to
exceed $1,200), and $300 per child. The phase-out provision
reduces the total rebate amount by five percent of the amount
by which the taxpayer's adjusted gross income exceeds $150,000.
Five percent of $25,000 ($175,000 minus $150,000) equals
$1,250. The taxpayer's rebate is thus $1,800 minus $1,250, or
$550.
Treatment of the U.S. possessions
Mirror code possessions \89\
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\89\ Possessions with mirror code tax systems are the United States
Virgin Islands, Guam, and the Commonwealth of the Northern Mariana
Islands.
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The U.S. Treasury will make a payment to each mirror code
possession in an amount equal to the aggregate amount of the
credits allowable by reason of the provision to that
possession's residents against its income tax. This amount will
be determined by the Treasury Secretary based on information
provided by the government of the respective possession. For
purposes of this payment, a possession is a mirror code
possession if the income tax liability of residents of the
possession under that possession's income tax system is
determined by reference to the U.S. income tax laws as if the
possession were the United States.
Non-mirror code possessions \90\
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\90\ Possessions that do not have mirror code tax systems are
Puerto Rico and American Samoa.
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To each possession that does not have a mirror code tax
system, the U.S. Treasury will make a payment in an amount
estimated by the Secretary as being equal to the aggregate
credits that would have been allowed to residents of that
possession if a mirror code tax system had been in effect in
that possession. Accordingly, the amount of each payment to a
non-mirror Code possession will be an estimate of the aggregate
amount of the credits that would be allowed to the possession's
residents if the credit provided by the provision to U.S.
residents were provided by the possession to its residents.
This payment will not be made to any U.S. possession unless
that possession has a plan that has been approved by the
Secretary under which the possession will promptly distribute
the payment to its residents.
General rules
No credit against U.S. income taxes is permitted under the
provision for any person to whom a credit is allowed against
possession income taxes as a result of the provision (for
example, under that possession's mirror income tax). Similarly,
no credit against U.S. income taxes is permitted for any person
who is eligible for a payment under a non-mirror code
possession's plan for distributing to its residents the payment
described above from the U.S. Treasury.
For purposes of the rebate credit payment, the Commonwealth
of Puerto Rico and the Commonwealth of the Northern Mariana
Islands are considered possessions of the United States.
For purposes of the rule permitting the Treasury Secretary
to disburse appropriated amounts for refunds due from certain
credit provisions of the Internal Revenue Code of 1986, the
payments required to be made to possessions under the provision
are treated in the same manner as a refund due from the
recovery rebate credit.
Federal programs or Federally-assisted programs
Any credit or refund allowed or made to an individual under
this provision (including to any resident of a U.S.
possessions) is not taken into account as income and shall not
be taken into account as resources for the month of receipt and
the following two months for purposes of determining
eligibility of such individual or any other individual for
benefits or assistance, or the amount or extent of benefits or
assistance, under any Federal program or under any State or
local program financed in whole or in part with Federal funds.

Effective Date

The provision applies to taxable years beginning after
December 31, 2007.

B. Temporary Increase in Limitations on Expensing of Certain
Depreciable Business Assets (sec. 102 of the Act and sec. 179 of the
Code)

Present Law

A taxpayer that satisfies limitations on annual investment
may elect under section 179 to deduct (or ``expense'') the cost
of qualifying property, rather than to recover such costs
through depreciation deductions.\91\ For taxable years
beginning in 2008, the maximum amount that a taxpayer may
expense is $128,000 of the cost of qualifying property placed
in service for the taxable year. The $128,000 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 $510,000.\92\ 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 2011 is treated as qualifying property.
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\91\ Additional section 179 incentives are provided with respect to
qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A), a renewal community (sec.
1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
\92\ Amounts applicable for 2008 are set forth in Rev. Proc. 2007-
66, 2007-45 I.R.B. 970. Present law provides that the maximum amount a
taxpayer may expense, for taxable years beginning in 2007 through 2010,
is $125,000 of the cost of qualifying property placed in service for
the taxable year. The $125,000 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 $500,000. The $125,000 and
$500,000 amounts are indexed for inflation in taxable years beginning
after 2007 and before 2011.
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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.\93\
For taxable years beginning in 2011 and thereafter, other rules
apply.\94\
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\93\ Sec. 179(c)(1).
\94\ Under the rules in effect for taxable years beginning in 2011
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 $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 (sec.
179(c)(2)).
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Explanation of Provision

The provision increases the $128,000 and $510,000 amounts
under section 179 for taxable years beginning in 2008 to
$250,000 and $800,000, respectively. The $250,000 and $800,000
amounts are not indexed for inflation.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

C. Special Depreciation Allowance for Certain Property (sec. 103 of the
Act and sec. 168(k) 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 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 taxpayer's
depreciation deduction would be maximized.
Section 280F limits the annual depreciation deductions with
respect to certain 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.
A taxpayer that satisfies limitations on annual investment
may elect under section 179 to deduct (or ``expense'') the cost
of qualifying property, rather than to recover such costs
through depreciation deductions.\95\ For taxable years
beginning in 2008, the maximum amount that a taxpayer may
expense is $128,000 of the cost of qualifying property placed
in service for the taxable year. The $128,000 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 $510,000.\96\ 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 2011 is treated as qualifying property.
For taxable years beginning in 2011 and thereafter, other rules
apply.\97\
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\95\ Additional section 179 incentives are provided with respect to
qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A), a renewal community (sec.
1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
\96\ Amounts applicable for 2008 are set forth in Rev. Proc. 2007-
66, 2007-45 I.R.B. 970. Present law provides that the maximum amount a
taxpayer may expense, for taxable years beginning in 2007 through 2010,
is $125,000 of the cost of qualifying property placed in service for
the taxable year. The $125,000 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 $500,000. The $125,000 and
$500,000 amounts are indexed for inflation in taxable years beginning
after 2007 and before 2011.
\97\ Under the rules in effect for taxable years beginning in 2011
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 $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 (sec.
179(c)(2)).
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Explanation of Provision \98\

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\98\ The provision was subsequently modified to provide an election
to accelerate AMT and research credits in lieu of bonus depreciation.
See Part Thirteen, Title III, A.1.
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The provision allows an additional first-year depreciation
deduction equal to 50 percent of the adjusted basis of
qualified property.\99\ 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.\100\ The basis of the property and the
depreciation allowances in the year the property is placed in
service and later years are appropriately adjusted to reflect
the additional first-year depreciation deduction. In addition,
there are no adjustments 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. The amount of the additional first-year
depreciation deduction is not affected by a short taxable year.
The taxpayer may elect out of additional first-year
depreciation for any class of property for any taxable year.
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\99\ The additional first-year depreciation deduction is subject to
the general rules regarding whether an item is deductible under section
162 or instead is subject to capitalization under section 263 or
section 263A.
\100\ However, the additional first-year depreciation deduction is
not allowed for purposes of computing earnings and profits.
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The interaction of the additional first-year depreciation
allowance with the otherwise applicable depreciation allowance
may be illustrated as follows. Assume that in 2008, a taxpayer
purchases new depreciable property and places it in
service.\101\ The property's cost is $1,000, and it is five-
year property subject to the half-year convention. The amount
of additional first-year depreciation allowed under the
provision is $500. The remaining $500 of the cost of the
property is deductible under the rules applicable to five-year
property. Thus, 20 percent, or $100, is also allowed as a
depreciation deduction in 2008. The total depreciation
deduction with respect to the property for 2008 is $600. The
remaining $400 cost of the property is recovered under
otherwise applicable rules for computing depreciation.
---------------------------------------------------------------------------
\101\ Assume that the cost of the property is not eligible for
expensing under section 179.
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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)).\102\ Second, the
original use \103\ of the property must commence with the
taxpayer after December 31, 2007.\104\ Third, the taxpayer must
purchase the property within the applicable time period.
Finally, the property must be placed in service after December
31, 2007, and before January 1, 2009. An extension of the
placed in service date of one year (i.e., to January 1, 2010)
is provided for certain property with a recovery period of 10
years or longer and certain transportation property.\105\
Transportation property is defined as tangible personal
property used in the trade or business of transporting persons
or property. Special rules, including an extension of the
placed-in-service date of one year (i.e., to January 1, 2010),
also apply to certain aircraft.
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\102\ A special rule precludes the additional first-year
depreciation deduction for any property that is required to be
depreciated under the alternative depreciation system of MACRS.
\103\ The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer.
If in the normal course of its business a taxpayer sells fractional
interests in property to unrelated third parties, then the original use
of such property begins with the first user of each fractional interest
(i.e., each fractional owner is considered the original user of its
proportionate share of the property).
\104\ A special rule applies in the case of certain leased
property. In the case of any property that is originally placed in
service by a person and that is sold to the taxpayer and leased back to
such person by the taxpayer within three months after the date that the
property was placed in service, the property would be treated as
originally placed in service by the taxpayer not earlier than the date
that the property is used under the leaseback.
If property is originally placed in service by a lessor (including
by operation of section 168(k)(2)(D)(i)), such property is sold within
three months after the date that the property was placed in service,
and the user of such property does not change, then the property is
treated as originally placed in service by the taxpayer not earlier
than the date of such sale.
\105\ In order for property to qualify for the extended placed in
service date, the property is required to have an estimated production
period exceeding one year and a cost exceeding $1 million.
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The applicable time period for acquired property is (1)
after December 31, 2007, and before January 1, 2009, but only
if no binding written contract for the acquisition is in effect
before January 1, 2008, or (2) pursuant to a binding written
contract which was entered into after December 31, 2007, and
before January 1, 2009.\106\ 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 December 31,
2007, and before January 1, 2009. 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. 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,
2009 (``progress expenditures'') is eligible for the additional
first-year depreciation.\107\
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\106\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire
a component of the property is in effect prior to January 1, 2008.
\107\ For purposes of determining the amount of eligible progress
expenditures, it is intended that rules similar to sec. 46(d)(3) as in
effect prior to the Tax Reform Act of 1986 shall apply.
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Property does not qualify for the additional first-year
depreciation deduction when the user of such property (or a
related party) would not have been eligible for the additional
first-year depreciation deduction if the user (or a related
party) were treated as the owner. For example, if a taxpayer
sells to a related party property that was under construction
prior to January 1, 2008, the property does not qualify for the
additional first-year depreciation deduction. Similarly, if a
taxpayer sells to a related party property that was subject to
a binding written contract prior to January 1, 2008, the
property does not qualify for the additional first-year
depreciation deduction. As a further example, if a taxpayer
(the lessee) sells property in a sale-leaseback arrangement,
and the property otherwise would not have qualified for the
additional first-year depreciation deduction if it were owned
by the taxpayer-lessee, then the lessor is not entitled to the
additional first-year depreciation deduction.
The limitation on the amount of depreciation deductions
allowed with respect to certain passenger automobiles (sec.
280F) is increased in the first year by $8,000 for automobiles
that qualify (and do not elect out of the increased first year
deduction). The $8,000 increase is not indexed for inflation.

Effective Date

The provision is effective for property placed in service
after December 31, 2007.

PART TEN: GENETIC INFORMATION NONDISCRIMINATION ACT OF 2008 (PUBLIC LAW
110-233) \108\
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\108\ H.R. 493. The House Committee on Ways and Means reported H.R.
493 on March 26, 2007 (H.R. Rep. 110-28, Part II). The bill passed the
House on April 25, 2007. The Senate passed the bill on April 24, 2008,
with an amendment. The House agreed to the Senate amendment on May 1,
2008. The President signed the bill on May 21, 2008.
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A. Prohibition of Discrimination Based on Genetic Testing (sec. 103 of
the Act and sec. 9802 and 9832 of the Code)

Present Law

The Health Insurance Portability and Accountability Act of
1996 (``HIPAA'') imposes a number of requirements with respect
to group health coverage that are designed to provide
protections to health plan participants. HIPAA includes similar
provisions in the Code, ERISA, and the Public Health Service
Act (``PHSA'').
Under present law, HIPAA provides certain protections
against genetic discrimination. Among other things, HIPAA
provides that a group health plan may not establish rules for
eligibility of any individual to enroll under the plan based on
genetic information.\109\ Under final regulations issued by the
Department of Treasury pursuant to HIPAA, any restriction on
benefits provided under a group health plan must apply
uniformly to all similarly situated individuals and must not be
directed at individual participants or beneficiaries based on
genetic information of the participants or beneficiaries.\110\
A group health plan also may not require an individual to pay a
premium or contribution which is greater than such premium or
contribution for a similarly situated individual enrolled in
the plan on the basis of genetic information of the individual
or of a dependent enrolled under the plan.\111\
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\109\ Code sec. 9802(a).
\110\ Treas. Reg. sec. 54.9802-1(b)(2)(i)(B).
\111\ Code sec. 9802(b).
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In addition, HIPAA generally provides that a pre-existing
condition exclusion may be imposed with respect to a
participant or beneficiary only if: (1) the exclusion relates
to a condition (whether physical or mental), regardless of the
cause of the condition, for which medical advice, diagnosis,
care, or treatment was recommended or received within the 6-
month period ending on the enrollment date; (2) the exclusion
extends for a period of not more than 12 months after the
enrollment date; and (3) the period of any pre-existing
condition exclusion is reduced by the length of the aggregate
of the periods of creditable coverage (if any) applicable to
the participant as of the enrollment date. Pre-existing
condition exclusions based on genetic information cannot be
applied absent a diagnosis of the condition related to the
information.\112\
---------------------------------------------------------------------------
\112\ Code sec. 9801(b)(1)(B).
---------------------------------------------------------------------------
Under final regulations issued by the Department of
Treasury, genetic information is defined as information about
genes, gene products, and inherited characteristics that may
derive from the individual or a family member. This includes
information regarding carrier status and information derived
from laboratory tests that identify mutations in specific genes
or chromosomes, physical medical examinations, family
histories, and direct analysis of genes or chromosomes.\113\
---------------------------------------------------------------------------
\113\ Treas. Reg. sec. 54.9801-2.
---------------------------------------------------------------------------
The requirements do not apply to any governmental plan or
any group health plan that has less than two participants who
are current employees. A group health plan is defined as a plan
(including a self-insured plan) of, or contributed to by, an
employer (including a self-employed person) or employee
organization to provide health care (directly or otherwise) to
the employees, former employees, the employer, others
associated or formerly associated with the employer in a
business relationship, or their families.
The Code imposes an excise tax on group health plans which
fail to meet these requirements.\114\ 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:
(1) 10 percent of the employer's group health plan expenses for
the prior year; or (2) $500,000. No tax is imposed if the
Secretary of the Treasury determines that the employer did not
know, and in exercising reasonable diligence would not have
known, that the failure existed.
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\114\ Code sec. 4980D.
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Reasons for Change

The advances in genetics open up many opportunities for
medical progress with respect to the prevention, detection, and
treatment of disease. However, this information also presents
the possibility for misuse. The Congress is aware of examples
of genetic discrimination in the workforce and with respect to
insurance. In some cases, genetic conditions and disorders are
associated with particular racial and ethnic groups and gender.
Because some genetic traits are most prevalent in particular
groups, members of a particular group may be stigmatized or
discriminated against as a result of genetic information. The
Congress is concerned that the possibility of discrimination on
the basis of genetic information may prohibit individuals from
taking full advantage of the information that may be available.
Thus, some individuals may not be receiving the best possible
medical care. The Act therefore adopts a uniform, national
standard that prohibits discrimination based on genetic
information. The Act assures that the full array of enforcement
mechanisms applicable to group health plans under the Code is
available with respect to the prohibition on genetic
discrimination under this provision.

Explanation of Provision

The provision modifies the group health plan requirements
under the Code.
Under the provision, a group health plan may not adjust
premium or contribution amounts for the group covered under
such plan on the basis of genetic information. In the case of
family members who are covered under the same group health
plan, the group health plan is permitted to adjust premium or
contribution amounts for the group on the basis of the
occurrence of diseases or disorders in family members in the
group, provided that such information is taken into account
only with respect to the individual in which the disease or
disorder occurs and not as genetic information with respect to
family members in which the disease or disorder has not
occurred.
The provision also requires that a group health plan may
not request or require an individual or family member of such
individual to undergo a genetic test. The provision does not
limit the authority of a health care professional who is
providing health care services to an individual to request that
such individual undergo a genetic test. The provision also does
not limit the authority of a group health plan to provide
information generally about the availability of genetic tests,
for example, in the case of a summary plan description, or to
provide information about genetic tests to a health care
professional with respect to the treatment of an individual to
whom such professional is providing health care services, for
example, during a quality assurance review.
The provision contains two rules with respect to a group
health plan's collection of genetic information. First, a group
health plan is prohibited from requesting, requiring, or
purchasing genetic information for purposes of underwriting.
Second, a group health plan is prohibited from requesting,
requiring, or purchasing genetic information with respect to
any individual prior to such individual's enrollment under the
plan or in connection with such enrollment. The second
prohibition is not violated where the collection of genetic
information is incidental to the requesting, requiring, or
purchasing of other information concerning the individual
provided that such request, requirement or purchase is not for
purposes of underwriting.
The term underwriting, with respect to any group health
plan, means: (1) Rules for determining eligibility for, or
determination of, benefits under the plan; (2) the computation
of premium or contribution amounts under the plan; (3) the
application of any pre-existing condition exclusion under the
plan; and (4) other activities related to the creation,
renewal, or replacement of a contract of health insurance or
health benefits.
Under the provision, the current law requirement that a
group health plan may not establish rules for eligibility based
on genetic information is extended to governmental plans and
group health plans with less than two participants who are
current employees. The provisions requiring (1) that group
premiums or contribution amounts may not be adjusted on the
basis of genetic information of an individual in the group, (2)
that a group health plan may not request or require an
individual or family member of such individual undergo a
genetic test, and (3) that group health plans not collect
genetic information for purposes of underwriting or in
connection with enrollment also apply to all group health
plans.
Genetic information means, with respect to any individual,
information about: (1) such individual's genetic tests; (2) the
genetic tests of family members of such individual; and (3) the
occurrence of a disease or disorder in family members of such
individual. The term genetic information also includes, with
respect to any individual, any request for genetic services,
receipt of genetic services, or participation in any clinical
research, or any other program, which includes genetic
services, by such individual or any family member of such
individual. The term genetic information does not include the
occurrence of a disease or disorder in family members of an
individual to the extent that such information is taken into
account only with respect to the individual in which such
disease or disorder occurs and not as genetic information with
respect to any other individual.
A genetic test is defined as an analysis of human DNA, RNA,
chromosomes, proteins, or metabolites, that detects genotypes,
mutations, or chromosomal changes. The term genetic test does
not include (1) an analysis of proteins or metabolites that
does not detect genotypes, mutations, or chromosomal changes,
or (2) an analysis of proteins or metabolites that is directly
related to a manifested disease, disorder, or pathological
condition that could reasonably be detected by a health care
professional with appropriate training and expertise in the
field of medicine involved.
Genetic services are defined as a genetic test, genetic
counseling (such as obtaining, interpreting, or assessing
genetic information), and genetic education.
A family member means, with respect to an individual: (1) A
dependent (as such term is used for purposes of section
9801(f)(2)) of such individual, and (2) any other individual
who is a first-degree, 2nd degree, 3rd degree, or 4th degree
relative of such individual or such individual's dependent. In
general, it is intended that the term ``family member'' be
interpreted broadly so as to provide the maximum protection
against discrimination.
Under the provision, the Secretary of the Treasury is
directed to issue regulations or other guidance to carry out
the provision no later than one year after date of enactment.
The Secretary of the Treasury is to coordinate administration
and enforcement with the Secretary of Health and Human Services
and the Secretary of Labor so that provisions over which two or
more such Secretaries have jurisdiction are administered in the
same manner and so as to avoid duplication of enforcement
efforts.

Effective Date

The provision is effective with respect to group health
plans for plan years beginning after the date that is one year
after the date of enactment (i.e., plan years beginning after
May 21, 2009).

PART ELEVEN: FOOD, CONSERVATION, AND ENERGY ACT OF 2008 (PUBLIC LAWS
110-234 AND 110-246) \115\

TITLE I--REVENUE PROVISIONS FOR AGRICULTURE PROGRAMS

A. Extension of Custom User Fees (sec. 15201 of the Act)

Present Law

Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (19 U.S.C. 58c) (``COBRA'')
authorizes the Secretary of the Treasury to collect certain
customs services fees. Section 412 of the Homeland Security Act
of 2002 authorizes the Secretary of the Treasury to delegate
such authority to the Secretary of Homeland Security. Customs
user fees include passenger and conveyance processing fees
(e.g., fees for processing air and sea passengers, commercial
trucks, rail cars, private aircraft and vessels, commercial
vessels, dutiable mail packages, barges and bulk carriers,
cargo, and Customs broker permits) and merchandise processing
fees. Congress has authorized collection of the passenger and
conveyance processing fees through December 27, 2014. The
current authorization for the collection of the merchandise
processing fees is through December 27, 2014.
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\115\ H.R. 2419. H.R. 2419 passed the House on July 27, 2007. The
Senate Committee on Finance reported S. 2242 on October 25, 2007 (S.
Rep. 110-206). The Senate passed H.R. 2419 on December 14, 2007, with
an amendment. The conference report was filed on May 13, 2008 (H.R.
110-627), was passed by the House on May 14, 2008, and passed by the
Senate on May 15, 2008. The bill was vetoed by the President on May 21,
2008. The veto was overridden by the House on May 21, 2008, and by the
Senate on May 22, 2008.
To correct an enrolling error in H.R. 2419, Pub. L. No. 110-246
(which contains the identical revenue provisions) was enacted on June
18, 2008. Section 4 of Pub. L. No. 110-246 provides that the amendments
made by P.L. 110-234 are repealed and that the amendments made by Pub.
L. No. 110-246 generally take effect on the date of enactment of the
earlier of the two bills to be enacted (May 22, 2008).
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Explanation of Provision \116\

The Act amends Section 13031 of the Consolidated Omnibus
Budget Reconciliation Act of 1985 to extend the passenger and
conveyance processing fees through September 30, 2017, and
extend the merchandise processing fees through November 14,
2017. The conference agreement would require remittance, by no
later than September 25, 2017, of passenger and conveyance fees
for the period July 1, 2017 through September 20, 2017. It
would also require an estimated prepayment of the merchandise
processing fees no later than September 25, 2017 for
merchandise entered on or after October 1, 2017 and before
November 15, 2017. The estimated prepayment will be based on
the amount paid in the equivalent period of the previous year,
as determined by the Secretary of the Treasury. The Act also
holds service users harmless for overpayments or underpayments
of merchandise processing fees by requiring the Secretary of
Treasury to reconcile the fees paid with the actual fees
incurred for services rendered. The Secretary of Treasury must
then refund any overpayments with interest, and make
adjustments for any underpayments of such merchandise
processing fees.
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\116\ All the public laws enacted in the 110th Congress affecting
this provision are described in Part Twenty-Two.
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Effective Date

The provision is effective on the date of enactment (May
22, 2008).

B. Modifications to Corporate Estimated Tax Payments (sec. 15202 of the
Act)

Present Law

In general

Tax Increase Prevention and Reconciliation Act of 2005 (``TIPRA'')

TIPRA provided the following special rules:
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.

Subsequent legislation

Several public laws have been enacted since TIPRA which
further increase the percentage of payments due under each of
the two special rules enacted by TIPRA described above.

Reasons for Change

The Congress believes it is appropriate to adjust the
corporate estimated tax payments.

Explanation of Provision \117\

The provision makes a modification to the corporate
estimated tax payment rules.
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\117\ All the public laws enacted in the 110th Congress affecting
this provision are described in Part Twenty-Two.
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In case of a corporation with assets of at least $1
billion, the payments due in July, August, and September, 2012,
are increased by 7\3/4\ percentage points of the payment
otherwise due and the next required payment shall be reduced
accordingly.

Effective Date

The provision is effective on the date of enactment.

TITLE II--TAX PROVISIONS

A. Conservation Provisions

1. Exclusion of Conservation Reserve Program Payments from SECA tax for
individuals receiving Social Security retirement or disability
payments (sec. 15301 of the Act and sec. 1402(a) of the Code)

Present Law

Generally, the Self-Employment Contributions Act (``SECA'')
tax is imposed on an individual's net earnings from self-
employment income within the Social Security wage base. Net
earnings from self-employment generally mean gross income
(including the individual's net distributive share of
partnership income) derived by an individual from any trade or
business carried on by the individual less applicable
deductions.\118\
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\118\ Sec. 1402.
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Reasons for Change

The Congress believes that the correct measurement of
income for SECA purposes in the cases of retired or disabled
individuals does not include conservation reserve program
payments.

Explanation of Provision

The provision excludes conservation reserve program
payments from self-employment income for purposes of the SECA
tax in the case of individuals who are receiving Social
Security retirement or disability benefits. The treatment of
conservation reserve program payments received by other
taxpayers is not changed.

Effective Date

The provision is effective for payments made after December
31, 2007.
2. Extend the special rule encouraging contributions of capital gain
real property for conservation purposes (sec. 15302 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.\119\
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\119\ Secs. 170, 2055, and 2522, respectively.
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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, (i.e.,
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.

Special rule regarding contributions of capital gain real property for
conservation purposes

In general
Under a temporary provision that is effective for
contributions made in taxable years beginning after December
31, 2005,\120\ 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.
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\120\ Sec. 170(b)(1)(E).
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Individuals are allowed to carry over 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 carry over 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
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.
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.\121\
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\121\ Sec. 170(b)(2)(B).
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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 on or before August 17, 2006.
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.
Termination
The special rule regarding contributions of capital gain
real property for conservation purposes does not apply to
contributions made in taxable years beginning after December
31, 2007.

Reasons for Change

Gifts of conservation easements to organizations that are
dedicated to maintaining natural habitats, open spaces, or
traditional agriculture help protect our nation's heritage. The
charitable tax deduction for such conservation easements has
proven to be a valuable incentive for making such gifts. The
Congress believes that the special rule that provides an
increased incentive to make charitable contributions of partial
interests in real property for conservation purposes is an
important way of encouraging conservation and preservation.

Explanation of Provision

The Act extends the special rule regarding contributions of
capital gain real property for conservation purposes for two
years for contributions made in taxable years beginning on or
before December 31, 2009.

Effective Date

The provision is effective for contributions made in
taxable years beginning after December 31, 2007.

3. Deduction for endangered species recovery expenditures (sec. 15303
of the Act and sec. 175 of the Code)

Present Law

Under present law, a taxpayer engaged in the business of
farming may treat expenditures that are paid or incurred by him
during the taxable year for the purpose of soil or water
conservation in respect of land used in farming, or for the
prevention of erosion of land used in farming, as expenses that
are not chargeable to capital account. Such expenditures are
allowed as a deduction, not to exceed 25 percent of the gross
income derived from farming during the taxable year.\122\ Any
excess above such percentage is deductible for succeeding
taxable years, not to exceed 25 percent of the gross income
derived from farming during such succeeding taxable year.
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\122\ Sec. 175.
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Reasons for Change

The goal of the Endangered Species Act of 1973 is to
recover listed species and the ecosystems on which they depend
to levels where protection under such Act is no longer
necessary. Recovery is the process by which the decline of an
endangered species is arrested or reversed, and threats removed
or reduced so that the species' long-term survival in the wild
can be ensured. Section 4(f)(1) of such Act directs the
appropriate Secretary to develop and implement recovery plans
for the conservation and survival of endangered and threatened
species, unless the appropriate Secretary finds that such a
plan will not promote the conservation of the species. To the
maximum extent practicable, the recovery plan must incorporate
a description of management actions to achieve the plan's
goals, objective and measurable criteria for determining the
removal of species from the endangered species list, and
estimate the time required and cost to carry out the recovery
plan. The appropriate Secretary may procure the services of
appropriate private and public agencies in developing and
implementing a recovery plan.
According to an April 6, 2006, General Accountability
Office report entitled ``Endangered Species: Time and Costs to
Recover Species Are Largely Unknown'', as of January 2006, the
Fish and Wildlife Service and the National Marine Fisheries
Service had finalized and approved 558 recovery plans covering
1,049 species, or about 82 percent of the 1,272 endangered or
threatened species protected in the United States at that time.
Recovery plans contain management measures that landowners can
adopt on their land that will aid in the recovery of endangered
or threatened species, resulting in a public benefit. Such are
similar to measures undertaken for soil and water conservation,
which are entitled to a tax deduction. The Congress believes
that certain expenses of farmers made pursuant to a recovery
plan under the Endangered Species Act should be treated
similarly to expenditures by farmers made for soil and water
conservation.

Explanation of Provision

The Act provides that expenditures paid or incurred by a
taxpayer engaged in the business of farming for the purpose of
achieving site-specific management actions pursuant to the
Endangered Species Act of 1973 \123\ are to be treated the same
as expenditures for the purpose of soil or water conservation
in respect of land used in farming, or for the prevention of
erosion of land used in farming, i.e., such expenditures are
treated as not chargeable to capital account and are deductible
subject to the limitation that the deduction may not exceed 25
percent of the farmer's gross income derived from farming
during the taxable year.
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\123\ 16 U.S.C. 1533(f)(B).
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Effective Date

The provision is effective for expenditures paid or
incurred after December 31, 2008.

4. Temporary reduction in corporate tax rate for qualified timber gain;
timber REIT provisions (secs. 15311-15315 of the Act and secs.
856, 857, and 1201 of the Code)

Present Law

Treatment of certain timber gain

Under present law, if a taxpayer cuts standing timber, the
taxpayer may elect to treat the cutting as a sale or exchange
eligible for capital gains treatment (sec. 631(a)). The fair
market value of the timber on the first day of the taxable year
in which the timber is cut is used to determine the gain
attributable to such cutting. Such fair market value is also
considered the taxpayer's cost of the cut timber for all
purposes, such as to determine the taxpayer's income from later
sales of the timber or timber products. Also, if a taxpayer
disposes of the timber with a retained economic interest or
makes an outright sale of the timber, the gain is eligible for
capital gain treatment (sec. 631(b)). This treatment under
either section 631(a) or (b) requires that the taxpayer has
owned the timber or held the contract right for a period of
more than one year.
Under present law, for taxable years beginning before
January 1, 2011, the maximum rate of tax on long term capital
gain (``net capital gain'') \124\ of an individual, estate, or
trust is 15 percent. Any net capital gain that otherwise would
be taxed at a 10- or 15-percent rate is taxed at a zero-percent
rate. These rates apply for purposes of both the regular tax
and the alternative minimum tax.\125\
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\124\ Net capital gain is defined as the excess of net long-term
capital gain over net short-term capital loss for the taxable year.
Sec. 1222(11).
\125\ Because the entire amount of the capital gain is included in
alternative minimum taxable income (``AMTI''), for taxpayers subject to
the alternative minimum tax with AMTI in excess of $112,500 ($150,000
in the case of a joint return), the gain may cause a reduction in the
minimum tax exemption amount and thus effectively tax the gain at rates
of 21.5 or 22 percent. Also the gain may cause the phase-out of certain
benefits in computing the regular tax.
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For taxable years beginning after December 31, 2010, the
maximum rate of tax on the net capital gain of an individual is
20 percent. Any net capital gain that 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 eight-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,
which would otherwise have been taxed at a 20-percent rate, is
taxed at an 18-percent rate.
The net capital gain of a corporation is taxed at the same
rates as ordinary income, up to a maximum rate of 35
percent.\126\
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\126\ Secs. 11 and 1201.
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Real estate investment trusts (``REITs'') are subject to a
special taxation regime. Under this regime, a REIT is allowed a
deduction for dividends paid to its shareholders.\127\ As a
result, REITs generally do not pay tax on distributed income,
but the income is taxed to the REIT shareholders. A REIT that
has long-term capital gain can declare a dividend that
shareholders are entitled to treat as long-term capital gain.
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\127\ A distribution to a corporate shareholder out of current or
accumulated earnings and profits of the corporation is a dividend,
unless the distribution is a redemption that terminates the
shareholder's stock interest or reduces the shareholder's interest in
the distributing corporation to an extent considered to result in
treatment as a sale or exchange of the shareholder's stock. Secs. 301
and 302. A distribution in excess of corporate earnings and profits is
treated by shareholders as first a recovery of their stock basis and
then, to the extent the distribution exceeds a shareholder's stock
basis, as a sale or exchange of the stock. Sec. 301. These rules
generally apply to REITs.
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REITs generally are required to distribute 90 percent of
their taxable income (other than net capital gain). A REIT
generally must pay tax at regular corporate rates on any
undistributed income. However, a REIT that has net capital gain
can retain that gain without distributing it, and the
shareholders can report the net capital gain as if it were
distributed to them. In that case the REIT pays a C corporation
tax on the retained gain, but the shareholders who report the
income are entitled to a credit or refund for the difference
between the tax that would be due if the income had been
distributed and the 35-percent rate paid by the REIT.\128\ In
effect, net capital gain of a REIT (including but not limited
to timber gain) can be taxed as net capital gain of the
shareholders, whether or not the gain is distributed.
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\128\ Sec. 857(b)(3)(D). The shareholders also obtain a basis
increase in their REIT stock for the gross amount of the deemed
distribution that is included in their income less the amount of
corporate tax deemed paid by them that was paid by the REIT on the
retained gain. Sec. 857(b)(3)(D)(iii).
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Other REIT provisions

A REIT is also subject to a four-percent excise tax to the
extent it does not distribute specified percentages of its
income within any calendar year. The required distributed
percentage is 85 percent in the case of the REIT ordinary
income, and 95 percent in the case of the REIT capital gain net
income (as defined).\129\ The amount of the excess of the
required distribution over the actual distribution is subject
to the 4-percent tax.
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\129\ Section 4981. The definition is the excess of gains from
sales or exchanges of capital assets over losses from such sales or
exchanges for the calendar year, reduced by any net ordinary loss.
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A REIT generally is restricted to earning certain types of
passive income. Among other requirements, at least 75 percent
of the gross income of a REIT in a taxable year must consist of
certain types of real estate related income, including rents
from real property, income from the sale or exchange of real
property (including interests in real property) that is not
stock in trade, inventory, or held by the taxpayer primarily
for sale to customers in the ordinary course of its trade or
business, and interest on mortgages secured by real property or
interests in real property.\130\ Interests in real property are
specifically defined to exclude mineral, oil, or gas royalty
interests.\131\ A REIT will not qualify as a REIT, and will be
taxable as a C corporation, for any taxable year if it does not
meet this income test.
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\130\ Section 856(c) and section 1221(a). Income from sales that
are not prohibited transactions solely by virtue of section 857(b)(6)
is also qualified REIT income.
\131\ Section 856(c)(5)(C).
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Some REITs have been formed to hold land on which trees are
grown. Upon maturity of the trees, the standing trees are sold
by the REIT. The Internal Revenue Service has issued private
letter rulings in particular instances stating that the income
from the sale of the trees under section 631(b) can qualify as
REIT real property income because the uncut timber and the
timberland on which the timber grew is considered real property
and the sale of uncut trees can qualify as capital gain derived
from the sale of real property.\132\
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\132\ Timber income under section 631(b) has also been held to be
qualified real estate income even if the one year holding period is not
met. See, e.g., PLR 200052021, see also PLR 199945055, PLR 199927021,
PLR 8838016. A private letter ruling may be relied upon only by the
taxpayer to which the ruling is issued. However, such rulings provide
an indication of administrative practice.
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A REIT is subject to a 100-percent excise tax on gain from
any sale that is a ``prohibited transaction,'' defined as a
sale of property that is stock in trade, inventory, or property
held by the taxpayer primarily for sale to customers in the
ordinary course of its trade or business.\133\ This
determination is based on facts and circumstances. However, a
safe-harbor provides that no excise tax is imposed if certain
requirements are met. In the case of timber property, the safe
harbor is met, regardless of the number of sales that occur
during the taxable year, if (i) the REIT has held the property
for not less than four years in connection with the trade or
business of producing timber; (ii) the aggregate adjusted bases
of the property sold (other than foreclosure property) during
the taxable year does not exceed 10 percent of the aggregate
bases of all the assets of the REIT as of the beginning of the
taxable year, and if certain other requirements are met. These
include requirements that limit the amount of expenditures the
REIT can make during the 4-year period prior to the sale that
are includible in the adjusted basis of the property,\134\ that
require marketing to be done by an independent contractor, and
that forbid a sales price that is based on the income or
profits of any person.\135\ There is a similar but separate
safe harbor for sales of non-timber property, with similar
rules, including a 4-year holding period requirement and a
limit on the percentage of the aggregate adjusted basis of
property that can be sold in one taxable year.\136\
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\133\ Sections 857(b)(6) and 1221(a)(1). There is an exception for
certain foreclosure property.
\134\ Aggregate expenditures (other than timberland acquisition
expenditures) during such period made by the REIT or a partner of the
REIT, which are includible in basis, may not exceed 30 percent of the
net selling price in the case of expenditures that are directly related
to operation of the property for the production of timber or the
preservation of the property for use as timberland, and may not exceed
5 percent of the net selling price in the case of expenditures that are
not directly related to those purposes.
\135\ Section 857(b)(6)(D).
\136\ Section 857(b)(6)(C).
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A REIT is not generally permitted to hold securities
representing more than 10 percent of the voting power or value
of the securities of any one issuer; nor may more than 5
percent of the fair market value of REIT assets be securities
of any one issuer.\137\ However, under an exception, a REIT may
hold any amount of securities of one or more ``taxable REIT
subsidiary'' (TRS) corporations, provided that such TRS
securities do not represent more than 20 percent of the fair
market value of REIT assets at the end of any quarter. A TRS is
a C corporation that is subject to regular corporate tax on its
income and that meets certain other requirements. A taxable
REIT subsidiary may conduct activities that would produce
disqualified non-passive or non-real estate income that could
disqualify the REIT if conducted by a REIT itself. Such
business could include business relating to processing timber,
or holding timber products or other assets for sale to
customers in the ordinary course of business. Such income would
be subject to regular corporate rates of tax as income of the
TRS.\138\
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\137\ Section 856(c)(4)(B)(ii) and (iii). Certain interests are not
treated as ``securities'' for purposes of the rule forbidding the REIT
to hold securities representing more than 10 percent of the value of
securities of any one issuer. Sec. 856(m).
\138\ A 100-percent excise tax is imposed on the amount of certain
transactions involving a TRS and a REIT, to the extent such amount
would exceed an arm's length amount under section 482. Sec. 857(b)(7).
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Reasons for Change

The Congress believes it is desirable to provide greater
equivalence to the capital gain tax treatment of timber gain,
regardless of whether the gain is recognized by a C corporation
or a REIT. The Congress also believes it is desirable to
provide changes to the statutory rules governing REITs, in
order to clarify and facilitate timber REIT operations.

Explanation of Provision

Corporate rate reduction for qualified timber gain

The Act provides a 15-percent alternative tax rate for
corporations on the portion of a corporation's taxable income
that consists of qualified timber gain (or, if less, the net
capital gain) for a taxable year.
The alternative 15-percent tax rate applies to both the
regular tax and the alternative minimum tax.
Qualified timber gain means the net gain described in
section 631(a) and (b) for the taxable year, determined by
taking into account only trees held more than 15 years.

Additional REIT provisions

Timber gain qualified REIT income without regard to 1 year
holding period
The Act specifically includes timber gain under section
631(a) as a category of statutorily recognized qualified real
estate income of a REIT if the cutting is provided by a taxable
REIT subsidiary, and also includes gain recognized under
section 631(b). For purposes of such qualified income treatment
under those provisions, the requirement of a one-year holding
period is removed. Thus, for example, a REIT can acquire timber
property and harvest the timber on the property within one year
of the acquisition, with the resulting income being qualified
real estate income for REIT qualification purposes, even though
such income is not eligible for long-term capital gain
treatment under sections 631(a) or (b). The provision
specifically provides, however, that for all purposes of the
Code, such income shall not be considered to be gain described
in section 1221(a)(1), that is, it shall not be treated as
income from the sale of stock in trade, inventory, or property
held by the REIT primarily for sale to customers in the
ordinary course of the REITs trade or business.
For purposes of determining REIT income, if the cutting is
done by a taxable REIT subsidiary, the cut timber is deemed
sold on the first day of the taxable year to the taxable REIT
subsidiary (with subsequent gain, if any, attributable to the
taxable REIT subsidiary).
REIT prohibited transaction safe harbor for timber property
For sales to a qualified organization for conservation
purposes, as defined in section 170(h), the provision reduces
to two years the present law four-year holding period
requirement under section 857(b)(6)(D), which provides a safe
harbor from ``prohibited transaction'' treatment for certain
timber property sales. Also, in the case of such sales, the
safe-harbor limitations on how much may be added, within the
four-year period prior to the date of sale, to the aggregate
adjusted basis of the property, are changed to refer to the
two-year period prior to the date of sale.
The Act also removes the safe-harbor requirement that
marketing of the property must be done by an independent
contractor, and permits a taxable REIT subsidiary of the REIT
to perform the marketing.
The Act states that any gain that is eligible for the
timber property safe harbor is considered for all purposes of
the Code not to be described in section 1221(a)(1), that is, it
shall not be treated as income from the sale of stock in trade,
inventory, or property held by the REIT primarily for sale to
customers in the ordinary course of the REITs trade or
business.
Special rules for Timber REITs
The Act contains several provisions applicable only to a
``timber REIT,'' defined as a REIT in which more than 50
percent of the value of its total assets consists of real
property held in connection with the trade or business of
producing timber.
First, mineral royalty income from real property owned by a
timber REIT and held, or once held, in connection with the
trade or business of producing timber by such REIT, is included
as qualifying real estate income for purposes of the REIT
income tests.
Second, a timber REIT is permitted to hold TRS securities
with a value up to 25 percent, (rather than 20 percent) of the
value of the total assets of the REIT.

Effective Date

The capital gain provision applies to taxable years ending
after the date of enactment (May 22, 2008) and beginning on or
before the date which is one year after the date of enactment.
In the case of a taxable year that includes the date of
enactment, qualified timber gain may not exceed the qualified
timber gain properly taken into account for the portion of the
year after that date. In the case of a taxable year that
includes the date that is one year after the date of enactment,
qualified timber gain may not exceed the qualified timber gain
properly taken into account for the portion of the year on or
before that date.
The additional REIT provisions apply only for the first
taxable year of the REIT that begins after the date of
enactment and before the date that is one year after the date
of enactment. The provisions terminate after that time.

5. Qualified forestry conservation bonds (sec. 15316 of the Act and new
secs. 54A and 54B of the Code)

Present Law

Tax-exempt bonds

In general
Subject to certain Code restrictions, interest on bonds
issued by State and local government generally is excluded from
gross income for Federal income tax purposes. Bonds issued by
State and local governments 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 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. For this purpose, the
term ``nongovernmental person'' generally includes the Federal
Government and all other individuals and entities other than
States or local governments. The exclusion from income for
interest on State and local bonds does not apply to private
activity bonds, unless the bonds are issued for certain
permitted purposes (``qualified private activity bonds'') and
other Code requirements are met.
Private activity bond tests
Present law provides two tests for determining whether a
State or local bond is in substance a private activity bond,
the private business test and the private loan test.\139\
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\139\ Sec. 141(b) and (c).
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Private business tests
Private business use and private payments result in State
and local bonds being private activity bonds if both parts of
the two-part private business test are satisfied--
1. More than 10 percent of the bond proceeds is to be used
(directly or indirectly) by a private business (the ``private
business use test''); and
2. More than 10 percent of the debt service on the bonds is
secured by an interest in property to be used in a private
business use or to be derived from payments in respect of such
property (the ``private payment test'').\140\
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\140\ The 10-percent private business use and payment threshold is
reduced to five percent for private business uses that are unrelated to
a governmental purpose also being financed with proceeds of the bond
issue. In addition, as described more fully below, the 10-percent
private business use and private payment thresholds are phased-down for
larger bond issues for the financing of certain ``output'' facilities.
The term output facility includes electric generation, transmission,
and distribution facilities.
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Private business use generally includes any use by a
business entity (including the Federal government), which
occurs pursuant to terms not generally available to the general
public. For example, if bond-financed property is leased to a
private business (other than pursuant to certain short-term
leases for which safe harbors are provided under Treasury
regulations), bond proceeds used to finance the property are
treated as used in a private business use, and rental payments
are treated as securing the payment of the bonds. Private
business use also can arise when a governmental entity
contracts for the operation of a governmental facility by a
private business under a management contract that does not
satisfy Treasury regulatory safe harbors regarding the types of
payments made to the private operator and the length of the
contract.\141\
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\141\ See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13,
1997-1 C.B. 632.
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Private loan test
The second standard for determining whether a State or
local bond is a private activity bond is whether an amount
exceeding the lesser of (1) five percent of the bond proceeds
or (2) $5 million is used (directly or indirectly) to finance
loans to private persons. Private loans include both business
and other (e.g., personal) uses and payments by private
persons; however, in the case of business uses and payments,
all private loans also constitute private business uses and
payments subject to the private business test. Present law
provides that the substance of a transaction governs in
determining whether the transaction gives rise to a private
loan. In general, any transaction which transfers tax ownership
of property to a private person is treated as a loan.
Qualified private activity bonds
As stated, interest on private activity bonds is taxable
unless the bonds meet the requirements for qualified private
activity bonds. Qualified private activity bonds permit States
or local governments to act as conduits providing tax-exempt
financing for certain private activities. 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)).
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 2007, the State volume cap, which is indexed
for inflation, equals $85 per resident of the State, or $256.24
million, if greater.
Arbitrage restrictions
The tax exemption for State and local bonds also does not
apply to any arbitrage bond.\142\ 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.\143\ 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.
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\142\ Sec. 103(a) and (b)(2).
\143\ Sec. 148.
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Indian tribal governments
Indian tribal governments are provided with a tax status
similar to State and local governments for specified purposes
under the Code.\144\ Among the purposes for which a tribal
government is treated as a State is the issuance of tax-exempt
bonds. However, bonds issued by tribal governments are subject
to limitations not imposed on State and local government
issuers. Tribal governments are authorized to issue tax-exempt
bonds only if substantially all of the proceeds are used for
essential governmental functions or certain manufacturing
facilities.\145\
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\144\ Sec. 7871.
\145\ Sec. 7871(c).
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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 qualified projects. ``Qualified projects'' are
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.\146\ 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 renewable energy
bond lenders. The term ``qualified borrower'' includes a
governmental body (including an Indian tribal government) and a
mutual or cooperative electric company. 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.
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\146\ In addition, Notice 2006-7 provides that qualified projects
include any facility owned by a qualified borrower that is functionally
related and subordinate to any facility described in section 45(d)(1)
through (d)(9) and owned by such qualified borrower.
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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.
In addition to the above requirements, at least 95 percent
of the proceeds of CREBs must be spent 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 $1.2
billion. The maximum amount of CREBs that may be allocated to
qualified projects of governmental bodies is $750 million.
CREBs must be issued before January 1, 2009.

Reasons for Change

The Congress believes it is appropriate to provide certain
tax incentives to further the goal of permanently setting aside
working forests for conservation purposes. The Congress
believes that providing tax-exempt financing to nonprofit
organizations for the purpose of acquiring forests and forest
lands to be dedicated to certain conservation purposes will
increase their ability to purchase such properties from
commercial owners and operators, and that providing limited
exclusions from income tax to such nonprofit organizations will
enable them to conduct charitable and conservation activities
as they make debt service payments on the bonds.

Explanation of Provision

The Act creates a new category of tax-credit bonds,
qualified forestry conservation bonds. Qualified forestry
conservation bonds are bonds issued by qualified issuers to
finance qualified forestry conservation projects. The term
``qualified issuer'' means a State or a section 501(c)(3)
organization. The term ``qualified forestry conservation
project'' means the acquisition by a State or section 501(c)(3)
organization from an unrelated person of forest and forest land
that meets the following qualifications: (1) some portion of
the land acquired must be adjacent to United States Forest
Service Land; (2) at least half of the land acquired must be
transferred to the United States Forest Service at no net cost
and not more than half of the land acquired may either remain
with or be donated to a State; (3) all of the land must be
subject to a habitat conservation plan for native fish approved
by the United States Fish and Wildlife Service; and (4) the
amount of acreage acquired must be at least 40,000 acres.
There is a national limitation on qualified forestry
conservation bonds of $500 million. Allocations of qualified
forestry conservation bonds are among qualified forestry
conservation projects in the manner the Secretary determines
appropriate so as to ensure that all of such limitation is
allocated before the date that is 24 months after the date of
enactment. The Act also requires the Secretary to solicit
applications for allocations of qualified forestry conservation
bonds no later than 90 days after the date of enactment.
The Act requires 100 percent of the available project
proceeds of qualified forestry conservation bonds to be used
within the three-year period that begins on the date of
issuance. The Act defines available project proceeds as
proceeds from the sale of the issue less issuance costs (not to
exceed two percent) and any investment earnings on such sale
proceeds. To the extent less than 100 percent of the available
project proceeds are used to finance qualified forestry
conservation purposes during the three-year spending period,
bonds will continue to qualify as qualified forestry
conservation bonds if unspent proceeds are used within 90 days
from the end of such three-year period to redeem bonds. The
three-year spending period may be extended by the Secretary
upon the issuer's request demonstrating that the failure to
satisfy the three-year requirement is due to reasonable cause
and the projects will continue to proceed with due diligence.
Qualified forestry conservation bonds generally are subject
to the arbitrage requirements of section 148. However,
available project proceeds invested during the three-year
spending period are not subject to the arbitrage restrictions
(i.e., yield restriction and rebate requirements). In addition,
amounts invested in a reserve fund are not subject to the
arbitrage restrictions to the extent: (1) such fund is funded
in a manner reasonably expected to result in an amount not
greater than an amount necessary to repay the issue; and (2)
the yield on such fund is not greater than the average annual
interest rate of tax-exempt obligations having a term of 10
years or more that are issued during the month the qualified
forestry conservation bonds are issued.
The maturity of qualified forestry conservation bonds is
the term that the Secretary estimates will result in the
present value of the obligation to repay the principal on such
bonds being equal to 50 percent of the face amount of such
bonds, using as a discount rate the average annual interest
rate of tax-exempt obligations having a term of 10 years or
more that are issued during the month the qualified forestry
conservation bonds are issued.
As with present-law tax credit bonds, the taxpayer holding
qualified forestry conservation bonds on a credit allowance
date is entitled to a tax credit. The credit rate is set by the
Secretary at a rate that would permit issuance of qualified
forestry conservation bonds without discount and interest cost
to the qualified issuer. The amount of the tax credit to the
holder is determined by multiplying the bond's credit rate by
the face amount on the holder's bond. The credit accrues
quarterly, 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. Unused credits in one year may be carried forward to
succeeding taxable years. In addition, credits may be separated
from the ownership of the underlying bond similar to how
interest coupons can be stripped for interest-bearing bonds.
Issuers of qualified forestry conservation bonds are
required to certify that the financial disclosure requirements
that apply to State and local bonds offered for sale to the
general public are satisfied with respect to any Federal,
State, or local government official directly involved with the
issuance of such bonds. The Act authorizes the Secretary to
impose additional financial reporting requirements by
regulation.
The Act also provides that a qualified issuer receiving an
allocation to issue qualified forestry conservation bonds may,
in lieu of issuing bonds, elect to treat such allocation as a
deemed payment of tax (regardless of whether the issuer is
subject to tax under chapter 1 of the Code) that is equal to 50
percent of the amount of such allocation. An election to treat
an allocation of qualified forestry conservation bonds as a
deemed payment is not valid unless the qualified issuer
certifies to the Secretary that any payment of tax refunded to
the issuer will be used exclusively for one or more qualified
forestry conservation purposes. The deemed tax payment may not
be used as an offset or credit against any other tax and shall
not accrue interest. In addition, if the qualified issuer fails
to use any portion of the overpayment for qualified forestry
conservation purposes, the issuer shall be liable to the United
States in an amount equal to such portion, plus interest, for
the period from the date such portion was refunded to the date
such amount is paid.

Effective Date

The provision is effective for bonds issued after the date
of enactment (May 22, 2008).

B. Energy Provisions

1. Credit for production of cellulosic biofuel (sec. 15321 of the Act
and sec. 40 of the Code)

Present Law

In the case of ethanol, the Code provides a separate 10-
cents-per-gallon credit for up to 15 million gallons per year
for small producers, defined generally as persons whose
production capacity does not exceed 60 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 a
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 credit is includible in income and
is 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, of
which the small producer credit is a part, is scheduled to
expire after December 31, 2010.
Under the Renewable Fuels Standard Program all renewable
fuel produced or imported on or after September 1, 2007, must
have a renewable identification number (RIN) associated with
it. Producers and importers must generate RINs to represent all
the renewable fuel they produce or import and provide those
RINs to the EPA. For cellulosic ethanol, 2.5 RINs are generated
for every gallon produced.

Reasons for Change

The Congress believes that the development of fuels from
cellulosic materials, such as corn stover, switchgrass, and
other organic materials that can be grown anywhere, is a
significant component in establishing the nation's energy
independence. Tax incentives are an important part of taking
this industry from the level of demonstration projects into a
practical and competitive fuel source. To encourage new
production capacity for this fuel, the provision provides a new
per-gallon incentive for cellulosic fuel producers.

Explanation of Provision

The provision adds a new component to section 40 of the
Code, the ``cellulosic biofuel producer credit.'' This credit
is a nonrefundable income tax credit for each gallon of
qualified cellulosic fuel production of the producer for the
taxable year. The amount of the credit per gallon is $1.01,
except in the case of cellulosic biofuel that is alcohol. In
the case of cellulosic biofuel that is alcohol, the $1.01
credit amount is reduced by (1) the credit amount applicable
for such alcohol under the alcohol mixture credit as in effect
at the time cellulosic biofuel is produced and (2) in the case
of cellulosic biofuel that is ethanol, the credit amount for
small ethanol producers as in effect at the time the cellulosic
biofuel fuel is produced. The reduction applies regardless of
whether the producer claims the alcohol mixture credit or small
ethanol producer credit with respect to the cellulosic alcohol.
When the alcohol mixture credit and small ethanol producer
credit expire after December 31, 2010, cellulosic biofuel will
receive the $1.01 without reduction.
``Qualified cellulosic biofuel production'' is any
cellulosic biofuel which is produced by the taxpayer and which
is (1) sold by the taxpayer to another person (a) for use by
such other person in the production of a qualified biofuel 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 biofuel at
retail to another person and places such biofuel in the fuel
tank of such other person; or (2) used by the producer for any
purpose described in (a), (b), or (c).
``Cellulosic biofuel'' means any liquid fuel that (1) is
produced in the United States and used as fuel in the United
States,\147\ (2) is derived from any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis and (3) meets the registration requirements for
fuels and fuel additives established by the Environmental
Protection Agency under section 211 of the Clean Air Act. Thus,
to qualify for the credit the fuel must be approved by the
Environmental Protection Agency. Cellulosic biofuel does not
include any alcohol with a proof of less than 150. Examples of
lignocellulosic or hemicellulosic matter that is available of a
renewable or recurring basis include dedicated energy crops and
trees, wood and wood residues, plants, grasses, agricultural
residues, fibers, animal wastes and other waste materials, and
municipal solid waste.
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\147\ For this purpose, ``United States'' includes any possession
of the United States.
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A ``qualified cellulosic biofuel mixture'' is a mixture of
cellulosic biofuel and a special fuel or of cellulosic biofuel
and gasoline, which is sold by the person producing such
mixture to any person for use as a fuel, or is used as a fuel
by the person producing such mixture. The term ``special fuel''
includes any liquid fuel (other than gasoline) which is
suitable for use in an internal combustion engine.
The cellulosic biofuel producer credit terminates on
December 31, 2012. The provision requires cellulosic biofuel
producers to be registered with the IRS. The cellulosic biofuel
producer credit cannot be claimed unless the taxpayer is
registered with the IRS as a producer of cellulosic biofuel.
With respect to the small ethanol producer credit, the
provision also waives the 15 million gallon limitation for
cellulosic biofuel that is ethanol. Thus the small ethanol
producer credit may be claimed for cellulosic ethanol in excess
of 15 million gallons. The other requirements for the small
ethanol producer credit continue to apply for ethanol other
than cellulosic ethanol, including the 15 million gallon
limitation.
Under the provision, cellulosic biofuel and alcohols cannot
qualify as biodiesel, renewable diesel, or alternative fuel for
purposes of the credit and payment provisions relating to those
fuels.

Effective Date

The provision is effective for fuel produced after December
31, 2008.

2. Comprehensive study of biofuels (sec. 15322 of the Act)

Present Law

The National Academy of Sciences serves to investigate,
examine, experiment and report upon any subject of science
whenever called upon to do so by any department of the
government. The National Research Council is part of the
National Academies. The National Research Council was organized
by the National Academy of Sciences in 1916 and is its
principal operating agency for conducting science policy and
technical work.

Explanation of Provision

The Act requires the Secretary, in consultation with the
Department of Energy and the Department of Agriculture and the
Environmental Protection Agency, to enter into an agreement
with the National Academy of Sciences to produce an analysis of
current scientific findings to determine:
1. Current biofuels production, as well as projections for
future production;
2. The maximum amount of biofuels production capable on
U.S. forests and farmlands, including the current quantities
and character of the feedstocks and including such information
as regional forest inventories that are commercially available,
used in the production of biofuels;
3. The domestic effects of a increase in biofuels
production on, for example, (a) the price of fuel, (b) the
price of land in rural and suburban communities, (c) crop
acreage and other land use, (d) the environment, due to changes
in crop acreage, fertilizer use, runoff, water use, emissions
from vehicles utilizing biofuels, and other factors, (e) the
price of feed, (f) the selling price of grain crops, and forest
products, (g) exports and imports of grains and forest
products, (h) taxpayers, through cost or savings to commodity
crop payments, and (i) the expansion of refinery capacity;
4. The ability to convert corn ethanol plants for other
uses, such as cellulosic ethanol or biodiesel;
5. A comparative analysis of corn ethanol versus other
biofuels and renewable energy sources, considering cost, energy
output, and ease of implementation;
6. The impact of the credit for production of cellulosic
biofuel (as established by the Act) on the regional
agricultural and silvicultural capabilities of commercially
available forest inventories; and
7. The need for additional scientific inquiry, and specific
areas of interest for future research.
The Secretary shall submit an initial report of the
findings to the Congress not later than six months after the
date of enactment, and a final report not later than 12 months
after the date of enactment. In the case of information
relating to the impact of the tax credits established by the
Act on the regional agricultural and silvicultural capabilities
of commercially available forest inventories, the initial
report is due 36 months after the date of enactment and the
final report is due 42 months after the date of enactment.
Effective date.--The provision is effective on the date of
enactment (May 22, 2008).

3. Modification of alcohol credit (sec. 15331 of the Act and secs. 40
and 6426 of the Code)

Present Law

Income tax credit

The alcohol fuels credit is the sum of three credits: the
alcohol mixture credit, the alcohol credit, and the small
ethanol producer credit. Generally, the alcohol fuels credit
expires after December 31, 2010.\148\
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\148\ The alcohol fuels credit is unavailable when, for any period
before January 1, 2011, the tax rates for gasoline and diesel fuels
drop to 4.3 cents per gallon.
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Taxpayers are eligible for an income tax credit of 51 cents
per gallon of ethanol (60 cents in the case of alcohol other
than ethanol) used in the production of a qualified mixture
(the ``alcohol mixture credit''). A ``qualified mixture'' means
a mixture of alcohol and gasoline, (or of alcohol and a special
fuel) sold by the taxpayer as fuel, or used as fuel by the
taxpayer producing such mixture. The term ``alcohol'' includes
methanol and ethanol but does not include (1) alcohol produced
from petroleum, natural gas, or coal (including peat), or (2)
alcohol with a proof of less than 150.
Taxpayers may reduce their income taxes by 51 cents for
each gallon of ethanol, which is not in a mixture with gasoline
or other special fuel, that they sell at the retail level as
vehicle fuel or use themselves as a fuel in their trade or
business (``the alcohol credit''). For alcohol other than
ethanol, the rate is 60 cents per gallon.\149\
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\149\ In the case of any alcohol (other than ethanol) with a proof
that is at least 150 but less than 190, the credit is 45 cents per
gallon (the ``low-proof blender amount''). For ethanol with a proof
that is at least 150 but less than 190, the low-proof blender amount is
37.78 cents.
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In the case of ethanol, the Code provides an additional 10-
cents-per-gallon credit for up to 15 million gallons per year
for small producers. Small producer is defined generally as
persons whose production capacity does not exceed 60 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 a 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 credit is includible in income and is
treated as a general business credit, subject to the ordering
rules and carryforward/carryback rules that apply to business
credits generally. The credit is allowable against the
alternative minimum tax.

Excise tax credit and payment provision for alcohol fuel mixtures

The Code also provides an excise tax credit and payment
provision for alcohol fuel mixtures. Like the income tax
credit, the amount of the credit is 60 cents per gallon of
alcohol used as part of a qualified mixture (51 cents in the
case of ethanol). For purposes of the excise tax credit and
payment provisions, alcohol includes methanol and ethanol but
does not include (1) alcohol produced from petroleum, natural
gas, or coal (including peat), or (2) alcohol with a proof of
less than 190. Such term also includes an alcohol gallon
equivalent of ethyl tertiary butyl either or other ethers
produced from alcohol. In lieu of a tax credit, a person making
a qualified mixture eligible for the credit may seek a payment
from the Secretary in the amount of the credit. The payment
provisions and credits are coordinated such that the incentive
is not claimed more than once for each gallon of alcohol used
as part of qualified mixture.

Renewable Fuels Standard Program

Under the Renewable Fuels Standard Program all renewable
fuel produced or imported on or after September 1, 2007 must
have a renewable identification number (RIN) associated with
it. Producers and importers must generate RINs to represent all
the renewable fuel they produce or import and provide those
RINs to the Environmental Protection Agency. For cellulosic
ethanol, 2.5 RINs are generated for every gallon produced.

Reasons for Change

As the ethanol industry further matures, the Congress
believes it is appropriate to reduce the amount of the tax
incentive.

Explanation of Provision

Under the Act, the 51-cent-per-gallon incentive for ethanol
is adjusted to 45 cents per gallon for the calendar year 2009
and thereafter.\150\ If the Secretary makes a determination, in
consultation with the Administrator of the Environmental
Protection Agency, that 7,500,000,000 gallons of ethanol
(including cellulosic ethanol) were not produced in or imported
into the United States in 2008, the reduction in the credit
amount will be delayed. If the threshold was not reached in
2008, the reduction for 2010 also will be delayed if the
Secretary determines 7,500,000,000 gallons were not produced or
imported in 2009. In the absence of a determination, the
reduction remains in effect. In the event the determination is
made subsequent to the start of a calendar year, those persons
claiming the reduced amount prior to the Secretary's
determination will be entitled to the difference between the
correct credit amount for that year and the credit amount
claimed, e.g. between 51 cents per gallon and 45 cents per
gallon.
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\150\ The low-proof blender amount is adjusted accordingly to 33.33
cents.
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Effective Date

The provision is effective on the date of enactment (May
22, 2008).

4. Calculation of volume of alcohol for fuel credits (sec. 15332 of the
Act and sec. 40 of the Code)

Present Law

The Code provides a per-gallon credit for the volume of
alcohol used as a fuel or in a qualified mixture. For purposes
of determining the number of gallons of alcohol with respect to
which the credit is allowable, the volume of alcohol includes
any denaturant, including gasoline.\151\ The denaturant must be
added under a formula approved by the Secretary and the
denaturant cannot exceed five percent of the volume of such
alcohol (including denaturants).
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\151\ Sec. 40(d)(4).
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Reasons for Change

Gasoline can be used as a denaturant of alcohol. The
Congress believes it is inappropriate to allow a credit that is
intended to be for alcohol to be claimed on liquids that do not
constitute alcohol.

Explanation of Provision

The Act reduces the amount of allowable denaturants to two
percent of the volume of the alcohol.

Effective Date

The provision is effective for fuel sold or used after
December 31, 2007.

5. Ethanol tariff extension (sec. 15333 of the Act)

Present Law

Heading 9901.00.50 of the Harmonized Tariff Schedule of the
United States imposes a cumulative general duty of 14.27 cents
per liter (approximately 54 cents per gallon) to imports of
ethyl alcohol, and any mixture containing ethyl alcohol, if
used as a fuel or in producing a mixture to be used as a fuel,
that are entered into the United States prior to January 1,
2009. Taxpayers who blend ethanol with gasoline are eligible to
claim an alcohol fuels tax credit of 51 cents per gallon,
irrespective of whether the ethanol used is produced
domestically or imported. Heading 9901.00.50 applies a
temporary duty to ethanol imports that offsets the benefit of
the alcohol fuels tax credit to imported ethanol.
Heading 9901.00.52 of the Harmonized Tariff Schedule of the
United States imposes a general duty of 5.99 cents per liter to
imports of ethyl tertiary-butyl ether, and any mixture
containing ethyl tertiary-butyl ether, that are entered into
the United States prior to January 1, 2009.

Reasons for Change

The Congress believes it is appropriate to extend the
tariff through the end of calendar year 2010.

Explanation of Provision

The Act modifies the existing effective period for ethyl
alcohol as classified under heading 9901.00.50 and 9901.00.52
of the Harmonized Tariff Schedule of the United States from
before January 1, 2009 to before January 1, 2011.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

6. Limitations on duty drawback on certain imported ethanol (sec. 15334
of the Act)

Present Law

Subheading 9901.00.50 of the Harmonized Tariff Schedule of
the United States (``HTSUS''), imposes an additional duty on
ethanol that is used as fuel or used to make fuel. Subsection
(b) of Section 313 of the Tariff Act of 1930 permits the refund
of duty if the duty-paid good, or a substitute good, is used to
make an article that is exported. Subsection (j)(2) of Section
313 permits the refund of duty if the duty-paid good, or a
substitute good, is exported. Subsection (p) of section 313
permits the substitution on exportation for drawback
eligibility of one motor fuel for another motor fuel. A person
who manufactures or acquires gasoline with ethanol subject to
the duty imposed by subheading 9901.00.50, HTSUS, can export
jet fuel (which does not involve the use of ethanol) and obtain
a refund of the duty paid under subheading 9901.00.50, HTSUS.

Reasons for Change

The Congress believes it is appropriate to eliminate the
ability to claim duty drawback on the substitution of jet fuel
for ethyl alcohol (ethanol), or an ethyl alcohol mixture, used
as a fuel. In addition, the Congress believes that it is
appropriate to eliminate the ability to claim duty drawback on
the substitution of a low-value ethyl alcohol for ethyl alcohol
(ethanol) subject to the duty under HTSUS subheading
9901.00.50.

Explanation of Provision

Under the provision, any duty paid under subheading
9901.00.50, HTSUS, on imports of ethyl alcohol or a mixture of
ethyl alcohol may not be refunded if the exported article upon
which a drawback claim is based does not contain ethyl alcohol
or a mixture of ethyl alcohol. In particular, the provision
eliminates the ability to export jet fuel as a substitute for
imports of ethyl alcohol or a mixture of ethyl alcohol, and
then receive duty drawback based upon the import duty paid on
the ethyl alcohol or the mixture of ethyl alcohol under
subheading 9901.00.50, HTSUS.

Effective Date

The provision applies to imports of ethyl alcohol or a
mixture of ethyl alcohol entered for consumption, or withdrawn
from warehouse for consumption, on or after October 1, 2008.
With respect to claims for substitution duty drawback that are
based upon imports of ethyl alcohol or a mixture of ethyl
alcohol entered for consumption, or withdrawn from warehouse
for consumption, before October 1, 2008, such claims must be
filed not later than September 30, 2010; otherwise, such claims
are disallowed.

C. Agricultural Provisions

1. Qualified small issue bonds for farming (sec. 15341 of the Act and
sec. 144 of the Code)

Present Law

Qualified small issue bonds are tax-exempt bonds issued by
State and local governments to finance private business
manufacturing facilities (including certain directly related
and ancillary facilities) or the acquisition of land and
equipment by certain first-time farmers. A first-time farmer
means any individual who has not at any time had any direct
ownership interest in substantial farmland in the operation of
which such individual materially participated. In addition, an
individual does not qualify as a first-time farmer if such
individual has received more than $250,000 in qualified small
issue bond financing. Substantial farmland means any parcel of
land unless (1) such parcel is smaller than 30 percent of the
median size of a farm in the county in which such parcel is
located and (2) the fair market value of the land does not at
any time while held by the individual exceed $125,000.

Reasons for Change

The Congress notes that the loan limits for first-time
farmers have not been increased in more than two decades.
Similarly, the rules relating to the definition of substantial
farmland have not been increased in many years and, as a
result, have not kept pace with increases in land prices. Thus,
the Congress believes the tax-exempt bond rules for first-time
farmers should be updated.

Explanation of Provision

The Act increases the maximum amount of qualified small
issue bond proceeds available to first-time farmers to $450,000
and indexes this amount for inflation. The provision also
eliminates the fair market value test from the definition of
substantial farmland.

Effective Date

The provision is effective for bonds issued after the date
of enactment (May 22, 2008).

2. Allowance of section 1031 for exchanges involving certain mutual
ditch, reservoir, or irrigation company stock (sec. 15342 of
the Act and sec. 1031 of the Code)

Present Law

An exchange of property, like a sale, generally is a
taxable event. However, no gain or loss is recognized if
property held for productive use in a trade or business or for
investment is exchanged for property of a ``like-kind'' which
is to be held for productive use in a trade or business or for
investment.\152\ If section 1031 applies to an exchange of
properties, the basis of the property received in the exchange
is equal to the basis of the property transferred, decreased by
any money received by the taxpayer, and further adjusted for
any gain or loss recognized on the exchange. In general,
section 1031 does not apply to any exchange of stock in trade
or other property held primarily for sale; stocks, bonds or
notes; other securities or evidences of indebtedness or
interest; interests in a partnership; certificates of trust or
beneficial interests; or choses in action.\153\
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\152\ Sec. 1031(a)(1).
\153\ Sec. 1031(a)(2).
---------------------------------------------------------------------------

Reasons for Change

The Congress believes that section 1031 should be clarified
to remove any doubt that an exchange of shares in mutual ditch,
reservoir, and irrigation company stock qualifies for tax
deferral treatment under section 1031. The Congress intends
this clarification would be for cases in which the highest
court or statute of the State in which the company is organized
recognize such shares as constituting or representing real
property or an interest in real property.

Explanation of Provision

The Act provides that the general exclusion from section
1031 treatment for stocks shall not apply to shares in a mutual
ditch, reservoir, or irrigation company, if at the time of the
exchange: (1) the company is an organization described in
section 501(c)(12)(A) (determined without regard to the
percentage of its income that is collected from its members for
the purpose of meeting losses and expenses); and (2) the shares
in the company have been recognized by the highest court of the
State in which such company was organized or by applicable
State statute as constituting or representing real property or
an interest in real property.

Effective Date

The provision is effective for transfers after the date of
enactment (May 22, 2008).

3. Agricultural chemicals security tax credit (sec. 15343 of the Act
and new sec. 45O of the Code)

Present Law

Present law does not provide a credit for agricultural
chemicals security.

Reasons for Change

The Congress believes that a security tax credit would help
the agricultural industry to properly safeguard agricultural
pesticides and fertilizers from the threat of terrorists, drug
dealers and other criminals. These safeguards are necessary to
help alleviate a heightened concern as to the vulnerability of
chemical storage facilities. This credit will help ease the
substantial increase in production costs faced by agriculture
related to installing improved security measures that will
better protect the American public from the potential threat of
terrorism or other illegal activities.

Explanation of Provision

The Act establishes a 30 percent credit for qualified
chemical security expenditures for the taxable year with
respect to eligible agricultural businesses. The credit is a
component of the general business credit.\154\
---------------------------------------------------------------------------
\154\ Sec. 38(b)(1).
---------------------------------------------------------------------------
The credit is limited to $100,000 per facility, this amount
is reduced by the aggregate amount of the credits allowed for
the facility in the prior five years. In addition, each
taxpayer's annual credit is limited to $2,000,000.\155\ The
credit only applies to expenditures paid or incurred before
December 31, 2012. The taxpayer's deductible expense is reduced
by the amount of the credit claimed.
---------------------------------------------------------------------------
\155\ The term taxpayer includes controlled groups under rules
similar to the rules set out in section 41(f)(1) and (2).
---------------------------------------------------------------------------
Qualified chemical security expenditures are amounts paid
for: 1) employee security training and background checks; (2)
limitation and prevention of access to controls of specific
agricultural chemicals stored at a facility; (3) tagging,
locking tank valves, and chemical additives to prevent the
theft of specific agricultural chemicals or to render such
chemicals unfit for illegal use; (4) protection of the
perimeter of areas where specified agricultural chemicals are
stored; (5) installation of security lighting, cameras,
recording equipment and intrusion detection sensors (6)
implementation of measures to increase computer or computer
network security; (7) conducting security vulnerability
assessments; (8) implementing a site security plan; and (9)
other measures provided for by regulation. Amounts described in
the preceding sentence are only eligible to the extent they are
incurred by an eligible agricultural business for protecting
specified agricultural chemicals.
Eligible agricultural businesses are businesses that: (1)
sell agricultural products, including specified agricultural
chemicals, at retail predominantly to farmers and ranchers; or
(2) manufacture, formulate, distribute, or aerially apply
specified agricultural chemicals.
Specified agricultural chemicals means: (1) fertilizer
commonly used in agricultural operations which is listed under
section 302(a)(2) of the Emergency Planning and Community
Right-to-know Act of 1986, section 101 or part 172 of title 49,
Code of Federal Regulations, or part 126, 127 or 154 of title
33, Code of Federal Regulations; and (2) any pesticide (as
defined in section 2(u) of the Federal Insecticide, Fungicide,
and Rodenticide Act) including all active and inert ingredients
which are used on crops grown for food, feed or fiber.

Effective Date

The provision is effective for expenses paid or incurred
after date of enactment (May 22, 2008).

4. Three-year depreciation for all race horses (sec. 15344 of the Act
and sec. 168 of the Code)

Present Law

Explanation of Provision

The Act provides a three year recovery period for any race
horse that is two years old or younger at the time that it is
placed in service.

Effective Date

The provision applies to property placed in service on or
after December 31, 2008 and before January 1, 2014.

5. Temporary relief for Kiowa County, Kansas and surrounding area \160\
---------------------------------------------------------------------------

\160\ The provisions of this Act generally provide tax relief
similar to certain other disaster areas.
---------------------------------------------------------------------------

(a) Suspension of certain limitations on personal casualty losses (sec.
15345 of the Act and sec. 1400S(b) of the Code)

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 (the ``$100 limitation'') (sec. 165(h)). 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 (the ``AGI limitation'') (sec. 165(h)).

Explanation of Provision

The Act removes two limitations on personal casualty or
theft losses to the extent those losses arose from such events
in the Kansas disaster area after May 4, 2007, and are
attributable to the disaster occurring at that time. For
purposes of the provisions of this Act, the term ``Kansas
disaster area'' means an area with respect to which a major
disaster has been declared by the President under section 401
of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act (FEMA-1699-DR, as in effect on the date of
enactment of this Act) by reason of severe storms and tornados
beginning on May 4, 2007, and determined by the President to
warrant individual or individual and public assistance from the
Federal Government under such Act with respect to damages
attributable to storms and tornados. These personal casualty or
theft losses are deductible without regard to either the $100
limitation or the AGI limitation. For purposes of applying the
AGI limitation 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 the disaster separate from all other casualty
losses.

Effective Date

The provision is effective for losses arising on or after
May 4, 2007.

(b) Extension of replacement period for nonrecognition of gain (sec.
15345 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 \161\ and principal residences damaged by a
Presidentially declared disaster \162\ 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.\163\
---------------------------------------------------------------------------
\161\ Sec. 1033(g)(4).
\162\ Sec. 1033(h)(1)(B).
\163\ Sec. 1033(e)(2).
---------------------------------------------------------------------------

Explanation of Provision

The Act 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 Kansas disaster area and
that is compulsorily or involuntarily converted on or after May
4, 2007, by reason of the May 4, 2007, storms and tornados.
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 (May
22, 2008).

Present Law

For employers affected by Hurricanes Katrina, Rita, or
Wilma, section 1400R 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.

Hurricane Katrina

An eligible employer is any employer (1) that conducted an
active trade or business on August 28, 2005, in the GO Zone 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 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 the GO
Zone. 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 51(i)(1) and 52 apply to the credit.

Hurricane Rita and Wilma

The credit for employers affected by Hurricanes Rita and
Wilma is subject to the same rules as Katrina, except the
reference dates for affected employers, comparable to the
August 28, 2005 date for Katrina, are September 23, 2005, and
October 23, 2005, respectively.

Explanation of Provision

The Act extends the retention credit, as modified to
include an employer size limitation, for employers affected by
the Kansas storms and tornados. The reference dates for these
employers, comparable to the August 28, 2005 and January 1,
2006 dates of present law for employers affected by Hurricane
Katrina, are May 4, 2007, and January 1, 2008, respectively.
The retention credit for employers affected by the Kansas
storms and tornados includes an employer size limitation. The
credit only applies to eligible employers who employed an
average of not more than 200 employees on business days during
the taxable year before May 4, 2007.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

(d) Special depreciation allowance (sec. 15345 of the Act and 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'').\164\ 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 20 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.
---------------------------------------------------------------------------
\164\ Sec. 168.
---------------------------------------------------------------------------
For qualified Gulf Opportunity Zone property, the Code
provides an additional first-year depreciation deduction equal
to 50 percent of the adjusted basis.\165\ 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).
---------------------------------------------------------------------------
\165\ Sec. 1400N(d).
---------------------------------------------------------------------------
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.\166\ 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 (December 31, 2008,
for qualifying nonresidential real property and residential
rental property). 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.
---------------------------------------------------------------------------
\166\ 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.
---------------------------------------------------------------------------
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 August 27, 2005, and before January 1, 2008, 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.
The special allowance for Gulf Opportunity Zone property
was extended for certain nonresidential real property and
residential rental property, and certain personal property if
substantially all of the use of such property is in such
building,\167\ placed in service in specified portions of the
GO Zone by the taxpayer on or before December 31, 2010.\168\
The extension only applies to nonresidential real property and
residential rental property to the extent of the adjusted basis
attributable to manufacture, construction, or production before
January 1, 2010.\169\
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\167\ Such personal property must be placed in service by the
taxpayer not later than 90 days after such building is placed in
service.
\168\ Sec. 1400N(d)(6).
\169\ Sec. 1400N(d)(6)(D).
---------------------------------------------------------------------------

Explanation of Provision

The Act provides an additional first-year depreciation
deduction equal to 50 percent of the adjusted basis for
qualified Recovery Assistance property. In order for property
to qualify for the additional first-year depreciation
deduction, it must meet all of the following requirements: (1)
The property must be a property to which the general rules of
the MACRS apply with (a) an applicable recovery period of 20
years or less, (b) computer software other than computer
software covered by section 197, (c) water utility property (as
defined in section 168(e)(5)), (d) certain leasehold
improvement property, or (e) certain nonresidential real
property and residential rental property; (2) substantially all
of the use of such property must be in the Kansas Disaster Zone
and in the active conduct of a trade or business by the
taxpayer in the Kansas Disaster Zone. Third, the original use
of the property in the Kansas Disaster Zone must commence with
the taxpayer on or after May 5, 2007.\170\ Finally, the
property must be acquired by purchase (as defined under section
179(d)) by the taxpayer on or after May 5, 2007 and placed in
service on or before December 31, 2008 (December 31, 2009, for
qualifying nonresidential real property and residential rental
property). Property does not qualify if a binding written
contract for the acquisition of such property was in effect
before May 5, 2007. 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 May 5, 2007.
---------------------------------------------------------------------------
\170\ Used property may constitute qualified property so long as it
has not previously been used within the Kansas Disaster Zone. In
addition, it is intended that additional capital expenditures incurred
to recondition or rebuild property the original use of which in the
Kansas Disaster Zone began with the taxpayer would satisfy the
``original use'' requirement. See Treasury Regulation sec. 1.48-2,
Example 5.
---------------------------------------------------------------------------
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 May 4, 2007, and before January 1, 2009, and the
property is placed in service on or before December 31, 2008
(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, 2009. 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.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

(e) Increase in expensing under section 179 (sec. 15345 of the Act and
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 under section 179. Present law provides
that the maximum amount a taxpayer may expense, for taxable
years beginning in 2007 through 2010, is $125,000 of the cost
of qualifying property placed in service for the taxable
year.\171\ 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 2010 is treated as qualifying property. The $125,000
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 $500,000. The $125,000 and $500,000
amounts are indexed for inflation in taxable years beginning
after 2007 and before 2011.
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\171\ Additional section 179 incentives are provided with respect
to qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A), a renewal community (sec.
1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
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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.\172\
---------------------------------------------------------------------------
\172\ Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, 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.
---------------------------------------------------------------------------
For taxable years beginning in 2011 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.\173\
---------------------------------------------------------------------------
\173\ Sec. 179(c)(2).
---------------------------------------------------------------------------
For qualified section 179 Gulf Opportunity Zone property,
the maximum amount that a taxpayer may elect to deduct is
increased by the lesser of $100,000 or the cost of qualified
section 179 Gulf Opportunity Zone property for the taxable
year.\174\ 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. This placed in service date was extended to December
31, 2008 for property substantially all of the use of which is
in one or more specified portions of the GO Zone. The threshold
for reducing the amount expensed is computed by increasing the
$500,000 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. Neither the
$100,000 nor $600,000 amounts are indexed for inflation.
---------------------------------------------------------------------------
\174\ Sec. 1400N(e).
---------------------------------------------------------------------------
Qualified section 179 Gulf Opportunity Zone property means
section 179 property (as defined in section 179(d)) that also
meets the following requirements: (1) The property must be
property to which the general rules of the MACRS apply with (a)
an applicable recovery period of 20 years or less, (b) computer
software other than computer software covered by section 197,
(c) water utility property (as defined in section 168(e)(5)),
(d) certain leasehold improvement property; (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.

Explanation of Provision

The Act increases the amount that a taxpayer may elect for
qualified section 179 Recovery Assistance property. The 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 Recovery Assistance property for the taxable year.
The provision applies with respect to qualified section 179
Recovery Assistance property acquired on or after May 5, 2007,
and placed in service on or before December 31, 2008. The
threshold for reducing the amount expensed is computed by
increasing the $500,000 present-law amount by the lesser of (1)
$600,000, or (2) the cost of qualified section 179 Recovery
Assistance property placed in service during the taxable year.
Neither the $100,000 nor $600,000 amounts are indexed for
inflation.
Qualified section 179 Recovery Assistance property means
section 179 property (as defined in section 179(d)) that also
meets the following requirements: (1) The property must be (a)
property to which the general rules of the MACRS apply with an
applicable recovery period of 20 years or less, (b) computer
software other than computer software covered by section 197,
(c) water utility property (as defined in section 168(e)(5)),
or (d) certain leasehold improvement property; (2)
substantially all of the use of which is in the Kansas Disaster
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 May 5, 2007; (4) which is
acquired by the taxpayer by purchase on or after May 5, 2007,
but only if no written binding contract for the acquisition was
in effect before May 5, 2007; and (5) which is placed in
service by the taxpayer on or before December 31, 2008.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

(f) Expensing for certain demolition and clean-up costs (sec. 15345 of
the Act and 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.\175\ Land is not subject to an allowance
for depreciation or amortization.
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\175\ Sec. 280B.
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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 \176\ 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.
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\176\ 1971-1 C.B. 76.
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Under section 1400N(f), a taxpayer is permitted a deduction
for 50 percent of any qualified Gulf Opportunity Zone clean-up
cost paid or incurred during the period beginning on August 28,
2005, and ending on December 31, 2007. The remaining 50 percent
is capitalized and treated as described above. 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.

Explanation of Provision

Under the Act, a taxpayer is permitted a deduction for 50
percent of any qualified Recovery Assistance clean-up cost paid
or incurred during the period beginning on May 4, 2007, and
ending on December 31, 2009. The remaining 50 percent is
treated as under present law. A qualified Recovery Assistance
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 Kansas disaster area 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 is effective on the date of enactment (May
22, 2008).

(g) Treatment of public utility property disaster losses (sec. 15345 of
the Act and 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.
Section 1400N(o) 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 purposes of section 1400N(o), 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.

Explanation of Provision

The Act provides an election for taxpayers who incurred
casualty losses attributable to the Kansas storms and tornados
with respect to public utility property located in the Kansas
Disaster 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.
The other definitions and rules that apply under section
1400N(o) shall apply to the losses claimed in the Kansas
Disaster Zone.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

(h) Treatment of net operating losses attributable to storm losses
(sec. 15345 of the Act and sec. 1400N(k) of the Code)

Present Law

Under present law, a net operating loss (``NOL'') is,
generally, the amount by which a taxpayer's business deductions
exceed its gross income. In general, an NOL may be carried back
two years and carried over 20 years to offset taxable income in
such years.\177\ NOLs offset taxable income in the order of the
taxable years to which the NOL may be carried.\178\
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\177\ Sec. 172(b)(1)(A).
\178\ Sec. 172(b)(2).
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Different rules apply with respect to NOLs arising in
certain circumstances. 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 applies to NOLs (1)
arising from a farming loss regardless of whether the loss was
incurred in a Presidentially declared disaster area), or (2)
certain amounts related to Hurricane Katrina and the Gulf
Opportunity Zone. 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). Additionally, a special rule applies to certain
electric utility companies.

Explanation of Provision

The Act provides rules in connection with certain net
operating losses similar to the rules provided for Gulf
Opportunity Zone losses under section 1400N(k). The rules, as
applied to qualified Recovery Assistance losses, are as
follows:

In general

The provision provides a special five-year carryback period
for NOLs to the extent of certain specified amounts related to
the Kansas storms and tornados. 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 Recovery Assistance casualty losses; (ii) certain
moving expenses; (iii) certain temporary housing expenses; (iv)
depreciation deductions with respect to qualified Recovery
Assistance property for the taxable year the property is placed
in service; and (v) deductions for certain repair expenses
resulting from the Kansas storms and tornados. The provision
applies for losses paid or incurred after May 3, 2007, and
before January 1, 2010; however, an irrevocable election not to
apply the five-year carryback under the provision may be made
with respect to any taxable year.

Qualified Recovery Assistance casualty losses

The amount of qualified Recovery Assistance 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 Kansas
Disaster Zone and the loss must be attributable to Kansas
storms or tornados. 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 Kansas
Disaster Zone caused by the Kansas storms or tornados.
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 May 3, 2007, and before January
1, 2010 with respect to an employee who (i) lived in the Kansas
Disaster Zone before May 4, 2007, (ii) was displaced from their
home either temporarily or permanently as a result of the
Kansas storms or tornados, and (iii) is employed in the Kansas
Disaster 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 the Kansas storms or
tornados. 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 Kansas Disaster
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 Kansas Disaster Zone
may be included in the eligible NOL. It is not necessary for
the temporary housing to be located in the Kansas Disaster 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 the Kansas Disaster Zone. So, for example,
if a taxpayer temporarily houses an employee at a location
outside of the Kansas Disaster Zone, and the employee commutes
into the Kansas Disaster 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 qualified Recovery Assistance property

The eligible NOL includes the depreciation deduction (or
amortization deduction in lieu of depreciation) with respect to
qualified Recovery Assistance 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 qualified
Recovery Assistance 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 the Kansas storms or tornados. In order to
qualify, the amount must be paid or incurred after May 3, 2007
and before January 1, 2010, and the property must be located in
the Kansas Disaster 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 does 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 on the date of enactment (May
22, 2008).

(i) Representations Regarding Income Eligibility for Purposes of
Qualified Residential Rental Project Requirements (sec. 15345 of the
Act and sec. 1400N(n) of the Code)

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 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 the severe storms
and tornados in the Kansas disaster area beginning on May 4,
2007 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. This rule only applies if the
individual's tenancy begins during the six-month period
beginning on the date when such individual was displaced.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

(j) Use of retirement funds from retirement plans relating to the
Kansas Disaster Zone (sec. 15345 of the Act and sec. 4100Q of the Code)

Present Law

In general

Withdrawals from retirement plans
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.\179\ (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.\180\
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\179\ Secs. 402(a), 403(a), 403(b), 408(d), and 457(a).
\180\ Sec. 72(t).
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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. Any
distribution is an eligible rollover distribution unless
specifically excepted. Exceptions include a distribution that
is part of a series of substantially equal periodic payments
made at least annually for the life of the employee.
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.
Loans from retirement plans
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.\181\ 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.
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\181\ Sec. 72(p).
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Plan amendments
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.\182\ In general, plan amendments required 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.
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\182\ Sec. 401(b).
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Use of retirement funds related to disaster relief for Hurricanes
Katrina, Rita, and Wilma

In general
Section 1400Q provides exceptions to certain rules
regarding distributions from retirement plans, for loans from
retirement plans, and for plan amendments to retirement
plans.\183\
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\183\ The relief with respect to Hurricane Katrina was initially
provided in the Katrina Emergency Relief Act of 2005 (Pub. L. 109-73).
The IRS provided guidance on those relief provisions in Notice 2005-92,
2005-2 C.B. 1165. The relief was codified in section 1400Q and was
expanded to the Hurricanes Rita and Wilma Disaster areas in the Gulf
Opportunity Zone Act of 2005 (Pub. L. 109-135).
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Tax favored withdrawals from retirement plans
Section 1400Q(a) provides an exception to the 10-percent
early withdrawal tax in the case of a qualified hurricane
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
distribution may be included in income ratably over three
years, and the amount of a qualified hurricane distribution may
be recontributed to an eligible retirement plan within three
years.
A qualified hurricane distribution includes certain
distributions from an eligible retirement plan related to
Hurricanes Katrina, Wilma, and Rita. Specifically, qualified
hurricane distributions include the following distributions
from an eligible retirement plan: any distribution 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; any
distribution 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; and any distribution 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. Thus, any distributions in excess of $100,000 during
the applicable periods are not qualified hurricane
distributions.
Any amount required to be included in income as a result of
a qualified hurricane 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.
Any portion of a qualified hurricane 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 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 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 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 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. 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 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.
Recontributions of withdrawals for home purchases
Section 1400Q(b) 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, Rita, or Wilma
disaster areas 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,
that is a qualified Katrina distribution, a qualified Rita
distribution, or a qualified Wilma distribution.
A qualified Katrina distribution is a distribution: (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 Katrina
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.
A qualified Hurricane Rita distribution is a distribution:
(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 distribution:
(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.
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).
Loans from qualified plans to individuals sustaining an
economic loss
Section 1400Q(c) provides an exception to the income
inclusion rule for loans from a qualified employer plan related
to Hurricanes Katrina, Rita, and Wilma made to a qualified
individual during an applicable period and provides a repayment
delay for loans that are outstanding on or after a qualified
beginning date if the due date for any repayment with respect
to such loan occurs after the qualified beginning date and
December 31, 2006.
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 the qualified beginning date from a qualified
employer plan, if the due date for any repayment with respect
to such loan occurs during the period beginning on the
qualified beginning date, 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.
A qualified individual entitled to this plan loan relief
includes a qualified Katrina individual, a qualified Rita
individual, or a qualified Wilma individual. A qualified
Hurricane Katrina 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 qualified beginning date for a
qualified Katrina individual is August 25, 2005 and the
applicable period is the period beginning on September 24,
2005, and ending December 31, 2006.
A qualified Hurricane Rita individual is 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. The qualified
beginning date for a qualified Hurricane Rita individual is
September 23, 2005, and the applicable period is the period
beginning on September 23, 2005, and ending on December 31,
2006.
A qualified Hurricane Wilma individual is 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. The qualified
beginning date for a qualified Hurricane Wilma individual is
October 23, 2005, and the applicable period is the period
beginning on October 23, 2005, and ending on December 31, 2006.
An individual cannot be a qualified individual with respect
to more than one hurricane.
Plan amendments relating to Hurricanes Katrina, Rita, and
Wilma
Section 1400Q(d) permits certain plan amendments made
pursuant to any provision in section 1400Q, or regulations
issued thereunder, to be retroactively effective. If the plan
amendment meets the requirements of section 1400Q, 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 section 1400Q (or regulations promulgated thereunder), 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
section 1400Q 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 section 1400Q (or regulations) if it has an
effective date before the effective date of the provision (or
regulations) to which it relates.

Explanation of Provision

The Act provides relief similar to the relief provided in
section 1400Q with respect to use of retirement funds in
connection with the tornadoes and storms that occurred in the
Kansas disaster area.

Effective Date

The provision is effective on the date of enactment (May
22, 2008).

6. Modification of the advanced coal project credit and the
gasification project credit (sec. 15346 of the Act and secs. 48A and
48B of the Code)

Present Law

Advanced coal project credit

An investment tax credit is available for power generation
projects that use integrated gasification combined cycle
(``IGCC'') or other advanced coal-based electricity generation
technologies.\184\ The credit amount is 20 percent for
investments in qualifying IGCC projects and 15 percent for
investments in qualifying projects that use other advanced
coal-based electricity generation technologies.
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\184\ Sec. 48A.
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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. Generally, 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.\185\
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\185\ For advanced coal project certification applications
submitted after October 2, 2006, an electric generation unit using
advanced coal-based generation technology designed to use subbituminous
coal can meet the performance requirement relating to the removal of
sulfur dioxide 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 unis on a 30-day average.
---------------------------------------------------------------------------
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,\186\ and each project application must be submitted
during the three-year period beginning on the date such
certification program is established. An applicant for
certification has two years from the date the Secretary accepts
the application to provide the Secretary with evidence that the
requirements for certification have been met. Upon
certification, the applicant has five years from the date of
issuance of the certification to place the project in service.
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\186\ The Secretary issued guidance establishing the certification
program on February 21, 2006 (IRS Notice 2006-24).
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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, 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.

Gasification project credit

A 20-percent investment tax credit is also available for
investments in certain qualifying coal gasification
projects.\187\ 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.
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\187\ Sec. 48B.
---------------------------------------------------------------------------
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. Qualified projects must be
carried out by an eligible entity, defined as any person whose
application for certification is principally intended for use
in a domestic project which employs domestic gasification
applications related to (1) chemicals, (2) fertilizers, (3)
glass, (4) steel, (5) petroleum residues, (6) forest products,
and (7) agriculture, including feedlots and dairy operations.
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,\188\ 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 not allocate more than $350 million in credits. In
addition, the Secretary may certify a maximum of $650 million
in qualified investment as eligible for credit with respect to
any single project.
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\188\ The Secretary issued guidance establishing the certification
program on February 21, 2006 (IRS Notice 2006-25).
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Explanation of Provision

In implementing either section 48A (relating to the credit
described above) or section 48B (relating to the coal
gasification credit), the provision directs the Secretary to
modify the terms of any competitive certification award and any
associated closing agreements in certain cases. Specifically,
modification is required when it (1) is consistent with the
objectives of such section, (2) is requested by the recipient
of the award, and (3) involves moving the project site to
improve the potential to capture and sequester carbon dioxide
emissions, reduce costs of transporting feedstock, and serve a
broader customer base. However, no modification is required if
the Secretary determines that the dollar amount of tax credits
available to the taxpayer under the applicable section would
increase as a result of the modification or such modification
would result in such project not being originally certified. In
considering any such modification, the Secretary must consult
with other relevant Federal agencies, including the Department
of Energy.

Effective Date

The provision is effective for credit allocation awards
issued before, on, or after the date of enactment (May 22,
2008).

D. Other Revenue Provisions

1. Limitation on farming losses of certain taxpayers (sec. 15351 of the
Act and sec. 461 of the Code)

Present Law

For taxpayers who materially participate (as defined in
section 469(h)) in a farming activity, net farming losses are
reported in full as a reduction to income from both passive and
nonpassive sources. For taxpayers who do not materially
participate in a farming activity, the passive activity rules
of section 469 limit the ability to use such losses to reduce
income from nonpassive sources.
Farming income generally includes sales of livestock,
produce, grains, and other products; cooperative distributions;
Agricultural Program Payments; certain Commodity Credit
Corporation (``CCC'') loans (if an election is made to include
loan proceeds in income in the year received); certain crop
insurance proceeds and federal crop disaster payments; and
other income. Farm expenses generally include feed,
fertilizers, gasoline, fuel, and oil; insurance; interest;
hired labor; rent and lease payments; repairs and maintenance;
taxes; utilities; depreciation; and other business-related
expenses. Living expenses and other personal expenses are not
deductible farming expenses.
Present law (section 263A(e)(4)) \189\ defines a farming
business as the trade or business of farming, including 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 (excluding evergreen trees that are
more than six years old at the time severed from the roots).
Treasury regulation section 1.263A-4(a)(4) further provides
that a farming business generally means a trade or business
involving the cultivation of land or the raising or harvesting
of any agricultural or horticultural commodity. The raising,
shearing, feeding, caring for, training, and management of
animals are included in this definition. For example, the
raising of cattle for sale is considered a farming business.
However, the mere buying and reselling of plants or animals
grown or raised entirely by another is not considered to be
raising an agricultural or horticultural commodity. While a
farming business does include processing activities that are
normally incident to the growing, raising, or harvesting of
agricultural or horticultural products (e.g., harvesting,
washing, inspecting, and packing fruits and vegetables for
sale), it does not include the processing of commodities or
products beyond those activities that are normally incident to
the growing, raising, or harvesting of such products.
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\189\ This is the same definition of ``farming business'' used for
averaging of farm income under section 1301.
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Reasons for Change

The Congress believes that taxpayers receiving government
assistance through payment programs and loan programs should
not be allowed to claim unlimited amounts of losses from
farming activities.

Explanation of Provision

The Act limits the farming loss of a taxpayer, other than a
C corporation, for any taxable year in which any applicable
subsidies are received to the greater of (1) $300,000 ($150,000
in the case of a married person filing a separate return), or
(2) the taxpayer's total net farm income for the prior five
taxable years. For purposes of the provision, applicable
subsidies are (1) any direct or counter-cyclical payments under
title I of the Food, Conservation, and Energy Act of 2008 (or
any payment elected in lieu of any such payment), or (2) any
CCC loan. Total net farm income is an aggregation of all income
and loss from farming businesses for the prior five taxable
years.
The following examples illustrate the operation of this
provision:
Example 1.--Assume an individual taxpayer has $1 million of
net income from a farming business in each taxable year 2010 to
2014, and incurs a $5 million farming loss in 2015. For
purposes of this provision, the farming loss in 2015 is limited
to the greater of (1) $300,000 or (2) $5 million (total net
farm income for the prior five taxable years). Thus, the
farming loss is allowable in full in 2015. Assuming the
taxpayer had no other income or deductions in any of the
taxable years 2010 to 2015, the $5 million net operating loss
for 2015 is carried back to the prior five taxable years under
the present-law net operating loss carryback rules and reduces
the taxpayer's taxable income in each of those years to
zero.\190\
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\190\ Under section 172(b)(1)(G), farming losses may be carried
back to each of the five taxable years preceding the taxable year of
the loss.
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Example 2.--Assume an individual taxpayer has $300,000 of
net farm income and $700,000 of non-farm income in 2010, and $1
million of net farm income in each taxable year 2011 to 2014.
In 2015, the taxpayer incurs a $7 million farming loss. For
purposes of this provision, the farming loss in 2015 is limited
to the greater of (1) $300,000 or (2) $4.3 million (total net
farm income for the prior five taxable years). Thus, $2.7
million of the farming loss is disallowed under the provision
and will be treated as a deduction attributable to a farming
business in 2016. The $4.3 million farming loss allowed for
2015 is carried back to the prior five taxable years and
allowed as a deduction under present-law rules. The taxpayer's
taxable income in each of the years 2010 \191\ to 2013 is
reduced to zero and taxable income in 2014 is reduced by the
remaining farm loss of $300,000 to $700,000.
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\191\ The loss carryback to 2010 reduces both the $300,000 of net
farm income and $700,000 of non-farm income to zero.
---------------------------------------------------------------------------
For purposes of calculating total net farm income for the
prior five years, losses that are limited under the provision
are taken into account in the year in which they are allowed as
a deduction. For example, if a taxpayer has a $500,000 excess
farm loss in 2010 that is not allowed as a deduction until
2012, the calculation in 2011 of total net farm income for the
prior five years does not take into account the $500,000 as a
farm loss. Instead, the $500,000 loss would be included in the
calculation of prior year's total net farm income for taxable
years 2013 through 2017. In the case where the filing status of
the taxpayer is not the same for the taxable year and each of
the taxable years in the five-year period, the Treasury
Department is authorized to provide guidance for the
computation of total net farm income.
In the case of a partnership or S corporation, the limit is
applied at the partner or shareholder level.\192\ Therefore,
each partner or shareholder takes into account its
proportionate share of income, gain, or deduction from farming
businesses of a partnership or S corporation, and any
applicable subsidies received by a partnership or S corporation
during the taxable year (regardless of whether such items are
treated as income for Federal tax purposes).
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\192\ The Treasury Department may provide guidance for the
application of this provision to any other pass-thru entity to the
extent necessary to carry out the purposes of this provision. In the
case of tiered partnership or pass-thru entity structures, the Treasury
Department may provide guidance as necessary to carry out the purposes
of this provision.
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For purposes of the provision, the term ``farming
business'' has the meaning provided in present-law section
263A(e)(4), with a modification for certain processing
activities. Thus, for purposes of this provision, the
conference agreement broadens the definition of ``farming
business'' to include the processing of commodities, without
regard to whether such activity is incidental, by a taxpayer
otherwise engaged in a farming business with respect to such
commodities. The farming activities of a cooperative are
attributed to each member for purposes of this rule. Thus, a
member of a cooperative who raises a commodity and sells it to
the cooperative for processing is considered to be the
processor of such commodity. In this case, patronage dividends
received from a cooperative that is engaged in a farming
business are considered to be income from a farming business
for purposes of this provision.
Any loss that is disallowed under the provision in a
particular year is carried forward to the next taxable year and
treated as a deduction attributable to farming businesses in
that year.
Farming losses arising by reason of fire, storm, or other
casualty, or by reason of disease or drought, are disregarded
for purposes of calculating the limitation.
Treasury regulatory authority is provided to prescribe such
additional reporting requirements as appropriate to carry out
the purposes of this provision.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2009.

2. Increase and index dollar thresholds for farm optional method and
nonfarm optional method for computing net earnings from self-employment
(sec. 15352 of the Act and sec. 1402(a) of the Code)

Present Law

In general

Generally, tax under the Self-Employment Contributions Act
(SECA) is imposed on the self-employment income of an
individual. SECA tax has two components. Under the old-age,
survivors, and disability insurance component, the rate of tax
is 12.40 percent on self-employment income up to the Social
Security wage base ($97,500 for 2007). Under the hospital
insurance component, the rate is 2.90 percent of all self-
employment income (without regard to the Social Security wage
base).
Self-employment income subject to the SECA tax is
determined as the net earnings from self-employment. An
individual may use one of three methods to calculate net
earnings from self-employment. Under the generally applicable
rule, net earnings from self-employment means gross income
(including the individual's net distributive share of
partnership income) derived by an individual from any trade or
business carried on by the individual, less the deductions
attributable to the trade or business that are allowed under
the SECA tax rules. Alternatively, an individual may elect to
use one of two optional methods for calculating net earnings
from self-employment. These methods are: (1) the farm optional
method; and (2) the nonfarm optional method. The farm optional
method allows individuals to pay SECA taxes (and secure Social
Security benefit coverage) when they have low net income or
losses from farming. The nonfarm optional method is similar to
the farm optional method.

Farm optional method

If an individual is engaged in a farming trade or business,
either as a sole proprietor or as a partner, the individual may
elect to use the farm optional method in one of two instances.
The first instance is an individual engaged in a farming
business who has gross farm income of $2,400 or less for the
taxable year. In this instance, the individual may elect to
report two-thirds of gross farm income as net earnings from
self-employment. In the second instance, an individual engaged
in a farming business may elect the farm optional method even
though gross farm income exceeds $2,400 for the taxable year
but only if the net farm income is less than $1,733 for the
taxable year. In this second instance, the individual may elect
to report $1,600 as net earnings from self-employment for the
taxable year. In all other instances (i.e., more than $2,400 of
gross farm income and net farm income of at least $1,733) a
person engaged in a farming business must compute net earnings
from self-employment under the generally applicable rule. There
is no limit on the number of years that an individual may elect
the farm optional method during such individual's lifetime.
The dollar limits in the farm optional method are not
indexed for inflation.

Nonfarm optional method

The nonfarm optional method is available only to
individuals who have been self-employed for at least two of the
three years before the year in which they seek to elect the
nonfarm optional method and who meet certain other
requirements. Specifically, an individual may elect the nonfarm
optional method if the individual's: (1) net nonfarm income for
the taxable year is less than $1,733; and (2) net nonfarm
income for the taxable year is less than 72.189 percent of
gross nonfarm income. If a qualified individual engaged in a
nonfarming business who elects the nonfarm optional method has
gross nonfarm income of $2,400 or less for the taxable year,
then the individual may elect to report two-thirds of gross
nonfarm income as net earnings from self-employment. If the
electing individual engaged in a nonfarming business has gross
nonfarm income of at least $2,400 for the taxable year, then
the individual may elect to report $1,600 as net earnings from
self-employment for the taxable year. In all other instances, a
person engaged in a nonfarming business must compute net
earnings from self-employment under the generally applicable
rule. An individual may elect to use the nonfarm optional
method for no more than five years in the course of the
individual's lifetime.
The dollar limits in the nonfarm optional method are not
indexed for inflation.

Other rules applicable to farm optional and nonfarm optional methods

In the case of a cash method trade or business, gross
income is defined as the gross receipts from such trade or
business less the cost or other basis of property sold in
carrying out such trade or business with certain adjustments.
In the case of an accrual method trade or business, gross
income is defined as the gross income from the trade or
business with certain adjustments. If an individual (including
a member of a partnership) derives gross income from more than
one trade or business then such gross income (including the
individual's distributive share of the gross income of any
partnership) is treated as derived from a single trade or
business.

Social Security benefit eligibility

Generally, Social Security benefits can be paid to an
individual (and dependents or survivors) only if that
individual has worked long enough in covered employment to be
insured. Insured status is measured in terms of ``credits,''
previously called ``quarters of coverage.'' For this purpose,
Social Security uses the lifetime record of earnings reported
for that individual. In the case of a self-employed individual,
net earnings from self-employment is used to calculate Social
Security benefit eligibility.
Up to four quarters of coverage can be earned for a year,
depending on covered wages for the year and the amount needed
to earn each quarter of coverage. For 2007, credit for a
quarter of coverage is provided for each $1,000 of wages.

Reasons for Change

The Congress believes that taxpayers should have the
ability to earn four quarters of coverage for Social Security
benefits annually under either the farm optional method or
nonfarm optional method. Because the present-law dollar amounts
are not updated or indexed for inflation otherwise eligible
taxpayers have lost that ability. The Act makes needed changes
to those methods and ensures that they are indexed so the
problem will not reoccur in the future.

Explanation of Provision

The Act modifies the farm optional method so that electing
taxpayers may be eligible to secure four credits of Social
Security benefit coverage each taxable year by increasing and
indexing the thresholds. The provision makes a similar
modification to the nonfarm optional method.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

3. Information reporting for commodity credit corporation transactions
(sec. 15353 of the Act and new sec. 6039J of the Code)

Present Law

The Farm Security and Rural Investment Act of 2002 \193\
authorizes a marketing assistance loan program through the
Commodity Credit Corporation (``CCC''). Under such program, the
CCC may make loans for eligible commodities at a specified rate
per unit of commodity (the original loan rate). The repayment
amount for such a loan secured by an eligible commodity
generally is based on the lower of the original loan rate or
the alternative repayment rate, as determined by the CCC, as of
the date of repayment. The alternative repayment rate may be
adjusted to reflect quality and location for each type of
commodity. A taxpayer receiving a CCC loan can use cash to
repay such a loan, purchase CCC certificates for use in
repayment of the loan, or deliver the pledged collateral as
full payment for the loan at maturity.
---------------------------------------------------------------------------
\193\ Pub. L. No. 107-171.
---------------------------------------------------------------------------
If a taxpayer uses cash or CCC certificates to repay a CCC
loan, and the loan is repaid at a time when the repayment rate
is less than the original loan rate, the difference between the
original loan amount and the lesser repayment amount is market
gain. Regardless of whether a taxpayer repays a CCC loan in
cash or uses CCC certificates in repayment of the loan, the
market gain is taken into account either as income or as an
adjustment to the basis of the commodity (if the taxpayer has
made an election under section 77).
If a farmer uses cash instead of certificates, the farmer
will receive a Form CCC-1099-G Information Return showing the
market gain realized. For transactions prior to January 1,
2007, however, if a farmer uses CCC certificates to facilitate
repayment of a CCC loan, the farmer will not receive an
information return. For loans repaid on or after January 1,
2007, IRS Notice 2007-63 provides that the CCC reports market
gain associated with the repayment of a CCC loan whether the
taxpayer repays the loan with cash or uses CCC certificates in
repayment of the loan.\194\ The CCC reports the market gain on
Form 1099-G, Certain Government Payments.
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\194\ 2007-33 IRB.
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Reasons for Change

Income that is subject to information reporting is less
likely to be underreported. In contrast, the absence of
information reporting on many types of payments results in
underreporting and contributes to the tax gap.\195\ Thus, the
Congress believes it is important to ensure that information
reporting rules are applied consistently to payments that may
differ in form, but are economically equivalent. For this
reason, the Congress believes it is appropriate to codify the
IRS's administrative determination regarding information
reporting for the repayment of CCC loans.
---------------------------------------------------------------------------
\195\ The tax gap is the amount of tax that is imposed by law for a
given tax year but is not paid voluntarily and timely.
---------------------------------------------------------------------------

Explanation of Provision

The Act codifies the requirements of IRS Notice 2007-63
providing that the CCC reports market gain associated with the
repayment of a CCC loan, regardless of whether the taxpayer
repays the loan with cash or uses CCC certificates in repayment
of the loan.

Effective Date

The provision is effective for loans repaid on or after
January 1, 2007.

PART TWELVE: HEROES EARNINGS ASSISTANCE AND RELIEF TAX ACT OF 2008
(PUBLIC LAW 110-245) \196\
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\196\ H.R. 6081. The House Committee on Ways and Means reported
H.R. 3997 on November 5, 2007 (H.R. Rep. 110-426). H.R. 6081 passed the
House on November 6, 2007. The bill passed the Senate on December 12,
2008, with an amendment, by unanimous consent. The House on December
18, 2007, agreed to the Senate amendment with an amendment. On December
19, 2007, the Senate concurred in the House amendment with an
amendment. H.R. 6081, which contains many of the provisions of H.R.
3997, passed the House on May 20, 2008. The bill passed the Senate by
unanimous consent on May 22, 2008. The President signed the bill on
June 17, 2008. Technical Explanation of H.R. 6081, the ``Heroes
Earnings Assistance and Relief Tax Act of 2008,'' as Scheduled For
Consideration by the House of Representatives on May 20, 2008 (JCX-44-
08 (May 20, 2008).
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TITLE I--BENEFITS FOR MILITARY

A. Recovery Rebate Provided for Military Families (sec. 101 of the Act
and sec. 6428 of the Code)

Present Law

In general
Present law includes a recovery rebate credit for 2008
which is refundable. The credit mechanism (and the issuance of
checks described below) is intended to deliver an expedited
fiscal stimulus to the economy.
The credit is computed with two components in the following
manner.
Basic credit
Eligible individuals receive a basic credit (for the first
taxable year beginning) in 2008 equal to the greater of the
following:
Net income tax liability not to exceed $600
($1,200 in the case of a joint return).
$300 ($600 in the case of a joint return) if: (1)
the eligible individual has qualifying income of at least
$3,000; or (2) the eligible individual has a net income tax
liability of at least $1 and gross income greater than the sum
of the applicable basic standard deduction amount and one
personal exemption (two personal exemptions for a joint
return).
An eligible individual is any individual other than: (1) a
nonresident alien; (2) an estate or trust; or (3) a dependent.
For these purposes, ``net income tax liability'' means the
excess of the sum of the individual's regular tax liability and
alternative minimum tax over the sum of all nonrefundable
credits (other than the child credit). Net income tax liability
as determined for these purposes is not reduced by the credit
added by this provision or any credit which is refundable under
present law.
Qualifying income is the sum of the eligible individual's:
(a) earned income; (b) Social Security benefits (within the
meaning of sec. 86(d)); and (c) veteran's payments (under
Chapters 11, 13, or 15 of title 38 of the U. S. Code). The
definition of earned income has the same meaning as when used
in the earned income credit except that it includes certain
combat pay and does not include net earnings from self-
employment which are not taken into account in computing
taxable income.
Qualifying child credit
If an individual is eligible for any amount of the basic
credit the individual also may be eligible for a qualifying
child credit. The qualifying child credit equals $300 for each
qualifying child of such individual. For these purposes, the
child credit definition of qualifying child applies.
Limitation based on adjusted gross income
The amount of the credit (i.e., the sum of the amounts of
the basic credit and the qualifying child credit) is phased out
at a rate of five percent of adjusted gross income above
certain income levels. The beginning point of this phase-out
range is $75,000 of adjusted gross income ($150,000 in the case
of joint returns).
Rebate checks
Most taxpayers will receive this credit in the form of a
check issued by the Department of the Treasury. The amount of
the payment is computed in the same manner as the credit,
except that it is done on the basis of tax returns filed for
2007 (instead of 2008).
In no event may the Department of the Treasury issue checks
after December 31, 2008. Payment of the credit (or the check)
is treated, for all purposes of the Code, as a payment of tax.
Any resulting overpayment under this provision is subject to
the refund offset provisions, such as those applicable to past-
due child support under section 6402 of the Code.
Valid identification numbers
No credit is allowed to an individual who does not include
a valid identification number on the individual's income tax
return. In the case of a joint return which does not include
valid identification numbers for both spouses, no credit is
allowed. In addition, a child shall not be taken into account
in determining the amount of the credit if a valid
identification number for the child is not included on the
return. For this purpose, a valid identification number means a
Social Security number issued to an individual by the Social
Security Administration. A taxpayer identification number
issued by the Internal Revenue Service (the ``IRS'') is not a
valid identification number for purposes of this credit (e.g.,
an ITIN).
If an individual fails to provide a valid identification
number, the omission is treated as a mathematical or clerical
error. As under present law, the IRS may summarily assess
additional tax due as a result of a mathematical or clerical
error without sending the taxpayer a notice of deficiency and
giving the taxpayer an opportunity to petition the Tax Court.
Where the IRS uses the summary assessment procedure for
mathematical or clerical errors, the taxpayer must be given an
explanation of the asserted error and given 60 days to request
that the IRS abate its assessment.

Explanation of Provision

The Act makes a modification to the rules relating to valid
identification numbers in the case of the recovery rebate
credit.
The Act provides that the identification number requirement
does not apply in the case of a joint return where at least one
spouse is a member of the Armed Forces of the United States
\197\ at any time during the taxable year.
---------------------------------------------------------------------------
\197\ The term includes all regular and reserve components of the
uniformed services. See section 7701(a)(15).
---------------------------------------------------------------------------

Effective Date

The provision is effective as if included in the amendments
made by section 101 of the Economic Stimulus Act of 2008 (Pub.
L. No. 110-185).

B. Make Permanent the Election to Treat Combat Pay as Earned Income for
Purposes of the Earned Income Tax Credit (sec. 102 of the Act and secs.
32 and 112 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 combat 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 tax 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 tax credit.
This election is available with respect to any taxable year
ending after the date of enactment and before January 1, 2008.

Reasons for Change

The Congress believes that members of the armed forces
serving in combat should have full availability of the earned
income tax credit, notwithstanding the exclusion of combat pay
from gross income for purposes of determining federal tax
liability. The Congress believes a permanent extension of the
election to treat combat pay as earnings for purposes of the
earned income tax credit is necessary to achieve this result.

Explanation of Proposal

The Act permanently extends 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 tax credit.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

C. Modification of Qualified Mortgage Bond Program Rules for Veterans
(sec. 103 of the Act and sec. 143 of the Code)

Present Law

In general

Private activity bonds are bonds that 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 interest paid on 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 qualified private
activity bonds includes both qualified mortgage bonds and
qualified veterans' mortgage bonds.

Qualified mortgage bonds

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 separate State volume limitation.
The five States eligible to issue these bonds are Alaska,
California, Oregon, Texas, and Wisconsin.
In the case of qualified veterans' mortgage bonds issued by
California or Texas, mortgage loans only can be made 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. In the case of
qualified veterans' mortgage bonds issued by the States of
Alaska, Oregon, and Wisconsin, mortgage loans can be made to
veterans who apply for financing before the date 25 years after
the last date on which such veteran left active service,
without regard to the calendar year the veteran served on
active duty.
The annual volume of qualified veterans' mortgage bonds
that can be issued in California or Texas is based on the
average amount of bonds issued in the respective State between
1979 and 1984. In Alaska, Oregon, and Wisconsin, the annual
limit on qualified veterans' mortgage bonds that can be issued
in years after 2009 is $25 million. This $25 million per-State
limit is phased in from 2006 through 2009 by allowing the
applicable percentage of the $25 million limit. The following
table provides those percentages.

------------------------------------------------------------------------
Applicable
Calendar year: percentage
is:
------------------------------------------------------------------------
2006....................................................... 20 percent
2007....................................................... 40 percent
2008....................................................... 60 percent
2009....................................................... 80 percent
------------------------------------------------------------------------

Unused allocation cannot be carried forward to subsequent
years.

Reasons for Change

The Congress believes that the eligibility requirements for
qualified veterans' mortgage bonds should be consistent. Thus,
the Congress believes the programs in California and Texas
should be expanded to permit financing for veterans without
regard to the date they served on active duty, as is the case
for financing provided in Alaska, Oregon, and Wisconsin under
present law. The Congress also believes that the volume limits
for qualified veterans' mortgage bonds should be modified so
that more veterans are able to benefit from the program.
Similarly, the Congress believes that the present-law exception
to the first-time homebuyer rule for qualified mortgage bonds
should be made permanent. The Congress believes this will allow
a broader class of veterans to achieve homeownership under the
program.

Explanation of Provision

Qualified mortgage bonds

The Act permanently extends the limited exception from the
first-time homebuyer rule for veterans under the qualified
mortgage bond program.

Qualified veterans' mortgage bonds

The Act increases the annual limit on qualified veterans'
mortgage bonds that can be issued in Alaska, Oregon, and
Wisconsin in years after 2009 to $100 million. For 2008 and
2009, the $100 million limit is phased in by applying the
present-law applicable percentages for those years (i.e., 60
percent in 2008 and 80 percent in 2009).
With respect to qualified veterans' mortgage bonds issued
in California or Texas, the provision repeals the requirement
that veterans receiving loans financed with qualified veterans'
mortgage bonds must have served before 1977 and reduces the
eligibility period to 25 years (rather than 30 years) following
release from military service.

Effective Date

The provision generally applies to bonds issued after
December 31, 2007. In the case of any bond issued after
December 31, 2007, and before the date of enactment, the
eligibility period for a loan financed with qualified veterans'
mortgage bonds is 30 years following release from military
service.

D. Survivor and Disability Payments with Respect to Qualified Military
Service (sec. 104 of the Act and secs. 401(a), 414(u), 403(b), and
457(g) of the Code)

Present Law

Under the Uniformed Services Employment and Reemployment
Rights Act of 1994 (``USERRA''),\198\ which revised and
restated the Federal law protecting veterans' reemployment
rights, an employee who leaves a civilian job for qualified
military service generally is entitled to be reemployed by the
civilian employer if the individual returns to employment
within a specified time period. In addition to reemployment
rights, a returning veteran also is entitled to the restoration
of certain pension, profit sharing and similar benefits that
would have accrued, but for the employee's absence due to the
qualified military service. The protections provided under
USERRA do not apply if the veteran is not reemployed by the
veteran's civilian employer.
---------------------------------------------------------------------------
\198\ Pub. L. No. 103-353.
---------------------------------------------------------------------------
USERRA generally provides that for a reemployed veteran,
service in the uniformed services is considered service with
the employer for retirement plan vesting and benefit accrual
purposes. The employer that reemploys the returning veteran is
liable for funding any resulting obligation. USERRA also
provides that the reemployed veteran is entitled to any accrued
benefits that are contingent on the making of, or derived from,
employee contributions or elective deferrals only to the extent
the reemployed veteran makes payment to the plan with respect
to such contributions or deferrals. No such payment may exceed
the amount the reemployed veteran would have been permitted or
required to contribute had the person remained continuously
employed by the employer throughout the period of uniformed
service. Under USERRA, any such payment to the plan must be
made during the period beginning with the date of reemployment
and whose duration is three times the reemployed veteran's
period of uniform service, not to exceed five years.
The Small Business Job Protection Act of 1996 \199\ added
section 414(u) to the Code to provide rules regarding the
interaction of the USERRA protections with generally applicable
rules that govern tax qualified retirement plans. For example,
section 414(u) provides that if any make-up contribution is
made by an employer or employee with respect to a reemployed
veteran, then such contribution is not subject to the otherwise
applicable plan contribution and deduction limits for the year
in which the contribution is made (such as the section 402(g)
annual limit on elective deferrals, which is generally $15,500
in 2008). Such limits are instead applied for the year to which
the contribution relates had the individual continued to be
employed by the employer during the period of uniformed
service.
---------------------------------------------------------------------------
\199\ Pub. L. No. 104-188.
---------------------------------------------------------------------------
Under section 414(u), a plan to which a make-up
contribution is made on account of a reemployed veteran is not
treated as failing to meet the qualified plan
nondiscrimination, coverage, minimum participation, and top
heavy rules \200\ by reason of the making of such contribution.
Consequently, for purposes of applying the requirements and
tests associated with these rules, make-up contributions are
not taken into account either for the year in which they are
made or for the year to which they relate.
---------------------------------------------------------------------------
\200\ These include Code sections 401(a)(4), 401(a)(26), 401(k)(3),
401(k)(11), 401(k)(12), 401(m), 403(b)(12), 408(k)(3), 408(k)(6),
408(p), 410(b), and 416.
---------------------------------------------------------------------------
In addition, section 414(u) provides for a special rule in
the case of make-up contributions of salary reduction, employer
matching, and after-tax employee amounts. A plan that provides
for elective deferrals or employee contributions is treated as
meeting the requirements of USERRA if the employer permits
reemployed veterans to make additional elective deferrals or
employee contributions under the plan during the period which
begins on the date of reemployment and has the same length as
the lesser of (1) the period of the individual's absence due to
uniformed service multiplied by three or (2) five years. The
employer is required to match any additional elective deferrals
or employee contributions at the same rate that would have been
required had the deferrals or contributions actually been made
during the period of uniformed service. Additional elective
deferrals, employer matching contributions, and employee
contributions are treated as make-up contributions for purposes
of the rule exempting such contributions from qualified plan
nondiscrimination, coverage, minimum participation, and top
heavy rules described above.

Reasons for Change

Present law provides certain retirement plan protections
for reservists who are called to active duty and who are able
to return to their civilian employers after serving our
country. The Congress is concerned that there is a gap in this
protection for those who are called to serve our country, but
who are unable to return to their civilian employers because
they have given their lives in service, or have suffered a
disability that makes reemployment impossible. The Congress
believes that certain retirement plan protections should be
extended to the survivors of reservists who have sacrificed
their lives, and that other protections should be permitted to
be made available under employer-sponsored qualified pension
plans in the case of reservists who do not survive, or who are
disabled while serving our country.

Explanation of Provision

The Act adds a new tax qualification requirement for
retirement plans that are qualified under section 401(a) of the
Code (a ``tax-qualified plan''). Under the new requirement, a
tax-qualified plan must provide that, in the case of a
participant who dies while performing qualified military
service, the survivors of the participant must be entitled to
any additional benefits (other than benefit accruals relating
to the period of qualified military service) that would be
provided under the plan had the participant resumed employment
with the employer maintaining the plan and then terminated
employment on account of death. Thus, if a plan provides for
accelerated vesting, ancillary life insurance benefits, or
other survivor benefits that are contingent upon a
participant's termination of employment on account of death,
the plan must provide such benefits to the beneficiary of a
participant who dies during qualified military service.
Under the provision, conforming amendments apply the new
tax qualification requirement to section 403(b) tax-deferred
annuities and eligible deferred compensation plans (described
in section 457(b)) maintained by State and local governments.
The provision also conditions the deduction timing rule of
section 404(a)(2) (permitting contributions for the purchase of
employee retirement annuities that meet certain requirements
applicable to tax-qualified retirement plans to be deducted in
the year of payment) on satisfaction of the new qualification
requirement.
In addition, for benefit accrual purposes, the provision
permits a retirement plan to treat an individual who leaves
service with the plan's sponsoring employer for qualified
military service, and who cannot be reemployed on account of
death or disability, as if the individual had been rehired as
of the day before death or disability (a ``deemed rehired
employee'') and then had terminated employment on the date of
death or disability. In the case of a deemed rehired employee,
the plan is permitted to comply fully or partially with the
benefit accrual restoration provisions that would be required
under section 414(u) had the individual actually been rehired.
Subject to several conditions, if a plan complies fully or
partially with the benefit accrual requirements of section
414(u), the special section 414(u) rules regarding the
interaction of USERRA with the otherwise applicable benefit
limitation and nondiscrimination rules apply. The first
condition is that all employees performing qualified military
service of the employer maintaining the plan who die or become
disabled must be credited with benefits on a reasonably
equivalent basis. Thus, differences in credited benefits on
account of different compensation levels are permissible, but
complying fully with the section 414(u) benefit accrual
requirements with respect to highly compensated employees and
complying partially with respect to nonhighly compensated
employees is not permissible. The second condition is that if
the plan credits deemed rehired employees with benefits that
are contingent on employee contributions or elective
contributions, the plan must determine the rate of employee
contributions or elective deferrals on the basis of the actual
average contributions or deferrals made by the employee during
the 12-month period prior to military service (or if less, the
average for the actual period of service).
The provision provides rules regarding the date by which a
plan must be amended to comply with the provision. In general,
a plan must be amended on or before the last day of the plan
year beginning on or after January 1, 2010.

Effective Date

The provision applies in the case of deaths and
disabilities occurring on or after January 1, 2007.

E. Treatment of Differential Military Pay as Wages (sec. 105 of the Act
and secs. 3401 and 414(u) of the Code)

Present Law

In general

In the case of an employee who is called to active duty
with the United States uniformed services, some employers
voluntarily agree to continue paying the level of compensation
that the service member would otherwise have received from the
employer during the service member's period of active duty.
Such compensation is commonly referred to as ``differential
pay.''

Wage withholding

Differential pay is not treated as wages for purposes of
the Federal income tax withholding rules that apply to an
employer's payment of wages. This is because the service member
is treated as terminating the employment relationship with the
employer that pays the differential pay upon being called for
active duty.\201\
---------------------------------------------------------------------------
\201\ See Rev. Rul. 69-136, 1969-1 C.B. 252.
---------------------------------------------------------------------------

Retirement plans

Section 415 imposes limitations on the benefits that may be
provided under a retirement plan that is qualified under
section 401(a) (a ``qualified plan''). For a defined
contribution plan, section 415 limits the annual additions to a
participant's account under the plan to the lesser of a dollar
amount ($46,000 in 2008) or 100 percent of the participant's
compensation. In the case of a defined benefit plan, section
415 generally limits the annual benefit payable under the plan
to the lesser of a dollar amount ($185,000 in 2008) or 100
percent of the participant's average compensation for the
participant's high three years.
Final regulations issued in 2007 generally permit a plan to
treat differential pay as compensation for purposes of section
415.\202\ The section 415 limitations also apply to tax
deferred annuities \203\ and simplified employee pensions \204\
(``SEPs''). The definition of compensation in section 415 is
used in limiting the amount that may be deferred under an
eligible deferred compensation plan (described in section
457(b)).
---------------------------------------------------------------------------
\202\ Treas. Reg. sec. 1.415(c)-2(e)(4), 72 Fed. Reg. 16,878 (Apr.
5, 2007).
\203\ Sec. 403(b).
\204\ Sec. 408(k).
---------------------------------------------------------------------------

Limitation on in-service distributions

Under present law, certain types of contributions to a
retirement plan are subject to restrictions that generally
limit distributions to a participant prior to the participant
severing employment with the employer that sponsors the plan.
This limitation on in-service distributions applies to: (1)
elective deferrals under a qualified cash or deferred
compensation arrangement (a ``section 401(k) plan''); (2)
amounts attributable to a salary reduction agreement under a
section 403(b) tax-sheltered annuity; (3) amounts contributed
to a custodial account described in section 403(b)(7); and (4)
amounts deferred under an eligible deferred compensation plan
(described in section 457(b)).

USERRA

Under USERRA, which revised and restated the Federal law
protecting veterans' reemployment rights, an employee who
leaves a civilian job for qualified military service generally
is entitled to be reemployed by the civilian employer if the
individual returns to employment within a specified time
period. In addition to reemployment rights, a returning veteran
also is entitled to the restoration of certain pension, profit
sharing and similar benefits that would have accrued, but for
the employee's absence due to the qualified military service.
Section 414(u) provides special rules that permit defined
benefit plans and individual account plans to satisfy the
requirements of USERRA. An individual account plan for this
purpose is any defined contribution plan (such as a section
401(k) plan), and includes a section 403(b) tax sheltered
annuity, a SEP, a qualified salary reduction arrangement under
section 408(p) (``SIMPLE''), and an eligible deferred
compensation plan (described in section 457(b)). Section 414(u)
does not apply to a plan to which Chapter 43 of Title 38 of the
United States Code does not apply.

IRA contributions

There are two general types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\205\
Under section 219, 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 ($5,000 for 2008); or (2)
the amount of the individual's compensation that is includible
in gross income for the year. 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. For purposes of the IRA contribution limitations,
compensation includes an individual's net earnings from self
employment.
---------------------------------------------------------------------------
\205\ Secs. 408 and 408A.
---------------------------------------------------------------------------

Reasons for Change

The Congress is concerned that the current law treatment of
differential pay for purposes of the Federal wage withholding
rules creates a possible trap for unwary reservists who are
called to active duty. This is because differential pay is paid
by the reservist's former civilian employer and thus reservists
may assume that such payments are subject to the wage
withholding rules as other compensation paid when not on
qualified military service. Thus, the reservist would not
anticipate that there is an estimated tax payment obligation
with respect to such payments. The Congress also believes that
differential pay should be treated as employer-paid
compensation for purposes of tax-favored retirement savings
programs.
The Congress believes that a reservist called to active
duty is properly treated as having terminated employment for
purposes of rules that limit an individual's ability to access
certain contributions to tax-favored retirement savings plans.
This rule allows reservists access to amounts in their
retirement savings plans. However, the Congress believes that
such contributions should not be accessed if reservists have
other means of satisfying their financial obligations. Thus, if
such contributions are accessed by a reservist, no additional
contributions may be made to the plan by the reservist for the
six-month period following the distribution.

Explanation of Provision

Wage withholding

The provision amends the definition of wages for purposes
of the Federal income tax withholding rules applicable to an
employer's payment of wages. The provision includes as wages
the employer's payment of any differential wage payment to the
employee. Differential wage payment is defined as any payment
which: (1) is made by an employer to an individual with respect
to any period during which the individual is performing service
in the uniformed services while on active duty for a period of
more than 30 days; and (2) represents all or a portion of the
wages that the individual would have received from the employer
if the individual were performing services for the employer.

Retirement plans

The provision also provides rules relating to differential
wage payments (as defined for purposes of wage withholding) for
purposes of a retirement plan that is subject to section
414(u). Specifically, an individual receiving a differential
wage payment is required to be treated as an employee of the
employer making the payment, and the differential wage payment
is required to be treated as compensation. In addition, a
retirement plan that is subject to section 414(u) is not
treated as failing to meet certain requirements relating to
minimum participation and nondiscrimination standards \206\ by
reason of any contribution or benefit that is based on the
differential wage payment if all of the sponsoring employer's
employees: (1) are entitled to differential wage payments on
reasonably equivalent terms; and (2) if all employees eligible
to participate in a retirement plan maintained by the employer
are entitled to make contributions based on such differential
payments on reasonably equivalent terms.
---------------------------------------------------------------------------
\206\ These standards include the following: section 401(a)(4)
(prohibiting discrimination in contributions or benefits provided under
qualified plans); section 401(a)(26) (providing minimum participation
rules for qualified defined benefit plans); section 401(k)(3), (11),
and (12) (providing non-discrimination rules for elective deferrals
under qualified cash or deferred arrangements); section 401(m)
(providing non-discrimination rules for employee contributions and
employer matching contributions to qualified plans); 403(b)(12)
(providing non-discrimination rules for section 403(b) tax sheltered
annuities); section 408(k)(3), (k)(6), and (p) (providing non-
discrimination rules for SEPs and SIMPLEs); section 410(b) (providing
minimum coverage rules for qualified plans); and section 416 (requiring
minimum benefits in the case of top heavy qualified plans).
---------------------------------------------------------------------------
Under the provision, an individual is treated as having
been severed from employment during any period the individual
is performing service in the uniformed services while on active
duty for a period of more than 30 days for purposes of the
limitation on in-service distributions with respect to: (1)
elective deferrals under a section 401(k) plan; (2) amounts
attributable to a salary reduction agreement under a section
403(b) tax-sheltered annuity; (3) amounts contributed to a
custodial account described in section 403(b)(7); and (4)
amounts deferred under an eligible deferred compensation plan
(described in section 457(b)). Thus, such individuals are not
prohibited from receiving distributions on account of not
severing employment. However, if any amounts are distributed on
account of the foregoing rule, the individual is not permitted
to make elective deferrals or employee contributions to the
plan during the six-month period beginning on the date of
distribution.

IRAs

For purposes of the limitation on contributions to an IRA,
the provision amends the term ``compensation'' to include
differential wage payments (as defined for purposes of wage
withholding).

Plan amendment timing

In general, the provision permits a plan or annuity
contract to be retroactively amended to comply with the
provision provided that the amendment is made no later than the
last day of the first plan year beginning on or after January
1, 2010. Subject to certain conditions, a plan or annuity
contract is treated as being operated in accordance with its
terms during the period prior to amendment and, except as
provided by the Secretary of the Treasury, the plan or annuity
contract does not fail to meet the requirements of the Code or
ERISA by reason of the amendment.

Effective Date

For purposes of the wage withholding rules, the provision
is effective with respect to remuneration paid after December
31, 2008. Otherwise, the provision is effective with respect to
years beginning after December 31, 2008.

F. Extension of the Statute of Limitations To File Claims for Refunds
Relating to Disability Determinations by the Department of Veterans
Affairs (sec. 106 of the Act and sec. 6511(d) of the Code)

Present Law

In general, a taxpayer must file a claim for credit or
refund within three years of the filing of the tax return or
within two years of the payment of the tax, whichever expires
later (if no tax return is filed, the two-year limit applies).
A claim for credit or refund that is not filed within these
time periods is rejected as untimely.
Generally, military retirement benefits based on length of
service are included in income, whereas veterans' benefits
based on a service-connected disability are excluded from
income. If an individual receives includible retirement
benefits and is later retroactively determined to be eligible
for service-connected disability benefits, the portion of the
retirement benefits attributable to the disability is
retroactively excluded from income. In that case, the
individual may claim a refund of the tax paid on the
retroactively excluded benefits, subject to the statute of
limitations on filing a refund claim.

Reasons for Change

Because of the lapse of time between retirement and the
determination of, or the onset and determination of, a service
connected disability, the Congress believes it is appropriate
to extend the statute of limitations to permit retired military
personnel to file claims for refunds when a determination of a
service-connected disability is made.

Explanation of Provision

The Act extends the time period for filing claims for
credits or refunds for retired military personnel who receive
disability determinations from the Department of Veterans
Affairs (e.g., determinations after the tax return is filed).
Specifically, in the case of a determination after the date of
enactment, the provision extends the period for filing such a
refund claim until one year after the date of the disability
determination (if later than the time periods allowed under
present law). The provision applies to any taxable year which
begins five years before the date of the determination or
thereafter. In the case of a determination after December 31,
2000, and on or before the date of enactment, the period for
filing a claim for credit or refund is extended until one year
after the date of enactment (if later than the time periods
allowed under present law).

Effective Date

The provision is effective for claims for credits or
refunds filed after the date of enactment (June 17, 2008).

G. Treatment of Distributions to Individuals Called to Active Duty for
at Least 180 Days (sec. 107 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 ``section 401(k) plan'') or in a tax-sheltered
annuity (a ``section 403(b) annuity'') may not be distributed
before severance from employment, age 59\1/2\, death,
disability, or financial hardship of the employee.
Pursuant to amendments to section 72(t) made by the Pension
Protection Act of 2006,\207\ 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 section
401(k) plan, section 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 United States 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 section 401(k) plan
or section 403(b) annuity does not violate the distribution
restrictions applicable to such plans by reason of making a
qualified reservist distribution.
---------------------------------------------------------------------------
\207\ Pub. L. No. 109-280.
---------------------------------------------------------------------------
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 this special repayment rule. No deduction is
allowed for any contribution made under the special repayment
rule.
The special rules applicable to a qualified reservist
distribution apply to individuals ordered or called to active
duty after September 11, 2001, and before December 31, 2007.

Reasons for Change

The Congress believes that the exception to the 10-percent
early withdrawal tax is an important tax relief provision for
reservists called to active duty. Reservists called to active
duty may need access to amounts that they have contributed to
tax-favored retirement savings programs in order to meet their
personal financial obligations while serving our country. Given
the continuing need for activation of reservists, the Congress
believes that this tax relief provision should be made
permanent so that it applies to reservists called to active
duty on or after December 31, 2007.

Explanation of Provision

The provision makes permanent the rules applicable to
qualified reservist distributions to individuals ordered or
called to active duty on or after December 31, 2007.

Effective Date

The provision is effective upon enactment (June 17, 2008).

H. Authority To Disclose Return Information for Certain Veterans
Programs Made Permanent (sec. 108 of the Act and sec. 6103 of the Code)

Present Law

The Code prohibits disclosure of returns and return
information, except to the extent specifically authorized by
the Code (sec. 6103). Unauthorized disclosure is a felony
punishable by a fine not exceeding $5,000 or imprisonment of
not more than five years, or both (sec. 7213). An action for
civil damages also may be brought for unauthorized disclosure
(sec. 7431). No tax information may be furnished by the IRS to
another agency unless the other agency establishes procedures
satisfactory to the IRS for safeguarding the tax information it
receives (sec. 6103(p)).
Among the disclosures permitted under the Code is
disclosure of certain tax information to the Department of
Veterans Affairs. Disclosure is permitted to assist the
Department of Veterans Affairs in determining eligibility for,
and establishing correct benefit amounts under, certain of its
needs-based pension, health care, and other programs (sec.
6103(1)(7)(D)(viii)). The Department of Veterans Affairs
disclosure provisions do not apply after September 30, 2008.

Reasons for Change

The temporary provision permitting the disclosure of
otherwise confidential return information to the Department of
Veterans Affairs to ensure the correctness of government
benefit payments has been in existence since 1990. The Congress
believes it is appropriate to make permanent this long-standing
temporary provision.

Explanation of Provision

The Act makes permanent the authority to make disclosures
to the Department of Veterans Affairs. The provision also
corrects the cross-references to Title 38.

Effective Date

The provision is effective for requests made after
September 30, 2008.

I. Contributions of Military Death Gratuities to Certain Tax-Favored
Accounts (sec. 109 of the Act and secs. 408A and 530 of the Code)

Present Law

Military death gratuities and SGLI

Section 1477 of Title 10 of the United States Code provides
for the payment of a military death gratuity to an eligible
survivor of a service member. Under Code section 134, as
amended by the Military Family Tax Relief Act of 2003, the full
amount of the military death gratuity is excludable from gross
income. Pursuant to section 1967 of Title 38 of the United
States Code, certain members of the uniformed services are
automatically insured against death under the Servicemembers'
Group Life Insurance (``SGLI'') program. In general, life
insurance proceeds are excludable from gross income under Code
section 101.

Roth IRAs

There are two general types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\208\
In general, contributions (other than a rollover contribution)
to a traditional IRA may be deductible, and distributions from
a traditional IRA are includible in gross income to the extent
not attributable to a return of nondeductible contributions.
Contributions to a Roth IRA are not deductible, and 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.
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\208\ Traditional IRAs are described in Code section 408, and Roth
IRAs in Code section 408A.
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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 ($5,000 for 2008); or (2) the amount of the
individual's compensation that is includible in gross income
for the year. IRA contributions in excess of the applicable
limit are generally subject to an excise tax of six percent per
year until withdrawn. The contribution limit is reduced to the
extent an individual makes contributions to any other IRA for
the same taxable year.
As under the rules relating to traditional IRAs, a
contribution of up to the dollar limit for each spouse may be
made to a Roth IRA provided the combined compensation of the
spouses is at least equal to the contributed amount. The
maximum annual contribution that can be made to a Roth IRA is
phased out for taxpayers with adjusted gross income for the
taxable year over certain indexed levels. The adjusted gross
income phase-out ranges for 2008 are: (1) for single taxpayers,
$101,000 to $116,000; (2) for married taxpayers filing joint
returns, $159,000 to $169,000; and (3) for married taxpayers
filing separate returns, $0 to $10,000.
The foregoing contribution limitations generally do not
apply in the case of a rollover contribution to an IRA. If
certain requirements are satisfied, a participant in a tax-
qualified retirement plan, a tax-sheltered annuity,\209\ or a
governmental section 457 plan may roll over distributions from
the plan or annuity into a traditional IRA. For distributions
after December 31, 2007, certain taxpayers are permitted to
make qualified rollover contributions from such plans or
annuities into a Roth IRA (subject to inclusion in gross income
of any amount that would be includible were it not part of the
qualified rollover contribution).
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\209\ Sec. 403(b).
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Coverdell Education Savings Accounts

Annual contributions to a Coverdell education savings
account \210\ may not exceed $2,000 (except in cases involving
certain tax-free rollovers) and may not be made after the
designated beneficiary reaches age 18. The maximum annual
contribution that can be made to a Coverdell education savings
account is phased out for taxpayers with adjusted gross income
for the taxable year over certain indexed levels. Contributions
to a Coverdell education savings account are not deductible. In
general, a rollover is permitted between Coverdell education
savings accounts for the benefit of the same beneficiary or
member of such beneficiary's family.
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\210\ Coverdell education savings accounts are described in sec.
530.
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In general, a distribution from a Coverdell education
savings account is includible in the gross income of the
distributee. However, distributions from an account are
excludable from the distributee's gross income to the extent
that the total distribution does not exceed the qualified
education expenses incurred by the beneficiary during the year
the distribution is made. Contributions to a Coverdell
education savings account are treated as nontaxable investment
in the contract. Thus, earnings on contributions are subject to
tax if amounts withdrawn from the account exceed qualified
education expenses. The portion of a distribution from a
Coverdell education savings account that is includible in
income (i.e., the portion allocable to earnings on
contributions when a distribution exceeds qualified education
expenses) is generally subject to an additional 10-percent tax.

Reasons for Change

The survivor of a service member who dies while serving our
country is eligible to receive certain death benefits. In some
cases, these benefit proceeds may not be needed by the survivor
for immediate living expenses. Instead, the benefit proceeds
may be needed for future expenses, such as retirement or
education expenses. Under present law, contributions to tax-
favored accounts for retirement and education savings are
subject to annual limits. As a result, immediate contribution
of death benefit proceeds to such accounts is prohibited. The
Congress believes survivors of service members should be able
to contribute death benefit proceeds to such accounts to save
for future retirement and education needs.

Explanation of Provision

In the case of an individual who receives a military death
gratuity or SGLI payment, the provision permits the individual
to contribute an amount no greater than the sum of the gratuity
and SGLI payments received by the individual to a Roth IRA,
notwithstanding the contributions limits that otherwise apply
to contributions to Roth IRAs (e.g., the annual contribution
limit and the income phase-out of the contribution dollar
limit). The provision also permits such an individual to
contribute the gratuity and SGLI payments that the individual
receives to one or more Coverdell education savings accounts,
notwithstanding the $2,000 annual contribution limit and the
income phase-out of the limit that would otherwise apply. The
maximum amount that can be contributed to a Roth IRA or one or
more Coverdell education savings accounts in the aggregate
under the provision is limited to the sum of the gratuity and
SGLI payments that the individual receives.
The contribution of a military death gratuity or SGLI
payment to a Roth IRA is treated as a qualified rollover
contribution to the Roth IRA. Similarly, the contribution of a
military death gratuity or SGLI payment to a Coverdell
education savings account is treated as a permissible rollover
to such an account. The contribution of a military death
gratuity or SGLI payment to a Roth IRA or Coverdell education
savings account cannot be made later than one year after the
date on which the gratuity or SGLI payment is received by the
individual.
In the event of a subsequent distribution from a Roth IRA
that is not a qualified distribution or a distribution from a
Coverdell education savings account that is not a qualified
education distribution, the amount of the distribution
attributable to the contribution of the military death gratuity
or SGLI payment is treated as nontaxable investment in the
contract.

Effective Date

The provision is generally effective with respect to
payments made on account of deaths from injuries occurring on
or after the date of enactment (June 17, 2008). In addition,
the provision permits the contribution to a Roth IRA or a
Coverdell education savings account of a military death
gratuity or SGLI payment received by an individual with respect
to a death from injury occurring on or after October 7, 2001,
and before the date of enactment of the provision (June 17,
2008) if the individual makes the contribution to the account
no later than one year after the date of enactment of the
provision (June 17, 2009).

J. Suspension of Five-year Period for the Exclusion of Gain on Sale of
a Principal Residence by Certain Peace Corps Volunteers (sec. 110 of
the Act and sec. 121(d) of the Code)

Present Law

In general

Uniformed services and Foreign Service

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.

Intelligence community

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. The five-year
period may not be extended more than 10 years.
The provision relating to employees of the intelligence
community is effective for sales and exchanges before January
1, 2011.

Reasons for Change

For purposes of determining the excludability of gain on
the sale of a principal residence, the Congress believes it is
appropriate to treat Peace Corps volunteers in a manner similar
to members of the uniformed services, the Foreign Service, and
the intelligence community. Specifically, the Congress
recognizes that Peace Corps volunteers face the same
requirements to serve abroad, and thus should receive treatment
similar to that provided members of the uniformed services, the
Foreign Service and the intelligence community with respect to
determining whether the necessary residency tests have been met
to qualify for exclusion of gain.

Explanation of Provision

The provision creates a new rule for Peace Corps volunteers
similar to the rules applicable to the uniformed services and
Foreign Service and the intelligence community. Under this new
rule, 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 volunteer service in the Peace Corps.
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 serving as a Peace Corps volunteer.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

K. Employer Wage Credit for Activated Military Reservists (sec. 111 of
the Act and new sec. 45P of the Code)

Present Law

In general, compensation paid by an employer to an employee
is deductible by the employer under section 162(a)(1), unless
the expense must be capitalized. In the case of an employee who
is called to active duty with respect to the armed forces of
the United States, some employers voluntarily pay the employee
the difference between the compensation that the employer would
have paid to the employee during the period of military service
less the amount of pay received by the employee from the
military. This payment of the difference is often referred to
as ``differential pay.''

Explanation of Provision

If a taxpayer qualifies as an eligible small business
employer, the provision allows the taxpayer to take a credit
against the taxpayer's income tax liability for a taxable year
in an amount equal to 20 percent of the sum of the eligible
differential wage payments for each of the taxpayer's qualified
employees for the taxable year.
A qualified employee of a taxpayer is a person who has been
an employee for the 91-day period immediately preceding the
period for which any differential wage payment is made.
Differential wage payments means any payment which: (1) is made
by an employer to an individual with respect to any period
during which the individual is performing service in the
uniformed services of the United States while on active duty
for a period of more than 30 days; and (2) represents all or a
portion of the wages that the individual would have received
from the employer if the individual were performing services
for the employer. The term eligible differential wage payments
means so much of the differential wage payments paid to a
qualified employee does not exceed $20,000.
An eligible small business employer means, with respect to
a taxable year, any taxpayer which: (1) employed on average
less than 50 employees on business days during the taxable
year; and (2) under a written plan of the taxpayer, provides
eligible differential wage payments to every qualified employee
of the taxpayer. Taxpayers under common control are aggregated
for purposes of determining whether a taxpayer is an eligible
small business employer. The credit is not available with
respect to a taxpayer who has failed to comply with the
employment and reemployment rights of members of the uniformed
services (as provided under Chapter 43 of Title 38 of the
United States Code).
Under the provision, no deduction may be taken for that
portion of compensation which is equal to the credit. In
addition, the amount of any other credit otherwise allowable
under Chapter 1 (Normal Taxes and Surtaxes) of Subtitle A
(Income Taxes) of the Code with respect to compensation paid to
an employee must be reduced by the differential wage payment
credit allowed with respect to such employee.
Under the provision, the differential wage payment credit
is part of the general business credit, and thus this credit is
subject to the rules applicable to business credits. For
example, an unused credit generally may be carried back to the
taxable year that precedes an unused credit year or carried
forward to each of the 20 taxable years following the unused
credit year. The credit is not allowable against a taxpayer's
alternative minimum tax liability.

Effective Date

The provision is effective with respect to amounts paid
after the date of enactment (June 17, 2008) and before January
1, 2010.

L. Exclusion of Certain State Payments to Military Personnel (sec. 112
of the Act and sec. 134 of the Code)

Present Law

Subject to certain limitations, military compensation
earned by members of the Armed Forces while serving in a combat
zone is excludable from gross income.\211\ Military personnel
may also exclude, for up to two years following service in a
combat zone, compensation earned while hospitalized from
wounds, disease, or injuries incurred while serving in the
zone. In addition, certain qualified military benefits,
including certain death gratuities and other payments, are
excludable from gross income.\212\ Finally, the IRS has ruled
that certain bonuses paid by States to military personnel are
gifts that are not includible in gross income.\213\
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\211\ Sec. 112.
\212\ Sec. 134.
\213\ Rev. Rul. 68-158, 1968-1 C.B. 47; Chief Counsel Advice
200708003 (Feb. 23, 2007).
---------------------------------------------------------------------------

Explanation of Provision

The Act provides that gross income does not include State
or local payments of bonuses to active or former military
personnel or their dependents by reason of such personnel's
service in a combat zone.

Effective Date

The provision is effective for payments made before, on, or
after the date of enactment (June 17, 2008).

M. Exclusion of Gain on Sale of a Principal Residence by Certain
Employees of the Intelligence Community (sec. 113 of the Act and sec.
121 of the Code)

Present Law

In general

Uniformed services and Foreign Service

Intelligence community

Explanation of Provision

The provision permanently extends the provision relating to
employees of the intelligence community.
The provision repeals the requirement that members of the
intelligence community must move to a duty station outside of
the United States to qualify for the exclusion.

Effective Date

The provision is effective for sales and exchanges after
the date of enactment (June 17, 2008).

N. Disposition of Unused Health Benefits in Flexible Spending
Arrangements (sec. 114 of the Act and sec. 125 of the Code)

Present Law

A flexible spending arrangement (``FSA'') is a
reimbursement account or other arrangement under which an
employee is reimbursed for medical expenses or other nontaxable
employer-provided benefits, such as dependent care. Typically,
FSAs are part of a cafeteria plan and may be funded through
salary reduction. FSAs may also be provided by an employer
outside of a cafeteria plan. FSAs are commonly used, for
example, to reimburse employees for medical expenses not
covered by insurance (referred to as a ``health FSA'').
There is no special exclusion for benefits provided under
an FSA. Thus, benefits provided under an FSA are excludable
from income only if there is a specific exclusion for the
benefits in the Code (e.g., the exclusion for employer-provided
health care (other than long-term care) or dependant care
assistance coverage). If certain requirements are satisfied,
contributions to a health FSA and all distributions to pay
medical expenses are excludable from income and from wages for
FICA tax purposes.
FSAs that are part of a cafeteria plan must comply with the
rules applicable to cafeteria plans generally. One of these
rules is that a cafeteria plan may not offer deferred
compensation except through a qualified cash or deferred
arrangement.\214\ Under proposed Treasury regulations, a
cafeteria plan is considered to permit the deferral of
compensation if it includes a health FSA which reimburses
participants for medical expenses incurred beyond the end of
the plan year.\215\ Thus, amounts in an employee's account that
are not used for medical expenses incurred before the end of a
plan year must be forfeited. This rule is often referred to as
the ``use it or lose it'' rule. In 2005, the IRS issued
guidance allowing a grace period immediately following the end
of a plan year during which unused benefits or contributions
remaining at the end of the plan year may be paid or reimbursed
to plan participants for qualified benefit expenses incurred
during a grace period.\216\ A plan may allow benefits not used
during the plan year to be used to reimburse qualified expenses
incurred during the period, not to exceed two and one-half
months, immediately following the end of the plan year.
Additionally, if health FSAs provide any benefit other than
medical reimbursements, all payments by the plan become
taxable.
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\214\ Sec. 125(d).
\215\ Prop. Treas. Reg. 1.125-5(c).
\216\ Notice 2005-42, 2005-1 C.B. 1204; see also Prop. Treas. Reg.
1.125-1(e).
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Proposed Treasury regulations contain additional
requirements with which health FSAs must comply in order for
the coverage and benefits provided under the FSA to be
excludable from income.\217\ These rules apply with respect to
a health FSA without regard to whether the health FSA is
provided through a cafeteria plan (i.e., without regard to
whether an employee has an election to take cash or benefits).
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\217\ Prop. Treas. Reg. 1.125-5.
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Explanation of Provision

Under the provision, a plan does not fail to be treated as
a cafeteria plan or health FSA merely because the plan provides
for qualified reservist distributions. A qualified reservist
distribution means a distribution to a participant in a health
FSA of all or a portion of the participant's FSA balance if (1)
the participant is a reservist called to active duty for a
period of at least 180 days (or is called for an indefinite
period) and (2) the distribution is made during the period
beginning with the call to active duty and ending on the date
that reimbursements would otherwise be made under the FSA for
the plan year.

Effective Date

The provision is effective for distributions made after
date of enactment (June 17, 2008).

O. Clarification Related to the Exclusion of Certain Benefits Provided
to Volunteer Firefighters and Emergency Medical Responders (sec. 115 of
the Act and secs. 3121, 3306, and 3401 of the Code)

Present Law

Deduction for certain State or local taxes

Charitable deduction for certain expenses

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), to a Federal,
State, or local governmental entity, or to certain other
organizations.\218\ 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. Within certain limitations, donors also are entitled
to deduct their contributions to section 501(c)(3)
organizations for Federal estate and gift tax purposes.
---------------------------------------------------------------------------
\218\ Sec. 170(a), (c), and (e).
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Certain tax reductions or tax rebates provided by a State or local
government

In general
Present law provides an exclusion from gross income to
members of qualified volunteer emergency response organizations
for: (1) any qualified State or local tax benefit; and (2) any
qualified reimbursement payment. A qualified State or local tax
benefit is any reduction or rebate of certain taxes provided by
State or local governments on account of services performed by
individuals as members of a qualified volunteer emergency
response organization. These taxes are limited to State or
local income taxes, State or local real property taxes, and
State or local personal property taxes. A qualified
reimbursement payment is a payment provided by a State or
political subdivision thereof on account of reimbursement for
expenses incurred in connection with the performance of
services as a member of a qualified volunteer emergency
response organization. The amount of such qualified
reimbursement payments is limited to $30 for each month during
which the taxpayer performs such services.
A qualified volunteer emergency response organization is
any volunteer organization: (1) which is organized and operated
to provide firefighting or emergency medical services for
persons in the State or its political subdivision; and (2)
which is required (by written agreement) by the State or
political subdivision to furnish firefighting or emergency
medical services in such State or political subdivision.
Denial of double benefits
Present law provides that the amount of State or local
taxes taken into account in determining the deduction for taxes
is reduced by the amount of any qualified State or local tax
benefit.
Also, present law provides that expenses paid or incurred
by the taxpayer in connection with the performance of services
as a member of a qualified volunteer emergency response
organization is taken into account for purposes of the
charitable deduction only to the extent such expenses exceed
the amount of any qualified reimbursement payment excluded from
income under the Act.
Sunset
The rules related to certain tax reductions or tax rebates
provided by a State or local government provided to volunteer
firefighters and emergency medical responders do not apply to
taxable years beginning after December 31, 2010.

Explanation of Provision

The provision clarifies that any qualified State or local
tax benefit and any qualified reimbursement payment excluded
from gross income is not subject to social security tax or
unemployment tax.

Effective Date

The provision is effective as if included in section 5 of
the Mortgage Forgiveness Debt Relief Act of 2007 (Pub. L. 110-
142).

TITLE III--REVENUE PROVISIONS

A. Revision of Tax Rules on Expatriation of Individuals (sec. 301 of
the Act and new secs. 877A and 2801 of the Code)

Present Law

In general
Income tax
U.S. citizens and residents generally are subject to U.S.
income taxation on their worldwide income. The U.S. tax may be
reduced or offset by a credit allowed for foreign income taxes
paid with respect to foreign source income. Nonresident aliens
are taxed at a flat rate of 30 percent (or a lower treaty rate)
on certain types of passive income derived from U.S. sources,
and at regular graduated rates on net profits derived from a
U.S. trade or business.
Certain special rules (sections 671-679) apply to certain
trust interests deemed to be owned by the grantor or other
person (a ``grantor trust''). In that case, the deemed owner
must include in income the items of income and deduction (and
credits against tax) of the portion of such trust deemed to be
owned by such person.
Except to the extent a trust is a grantor trust, a transfer
of property by a U.S. person to a foreign estate or trust is
treated (under section 684) by the transferor as if the
property had been sold to such estate or trust. The same rule
applies if a domestic trust becomes a foreign trust.
Estate tax
The estates of U.S. citizens and residents are subject to
estate tax on all property, wherever located. The estates of
nonresident aliens generally are subject to estate tax on U.S.-
situated property (e.g., real estate and tangible property
located within the United States and stock in a U.S.
corporation).
Gift tax
U.S. citizens and residents generally are subject to gift
tax on transfers by gift of any property, wherever situated.
Nonresident aliens generally are subject to gift tax on
transfers by gift of U.S.-situated property (e.g., real estate
and tangible property located within the United States), but
excluding intangibles, such as stock, regardless of where they
are located.
Income tax rules with respect to expatriates
For the 10 taxable years after an individual relinquishes
his or her U.S. citizenship or terminates his or her U.S. long-
term residency, unless certain conditions are met, the
individual is subject to an alternative method of income
taxation than that generally applicable to nonresident aliens
(the ``alternative tax regime''). Generally, the individual is
subject to income tax for the 10-year period at the rates
applicable to U.S. citizens, but only on U.S.-source
income.\219\
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\219\ For this purpose, however, U.S.-source income has a broader
scope than it does typically in the Code.
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A ``long-term resident'' is a noncitizen who is a lawful
permanent resident of the United States for at least eight
taxable years during the period of 15 taxable years ending with
the taxable year during which the individual either ceases to
be a lawful permanent resident of the United States or
commences to be treated as a resident of a foreign country
under a tax treaty between such foreign country and the United
States (and does not waive such benefits).
A former citizen or former long-term resident is subject to
the alternative tax regime for a 10-year period following
citizenship relinquishment or residency termination, unless the
former citizen or former long-term resident: (1) establishes
that his or her average annual net income tax liability for the
five preceding years does not exceed $124,000 (adjusted for
inflation after 2004) and his or her net worth is less than $2
million, or alternatively satisfies limited, objective
exceptions for certain dual citizens and minors who have had no
substantial contacts with the United States; and (2) certifies
under penalties of perjury that he or she has complied with all
U.S. Federal tax obligations for the preceding five years and
provides such evidence of compliance as the Secretary may
require.
Anti-abuse rules are provided to prevent the circumvention
of the alternative tax regime.
Estate tax rules with respect to expatriates
Special estate tax rules apply to individuals who die
during a taxable year in which they are subject to the
alternative tax regime. Under these special rules, certain
closely-held foreign stock owned by the former citizen or
former long-term resident is includible in his or her gross
estate to the extent that the foreign corporation owns U.S.-
situated assets. The special rules apply if, at the time of
death, the former citizen or former long-term resident: (1)
owns, directly or indirectly, 10 percent or more of the total
combined voting power of all classes of stock of the foreign
corporation entitled to vote; and (2) is considered to own,
directly or indirectly, more than 50 percent of (a) the total
combined voting power of all classes of stock of the foreign
corporation entitled to vote, or (b) the total value of the
stock of such corporation. If this stock ownership test is met,
then the gross estate of the former citizen or former long-term
resident includes that proportion of the fair market value of
the foreign stock owned by the individual at the time of death,
which the fair market value of any assets owned by such foreign
corporation and situated in the United States (at the time of
death) bears to the total fair market value of all assets owned
by such foreign corporation (at the time of death).
Gift tax rules with respect to expatriates
Special gift tax rules apply to individuals who make gifts
during a taxable year in which they are subject to the
alternative tax regime. The individual is subject to gift tax
on gifts of U.S.-situated intangibles made during the 10 years
following citizenship relinquishment or residency termination.
In addition, gifts of stock of certain closely-held foreign
corporations by a former citizen or former long-term resident
are subject to gift tax, if the gift is made during the time
that such person is subject to the alternative tax regime. The
operative rules with respect to these gifts of closely-held
foreign stock are the same as described above relating to the
estate tax, except that the relevant testing and valuation date
is the date of gift rather than the date of death.
Termination of U.S. citizenship or long-term resident status for U.S.
Federal income tax purposes
An individual continues to be treated as a U.S. citizen or
long-term resident for U.S. Federal tax purposes, including for
purposes of section 7701(b)(10), until the individual: (1)
gives notice of an expatriating act or termination of residency
(with the requisite intent to relinquish citizenship or
terminate residency) to the Secretary of State or the Secretary
of Homeland Security, respectively; and (2) provides a
statement to the Secretary of the Treasury in accordance with
section 6039G.
Sanction for individuals subject to the individual tax regime who
return to the United States for extended periods
The alternative tax regime does not apply to any individual
for any taxable year during the 10-year period following
citizenship relinquishment or residency termination if such
individual is present in the United States for more than 30
days in the calendar year ending in such taxable year. Such
individual is treated as a U.S. citizen or resident for such
taxable year and, therefore, is taxed on his or her worldwide
income.
Similarly, if an individual subject to the alternative tax
regime is present in the United States for more than 30 days in
any calendar year ending during the 10-year period following
citizenship relinquishment or residency termination, and the
individual dies during that year, he or she is treated as a
U.S. resident, and the individual's worldwide estate is subject
to U.S. estate tax. Likewise, if an individual subject to the
alternative tax regime is present in the United States for more
than 30 days in any year during the 10-year period following
citizenship relinquishment or residency termination, the
individual is subject to U.S. gift tax on any transfer of his
or her worldwide assets by gift during that taxable year.
For purposes of these rules, an individual is treated as
present in the United States on any day if such individual is
physically present in the United States at any time during that
day. The present-law exceptions to the U.S. presence rules for
residency purposes \220\ generally do not apply. However, for
individuals with certain ties to countries other than the
United States \221\ and individuals with minimal prior physical
presence in the United States,\222\ a day of physical presence
in the United States is disregarded if the individual is
performing services in the United States on such day for an
unrelated employer (within the meaning of sections 267 and
707(b)), that meets such requirements as the Secretary may
prescribe in regulations. No more than 30 days may be
disregarded during any calendar year under this rule.
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\220\ Secs. 7701(b)(3)(D), 7701(b)(5), and 7701(b)(7)(B)-(D).
\221\ An individual has such a relationship to a foreign country if
(1) the individual becomes a citizen or resident of the country in
which the individual was born, such individual's spouse was born, or
either of the individual's parents was born, and (2) the individual
becomes fully liable for income tax in such country.
\222\ An individual has a minimal prior physical presence in the
United States if the individual was physically present for no more than
30 days during each year in the ten-year period ending on the date of
loss of United States citizenship or termination of residency. However,
for purposes of this test, an individual is not treated as being
present in the United States on a day if the individual remained in the
United States because of a medical condition that arose while the
individual was in the United States. Sec. 7701(b)(3)(D)(ii).
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Annual return
Former citizens and former long-term residents are required
to file an annual return for each year in which they are
subject to the alternative tax regime. The annual return is
required even if no U.S. Federal income tax is due. The annual
return requires certain information, including information on
the permanent home of the individual, the individual's country
of residence, the number of days the individual was present in
the United States for the year, and detailed information about
the individual's income and assets that are subject to the
alternative tax regime. This requirement includes information
relating to foreign stock potentially subject to the special
estate and gift tax rules.
If the individual fails to file the statement in a timely
manner or fails correctly to include all the required
information, the individual is required to pay a penalty of
$10,000. The $10,000 penalty does not apply if it is shown that
the failure is due to reasonable cause and not to willful
neglect.

Reasons for Change \223\

The Congress is aware that some individuals each year
relinquish their U.S. citizenship or terminate their U.S.
residency for the purpose of avoiding U.S. income, estate, and
gift taxes. By so doing, such individuals reduce their annual
U.S. income tax liability and reduce or eliminate their U.S.
estate and gift tax liability.
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\223\ See. S. 349, the Small Business and Work Opportunity Act of
2007, which was reported by the Senate Committee on Finance on January
22, 2007 (S. Rep. No. 110-1).
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The Congress recognizes that citizens and residents of the
United States have a right not only physically to leave the
United States to live elsewhere, but also to relinquish their
citizenship or terminate their residency. The Congress does not
believe that the Internal Revenue Code should be used to stop
U.S. citizens and residents from relinquishing citizenship or
terminating residency; however, the Congress also does not
believe that the Code should provide a tax incentive for doing
so. In other words, to the extent possible, an individual's
decision to relinquish citizenship or terminate residency
should be tax-neutral.
The Congress recognizes that the American Jobs Creation Act
of 2004 altered prior law regarding expatriation in a number of
respects, including the replacement of the subjective
``principal purpose of tax avoidance test'' with objective
rules. Notwithstanding these changes, the Congress remains
concerned that the present-law expatriation tax rules (as
modified in 2004) are difficult to administer and could be made
more effective. In addition, the Congress is concerned that the
alternative method of taxation under section 877 can be avoided
by postponing the realization of U.S.-source income for 10
years.
Consequently, the Congress believes that the present-law
expatriation tax rules should be replaced with a new tax regime
applicable to former citizens and residents. Because U.S.
citizens and residents who retain their citizenship or
residency generally are subject to income tax on accrued
appreciation when they dispose of their assets, as well as
estate tax on the full value of assets that are held until
death, the Congress believes it fair to tax individuals on the
appreciation in their assets when they relinquish their
citizenship or terminate their residency. The Congress believes
that an exception from such a tax should be provided for
individuals with a relatively modest amount of appreciated
assets. The Congress also believes that, where U.S. estate or
gift taxes are avoided with respect to a transfer of property
to a U.S. person by reason of the expatriation of the donor, it
is appropriate for the recipient to be subject to an income tax
based on the value of the property.
The Congress also believes that the present-law immigration
rules applicable to former citizens are ineffective. The
Congress believes that the rules should be modified to
eliminate the requirement of proof of a tax avoidance purpose,
and to coordinate the application of those rules with the tax
rules provided under the new regime.

Explanation of Provision

In general

In general, the provision imposes tax on certain U.S.
citizens who relinquish their U.S. citizenship and certain
long-term U.S. residents who terminate their U.S. residency.
Such individuals are subject to income tax on the net
unrealized gain in their property as if the property had been
sold for its fair market value on the day before the
expatriation or residency termination (``mark-to-market tax'').
Gain from the deemed sale is taken into account at that time
without regard to other Code provisions. Any loss from the
deemed sale generally is taken into account to the extent
otherwise provided in the Code, except that the wash sale rules
of section 1091 do not apply. Any net gain on the deemed sale
is recognized to the extent it exceeds $600,000. The $600,000
amount is increased by a cost of living adjustment factor for
calendar years after 2008. Any gains or losses subsequently
realized are to be adjusted for gains and losses taken into
account under the deemed sale rules, without regard to the
$600,000 exemption.
The mark-to-market tax described above applies to most
types of property interests held by the individual on the date
of relinquishment of citizenship or termination of residency,
with certain exceptions. Deferred compensation items, interests
in nongrantor trusts, and specified tax deferred accounts are
excepted from the mark-to-market tax but are subject to the
special rules described below.
In addition, the provision imposes a transfer tax on
certain transfers to U.S. persons from certain U.S. citizens
who relinquished their U.S. citizenship and certain long-term
U.S. residents who terminated their U.S. residency, or from
their estates.

Individuals covered

The provision applies to any U.S. citizen who relinquishes
citizenship and any long-term resident who terminates U.S.
residency, if such individual (``covered expatriate'') (1) has
an average annual net income tax liability for the five
preceding years ending before the date of the loss of U.S.
citizenship or residency termination that exceeds $124,000 (as
adjusted for inflation after 2004--$139,000 in 2008); \224\ (2)
has a net worth of $2 million or more on such date; or (3)
fails to certify under penalties of perjury that he or she has
complied with all U.S. Federal tax obligations for the
preceding five years or fails to submit such evidence of
compliance as the Secretary may require.
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\224\ Rev. Proc. 2007-66, sec. 3.29, 2007-45 I.R.B. 970.
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Exceptions to an individual's classification as a covered
expatriate due to (1) or (2) above (but not (3)) are provided
in two situations. The first exception applies to an individual
who was born with citizenship both in the United States and in
another country; provided that (1) as of the expatriation date
the individual continues to be a citizen of, and is taxed as a
resident of, such other country, and (2) the individual has
been a resident of the United States (under the substantial
presence test of section 7701(b)(1)(A)(ii)) for not more than
10 taxable years during the 15-year taxable year period ending
with the taxable year of expatriation. The second exception
applies to a U.S. citizen who relinquishes U.S. citizenship
before reaching age 18\1/2\, provided that the individual was a
resident of the United States (under the substantial presence
test of section 7701(b)(1)(A)(ii)) for no more than 10 taxable
years before such relinquishment.
The definition of ``long-term resident'' under the
provision is generally the same as that under present law. As
under present law, an individual is considered to terminate
long-term U.S. residency when the individual ceases to be a
lawful permanent resident of the United States (i.e., loses his
or her green card status through revocation or has been
administratively or judicially determined to have abandoned
such status). Under the provision, however, an individual
ceases to be treated as a lawful permanent resident of the
United States for all tax purposes if such individual commences
to be treated as a resident of a foreign country under a tax
treaty between the United States and such foreign country, does
not waive the benefits of the treaty applicable to residents of
such foreign country, and notifies the Secretary of the
commencement of such treatment.
The provision provides that, for all tax purposes, a U.S.
citizen continues to be treated as a U.S. citizen for tax
purposes until that individual's citizenship is treated as
relinquished under the following rules. An individual is
treated as having relinquished U.S. citizenship on the earliest
of four possible dates: (1) the date that the individual
renounces U.S. nationality before a diplomatic or consular
officer of the United States (provided that the voluntary
relinquishment is later confirmed by the issuance of a
certificate of loss of nationality); (2) the date that the
individual furnishes to the State Department a signed statement
of voluntary relinquishment of U.S. nationality confirming the
performance of an expatriating act (again, provided that the
voluntary relinquishment is later confirmed by the issuance of
a certificate of loss of nationality); (3) the date that the
State Department issues a certificate of loss of nationality;
or (4) the date that a U.S. court cancels a naturalized
citizen's certificate of naturalization. Notwithstanding the
two immediately preceding sentences, relinquishment may occur
earlier under Treasury regulations with respect to an
individual who became at birth a citizen of the United States
and of another country.
In the case of a long-term resident, the date that long-
term residency is terminated is the ``expatriation date.'' In
the case of a citizen, the date that the individual
relinquishes citizenship is the ``expatriation date.''
The foregoing rules replace the present-law rules that
provide that an individual continues to be treated as a U.S.
citizen or long-term resident for U.S. Federal tax purposes
until the individual gives notice of an expatriating act or
termination of residency.
If an individual who is a covered expatriate becomes
subject to tax as a citizen or resident of the United States
for any period beginning after the expatriation date, the
individual is not treated as a covered expatriate during that
period for purposes of applying the withholding rules relating
to deferred compensation items, the rules relating to interests
in nongrantor trusts, and the rules relating to gifts and
bequests from covered expatriates. If the individual again
relinquishes citizenship or terminates long-term residency
(after meeting anew the requirements to become a long-term
resident), the mark-to-market tax and other provisions are re-
triggered with the new expatriation date.

Deferral of payment of mark-to-market tax

Under the provision, an individual may elect to defer
payment of the mark-to-market tax imposed on the deemed sale of
property. Interest is charged for the period the tax is
deferred at the rate normally applicable to individual
underpayments. The election is irrevocable and is made on a
property-by-property basis. Under the election, the deferred
tax attributable to a particular property is due when the
return is due for the taxable year in which the property is
disposed (or, if the property is disposed of in a transaction
in which gain is not recognized in whole or in part, at such
other time as the Secretary may prescribe). The deferred tax
attributable to a particular property is an amount which bears
the same ratio to the total mark-to-market tax as the gain
taken into account with respect to such property bears to the
total gain taken into account for the mark-to-market tax. The
deferral of the mark-to-market tax may not be extended beyond
the due date of the return for the taxable year which includes
the individual's death.
In order to elect deferral of the mark-to-market tax, the
individual is required to furnish a bond to the Secretary. The
bond must be conditioned upon payment of the amount of tax due,
plus interest thereon, and must be in accordance with such
requirements relating to terms, conditions, form of the bond,
and sureties, as may be specified by regulations. The bond must
be accepted by the Secretary. Other security mechanisms,
including letters of credit, are permitted provided that they
meet such requirements as the Secretary may prescribe. In the
event that the security provided with respect to a particular
property subsequently fails to meet the requirements of these
rules and the individual fails to correct such failure, the
deferred tax and the interest with respect to such property
will become due. As a further condition to making the election,
the individual is required to consent to the waiver of any
treaty rights that would preclude the assessment or collection
of the tax.

Deferred compensation items

The provision contains special rules for interests in
deferred compensation items. For purposes of the provision, a
``deferred compensation item'' means any interest in a plan or
arrangement described in section 219(g)(5), any interest in a
foreign pension plan or similar retirement arrangement or
program, any item of deferred compensation, and any property,
or right to property, which the individual is entitled to
receive in connection with the performance of services to the
extent not previously taken into account under section 83 or in
accordance with section 83.
The plans and arrangements described in section 219(g)(5)
are (i) a plan described in section 401(a), which includes a
trust exempt from tax under section 501(a); (ii) an annuity
plan described in section 403(a); (iii) a plan established for
its employees by the United States, by a State or political
subdivision thereof, or by an agency or instrumentality of any
of the foregoing, but excluding an eligible deferred
compensation plan (within the meaning of section 457(b)); (iv)
an annuity contract described in section 403(b); (v) a
simplified employee pension (within the meaning of section
408(k)); (vi) a simplified retirement account (within the
meaning of section 408(p)); and (vii) a trust described in
section 501(c)(18).
If a deferred compensation item is an eligible deferred
compensation item, the payor must deduct and withhold from a
``taxable payment'' to the covered expatriate a tax equal to 30
percent of such taxable payment. This withholding requirement
is in lieu of any withholding requirement under present law. A
taxable payment is subject to withholding to the extent it
would be included in gross income of the covered expatriate if
such person were subject to tax as a citizen or resident of the
United States. A deferred compensation item is taken into
account as a payment when such item would be so includible. A
deferred compensation item that is subject to the 30 percent
withholding requirement is subject to tax under section 871.
If a deferred compensation item is not an eligible deferred
compensation item (and is not subject to section 83), an amount
equal to the present value of the covered expatriate's deferred
compensation item is treated as having been received on the day
before the expatriation date. In the case of a deferred
compensation item that is subject to section 83, the item is
treated as becoming transferable and no longer subject to a
substantial risk of forfeiture on the day before the
expatriation date. Appropriate adjustments shall be made to
subsequent distributions to take into account the foregoing
treatment. In addition, these deemed distributions are not
subject to early distribution tax. For this purpose, ``early
distribution tax'' means any increase in tax imposed under
section 72(t), 220(e)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6),
or 530(d)(4).
An ``eligible deferred compensation item'' means any
deferred compensation item with respect to which (i) the payor
is either a U.S. person or a non-U.S. person who elects to be
treated as a U.S. person for purposes of withholding and who
meet the requirements prescribed by the Secretary to ensure
compliance with the withholding requirements, and (ii) the
covered expatriate notifies the payor of his status as a
covered expatriate and irrevocably waives any claim of
withholding reduction under any treaty with the United States.
The foregoing taxing rules regarding eligible deferred
compensation items and items that are not eligible deferred
compensation items do not apply to deferred compensation items
to the extent attributable to services performed outside the
United States while the covered expatriate was not a citizen or
resident of the United States.

Specified tax deferred accounts

There are special rules for interests in specified tax
deferred accounts. If a covered expatriate holds any interest
in a specified tax deferred account on the day before the
expatriation date, such covered expatriate is treated as
receiving a distribution of his entire interest in such account
on the day before the expatriation date. Appropriate
adjustments are made for subsequent distributions to take into
account this treatment. As with deferred compensation items,
these deemed distributions are not subject to early
distribution tax.
The term ``specified tax deferred account'' means an
individual retirement plan (as defined in section 7701(a)(37)),
a qualified tuition plan (as defined in section 529), a
Coverdell education savings account (as defined in section
530), a health savings account (as defined in section 223), and
an Archer MSA (as defined in section 220). However, simplified
employee pensions (within the meaning of section 408(k)) and
simplified retirement accounts (within the meaning of section
408(p)) of a covered expatriate are treated as deferred
compensation items and not as specified tax deferred accounts.

Interests in trusts

Grantor trusts
In the case of the portion of any trust for which the
covered expatriate is treated as the owner under the grantor
trust provisions of the Code, as determined immediately before
the expatriation date, the assets held by that portion of the
trust are subject to the mark-to-market tax.
If a trust that is a grantor trust immediately before the
expatriation date subsequently becomes a nongrantor trust, such
trust remains a grantor trust for purposes of the provision.
Nongrantor trusts
Special rules apply to trusts with respect to which the
covered expatriate is a beneficiary on the day before the
expatriation date. The mark-to-market tax does not apply with
respect to the portion of any such trust not treated (under the
grantor trust provisions of the Code) as owned by a covered
expatriate immediately before the expatriation date. Instead,
in the case of any direct or indirect distribution from such a
portion of a trust (``nongrantor trust'') to a covered
expatriate, the trustee must deduct and withhold from the
distribution an amount equal to 30 percent of the portion of
the distribution which would be includible in the gross income
of the covered expatriate if the covered expatriate continued
to be subject to tax as a citizen or resident of the United
States. Such portion of such distribution (that is subject to
the 30 percent withholding requirement) is subject to tax under
section 871. The covered expatriate is treated as having waived
any right to claim any reduction in withholding under any
treaty with the United States unless the covered expatriate
agrees to such other treatment as the Secretary deems
appropriate.
In addition, if the nongrantor trust distributes
appreciated property to a covered expatriate, the trust must
recognize gain as if the property were sold to the covered
expatriate at its fair market value.
If a trust that is a nongrantor trust immediately before
the expatriation date subsequently becomes a grantor trust of
which a covered expatriate is treated as the owner, directly or
indirectly, such conversion is treated under the provision as a
distribution to such covered expatriate to the extent of the
portion of the trust of which the covered expatriate is treated
as the owner.

Special rules

Notwithstanding any other provision of the Code, any period
for acquiring property which results in the reduction of gain
recognized with respect to property disposed of by the taxpayer
terminates on the day before the expatriation date. This rule
applies to certain incomplete transactions such as deferred
like-kind exchanges and involuntary conversions. In addition,
notwithstanding any other provision of the Code, any extension
of time for payment of tax ceases to apply on the day before
relinquishment of citizenship or termination of residency, and
the unpaid portion of such tax becomes due and payable at the
time and in the manner prescribed by the Secretary.
For purposes of determining the tax imposed under the mark-
to-market tax, property that was held by an individual on the
date that such individual first became a resident of the United
States (within the meaning of section 7701(b)) is treated as
having a basis on such date of not less than the fair market
value of such property on such date. An individual may make an
irrevocable election not to have this rule apply.
In the case of a domestic trust that becomes a foreign
trust due to the expatriation of an individual, the general
income tax rules pertaining to transfers by U.S. persons to
foreign trusts (i.e., section 684) apply before the rules of
the provision.

Regulatory authority

The provision authorizes the Secretary to prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of the income tax rules of the provision.

Treatment of gifts and bequests from a former citizen or former long-
term resident

Under the provision, a special transfer tax applies to
certain ``covered gifts or bequests'' received by a U.S.
citizen or resident. A covered gift or bequest is any property
acquired (i) by gift directly or indirectly from an individual
who is a covered expatriate at the time of such acquisition, or
(ii) directly or indirectly by reason of the death of an
individual who was a covered expatriate immediately before
death. A covered gift or bequest, however, does not include (i)
any property shown as a taxable gift on a timely filed gift tax
return by the covered expatriate, (ii) any property included in
the gross estate of the covered expatriate for estate tax
purposes and shown on a timely filed estate tax return of the
estate of the covered expatriate, and (iii) any property with
respect to which a deduction would be allowed under section
2055, 2056, 2522 or 2523, whichever is appropriate (these
sections allow deductions for transfers for charitable purposes
or to spouses, for purposes of determining estate and gift
taxes).
The tax is calculated as the product of (i) the highest
marginal rate of tax specified in the table applicable to
estate tax (i.e., section 2001(c)) or, if greater, the highest
marginal rate of tax specified in the table applicable to gift
tax (i.e., section 2502(a)), both as in effect on the date of
receipt of the covered gift or bequest; and (ii) the value of
the covered gift or bequest.
The tax is imposed upon the recipient of the covered gift
or bequest and is imposed on a calendar-year basis. The tax
applies to a recipient of a covered gift or bequest only to the
extent that the total value of covered gifts and bequests
received by such recipient during a calendar year exceeds the
amount in effect under section 2503(b) for that calendar year
($12,000 for 2008).\225\ The tax on covered gifts and bequests
is reduced by the amount of any gift or estate tax paid to a
foreign country with respect to such covered gift or bequest.
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\225\ Rev. Proc. 2007-66, sec. 3.32(1), 2007-45 I.R.B. 970.
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Special rules apply to the tax on covered gifts or bequests
made to domestic or foreign trusts. In the case of a covered
gift or bequest made to a domestic trust, the tax applies as if
the trust is a U.S. citizen, and the trust is required to pay
the tax. In the case of a covered gift or bequest made to a
foreign trust, the tax applies to any distribution from such
trust (whether from income or corpus) attributable to such
covered gift or bequest to a recipient that is a U.S. citizen
or resident, in the same manner as if such distribution were a
covered gift or bequest. Such a recipient is entitled to deduct
the amount of such tax for income tax purposes to the extent
such tax is imposed on the portion of such distribution that is
included in the gross income of the recipient. For purposes of
these rules, a foreign trust may elect to be treated as a
domestic trust. The election may not be revoked without the
Secretary's consent.

Coordination with present-law alternative tax regime

Under the provision, the present-law expatriation income
tax rules under section 877 do not apply with respect to a
covered expatriate whose expatriation or residency termination
occurs on or after the date of enactment.

Information reporting

Certain information reporting requirements under the law
presently applicable to former citizens and former long-term
residents (sec. 6039G) also apply for purposes of the
provision.

Effective Date

The provision generally is effective for U.S. citizens who
relinquish citizenship or long-term residents who terminate
their residency on or after the date of enactment (June 17,
2008). The portion of the provision relating to covered gifts
and bequests is effective for gifts and bequests received on or
after the date of enactment (June 17, 2008) from former
citizens or former long-term residents (or the estates of such
persons) whose expatriation date is on or after the date of
enactment (June 17, 2008).

B. Certain Domestically Controlled Foreign Persons Performing Services
Under Contract with United States Government Treated as American
Employers (sec. 302 of the Act and sec. 3121 of the Code)

Present Law

In general

Under the Federal Insurance Contributions Act (``FICA''),
separate taxes are imposed on every employer and employee with
respect to wages paid to such employer's employees.\226\ These
two taxes are commonly referred to as the employer's and the
employee's share of FICA. The employee's share of FICA is
collected by means of payroll withholding by the employee's
employer.
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\226\ Secs. 3101-3128 (FICA). Sections 3501-3510 provide additional
rules..
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For both the employer and the employee's share of FICA, the
tax consists of two parts: (1) old age, survivor, and
disability insurance (``OASDI''), which correlates to the
Social Security program that provides monthly benefits after
retirement, disability, or death; and (2) Medicare hospital
insurance (``HI''). The OASDI tax rate is 6.2 percent on both
the employee and employer (for a total rate of 12.4 percent).
The OASDI tax rate applies to wages up to the OASDI wage base
($102,000 for 2008). The HI tax rate is 1.45 percent on both
the employee and the employer (for a total rate of 2.9
percent). Unlike the OASDI tax, the HI tax is not limited to a
specific amount of wages, but applies to all wages.
For purposes of the employer's and employee's share of
FICA, wages generally means all remuneration for employment
including the cash value of all remuneration paid in a medium
other than cash. However, the general definition of wages is
subject to a number of special rules and exceptions.\227\
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\227\ Sec. 3121(a).
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Employment for FICA purposes generally means any service of
whatever nature performed by an employee for the employer
(irrespective of the citizenship or residence of either) within
the United States. In the case of service outside the United
States, employment also includes service performed by a United
States citizen or resident as an employee for an American
employer. As in the case of the definition of wages, the
definition of employment is also subject to a number of
exceptions and special rules.\228\ An American employer is
defined as an employer which is: (1) the United States or any
instrumentality thereof; (2) an individual who is a resident of
the United States; (3) a partnership, if at least two-thirds of
the partners are United States residents; (4) a trust, if all
of the trustees are United States residents; or (5) a
corporation organized under the laws of the United States or
any of the States.\229\
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\228\ Sec. 3121(b). For example, employment for FICA purposes
includes certain service with respect to American vessels or aircrafts
and also includes service that is designated as employment under an
agreement entered into under section 233 of the Social Security Act.
\229\ Sec. 3121(h).
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Section 3121(l) agreements

An American employer may enter into a voluntary agreement
with the Secretary of the Treasury to extend coverage of the
insurance system of Title II of the Social Security Act to
service performed outside the United States in the case of
certain employees. Specifically, such an agreement may be
entered into with respect to employees of a foreign affiliate
of the American employer who are United States citizens or
residents.\230\ Such an agreement is commonly referred to as a
``section 3121(l) agreement,'' and is entered into by
completing Internal Revenue Service Form 2032. A foreign
affiliate for purposes of the section 3121(l) agreement is any
foreign entity in which the American employer has at least a
10-percent interest.\231\
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\230\ Sec. 3121(l).
\231\ Sec. 3121(l)(6).
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If a section 3121(l) agreement is entered into, the
American employer agrees to pay the Secretary of the Treasury
amounts equivalent to the employer and employee's share of FICA
(including amounts equivalent to interest, additional taxes,
and penalties which would be applicable) with respect to the
remuneration which would be wages if the services covered by
the agreement constituted employment for purposes of FICA. In
addition, the American employer agrees to comply with such
regulations relating to payments and reports as the Secretary
of the Treasury may prescribe.\232\ A section 3121(l) agreement
may not be terminated with respect to a foreign affiliate after
June 15, 1989.\233\
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\232\ Sec. 3121(l)(1).
\233\ Sec. 3121(l)(3).
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In the case of a domestic corporation, a deduction is
allowed for amounts paid or incurred pursuant to a section
3121(l) agreement with respect to services performed by United
States citizens employed by foreign subsidiary
corporations.\234\ Any reimbursement of any amount previously
allowed as a deduction is included in gross income in the year
received.
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\234\ Sec. 176.
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Totalization agreements

Under section 233 of the Social Security Act, the President
of the United States is authorized to enter into agreements
establishing totalization arrangements between the social
security system of the United States and the social security
system of a foreign country (referred to as a ``totalization
agreement'').\235\ The purposes of a totalization agreement are
(1) to establish entitlement to and the amount of old-age,
survivors, disability, or derivative benefits based on a
combination of an individual's periods of coverage under the
United States social security system and the social security
system of a foreign country, and (2) to prevent imposition of
employment taxes by two countries on the same wages.
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\235\ 42 U.S.C. sec. 433.
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For purposes of FICA, during any period in which a
totalization agreement is in effect, wages paid to an
individual are exempt from the employer's and employee's share
of FICA to the extent such wages are subject under the
agreement exclusively to the laws applicable to the foreign
country's social security system.\236\
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\236\ Secs. 3101(c) and 3111(c).
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Explanation of Provision

Under the provision, a foreign person is treated as an
American employer with respect to certain employees for
purposes of determining whether their employment is subject to
the employer's and employee's share of FICA. Specifically, a
foreign person is treated as an American employer with respect
to an employee of the foreign person who is performing services
in connection with a contract between the United States
government (or any instrumentality thereof) and any member of
any domestically controlled group of entities which includes
such foreign person. Thus, under the provision, service
performed as an employee for such an employer outside of the
United States by a United States citizen or resident in
connection with such a contract is employment that is subject
to FICA. A domestically controlled group of entities is a
controlled group of entities the common parent of which is a
domestic corporation. For this purpose, a controlled group of
entities is as defined in section 1563(a)(1) except that the
ownership threshold is 50 percent rather than 80 percent and
certain other changes are made, including that certain
partnerships may be considered members of a controlled group.
The sections 3101(c) and 3111(c) exceptions for wages not
subject to FICA as a result of a totalization agreement apply
under the provision. Also, this provision does not apply to any
services covered by an agreement under section 3121(l). In
addition, the provision does not apply to services if the
employer establishes to the satisfaction of the Secretary that
the remuneration paid by such employer for such services is
subject to a tax imposed by a foreign country which is
substantially equivalent to FICA. It is intended that a tax is
substantially equivalent to FICA only if the tax is imposed on
wages at a rate equivalent to at least 80 percent of the
combined employer and employee rates under FICA (i.e., 15.3
percent).
The provision provides that the common parent of the
domestically controlled group of entities is jointly and
severally liable for the FICA taxes for which the foreign
person is liable as a result of the provision. In addition, the
common parent is liable for any penalty imposed on the foreign
person with respect to any failure to pay the FICA taxes or any
failure to file any return or statement with respect to such
tax or wages subject to such tax. No deduction is allowed for
any liability imposed on the common parent as a result of these
joint and several liability rules.

Effective Date

The provision is effective for services performed in
calendar months beginning more than 30 days after the date of
enactment of the provision.

C. Minimum Failure to File Penalty (sec. 303 of the Act and sec. 6651
of the Code)

Present Law

Under present law, a taxpayer who fails to file a tax
return on a timely basis is subject to a penalty equal to five
percent of the net amount of tax due for each month that the
return is not filed, up to a maximum of five months or 25
percent.\237\ An exception from the penalty applies if the
failure is due to reasonable cause. The net amount of tax due
is the excess of the amount of the tax required to be shown on
the return over the amount of any tax paid on or before the due
date prescribed for the payment of tax.\238\
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\237\ Sec. 6651(a)(1).
\238\ Sec. 6651(b)(1).
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In the case of a failure to file a tax return within 60
days of the due date, present law imposes a minimum penalty
equal to the lesser of $100 or 100 percent of the amount of tax
required to be shown on the return.

Reasons for Change

The minimum penalty for an extended failure to file (i.e.,
a return not filed within 60 days of the due date) has not been
modified since 1982. The Congress believes that inflation has
eroded the deterrent effect of the present law penalty. Thus,
the Congress believes that the minimum penalty for an extended
failure to file should be increased to a level that effectively
discourages noncompliance.

Explanation of Provision

The provision increases the minimum penalty for a failure
to file a tax return within 60 days of the due date to the
lesser of $135 or 100 percent of the amount of tax required to
be shown on the return.

Effective Date

The provision is effective for tax returns required to be
filed after December 31, 2008.

TITLE IV--PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH
BENEFITS

A. Extension of Parity in the Application of Certain Limits to Mental
Health Benefits (sec. 401 of the Act and sec. 9812(f) of the Code)

Present Law

The Code, ERISA, and 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
expired with respect to benefits for services furnished after
December 31, 2007.

Reasons for Change \239\
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\239\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H.R. Rep. No. 110-658).
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The Congress recognizes that the provisions relating to
mental health parity are important to carrying out the purposes
of the Mental Health Parity Act. Thus, the Congress believes
that extending the provisions relating to mental health parity
is warranted.

Explanation of Provision \240\
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\240\ The provision was subsequently extended and modified. See
Part 17, Division C, Title IV, Subtitle B.
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The provision extends the present-law Code excise tax for
failure to comply with the mental health parity requirements
for benefits for services furnished on or after the date of
enactment through December 31, 2008. It also extends the ERISA
and PHSA requirements through December 31, 2008.

Effective Date

The provision is effective upon the date of enactment (June
17, 2008).

PART THIRTEEN: HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (PUBLIC LAW
110-289) \241\
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\241\ H.R. 3221. The House Committee on Ways and Means reported
H.R. 5720 on April 24, 2008 (H.R. Rep. 110-606). The Senate passed H.R.
3221 (a bill unrelated to housing as passed by the House) on April 10,
2008 with an amendment. The House passed H.R. 3221 on May 8, 2008 with
amendments to the Senate amendment. The Senate passed H.R. 3221 on July
11, 2008, with an amendment to the House amendments. The House passed
H.R. 3221 on July 23, 2008 with an amendment to the Senate amendment.
The Senate agreed to the House amendment on July 26, 2008. The
President signed the bill on July 30, 2008. For a technical explanation
of the bill prepared by the staff of the Joint Committee on Taxation,
see Technical Explanation of Division C of H.R. 3221, the ``Housing
Assistance Tax Act of 2008'' as Scheduled For Consideration By the
House of Representatives on July 23, 2008 (JCX-63-08 (July 23, 2008)).
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TITLE I--BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING

Overview

Low-income housing credit
The low-income housing credit may be claimed over a 10-year
period for the cost of building 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 of the credit 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.
Tax-exempt bonds for housing
Private activity bonds are bonds that nominally are issued
by State 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 interest paid on 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, but is not limited to,
qualified mortgage bonds, qualified veterans' mortgage bonds,
and bonds for qualified residential rental projects.
Residential rental property may be financed with qualified
private activity 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.

Reasons for Change

Safe, affordable housing is a major priority to all
individual Americans. The temporary increase in the volume
limit for the low income housing credit is intended to augment
the supply of rental housing for low-income individuals. The
various improvements to the low-income housing credit and tax-
exempt bond rules are designed to create new opportunities for
such housing in situations and geographical areas which have
not previously benefited from the low-income housing credit and
tax-exempt bond financing. In the first comprehensive effort to
improve the technical operation of the credit in over a decade,
the Congress intends to eliminate outdated requirements,
unnecessary restrictions, and needless complexity in the
development and operation of low-income credit projects. The
Congress also believes that a change to the refunding rules for
multi-family housing bonds will allow more efficient
combinations of the credit and tax-exempt bonds in certain
circumstances. The Congress believes that all the modifications
described in this title of the Act are necessary improvements
to the vitally important system of housing tax incentives in
the Code. In the future, the Congress will continue to monitor
the operation of the low-income credit and tax-exempt housing
bonds to ensure that these subsidies for affordable housing
continue to serve low-income individuals efficiently.

A. Low-Income Housing Credit

1. Temporary increase in the low-income housing credit volume limits
(sec. 3001 of the Act and sec. 42 of the Code)

Present Law

In general
The low-income housing credit may be claimed over a 10-year
period by owners of certain residential rental property for the
cost of rental housing occupied by tenants having incomes below
specified levels (sec. 42). 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.
Volume limits
A low-income housing credit is allowable only if the owner
of a qualified building receives a housing credit allocation
from the State or local housing credit agency. Generally, the
aggregate credit authority provided annually to each State for
calendar year 2008 is $2.00 per resident, with a minimum annual
cap of $2,325,000 for certain small population States (Rev.
Proc. 2007-66). These amounts are indexed for inflation.
Projects that also receive financing with proceeds of tax-
exempt bonds issued subject to the private activity bond volume
limit do not require an allocation of the low-income housing
credit.

Explanation of Provision

The provision increases from $2.00 per resident to $2.20
per resident the allocation authority provided annually to each
State for calendar years 2008 and 2009. Also, the provision
increases the minimum annual cap for certain small population
States by ten percent of the otherwise available amounts in
2008 and 2009, respectively. In 2010, the volume limits will
return to the prescribed levels had this provision not been
enacted.

Effective Date

The provision is effective for low-income credit
allocations made for calendar years after 2007.

2. Determination of credit rate (sec. 3002 of the Act and sec. 42 of
the Code)

(a) Modifications to the applicable percentage

Present Law

In general

The low-income housing credit may be claimed over a 10-year
credit period after each low-income building is placed-in-
service. 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.

Present value credit

The calculation of the applicable percentage is designed to
produce a credit equal to: (1) 70 percent of the present value
of the building's qualified basis in the case of newly
constructed or substantially rehabilitated housing that is not
Federally subsidized (the ``70-percent credit''); or (2) 30
percent of the present value of the building's qualified basis
in the case of newly constructed or substantially rehabilitated
housing that is Federally subsidized and existing housing that
is substantially rehabilitated (the ``30-percent credit'').
Where existing housing is substantially rehabilitated, the
existing housing is eligible for the 30-percent credit and the
qualified rehabilitation expenses (if not Federally subsidized)
are eligible for the 70-percent credit.

Calculation of the applicable percentage

The credit percentage for a low-income building is set for
the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the housing credit agency enter into a binding
agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages (used for the 70-percent credit
and 30-percent credit) are adjusted monthly by the IRS on a
discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.

Explanation of Provision

The provision provides a temporary applicable percentage of
9 percent for newly constructed non-Federally subsidized
buildings placed in service after the date of enactment and
before December 31, 2013.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(b) Modification to the definition of a Federally subsidized building

Present Law

If any portion of the eligible basis of a building is
Federally subsidized, then the building is ineligible for the
70-percent credit. A Federal subsidy is defined as: (1) any
obligation the interest of which is tax exempt from tax under
section 103; (2) a direct or indirect Federal loan if the
interest rate is less than the applicable Federal rate; or (3)
assistance provided under the HOME Investments Partnership Act
or the Native American Housing Assistance and Self
Determination Act of 1996 if certain requirements are not met.

Explanation of Provision

The provision limits the definition of a Federal subsidy
for these purposes to any obligation the interest on which is
exempt from tax under section 103. Therefore, additional
buildings may become eligible for the 70-percent credit.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

3. Modifications to definition of eligible basis (sec. 3003 of the Act
and sec. 42 of the Code)

(a) Modification to the enhanced credit for buildings in high-cost
areas

Present Law

Generally, buildings located in two types of 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 credits are increased to
a 91-percent and 39-percent credit, respectively. The mechanism
for this increase is through 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
the portions of each metropolitan statistical area or
nonmetropolitan statistical area designated as difficult to
develop areas cannot exceed an aggregate area having 20 percent
of the population of such statistical area.

Explanation of Provision

The provision adds a third type of high-cost area eligible
for an enhanced credit. The third type is defined as any
building designated by the State housing credit agency as
requiring the enhanced credit in order for such building to be
financially feasible. This new type of high-cost area is not
subject to the present-law limitation limiting high cost areas
to 20 percent of the population of each metropolitan
statistical area or nonmetropolitan statistical area.
It is expected that the State allocating agencies shall set
standards for determining which areas shall be designated
difficult development areas and which projects shall be
allocated additional credits in such areas in the State
allocating agency's allocation plan. It is also expected that
the State allocating agency shall publicly express its reasons
for such area designations and the basis for allocating
additional credits to a project.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(b) Modification to the substantial rehabilitation requirement

Present Law

Rehabilitation expenditures \242\ paid or incurred by a
taxpayer with respect to a low-income building are treated as a
separate building and may be eligible for the 70-percent credit
if they satisfy the otherwise applicable credit rules.\243\ To
qualify for the credit, the rehabilitation expenditures must
equal the greater of an amount that is (1) at least 10 percent
of the adjusted basis of the building being rehabbed; or (2) at
least $3,000 per low-income unit in the building being
rehabbed.
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\242\ Rehabilitation expenditures are amounts chargeable to a
capital account and incurred for property (or additions or improvements
to property) of a character subject to the allowance for depreciation
in connection with the rehabilitation of a building. Such term does not
include the cost of acquiring the building (or any interest therein).
Other rules apply.
\243\ The credit period for an existing building does not begin
before the credit period for the rehabilitation expenditures.
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At the election of the taxpayer, a special rule applies
allowing the 30 percent credit to both existing buildings and
rehabilitation expenditures if the second prong (i.e., at least
$3,000 of rehabilitation expenditures per low-income unit) of
the rehabilitation expenditures test is satisfied. This special
rule applies only in the case where the taxpayer acquired the
building and immediately prior to that acquisition the building
was owned by or on behalf of a government unit.

Explanation of Provision

The provision increases the minimum expenditure
requirements. Under the provision, the rehabilitation
expenditures must equal the greater of an amount that is (1) at
least 20 percent of the adjusted basis of the building being
rehabbed; or (2) at least $6,000 per low-income unit in the
building being rehabbed. The provision also indexes the $6,000
amount for inflation. The other present-law rules apply.\244\
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\244\ A present-law rule reduces the $3,000 amount to $2,000 for
any building substantially assisted, financed, or operated under
Housing and Urban Development (``HUD'') section 8, section 221(d)(3),
or section 236 programs, or under the USDA Rural Development section
515 program where an assignment of the mortgage secured by the property
in the project to HUD or the USDA Rural Development otherwise would
occur or when a claim against a Federal mortgage insurance fund would
occur. A conforming change is made by the provision so that that the
$2,000 amount will be increased to two-thirds of the $6,000 amount as
indexed.
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The provision retains the taxpayer election allowing the
30-percent credit to both existing building and the
rehabilitation expenditures if the second prong (i.e., at least
$6,000 of rehabilitation expenditures per low-income unit) of
the rehabilitation expenditures test is satisfied.

Effective Date

The provision is effective for buildings which receive
credit allocations after the date of enactment (July 30, 2008)
and substantially tax-exempt bond financed buildings (which
satisfy the requirements of section 42(h)(4) and therefore do
not require a credit allocation) which receive a tax-exempt
bond allocation after the date of enactment.

Present Law

In general, the qualified basis of a low-income building is
limited to that portion of the building dedicated to qualified
low-income use (either living space or certain common areas).
However certain ``community service facilities'' used by non-
tenants of the low-income building may be included in the
qualified basis of the low-income building if certain
requirements are satisfied. For this purpose, a community
service facility: (1) means any facility to serve primarily
individuals whose income is 60 percent or less of area median
income; and (2) may not exceed 10 percent of the eligible basis
of the qualified low-income housing credit project of which it
is a part.

Explanation of Provision

The provision expands the size of the community service
facility with respect to which the low-income housing credit
may be claimed. Under the provision the size of the community
service facility may not exceed the sum of: (1) 25 percent of
so much of the eligible basis of the qualified low-income
housing credit project of which it is a part as does not exceed
$15,000,000; and (2) 10 percent of any excess over $15,000,000
of the eligible basis of the qualified low-income housing
credit project of which it is a part.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(d) Clarification of the treatment of Federal grants

Present Law

The compliance period for any low-income credit building is
the period of fifteen taxable years beginning with the taxable
year in which the building is placed in service, or at the
election of the taxpayer the succeeding taxable year. If during
any year of the compliance period, a grant is made with respect
to any building or the operation thereof and any portion of the
grant is funded with Federal funds, the eligible basis of the
building must be reduced by the portion of the grant that is
Federally-funded. This basis reduction must be made for the
taxable year in which the grant is made and all succeeding
taxable years.

Explanation of Provision

The provision clarifies the basis reduction rule to apply
to Federally-funded grants received before the compliance
period. It also provides that no basis reduction is required
for Federally-funded grants to enable the property to be rented
to low-income tenants received during the compliance period if
those grants do not otherwise increase the taxpayer's eligible
basis in the building.
The provision also directs the modification of section
1.42-16(b) of the Treasury regulations to provide that none of
the following shall be considered a grant made with respect to
a building or its operation for purposes of section 42(d)(5)(A)
of the Internal Revenue Code of 1986: (1) rental assistance
under section 521 of the Housing Act of 1949 (42 U.S.C. 1490a);
(2) assistance under section 538(f)(5) of the Housing Act of
1949 (42 U.S.C. 1490p-2(f)(5)); (3) interest reduction payments
under section 236 of the National Housing Act (12 U.S.C. 1715z-
1); (4) rental assistance under section 202 of the Housing Act
of 1959 (12 U.S.C. 1701q); (5) rental assistance under section
811 of the Cranston-Gonzalez National Affordable Housing Act
(42 U.S.C. 8013); (6) modernization, operating, and rental
assistance pursuant to section 202 of the Native American
Housing Assistance and Self-Determination Act of 1996 (25
U.S.C. 4132); (7) assistance under title IV of the Stewart B.
McKinney Homeless Assistance Act (42 U.S.C. 11361 et seq.); (8)
tenant-based rental assistance under section 212 of the
Cranston-Gonzalez National Affordable Housing Act (42 U.S.C.
12742); (9) assistance under the AIDS Housing Opportunity Act
(42 U.S.C. 12901 et seq.); (10) per diem payments under section
2012 of title 38, United States Code; (11) rent supplements
under section 101 of the Housing and Urban Development Act of
1965 (12 U.S.C. 1701s); (12) assistance under section 542 of
the Housing Act of 1949 (42 U.S.C. 1490r); and (13) any other
ongoing payment used to enable the property to be rented to
low-income tenants. Further, no basis reduction is required for
loans (regardless of interest rate) made to owners of qualified
low-income housing projects from the proceeds of Federally-
funded grants. Nothing contained in this direction to modify
the regulations is intended to create any inference with
respect to the consideration of any program specified under
subsection (a) of a grant made with respect to a building or
its operation for purposes of section 42(d)(5)(A) of the
Internal Revenue Code of 1986 as in effect on the day before
such date of enactment.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(e) Modification to the definition of related persons

Present Law

With certain exceptions,\245\ the eligible basis of an
existing building is zero for low-income housing credit
purposes unless: (1) the building was acquired by purchase; (2)
there has been a period of at least 10 years between the
acquisition by purchase and the later of the date the building
was last placed in service or the date of the most recent
nonqualified substantial improvement of the building (e.g.,
improvements equaling at least 25 percent of the adjusted basis
of the building before such improvements); and (3) the building
was not previously placed-in-service by the taxpayer or a
related person (sec. 42(d)(2)(B)). In order for a building to
be acquired by purchase, it may not be acquired from a related
party.
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\245\ The Internal Revenue Service may waive the 10-year
requirement for any building substantially assisted, financed, or
operated under Housing and Urban Development (``HUD'') section 8,
section 221(d)(3), or section 236 programs, or under the Farmers' Home
Administration section 515 program where an assignment of the mortgage
secured by the property in the project to HUD or the Farmers' Home
Administration otherwise would occur or when a claim against a Federal
mortgage insurance fund would occur.
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The definition of related persons for purposes of these
rules is the same as the definition used in sections 267(b) and
707(b)(1) (relating to the disallowance of losses) with one
modification.\246\ Under the modification, in determining
whether two persons are related, ``10 percent'' is substituted
for ``50 percent'' in determining the threshold level of
ownership in certain partnerships and corporations. For
example, under the low-income credit provision, two
partnerships are related if the same persons own more than ten
percent of the capital interests or profits interest in each
partnership.
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\246\ In addition, certain businesses under common control are
related persons for purposes of these rules.
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Explanation of Provision

The provision repeals the ten-percent attribution rule used
to determine whether parties are related for purposes of
determining whether an existing building qualifies for the low-
income housing credit. Under the provision, two persons are
related for this purpose if they bear a relationship to each
other specified in sections 267(b) or 707(b)(1).

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(f) Exception to 10-year period rule related to prior placement in
service of certain buildings

Present Law

In general the low-income housing credit is not allowed
with respect to existing buildings unless there was a period of
at least ten years between the date of its acquisition by the
taxpayer and the later of the date the building was last
placed-in-service or the date of the most recent nonqualified
substantial improvement of the buildings (the ``ten-year''
rule'').
Under one exception from this general rule, the Secretary
of the Treasury (after consultation with the appropriate
Federal official) may waive the ten-year rule with respect to
any Federally-assisted building if such waiver is necessary:
(1) to avert an assignment of the mortgage secured by property
in the project (of which the building is a part) to the
Department of Housing and Urban Development or the Farmers Home
Administration, or (2) to avert a claim against a Federal
mortgage insurance fund (or such department or Administration)
with respect to a mortgage which is so secured. For these
purposes a Federally-assisted building is any building which is
substantially assisted, financed, or operated under: (1)
section 8 of the United States Housing Act of 1937; (2) section
221(d)(3) or 236 of the National Housing Act; or (3) section
515 of the Housing Act of 1949, as such Acts are in effect on
the date of the enactment of the Tax Reform Act of 1986.
Also, a waiver may be granted with respect to certain
Federally-assisted building if; (1) the mortgage on such
building is eligible for prepayment under subtitle B of the
Emergency Low Income Housing Preservation Act of 1987 or under
section 502(c) of the Housing Act of 1949 at any time within
one year after the date of the application for such waiver; (2)
the appropriate Federal official certifies to the Secretary of
the Treasury that it is reasonable to expect that, if the
waiver is not granted, such building will cease complying with
its low-income occupancy requirements; and (3) the eligibility
to prepay such mortgage without the approval of the appropriate
Federal official is waived by all persons who are so eligible
and such waiver is binding on all successors of such persons.
For purposes of this rule a Federally-assisted building is a
building which is substantially assisted, financed, or operated
under: (1) section 221(d)(3) or 236 of the National Housing
Act; or (2) section 515 of the Housing Act of 1949, as such
Acts are in effect on the date of the enactment of the Tax
Reform Act of 1986). An appropriate Federal official means, for
these purposes, the Secretary of Housing and Urban Development
(in certain instances) and the Secretary of Agriculture (in
certain instances).
Finally, a waiver may be granted with respect to any
building acquired from an insured depository institution in
default (as defined in section 3 of the Federal Deposit
Insurance Act) or from a receiver or conservator of such an
institution.

Explanation of Provision

The provision replaces the first two exceptions to the ten-
year rule under present law with one new exception. The new
exception waives the ten-year rule in the case of any
Federally- or State-assisted building. For these purposes, the
definition of Federally-assisted building is expanded to
include any building which is substantially assisted, financed,
or operated under section 8 of the United States Housing Act of
1937, section 221(d)(3), 221(d)(4) or 236 of the National
Housing Act, section 515 of the Housing Act of 1949, or any
other housing program administered by the Department of Housing
and Urban Development or the Rural Housing Service of the
Department of Agriculture. The term State-assisted building
means any building which is substantially assisted, financed,
or operated under any State law similar in purposes to those of
the Federal laws used in the definition of a Federally-assisted
building. The present-law exception related to certain
depository institutions in default is retained.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

4. Other simplification and reform of low-income housing tax incentives
(sec. 3004 of the Act and sec. 42 of the Code)

(a) Repeal prohibition of the credit for buildings receiving HUD
moderate rehabilitation assistance

Present Law

Generally, the low-income housing credit is available to
otherwise qualifying buildings which also receive direct
assistance under HUD Section 8 programs. No credit is allowed
to any building with respect to which moderate rehabilitation
assistance is provided at any time during the compliance
period, under section 8(e)(2) of the United States Housing Act
of 1937 (other than assistance under the Stewart B. McKinney
Homeless Assistance Act).

Explanation of Provision

The provision eliminates the present-law prohibition
against providing the low-income housing credit to buildings
receiving moderate rehabilitation assistance under section
8(e)(2) of the United States Housing Act of 1937.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

(b) Carryover allocation rule

Present Law

In general, the allocation of the low-income housing credit
must be made not later than the close of the calendar year in
which the building is placed in service. One exception to this
rule is a carryover allocation. In a carryover allocation, an
allocation may be made to a building that has not yet been
placed in service, provided that: (1) more than 10 percent of
the taxpayer's reasonably expected basis in the project (as of
the close of the second calendar year following the calendar
year of the allocation) is incurred as of the later of six
months after the allocation is made or the end of the calendar
year in which the allocation is made; and (2) the building is
placed in service not later than the close of the second
calendar year following the calendar year of the allocation.

Explanation of Provision

The provision modifies the first prong of the carryover
allocation rule. Under this modification such an allocation
will satisfy the first prong provided that more than 10 percent
of the taxpayer's reasonably expected basis in the project (as
of the close of the second calendar year following the calendar
year of the allocation) is incurred as of 12 months after the
allocation is made. The second prong of the carryover
allocation rules is unchanged.

Effective Date

The provision is effective for buildings placed in service
after the date of enactment (July 30, 2008).

Present Law

The compliance period for any building is the period
beginning on the first day of the first taxable year of the
credit period of such building and ending 15 years from such
date.
The penalty for any building subject to the 15-year
compliance period failing to remain part of a qualified low-
income project (due, for example, to noncompliance with the
minimum set aside requirement, or the gross rent requirement,
or other requirements with respect to the units comprising the
set aside) is recapture of the accelerated portion of the
credit, with interest, for all prior years.
Generally, any change in ownership by a taxpayer of a
building subject to the compliance period is also a recapture
event. An exception is provided if the seller satisfies certain
bond posting requirements (in an amount and manner prescribed
by Treasury), and if it can reasonably be expected that such
building will continue to be operated as a qualified low-income
building for the remainder of the compliance period.

Explanation of Provision

The provision eliminates the bond posting requirement. In
its place the provision extends the otherwise applicable
statute of limitation until three years after the Secretary of
the Treasury is notified of noncompliance with the low-income
housing credit rules.
Also, at the election of the taxpayer, the provision
applies with respect to dispositions of interests in a building
on or before the date of enactment if it is reasonably expected
that such building will continue to be a qualified low-income
building for the remaining compliance period.

Effective Date

The provision applies with respect to dispositions of
interests in buildings after the date of enactment (July 30,
2008).

(d) Additions of energy efficiency and historic nature criteria to
housing credit agency allocation plan criteria

Present Law

Each State must develop a plan for allocating credits, and
such plan must include certain allocation criteria including:
(1) project location; (2) housing needs characteristics; (3)
project characteristics (including whether the project uses
existing housing as part of a community revitalization plan;
(4) sponsor characteristics; (5) tenant populations with
special needs; (6) tenant populations of individuals with
children; and (7) projects intended for eventual tenant
ownership.
The State allocation plan must also give preference to
housing projects: (1) that serve the lowest-income tenants; (2)
that are obligated to serve qualified tenants for the longest
periods; and (3) that are located in qualified census tracts
and the development of which contributes to a concerted
community revitalization plan. For this purpose, a qualified
census tract is defined as a census tract: (1) designated by
the Secretary of HUD; and (2) for the most recent year for
which census data is available for such tract, either 50
percent or more of the households have a income that is less
than 60 percent of the area median income for that year or
which has a poverty rate of at least 25 percent.
Present law also requires that housing credit agencies
perform a comprehensive market study of the housing needs of
the low-income individuals in the area to be served by the
project and a written explanation, available to the general
public, for any allocation not made in accordance with the
established priorities and selection criteria of the housing
credit agency. It also requires that the housing credit agency
conduct site visits to monitor for compliance with habitability
standards.

Explanation of Provision

The provision adds two additional criteria which States
must use in its allocation of credits among potential low-
income housing projects. The additional criteria are: (1) the
energy efficiency of the project; (2) the historic nature of
the project (e.g., encouraging rehabilitation of certified
historic structures (sec. 47(c)(3))).

Effective Date

The provision is effective for allocations made after
December 31, 2008.

(e) Treatment of individuals who previously received foster care
assistance

Present Law

In general, student housing does not qualify for the low-
income housing credit. Two exceptions are provided from this
general rule.\247\ These two exceptions are units occupied by
an individual: (1) who is a student and receiving assistance
under title IV of the Social Security Act (Temporary Assistance
for Needy Families); or (2) enrolled in a job training program
receiving assistance under the Job Training Partnership Act or
under other similar Federal, State, or local laws.
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\247\ See also the discussion of the full-time student rule in item
I.A.7., below.
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Explanation of Provision

The provision adds a third exception to the general rule
that student housing is not eligible for the low-income housing
credit. This new exception applies in the case of a student who
was previously under the care and placement responsibility of a
foster care program (under part B or E of title IV of the
Social Security Act).

Effective Date

The provision is effective for determinations made after
the date of enactment (July 30, 2008).

(f) Measurement of area median gross income for certain projects
located in certain nonmetropolitan areas

Present Law

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'').
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 above). The income targeting
rules are not changed for buildings in metropolitan areas in
the Gulf Opportunity Zone.

Explanation of Provision

The measurement of area median gross income applied for
residential rental property located in certain rural areas is
modified in the case of projects subject to the low-income
housing credit volume limits. In the case of such properties
located in rural areas (as defined in section 520 of the
Housing Act of 1949), the income targeting rules of the low-
income housing credit are applied by reference to the greater
of the otherwise applicable area median gross income standard,
or the national nonmetropolitan median gross income. This new
income targeting rule applies to all such buildings if the
building receives a low-income housing credit allocation under
the otherwise applicable low-income housing credit volume
limit. It does not apply in the case of buildings which do not
require a low-income housing credit allocation because they are
substantially bond-financed. The area median gross income rules
are not changed for buildings in metropolitan areas.

Effective Date

The provision is effective for determinations after the
date of enactment (July 30, 2008).

(g) Clarification of general public use rule

Present Law

In order to be eligible for the low-income housing credit,
the residential units in a qualified low-income housing project
must be available for use by the general public. A project is
available for general public use if: (1) the project complies
with housing non-discrimination policies including those set
forth in the Fair Housing Act (42 U.S.C. 3601), and (2) the
project does not restrict occupancy based on membership in a
social organization or employment by specific employers.\248\
In addition, any residential unit that is part of a hospital,
nursing home, sanitarium, lifecare facility, trailer park, or
intermediate care facility for the mentally or physically
handicapped is not available for use by the general public.
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\248\ See Treas. Reg. 1.42-9.
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Explanation of Provision

The provision clarifies that a project which otherwise
meets the general public use requirements above shall not fail
to meet the general public use requirement solely because of
occupancy restrictions or preferences that favor tenants: (1)
with special needs; or (2) who are members of specified group
under a Federal program or State program or policy that
supports housing for such a specified group; or (3) who are
involved in artistic and literary activities.

Effective Date

The provision applies to buildings placed in service
before, on, or after the date of enactment (July 30, 2008).

(h) GAO study

Present Law

There are no current GAO studies planned of the low-income
credit.

Explanation of Provision

The Comptroller General of the United States is directed to
analyze the changes to the low-income credit made by this Act.
The report shall be submitted to Congress not later than
December 31, 2012.

Effective Date

The provision is effective on the date of enactment (July
30, 2008).

5. Treatment of basic housing allowances for purposes of income
eligibility rules (sec. 3005 of the Act and sec. 42 of the Code)

Present Law

Explanation of Provision

In general

Under the provision the basic housing allowance (i.e.,
payments under 37 U.S.C. sec. 403) is not included in income
for the low-income credit income eligibility rule. The
provision is limited in application to qualified buildings. A
qualified building is defined as any building located:
1. any county which contains a qualified military
installation to which the number of members of the
Armed Forces assigned to units based out of such
qualified military installation has increased by 20
percent or more as of June 1, 2008 over the personnel
level on December 31, 2005; and
2. any counties adjacent to county described in (1),
above.
For these purposes, a qualified military installation is
any military installation or facility with at least 1000
members of the Armed Forces assigned to it.

Applicability

The provision applies to income determinations: (1) made
after the date of enactment and before January 1, 2012 in the
case of qualified buildings which received credit allocations
on or before the date of enactment or qualified buildings
placed in service on or before the date of enactment to the
extent a credit allocation was not required with respect to
such building by reason of 42(h)(4) (i.e. such qualified
building was at least 50% tax bond financed with bonds subject
to the private activity bonds volume cap) but only with respect
to bonds issued before such date of enactment; and (2) made
after the date of enactment in the case of qualified buildings
which received credit allocations after the date of enactment
and before January 1, 2012 or qualified buildings placed in
service after the date of enactment and before January 1, 2012,
to the extent a credit allocation was not required with respect
to such qualified building by reason of 42(h)(4) (i.e. such
qualified building was at least 50% tax bond financed with
bonds subject to the private activity bond volume cap) but only
with respect to bonds issued after such date of enactment and
before January 1, 2012.

Effective Date

The provision is effective for income determinations after
the date of enactment (July 30, 2008).

6. Refunding treatment for certain multi-family housing bonds (sec.
3007 of the Act and sec. 146 of the Code)

Present Law

In general

Private activity bonds are bonds that nominally are issued
by State 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 interest paid on 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, but is not limited to,
qualified mortgage bonds, qualified veterans' mortgage bonds,
and bonds for qualified residential rental projects.

Qualified residential rental projects

Residential rental property may be financed with qualified
private activity 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.
As with most qualified private activity bonds, bonds for
qualified residential rental projects are subject to annual
State volume limitations (the ``State volume cap''). For
calendar year 2008, the State volume cap, which is indexed for
inflation, equals $85 per resident of the State, or $262.09
million, if greater.
Bonds issued to finance qualified residential rental
projects are subject to a term to maturity rule which limits
the period of time such bonds may remain outstanding.
Generally, this rule provides that the average maturity of a
qualified private activity bond cannot exceed 120 percent of
the economic life of the property being financed.\249\
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\249\ Sec. 147(b).
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Explanation of Provision

Under the provision, if within six months after receipt of
a repayment of a conduit loan used to finance a qualified
residential rental project, such repayment is used to finance a
second qualified residential rental project, any bond issued to
refinance the first issue of bonds (i.e., the bond financing
the original conduit loan) shall be treated as a refunding
issue. A loan to a person other than the governmental entity
from the proceeds of a bond issue to carry out the defined
qualified purpose of the issue is a conduit loan. Thus, under
the provision, the refinancing bond is treated as a refunding
notwithstanding a change in obligors under the first and second
conduit loans. The provision only applies to the first
refunding of the refunded bond and only if such refunding bond
is issued within four years of the date of issue of the
refunded bond. In addition, the final maturity date for the
refunding bonds cannot be later than 34 years after the date of
issuance of the refunded bond.

Effective Date

The provision applies to repayments of loans received after
the date of enactment (July 30, 2008).

7. Coordination of certain rules applicable to the low-income housing
credit and qualified residential rental project exempt facility bonds
(sec. 3008 of the Act and sec. 142 of the Code)

(a) Next available unit rule

Present Law

In order to be eligible for the low-income housing credit,
each of the residential units with respect to which the credit
is claimed must be: (1) occupied by low-income tenants; and (2)
rent-restricted. If the incomes of any such tenants rise above
certain levels, then the credit with respect to that unit is
denied unless the next available unit in the low-income
building (of a size comparable or smaller than such unit) is
rented to a new tenant who satisfies the income and rent-
restriction requirements (the ``next-available-unit
rule'').\250\
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\250\ Sec. 42(g)(2)(D)(ii).
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Subject to certain requirements, tax-exempt bonds may be
issued to finance qualified residential rental projects. The
tax-exempt bond rules for qualified residential projects have
similar tenant income limitations as the low-income credit, but
apply the next available unit rule on a project basis rather
than a building-by-building basis.\251\ Therefore, to avoid
noncompliance when the income of a tenant rises above certain
levels, the next available unit (of a size comparable or
smaller than such unit) in the entire project (rather than just
the same building) must be rented to a new tenant who satisfies
the income and rent-restriction requirements.
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\251\ Sec. 142(d)(3)(B).
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Explanation of Provision

In the case of a low-income building which is tax-exempt
bond financed and eligible for the low-income housing credit,
the provision provides that both the bond and credit
restrictions will be satisfied if the next available unit in
the building is rented to a new tenant who satisfies the income
and rent-restriction requirements. It therefore conforms the
tax-exempt bond rule to the low-income housing credit rule.

Effective Date

The provision applies to determinations of the status of
qualified residential rental projects for periods beginning
after the date of enactment (July 30, 2008) with respect to
bonds issued before, on, or after such date.

(b) Students

Present Law

In general
The low-income housing credit is not available for any
residential unit unless it is available for use by the general
public. For these purposes, a residential unit generally is
available for use by the general public if the unit is rented
in a manner consistent with housing policy governing
nondiscrimination as evidenced by the rules and regulations of
the Department of Housing and Urban Development (``HUD'').
Notwithstanding compliance with the HUD rules and regulations,
a residential rental unit is not available for use by the
general public if such unit is: (1) provided only for a member
of a social organization; or (2) provided by an employer for
its employees. Other rules may apply.
Rules for full-time students
For purposes of the low-income housing credit, no credit is
allowed with respect to a otherwise eligible unit occupied
entirely by full-time students: (1) unless those students are
comprised entirely of single parents and their children; or (2)
are married and file a joint return. Further, the single
parents may not be dependents of another individual and the
children may not be dependents of another individual other than
of their parents. For purposes of the tax-exempt bond rules, a
slightly different full-time student rule applies. The tax-
exempt bond rule provides that a residential unit will not
satisfy the income tests if all the occupants are students (as
defined in section 152(f)(2)) and are not entitled to file a
joint tax return.

Explanation of Provision

The provision conforms the tax-exempt bond rule with
respect to students to the low-income housing credit rule.

Effective Date

The full-time student provision applies to determinations
of the status of qualified residential rental projects for
periods beginning after the date of enactment with respect to
bonds issued before, on, or after such date.

Present Law

Unlike the requirements for projects financed with tax-
exempt bonds, certain single-room occupancy housing used on a
nontransient basis may qualify for the low-income credit, even
though such housing may provide eating, cooking, and sanitation
facilities on a shared basis. An example of housing that may
qualify for the credit is a residential hotel used on a
nontransient basis that is available to all members of the
public.
Among other requirements, qualified residential rental
projects financed with tax-exempt bonds generally cannot be
used on a transient basis. Treasury regulations clarify that a
residential unit will not be treated as used on a transient
basis if the unit contains complete facilities for living,
including living, sleeping, eating, cooking, and
sanitation.\252\
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\252\ Treas. Reg. sec. 1.103-8(b)(10)(ii).
---------------------------------------------------------------------------

Explanation of Provision

The provision conforms the tax-exempt bond rule to the low-
income housing credit rule.

Effective Date

The provision applies to determinations of the status of
qualified residential rental projects for periods beginning
after the date of enactment with respect to bonds issued
before, on, or after such date (July 30, 2008).

8. Hold harmless for reductions in area median gross income (sec. 3009
of the Act and sec. 42 of the Code)

Present Law

Tax rules

Tax-exempt bonds
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 (sec. 142).
Low-income housing tax credit
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 that satisfies one of
two tests at the election of the taxpayer (sec. 42(g)). 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''). These income figures are adjusted for family size.
Determination of income and area median gross income
The income of individuals and area median gross income are
determined by the Secretary of the Treasury in a manner
consistent with determinations of lower-income families and
area median gross income under section 8 of the Housing Act of
1937 (sec. 142(d)). These determinations under section 8 are
made by HUD. These determinations also include adjustments for
family size.
Therefore such determinations (individual and area median
gross income) are applicable for purposes of tax-exempt bonds
and the low-income housing credit.

HUD hold harmless policy

Generally HUD releases its calculation of area median gross
income for a calendar year early in that year. Historically HUD
has used the most recent decennial census data and updated it
with other data on income, employment and earnings.
Recently HUD modified its methodology to include additional
data in its calculation of area median gross income. In some
instances this change in methodology resulted in significantly
lower numbers for area median gross income in some areas. In
response to this result, HUD provided that such areas are not
treated as having a lower area median gross income for purposes
of HUD housing programs.

Explanation of Provision

In general

The provision makes two modifications to the determination
of area median gross income for purposes of tax-exempt bonds
and the low-income housing credit.

Determination of income and area median gross income

The provision provides that any determination of area
median gross income with respect to a project may not be less
than the determination of area median gross income with respect
to that project for the preceding calendar year. This
modification applies to all projects and is not limited to
projects benefiting from the HUD hold harmless policy.

HUD hold harmless policy

In the case of a HUD hold harmless impacted project, the
determination of area median gross income for the project is
the greater of (i) the amount determined without regard to the
special rule for HUD hold harmless impacted projects or (ii)
the sum of the area median gross income determined under the
HUD hold harmless policy with respect to the project for 2008
plus any increase in area median gross income after 2008.

Effective Date

The provision applies to determinations of area median
gross income for calendar years after 2008.

9. Exception from the annual recertification requirement for projects
which are entirely low-income use (sec. 3010 of the Act and sec. 142 of
the Code)

Present Law

Tax rules

In general
Tax-exempt bonds
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 (sec. 142).
Low-income housing tax credits
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 that satisfies one of
two tests at the election of the taxpayer (sec. 42(g)). 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''). These income figures are adjusted for family size.
Determination of income and area median gross income
The income of individuals and area median gross income are
determined by the Secretary of the Treasury in a manner
consistent with determinations of lower-income families and
area median gross income under section 8 of the Housing Act of
1937 (sec. 142(d)). These determinations also include
adjustments for family size.
Certification
The Code provides that the operator of any qualified
residential rental project must submit to the Secretary of the
Treasury (at such time and in such manner as the Secretary
prescribes) an annual certification that the project continues
to satisfy the requirements of a qualified residential rental
project. Any failure to comply with the annual certification to
the Secretary of the Treasury will subject the operator to
penalties but will not affect the tax-exempt status of the
underlying bonds (sec. 142(d)(7)).
Similar rules apply for the low-income housing credit
regarding tenant incomes (sec. 42(g)(4)). IRS Revenue Procedure
1994-64 allows a taxpayer to request a waiver of this
certification under certain circumstances with the consent of
the State agency responsible for monitoring the low-income
credit project.
Treatment of tenants whose incomes rise above the income
limits
Generally a low-income unit will continue to be treated as
such even when the tenant's income rises above the income
limits provided that the next available unit (of a size
comparable to or smaller than such unit) in the project is
occupied by a new resident who satisfies the income limits.

HUD rules

A family's eligibility for various types of HUD housing
assistance is based on its income and family composition. The
HUD Handbook 4350.3 contains the certification and annual
recertification rules to be followed by project operators.
Under the HUD program requirements tenants have the
responsibility to provide timely information to the project
operators. Operators have the responsibility to review and
verify the tenant information and to make changes to assistance
payment and tenant rent to satisfy program requirements.

Explanation of Provision

The provision waives the annual recertification
requirements under the low-income credit (sec. 42) and tax-
exempt bonds (sec. 142) for any project as long as no
residential unit in the project is occupied by tenants who fail
to satisfy the otherwise applicable income limits. The
provision does not modify the HUD rules; therefore some
projects must continue annual certification notwithstanding
this provision.

Effective Date

The provision is effective for years ending after the date
of enactment (July 30, 2008).

B. Single Family Housing

1. First-time homebuyer credit (sec. 3011 of the Act and sec. 36 of the
Code)

Present Law

Qualified mortgage bonds are issued to make mortgage loans
to qualified mortgagors for owner-occupied residences. The
subsidy provided for qualified mortgage bonds allows issuers to
finance mortgages for homebuyers at reduced interest rates. The
Code imposes several limitations on qualified mortgage bonds,
including a ``first-time homebuyer'' requirement. The first-
time homebuyer requirement provides that 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. In addition, bond proceeds generally only can be used
for new mortgages, i.e., proceeds cannot be used to acquire or
refinance existing mortgages.
In addition, 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 filing a joint return. A married individual
filing separately can claim a maximum credit of $2,500. The
instructions to IRS Form 8859 (District of Columbia First-Time
Homebuyer Credit) state that if ``two or more unmarried
individuals buy a main home, they can allocate the credit among
the individual owners in any manner they choose.'' The credit
phases out for individual taxpayers with modified 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 expires for residences purchased after
December 31, 2009.\253\
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\253\ Sec. 1400C. The credit was enacted as part of the Taxpayer
Relief Act of 1997 and was originally scheduled to expire on December
31, 2000. It has been extended several times, the last extension
through December 31, 2009.
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Reasons for Change

The Congress wishes to provide temporary alternatives to
assist first-time homebuyers. The provision is intended to
provide first-time homebuyers with the equivalent of an
interest-free loan, effectively reducing the cost incurred by
first-time homebuyers in borrowing to acquire a home.

Explanation of Provision

Under the proposal, a taxpayer who is a first-time
homebuyer is allowed a refundable tax credit equal to the
lesser of $7,500 ($3,750 for a married individual filing
separately) or 10 percent of the purchase price of a principal
residence. The credit is allowed for the tax year in which the
taxpayer purchases the home.
The credit phases out for individual taxpayers with
modified adjusted gross income between $75,000 and $95,000
($150,000-$170,000 for joint filers) for the year of purchase.
A taxpayer is considered a first-time homebuyer if such
individual had no ownership interest in a principal residence
in the United States during the three-year period prior to the
purchase of the home to which the credit applies.
No credit is allowed if the D.C. homebuyer credit is
allowable for the taxable year the residence is purchased or a
prior taxable year. A taxpayer is not permitted to claim the
credit if the taxpayer's financing is from tax-exempt mortgage
revenue bonds, if the taxpayer is a nonresident alien, or if
the taxpayer disposes of the residence (or it ceases to be a
principal residence) before the close of a taxable year for
which a credit otherwise would be allowable.
The credit is recaptured ratably over fifteen years with no
interest charge beginning in the second taxable year after the
taxable year in which the home is purchased. For example, if
the taxpayer purchases a home in 2008, the credit is allowed on
the 2008 tax return, and repayments commence with the 2010 tax
return. If the taxpayer sells the home (or the home ceases to
be used as the principal residence of the taxpayer or the
taxpayer's spouse) prior to complete repayment of the credit,
any remaining credit repayment amount is due on the tax return
for the year in which the home is sold (or ceases to be used as
the principal residence). However, the credit repayment amount
may not exceed the amount of gain from the sale of the
residence to an unrelated person. For this purpose, gain is
determined by reducing the basis of the residence by the amount
of the credit to the extent not previously recaptured. No
amount is recaptured after the death of a taxpayer. In the case
of an involuntary conversion of the home, recapture is not
accelerated if a new principal residence is acquired within a
two year period. In the case of a transfer of the residence to
a spouse or to a former spouse incident to divorce, the
transferee spouse (and not the transferor spouse) will be
responsible for any future recapture.
An election is provided to treat a home purchased in the
eligible period in 2009 as if purchased on December 31, 2008
for purposes of claiming the credit on the 2008 tax return and
for establishing the beginning of the recapture period.
Taxpayers may amend their returns for this purpose.

Effective Date

The provision is effective for qualifying home purchases on
or after April 9, 2008 and before July 1, 2009 (without regard
to whether or not there was a binding contract to purchase
prior to April 9, 2008).

2. Additional standard deduction for state and local real property
taxes (sec. 3012 of the Act and sec. 63 of the Code)

Present Law

An individual taxpayer's taxable income is computed by
reducing adjusted gross income either by a standard deduction
or, if the taxpayer elects, by the taxpayer's itemized
deductions. Unless an individual taxpayer elects, no itemized
deduction is allowed for the taxable year. The deduction for
certain taxes, including income taxes, real property taxes, and
personal property taxes, generally is an itemized
deduction.\254\
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\254\ If the deduction for State and local taxes is attributable to
business or rental income, the deduction is allowed in computing
adjusted gross income and therefore is not an itemized deduction.
---------------------------------------------------------------------------

Reasons for Change

The Congress believes an additional standard deduction for
real property taxes is appropriate in order to help lessen the
impact of rising State and local property tax bills on those
individual taxpayers with insufficient total itemized
deductions to elect not to take the standard deduction.

Explanation of Provision \255\

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\255\ This provision was subsequently extended through December 31,
2009. See Part Seventeen, Division C. Title II. D.
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The provision increases an individual taxpayer's standard
deduction for a taxable year beginning in 2008 by the lesser of
(1) the amount allowable \256\ to the taxpayer as a deduction
for State and local taxes described in section 164(a)(1)
(relating to real property taxes), or (2) $500 ($1,000 in the
case of a married individual filing jointly). The increased
standard deduction is determined by taking into account real
estate taxes for which a deduction is allowable to the taxpayer
under section 164 and, in the case of a tenant-stockholder in a
cooperative housing corporation, real estate taxes for which a
deduction is allowable to the taxpayer under section 216. No
taxes deductible in computing adjusted gross income are taken
into account in computing the increased standard deduction.
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\256\ In the case of an individual taxpayer who does not elect to
itemize deductions, although no itemized deductions are allowed to the
taxpayer, itemized deductions are nevertheless treated as
``allowable.'' See section 63(e).
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Effective Date

The provision applies to taxable years beginning in 2008.

C. General Provisions

1. Modifications to qualified private activity bond rules for housing
(sec. 3021 of the Act and secs. 142, 143, and 146 of the Code)

Present Law

In general

Qualified private activity bond rules for housing

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, purchase price
limitations for 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 that 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. In addition, bond
proceeds generally only can be used for new mortgages, i.e.,
proceeds cannot be used to acquire or refinance existing
mortgages. Under present law, the proceeds of qualified
mortgage bonds generally must be used to finance mortgages
within 42 months from the date of issuance of the bonds.
Residential rental property may be financed with qualified
private activity 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'').
As with most qualified private activity bonds, qualified
mortgage bonds and bonds for qualified residential rental
projects are subject to annual State volume limitations (the
``State volume cap''). For calendar year 2008, the State volume
cap, which is indexed for inflation, equals $85 per resident of
the State, or $262.09 million, if greater. The interest income
from qualified mortgage bonds and bonds for qualified
residential rental projects is a preference item for purposes
of calculating the alternative minimum tax (``AMT'').

Reasons for Change

The Congress is concerned that the general deterioration in
the credit markets and decline in housing prices is making it
difficult for many homeowners to refinance high interest rate
mortgages. The Congress believes that additional tools are
needed to alleviate the financial burdens faced by homeowners
with subprime, adjustable-rate mortgages that are due to reset
over the next several years. The Congress also believes that
tax-exempt bonds are an effective way to provide these
homeowners with lower-cost refinancing options than are
otherwise available under current market conditions. Thus, the
Congress believes it is appropriate to temporarily expand the
purposes for which qualified mortgage bonds may be issued and
to temporarily increase the volume cap available for housing
projects.

Explanation of Provision

Temporary volume cap increase

The provision authorizes an additional $11 billion of
volume cap for 2008 for the purpose of issuing qualified
mortgage bonds or private activity bonds for qualified
residential rental projects. The additional volume cap is
allocated to each State in the same proportion as the total
State volume is allocated to each of the States. Qualified
mortgage bonds issued with respect to the additional volume cap
may be used to finance either mortgages permitted under present
law (e.g., new mortgages) or qualified subprime loans as
defined under the Act. However, all proceeds of qualified
mortgage bonds issued with respect to the additional volume cap
must be used within 12 months of the date of issuance of such
bonds. Additional volume cap that remains unused at the end of
2008 may be carried forward to 2009 and 2010, but solely for
the purpose of issuing qualified mortgage bonds or private
activity bonds for qualified residential rental projects.

Qualified mortgage bonds for certain refinancings

The provision creates an exception to the new mortgage
requirement for qualified mortgage bonds by authorizing the use
of such bonds to refinance a qualified subprime loan. The
provision defines a qualified subprime loan as an adjustable
rate residential mortgage loan originated after December 31,
2001, and before January 1, 2008, that the issuer determines
would be reasonably likely to cause financial hardship to the
borrower if not refinanced. Under the provision, proceeds of
qualified mortgage bonds used to refinance qualified subprime
loans must be so used within 12 months from the date of
issuance of the bond. In addition, the provision also provides
that qualified subprime loans cannot be refinanced by bonds
issued after December 31, 2010.

Effective Date

The provision applies to bonds issued after the date of
enactment (July 30, 2008).

2. Alternative minimum tax treatment of interest on certain bonds, the
low-income housing credit, and the rehabilitation credit (sec. 3022 of
the Act and secs. 38, 56 and 57 of the Code)

Present Law

In general

Present law imposes an alternative minimum tax (``AMT'') on
individuals and corporations. AMT is the amount by which the
tentative minimum tax exceeds the regular income tax. The
tentative minimum tax is computed based upon a taxpayer's
alternative minimum taxable income (``AMTI''). AMTI is the
taxpayer's taxable income modified to take into account certain
preferences and adjustments.

Tax-exempt bonds

One of the preference items is tax-exempt interest on
certain tax-exempt bonds issued for private activities (sec.
57(a)(5)). Also, in the case of a corporation, an adjustment
based on current earnings is determined, in part, by taking
into account 75 percent of items, including tax-exempt
interest, that are excluded from taxable income but included in
the corporation's earnings and profits (sec. 56(g)(4)(B)).

Low-income housing and rehabilitation credits

Business tax credits generally may not exceed the excess of
the taxpayer's income tax liability over the tentative minimum
tax (or, if greater, 25 percent of the regular tax liability in
excess of $25,000). Thus, business tax credits generally cannot
offset the alternative minimum tax liability.\257\
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\257\ A special rule treats the tentative minimum tax as being zero
for purposes of determining the tax liability limitation with respect
to certain energy credits, the work opportunity credit and the credit
for taxes paid with respect to employee cash tips (sec. 38(c)(4)).
Thus, the credits listed in the preceding sentence may offset the
alternative minimum tax liability.
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Credits in excess of the limitation may be carried back one
year and carried forward for up to 20 years.

Reasons for Change

The alternative minimum tax limits the intended benefits of
tax-exempt housing bonds for some taxpayers who invest in these
bonds. Also, the alternative minimum tax limits the intended
effects of the low-income housing tax credit and the
rehabilitation credit for some taxpayers. The Congress believes
that the tax exemption for interest on these housing bonds, the
low-income housing tax credit and the rehabilitation credit
should be available to taxpayers regardless of their
alternative minimum tax status. Accordingly, the Act eliminates
the treatment of this interest as a tax preference under the
alternative minimum tax and provides that these credits can be
utilized to offset both the regular tax and the alternative
minimum tax.

Explanation of Provision

Tax-exempt bonds

The Act provides that tax-exempt interest on (i) exempt
facility bonds issued as part of an issue 95 percent or more of
the net proceeds of which are used to provide qualified
residential rental projects (as defined in section 142(d)),
(ii) qualified mortgage bonds (as defined in section 143(a)),
and (iii) qualified veterans' mortgage bonds (as defined in
section 143(b)) is not an item of tax preference for purposes
of the alternative minimum tax. Also, this interest is not
included in the corporate adjustment based on current earnings.
The provision does not apply to interest on any refunding bond
unless interest on the refunded bond (or in the case of a
series of refundings, the original bond) was not an item of tax
preference.

Low-income housing and rehabilitation credits

The Act treats the tentative minimum tax as being zero for
purposes of determining the tax liability limitation with
respect to the low-income housing credit and the rehabilitation
credit.
Thus, the low-income housing tax credit and the
rehabilitation credit may offset the alternative minimum tax
liability.

Effective Date

The provision applies to interest on bonds issued after the
date of enactment (July 30, 2008).
The provision applies to low-income housing credits
determined under section 42 attributable to buildings placed in
service after December 31, 2007 (including any carryback of the
credits).
The provision applies to rehabilitation credits determined
under section 47 attributable to qualified rehabilitation
expenses properly taken into account for periods after December
31, 2007 (including any carryback of the credits).

3. Bonds guaranteed by Federal Home Loan Banks eligible for treatment
as tax-exempt bonds (sec. 3023 of the Act and sec. 149 of the Code)

Present Law

Interest paid on bonds issued by State and local
governments generally is excluded from gross income for Federal
income tax purposes. However, the exclusion generally does not
apply to State and local bonds that are Federally guaranteed.
Under present law, a bond is Federally guaranteed if: (1) the
payment of principal or interest with respect to such bond is
guaranteed (in whole or in part) by the United States (or any
agency or instrumentality thereof); (2) such bond is issued as
part of an issue and five percent or more of the proceeds of
such issue is to be (a) used in making loans the payment of
principal or interest with respect to which is guaranteed (in
whole or in part) by the United States (or any agency or
instrumentality thereof), or (b) invested directly or
indirectly in Federally insured deposits or accounts; or (3)
the payment of principal or interest on such bond is otherwise
indirectly guaranteed (in whole or in part) by the United
States (or any agency or instrumentality thereof).
The Federal guarantee restriction was enacted in 1984 with
certain exceptions for certain guarantee programs in existence
at that time. The exceptions include guarantees by: the Federal
Housing Administration; the Department of Veterans' Affairs;
the Federal National Mortgage Association; the Federal Home
Loan Mortgage Association; the Government National Mortgage
Association; the Student Loan Marketing Association; and the
Bonneville Power Authority. The exception also includes
guarantees for certain housing programs. These are: (a) private
activity bonds for a qualified residential rental project or a
housing program obligation under section 11(b) of the United
States Housing Act of 1937; (b) a qualified mortgage bond; or
(c) a qualified veterans' mortgage bond.

Reasons for Change

The Congress is concerned that the recent deterioration in
the credit markets is increasing the borrowing costs of State
and local governments for essential governmental projects. The
Congress believes that additional tools are needed to allow
State and local governments easier access to the credit
markets. Thus, the Congress believes it is appropriate to
provide a temporary exception to the Federal guarantee
prohibition to reduce the borrowing costs of State and local
governments.

Explanation of Provision

Under the provision, bonds issued by State and local
governments are not treated as Federally guaranteed by reason
of any guarantee provided by any Federal Home Loan Bank of a
bond issued after the date of enactment and before January 1,
2011, if such bank made a guarantee of such bond in connection
with such issuance.
The exception to the Federal guarantee prohibition does not
apply to any guarantee by a Federal home loan bank unless such
bank meets safety and soundness collateral requirements for
such guarantees which are at least as stringent as the
regulatory requirements for guarantees by Federal home loan
banks as in effect on April 9, 2008.

Effective Date

The provision applies to guarantees made after the date of
enactment (July 30, 2008).

4. Modification of rules pertaining to FIRPTA nonforeign affidavits
(sec. 3024 of the Act and sec. 1445 of the Code)

Present Law

In general, nonresident aliens and foreign corporations are
not taxed on capital gains.\258\ However, such foreign persons
must take into account gains and losses from the disposition of
an interest in United States real property (``USRPI'') as if
such persons were engaged in a trade or business in the United
States during the taxable year and such gains or losses were
effectively connected with such trade or business.\259\
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\258\ Nonresident aliens present in the United States for a period
or period aggregating 183 days or more during a taxable year are taxed
at a flat 30 percent on their net U.S. source capital gains. Sec.
871(a)(2).
\259\ Sec. 897(a)(1).
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Although tax is imposed upon such dispositions on a net
basis, in the case of any disposition of a USRPI by a foreign
person, the transferee is generally required to deduct and
withhold a tax equal to ten percent of the amount
realized.\260\ The transferee is exempt from this withholding
requirement if:
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\260\ Sec. 1445(a).
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In general, the transferred interest is not a USRPI;
The transferee receives a ``qualifying statement''
from the Secretary of the Treasury (or his delegate)
that states that the transferor is exempt from the tax
on the disposition of the USRPI or has reached
agreement with the Secretary for payment of such tax,
and that any withholding tax has been satisfied or
secured;
The USRPI is acquired by the transferee for use by
him as a residence and the amount realized does not
exceed $300,000; or
The transferor furnishes to the transferee an
affidavit by the transferor stating, under penalties of
perjury, the transferor's United States taxpayer
identification number and that the transferor is not a
foreign person. However, this rule does not apply if
the transferee has actual knowledge that such affidavit
is false or if the transferee receives a notice from a
transferor's agent or a transferee's agent that such
affidavit is false, or if the transferee fails to meet
the Secretary's requirement that the transferee furnish
a copy of such affidavit to the Secretary.\261\
Regulations require the transferee to retain the
transferor's affidavit until the end of the fifth
taxable year following the taxable year in which the
transfer takes place.\262\
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\261\ Sec. 1445(b).
\262\ Treas. Reg. sec. 1.1445-2(b)(3).
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In certain circumstances, agents may be liable for some or
all of the withholding tax. In general, if the transferor's
agent or the transferee's agent has actual knowledge that the
affidavit is false, then such agent is required to notify the
transferee pursuant to regulations.\263\ An agent that is
required to notify the transferee pursuant to regulations yet
fails to do so is under the same duty to deduct and withhold
that the transferee would have been under if such agent had
properly given such notice.\264\ However, an agent's liability
under these circumstances is limited to the amount of the
agent's compensation from the transaction.\265\
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\263\ Sec. 1445(d)(1).
\264\ Sec. 1445(d)(2)(A).
\265\ Sec. 1445(d)(2)(B).
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In the case of a real estate transaction, a ``real estate
reporting person'' is required to file an information return
and to furnish certain written statements to customers.\266\ A
real estate reporting person means the person (including any
attorney or title company) responsible for closing the
transaction, if there is such a person.\267\
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\266\ Sec. 6045(e)(1). There is an exception to this requirement
for a sale or exchange of a residence for $250,000 or less ($500,000 if
the seller is married), if certain conditions are met. Sec. 6045(e)(5).
\267\ If there is no such person, then the real estate reporting
person with respect to that transaction is either the mortgage lender,
seller's broker, buyer's broker, or other person designated under
regulations, in that order. Sec. 6045(e)(2).
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Reasons for Change

The Congress believes that U.S. persons generally are
hesitant to provide their social security numbers to persons
with whom they do not have an ongoing business relationship.
The Congress believes that offering transferors of USRPIs the
option of providing nonforeign affidavits solely to the person
responsible for closing the transaction should better protect
the social security numbers of transferors and provide
assurance to transferors that their private information will be
secure.

Explanation of Provision

The provision provides an alternate procedure with respect
to the nonforeign affidavit. Under this procedure, in lieu of
furnishing a nonforeign affidavit to the transferee, a
transferor may furnish such affidavit to a ``qualified
substitute.'' Such qualified substitute is then required to
furnish a statement to the transferee stating, under penalties
of perjury, that the qualified substitute has such affidavit in
his or her possession. With respect to a disposition of a
USRPI, the term ``qualified substitute'' means (1) the person,
including any attorney or title company, responsible for
closing the transaction, other than the transferor's agent, and
(2) the transferee's agent.
This exemption does not apply if the transferee or
qualified substitute has actual knowledge that such affidavit
or statement is false, if the transferee or qualified
substitute receives a notice from a transferor's agent,
transferee's agent, or qualified substitute that such affidavit
or statement is false, or if the transferee or qualified
substitute fails to meet a regulatory requirement that the
transferee or qualified substitute furnish a copy of such
affidavit or statement to the Secretary.
Moreover, if the transferor's agent, the transferee's
agent, or the qualified substitute has actual knowledge that
the affidavit or statement is false, then such agent or
qualified substitute is required to notify the transferee. As
under present law, the time and manner of such notice is to be
specified by regulations. An agent or qualified substitute that
is required to notify the transferee pursuant to regulations
yet fails to do so has the same duty to deduct and withhold
that the transferee would have had if such agent or qualified
substitute had properly given such notice. An agent's or
qualified substitute's liability under these circumstances is
limited to the amount of the compensation that such agent or
qualified substitute derives from the transaction.
The Secretary of the Treasury is required to prescribe such
regulations as may be necessary or appropriate to carry out
this provision. It is intended that such rules will require the
qualified substitute and transferee to retain the documentation
for a period commensurate with the period required under the
present-law regulations.

Effective Date

The provision is effective for dispositions after the date
of enactment (July 30, 2008).

5. Modify rehabilitation credit tax-exempt use safe harbor and
definition of disqualified lease (sec. 3025 of the House Act and sec.
47 of the Code)

Present Law

A 10-percent credit is provided for rehabilitation
expenditures with respect to buildings first placed in service
before 1936. A 20-percent credit is provided for rehabilitation
expenditures with respect to a certified historic structure.
Rehabilitation expenditures eligible for the credit do not
include any expenditure in connection with the rehabilitation
of a building that is allocable to the portion of the property
that is (or may reasonably be expected to be) tax-exempt use
property. In the case of nonresidential real property, tax-
exempt use property generally means the portion of the property
leased in a disqualified lease to tax-exempt entities (sec.
168(h)(1)). For this purpose, a tax-exempt entity means (1) the
United States, a State or political subdivision, a U.S.
possession, or an agency or instrumentality thereof, (2) a tax-
exempt organization, (3) a foreign person or entity, or (4) an
Indian tribal government.
A safe harbor provides, however, that in the case of
nonresidential real property, the property is treated as tax-
exempt use property only if the portion of the property leased
to tax-exempt entities in disqualified leases is more than 35
percent of the property.
A disqualified lease for this purpose is a lease to a tax-
exempt entity in specified circumstances. These are: (1) part
or all of the property was financed, directly or indirectly, by
tax-exempt bond financing and the entity (or a related entity)
participated in the financing; (2) under the lease there is a
fixed or determinable price purchase or sale involving the
entity or a related entity (or the equivalent of such an
option); (3) the term of the lease exceeds 20 years; or (4)
there has been a sale and leaseback of the property and the
entity (or a related entity) used the property before the sale,
transfer, or lease (sec. 168(h)(1)(B)).

Reasons for Change

The Congress is concerned that the rehabilitation tax
credit may not be providing an incentive to rehabilitate
buildings when a tax-exempt entity leases a portion of the
building in some circumstances. For example, when a
governmental entity such as a post office uses a portion of the
building exceeding 35 percent, the amount of the tax credit for
rehabilitating the building is reduced. The Congress believes
that increasing the present-law percentage of permitted tax-
exempt use somewhat, from 35 percent to 50 percent, will
encourage the rehabilitation of more buildings.

Explanation of Provision

The provision increases from 35 percent to 50 percent the
percentage of the property that may be leased to a tax-exempt
entity in a disqualified lease without requiring allocation of
rehabilitation expenditures under the rehabilitation credit.
Under the provision, for determining rehabilitation
expenditures eligible for the credit, nonresidential real
property is treated as ``tax-exempt use'' property only if the
portion of the property leased to tax-exempt entities in
disqualified leases is more than 50 percent of the property.
For this purpose, a tax-exempt entity continues to have the
same meaning provided by present law.

Effective Date

The provision is effective for expenditures properly taken
into account for periods after December 31, 2007.

6. Special rules for mortgage revenue bonds in Presidentially declared
disaster areas (sec. 3026 of the Act and sec. 143 of the Code)

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.
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 December 31, 1998.

Explanation of Provision \268\

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\268\ The provision related to mortgage revenue bonds in
Presidentially declared disaster areas was subsequently amended. See
Part Seventeen, Division C. Title VI. Subtitle B. D.
---------------------------------------------------------------------------
The provision waives the first-time homebuyer requirement
for residences located in Presidentially declared disaster
areas. In addition, residences located in such areas were
treated as targeted area residences for purposes of the income
and purchase price limitations. The provision applies to bonds
issued after May 1, 2008 and before January 1, 2010.

Effective Date

The provision is effective on the date of enactment (July
30, 2008).

7. Transfer of funds appropriated to carry out 2008 recovery rebates to
individuals (sec. 3027 of the Act)

Present Law

The Economic Stimulus Act of 2008 (Pub. L. No. 110-185)
appropriated the following sums, for the fiscal year ending
September 30, 2008 to the Department of the Treasury: (1) an
additional amount for the Financial Management Service--
Salaries and Expenses'', $64,175,000, to remain available until
September 30, 2009; (2) an additional amount for the Internal
Revenue Service--Taxpayer Services'', $50,720,000, to remain
available until September 30, 2009; and (3) an additional
amount for Internal Revenue Service--Operations Support'',
$151,415,000, to remain available until September 30, 2009. The
Economic Stimulus Act also appropriated an additional amount
for the ``Social Security Administration--Limitation on
Administrative Expenses'', $31,000,000, to remain available
until September 30, 2008.

Explanation of Provision

The Act provides that the Secretary of the Treasury may
transfer funds among the three accounts specified for the
Department of Treasury to carry out the purposes of the
Economic Stimulus Act.

Effective Date

The provision is effective on the date of enactment (July
30, 2008).

TITLE II--REFORMS RELATED TO REAL ESTATE INVESTMENT TRUSTS (``REITS'')

(secs. 3031-3071 of the Act and secs. 856 and 857 of the Code)

Present Law

In general
A real estate investment trust (``REIT'') is an entity that
otherwise would be taxed as a U.S. corporation but elects to be
taxed under a special REIT tax regime. In order to qualify as a
REIT, an entity must meet a number of requirements. At least 90
percent of REIT income (other than net capital gain) must be
distributed annually;\269\ the REIT must derive most of its
income from passive, generally real-estate-related investments;
and REIT assets must be primarily real-estate related. In
addition, a REIT must have transferable interests and at least
100 shareholders, and no more than 50 percent of the REIT
interests may be owned by 5 or fewer individual shareholders
(as determined using specified attribution rules). Other
requirements also apply.\270\
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\269\ Even if a REIT meets the 90-percent income distribution
requirement for REIT qualification, more stringent distribution
requirements must be met in order to avoid an excise tax under section
4981.
\270\ Secs. 856 and 857.
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If an electing entity meets the requirements for REIT
status, the portion of its income that is distributed to its
shareholders each year as a dividend is deductible by the REIT
(unlike the case of a regular subchapter C corporation, which
cannot deduct dividends). As a result, the distributed income
of the REIT is not taxed at the entity level; instead, it is
taxed only at the investor level.\271\
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\271\ A REIT that has net capital gain can either distribute that
gain as a ``capital gain'' dividend or retain that gain without
distributing it but cause the shareholders to be treated as if they had
received and reinvested a capital gain dividend. In either case, the
gain in effect is taxed only as net capital gain of the shareholders.
Sec. 857(b)(3).
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Income tests
In general
A REIT is restricted to earning certain types of generally
passive income. Among other requirements, at least 75 percent
of the gross income of a REIT in each taxable year must consist
of real-estate-related income. Such income includes: rents from
real property; income from the sale or exchange of real
property (including interests in real property) that is not
stock in trade, inventory, or held by the taxpayer primarily
for sale to customers in the ordinary course of its trade or
business; interest on mortgages secured by real property or
interests in real property; and certain income from foreclosure
property (the ``75-percent income test'').\272\ Amounts
attributable to most types of services provided to tenants
(other than certain ``customary services''), or to more than
specified amounts of personal property, are not qualifying
rents.\273\ In addition, rents received from any entity in
which the REIT owns more than 10 percent of the vote or value
also generally are not qualifying income. However, there is an
exception for certain rents received from taxable REIT
subsidiaries (described further below), in which a REIT may own
more than 10 percent of the vote or value.
---------------------------------------------------------------------------
\272\ Secs. 856(c)(3) and 1221(a)(1). Income from sales that are
not prohibited transactions solely by virtue of section 857(b)(6) also
is qualified REIT income.
\273\ Sec. 856(d). Amounts attributable to the provision of certain
services by an independent contractor or by a taxable REIT subsidiary
can be qualified rents. Sec. 856(d)(7).
---------------------------------------------------------------------------
In addition, 95 percent of the gross income of a REIT for
each taxable year must be from the 75-percent income sources
and a second permitted category of other, generally passive
investments such as dividends, capital gains, and interest
income (the ``95-percent income test'').\274\
---------------------------------------------------------------------------
\274\ Sec. 856(c)(3).
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Income from certain hedging transactions
Except as provided by Treasury regulations, income from a
hedging transaction that is clearly identified,\275\ including
gain from the sale or disposition of such a transaction, is not
included as gross income under the 95-percent income test, to
the extent the transaction hedges any indebtedness incurred or
to be incurred by the REIT to acquire or carry real estate
assets.\276\
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\275\ A hedging transaction for this purpose is one defined in
clause (ii) or (iii) of section 1221(b)(2)(A). The identification
requirement is defined in section 1221(a)(7).
\276\ Sec. 856(c)(5)(G).
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Foreign currency exchange gain
A REIT must be a U.S. domestic entity, but it is permitted
to hold foreign real estate or other foreign-based assets,
provided the 75-percent and 95-percent income tests and the
other requirements for REIT qualification are met.\277\ A REIT
that holds foreign real estate or other foreign-based assets
may have foreign currency exchange gain under the foreign
currency transaction rules of the Code (described below).
Foreign currency exchange gain is not explicitly included in
the statutory definitions of qualifying income for purposes of
the 75-percent and 95-percent income tests, though the IRS has
issued guidance that allows foreign currency gain to be treated
as qualified income in certain circumstances.
---------------------------------------------------------------------------
\277\ See Rev. Rul. 74-191, 1974-1 C.B. 170.
---------------------------------------------------------------------------
The foreign currency transaction rules of sections 985
through 989 apply whenever a taxpayer engages in a business or
investment activity using a currency other than the taxpayer's
functional currency (a ``nonfunctional currency''). Section 985
provides in general that all determinations for Federal income
tax purposes are made in the taxpayer's functional currency. A
taxpayer's functional currency is the dollar except in the case
of a qualified business unit (``QBU''), in which case the
functional currency is ``the currency of the economic
environment in which a significant part of such unit's
activities are conducted and which is used by such unit in
keeping its books and records.'' \278\ A QBU is any separate
and clearly identified unit of a trade or business of a
taxpayer if the unit maintains separate books and records.\279\
---------------------------------------------------------------------------
\278\ Sec. 985(b)(1).
\279\ Sec. 989(a).
---------------------------------------------------------------------------
A taxpayer that engages in a business or investment
activity using a currency other than the U.S. dollar may have
gain or loss under section 987 or 988, depending on the nature
of the activity and type of entity (if any) through which the
activity is conducted.
A U.S. taxpayer becomes subject to section 988 when it
enters into a ``section 988 transaction.'' Among other things,
a ``section 988 transaction'' includes the acquisition of a
debt instrument, becoming an obligor under a debt instrument,
the accrual of items of expense or gross income, or the
disposition of any nonfunctional currency.\280\
---------------------------------------------------------------------------
\280\ Sec. 988(c)(1)(B) and (C).
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When a REIT holds a mortgage (or other instrument or
arrangement described in section 988) \281\ denominated in a
nonfunctional currency or determined by reference to the value
of a nonfunctional currency and the applicable foreign currency
exchange rate changes between the time interest on an
obligation to (or an obligation of) the REIT accrues and the
time it is paid, the REIT may have foreign currency gain or
loss under the rules of section 988. Foreign currency exchange
gain under section 988 also can result when a REIT receives
payment of principal on a debt instrument denominated in a
nonfunctional currency or sells such a debt instrument, or when
a REIT incurs a debt obligation denominated in a nonfunctional
currency and pays interest or principal in that currency.
---------------------------------------------------------------------------
\281\ Section 988 applies to (i) the acquisition of a debt
instrument or becoming the obligor under a debt instrument; (ii)
accruing (or otherwise taking into account) any item of expense or
gross income or receipts which is to be paid after the date on which so
accrued or taken into account, and (iii) entering into or acquiring any
forward contract, futures contract, option, or similar financial
instrument (except for any regulated futures contract or nonequity
option which would be marked to market under section 1256 if held on
the last day of the taxable year). Section 988 also applies to the
disposition of any nonfunctional currency. Nonfunctional currency
includes ``coin or currency, and nonfunctional currency denominated
demand or time deposits or similar instruments issued by a bank or
other financial institution.'' Sec. 988(c)(1).
---------------------------------------------------------------------------
In May 2007, the IRS ruled in Rev. Rul. 2007-33 that if
section 988 currency gain is recognized by a REIT with respect
to an item of income, the section 988 gain will be qualifying
income for purposes of the 95-percent and 75-percent income
tests of section 856(c)(2) and (3), respectively, to the extent
the underlying income so qualifies. Analogous relief was not
provided for section 988 gain with respect to any items other
than income items.\282\
---------------------------------------------------------------------------
\282\ Rev. Rul. 2007-33, 2007-1 C.B. 1281. This ruling does not
address the treatment of currency gain that might arise with respect to
the payment of principal on an obligation that would produce qualified
income. The ruling also does not address the treatment of foreign
currency gain that might arise in connection with indebtedness
denominated in a foreign currency that is incurred to acquire assets
that produce qualifying income. A private letter ruling concluded that
section 988 currency gain attributable to fluctuation in the exchange
rates of currency used to make payments on non-dollar debt obligations
incurred to acquire investments that produced qualifying non-dollar
income would be treated as qualifying income, where the borrowings were
to be used to finance the acquisition of the investments on a cost-
effective basis, and not to speculate in foreign currency. PLR
200808024. A private letter ruling may be relied upon only by the
taxpayer to which the ruling is issued.
---------------------------------------------------------------------------
Section 987 applies when there is a remittance from a
foreign business or investment activity conducted through a QBU
that is a branch that keeps its books and records in a
functional currency other than the dollar. If a REIT has a QBU
that keeps its books and records in a foreign currency, the
REIT could have foreign currency exchange gain or loss under
section 987 with respect to remittances.\283\
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\283\ Recent proposed regulations under section 987 would replace
previously proposed rules in an attempt to limit the ability of
taxpayers to recognize non-economic foreign currency losses that could
reduce otherwise taxable income, as well as to prevent non-economic
currency gains that could arise. The 2006 proposed regulations would
provide certain tracing-type rules. See REG-208270-86 (Sept. 7, 2006).
See also, Notice 2000-20 (March 22, 2000), discussing concerns
regarding earlier proposed regulations issued in 1991. The 2006
proposed regulations when originally issued did not by their terms
apply to REITs, RICs, or certain other types of entities. Prop. Reg.
Sec. 1.987-1(b)(iii). But see Notice 2007-42, 2007-1 C.B. 1288, infra.
---------------------------------------------------------------------------
The IRS has ruled in several private rulings that a REIT
may establish a REIT subsidiary that itself qualifies as a
separate REIT (and thus would not be treated as a branch) to
conduct qualified REIT activity with respect to foreign
investments in a particular foreign currency, and that
subsidiary can itself be treated as a QBU whose functional
currency is that particular foreign currency, if that
subsidiary keeps its books and records in that particular
foreign currency.\284\ This structure provides a method for a
REIT to conduct activities abroad and minimize any concerns
regarding the treatment of foreign currency gain for purposes
of the 75-percent and 95-percent income tests. However, this
structure effectively requires a separate REIT subsidiary that
itself qualifies as a REIT, for each different currency in
which the REIT may conduct activities.\285\
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\284\ See, e.g., PLR 200625019 and PLR 200550025. A private letter
ruling may be relied upon only by the taxpayer to which the ruling was
issued.
\285\ In this structure, the parent REIT treats the dividends paid
by the subsidiary REIT as a qualified REIT dividend, minimizing any
currency gains by exchanging the foreign currency into dollars at the
time of the dividend distribution.
---------------------------------------------------------------------------
At the same time that it issued Rev. Rul. 2007-33, the IRS
also issued a notice regarding the application of section 987
to a QBU of a REIT. The notice states that until further
guidance is issued, a REIT that has a QBU that uses a
functional currency other than the U.S. dollar may apply the
principles of proposed regulations issued on September 7, 2006,
to determine whether section 987 currency gain is derived from
income described in sections 856(c)(2) or (3).\286\
---------------------------------------------------------------------------
\286\ Notice 2007-42, 2007-1 C.B. 1288. Compare REG-208270-86
(Sept. 7, 2006), which by its terms did not apply to REITs.
---------------------------------------------------------------------------
Certain other items
Certain private letter rulings issued to particular
taxpayers have permitted various other types of income to be
ignored for purposes of the 75-percent or 95-percent income
tests, due to the relationship of the income to REIT qualifying
assets or income. A few examples include a settlement payment
received by a REIT with respect to construction of a mall or a
payment received as a ``breakup'' fee in a proposed
merger.\287\
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\287\ PLR 200039027 and PLR 200127024. A private letter ruling may
relied upon only by the taxpayer to which the ruling was issued.
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Asset tests
At least 75 percent of the value of a REIT's assets must be
real estate assets, cash and cash items (including
receivables), and Government securities (the ``75-percent asset
test''). Real estate assets are real property (including
interests in real property and mortgages on real property) and
shares (or transferable certificates of beneficial interest) in
other REITs.\288\ No more than 25 percent of a REIT's assets
may be securities other than such real estate assets.\289\
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\288\ Sec. 856(c)(4)(A). Temporary investments in certain stock or
debt instruments also can qualify if they are temporary investments of
new capital, but only for the one-year period beginning on the date the
REIT receives such capital. Sec. 856(c)(5)(B).
\289\ Sec. 856(c)(4)(B)(i).
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Except with respect to a taxable REIT subsidiary (described
further below), not more than 5 percent of the value of a
REIT's assets may be securities of any one issuer, and the REIT
may not possess securities representing more than 10 percent of
the outstanding value or voting power of any one issuer.\290\
In addition, (except in the case of certain timber REITs for a
limited time period), not more than 20 percent of the value of
a REIT's assets may be securities of one or more taxable REIT
subsidiaries.\291\
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\290\ Sec. 856(c)(4)(B)(iii).
\291\ Sec. 856(c)(4)(B)(ii). In the case of a ``timber REIT''
defined as a REIT more than 50 percent of the value of whose assets
consists of real property held in connection with the trade or business
or producing timber, up to 25 percent of the value of the REITs assets
may be securities of one or more taxable REIT subsidiaries. This
special rule is in place only for taxable years beginning after the
date of enactment of the Food, Conservation, and Energy Act of 2008
(H.R. 2419, Pub. L. No. 110-234, enacted on May 22, 2008) and before
the date that is one year after such date of enactment.
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The asset tests must be met as of the close of each quarter
of a REIT's taxable year. However, a REIT that has met the
asset tests as of the close of any quarter does not lose its
REIT status solely because of a discrepancy during a subsequent
quarter between the value of the REIT's investments and such
requirements, unless such discrepancy exists immediately after
the acquisition of any security or other property and is wholly
or partly the result of such acquisition.\292\
---------------------------------------------------------------------------
\292\ Sec. 856(c)(4). In the case of such an acquisition, the REIT
also has a grace period of 30 days after the close of the quarter to
eliminate the discrepancy.
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Taxable REIT subsidiaries
A REIT generally cannot own more than 10 percent of the
vote or value of a single entity; however, there is an
exception for ownership of a taxable REIT subsidiary (``TRS'')
that is taxed as a corporation, provided that securities of one
or more TRSs do not represent more than 20 percent \293\ of the
value of REIT assets.
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\293\ 25 percent for certain timber REITs for a one-year period.
See ``Asset tests,'' supra.
---------------------------------------------------------------------------
A TRS generally can engage in any kind of business activity
except that it is not permitted directly or indirectly to
operate either a lodging facility or a health care facility.
However, a TRS is permitted to rent hotel, motel, or other
transient lodging facilities from its parent REIT and is
permitted to hire an independent contractor to operate such
facilities.\294\
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\294\ An independent contractor will not fail to be treated as such
for this purpose because the TRS bears the expenses of operation of the
facility under the contract, or because the TRS receives the revenues
from the operation of the facility, net of expenses for such operation
and fees payable to the operator pursuant to the contract, or both.
Sec. 856(d)(9)(B).
---------------------------------------------------------------------------
Furthermore, rent paid to the parent REIT by the TRS with
respect to hotel, motel, or other transient lodging facilities
operated by an independent contractor is qualified rent for
purposes of the REIT's 75-percent and 95-percent income tests.
This lodging facility rental rule is an exception to the
general rule that rent paid to a REIT by any corporation
(including a TRS) in which the REIT owns 10 percent or more of
the vote or value is not qualified rental income for purposes
of the 75-percent or 95-percent REIT income tests. An exception
to the general rule exists in the case of a TRS that rents
space in a building owned by its parent REIT if at least 90
percent of the space in the building is rented to unrelated
parties and the rent paid by the TRS to the REIT is comparable
to the rent paid by the unrelated parties.\295\
---------------------------------------------------------------------------
\295\ REITs are also subject to a tax equal to 100 percent of
redetermined rents, redetermined deductions, and excess interest. These
are defined generally as the amounts of specified REIT transactions
with a TRS of the REIT, to the extent such amounts differ from an arm's
length amount.
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Prohibited transactions tax

REITs are subject to a prohibited transaction tax (``PTT'')
of 100 percent of the net income derived from prohibited
transactions. For this purpose, a prohibited transaction is a
sale or other disposition of property by the REIT that is
``stock in trade of a taxpayer or other property which would
properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held for
sale to customers by the taxpayer in the ordinary course of his
trade or business'' (sec. 1221(a)(1)) \296\ and is not
foreclosure property. The PTT for a REIT does not apply to a
sale if the REIT satisfies certain safe harbor requirements in
sections 857(b)(6)(C) or (D), including an asset holding period
of at least four years (2 years in the case of certain sales of
timber property for a limited time period).\297\ If the
conditions are met, a REIT may either i) make no more than 7
sales within a taxable year (other than sales of foreclosure
property or involuntary conversions under section 1033), or ii)
sell no more than 10 percent of the aggregate bases of all its
assets as of the beginning of the taxable year (computed
without regard to sales of foreclosure property or involuntary
conversions under section 1033), without being subject to the
PTT tax.
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\296\ This definition is the same as the definition of certain
property the sale or other disposition of which would produce ordinary
income rather than capital gain under section 1221(a)(1).
\297\ Additional requirements for the safe harbor limit the amount
of expenditures the REIT can make during the four year period prior to
the sale that are includible in the adjusted basis of the property,
require marketing to be done by an independent contractor, and forbid a
sales price that is based on the income or profits of any person. Under
the Food, Conservation, and Energy Act of 2008 (H.R. 2419, Pub. L. No.
110-234, enacted on May 22, 2008), the four-year holding period is
reduced to two years in the case of a sale of timber property under
section 857(b)(6)(D), provided the sale is to a qualified organization
(as defined in section 170(h)(3)), exclusively for conservation
purposes (as defined in section 170(h)(1)(C). The rule is in place only
for taxable years beginning after the date of enactment of that Act and
before one year following such date of enactment. In addition, for the
same one year period, any sale that is exempt from the prohibited
transactions provision by virtue of section 857(b)(6)(D) is treated for
all purposes of subtitle A of the Code as a sale of property held for
investment or use in a trade or business, and not property described in
section 1221(a)(1) of the Code.
---------------------------------------------------------------------------

Reasons for Change

The Congress believes that present law contains undesirable
uncertainty and complexity in determining the effect of foreign
currency gain on REIT qualification when a REIT invests in
otherwise qualified foreign assets that produce otherwise
qualified foreign income. If foreign currency gain is
attributable to otherwise qualifying REIT income from foreign
investments, such currency gain should not cause
disqualification of a REIT. The Treasury Department has issued
some guidance to that effect in the case of certain income
items.\298\ The Congress wishes to assure that the same result
will occur with respect to foreign currency gain on a REIT's
receipt of payments of principal (rather than income) on an
asset that would produce qualified REIT income (for example,
the receipt of principal payments on a mortgage that is secured
by real property and denominated in foreign currency). If a
REIT borrows in a foreign currency to facilitate the
acquisition of qualified assets denominated in a foreign
currency, the Congress wishes to assure that the same result
will occur with respect to payments of interest and principal
on such a borrowing.
---------------------------------------------------------------------------
\298\ Rev. Rul. 2007-33, 2007-21 I.R.B. 1281.
---------------------------------------------------------------------------
Similarly, although the Treasury Department has indicated
that a REIT may operate in a foreign country with a qualified
business unit that uses a nonfunctional currency and that the
REIT may rely on the principles of the 2006 proposed Treasury
regulations to determine whether currency gain on remittances
is qualified REIT income,\299\ the Congress wishes to provide a
simpler method to determine that foreign currency gain on
remittances from a qualified business unit will not adversely
affect REIT qualification. The Congress therefore has adopted
rules that are intended both to assure that appropriate foreign
currency gain will not disqualify a REIT and to preclude the
treatment of income from foreign currency speculation as
qualified income.
---------------------------------------------------------------------------
\299\ Notice 2007-42, 2007-21 I.R.B. 1288.
---------------------------------------------------------------------------
The Congress also believes it is desirable to grant
regulatory authority to the Treasury Department to permit other
types of income that are not statutorily designated as
qualified income to be disregarded for purposes of the REIT
gross income tests in appropriate cases. Under present law, the
Internal Revenue Service has issued private rulings that have
reached this result in cases involving income related to the
conduct of permitted REIT activities, for example, income
relating to settlement of a lawsuit over construction of a mall
in which a REIT was investing,\300\ and income from a
``breakup'' fee related to the termination of a proposed
acquisition of another REIT.\301\ However, a private ruling may
be relied upon only by the taxpayer to whom the ruling is
issued. The Congress believes it is desirable for the Treasury
Department to be permitted to issue generally applicable
guidance in appropriate cases.
---------------------------------------------------------------------------
\300\ PLR 200039027.
\301\ PLR 200127024.
---------------------------------------------------------------------------
With respect to taxable REIT subsidiaries (``TRSs''), the
Congress believes it is appropriate to allow a greater
percentage of a REIT's assets to consist of stock of such
subsidiaries. The Congress believes that a 25 percent
limitation is consistent with the present law rule that at
least 75 percent of REIT assets must be real estate assets,
cash, cash items, and Government securities.
The Congress also believes it is desirable to extend to
health care facilities the rules that permit a TRS to bear the
costs and receive the revenues of a qualified lodging facility,
and to pay qualified arm's length rent to the REIT for such a
facility, provided the facility is operated by an independent
contractor and the TRS pays an arm's length fee to the
independent contractor for such operation. Also, the Congress
desires to provide that a taxable REIT subsidiary is not
considered to be directly or indirectly operating a lodging or
health care facility (i.e., without the required use of an
independent contractor) merely because it possesses a license
to do so.
Finally, the Congress is concerned that the four-year
holding period for the safe harbor from prohibited transactions
tax may inappropriately deter REITs from selling their
properties, and that the present law rule requiring use of
basis for purposes of the 10-percent safe harbor limitation may
unfairly affect a REIT that sells more recently acquired,
higher-basis assets instead of longer-held assets with greater
appreciation. The Congress thus desires to shorten the required
holding period for REIT asset sales that can qualify for the
safe harbor from the prohibited transactions tax (``PTT''), and
to allow a REIT that makes more than 7 sales in a taxable year
to make sales under the alternative safe harbor equal to 10
percent of the aggregate fair market value of the REIT assets,
where the basis of property sold during the year exceeds the
amount permitted under the present law rule (10 percent of
aggregate basis of REIT assets). The Congress believes these
changes will enable REITs to sell properties more readily and
thus capture asset values for shareholders with more
flexibility.

Explanation of Provision

Foreign currency gain

Exclusion of certain foreign currency gain for certain
income tests
The provision excludes certain foreign currency gain
recognized under section 987 or section 988 from the
computation of qualifying income for purposes of the 75-percent
income test or the 95-percent income test, respectively.\302\
The exclusion is solely for purposes of the computations under
these tests.
---------------------------------------------------------------------------
\302\ The excluded amounts are excluded from both the numerator and
the denominator in the relevant computations.
---------------------------------------------------------------------------
The provision defines two new categories of income for
purposes of the exclusion rules: ``real estate foreign exchange
gain'' and ``passive foreign exchange gain.'' Real estate
foreign exchange gain is excluded from gross income for
purposes of both the 75-percent and 95-percent income tests.
Passive foreign exchange gain is excluded for purposes of the
95-percent income test but is included in gross income and
treated as non-qualifying income to the extent that it is not
real estate foreign exchange gain, for purposes of the 75-
percent income test.
Real estate foreign exchange gain is foreign currency gain
(as defined in section 988(b)(1)) which is attributable to (i)
any item of income or gain described in section 856(c)(3)
(i.e., described in the 75-percent income test), (ii) the
acquisition or ownership of obligations secured by mortgages on
real property or interests in real property; or (iii) becoming
or being the obligor under obligations secured by mortgages on
real property or on interests in real property. Real estate
foreign exchange gain also includes section 987 gain
attributable to a qualified business unit (``QBU'') of the REIT
if the QBU itself meets the 75-percent income test for the
taxable year, and meets the 75-percent asset test at the close
of each quarter of the REIT that has directly or indirectly
held the QBU. The QBU is not required to meet the 95-percent
income test in order for this 987 gain exclusion to apply. Real
estate foreign exchange gain also includes any other foreign
currency gain as determined by the Secretary of the Treasury.
Passive foreign exchange gain includes all real estate
foreign exchange gain, and in addition includes foreign
currency gain which is attributable to (i) any item of income
or gain described in section 856(c)(2) (i.e., described in the
95-percent income test), (ii) the acquisition or ownership of
obligations, (iii) becoming or being the obligor under
obligations, and (iv) any other foreign currency gain as
determined by the Secretary of the Treasury.
Notwithstanding the foregoing rules, except in the case of
certain income that is excluded under the hedging rules of
section 856(c)(5)(G) (as amended by the provision), any section
988 gain derived from engaging in dealing, or substantial and
regular trading, in securities (as defined in section
475(c)(2)) shall constitute gross income that does not qualify
under either the 75-percent or 95-percent income test.
The effect of these rules is to change the result of Rev.
Rul. 2007-33 in the case of foreign currency gain attributable
to an item of REIT income that qualifies under sections
856(c)(2) or 856(c)(3), respectively, because the provision
excludes such gain (solely for purposes of the relevant income
test) rather than treating such gain as qualified income for
purposes of that test. The provision in addition excludes
foreign currency gain attributable to principal payments
received on certain REIT assets, or to principal or interest
payments with respect to certain liabilities of a REIT,
situations not addressed in the revenue ruling.
The rules of the provision also supersede Notice 2007-42 in
the case of remittances from a QBU that uses a functional
currency other than the dollar. The provision excludes section
987 gain on a remittance from such a QBU to the REIT from the
computation of both the 75-percent and the 95-percent income
tests of the REIT, provided the QBU itself both meets the 75-
percent income test for the taxable year and meets the 75-
percent asset test at the close of each quarter of the taxable
year. If the QBU meets these requirements, the section 987 gain
is excluded entirely for purposes of the REIT gross income
tests, and no tracing-type rules with respect to section 987
gain are imposed, as would have been the case under Notice
2007-42. For this purpose, the QBU is tested as if it were a
separate entity that is independently required to meet the 75-
percent income test and the 75-percent asset test applicable to
REIT qualification. However, the QBU need not meet any of the
other REIT requirements, nor itself be treated as a REIT. It is
expected that the Treasury Department will use its regulatory
authority \303\ to provide appropriate rules with respect to
the treatment of section 987 currency gain for purposes of the
REIT gross income tests if a QBU does not meet the requirements
of the provision.
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\303\ See, e.g. Sec. 989(c).
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In the case of a section 988 transaction, it is intended
that the provision only apply to foreign currency gain that is
directly attributable to income items that otherwise are
treated as qualifying income for purposes of the 75-percent and
95-percent income tests, respectively, (or directly
attributable to the acquisition or ownership of, or to becoming
the obligor under, obligations secured by mortgages on real
property or on interests on real property). As one example,
foreign currency gain attributable to exchange rate
fluctuations between the time of the accrual of interest income
on a foreign-currency denominated obligation secured by a
mortgage on real property and the time of payment, would
constitute excluded income for purposes of both the 75-percent
and 95-percent income tests. However, any additional foreign
currency gain arising from subsequent disposition of the
foreign currency received upon payment of the accrued interest
would be attributable to holding the foreign currency after its
receipt and would not constitute excluded income under either
test; rather it would be non-qualifying income.
Similarly, in the case of section 987 foreign currency gain
on remittances, only section 987 gain as of the time of, and
resulting from, the remittance is attributable to the QBU and
is excluded income. Any currency gain arising from holding
currency after remittance is not attributable to the QBU. Such
gain is not excluded income for purposes of the 75-percent or
95-percent income tests and is not qualifying income for
purposes of those tests.
The following examples demonstrate the operation of the
distinction between ``real estate foreign exchange gain'',
which is excluded for purposes of both the 75-percent and 95-
percent income tests, and ``passive foreign exchange gain,''
which is excluded only for purposes of the 95-percent income
test and which is non-qualifying income for purposes of the 75-
percent income test.
Example 1.--Assume that a REIT whose functional currency is
the dollar holds an obligation that is secured by a mortgage on
real property, which instrument pays interest at a date later
than the date the interest is accrued by the REIT. The
obligation is denominated in a foreign currency. Under sections
856(c)(3) and 856(c)(2), the REIT's interest income accrued on
such a mortgage obligation is qualified income for purposes of
the 75-percent and 95-percent income tests. Under the
provision, any section 988 gain attributable to currency
fluctuations between the time the interest is accrued by the
REIT and the time the interest is paid to the REIT is real
estate foreign exchange gain because it is directly
attributable to the qualified interest income, and thus the
section 988 gain is excluded for purposes of the 75-percent and
95-percent income tests.
Example 2.--Assume the same facts as in Example 1, except
that the instrument held by the REIT is a debt instrument that
is not an obligation secured by a mortgage on real property or
an interest in real property. Under sections 856(c)(3) and
856(c)(2), interest income accrued by the REIT is qualified
income for purposes of the 95-percent income test but is not
qualified income for purposes of the 75-percent income test.
Under the provision, any section 988 gain attributable to
currency fluctuations between the time the interest is accrued
and the time the interest is paid is passive foreign exchange
gain because it is directly attributable to the interest income
that is qualified for purposes of the 95-percent income test.
Such passive foreign exchange gain is excluded for purposes of
the 95-percent income test but is not excluded (and is not
qualified income) for purposes of the 75-percent income test.
Example 3.--Assume the same facts as in Example 1, and
further assume that the REIT receives a repayment of the
principal on the obligation. Under the provision, any section
988 gain attributable to the receipt of principal is real
estate foreign exchange gain because it is attributable to the
acquisition or ownership of an obligation secured by a mortgage
on real property. Such section 988 gain is excluded for
purposes of both the 75-percent and 95-percent income tests.
Example 4.--Assume the same facts as in Example 2, and
further assume that the REIT receives a repayment of the
principal on the obligation. Under the provision, any section
988 gain attributable to the receipt of principal is passive
foreign exchange gain because it is attributable to the
acquisition or ownership of an obligation not secured by a
mortgage on real property or an interest in real property. Such
section 988 gain is excluded for purposes of the 95-percent
income test but is not excluded, and is not qualified income,
for purposes of the 75-percent income test.
Other rules
The provision makes several changes to other REIT
provisions.
First, the provision extends the present law rule of
section 856(c)(5)(G), which excludes certain hedging income
from the computation of the 95-percent income test, to exclude
such hedging income from the computation of the 75-percent
income test as well. As under present law, except to the extent
determined by the Secretary of the Treasury, such income is
income of a REIT from a hedging transaction (as defined in
clause (ii) or (iii) of section 1221(b)(2)(A)), which is
clearly identified pursuant to section 1221(a)(7), including
gain from the sale or disposition of such a transaction, to the
extent that the transaction hedges any indebtedness incurred or
to be incurred by the REIT to acquire or carry real estate
assets.
Second, the provision extends section 856(c)(5)(G) to
encompass, (except to the extent determined by the Secretary of
the Treasury), income of a REIT from a transaction entered into
by the REIT primarily to manage risk of currency fluctuations
with respect to any item of income or gain that would be
qualified income under the 75-percent or 95-percent income
tests, (or any property which generates such income or gain)
provided the transaction is clearly identified as such before
the close of the day on which it was acquired, originated, or
entered into (or such other time as the Secretary may
prescribe). Such income is excluded from gross income for
purposes of both the 75-percent and 95-percent income tests.
Third, the rule that if a REIT has met the asset tests as
of the close of any quarter it will not fail them solely
because of a discrepancy due to variations in value that are
not attributable to the acquisition of investments is clarified
to include a discrepancy caused solely by the change in the
foreign currency exchange rate used to value a foreign
asset.\304\
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\304\ For example, suppose a REIT meets the 75-percent asset test
as of the close of a quarter, but as of the close of the following
quarter, a change in the foreign currency exchange rate has increased
the value of certain foreign currency-denominated securities that are
not qualifying assets for purposes of that test, such that the value of
those securities exceeds the 25 percent permitted amount. If the REIT
does not acquire any other asset during that next quarter, the REIT
will not lose its status by reason of failure to meet the 75-percent
asset test. However, if in that next quarter the REIT acquires another
foreign-currency denominated (or any other) asset that is not a
qualifying asset, and immediately after that acquisition the total
value of non-qualifying assets, including the new acquisition, fails
the test, then the REIT has until 30 days after the end of that quarter
to adjust its asset value so that it satisfies the test.
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Fourth, the term ``cash'' for purposes of the REIT asset
qualification rules is defined to include foreign currency
\305\ if the REIT \306\ or its QBU uses such currency as its
functional currency, but only to the extent such foreign
currency is held for use in the normal course of the activities
of the REIT or the QBU giving rise to income or gain described
in sections 856(c)(2) or (3), or directly related to acquiring
or holding assets described in section 856(c)(4), and is not
held in connection with a trade or business of trading or
dealing in securities (as defined in section 475(c)(2)).\307\
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\305\ Although foreign currency thus may be considered a qualified
asset for purposes of the 75-percent asset test of section 856(c)(4),
foreign currency gain with respect to such currency is excluded income
for purposes of the 75-percent or 95-percent income tests only to the
extent such gain is attributable to the income items or other specific
988 transactions described in the rules of the provision that govern
such income exclusions.
\306\ Because a REIT must be a U.S. entity, it is normally required
to use the dollar as its functional currency. However, under private
rulings, the IRS has permitted REITs to use a functional currency other
than the dollar where the operations and record-keeping requirements
for treatment as a QBU that uses a functional currency other than the
dollar are met. See, e.g., PLR 200625019 and PLR 200550025. A private
letter ruling may be relied upon only by the taxpayer to which the
ruling was issued.
\307\ This test applies to a REIT in determining whether it meets
the 75-percent asset test. This test also independently applies to any
QBU of a REIT in determining whether such QBU meets the 75-percent
asset requirement. If that 75 percent asset requirement (along with the
75 percent income test) is met, then section 987 gain of the REIT
attributable to that QBU is excluded from the REIT's gross income for
the 75-percent and 95-percent income tests. In applying the 75-percent
asset test to the REIT or a QBU, respectively, it is intended that
currency held by such REIT or QBU, respectively, is treated as cash
only to the extent used in the normal course of the activities of such
REIT or QBU giving rise to income or gain described in sections
856(c)(2) or (3) or directly related to acquiring or holding assets
described in section 856(c)(4) (other than such cash), and not held in
connection with a trade or business of trading or dealing in securities
(as defined in section 475(c)(2)).
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Fifth, permitted foreclosure property income also includes
foreign currency gain that is attributable to otherwise
permitted income from foreclosure property.\308\
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\308\ Such foreign currency gain is also included as foreclosure
property income for purposes of any tax on such income under section
857(b)(4)(B)(i).
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Finally, foreign currency gain under section 988(b)(1), or
loss under section 988(b)(2), that is attributable to any
prohibited transaction is taken into account in determining the
amount of prohibited transaction net income subject to the 100-
percent tax.

Treasury authority regarding other items of income

The provision authorizes the Treasury Department to issue
guidance that would allow other items of income to be excluded
for purposes of the computation of qualifying gross income
under either the 75 percent or the 95 percent test,
respectively, or to be included as qualifying income for either
of such tests, respectively, in appropriate cases consistent
with the purposes of the REIT provisions.\309\
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\309\ Income that is statutorily excluded from gross income
computations under the provision is not intended to be within the
authority to include as qualifying income. In all cases, the Treasury
regulatory authority applies solely for purposes of applying the
relevant percentage tests for REIT qualification, and does not affect
the substantive characterization of an item as income for purposes of
computing the REIT's taxable income.
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Taxable REIT subsidiary limit increase

The provision increases the percentage of the value of REIT
assets that can be held in securities of a taxable REIT
subsidiary to 25 percent from the present 20 percent.\310\
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\310\ The special 25 percent rule for timber REITs is made
permanent under the provision, since timber REITs are treated in the
same manner as other REITs for this purpose.
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Holding period under safe harbor for prohibited transactions

The provision shortens from four years to two years the
minimum holding period under the prohibited transactions tax
safe harbors of 857(b)(6)(C) and 857(b)(6)(D). The requirement
that timber property under section 857(b)(6)(D) be sold to a
qualified organization (as defined in section 170(h)(3))
exclusively for conservation purposes (as defined in section
170(h)(1)(C)) in order for the 2-year holding period to apply
under the safe harbor, and the one-year limited application of
the 2-year holding period rule under 857(b)(6)(D), are
generally removed. The provision makes clear that the safe
harbor is an exception from the prohibited transactions tax
only, and does not cause a gain on a sale that otherwise does
not qualify for capital gains treatment (i.e., because it was a
sale of property held for sale to customers in the ordinary
course of business under section 1221(a)(1)) to become a
capital gain transaction.\311\ Consequently, treatment of gain
or loss as ordinary or capital in character continues to be
determined based on all the facts and circumstances as under
present law, without regard to the prohibited transactions tax
safe harbor. However, in the case of timber property under
section 857(b)(6)(D), the provision retains for the one-year
period prescribed in the Food, Energy and Conservation Act of
2008 the rule that qualification of the sale under the safe
harbor also means that the sale is considered to be a sale of
property held for investment or use in a trade or business, and
not of property described in section 1221(a)(1), for all
purposes of subtitle A of the Code, but only if the sale would
have qualified under section 857(b)(6)(D) as in effect prior to
the enactment of the provision.
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\311\ In the case of a sale of timber property that qualifies for
the safe harbor under section 857(b)(1)(D), for the one-year period
prescribed in the Food, Conservation and Energy Act of 2008, such a
sale is considered to be a sale of property held for investment or use
in a trade or business, and not of property described in section
1221(a)(1), for all purposes of subtitle A of the Code, for such one-
year period.
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Permitted extent of sales under safe harbor for prohibited transactions

The provision changes the prohibited transactions tax safe
harbor provisions concerning maximum amount of sales within a
taxable year that are consistent with the alternative
prohibited transactions tax safe harbor (that is an alternative
to the test for no more than 7 sales). Instead of the present
alternative limit of 10-percent of the aggregate bases of all
the assets of the REIT as of the beginning of the taxable year,
the limit under the provision is either 10-percent of such
aggregate basis or 10-percent of the aggregate fair market
value of all the assets of the REIT as of such time.

Health care facilities held by a taxable REIT subsidiary

The provision expands the taxable REIT subsidiary exception
for hotel, motel, and other transient facilities so that it
also applies to health care facilities. Thus, a taxable REIT
subsidiary is permitted to rent a health care facility from its
parent REIT and hire an independent contractor to operate such
a facility; the rents paid to the parent REIT are qualifying
rental income for purposes of the 75-percent and 95-percent
income tests.

Rules regarding operating a health care or lodging facility through an
independent contractor

Under the provision, a taxable REIT subsidiary is not to be
considered to be operating or managing a qualified health care
property or a qualified lodging facility other than through an
independent contractor solely because the taxable REIT
subsidiary directly or indirectly possesses a license, permit,
or similar instrument enabling it to do so.
Under the provision, a taxable REIT subsidiary is not to be
considered to be operating or managing a qualified health care
property or qualified lodging facility solely because it
employs individuals working at such property or facility
located outside the United States, but only if an eligible
independent contractor is responsible for the daily supervision
and direction of such individuals on behalf of the taxable REIT
subsidiary pursuant to a management agreement or similar
service contract.

Effective Date

The provision generally is effective for taxable years
beginning after the date of enactment (July 30, 2008). However,
the rules treating certain foreign currency gain as excluded
income for purposes of the income tests apply to gain and items
of income recognized after the date of enactment. The new rules
of section 856(c)(5)(G), relating to hedging and managing risk,
are effective for transactions entered into after such date of
enactment. The Treasury authority to exclude items from income
or to add items of qualifying income for purposes of the income
qualification tests applies to gains and items of income
recognized after the date of enactment. The foreign currency
amendment relating to gain from foreclosure property applies to
gain recognized after the date of enactment, and the provision
relating to net prohibited transactions income applies to gain
and deductions recognized after the date of enactment. The
provisions relating to the prohibited transactions tax safe
harbor apply to sales made after the date of enactment.

TITLE III--REVENUE PROVISIONS

A. General Provisions

1. Election to accelerate AMT and research credits in lieu of bonus
depreciation (sec. 3081 of the Act and sec. 168(k) of the Code)

Present Law

Bonus depreciation
Taxpayers are permitted an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of qualified property generally placed in service in
2008.\312\ 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 basis of the property and the depreciation
allowances in the year the property is placed in service and
later years are appropriately adjusted to reflect the
additional first-year depreciation deduction.
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\312\ This provision was added by section 103 of the Economic
Stimulus Act of 2008.
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In order for property to qualify for the additional first-
year depreciation deduction it must meet all of the following
requirements: (1) the property must be (a) property to which
MACRS applies with an applicable recovery period of 20 years or
less, (b) water utility property (as defined in section
168(e)(5)), (c) computer software other than computer software
covered by section 197, or (d) qualified leasehold improvement
property (as defined in section 168(k)(3)); (2) the original
use of the property must commence with the taxpayer after
December 31, 2007; (3) the taxpayer must purchase the property
either (a) after December 31, 2007, and before January 1, 2009,
but only if no binding written contract for the acquisition is
in effect before January 1, 2008, or (b) pursuant to a binding
written contract which was entered into after December 31,
2007, and before January 1, 2009; \313\ and (4) the property
must be placed in service after December 31, 2007, and before
January 1, 2009. An extension of the placed in service date of
one year (i.e., to January 1, 2010) is provided for certain
property with a recovery period of 10 years or longer and
certain transportation property.
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\313\ Special rules apply to property manufactured, constructed, or
produced by the taxpayer for use by the taxpayer.
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Corporate AMT credit
If a corporation is subject to the alternative minimum tax
(``AMT'') in any year, the amount of AMT paid is allowed as a
credit in any subsequent taxable year to the extent the
taxpayer's regular tax liability exceeds its tentative minimum
tax.
Research credit
As part of the general business credit, section 38 limits
credits for increasing research activities (``research
credit'') generally to the amount of regular tax in excess of
tentative minimum tax.

Explanation of Provision

Corporations otherwise eligible for additional first year
depreciation under section 168(k) may elect to claim additional
research or minimum tax credits in lieu of claiming
depreciation under section 168(k) for ``eligible qualified
property'' placed in service after March 31, 2008.\314\ A
corporation making the election forgoes the depreciation
deductions allowable under section 168(k) and instead increases
the limitation under section 38(c) on the use of research
credits or section 53(c) on the use of minimum tax credits. The
increases in the allowable credits are treated as refundable
for purposes of this provision. The depreciation for qualified
property is calculated for both regular tax and AMT purposes
using the straight-line method in place of the method that
would otherwise be used absent the election under this
provision.
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\314\ In the case of an electing corporation that is a partner in a
partnership, the corporate partner's distributive share of partnership
items is determined as if 168(k) does not apply to any eligible
qualified property and the straight line is used to calculate
depreciation of such property.
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The research credit or minimum tax credit limitation is
increased by the bonus depreciation amount, which is equal to
20 percent of bonus depreciation \315\ for certain eligible
qualified property that could be claimed absent an election
under this provision. Generally, eligible qualified property
included in the calculation is bonus depreciation property that
meets the following requirements: (1) the original use of the
property must commence with the taxpayer after March 31, 2008;
(2) the taxpayer must purchase the property either (a) after
March 31, 2008, and before January 1, 2009, but only if no
binding written contract for the acquisition is in effect
before April 1, 2008,\316\ or (b) pursuant to a binding written
contract which was entered into after March 31, 2008, and
before January 1, 2009; \317\ and (3) the property must be
placed in service after March 31, 2008, and before January 1,
2009 (January 1, 2010 for certain longer-lived and
transportation property).
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\315\ For this purpose, bonus depreciation is the difference
between (i) the aggregate amount of depreciation for all eligible
qualified property determined if section 168(k)(l) applied using the
most accelerated depreciation method (determined without regard to this
provision), and shortest life allowable for each property, and (ii) the
amount of depreciation that would be determined if section 168(k)(1)
did not apply using the same method and life for each property.
\316\ In the case of passenger aircraft, the written binding
contract limitation does not apply.
\317\ Special rules apply to property manufactured, constructed, or
produced by the taxpayer for use by the taxpayer.
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The bonus depreciation amount is limited to the lesser of:
(1) $30 million, or (2) six percent of the sum of research
credit carryforwards from taxable years beginning before
January 1, 2006 and minimum tax credits allocable to the
adjusted minimum tax imposed for taxable years beginning before
January 1, 2006. All corporations treated as a single employer
under section 52(a) shall be treated as one taxpayer for
purposes of the limitation, as well as for electing the
application of this provision.
The provision also provides that an applicable partnership
may elect to be treated as making a deemed payment of tax for
any applicable taxable year in the amount of the least of the
following: (1) the bonus depreciation amount that would be
determined if an election under this provision were in effect
for the partnership; (2) the amount of the partnership's
research credit for the taxable year; or (3) $30 million
(reduced by any deemed payment for any preceding taxable year).
The deemed payment may not be used as an offset or credit
against any tax liability of the partnership or any partner,
but is instead refunded to the partnership. For purposes of
this provision, an applicable partnership is a domestic
partnership that was formed on August 3, 2007, and will produce
in excess of 675,000 automobiles during the period beginning on
January 1, 2008, and ending on June 30, 2008. An applicable
taxable year is any taxable year during which eligible
qualified property is placed in service. If an applicable
partnership makes this election, the amount of the deduction
allowable to the partnership or any partner for any eligible
qualified property is computed without applying section 168(k),
the straight line method must be used by the partnership and
any partner for such property, the election to increase minimum
tax credits and research credits under this provision is not
available, and the research credit amount for any applicable
taxable year with respect to the partnership is reduced by the
amount of the deemed payment.

Effective Date

The provision is effective for taxable years ending after
March 31, 2008.

2. Certain GO Zones incentives

(a) Election to amend returns for hurricane-related casualty losses
(sec. 3082(a) 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.\318\ 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.\319\ Generally, personal casualty or
theft losses are deductible only if they exceed $100 per
casualty or theft and net casualty and theft losses are
deductible only to the extent it exceeds 10 percent of adjusted
gross income.\320\ However, for hurricane-related casualty
losses, these two casualty loss limitations are removed.\321\
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\318\ Sec. 165.
\319\ Sec. 165(c)(3).
\320\ Sec. 165(h).
\321\ Sec. 1400S(b).
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Casualty losses are generally allowed for the taxable year
of the loss. However, in the case of a disaster loss arising in
an area determined by the President of the United States to
warrant assistance by the Federal Government under the Robert
T. Stafford Disaster Relief and Emergency Assistance Act, the
taxpayer may elect to take the loss into account for the
taxable year immediately before the taxable year in which the
disaster occurred.\322\
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\322\ Sec. 165(i).
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When a taxpayer receives reimbursement for such loss in a
subsequent taxable year, the deductible loss is not recomputed
for the taxable year in which the deduction was taken, the
reimbursement amount is taken into income in the taxable year
received.\323\
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\323\ Treas. Reg. sec. 165-1(d)(2)(iii).
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Reasons for Change

The Congress believes that homeowners who sustained
hurricane related casualty losses on a principal residence
should receive additional relief. Taxpayers may elect to
include grant reimbursements into income in the year the
casualty loss was taken to avoid being subject to higher
marginal tax rate brackets in the year of receipt. This
provides tax relief that allows homeowners to put more funds
into rebuilding their principal residences.

Explanation of Provision

The provision allows a taxpayer who claimed a casualty loss
to a principal residence (within the meaning of section 121)
resulting from Hurricane Katrina, Hurricane Rita, or Hurricane
Wilma and in a subsequent year receives a grant as
reimbursement of such loss to elect to file an amended return
for the taxable year in which such deduction was allowed.\324\
The casualty loss deduction is reduced, but not below zero, by
the amount of such reimbursement. The time for filing such
amended return is the later of one year from the date of
enactment of this Act or the due date for the tax return for
the year in which the grant was received. The provision further
provides that interest and penalties are waived with respect to
the resulting underpayment to the extent of payments, whether
full or partial, actually paid within one year after filing of
the amended return.
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\324\ To qualify the grant must be received under Public Law 109-
148, 109-234, or 110-116.
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Effective Date

The provision is effective on the date of enactment (July
30, 2008).

(b) Waiver of deadline on construction of GO Zone property eligible for
bonus depreciation (sec. 3082(b) of the Act)

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 (other than
residential rental property and nonresidential real 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.
Gulf Opportunity Zone
The ``Gulf Opportunity Zone'' or ``GO 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.
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 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 (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 before January 1,
2008, 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.
Gulf Opportunity Zone extension property
The placed-in-service deadline is extended for specified
Gulf Opportunity Zone extension property to qualify for the
additional first-year depreciation deduction. 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) \325\ placed in service on or before
December 31, 2010, 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.
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\325\ Property described in section 168(k)(2)(A)(i) includes (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)), and (4) certain leasehold improvement property.
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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). These areas include the Louisiana parishes of
Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St.
Tammany, and Washington, and the Mississippi counties of
Hancock, Harrison, Jackson, Pearl River, and Stone.\326\
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\326\ Notice 2007-36, 2007-17 I.R.B. 1000.
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Reasons for Change

Many taxpayers have been unable to begin the construction
of property in the Gulf Opportunity Zone due to the lack of
electricity, clean water, and other circumstances beyond their
control. Therefore, the Congress believes the commencement date
for beginning the construction of self-constructed property
should be removed so that these taxpayers may qualify for the
additional first-year depreciation deduction to the extent the
other requirements are met.

Description of Proposal

The Act removes the commencement date of January 1, 2008,
for self-constructed Gulf Opportunity Zone extension property.
The placed in service date of December 31, 2010 and the
progress expenditure date of January 1, 2010 are not modified.

Effective Date

The provision applies to property placed in service after
December 31, 2007.

(c) Inclusion of certain counties in GO Zone for purposes of tax-exempt
bond financing (sec. 3082(c) of the Act and sec. 1400N(a) of the Code)

Present Law

The Gulf Opportunity Zone Act of 2005 established certain
tax benefits for areas affected by Hurricanes Katrina, Wilma
and Rita.\327\ Under present law, the ``Gulf Opportunity Zone''
or ``GO Zone'' 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 the Robert T. Stafford Disaster Relief and Emergency
Assistance Act (the ``Stafford Act'') by reason of Hurricane
Katrina.\328\ The ``Hurricane Katrina disaster area'' is the
area with respect to which a major disaster has been declared
by the President before September 14, 2005, under section 401
of the Stafford Act by reason of Hurricane Katrina.\329\ The
Code authorizes the States of Alabama, Louisiana and
Mississippi to issue certain exempt facility bonds and
qualified mortgage bonds for property located in the GO Zone
(``GO Zone bonds'').\330\ In Alabama, the following counties
have been identified as warranting individual or individual and
public assistance: Baldwin, Chocktaw, Clarke, Greene, Hale,
Marengo, Mobile, Pickens, Sumter, Tuscaloosa and
Washington.\331\
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\327\ Pub. L. No. 109-135.
\328\ Sec. 1400M(1).
\329\ Sec. 1400M(2).
\330\ Sec. 1400N(a). For purposes of these bonds, qualified project
costs are the cost of any qualified residential rental project (as
defined in section 142(d)) located in the GO Zone, the cost of
acquisition, construction, reconstruction and renovation of
nonresidential real property (including fixed improvements associated
with such property) located in the GO Zone, and the cost of
acquisition, construction, reconstruction and renovation of public
utility property (as defined in section 168(i)(10) located in the GO
Zone (sec. 1400N(a)(4)). GO Zone bonds cannot be used for movable
fixtures or equipment (sec. 1400N(a)(3)(B)). Nor can GO Zone bonds be
used to provide 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 businesses of
which is the sale of alcoholic beverages for consumption off premises
(sec. 1400N(a)(2)(E) and sec. 144(c)(6)(B)). GO Zone bonds are treated
as qualified mortgage bonds if the issue meets the general requirements
of a qualified mortgage issue and the residences financed with such
bonds are located in the GO Zone. For these residences, the first-time
homebuyer rule is waived and purchase and income rules for targeted
area residences apply. In addition, 100 percent of the mortgages must
be made to mortgagors whose family income is 140 percent or less of the
applicable median family income.
\331\ Internal Revenue Service, Notice 2006-21, GO Zone Resident
Population Estimates (March 20, 2006).
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Reasons for Change

The Congress believes that areas affected by Hurricane
Katrina need additional recovery tools. The Congress believes
that the Gulf Opportunity Zone bonds are a valuable resource
for promoting recovery in the affected areas. The Congress
believes that the Gulf Opportunity Zone bonds should be
expanded so that this resource may be utilized by those areas
that were not originally designated as part of the Gulf
Opportunity Zone, but were severely impacted by the hurricane.

Explanation of Provision

For purposes of GO Zone bonds only, the provision includes
the following counties for purposes of defining the GO Zone:
Colbert County, Alabama and Dallas County, Alabama.

Effective Date

The provision is effective as if included in the Gulf
Opportunity Zone Act of 2005 to which it relates.

B. Revenue Offsets

1. Require information reporting on payment card and third party
payment transactions (sec. 3091 of the Act and new sec. 6050W of the
Code)

Present Law

Present law imposes a variety of information reporting
requirements on participants in certain transactions. These
requirements are intended to assist taxpayers in preparing
their income tax returns and to help the Internal Revenue
Service (``IRS'') determine whether such returns are correct
and complete. 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.\332\ Payments to
corporations generally are excepted from this requirement.
Certain payments subject to information reporting also are
subject to backup withholding if the payee has not provided a
valid taxpayer identification number (``TIN'').
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\332\ Sec. 6041(a).
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Under present law, any person required to file a correct
information return who fails to do so on or before the
prescribed filing date is subject to a penalty that varies
based on when, if at all, the correct information return is
filed.

Explanation of Provision

The provision requires any payment settlement entity making
payment to a participating payee in settlement of reportable
payment transactions to report annually to the IRS and to the
participating payee the gross amount of such reportable payment
transactions, as well as the name, address, and TIN of the
participating payees. A ``reportable payment transaction''
means any payment card transaction and any third party network
transaction.
Under the provision, a ``payment settlement entity'' means,
in the case of a payment card transaction, a merchant acquiring
entity and, in the case of a third party network transaction, a
third party settlement organization. A ``participating payee''
means, in the case of a payment card transaction, any person
who accepts a payment card as payment and, in the case of a
third party network transaction, any person who accepts payment
from a third party settlement organization in settlement of
such transaction.
For purposes of the reporting requirement, the term
``merchant acquiring entity'' means the bank or other
organization with the contractual obligation to make payment to
participating payees in settlement of payment card
transactions. A ``payment card transaction'' means any
transaction in which a payment card is accepted as
payment.\333\ A ``payment card'' is defined as any card (e.g.,
a credit card or debit card) which is issued pursuant to an
agreement or arrangement which provides for: (1) one or more
issuers of such cards; (2) a network of persons unrelated to
each other, and to the issuer, who agree to accept such cards
as payment; and (3) standards and mechanisms for settling the
transactions between the merchant acquiring entities and the
persons who agree to accept such cards as payment. Thus, under
the provision, a bank that enrolls a business to accept credit
cards and contracts with the business to make payment on credit
card transactions is required to report to the IRS the
business's gross credit card transactions for each calendar
year. The bank also is required to provide a copy of the
information report to the business.
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\333\ For this purpose, the acceptance as payment of any account
number or other indicia associated with a payment card also qualifies a
payment card transaction.
---------------------------------------------------------------------------
The provision also requires reporting on a third party
network transaction. The term ``third party network
transaction'' means any transaction which is settled through a
third party payment network. A ``third party payment network''
is defined as any agreement or arrangement which (1) involves
the establishment of accounts with a central organization by a
substantial number of persons (e.g., more than 50) who are
unrelated to such organization, provide goods or services, and
have agreed to settle transactions for the provision of such
goods or services pursuant to such agreement or arrangement;
(2) which provides for standards and mechanisms for settling
such transactions; and (3) which guarantees persons providing
goods or services pursuant to such agreement or arrangement
that such persons will be paid for providing such goods or
services. In the case of a third party network transaction, the
payment settlement entity is the third party settlement
organization, which is defined as the central organization
which has the contractual obligation to make payment to
participating payees of third party network transactions. Thus,
an organization generally is required to report if it provides
a network enabling buyers to transfer funds to sellers who have
established accounts with the organization and have a
contractual obligation to accept payment through the network.
However, an organization operating a network which merely
processes electronic payments (such as wire transfers,
electronic checks, and direct deposit payments) between buyers
and sellers, but does not have contractual agreements with
sellers to use such network, is not required to report under
the provision. Similarly, an agreement to transfer funds
between two demand deposit accounts will not, by itself,
constitute a third party network transaction.
A third party payment network does not include any
agreement or arrangement which provides for the issuance of
payment cards as defined by the provision. In addition, a third
party settlement organization is not required to report unless
the aggregate value of third party network transactions for the
year exceeds $20,000 and the aggregate number of such
transactions exceeds 200. For the avoidance of doubt, if a
payment of funds is made to a third party settlement
organization by means of a payment card (i.e., as part of a
transaction that is a payment card transaction), the $20,000
and 200 transaction de minimis rule continues to apply to any
reporting obligation with respect to payment of such funds to a
participating payee by the third party settlement organization
made as part of a third party network transaction.
The provision also imposes reporting requirements on
intermediaries who receive payments from a payment settlement
entity and distribute such payments to one or more
participating payees. The provision treats such intermediaries
as participating payees with respect to the payment settlement
entity and as payment settlement entities with respect to the
participating payees to whom the intermediary distributes
payments. Thus, for example, in the case of a corporation that
receives payment from a bank for credit card sales effectuated
at the corporation's independently-owned franchise stores, the
bank is required to report the gross amount of reportable
payment transactions settled through the corporation
(notwithstanding the fact that the corporation does not accept
payment cards and would not otherwise be treated as a
participating payee). In turn, the corporation, as an
intermediary, would be required to report the gross amount of
reportable payment transactions allocable to each franchise
store. The bank would have no reporting obligation with respect
to payments made by the corporation to its franchise stores.
If a payment settlement entity contracts with a third party
to settle reportable payment transactions on behalf of the
payment settlement entity, the provision requires the third
party to file the annual information return in lieu of the
payment settlement entity.
The provision grants authority to the Secretary to issue
guidance to implement the reporting requirement, including
rules to prevent the reporting of the same transaction more
than once.
Under the provision, reportable payment transactions
subject to information reporting generally are subject to
backup withholding requirements. Finally, present law penalties
relating to the failure to file correct information returns
would apply to the new information reporting requirements
required under the provision.

Effective Date

The provision generally is effective for information
returns for reportable payment transactions for calendar years
beginning after December 31, 2010. The amendments to the backup
withholding requirements apply to amounts paid after December
31, 2011.

2. Exclusion of gain on sale of a principal residence not to apply to
nonqualified use (sec. 3092 of the Act and sec. 121 of the Code)

Present Law

In general

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 an election relating to members
of the uniformed services, the Foreign Service, and certain
employees of the intelligence community. 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. 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.
The election may be made with respect to only one property for
a suspension period.
The exclusion does not apply to gain to the extent the gain
is attributable to depreciation allowable with respect to the
rental or business use of a principal residence for periods
after May 6, 1997.

Reasons for Change

The present-law exclusion of gain on principal residences
has many beneficial effects by encouraging home ownership. The
Congress believes that the application of present law to
exclude gain attributable to periods of use prior to a home's
use as a principal residence is not consistent with the purpose
of the present-law exclusion and inappropriate. The Congress
believes that the provision limits the application of the
exclusion to use as a principal residence without imposing
undue computational and record-keeping burdens on the taxpayer
or the Internal Revenue Service.

Explanation of Provision

Under the Act, gain from the sale or exchange of a
principal residence allocated to periods of nonqualified use is
not excluded from gross income. The amount of gain allocated to
periods of nonqualified use is the amount of gain multiplied by
a fraction the numerator of which is the aggregate periods of
nonqualified use during the period the property was owned by
the taxpayer and the denominator of which is the period the
taxpayer owned the property.
A period of nonqualified use means any period (not
including any period before January 1, 2009) during which the
property is not used by the taxpayer or the taxpayer's spouse
or former spouse as a principal residence. For purposes of
determining periods of nonqualified use, (i) any period after
the last date the property is used as the principal residence
of the taxpayer or spouse (regardless of use during that
period), and (ii) any period (not to exceed two years) that the
taxpayer is temporarily absent by reason of a change in place
of employment, health, or, to the extent provided in
regulations, unforeseen circumstances, are not taken into
account. The present-law election for the uniformed services,
Foreign Service and employees of the intelligence community is
unchanged.
If any gain is attributable to post-May 6, 1997,
depreciation, the exclusion does not apply to that amount of
gain, as under present law, and that gain is not taken into
account in determining the amount of gain allocated to
nonqualified use.
These provisions may be illustrated by the following
examples:
Example 1.--Assume that an individual buys a property on
January 1, 2009, for $400,000, and uses it as rental property
for two years claiming $20,000 of depreciation deductions. On
January 1, 2011, the taxpayer converts the property to his
principal residence. On January 1, 2013, the taxpayer moves
out, and the taxpayer sells the property for $700,000 on
January 1, 2014. As under present law, $20,000 gain
attributable to the depreciation deductions is included in
income. Of the remaining $300,000 gain, 40% of the gain (2
years divided by 5 years), or $120,000, is allocated to
nonqualified use and is not eligible for the exclusion. Since
the remaining gain of $180,000 is less than the maximum gain of
$250,000 that may be excluded, gain of $180,000 is excluded
from gross income.
Example 2.--Assume that an individual buys a principal
residence on January 1, 2009, for $400,000, moves out on
January 1, 2019, and on December 1, 2021 sells the property for
$600,000. The entire $200,000 gain is excluded from gross
income, as under present law, because periods after the last
qualified use do not constitute nonqualified use.

Effective Date

The provision is effective for sales and exchanges after
December 31, 2008.

3. Delay implementation of worldwide interest allocation (sec. 3093 of
the Act and sec. 864(f) of the Code)

Present Law

In general

In order to compute the foreign tax credit limitation, a
taxpayer must determine the amount of its taxable income from
foreign sources. Thus, the taxpayer must allocate and apportion
deductions between items of U.S.-source gross income, on the
one hand, and items of foreign-source gross income, on the
other.
In the case of interest expense, the rules generally are
based on the approach that money is fungible and that interest
expense is properly attributable to all business activities and
property of a taxpayer, regardless of any specific purpose for
incurring an obligation on which interest is paid.\334\ For
interest allocation purposes, all members of an affiliated
group of corporations generally are treated as a single
corporation (the so-called ``one-taxpayer rule'') and
allocation must be made on the basis of assets rather than
gross income. The term ``affiliated group'' in this context
generally is defined by reference to the rules for determining
whether corporations are eligible to file consolidated returns.
---------------------------------------------------------------------------
\334\ However, exceptions to the fungibility are provided in
particular cases, some of which are described below.
---------------------------------------------------------------------------
For consolidation purposes, the term ``affiliated group''
means one or more chains of includible corporations connected
through stock ownership with a common parent corporation which
is an includible corporation, but only if: (1) the common
parent owns directly stock possessing at least 80 percent of
the total voting power and at least 80 percent of the total
value of at least one other includible corporation; and (2)
stock meeting the same voting power and value standards with
respect to each includible corporation (excluding the common
parent) is directly owned by one or more other includible
corporations.
Generally, the term ``includible corporation'' means any
domestic corporation except certain corporations exempt from
tax under section 501 (for example, corporations organized and
operated exclusively for charitable or educational purposes),
certain life insurance companies, corporations electing
application of the possession tax credit, regulated investment
companies, real estate investment trusts, and domestic
international sales corporations. A foreign corporation
generally is not an includible corporation.
Subject to exceptions, the consolidated return and interest
allocation definitions of affiliation generally are consistent
with each other.\335\ For example, both definitions generally
exclude all foreign corporations from the affiliated group.
Thus, while debt generally is considered fungible among the
assets of a group of domestic affiliated corporations, the same
rules do not apply as between the domestic and foreign members
of a group with the same degree of common control as the
domestic affiliated group.
---------------------------------------------------------------------------
\335\ One such exception is that the affiliated group for interest
allocation purposes includes section 936 corporations that are excluded
from the consolidated group.
---------------------------------------------------------------------------
Banks, savings institutions, and other financial affiliates
The affiliated group for interest allocation purposes
generally excludes what are referred to in the Treasury
regulations as ``financial corporations.'' \336\ These include
any corporation, otherwise a member of the affiliated group for
consolidation purposes, that is a financial institution
(described in section 581 or section 591), the business of
which is predominantly with persons other than related persons
or their customers, and which is required by State or Federal
law to be operated separately from any other entity which is
not a financial institution.\337\ The category of financial
corporations also includes, to the extent provided in
regulations, bank holding companies (including financial
holding companies), subsidiaries of banks and bank holding
companies (including financial holding companies), and savings
institutions predominantly engaged in the active conduct of a
banking, financing, or similar business.\338\
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\336\ Treas. Reg. sec. 1.861-11T(d)(4).
\337\ Sec. 864(e)(5)(C).
\338\ Sec. 864(e)(5)(D).
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A financial corporation is not treated as a member of the
regular affiliated group for purposes of applying the one-
taxpayer rule to other non-financial members of that group.
Instead, all such financial corporations that would be so
affiliated are treated as a separate single corporation for
interest allocation purposes.

Worldwide interest allocation

In general
The American Jobs Creation Act of 2004 (``AJCA'') \339\
modifies the interest expense allocation rules described above
(which generally apply for purposes of computing the foreign
tax credit limitation) by providing a one-time election (the
``worldwide affiliated group election'') under which the
taxable income of the domestic members of an affiliated group
from sources outside the United States generally is determined
by allocating and apportioning interest expense of the domestic
members of a worldwide affiliated group on a worldwide-group
basis (i.e., as if all members of the worldwide group were a
single corporation). If a group makes this election, the
taxable income of the domestic members of a worldwide
affiliated group from sources outside the United States is
determined by allocating and apportioning the third-party
interest expense of those domestic members to foreign-source
income in an amount equal to the excess (if any) of (1) the
worldwide affiliated group's worldwide third-party interest
expense multiplied by the ratio which the foreign assets of the
worldwide affiliated group bears to the total assets of the
worldwide affiliated group,\340\ over (2) the third-party
interest expense incurred by foreign members of the group to
the extent such interest would be allocated to foreign sources
if the principles of worldwide interest allocation were applied
separately to the foreign members of the group.\341\
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\339\ Pub. L. No. 108-357, sec. 401 (2004).
\340\ For purposes of determining the assets of the worldwide
affiliated group, neither stock in corporations within the group nor
indebtedness (including receivables) between members of the group is
taken into account.
\341\ Although the interest expense of a foreign subsidiary is
taken into account for purposes of allocating the interest expense of
the domestic members of the electing worldwide affiliated group for
foreign tax credit limitation purposes, the interest expense incurred
by a foreign subsidiary is not deductible on a U.S. return.
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For purposes of the new elective rules based on worldwide
fungibility, the worldwide affiliated group means all
corporations in an affiliated group as well as all controlled
foreign corporations that, in the aggregate, either directly or
indirectly,\342\ would be members of such an affiliated group
if section 1504(b)(3) did not apply (i.e., in which at least 80
percent of the vote and value of the stock of such corporations
is owned by one or more other corporations included in the
affiliated group). Thus, if an affiliated group makes this
election, the taxable income from sources outside the United
States of domestic group members generally is determined by
allocating and apportioning interest expense of the domestic
members of the worldwide affiliated group as if all of the
interest expense and assets of 80-percent or greater owned
domestic corporations (i.e., corporations that are part of the
affiliated group, as modified to include insurance companies)
and certain controlled foreign corporations were attributable
to a single corporation.
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\342\ Indirect ownership is determined under the rules of section
958(a)(2) or through applying rules similar to those of section
958(a)(2) to stock owned directly or indirectly by domestic
partnerships, trusts, or estates.
---------------------------------------------------------------------------
The common parent of the domestic affiliated group must
make the worldwide affiliated group election. It must be made
for the first taxable year beginning after December 31, 2008,
in which a worldwide affiliated group exists that includes at
least one foreign corporation that meets the requirements for
inclusion in a worldwide affiliated group. Once made, the
election applies to the common parent and all other members of
the worldwide affiliated group for the taxable year for which
the election was made and all subsequent taxable years, unless
revoked with the consent of the Secretary of the Treasury.
Financial institution group election
Taxpayers are allowed to apply the bank group rules to
exclude certain financial institutions from the affiliated
group for interest allocation purposes under the worldwide
fungibility approach. The rules also provide a one-time
``financial institution group'' election that expands the bank
group. At the election of the common parent of the pre-election
worldwide affiliated group, the interest expense allocation
rules are applied separately to a subgroup of the worldwide
affiliated group that consists of (1) all corporations that are
part of the bank group, and (2) all ``financial corporations.''
For this purpose, a corporation is a financial corporation if
at least 80 percent of its gross income is financial services
income (as described in section 904(d)(2)(C)(i) and the
regulations thereunder) that is derived from transactions with
unrelated persons.\343\ For these purposes, items of income or
gain from a transaction or series of transactions are
disregarded if a principal purpose for the transaction or
transactions is to qualify any corporation as a financial
corporation.
---------------------------------------------------------------------------
\343\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
The common parent of the pre-election worldwide affiliated
group must make the election for the first taxable year
beginning after December 31, 2008, in which a worldwide
affiliated group includes a financial corporation. Once made,
the election applies to the financial institution group for the
taxable year and all subsequent taxable years. In addition,
anti-abuse rules are provided under which certain transfers
from one member of a financial institution group to a member of
the worldwide affiliated group outside of the financial
institution group are treated as reducing the amount of
indebtedness of the separate financial institution group.
Regulatory authority is provided with respect to the election
to provide for the direct allocation of interest expense in
circumstances in which such allocation is appropriate to carry
out the purposes of these rules, to prevent assets or interest
expense from being taken into account more than once, or to
address changes in members of any group (through acquisitions
or otherwise) treated as affiliated under these rules.
Effective date of worldwide interest allocation under AJCA
The worldwide interest allocation rules under AJCA are
effective for taxable years beginning after December 31, 2008.

Reasons for Change

The Congress believes that it is appropriate to delay
implementation of the worldwide interest allocation rules.

Explanation of Provision

The provision delays the effective date of worldwide
interest allocation rules for two years, until taxable years
beginning after December 31, 2010. The required dates for
making the worldwide affiliated group election and the
financial institution group election are changed accordingly.
The provision also provides a special phase-in rule in the
case of the first taxable year to which the worldwide interest
allocation rules apply. For that year, the amount of the
taxpayer's taxable income from foreign sources is reduced by 70
percent of the excess of (i) the amount of its taxable income
from foreign sources as calculated using the worldwide interest
allocation rules over (ii) the amount of its taxable income
from foreign sources as calculated using the present-law
interest allocation rules. Any foreign tax credits disallowed
by virtue of this reduction in foreign-source taxable income
may be carried back or forward under the normal rules for
carrybacks and carryforwards of excess foreign tax credits.

Effective Date

The provision is effective on the date of enactment (July
30, 2008).

4. Modifications to corporate estimated tax payments (sec. 3094 of the
Act)

Present Law

In general

Tax Increase Prevention and Reconciliation Act of 2005 (``TIPRA'')

Subsequent legislation

Several public laws have been enacted since TIPRA which
further increase the percentage of payments due under each of
the two special rules enacted by TIPRA described above.

Reasons for Change

The Congress believes it is appropriate to adjust the
corporate estimated tax payments.

Explanation of Provision \344\

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\344\ All the public laws enacted in the 110th Congress affecting
this provision are described in Part Twenty-Two.
---------------------------------------------------------------------------
The provision makes two modifications to the corporate
estimated tax payment rules.
First, in case of a corporation with assets of at least $1
billion, the payments due in July, August, and September, 2013,
are increased by 16.75 percent points of the payment otherwise
due and the next required payment shall be reduced accordingly.
Second, in case of a corporation with assets of at least $1
billion, the increased payments due in July, August, and
September, 2012 under the special rules in TIPRA and subsequent
legislation are repealed. In effect the general rule is applied
(i.e., such corporations are required to make quarterly
estimated tax payments based on their income tax liability.)

Effective Date

The provision is effective on the date of enactment (July
30, 2008).

PART FOURTEEN: REVENUE PROVISION RELATING TO FUNERAL TRUSTS (PUBLIC LAW
110-317) \345\
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\345\ H.R. 6580. H.R. 6580 passed the House on July 29, 2008, and
passed the Senate without amendment on August 1, 2008. The President
signed the bill on August 29, 2008.
---------------------------------------------------------------------------

Present Law

A qualified funeral trust is a taxable trust that arises as
a result of a contract with a person engaged in the trade or
business of providing funeral or burial services or property
necessary to provide such services, and which meets certain
other requirements.\346\ A qualified funeral trust must have as
its sole purpose holding, investing, and reinvesting funds in
the trust, and using such funds solely to make payments for the
above-described services or property for the benefit of the
beneficiaries of the trust. A qualified funeral trust may have
as beneficiaries only individuals with respect to whom the
above-described services or property are to be provided at
death, and the trust may only accept contributions by or for
the benefit of such beneficiaries. In addition, to qualify, the
trust must be one that, but for the making of a required
election, would be treated under the grantor trust rules as
owned by the purchaser of the funeral or burial contract.
Because a qualified funeral trust is not treated as a grantor
trust, the trust (rather than the purchaser of the contract) is
taxed on income from the trust.
---------------------------------------------------------------------------
\346\ Sec. 685(b).
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A trust is not a qualified funeral trust if it accepts
aggregate contributions by or for the benefit of an individual
in excess of a statutory dollar limit, which is $9,000 for 2008
\347\ (and which periodically is adjusted for inflation).
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\347\ Rev. Proc. 2007-66, I.R.B. 2007-45 (Oct. 18, 2007).
---------------------------------------------------------------------------

Explanation of Provision

The provision repeals the dollar limit on contributions to
qualified funeral trusts.

Effective Date

The provision is effective for taxable years beginning
after the date of enactment (August 29, 2008).

PART FIFTEEN: HIGHWAY TRUST FUND RESTORATION (PUBLIC LAW 110-318) \348\
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\348\ H.R. 6532. H.R. 6532 passed the House on July 23, 2008. The
Senate passed the bill on September 10, 2008, with an amendment. The
House agreed to the Senate amendment on September 11, 2008. The
President signed the bill on September 15, 2008.
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Present Law

Section 9004 of the Surface Transportation Revenue Act of
1998 (Title IX of the Transportation Equity Act for the 21st
Century) provided that the Highway Trust Fund will not earn
interest on unspent balances after September 30, 1998. Further.
the balance in excess of $8 billion in the Highway Account of
the Highway Trust Fund was cancelled on October 1, 1998 and
transferred to the General Fund.\349\
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\349\ Sec. 9502(f).
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Explanation of Provision

The Act provides that out of money in the Treasury not
otherwise appropriated, $8,017,000,000 is appropriated to the
Highway Trust Fund.

Effective Date

The provision is effective on the date of enactment
(September 15, 2008).

PART SIXTEEN: SSI EXTENSION FOR ELDERLY AND DISABLED REFUGEES ACT
(PUBLIC LAW 110-328) \350\
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\350\ H.R. 2608. H.R. 2608 passed the House on July 11, 2007. The
bill passed the Senate on August 1, 2008, with an amendment. The House
agreed to the Senate amendment on September 17, 2008. The President
signed the bill on September 30, 2008.
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A. Collection of Unemployment Compensation Debts Resulting From Fraud
(sec. 3 of the Act and sec. 6402 and 6103 of the Code)

Present Law

Under present law, the IRS has the authority to credit any
overpayment against any other federal tax liability owed by the
person who made the overpayment. The balance of the overpayment
will generally be refunded, unless a claim has been made for
payment of certain non-tax debts of that person. Such non-tax
debts include past-due support within the meaning of the Social
Security Act,\351\ debts owed to federal agencies \352\ and
state income tax obligations.\353\
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\351\ Sec. 6402(c).
\352\ Sec. 6402(d).
\353\ Sec. 6403(e).
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If such a debt is claimed by the creditor agency to which
the debt is owed, the IRS will notify the person who overpaid
that the overpayment has been reduced by the amount of the debt
and that such amount will be paid to the creditor agency. The
statute establishes priorities of the various categories of
debt. It requires that any offsets for non-tax debts occur only
after satisfaction of federal tax debts but before any amount
is credited to estimated tax for a future tax liability; past-
due support is paid before federal agencies, which are in turn
paid before states that are owed state income tax.\354\ In the
case of state income tax debts, only overpayments by residents
of the requesting state are subject to offset.\355\ In
addition, if a payment to a State is determined to have been
erroneously made by the IRS in its exercise of this authority,
the State is required to promptly repay upon notice from the
IRS. The actions of the IRS in reducing the overpayment to
satisfy non-tax debts are not subject to judicial review.\356\
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\354\ Sec. 6402(c), 6402(d)(1)(C) and 6402(e)(1)(C).
\355\ Sec. 6402(e)(2).
\356\ Sec. 6402(f).
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The IRS is generally barred from disclosing return
information for reasons other than tax administration. Certain
information may be disclosed to agencies requesting a reduction
of an overpayment under section 6402.\357\
---------------------------------------------------------------------------
\357\ Sec. 6103(l)(10).
---------------------------------------------------------------------------

Explanation of Provision

The Act adds a new category of non-tax debt that may be
satisfied by offset against an overpayment of income tax. Under
new subsection 6402(f), upon receipt of notice from a State,
the IRS is authorized to offset an overpayment against a
covered unemployment compensation debt. The definition of
covered unemployment compensation debts includes debts that
arise from either uncollected contributions due to the State's
unemployment fund that remain unpaid due to fraud and erroneous
payments of unemployment compensation obtained by fraud on the
part of the taxpayer who made the overpayment of tax. In
addition, the penalty and interest attributable to these debts
constitute covered unemployment compensation debts. If the debt
is for an erroneous payment, the State must establish that the
debt has become final and certified by the Secretary of
Labor.\358\
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\358\ Sec. 3304.
---------------------------------------------------------------------------
The provision includes safeguards and establishes
priorities that generally parallel those applicable to state
income tax debts. Before submitting its claim to the IRS, the
State must provide notice by certified mail with return receipt
of its intent to the person owing the debt. The notice must
allow at least 60 days for the person to submit a response,
with any supporting evidence, which the State will then
consider. If more than one debt is owed by the same resident to
his state, the debts will be satisfied by the overpayment in
the order in which the debts accrued, without regard to whether
they arise from income tax or unemployment compensation. Other
conditions may be prescribed by the Secretary to ensure that
the State has made reasonable efforts to obtain payment of the
covered debt and that the State determination with respect to
fraud is valid.
The provision also amends section 6103 to permit the IRS to
disclose information about the covered unemployment
compensation debts and related offsets to the Department of
Labor.

Effective Date

The provision is effective for refunds paid within the 10-
year period following the date of enactment (September 30,
2008).

PART SEVENTEEN: EMERGENCY ECONOMIC STABILIZATION ACT OF 2008, ENERGY
IMPROVEMENT AND EXTENSION ACT OF 2008, AND TAX EXTENDERS AND THE
ALTERNATIVE MINIMUM TAX RELIEF ACT OF 2008 (110-343) \359\
---------------------------------------------------------------------------

\359\ H.R. 1424. The House Committee on Ways and Means reported
H.R. 6049 on May 20, 2008 (H. Rept. 110-658). H.R. 6049 passed the
House on May 21, 2008. The Senate passed H.R. 6049 with an amendment on
September 23, 2008. The Senate passed H.R. 1424, with an amendment
including the text of the Senate amendment to H.R 6049, on October 1,
2008. The House agreed to the Senate amendment on October 3, 2008. The
President signed the bill on October 3, 2008.
---------------------------------------------------------------------------

DIVISION A

EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

A. Treat Gain or Loss From Sale or Exchange of Certain Preferred Stock
by Applicable Financial Institutions as Ordinary Income or Loss (sec.
301 of the Act)

Present Law

Under section 582(c)(1), the sale or exchange of a bond,
debenture, note, or certificate or other evidence of
indebtedness by a financial institution described in section
582(c)(2) is not considered a sale or exchange of a capital
asset. The financial institutions described in section
582(c)(2) are (i) any bank (including any corporation which
would be a bank except for the fact that it is a foreign
corporation), (ii) any financial institution referred to in
section 591, which includes mutual savings banks, cooperative
banks, domestic building and loan associations, and other
savings institutions chartered and supervised as savings and
loan or similar associations under Federal or State law, (iii)
any small business investment company operating under the Small
Business Investment Act of 1958, and (iv) any business
development corporation, defined as a corporation which was
created by or pursuant to an act of a State legislature for
purposes of promoting, maintaining, and assisting the economy
and industry within such State on a regional or statewide basis
by making loans to be used in trades and businesses which would
generally not be made by banks within such region or State in
the ordinary course of their business (except on the basis of a
partial participation) and which is operated primarily for such
purposes. In the case of a foreign corporation, section
582(c)(1) applies only with respect to gains or losses that are
effectively connected with the conduct of a banking business in
the United States.
Preferred stock issued by the Federal National Mortgage
Corporation (``Fannie Mae'') or the Federal Home Loan Mortgage
Corporation (``Freddie Mac'') is not treated as indebtedness
for Federal income tax purposes, and therefore is not treated
as an asset to which section 582(c)(1) applies. Accordingly, a
financial institution described in section 582(c)(2) that holds
Fannie Mae or Freddie Mac preferred stock as a capital asset
generally will recognize capital gain or loss upon the sale or
taxable exchange of that stock. Section 1211 provides that, in
the case of a corporation, losses from sales or exchanges of
capital assets are allowed only to the extent of gains from
such sales or exchanges.\360\ Thus, in taxable years in which a
corporation does not recognize gain from the sale of capital
assets, its capital losses do not reduce its income.
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\360\ In general, corporations (other than S corporations) may
carry capital losses back to each of the three taxable years preceding
the loss year and forward to each of the five taxable years succeeding
the loss year. Sec. 1212(a). In the case of an S corporation, net
capital losses flow through to the corporation's shareholders. Banks
hold a wide range of financial assets in the ordinary course of their
banking business. For convenience, those assets often are described as
``loans'' or ``investments,'' but both serve the same overall purpose
(to earn a return on the bank's capital and borrowings consistent with
prudent banking practices). A bank's investments are subject to the
same regulatory capital adequacy supervision as are its loans, and a
bank may acquire only certain types of financial assets as permitted
investments. Banks determine how much of their assets to hold as loans
or as investments based on the exercise of their commercial and
financial judgment, taking into account such factors as return on the
asset, relative liquidity, and diversification objectives. As a result,
for Federal income tax purposes, gains and losses on a bank's
investment portfolio ordinarily would be considered an integral part of
the business operations of the bank, and ordinary losses that pass
through to the shareholder of a bank that is an S corporation therefore
could comprise part of such shareholder's net operating loss for the
year attributable to that banking business.
Section 1366(d) provides that losses that flow through to an S
corporation shareholder are limited to the sum of (i) the shareholder's
adjusted basis in his S corporation stock and (ii) the shareholder's
adjusted basis in any indebtedness of the S corporation to the
shareholder; losses in excess of basis are suspended (and allowed to
the extent of basis in subsequent years). An S corporation
shareholder's ability to utilize any flow-through capital loss is
subject to all limitations otherwise imposed by the Code on such
shareholder. In general, under section 1211, an individual (including
an individual S corporation shareholder) may deduct capital losses only
against capital gains plus up to $3,000 of ordinary income; in
addition, an individual may carry excess capital losses forward but not
back.
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Explanation of Provision

Under the provision, gain or loss recognized by an
``applicable financial institution'' from the sale or exchange
of ``applicable preferred stock'' is treated as ordinary income
or loss. An applicable financial institution is a financial
institution referred to in section 582(c)(2) or a depository
institution holding company (as defined in section 3(w)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)).
Applicable preferred stock is preferred stock of Fannie Mae or
Freddie Mac that was (i) held by the applicable financial
institution on September 6, 2008, or (ii) was sold or exchanged
by the applicable financial institution on or after January 1,
2008, and before September 7, 2008.\361\
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\361\ On September 7, 2008, the Federal Housing Finance Agency
(``FHFA'') placed both Fannie Mae and Freddie Mac in a conservatorship.
Also on September 7, 2008, FHFA and the Treasury Department entered
into Preferred Stock Purchase Agreements, contractual agreements
between the Treasury and the conserved entities. Under these
agreements, the Treasury Department received senior preferred stock in
the two companies and warrants to buy 79.9% of the common stock of such
companies.
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In the case of a sale or exchange of applicable preferred
stock on or after January 1, 2008, and before September 7,
2008, the provision applies only to taxpayers that were
applicable financial institutions at the time of such sale or
exchange. In the case of a sale or exchange of applicable
preferred stock after September 6, 2008, by a taxpayer that
held such preferred stock on September 6, 2008, the provision
applies only where the taxpayer was an applicable financial
institution at all times during the period beginning on
September 6, 2008, and ending on the date of the sale or
exchange of the applicable preferred stock. Thus, the provision
is generally inapplicable to any Fannie Mae or Freddie Mac
preferred stock held by a taxpayer that was not an applicable
financial institution on September 6, 2008 (even if such
taxpayer subsequently became an applicable financial
institution).
The provision grants the Secretary authority to extend the
provision to cases in which gain or loss is recognized on the
sale or exchange of applicable preferred stock acquired in a
carryover basis transaction by an applicable financial
institution after September 6, 2008. For example, if after
September 6, 2008, Bank A, an entity that was an applicable
financial institution at all times during the period beginning
on September 6, 2008, acquired assets of Bank T, an entity that
also was an applicable financial institution at all times
during the period beginning on September 6, 2008, in a
transaction in which no gain or loss was recognized under
section 368(a)(1), regulations could provide that Fannie Mae
and Freddie Mac stock that was applicable preferred stock in
the hands of Bank T will continue to be applicable preferred
stock in the hands of Bank A.
In addition, the Secretary may, through regulations, extend
the provision to cases in which the applicable financial
institution is a partner in a partnership that (i) held
preferred stock of Fannie Mae or Freddie Mac on September 6,
2008, and later sold or exchanged such stock, or (ii) sold or
exchanged such preferred stock on or after January 1, 2008, and
before September 7, 2008. It is intended that Treasury guidance
will provide that loss (or gain) attributable to Fannie Mae or
Freddie Mac preferred stock of a partnership is characterized
as ordinary in the hands of a partner only if the partner is an
applicable financial institution, and only if the institution
would have been eligible for ordinary treatment under section
301 of the Act had the institution held the underlying
preferred stock directly for the time period during which both
(i) the partnership holds the preferred stock and (ii) the
institution holds substantially the same partnership interest.
In particular, substantial amounts of the preferred stock
of Fannie Mae and Freddie Mac are held through ``pass-through
trusts'' analyzed as partnerships for Federal income tax
purposes. Substantially all the assets of such a pass-through
trust comprise Fannie Mae or Freddie Mac preferred stock, and
the trust in turn passes through dividends received on such
stock to its two outstanding classes of certificates
(partnership interests): an auction-rate class, where the share
of the underlying preferred stock dividend is determined by
periodic auctions, and a residual class, which receives the
remainder of any dividends received on the underlying stock.
The Act's delegation of authority to the Secretary anticipates
that regulations will promptly be issued confirming in general
that losses recognized by such a trust on or after January 1,
2008, in respect of the preferred stock of Fannie Mae or
Freddie Mac that it acquired before September 6, 2008, will be
characterized as ordinary loss in the hands of a certificate
holder that is an applicable financial institution and that
would be eligible for the relief contemplated by this provision
if the applicable financial institution had held the underlying
preferred stock directly for the same period that it held the
pass-through certificate. In light of the substantial amount of
such pass-through certificates in the marketplace, and the
importance of the prompt resolution of the character of any
resulting losses allocated to certificate holders that are
applicable financial institutions for purposes of their
regulatory and investor financial statement filings,
unnecessary disruptions to the marketplace could best be
avoided if the Secretary were to exercise the regulatory
authority granted under the provision to address this case as
soon as possible and, in any event, by October 31, 2008.
The provision was the subject of a colloquy on the House
floor between Mr. Frank of Massachusetts and Mr. Neal of
Massachusetts.\362\
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\362\ 154 Cong. Rec. H10769 (daily ed. Oct. 3, 2008).
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Effective Date

This provision applies to sales or exchanges occurring
after December 31, 2007, in taxable years ending after such
date.

B. Special Rules for Tax Treatment of Executive Compensation of
Employers Participating in the Troubled Assets Relief Program (sec. 302
of the Act and secs. 162(m) and 280G of the Code)

Present Law

In general

An employer generally may deduct reasonable compensation
for personal services as an ordinary and necessary business
expense. Sections 162(m) and 280G provide explicit limitations
on the deductibility of compensation expenses in the case of
corporate employers.

Section 162(m)

In general
The otherwise allowable deduction for compensation paid or
accrued with respect to a covered employee of a publicly held
corporation \363\ is limited to no more than $1 million per
year.\364\ The deduction limitation applies when the deduction
would otherwise be taken. Thus, for example, in the case of
compensation resulting from a transfer of property in
connection with the performance of services, such compensation
is taken into account in applying the deduction limitation for
the year for which the compensation is deductible under section
83 (i.e., generally the year in which the employee's right to
the property is no longer subject to a substantial risk of
forfeiture).
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\363\ A corporation is treated as publicly held if it has a class
of common equity securities that is required to be registered under
section 12 of the Securities Exchange Act of 1934.
\364\ Sec. 162(m). This deduction limitation applies for purposes
of the regular income tax and the alternative minimum tax.
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Covered employees
Section 162(m) defines a covered employee as (1) the chief
executive officer of the corporation (or an individual acting
in such capacity) as of the close of the taxable year and (2)
the four most highly compensated officers for the taxable year
(other than the chief executive officer). Treasury regulations
under section 162(m) provide that whether an employee is the
chief executive officer or among the four most highly
compensated officers should be determined pursuant to the
executive compensation disclosure rules promulgated under the
Securities Exchange Act of 1934 (``Exchange Act'').
In 2006, the Securities and Exchange Commission amended
certain rules relating to executive compensation, including
which executive officers' compensation must be disclosed under
the Exchange Act. Under the new rules, such officers consist of
(1) the principal executive officer (or an individual acting in
such capacity), (2) the principal financial officer (or an
individual acting in such capacity), and (3) the three most
highly compensated executive officers, other than the principal
executive officer or financial officer.
In response to the Securities and Exchange Commission's new
disclosure rules, the Internal Revenue Service issued updated
guidance on identifying which employees are covered by section
162(m).\365\ The new guidance provides that ``covered
employee'' means any employee who is (1) the principal
executive officer (or an individual acting in such capacity)
defined in reference to the Exchange Act, or (2) among the
three most highly compensated officers for the taxable year
(other than the principal executive officer), again defined by
reference to the Exchange Act. Thus, under current guidance,
only four employees are covered under section 162(m) for any
taxable year. Under Treasury regulations, the requirement that
the individual meet the criteria as of the last day of the
taxable year applies to both the principal executive officer
and the three highest compensated officers.\366\
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\365\ Notice 2007-49, 2007-25 I.R.B. 1429.
\366\ Treas. Reg. sec. 1.162-27(c)(2).
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Compensation subject to the deduction limitation
In general.--Unless specifically excluded, the deduction
limitation applies to all remuneration for services, including
cash and the cash value of all remuneration (including
benefits) paid in a medium other than cash. If an individual is
a covered employee for a taxable year, the deduction limitation
applies to all compensation not explicitly excluded from the
deduction limitation, regardless of whether the compensation is
for services as a covered employee and regardless of when the
compensation was earned. The $1 million cap is reduced by
excess parachute payments (as defined in sec. 280G, discussed
below) that are not deductible by the corporation.
Certain types of compensation are not subject to the
deduction limit and are not taken into account in determining
whether other compensation exceeds $1 million. The following
types of compensation are not taken into account: (1)
remuneration payable on a commission basis; (2) remuneration
payable solely on account of the attainment of one or more
performance goals if certain outside director and shareholder
approval requirements are met (``performance-based
compensation''); (3) payments to a tax-qualified retirement
plan (including salary reduction contributions); (4) amounts
that are excludable from the executive's gross income (such as
employer-provided health benefits and miscellaneous fringe
benefits (sec. 132)); and (5) any remuneration payable under a
written binding contract which was in effect on February 17,
1993. In addition, remuneration does not include compensation
for which a deduction is allowable after a covered employee
ceases to be a covered employee. Thus, the deduction limitation
often does not apply to deferred compensation that is otherwise
subject to the deduction limitation (e.g., is not performance-
based compensation) because the payment of compensation is
deferred until after termination of employment.
Performance-based compensation.--Compensation qualifies for
the exception for performance-based compensation only if (1) it
is paid solely on account of the attainment of one or more
performance goals, (2) the performance goals are established by
a compensation committee consisting solely of two or more
outside directors,\367\ (3) the material terms under which the
compensation is to be paid, including the performance goals,
are disclosed to and approved by the shareholders in a separate
vote prior to payment, and (4) prior to payment, the
compensation committee certifies that the performance goals and
any other material terms were in fact satisfied.
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\367\ A director is considered an outside director if he or she is
not a current employee of the corporation (or related entities), is not
a former employee of the corporation (or related entities) who is
receiving compensation for prior services (other than benefits under a
tax-qualified retirement plan), was not an officer of the corporation
(or related entities) at any time, and is not currently receiving
compensation for personal services in any capacity (e.g., for services
as a consultant) other than as a director.
---------------------------------------------------------------------------
Compensation (other than stock options or other stock
appreciation rights) is not treated as paid solely on account
of the attainment of one or more performance goals unless the
compensation is paid to the particular executive pursuant to a
pre-established objective performance formula or standard that
precludes discretion. Stock options or other stock appreciation
rights generally are treated as meeting the exception for
performance-based compensation, provided that the requirements
for outside director and shareholder approval are met (without
the need for certification that the performance standards have
been met), because the amount of compensation attributable to
the options or other rights received by the executive would be
based solely on an increase in the corporation's stock price.
Stock-based compensation is not treated as performance-based if
it is dependent on factors other than corporate performance.
For example, if a stock option is granted to an executive with
an exercise price that is less than the current fair market
value of the stock at the time of grant, then the executive
would have the right to receive compensation on the exercise of
the option even if the stock price decreases or stays the same.
In contrast to options or other stock appreciation rights,
grants of restricted stock are not inherently performance-based
because the executive may receive compensation even if the
stock price decreases or stays the same. Thus, a grant of
restricted stock does not satisfy the definition of
performance-based compensation unless the grant or vesting of
the restricted stock is based upon the attainment of a
performance goal and otherwise satisfies the standards for
performance-based compensation.

Section 280G

In general
In some cases, a compensation agreement for a corporate
executive may provide for payments to be made if there is a
change in control of the executive's employer, even if the
executive does not lose his or her job as part of the change in
control. Such payments are sometimes referred to as ``golden
parachute payments.'' The Code contains limits on the amount of
certain types of such payments, referred to as ``excess
parachute payments.'' Excess parachute payments are not
deductible by a corporation.\368\ In addition, an excise tax is
imposed on the recipient of any excess parachute payment equal
to 20 percent of the amount of such payment.\369\
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\368\ Sec. 280G.
\369\ Sec. 4999.
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Definition of parachute payment
A ``parachute payment'' is any payment in the nature of
compensation to (or for the benefit of) a disqualified
individual which is contingent on a change in the ownership or
effective control of a corporation or on a change in the
ownership of a substantial portion of the assets of a
corporation (``acquired corporation''), if the aggregate
present value of all such payments made or to be made to the
disqualified individual equals or exceeds three times the
individual's ``base amount.''
The individual's base amount is the average annual
compensation payable by the acquired corporation and includible
in the individual's gross income over the five-taxable years of
such individual preceding the individual's taxable year in
which the change in ownership or control occurs.
The term parachute payment also includes any payment in the
nature of compensation to a disqualified individual if the
payment is made pursuant to an agreement which violates any
generally enforced securities laws or regulations.
Certain amounts are not considered parachute payments,
including payments under a qualified retirement plan, and
payments that are reasonable compensation for services rendered
on or after the date of the change in control. In addition, the
term parachute payment does not include any payment to a
disqualified individual with respect to a small business
corporation or a corporation no stock of which was readily
tradable, if certain shareholder approval requirements are
satisfied.
Disqualified individual
A disqualified individual is any individual who is an
employee, independent contractor, or other person specified in
Treasury regulations who performs personal services for the
corporation and who is an officer, shareholder, or highly
compensated individual of the corporation. Personal service
corporations and similar entities generally are treated as
individuals for this purpose. A highly compensated individual
is defined for this purpose as an employee (or a former
employee) who is among the highest-paid one percent of
individuals performing services for the corporation (or an
affiliated corporation) or the 250 highest paid individuals who
perform services for a corporation (or affiliated group).
Excess parachute payments
In general, excess parachute payments are any parachute
payments in excess of the base amount allocated to the payment.
The amount treated as an excess parachute payment is reduced by
the portion of the payment that the taxpayer establishes by
clear and convincing evidence is reasonable compensation for
personal services actually rendered before the change in
control.

Explanation of Provision

Section 162(m)

In general
Under the provision, the section 162(m) limit is reduced to
$500,000 in the case of otherwise deductible compensation of a
covered executive for any applicable taxable year of an
applicable employer.
An applicable employer means any employer from which one or
more troubled assets are acquired under the ``troubled assets
relief program'' (``TARP'') established by the Act if the
aggregate amount of the assets so acquired for all taxable
years (including assets acquired through a direct purchase by
the Treasury Department, within the meaning of section 113(c)
of Title I of the Act) exceeds $300,000,000. However, such term
does not include any employer from which troubled assets are
acquired by the Treasury Department solely through direct
purchases (within the meaning of section 113(c) of Title I of
the Act). For example, if a firm sells $250,000,000 in assets
through an auction system managed by the Treasury Department,
and $100,000,000 to the Treasury Department in direct
purchases, then the firm is an applicable employer. Conversely,
if all $350,000,000 in sales take the form of direct purchases,
then the firm would not be an applicable employer.
Unlike section 162(m), an applicable employer under this
provision is not limited to publicly held corporations (or even
limited to corporations). For example, an applicable employer
could be a partnership if the partnership is an employer from
which a troubled asset is acquired. The aggregation rules of
Code section 414(b) and (c) apply in determining whether an
employer is an applicable employer. However, these rules are
applied disregarding the rules for brother-sister controlled
groups and combined groups in sections 1563(a)(2) and (3).
Thus, this aggregation rule only applies to parent-subsidiary
controlled groups. A similar controlled group rule applies for
trades and businesses under common control.
The result of this aggregation rule is that all
corporations in the same controlled group are treated as a
single employer for purposes of identifying the covered
executives of that employer and all compensation from all
members of the controlled group are taken into account for
purposes of applying the $500,000 deduction limit. Further, all
sales of assets under the TARP from all members of the
controlled group are considered in determining whether such
sales exceed $300,000,000.
An applicable taxable year with respect to an applicable
employer means the first taxable year which includes any
portion of the period during which the authorities for the TARP
established under the Act are in effect (the ``authorities
period'') if the aggregate amount of troubled assets acquired
from the employer under that authority during the taxable year
(when added to the aggregate amount so acquired for all
preceding taxable years) exceeds $300,000,000, and includes any
subsequent taxable year which includes any portion of the
authorities period.
A special rule applies in the case of compensation that
relates to services that a covered executive performs during an
applicable taxable year but that is not deductible until a
later year (``deferred deduction executive remuneration''),
such as nonqualified deferred compensation. Under the special
rule, the unused portion (if any) of the $500,000 limit for the
applicable tax year is carried forward until the year in which
the compensation is otherwise deductible, and the remaining
unused limit is then applied to the compensation.
For example, assume a covered executive is paid $400,000 in
cash salary by an applicable employer in 2008 (assuming 2008 is
an applicable taxable year) and the covered executive earns
$100,000 in nonqualified deferred compensation (along with the
right to future earnings credits) payable in 2020. Assume
further that the $100,000 has grown to $300,000 in 2020. The
full $400,000 in cash salary is deductible under the $500,000
limit in 2008. In 2020, the applicable employer's deduction
with respect to the $300,000 will be limited to $100,000 (the
lesser of the $300,000 in deductible compensation before
considering the special limitation, and $500,000 less $400,000,
which represents the unused portion of the $500,000 limit from
2008).
Deferred deduction executive remuneration that is properly
deductible in an applicable taxable year (before application of
the limitation under the provision) but is attributable to
services performed in a prior applicable taxable year is
subject to the special rule described above and is not double-
counted. For example, assume the same facts as above, except
that the nonqualified deferred compensation is deferred until
2009 and that 2009 is an applicable taxable year. The
employer's deduction for the nonqualified deferred compensation
for 2009 would be limited to $100,000 (as in the example
above). The limit that would apply under the provision for
executive remuneration that is in a form other than deferred
deduction executive remuneration and that is otherwise
deductible for 2009 is $500,000. For example, if the covered
executive is paid $500,000 in cash compensation for 2009, all
$500,000 of that cash compensation would be deductible in 2009
under the provision.
Covered executive
The term covered executive means any individual who is the
chief executive officer or the chief financial officer of an
applicable employer, or an individual acting in that capacity,
at any time during a portion of the taxable year that includes
the authorities period. It also includes any employee who is
one of the three highest compensated officers of the applicable
employer for the applicable taxable year (other than the chief
executive officer or the chief financial officer and only
taking into account employees employed during any portion of
the taxable year that includes the authorities period).
The determination of the three highest compensated officers
is made on the basis of the shareholder disclosure rules for
compensation under the Exchange Act, except to the extent that
the shareholder disclosure rules are inconsistent with the
provision.\370\ Such shareholder disclosure rules are applied
without regard to whether those rules actually apply to the
employer under the Exchange Act. If an employee is a covered
executive with respect to an applicable employer for any
applicable taxable year, the employee will be treated as a
covered executive for all subsequent applicable taxable years
(and will be treated as a covered executive for purposes of any
subsequent taxable year for purposes of the special rule for
deferred deduction executive remuneration).
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\370\ For example, the shareholder disclosure rules require the
reporting of the compensation of the three most highly compensated
executive officers (other than the principal executive officer and the
principal financial officer) who were serving as executive officers at
the end of the last completed fiscal year and up to two additional
individuals from whom disclosure would have been provided but for the
fact that the individual was not serving as an executive officer at the
end of the last completed fiscal year. 17 C.F.R. sec.
229.402(a)(3)(iii), (iv). For purposes of the provision, the term
``officer'' is intended to mean those ``executive officers'' whose
compensation is subject to reporting under the Exchange Act. Under the
provision, however, an individual's status as one of the three most
highly compensated officers takes into account only executive officers
employed during the authorities period, regardless of whether the
individual serves as an executive officer at year end. Additionally,
the shareholder disclosure rules measure compensation for purposes of
determining ``high three'' status by reference to total compensation
for the last completed fiscal year, and compensation is measured
without regard to whether the compensation is includible in an
executive officer's gross income. It is intended that this broad
measurement of compensation apply for purposes of the provision;
however, the measurement period for purposes of the provision is the
applicable taxable year for which ``high three'' status is being
determined.
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Executive remuneration
The provision generally incorporates the present law
definition of applicable employee remuneration. However, the
present law exceptions for remuneration payable on commission
and performance-based compensation do not apply for purposes of
the new $500,000 limit. In addition, the new $500,000 limit
only applies to executive remuneration which is attributable to
services performed by a covered executive during an applicable
taxable year. For example, assume the same facts as in the
example above, except that the covered executive also receives
in 2008 a payment of $300,000 in nonqualified deferred
compensation that was attributable to services performed in
2006. Such payment is not treated as executive remuneration for
purposes of the new $500,000 limit.
Other rules
The modification to section 162(m) provides the same
coordination rules with disallowed parachute payment and stock
compensation of insiders in expatriated corporations as exist
under present law section 162(m). Thus, the $500,000 deduction
limit under this section is reduced (but not below zero) by any
parachute payments (including parachute payments under the
expanded definition under this provision) paid during the
authorities period and any payment of the excise tax under
section 4985 for stock compensation of insiders in expatriated
corporations.
The modification authorizes the Secretary of the Treasury
to prescribe such guidance, rules, or regulations as are
necessary to carry out the purposes of the $500,000 deduction
limit, including the application of the limit in the case of
any acquisition, merger, or reorganization of an applicable
employer.

Section 280G

The provision also modifies section 280G by expanding the
definition of parachute payment in the case of a covered
executive of an applicable employer. For this purpose, the
terms ``covered executive,'' ``applicable taxable year,'' and
``applicable employer'' have the same meaning as under the
modifications to section 162(m) (described above).
Under the modification, a parachute payment means any
payments in the nature of compensation to (or for the benefit
of) a covered executive made during an applicable taxable year
on account of an applicable severance from employment during
the authorities period if the aggregate present value of such
payments equals or exceeds an amount equal to three times the
covered executive's base amount. An applicable severance from
employment is any severance from employment of a covered
executive (1) by reason of an involuntary termination of the
executive by the employer or (2) in connection with a
bankruptcy, liquidation, or receivership of the employer.
Whether a payment is on account of the employee's severance
from employment is generally determined in the same manner as
under present law. Thus, a payment is on account of the
employee's severance from employment if the payment would not
have been made at that time if the severance from employment
had not occurred. Such payments include amounts that are
payable upon severance from employment (or separation from
service), vest or are no longer subject to a substantial risk
of forfeiture on account of such a separation, or are
accelerated on account of severance from employment. As under
present law, the modified definition of parachute payment does
not include amounts paid to a covered executive from certain
tax qualified retirement plans.
A parachute payment during an applicable taxable year that
is paid on account of a covered executive's applicable
severance from employment is nondeductible on the part of the
employer (and the covered executive is subject to the section
4999 excise tax) to the extent of the amount of the payment
that is equal to the excess over the employee's base amount
that is allocable to such payment. For example, assume that a
covered executive's annualized includible compensation is $1
million and the covered executive's only parachute payment
under the provision is a lump sum payment of $5 million. The
covered executive's base amount is $1 million and the excess
parachute payment is $4 million.
The modifications to section 280G do not apply in the case
of a payment that is treated as a parachute payment under
present law. The modifications further authorize the Secretary
of Treasury to issue regulations to carry out the purposes of
the provision, including the application of the provision in
the case of a covered executive who receives payments some of
which are treated as parachute payments under present law
section 280G and others of which are treated as parachute
payments on account of this provision, and the application of
the provision in the event of any acquisition, merger, or
reorganization of an applicable employer. The regulations shall
also prevent the avoidance of the application of the provision
through the mischaracterization of a severance from employment
as other than an applicable severance from employment. It is
intended that the regulations prevent the avoidance of the
provision through the acceleration, delay, or other
modification of payment dates with respect to existing
compensation arrangements.

Effective Date

The provision is effective for taxable years ending on or
after date of enactment (October 3, 2008), except that the
modifications to section 280G are effective for payments with
respect to severances occurring during the authorities period.

C. Exclude Discharges of Acquisition Indebtedness on Principal
Residences From Gross Income (sec. 303 of the Act and sec. 108 of the
Code)

Present Law

In general

Qualified principal residence indebtedness

An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2,000,000)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the indebtedness resulting from such refinancing
does not exceed the amount of the refinanced indebtedness. For
these purposes, the term ``principal residence'' has the same
meaning as under section 121 of the Code.
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2010.

Explanation of Provision

The provision extends for three additional years the
exclusion from gross income for discharges of qualified
principal residence indebtedness.

Effective Date

The provision is effective for discharges of indebtedness
on or after January 1, 2010, and before January 1, 2013.

DIVISION B

ENERGY IMPROVEMENT AND EXTENSION ACT OF 2008

TITLE I--ENERGY PRODUCTION INCENTIVES

A. Renewable Energy Incentives

1. Extension and modification of the renewable electricity and coal
production credits (secs. 101, 102, and 108 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 energy resources at qualified
facilities (the ``electricity production credit'').\372\
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 (the ``refined coal
credit'') and Indian coal (the ``Indian coal credit'') at
qualified facilities. The electricity production credit, the
refined coal credit, and the Indian coal credit are referred to
collectively as the ``section 45 credit.''
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\372\ Sec. 45.
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Credit amounts and credit periods

Electricity production credit rate and period
The base amount of the electricity production credit is 1.5
cents per kilowatt-hour (indexed annually for inflation) of
electricity produced. The amount of the credit was 2.1 cents
per kilowatt-hour for 2008. 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.
Credit phaseout
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 credit) exceeds certain threshold levels. The
electricity production credit is reduced over a three-cent
phaseout 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 eight cents
(adjusted for inflation; 11.8 cents for 2008). The refined coal
credit is reduced over an $8.75 phaseout 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 periods and credit amounts for certain
facilities
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 placed in service before August 8, 2005,
the 10-year credit period is reduced to five years commencing
on the date the facility was originally placed in service.
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 rate is one half of the generally
applicable amount, indexed for inflation (one cent per
kilowatt-hour for 2008).
Refined coal credit rate
The amount of the credit for refined coal is $4.375 per ton
(also indexed for inflation after 1992 and equaling $6.061 per
ton for 2008).
Indian coal credit period and rate
A credit is available for the sale of Indian coal to an
unrelated party 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; for
2008 the Indian coal credit is $1.589 per ton.
Other limitations on section 45 credit claimants and credit
amounts
In general, in order to claim the credit, a taxpayer must
own the qualified facility and sell the electricity, refined
coal or Indian coal produced by the facility 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 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 the amount of 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.\373\ 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 25 percent of so much
of the net regular tax liability as exceeds $25,000. However,
this limitation does not apply to section 45 credits for
electricity or refined coal 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.\374\ Excess credits may be carried back one year and
forward up to 20 years.
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\373\ Sec. 38(b)(8).
\374\ Sec. 38(c)(4)(B)(ii).
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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, 2009.
Closed-loop biomass facility
A closed-loop biomass facility is a facility that uses any
organic material from a plant that 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, 2009. 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, 2009.
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
section 45 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, and landscape or right-of-way
tree trimmings; 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 that 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, 2009, 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, 2009.
Geothermal facility
A geothermal facility is a facility that uses geothermal
energy to produce electricity. Geothermal energy is energy
derived from a geothermal deposit that is a geothermal
reservoir consisting of natural heat that 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,
2009.
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 power 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 at least 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, 2009.
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,
2009.
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, 2009. 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 after
such date and before January 1, 2009.
At an existing hydroelectric facility, the taxpayer may
claim credit only 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. In addition, there must not be any enlargement of
the diversion structure, 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 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
at least 20 percent less nitrogen oxide and 20 percent less
sulfur dioxide or mercury than the feedstock coal or comparable
coal predominantly available in the marketplace as of January
1, 2003, and that sells at prices at least 50 percent greater
than the prices of the feedstock 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 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 1.--SUMMARY OF SECTION 45 CREDIT RATES AND PERIODS
----------------------------------------------------------------------------------------------------------------
Credit period for
facilities placed in Credit period
Eligible electricity production Credit amount for 2008 service on or before facilities placed in
or coal production activity (cents per kilowatt-hour; August 8, 2005 (years service after August 8,
dollars per ton) from placed-in-service 2005 (years from placed-
date) in-service date)
----------------------------------------------------------------------------------------------------------------
Wind............................. 2.1 10 10
Closed-loop biomass.............. 2.1 101 10
Open-loop biomass (including 1.0 52 10
agricultural livestock waste
nutrient facilities)............
Geothermal....................... 2.1 5 10
Solar (pre-2006 facilities only). 2.1 5 10
Small irrigation power........... 1.0 5 10
Municipal solid waste (including 1.0 5 10
landfill gas facilities and
trash combustion facilities)....
Qualified hydropower............. 1.0 N/A 10
Refined Coal..................... 6.061 10 10
Indian Coal...................... 1.589 73 73
----------------------------------------------------------------------------------------------------------------
\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 five-year credit period commences on
January 1, 2005.
\3\ For Indian coal, the credit period begins for coal sold after January 1, 2006.

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, a
cooperative that is subject to the cooperative tax rules of
subchapter T of the Code \375\ is permitted a deduction for
patronage dividends paid only to the extent of net income that
is derived from transactions with patrons who are members of
the cooperative.\376\ 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.
---------------------------------------------------------------------------
\375\ Secs. 1381-1383.
\376\ Sec. 1382.
---------------------------------------------------------------------------
Eligible cooperatives may elect to pass any portion of the
section 45 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.

Reasons for Change \377\

---------------------------------------------------------------------------
\377\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that additional incentives for the
production of electricity from renewable resources will help
limit the environmental consequences of continued reliance on
power generated using fossil fuels. The Congress also believes
that it is important to modify the existing incentives to make
them operate more effectively and to take advantage of new
renewable energy technologies.

Explanation of Provision

The provision extends and modifies the section 45 credit.

Extension of placed-in-service date for qualifying facilities

The provision extends for two years (through 2010) the
period during which qualified facilities producing electricity
from closed-loop biomass, open-loop biomass, geothermal energy,
small irrigation power, municipal solid waste, and qualified
hydropower may be placed in service for purposes of the
electricity production credit. The provision extends for one
year (through 2009) the placed-in-service period for qualified
wind and refined coal facilities.

Addition of marine and hydrokinetic renewable energy as a qualified
resource

The provision adds marine and hydrokinetic renewable energy
as a qualified energy resource and marine and hydrokinetic
renewable energy facilities as qualified facilities. Marine and
hydrokinetic renewable energy is defined as energy derived from
(1) waves, tides, and currents in oceans, estuaries, and tidal
areas; (2) free flowing water in rivers, lakes, and streams;
(3) free flowing water in an irrigation system, canal, or other
man-made channel, including projects that utilize nonmechanical
structures to accelerate the flow of water for electric power
production purposes; or (4) differentials in ocean temperature
(ocean thermal energy conversion). The term does not include
energy derived from any source that uses a dam, diversionary
structure (except for irrigation systems, canals, and other
man-made channels), or impoundment for electric power
production. A qualified marine and hydrokinetic renewable
energy facility is any facility owned by the taxpayer and
placed in service after the date of enactment and before 2011,
that produces electric power from marine and hydrokinetic
renewable energy and that has a nameplate capacity rating of at
least 150 kilowatts.
Under the provision, marine and hydrokinetic renewable
energy facilities subsume small irrigation power facilities.
The provision, therefore, terminates as a separate category of
qualified facility small irrigation power facilities placed in
service on or after the date of enactment. Such facilities
qualify for the electricity production credit as marine and
hydrokinetic renewable energy facilities.

Clarification of the definition of trash combustion facility

The provision modifies the definition of qualified trash
combustion facility to permit facilities that use municipal
solid waste as part of an electricity generation process to
qualify for the electricity production credit, whether or not
such facilities utilize a process that involves burning the
waste.

Modification of the definitions of open-loop biomass facility and
closed-loop biomass facility to include new units added to
existing qualified facilities

The definitions of qualified open-loop biomass facility and
qualified closed-loop biomass facility are modified to include
new power generation units placed in service at existing
qualified facilities, but only to the extent of the increased
amount of electricity produced at such facilities by reason of
such new units.

Modification to definition of nonhydroelectric dam for purposes of
qualified hydropower production

The provision modifies the definition of nonhydroelectric
dam for purposes of qualified hydropower production. Under the
new definition, the nonhydroelectric dam must have been
operated for flood control, navigation, or water supply
purposes.
The provision replaces the requirement that any
hydroelectric project installed on a nonhydroelectric dam not
enlarge the diversion structure or bypass channel, or impound
additional water from the natural stream channel, with a
requirement that such project be operated so that the water
surface elevation at any given location and time be the same as
would occur in absence of the project, subject to any license
requirements aimed at improving the environmental quality of
the affected waterway.
A hydroelectric project installed on a nonhydroelectric dam
must still be licensed by the Federal Energy Regulatory
Commission and meet all other applicable environmental,
licensing, and regulatory requirements, including applicable
fish passage requirements.

Modification to definition of refined coal

The provision modifies the definition of refined coal by
eliminating the requirement that the qualified refined coal
fuel sell at a price at least 50 percent greater than the price
of the feedstock coal. It also increases to 40 percent the
amount by which refined coal must reduce, when burned,
emissions of either sulfur dioxide or mercury compared to the
emissions released by the feedstock coal or comparable coal
predominantly available in the marketplace as of January 1,
2003.

Steel industry fuel

The provision adds to the section 45 credit a new
production credit for steel industry fuel. The provision
defines steel industry fuel as a fuel produced through a
process of liquefying coal waste sludge, distributing the
liquefied product on coal, and using the resulting mixture as a
feedstock for the manufacture of coke. Coal waste sludge
includes tar decanter sludge and related byproducts of the
coking process.
Under the provision, each barrel-of-oil equivalent (defined
as 5.8 million British thermal units) of steel industry fuel
produced at a qualified facility during the credit period
receives a $2 credit (adjusted for inflation using 1992 as the
base year). A qualified facility is any facility capable of
producing steel industry fuel (or any modification to a
facility making it so capable) that is placed in service before
January 1, 2010. For facilities capable of producing steel
industry fuel on or before October 1, 2008, the credit is
available for fuel produced and sold on or after such date and
before January 1, 2010. For facilities placed in service or
modified to produce steel industry fuel after October 1, 2008,
the credit period begins on the placed-in-service or
modification date and ends one year after such date or December
31, 2009, whichever is later.
Coke produced using fuel qualifying for a credit under this
provision is not eligible for credit under present-law section
45K(g).\378\
---------------------------------------------------------------------------
\378\ A technical correction may be necessary so that the statute
reflects this intent.
---------------------------------------------------------------------------

Effective Date

The extension of the section 45 credit is effective for
facilities originally placed in service after 2008. The
addition of marine and hydrokinetic renewable energy as a
qualified energy resource is effective for electricity produced
at qualified facilities and sold after the date of enactment in
taxable years ending after such date. The clarification of the
definition of trash combustion facility is effective for
electricity produced and sold after the date of enactment. The
modifications to the definitions of open-loop biomass facility,
closed-loop biomass facility, and nonhydroelectric dam are
effective for property placed in service after the date of
enactment. The modification to the definition of refined coal
is effective for coal produced and sold from facilities placed
in service after 2008. The new credit for steel industry fuel
is effective for fuel produced and sold after September 30,
2008.

2. Extension and modification of energy credit (secs. 103, 104 and 105
of the Act and sec. 48 of the Code)

Present Law

In general

A nonrefundable, 10-percent business energy credit \379\ is
allowed for the cost of new property that is equipment that
either (1) uses solar energy to generate electricity, to heat
or cool a structure, or to provide solar process heat, or (2)
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. Property used to generate energy for the purpose of
heating a swimming pool is not eligible solar energy property.
---------------------------------------------------------------------------
\379\ Sec. 48.
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The energy credit is a component of the general business
credit \380\ and as such is subject to the alternative minimum
tax. An unused general business credit generally may be carried
back one year and carried forward 20 years.\381\ The taxpayer's
basis in the property is reduced by one-half of the amount of
the credit claimed. For projects whose construction time is
expected to equal or exceed two years, the credit may be
claimed as progress expenditures are made on the project,
rather than during the year the property is placed in service.
The credit only applies to expenditures made after the
effective date of the provision.
---------------------------------------------------------------------------
\380\ Sec. 38(b)(1).
\381\ Sec. 39.
---------------------------------------------------------------------------
In general, property that is public utility property is not
eligible for the credit. Public utility property is property
that is used predominantly in the trade or business of the
furnishing or sale of (1) electrical energy, water, or sewage
disposal services, (2) gas through a local distribution system,
or (3) telephone service, domestic telegraph services, or other
communication services (other than international telegraph
services), if the rates for such furnishing or sale have been
established or approved by a State or political subdivision
thereof, by an agency or instrumentality of the United States,
or by a public service or public utility commission.

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, 2009. 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, 2009. 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, and (2) has an electricity-only
generation efficiency of greater than 30 percent and a capacity
of at least one-half kilowatt. 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, 2009.
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.

Reasons for Change \382\

---------------------------------------------------------------------------
\382\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that alternative sources of energy
are necessary to meet growing energy needs, reduce reliance on
imports, and reduce green-house gas emissions. Toward that end,
the Congress believes a long-term extension of the business
credit for solar and fuel cell property is warranted to ensure
the continued development of alternative energy resources. The
Congress further believes that provision of the credit for
combined heat and power property will help to stimulate more
efficient use of fossil fuels used to generate electrical or
mechanical power.
The Congress believes that all sectors of the economy
should be encouraged to invest in alternative energy
technologies, and therefore removes the rule that prohibits
public utilities from claiming the energy credit and also
allows the credit against the alternative minimum tax for all
taxpayers. The Congress also believes that increasing the cap
on the fuel cell credit is necessary to promote further
development of fuel cell technology.

Explanation of Provision

In general

The provision extends the otherwise expiring credits and
credit rates for eight years, through December 31, 2016. The
provision raises the $500 per half kilowatt of capacity credit
cap with respect to fuel cells to $1500 per half kilowatt of
capacity. Also, the restrictions on public utility property
being eligible for the credit are repealed. The provision makes
the energy credit allowable against the alternative minimum
tax.

Geothermal heat pump property

The provision provides a 10 percent credit for qualified
geothermal heat pump property placed in service, through
December 31, 2016. Geothermal heat pump property is equipment
that uses the ground or ground water as a thermal energy source
to heat a structure or as a thermal energy sink to cool a
structure.

Small wind property

The provision provides a credit of 30 percent of the basis
of qualified small wind energy property placed in service,
through December 31, 2016. The credit is limited to $4,000 per
year with respect to all wind energy property of any taxpayer.
Qualified small wind energy property is property that uses a
qualified wind turbine to generate electricity. A qualifying
wind turbine means a wind turbine of 100 kilowatts of rated
capacity or less.

Combined heat and power property

The provision makes combined heat and power (``CHP'')
property eligible for the 10-percent energy credit through
December 31, 2016.
CHP property is property: (1) that uses the same energy
source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in
combination with the generation of steam or other forms of
useful thermal energy (including heating and cooling
applications); (2) that has an electrical capacity of not more
than 50 megawatts or a mechanical energy capacity of no more
than 67,000 horsepower or an equivalent combination of
electrical and mechanical energy capacities; (3) that produces
at least 20 percent of its total useful energy in the form of
thermal energy that is not used to produce electrical or
mechanical power, and produces at least 20 percent of its total
useful energy in the form of electrical or mechanical power (or
a combination thereof); and (4) the energy efficiency
percentage of which exceeds 60 percent. CHP property does not
include property used to transport the energy source to the
generating facility or to distribute energy produced by the
facility.
The otherwise allowable credit with respect to CHP property
is reduced to the extent the property has an electrical
capacity or mechanical capacity in excess of any applicable
limits. Property in excess of the applicable limit (15
megawatts or a mechanical energy capacity of more than 20,000
horsepower or an equivalent combination of electrical and
mechanical energy capacities) is permitted to claim a fraction
of the otherwise allowable credit. The fraction is equal to the
applicable limit divided by the capacity of the property. For
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again,
no credit is allowed if the property exceeds the 50 megawatt or
67,000 horsepower limitations described above.
Additionally, the provision provides that systems whose
fuel source is at least 90 percent open-loop biomass and that
would qualify for the credit but for the failure to meet the
efficiency standard are eligible for a credit that is reduced
in proportion to the degree to which the system fails to meet
the efficiency standard. For example, a system that would
otherwise be required to meet the 60-percent efficiency
standard, but which only achieves 30-percent efficiency, would
be permitted a credit equal to one-half of the otherwise
allowable credit (i.e., a five-percent credit).

Effective Date

The provision is generally effective on the date of
enactment (October 3, 2008).
The provisions relating to geothermal heat pump property,
small wind property, and combined heat and power property apply
to periods after the date of enactment, in taxable years ending
after such date, under rules similar to the rules of section
48(m) of the Code (as in effect on the day before the enactment
of the Revenue Reconciliation Act of 1990).
The provision relating to the restrictions on public
utility property applies to periods after February 13, 2008, in
taxable years ending after such date, under rules similar to
the rules of section 48(m) of the Code (as in effect on the day
before the enactment of the Revenue Reconciliation Act of
1990).
The allowance of the credit against the alternative minimum
tax is effective for credits determined in taxable years
beginning after the date of enactment (October 3, 2008).

3. Credit for residential energy efficient property (sec. 106 of the
Act and sec. 25D of the Code)

Present Law

Code section 25D provides a personal tax credit for the
purchase of qualified solar electric 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.
Qualified solar water heating property is property that
heats 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 solar electric property is property that uses solar
energy to generate electricity for use in such 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) has a
nameplate capacity of at least 0.5 kilowatts. 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.
The credit applies to property placed in service prior to
January 1, 2009.

Reasons for Change \383\

---------------------------------------------------------------------------
\383\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes the cap on the amount of the
available credit for solar electric and fuel cell property
should be removed in order to provide additional incentive to
invest in such property for those who would otherwise have been
restricted by the cap. The Congress also believes that it is
proper to provide an incentive for residential wind and
geothermal property to encourage investments in such property
to reduce fossil fuel consumption. Finally, the Congress
believes that it is appropriate to allow the credit against the
alternative minimum tax in order to make sure the incentive is
available to all taxpayers.

Explanation of Provision

The provision extends the credit for eight years (through
December 31, 2016) and allows the credit to be claimed against
the alternative minimum tax. Additionally, the credit cap
(currently $2,000) for solar electric property is eliminated.
The provision provides a new 30 percent credit for
qualified small wind energy property expenses made by the
taxpayer during the taxable year. The credit is limited to $500
with respect to each half kilowatt of capacity, not to exceed
$4,000. The credit for qualified small wind energy property is
allowed for expenditures in taxable years beginning after
December 31, 2007, for property placed in service prior to
January 1, 2017.
Qualified small wind energy property expenditures are
expenditures for property that uses a wind turbine to generate
electricity for use in a dwelling unit located in the United
States and used as a residence by the taxpayer.
The provision also provides a 30 percent credit for
qualified geothermal heat pump property expenditures, not to
exceed $2,000. The term ``qualified geothermal heat pump
property expenditure'' means an expenditure for qualified
geothermal heat pump property installed on or in connection
with a dwelling unit located in the United States and used as a
residence by the taxpayer. Qualified geothermal heat pump
property means any equipment which (1) uses the ground or
ground water as a thermal energy source to heat the dwelling
unit or as a thermal energy sink to cool such dwelling unit,
and (2) meets the requirements of the Energy Star program which
are in effect at the time that the expenditure for such
equipment is made. The credit for qualified geothermal heat
pump property is allowed for expenditures in taxable years
beginning after December 31, 2007, for property placed in
service prior to January 1, 2017.

Effective Date

Generally, the provision is effective for taxable years
beginning after December 31, 2007, for property placed in
service prior to January 1, 2017. The removal of the solar
electric credit cap applies to taxable years beginning after
December 31, 2008.

4. New clean renewable energy bonds (sec. 107 of the Act and new sec.
54C of the Code)

Present Law

Tax-exempt bonds

Subject to certain Code restrictions, interest paid on
bonds issued by State and local governments generally is
excluded from gross income for Federal income tax purposes.
Bonds issued by State and local governments 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
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. For
this purpose, the term ``nongovernmental person'' generally
includes the Federal Government and all other individuals and
entities other than States or local governments. The exclusion
from income for interest on State and local bonds does not
apply to private activity bonds, unless the bonds are issued
for certain permitted purposes (``qualified private activity
bonds'') and other Code requirements are met.
In most cases, the aggregate volume of tax-exempt qualified
private activity bonds is restricted by annual aggregate volume
limits imposed on bonds issued by issuers within each State.
For calendar year 2008, the State volume limit, which is
indexed for inflation, equals $85 per resident of the State, or
$262.09 million, if greater.
The exclusion from income for interest on State and local
bonds also does not apply to any arbitrage bond.\384\ 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.\385\ 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.
---------------------------------------------------------------------------
\384\ See 103(a) and (b)(2).
\385\ See 148.
---------------------------------------------------------------------------
An issuer must file with the IRS certain information about
the bonds issued by it in order for that bond issue to be tax
exempt.\386\ Generally, this information return is required to
be filed no later than the 15th day of the second month after
the close of the calendar quarter in which the bonds were
issued.
---------------------------------------------------------------------------
\386\ See 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 qualified projects. ``Qualified projects'' are
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.\387\ 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 renewable energy
bond lenders. The term ``qualified borrower'' includes a
governmental body (including an Indian tribal government) and a
mutual or cooperative electric company. 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.
---------------------------------------------------------------------------
\387\ In addition, Notice 2006-7 provides that qualified projects
include any facility owned by a qualified borrower that is functionally
related and subordinate to any facility described in section 45(d)(1)
through (d)(9) and owned by such qualified borrower.
---------------------------------------------------------------------------
Unlike tax-exempt bonds, CREBs are not interest-bearing
obligations. Rather, a taxpayer holding a CREB 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. The discount rate used to determine the
present value amount is the average annual interest rate of
tax-exempt obligations having a term of 10 years or more which
are issued during the month the CREBs are issued. 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.
In addition to the above requirements, at least 95 percent
of the proceeds of CREBs must be spent 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 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 $1.2
billion. The maximum amount of CREBs that may be allocated to
qualified projects of governmental bodies is $750 million.
CREBs are to be issued before January 1, 2009.

Qualified tax credit bonds

Section 54A of the Code sets forth general rules applicable
to qualified tax credit bonds (defined as qualified forestry
conservation bonds meeting certain requirements specified in
section 54A). Section 54A sets forth requirements regarding the
expenditure of available project proceeds, reporting,
arbitrage, maturity limitations, and financial conflicts of
interest, among other special rules.

Reasons for Change \388\

---------------------------------------------------------------------------
\388\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that incentives for the development
of facilities that produce electricity from renewable resources
will help limit the environmental consequences of continued
reliance on power generated using fossil fuels. Because certain
taxpayers themselves are unable to benefit from tax credits,
tax-credit bonds provide an alternative means of assisting such
taxpayers with the costs of installing facilities that produce
electricity from renewable resources. As a result, the Congress
feels that it is appropriate to authorize the issuance of new
clean renewable energy bonds.

Explanation of Provision

New Clean Renewable Energy Bonds

The provision creates a new category of clean renewable
energy bonds (``New CREBs'') that may be issued by qualified
issuers to finance qualified renewable energy facilities.
Qualified renewable energy facilities are facilities: (1) that
qualify for the tax credit under section 45 (other than Indian
coal and refined coal production facilities), without regard to
the placed-in-service date requirements of that section; and
(2) that are owned by a public power provider, governmental
body, or cooperative electric company.
The term ``qualified issuers'' includes: (1) public power
providers; (2) a governmental body; (3) cooperative electric
companies; (4) a not-for-profit electric utility that has
received a loan or guarantee under the Rural Electrification
Act; and (5) clean renewable energy bond lenders. The term
``public power provider'' means a State utility with a service
obligation, as such terms are defined in section 217 of the
Federal Power Act (as in effect on the date of the enactment of
this paragraph). A ``governmental body'' means any State or
Indian tribal government, or any political subdivision thereof.
The term ``cooperative electric company'' means a mutual or
cooperative electric company (described in section 501(c)(12)
or section 1381(a)(2)(C)). A clean renewable energy bond lender
means a cooperative that is owned by, or has outstanding loans
to, 100 or more cooperative electric companies and is in
existence on February 1, 2002 (including any affiliated entity
which is controlled by such lender).
There is a national limitation for New CREBs of $800
million. Under the provision, no more than one third of the
national limit may be allocated to projects of public power
providers, governmental bodies, or cooperative electric
companies. Allocations to governmental bodies and cooperative
electric companies may be made in the manner the Secretary
determines appropriate. Allocations to projects of public power
providers shall be made, to the extent practicable, in such
manner that the amount allocated to each such project bears the
same ratio to the cost of such project as the maximum
allocation limitation to projects of public power providers
bears to the cost of all such projects.
The provision makes New CREBs a type of qualified tax
credit bond for purposes of section 54A of the Code. As such,
100 percent of the available project proceeds of New CREBs must
be used within the three-year period that begins on the date of
issuance. Available project proceeds are proceeds from the sale
of the bond issue less issuance costs (not to exceed two
percent) and any investment earnings on such sale proceeds. To
the extent less than 100 percent of the available project
proceeds are used to finance qualified projects during the
three-year spending period, bonds will continue to qualify as
New CREBs if unspent proceeds are used within 90 days from the
end of such three-year period to redeem bonds. The three-year
spending period may be extended by the Secretary upon the
qualified issuer's request demonstrating that the failure to
satisfy the three-year requirement is due to reasonable cause
and the projects will continue to proceed with due diligence.
New CREBs generally are subject to the arbitrage
requirements of section 148. However, available project
proceeds invested during the three-year spending period are not
subject to the arbitrage restrictions (i.e., yield restriction
and rebate requirements). In addition, amounts invested in a
reserve fund are not subject to the arbitrage restrictions to
the extent: (1) such fund is funded at a rate not more rapid
than equal annual installments; (2) such fund is funded in a
manner reasonably expected to result in an amount not greater
than an amount necessary to repay the issue; and (3) the yield
on such fund is not greater than the average annual interest
rate of tax-exempt obligations having a term of 10 years or
more that are issued during the month the New CREBs are issued.
The maturity of New CREBs is the term that the Secretary
estimates will result in the present value of the obligation to
repay the principal on such bonds being equal to 50 percent of
the face amount of such bonds, using as a discount rate the
average annual interest rate of tax-exempt obligations having a
term of 10 years or more that are issued during the month the
New CREBs are issued.
As with present-law CREBs, a taxpayer holding New CREBs on
a credit allowance date is entitled to a tax credit. Unlike
present-law CREBs, however, the credit rate on New CREBs is set
by the Secretary at a rate that is 70 percent of the rate that
would permit issuance of such bonds without discount and
interest cost to the issuer. The amount of the tax credit is
determined by multiplying the bond's credit rate by the face
amount on the holder's bond. The credit accrues quarterly, 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. Unused credits
may be carried forward to succeeding taxable years. In
addition, credits may be separated from the ownership of the
underlying bond similar to how interest coupons can be stripped
for interest-bearing bonds.
An issuer of New CREBs is treated as meeting the
``prohibition on financial conflicts of interest'' requirement
in section 54A(d)(6) if it certifies that it satisfies (i)
applicable State and local law requirements governing conflicts
of interest and (ii) any additional conflict of interest rules
prescribed by the Secretary with respect to any Federal, State,
or local government official directly involved with the
issuance of New CREBs.

Extension of time to issue CREBS

The provision extends the period to issue CREBs for one
additional year. Under the provision, CREBs must be issued by
December 31, 2009.

Effective Date

The provision is effective for bonds issued after the date
of enactment (October 3, 2008).

5. Special rule to implement FERC and State electric restructuring
policy (sec. 109 of the Act and sec. 451(i) 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
\389\ (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.
---------------------------------------------------------------------------
\389\ 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 an entity providing such services,
to an independent transmission company prior to January 1,
2008. In general, an independent transmission company is
defined as: (1) an independent transmission provider \390\
approved by the Federal Energy Regulatory Commission
(``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
December 31, 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).
---------------------------------------------------------------------------
\390\ 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).

Reasons for Change \391\

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\391\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the ``unbundling'' of electric
transmission assets held by vertically integrated utilities,
with the transmission assets ultimately placed under the
ownership or control of independent transmission providers (or
other similarly-approved operators), continues to be an
important policy. To facilitate the implementation of this
policy, the Congress believes it is appropriate to assist
taxpayers in moving forward with industry restructuring by
providing a tax deferral for gain associated with certain
dispositions of electric transmission assets.
The Congress believes that the exempt utility property
purchased by the taxpayer with the proceeds from the qualifying
electric transmission transaction should be located in the
United States in order to qualify for tax-deferral treatment.

Explanation of Provision

The provision extends the treatment under the present-law
deferral provision to sales or dispositions by a qualified
electric utility prior to January 1, 2010. A qualified electric
utility is defined as an electric utility, which as of the date
of the qualifying electric transmission transaction, is
vertically integrated in that it is both (1) a transmitting
utility (as defined in the Federal Power Act) \392\ with
respect to the transmission facilities to which the election
applies, and (2) an electric utility (as defined in the Federal
Power Act). \393\
---------------------------------------------------------------------------
\392\ Sec. 3(23), 16 U.S.C. 796, defines ``transmitting utility''
as any electric utility, qualifying cogeneration facility, qualifying
small power production facility, or Federal power marketing agency
which owns or operates electric power transmission facilities which are
used for the sale of electric energy at wholesale.
\393\ Sec. 3(22), 16 U.S.C. 796, defines ``electric utility'' as
any person or State agency (including any municipality) which sells
electric energy; such term includes the Tennessee Valley Authority, but
does not include any Federal power marketing agency.
---------------------------------------------------------------------------
The definition of an independent transmission company is
modified for taxpayers whose transmission facilities are placed
under the operational control of a FERC-approved independent
transmission provider, which under the provision must take
place no later than four years after the close of the taxable
year in which the transaction occurs.
The provision also changes the definition of exempt utility
property to exclude property that is located outside the United
States.

Effective Date

The extension provision applies transactions after December
31, 2007. The change in the definition of an independent
transmission company is effective as if included in section 909
of the American Jobs Creation Act of 2004. The exclusion for
property located outside the United States applies to
transactions after the date of enactment (October 3, 2008).

B. Carbon Mitigation and Coal Provisions

1. Expansion and modification of the advanced coal project credit (sec.
111 of the Act and sec. 48A of the Code)

Present Law

An investment tax credit is available for power generation
projects that use integrated gasification combined cycle
(``IGCC'') or other advanced coal-based electricity generation
technologies. The credit amount is 20 percent for investments
in qualifying IGCC projects and 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. Generally, 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.\394\
---------------------------------------------------------------------------
\394\ For advanced coal project certification applications
submitted after October 2, 2006, an electric generation unit using
advanced coal-based generation technology designed to use subbituminous
coal can meet the performance requirement relating to the removal of
sulfur dioxide 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.
---------------------------------------------------------------------------
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,\395\ and each project application must be submitted
during the three-year period beginning on the date such
certification program is established. An applicant for
certification has two years from the date the Secretary accepts
the application to provide the Secretary with evidence that the
requirements for certification have been met. Upon
certification, the applicant has five years from the date of
issuance of the certification to place the project in service.
---------------------------------------------------------------------------
\395\ The Secretary issued guidance establishing the certification
program on February 21, 2006 (IRS Notice 2006-24).
---------------------------------------------------------------------------
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, 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.

Reasons for Change \396\

---------------------------------------------------------------------------
\396\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that to the extent electricity will
continue to be produced from coal, it must be done in as clean
and efficient a manner as possible. To this end, the Congress
believes that additional investment incentives will encourage
the construction of advanced coal facilities that both capture
and sequester carbon dioxide and reduce the emissions of other
pollutants.

Explanation of Provision

The provision increases to 30 percent the credit rate for
new IGCC and other advanced coal projects. In addition, the
provision permits the Secretary to allocate an additional $1.25
billion of credits to qualifying projects.
The provision modifies the definition of qualifying
projects to require that projects include equipment which
separates and sequesters at least 65 percent of the project's
total carbon dioxide emissions. This percentage increases to 70
percent if the credits are later reallocated by the Secretary.
The Secretary is required to recapture the benefit of any
allocated credit if a project fails to attain or maintain these
carbon dioxide separation and sequestration requirements.
In selecting projects, the provision requires the Secretary
to give high priority to applicants who have a research
partnership with an eligible educational institution. In
addition, the Secretary must give the highest priority to
projects with the greatest separation and sequestration
percentage of total carbon dioxide emissions. The provision
also requires that the Secretary disclose which projects
receive credit allocations, including the identity of the
taxpayer and the amount of the credit awarded.

Effective Date

The provision authorizing the Secretary to allocate
additional credits is effective on the date of enactment
(October 3, 2008). The increased credit rate along with the
carbon dioxide sequestration and other rules are effective with
respect to these additional credit allocations.

2. Expansion and modification of the coal gasification investment
credit (sec. 112 of the Act and sec. 48B of the Code)

Present Law

A 20-percent investment tax credit is available for
investments in certain qualifying coal gasification projects.
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.
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. Qualified projects must be
carried out by an eligible entity, defined as any person whose
application for certification is principally intended for use
in a domestic project which employs domestic gasification
applications related to (1) chemicals, (2) fertilizers, (3)
glass, (4) steel, (5) petroleum residues, (6) forest products,
and (7) agriculture, including feedlots and dairy operations.
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,\397\ and each project application must be submitted
during the 3-year period beginning on the date such
certification program is established. The Secretary of Treasury
may not allocate more than $350 million in credits. In
addition, the Secretary may certify a maximum of $650 million
in qualified investment as eligible for credit with respect to
any single project.
---------------------------------------------------------------------------
\397\ The Secretary issued guidance establishing the certification
program on February 21, 2006 (IRS Notice 2006-25).
---------------------------------------------------------------------------

Reasons for Change \398\

---------------------------------------------------------------------------
\398\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H.R. Rep. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that facilities that gasify coal and
other resources for use in industrial applications should be
operated in an environmentally responsible manner. To this end,
the Congress believes these incentives will reduce pollution
and encourage the capture and sequestration of carbon dioxide
emissions.

Explanation of Provision

The provision expands and modifies the coal gasification
investment credit. The provision increases the gasification
project credit rate to 30 percent and permits the Secretary to
allocate an additional $250 million of credits to qualified
projects that separate and sequester at least 75 percent of
total carbon dioxide emissions. The provision also expands the
definition of credit-eligible entities to include entities
whose gasification projects are related to the production of
transportation grade liquid fuels. The Secretary is required to
recapture the benefit of any allocated credit if a project
fails to attain or maintain these carbon dioxide separation and
sequestration requirements.
In selecting projects, the provision requires the Secretary
to give high priority to applicants who have a research
partnership with an eligible educational institution. In
addition, the Secretary must give the highest priority to
projects with the greatest separation and sequestration
percentage of total carbon dioxide emissions. The provision
also requires that the Secretary disclose which projects
receive credit allocations, including the identity of the
taxpayer and the amount of the credit awarded.

Effective Date

3. Extend excise tax on coal at current rates (sec. 113 of the Act and
sec. 4121 of the Code)

Present Law

A $1.10 per ton excise tax is imposed on coal sold by the
producer from underground mines in the United States. The rate
is 55 cents per ton on coal sold by the producer from surface
mining operations. In either case, the tax cannot exceed 4.4
percent of the coal producer's selling price. No tax is imposed
on lignite.
Gross receipts from the excise tax are dedicated to the
Black Lung Disability Trust Fund (``Trust Fund'') to finance
benefits under the Federal Black Lung Benefits Act. Currently,
the Trust Fund is in a deficit position because previous
spending was financed with interest-bearing advances from the
General Fund.
The coal excise tax rates are scheduled to decline to 50
cents per ton for underground-mined coal and 25 cents per ton
for surface-mined coal (and the cap is scheduled to decline to
two percent of the selling price) for sales after January 1,
2014, or after any earlier January 1 on which there is no
balance of repayable advances from the Trust Fund to the
General Fund and no unpaid interest on such advances.

Reasons for Change \399\

---------------------------------------------------------------------------
\399\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Trust fund financing of benefits under the Federal Black
Lung Benefits Act was established in 1977 to reduce reliance on
the Treasury and to recover costs from the mining industry. The
expenses of the program covered by the Trust Fund (benefits,
administration, and interest) have exceeded revenues, with
advances from the General Fund making up the difference. It
appears that the Trust Fund will not be able to pay off its
debt to the Treasury Department by December 31, 2013.
Therefore, the Congress believes that it is appropriate to
continue the tax on coal at the increased rates beyond the
expiration date.

Explanation of Provision

The provision retains the excise tax on coal at the current
rates until the earlier of the following dates: (1) January 1,
2019; and (2) the day after the first December 31 after 2007 on
which the Trust Fund has repaid, with interest, all amounts
borrowed from the General Fund. On and after that date, the
reduced rates of $.50 per ton for coal from underground mines
and $.25 per ton for coal from surface mines will apply and the
tax per ton of coal will be capped at two percent of the amount
for which it is sold by the producer.
The provision also provides for the financial restructuring
of the Trust Fund, as follows. On the refinancing date, the
Trust Fund shall repay the market value of the outstanding
repayable advances, plus accrued interest, by transferring into
the General Fund of the Treasury the following sums:
1. The proceeds from obligations that the Trust Fund
shall issue to the Secretary of the Treasury in such
amounts as the Secretaries of Labor and the Treasury
shall determine and bearing interest at the Treasury
rate, and that shall be in such forms and denominations
and be subject to such other terms and conditions,
including maturity, as the Secretary of the Treasury
shall prescribe; and
2. All, or that portion, of the one-time
appropriation, made to the Trust Fund that is needed to
cover the difference between:
a. the market value of the outstanding
repayable advances, plus accrued interest; and
b. the proceeds from the obligations issued
by the Trust Fund to the Secretary of the
Treasury under paragraph one above.
In the event that the Trust Fund is unable to repay the
obligations that it has issued to the Secretary of the Treasury
under paragraph one above and under this paragraph, or is
unable to make benefit payments and other authorized
expenditures, the Trust Fund shall issue obligations to the
Secretary of the Treasury in such amounts as may be necessary
to make such repayments, payments, and expenditures, with a
maturity of one year, and bearing interest at the Treasury one-
year rate. These obligations shall be in such forms and
denominations and be subject to such other terms and conditions
as the Secretary of the Treasury shall prescribe.
The provision also authorizes the Trust Fund to issue
obligations to the Secretary of the Treasury under paragraph
one above and under the paragraph immediately preceding this
paragraph. The Secretary of the Treasury is authorized to
purchase such obligations of the Trust Fund. For the purposes
of making such purchases, the Secretary of the Treasury may use
as a public debt transaction the proceeds from the sale of any
securities issued under chapter 31 of title 31, United States
Code, and the purposes for which securities may be issued under
such chapter are extended under the provision to include any
purchase of such Trust Fund obligations under this paragraph.
The Trust Fund is also authorized to repay any obligation
issued to the Secretary of the Treasury under the provision
prior to its maturity date by paying a prepayment price that
would, if the obligation being prepaid (including all unpaid
interest accrued thereon through the date of prepayment) were
purchased by a third party and held to the maturity date of
such obligation, produce a yield to the third-party purchaser
for the period from the date of purchase to the maturity date
of such obligation substantially equal to the Treasury yield on
outstanding marketable obligations of the United States having
a comparable maturity to this period.
The following definitions apply for purposes of the
provision. The term ``market value of the outstanding repayable
advances, plus accrued interest'' means the present value
(determined by the Secretary of the Treasury as of the
refinancing date and using the Treasury rate as the discount
rate) of the stream of principal and interest payments derived
assuming that each repayable advance that is outstanding on the
refinancing date is due on the 30th anniversary of the end of
the fiscal year in which the advance was made to the Trust
Fund, and that all such principal and interest payments are
made on September 30 of the applicable fiscal year.
The term ``refinancing date'' means the date occurring two
days after the enactment of the provision.
The term ``repayable advance'' means an amount that has
been appropriated to the Trust.
Fund in order to make benefit payments and other
expenditures that are authorized under section 9501 and are
required to be repaid when the Secretary of the Treasury
determines that monies are available in the Trust Fund for such
purpose.
The term ``Treasury rate'' means a rate determined by the
Secretary of the Treasury, taking into consideration current
market yields on outstanding marketable obligations of the
United States of comparable maturities.
The term ``Treasury one-year rate'' means a rate determined
by the Secretary of the Treasury, taking into consideration
current market yields on outstanding marketable obligations of
the United States with remaining periods to maturity of
approximately one year, to have been in effect as of the close
of business one business day prior to the date on which the
Trust Fund issues obligations to the Secretary of the Treasury
under this provision.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

4. Temporary procedures for excise tax refunds on exported coal (sec.
114 of the Act)

Present Law

In general

Excise tax is imposed on coal, except lignite, produced
from mines located in the United States.\400\ The producer of
the coal is liable for paying the tax to the IRS. Producers
generally recover the tax from their purchasers.
---------------------------------------------------------------------------
\400\ Sec. 4121(a). Throughout the relevant period, the rate of tax
on coal from underground mines has been $1.10 per ton and the rate of
tax on coal from surface mines has been $0.55 per ton. These rates are
subject to a limitation of 4.4 percent of the producer's sale price.
Sec. 4121(b).
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The Export Clause of the U.S. Constitution provides that
``no Tax or Duty shall be laid on Articles exported from any
State.'' \401\ Courts have determined that the Export Clause
applies to excise tax on exported coal, and therefore such
taxes are subject to a claim for refund.\402\ The Supreme Court
has ruled that taxpayers seeking a refund of such taxes must
proceed under the rules of the Internal Revenue Code.\403\
---------------------------------------------------------------------------
\401\ U.S. Const., art. I, sec. 9, cl. 5.
\402\ See Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466
(E.D. Va. 1998). The IRS subsequently provided guidance regarding how
taxpayers may assure that exported coal would not be subject to excise
tax. Notice 2000-28, 2000-1 C.B. 1116.
\403\ United States v. Clintwood Elkhorn Mining Co., 128 S. Ct.
1511 (April 15, 2008). Prior to the Supreme Court's decision, some
courts had allowed taxpayers to bring claims under the Tucker Act, 28
U.S.C. sec. 1491(a), which confers jurisdiction upon the Court of
Federal Claims ``to render judgment upon any claim against the United
States founded either upon the Constitution, or any Act of Congress or
any regulation of an executive department ....'' Lower courts had held
that such a Tucker Act claim was subject to the Tucker Act's six-year
statute of limitations and was not subject to the requirements of the
Code. Venture Coal Sales Co. v. U.S., 93 AFTR 2d 2004-2495 (Fed. Cir.
2004); Cyprus Amax Coal Co. v. U.S., 205 F.3d 1369 (Fed. Cir. 2000).
The Supreme Court held that the stricter rules of the Code apply to
these refund claims.
---------------------------------------------------------------------------

Claims under the Code

In order to obtain a refund of taxes on exported coal, a
claimant must satisfy the following requirements of the Code
and case law:
1. A claim for refund must be filed within three
years from the time the return was filed, or within two
years from the time the tax was paid, whichever period
expires later; \404\
---------------------------------------------------------------------------
\404\ Sec. 6511(a).
---------------------------------------------------------------------------
2. The person must establish that the goods were in
the stream of export when the excise tax was imposed;
\405\
---------------------------------------------------------------------------
\405\ See Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466
(E.D. Va. 1998). See also United States v. International Business
Machines Corp., 517 U.S. 843 (1996); Joy Oil, Ltd. v. State Tax
Commission, 337 U.S. 286 (1949).
---------------------------------------------------------------------------
3. The claimant must establish that it has borne the
tax. More specifically, the claimant must establish
that the tax was neither included in the price of the
article nor collected from the purchaser (or if so,
that the claimant has repaid the amount of tax to the
ultimate purchaser), that the claimant has repaid or
agreed to repay the tax to the ultimate vendor or has
obtained the written consent of such ultimate vendor to
the allowance of the claim, or that the claimant has
filed the written consent of the ultimate purchaser to
the allowance of the claim; \406\
---------------------------------------------------------------------------
\406\ Sec. 6416(a)(1).
---------------------------------------------------------------------------
4. In the case of an exporter or shipper of an
article exported to a foreign country or shipped to a
possession, the amount of tax may be refunded to the
exporter or shipper if the person who paid the tax
waives its claim to such amount; \407\ and
---------------------------------------------------------------------------
\407\ Sec. 6416(c).
---------------------------------------------------------------------------
5. A civil action for refund must not be begun before
the expiration of six months from the date of filing
the claim (unless the claim has been disallowed during
that time), nor after the expiration of two years from
the date of mailing the notice of claim
disallowance.\408\
---------------------------------------------------------------------------
\408\ Sec. 6532(a).
---------------------------------------------------------------------------
In 2000, the IRS issued Notice 2000-28,\409\ which
summarizes its position regarding claims for credits or refunds
of excise taxes on exported coal and sets forth procedural
rules relating to such claims. Under Notice 2000-28, a coal
producer or exporter must provide the following information as
part of its claim:
---------------------------------------------------------------------------
\409\ Notice 2000-28, 2001-1 C.B. 1116.
---------------------------------------------------------------------------
1. A statement by the person that paid the tax to the
government that provides the quarter and the year for
which the tax was reported on Form 720, the line number
on such Form, the amount of tax paid on the coal, and
the date of payment;
2. In the case of an exporter, a statement by the
person that paid the tax to the government that such
person has waived the right to claim a refund;
3. A statement that the claimant has evidence that
the coal was in the stream of export when sold by the
producer;
4. In the case of an exporter, proof of exportation;
5. In the case of a coal producer, a statement that
the coal actually was exported; and
6. A statement that the claimant:
a. has neither included the tax in the price
of the coal nor collected the amount of the tax
from its buyer;
b. has repaid the amount of the tax to the
ultimate purchaser of the coal; or
c. has obtained the written consent of the
ultimate purchaser of the coal to the allowance
of the claim.
If the IRS disallows the claim, the claimant may proceed in
a Federal district court or the Court of Federal Claims under
28 U.S.C. sec. 1346(a)(1), which grants these courts concurrent
jurisdiction over ``[a]ny civil action against the United
States for the recovery of any internal revenue tax alleged to
have been erroneously or illegally assessed or collected . . .
or any sum alleged to have been excessive or in any manner
wrongfully collected under the internal-revenue laws.''
With respect to claims under the Code allowed by the IRS or
by a court, prejudgment interest is generally allowed.\410\
---------------------------------------------------------------------------
\410\ See sec. 6611; 28 U.S.C. sec. 2411.
---------------------------------------------------------------------------

Reasons for Change \411\

---------------------------------------------------------------------------
\411\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Courts have determined, and the IRS has agreed, that the
Federal excise taxes imposed on exported coal was
unconstitutionally collected. However, present law does not
offer a complete remedy to affected coal producers and
exporters, to whom the producers generally passed on the excise
tax (in those transactions in which exporters were involved).
The recent Supreme Court case of United States v. Clintwood
Elkhorn Mining Co. further limits the available remedies by
clarifying that the claims of the coal producers and exporters
are subject to the three-year statute of limitations of the
Code. The Congress believes that it is appropriate to provide a
fair, equitable, and more complete remedy to both the affected
coal producers and exporters that permits refunds for these
unconstitutionally collected taxes that would otherwise be
barred by the applicable statute of limitations.

Explanation of Provision

The provision creates a new procedure under which certain
coal producers and exporters may claim a refund of excise taxes
imposed on coal exported from the United States. Coal producers
or exporters that exported coal during the period beginning on
or after October 1, 1990, and ending on or before the date of
enactment of the provision, with respect to which a return was
filed on or after October 1, 1990, and on or before the date of
enactment, and that file a claim for refund not later than the
close of the 30-day period beginning on the day of enactment,
may obtain a refund from the Secretary of the Treasury of
excise taxes paid on such exported coal and any interest
accrued from the date of overpayment. Interest on such claims
is computed under the Code.\412\ The Secretary of the Treasury
is required to determine whether to approve the claim within
180 days after such claim is filed, and to pay such claim not
later than 180 days after making such determination.
---------------------------------------------------------------------------
\412\ See sec. 6621.
---------------------------------------------------------------------------
In order to qualify for a refund under the provision, a
coal producer must establish that it, or a party related to
such coal producer, exported coal produced by such coal
producer to a foreign country or shipped coal produced by such
coal producer to a U.S. possession, the export or shipment of
which was other than through an exporter that has filed a valid
and timely claim for refund under the provision. An exporter
must establish that it exported coal to a foreign country,
shipped coal to a U.S. possession, or caused such coal to be so
exported or shipped. Refunds to producers are to be made in an
amount equal to the tax paid on exported coal. Exporters are to
receive a payment equal to $0.825 per ton of exported coal.
Special rules apply if a court has rendered a judgment. If
a coal producer or a party related to a coal producer has
received, from a court of competent jurisdiction in the United
States, a judgment in favor of such coal producer (or party
related to such coal producer) that relates to the
constitutionality of Federal excise tax paid on exported coal,
then such coal producer is deemed to have established the
export of coal to a foreign country or shipment of coal to a
possession of the United States. If such coal producer is
entitled to a payment under this provision, the amount of such
payment is reduced by any amount awarded under such court
judgment. Subject to the rules below, a coal exporter may file
a claim notwithstanding that a coal producer or a party related
to a coal producer has received a court judgment relating to
the same coal.
Under the provision, the term ``coal producer'' means the
person that owns the coal immediately after the coal is severed
from the ground, without regard to the existence of any
contractual arrangement for the sale or other disposition of
the coal or the payment of any royalties between the producer
and third parties. The term also includes any person who
extracts coal from coal waste refuse piles or from the silt
waste product which results from the wet washing or similar
processing of coal. The term ``exporter'' means a person, other
than a coal producer, that does not have an agreement with a
producer or seller of such coal to sell or export such coal to
a third party on behalf of such producer or seller, and that is
indicated as the exporter of record in the shipper's export
declaration or other documentation, or actually exported such
coal to a foreign country, shipped such coal to a U.S.
possession, or caused such coal to be so exported or shipped.
The term ``a party related to such coal producer'' means a
person that is related to such coal producer through any degree
of common management, stock ownership, or voting control, is
related, within the meaning of section 144(a)(3), to such coal
producer, or has a contract, fee arrangement, or any other
agreement with such coal producer to sell such coal to a third
party on behalf of such coal producer.
The provision does not apply with respect to excise tax
imposed on exported coal if a credit or refund of such tax has
been allowed or made, or if a ``settlement with the Federal
Government'' has been made with and accepted by the coal
producer, a party related to such coal producer, or the
exporter of such coal, as of the date that the claim is filed
under the provision. The term ``settlement with the Federal
Government'' does not include a settlement or stipulation
entered into as of the date of enactment, if such settlement or
stipulation contemplates a judgment with respect to which any
party has filed an appeal or has reserved the right to file an
appeal. In addition, the provision does not apply to the extent
that a credit or refund of tax on exported coal has been paid
to any person, regardless of whether such credit or refund
occurs prior to, or after, the date of enactment.
The provision does not confer standing upon an exporter to
commence, or intervene in, any judicial or administrative
proceeding concerning a claim for refund by a coal producer of
any Federal or State tax, fee, or royalty paid by the coal
producer. The provision does not confer standing upon a coal
producer to commence, or intervene in, any judicial or
administrative proceeding concerning a claim for refund by an
exporter of any Federal or State tax, fee, or royalty paid by
the producer and alleged to have been passed on to an exporter.

Effective Date

The provision applies to claims on coal exported on or
after October 1, 1990, through the date of enactment (October
3, 2008), with respect to amounts of tax for which a return was
filed on or after October 1, 1990, and on or before the date of
enactment (October 3, 2008), and for which a claim for refund
is filed not later than the close of the 30-day period
beginning on the date of enactment (October 3, 2008).

5. Credit for carbon dioxide sequestration (sec. 115 of the Act and new
sec. 45Q of the Code)

Present Law

Taxpayers engaged in petroleum extraction activities may
generally deduct qualified tertiary injectant expenses paid or
incurred while applying a tertiary recovery method, including
carbon dioxide augmented waterflooding and immiscible carbon
dioxide displacement.\413\ In addition, taxpayers may claim a
credit equal to 15 percent of their qualified enhanced oil
recovery (``EOR'') costs, which include tertiary injectant
expenses associated with an EOR project.\414\ The EOR credit is
ratably reduced over a $6 phase-out range when the reference
price for domestic crude oil exceeds $28 per barrel (adjusted
for inflation after 1991) and is currently phased out.
---------------------------------------------------------------------------
\413\ Sec. 193.
\414\ Sec. 43.
---------------------------------------------------------------------------

Explanation of Provision

The provision allows a credit of $20 per metric ton of
qualified carbon dioxide that is captured by the taxpayer at a
qualified facility and disposed of by such taxpayer in secure
geological storage (including storage at deep saline formations
and unminable coal seams under such conditions as the Secretary
may determine). In addition, the provision allows a credit of
$10 per metric ton of qualified carbon dioxide that is captured
by the taxpayer at a qualified facility and used by such
taxpayer as a tertiary injectant in a qualified enhanced oil or
natural gas recovery project. Both credit amounts are adjusted
for inflation after 2009.
Qualified carbon dioxide is defined under the provision as
carbon dioxide captured from an industrial source that (1)
would otherwise be released into the atmosphere as an
industrial emission of greenhouse gas, and (2) is measured at
the source of capture and verified at the point or points of
injection. Qualified carbon dioxide includes the initial
deposit of captured carbon dioxide used as a tertiary injectant
but does not include carbon dioxide that is recaptured,
recycled, and re-injected as part of an enhanced oil or natural
gas recovery project process. A qualified enhanced oil or
natural gas recovery project is a project that would otherwise
meet the definition of an EOR project under section 43, if
natural gas projects were included within that definition.
Under the provision, a qualified facility means any
industrial facility (1) which is owned by the taxpayer, (2) at
which carbon capture equipment is placed in service, and (3)
which captures not less than 500,000 metric tons of carbon
dioxide during the taxable year. The credit applies only with
respect to qualified carbon dioxide captured and sequestered or
injected in the United States \415\ or one of its
possessions.\416\
---------------------------------------------------------------------------
\415\ Sec. 638(1).
\416\ Sec. 638(2).
---------------------------------------------------------------------------
Except as provided in regulations, any credit under the
provision is attributable to the person that captures and
physically or contractually ensures the disposal, or use as a
tertiary injectant, of the qualified carbon dioxide. Any credit
allowable under the provision will be recaptured, as provided
by regulation, with respect to any qualified carbon dioxide
which ceases to be recaptured, disposed of, or used as a
tertiary injectant in a manner consistent with the rules of the
provision.
The credit is part of the general business credit. The
credit sunsets at the end of the calendar year in which the
Secretary, in consultation with the Administrator of the
Environmental Protection Agency, certifies that 75 million
metric tons of qualified carbon dioxide have been captured and
disposed of or used as a tertiary injectant.

Effective Date

The provision is effective for carbon dioxide captured
after the date of enactment (October 3, 2008).

6. Certain income and gains relating to industrial source carbon
dioxide and to alcohol fuels and mixtures, biodiesel fuels and
mixtures, and alternative fuels and mixtures treated as qualifying
income for purposes of the exception from treatment of publicly traded
partnerships as corporations (secs. 116 and 208 of the Act and sec.
7704 of the Code)

Present Law

Partnerships in general

A partnership generally is not treated as a taxable entity
(except for certain publicly traded partnerships), but rather,
is treated as a pass-through entity. Income earned by a
partnership, whether distributed or not, is taxed to the
partners.\417\ The character of partnership items passes
through to the partners, as if the items were realized directly
by the partners.\418\ For example, a partner's share of the
partnership's dividend income is generally treated as dividend
income in the hands of the partner.
---------------------------------------------------------------------------
\417\ Sec. 701.
\418\ Sec. 702.
---------------------------------------------------------------------------

Publicly traded partnerships

Under present law, a publicly traded partnership generally
is treated as a corporation for Federal tax purposes (sec.
7704(a)). For this purpose, a publicly traded partnership means
any partnership if interests in the partnership are traded on
an established securities market, or interests in the
partnership are readily tradable on a secondary market (or the
substantial equivalent thereof).
An exception from corporate treatment is provided for
certain publicly traded partnerships, 90 percent or more of
whose gross income is qualifying income.\419\ However, this
exception does not apply to any partnership that would be
described in section 851(a) if it were a domestic corporation,
which includes a corporation registered under the Investment
Company Act of 1940 as a management company or unit investment
trust.
---------------------------------------------------------------------------
\419\ Sec. 7704(c)(2).
---------------------------------------------------------------------------
Qualifying income includes interest, dividends, and gains
from the disposition of a capital asset (or of property
described in section 1231(b)) that is held for the production
of income that is qualifying income. Qualifying income also
includes rents from real property, gains from the sale or other
disposition of real property, and income and gains from the
exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas,
oil, or products thereof), or the marketing of any mineral or
natural resource (including fertilizer, geothermal energy, and
timber). It also includes income and gains from commodities
(not described in section 1221(a)(1)) or futures, options, or
forward contracts with respect to such commodities (including
foreign currency transactions of a commodity pool) in the case
of partnership, a principal activity of which is the buying and
selling of such commodities, futures, options or forward
contracts.

Explanation of Provision

The Act provides that qualifying income of a publicly
traded partnership includes income or gains from specified
activities with respect to industrial source carbon dioxide,
including transportation or marketing of industrial source
carbon dioxide.
The Act provides that qualifying income of a publicly
traded partnership includes income or gains from the
transportation or storage of specified fuels. Specifically, the
fuels are: (1) Any fuel described in subsection (b), (c), (d)
or (e) of section 6426, namely, alcohol fuel mixtures,
biodiesel mixtures, alternative fuels (which include liquefied
petroleum gas, P Series Fuels, compressed or liquefied natural
gas, liquefied hydrogen, liquid fuel derived from coal through
the Fischer-Tropsch process, and liquid fuel derived from
biomass), and alternative fuel mixtures; (2) neat alcohol other
than alcohol derived from petroleum, natural gas, or coal, or
having a proof of less than 190 (as defined in section
6426(b)(4)(A)), and (3) neat biodiesel (as defined in section
40A(d)(1)).

Effective Date

The provisions apply to taxable years ending after the date
of enactment (October 3, 2008).

7. Carbon audit of provisions of the Internal Revenue Code of 1986
(sec. 117 of the Act)

Present Law

Present law does not require a review of the Code for
provisions that affect carbon emissions and climate. The
National Research Council is part of the National Academies.
The National Academy of Sciences serves to investigate,
examine, experiment, and report upon any subject of science
whenever called upon to do so by any department of the
government. The National Research Council was organized by the
National Academy of Sciences in 1916 and is its principal
operating agency for conducting science policy and technical
work.

Reasons for Change \420\

---------------------------------------------------------------------------
\420\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes it is important to identify
provisions in the Code which affect carbon dioxide and other
greenhouse emissions. This study will provide scientifically-
based information to aid decision makers in the formulation of
tax policies aimed at reducing emissions and mitigating climate
change.

Explanation of Provision

The provision directs the Secretary to request that the
National Academy of Sciences undertake a comprehensive review
of the Code to identify the types of and specific tax
provisions that have the largest effects on carbon dioxide and
other greenhouse gas emissions and to generally estimate the
magnitude of those effects.\421\ The report should identify the
provisions of the Code that are most likely to have significant
effects on carbon dioxide emissions and discuss the importance
of controlling carbon dioxide and greenhouse gas emissions as
part of a comprehensive national strategy for reducing U.S.
contributions to global climate change.\422\ The report will
describe the processes by which the tax provisions affect
emissions (both directly and indirectly), assess the relative
influence of the identified provisions, and evaluate the
potential for changes in the Code to reduce carbon dioxide
emissions. The report also will identify other provisions of
the Code that may have significant influence on other factors
affecting climate change.
---------------------------------------------------------------------------
\421\ A detailed quantitative analysis is not required. It is
envisioned that the review will catalogue and provide a general
analysis of the effect of each identified provision.
\422\ ``Greenhouse gas emissions'' include, but are not limited to,
methane, nitrous oxide, ozone, and fluorinated hydrocarbons.
---------------------------------------------------------------------------
The Secretary is to submit to Congress a report containing
the results of the National Academy of Sciences review within
two years of the date of enactment. The provision authorizes
the appropriation of $1,500,000 to carry out the review.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

TITLE II--TRANSPORTATION AND DOMESTIC FUEL SECURITY PROVISIONS

A. Inclusion of Cellulosic Biofuel in Bonus Depreciation for Biomass
Ethanol Plant Property (sec. 201 of the Act and sec. 168(l) of the
Code)

Present Law

Section 168(l) 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, 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 December 20, 2006. The property
must be acquired by purchase (as defined under section 179(d))
by the taxpayer after December 20, 2006, 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 December 20, 2006.
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 December 20, 2006, 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 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.

Reasons for Change \423\
---------------------------------------------------------------------------

\423\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the expensing provision should
include any cellulosic biofuel and not be limited to ethanol.
Additionally, the Congress believes that the provision should
not be limited to certain processes.

Explanation of Provision

The provision changes the definition of qualified property.
Under the provision, qualified property includes cellulosic
biofuel, which is defined as any liquid fuel which is produced
from any lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis.

Effective Date

The provision is effective for property placed in service
after the date of enactment (October 3, 2008), in taxable years
ending after such date.

B. Credits for Biodiesel and Renewable Diesel (sec. 202 of the Act and
secs. 40A, 6426, and 6427 of the Code)

Present Law

Income tax credit
Overview
The Code provides an income tax credit for biodiesel fuels
(the ``biodiesel fuels credit'').\424\ The biodiesel fuels
credit is the sum of three credits: (1) the biodiesel mixture
credit, (2) the biodiesel credit, and (3) the small agri-
biodiesel producer credit. The biodiesel fuels credit 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 does not apply to fuel
sold or used after December 31, 2008.
---------------------------------------------------------------------------
\424\ 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 (``ASTM'') 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 that identifies the
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is 50 cents for each gallon of
biodiesel (other than agri-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 that 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.
Small agri-biodiesel producer credit
The Code provides a small agri-biodiesel producer income
tax credit, in addition to the biodiesel and biodiesel fuel
mixture credits. 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 agri-biodiesel in the fuel tank of such
other person; or (2) be used by the producer for any purpose
described in (a), (b), or (c).
Biodiesel mixture excise tax credit
The Code also provides an excise tax credit for biodiesel
mixtures.\425\ 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.\426\
---------------------------------------------------------------------------
\425\ Sec. 6426(c).
\426\ Sec. 6426(c)(4).
---------------------------------------------------------------------------
The credit is not available for any sale or use for any
period after December 31, 2008. 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.\427\ Such a
payment is required only to the extent the biodiesel fuel
mixture credit exceeds the person's section 4081 liability.
Thus, the credit is refundable to the extent it exceeds the
person's section 4081 liability. The Secretary is not required
to make payments with respect to biodiesel fuel mixtures sold
or used after December 31, 2008.
---------------------------------------------------------------------------
\427\ Sec. 6427(e).
---------------------------------------------------------------------------
Renewable diesel
``Renewable diesel'' is diesel fuel that (1) is derived
from biomass (as defined in section 45K(c)(3)) using a thermal
depolymerization process; (2) meets the registration
requirements for fuels and fuel additives established by the
Environmental Protection Agency (``EPA'') under section 211 of
the Clean Air Act (42 U.S.C. sec. 7545); and (3) meets the
requirements of the ASTM D975 or D396. ASTM D975 provides
standards for diesel fuel suitable for use in diesel engines.
ASTM D396 provides standards for fuel oil intended for use in
fuel-oil burning equipment, such as furnaces.
For purposes of the Code, renewable diesel is generally
treated the same as biodiesel. Like biodiesel, the incentive
may be taken as an income tax credit, an excise tax credit, or
as a payment from the Secretary.\428\ The incentive for
renewable diesel is $1.00 per gallon. There is no small
producer credit for renewable diesel. The incentives for
renewable diesel expire after December 31, 2008.
---------------------------------------------------------------------------
\428\ Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------
Pursuant to IRS Notice 2007-37, the Secretary provided that
fuel produced as a result of co-processing biomass and
petroleum feedstock (``co-produced fuel'') qualifies for the
renewable diesel incentives to the extent of the fuel
attributable to the biomass in the mixture. In co-produced
fuel, the fuel attributable to the biomass does not exist as a
distinct separate quantity prior to mixing.

Reasons for Change \429\
---------------------------------------------------------------------------

\429\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes it is appropriate to extend the
biodiesel and renewable diesel incentives for an additional
year to further encourage the development and use of these
fuels. With respect to renewable diesel, the Congress believes
that the incentive should be technology neutral, and therefore,
the Congress deletes the requirement that the fuel be made
through a thermal depolymerization process. While the Congress
is unaware of an appropriate standard in addition to ASTM D975
and ASTM D396 for renewable diesel, the Congress recognizes
that as technology evolves, other appropriate standards may
arise for such fuel and therefore, the provision permits the
Secretary to identify other equivalent or improved standards
for renewable diesel.

Explanation of Provision

The provision extends an additional year (through December
31, 2009) the income tax credit, excise tax credit, and payment
provisions for biodiesel (including agri-biodiesel) and
renewable diesel. The provision provides that both biodiesel
and agri-biodiesel are entitled to a credit of $1.00 per
gallon.
The provision modifies the definition of renewable diesel.
The provision eliminates the requirement that the fuel be made
using a thermal depolymerization process. The provision also
permits the Secretary to identify standards equivalent to ASTM
D975 and ASTM D396 for renewable diesel. Thus, under the
provision, renewable diesel is liquid fuel derived from biomass
which meets (a) the registration requirements for fuels and
fuel additives established by the EPA under section 211 of the
Clean Air Act, and (b) the requirements of the ASTM D975, ASTM
D396, or other equivalent standard approved by the Secretary.
The provision also provides that renewable diesel includes
biomass fuel that meets a Department of Defense military
specification for jet fuel or an ASTM for aviation turbine
fuel.
The provision also overrides IRS Notice 2007-37 with
respect to co-produced fuel, providing that renewable diesel
does not include any fuel derived from co-processing biomass
with a feedstock that is not biomass. The de minimis use of
catalysts, such as hydrogen, is permitted under the provision.

Effective Date

The provision is generally effective for fuel produced, and
sold or used, after December 31, 2008. The provision making co-
produced fuel ineligible for the renewable diesel incentives is
effective for fuel produced, and sold or used, after the date
of enactment (October 3, 2008).

C. Clarification That Credits for Fuel Are Designed To Provide an
Incentive for United States Production (sec. 203 of the Act and secs.
40, 40A, 6426 and 6427 of the Code)

Present Law

The Code provides per-gallon incentives relating to the
following qualified fuels: alcohol (including ethanol),
biodiesel (including agri-biodiesel), renewable diesel, and
certain alternative fuels.\430\ The incentives may be taken as
an income tax credit, excise tax credit or payment. The
provisions are coordinated so that a gallon of qualified fuel
is only taken into account once. If the qualified fuel is part
of a qualified fuel mixture, the incentives apply only to the
amount of qualified fuel in the mixture.
---------------------------------------------------------------------------
\430\ See secs. 40, 40A, 6426, and 6427(e).
---------------------------------------------------------------------------
For alcohol, other than ethanol, the amount of the credit
is 60 cents per gallon. For ethanol, the credit is generally 51
cents per gallon, an extra 10 cents per gallon available for
small ethanol producers. The alcohol incentives expire after
December 31, 2010. The amount of the credit for biodiesel is 50
cents. For agri-biodiesel and renewable diesel, the credit
amount is $1.00 per gallon. An extra 10 cents per gallon is
available for small producers of agri-biodiesel. The biodiesel,
agri-biodiesel and renewable diesel incentives expire after
December 31, 2008. The credit amount for alternative fuels is
50 cents per gallon. The incentives for alternative fuels
expire after September 30, 2009 (after September 30, 2014, in
the case of liquefied hydrogen).
The Code is silent as to the geographic limitations on
where the fuel must be produced, used, or sold.

Reasons for Change \431\

---------------------------------------------------------------------------
\431\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Alternative fuels are a significant component of
establishing the nation's independence from foreign oil. The
fuel incentives were not intended to subsidize fuels with no
nexus to the United States. The Congress is aware of situations
in which foreign-produced fuel is imported into the United
States, mixed with a small amount of diesel fuel, in order to
qualify for the credit for qualified biodiesel fuel mixtures,
and then the fuel is exported. This practice does not
contribute to establishing the country's fuel independence,
therefore the provision denies the fuel credits and payments to
such fuel.

Explanation of Provision

The provision provides that fuel that is produced outside
the United States for use as a fuel outside the United States
is ineligible for the per-gallon tax incentives relating to
alcohol, biodiesel, renewable diesel, and alternative fuel. For
example, fuel in the following situations is ineligible for
incentives: (1) biodiesel, which is not in a mixture, that is
both produced and used outside the United States, (2) foreign-
produced biodiesel that is used to make a qualified mixture
outside of the United States for foreign use, and (3) foreign-
produced biodiesel that is used to make a qualified mixture in
the United States that is then exported for foreign use.

Effective Date

The provision is effective for claims for credit or payment
made on or after May 15, 2008.

D. Extension and Modification of Alternative Fuel Credit (sec. 204 of
the Act and secs. 6426 and 6427 of the Code)

Present Law

The Code provides two per-gallon excise tax credits with
respect to alternative fuel, 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 Fischer-
Tropsch process, or 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 \432\ 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.
---------------------------------------------------------------------------
\432\ ``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. The credits generally expire after September 30,
2009.
A person may 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. 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.

Explanation of Provision

The provision extends the alternative fuel excise tax
credit, alternative fuel mixture excise tax credit and related
payment provisions an additional three months (through December
31, 2009) for all fuels other than hydrogen. The incentives for
hydrogen are unchanged by the provision and will expire as
provided under present law. The provision provides that
liquefied or compressed biomass gas qualifies for the credit.
The provision also provides that alternative fuel that is not
in a mixture may be used, or sold for use, as a fuel in
aviation for purposes of the credit.
For fuel produced after September 30, 2009, to qualify as
an alternative fuel, liquid fuel from coal derived through the
Fischer-Tropsch process must be certified as having been
derived from coal produced at a gasification facility that
separates and sequesters at least 50 percent of such facility's
total carbon dioxide emissions. The sequestration requirement
increases to 75 percent on December 31, 2009.

Effective Date

The provision is effective for fuel sold or used after the
date of enactment (October 3, 2008).

E. Alternative Motor Vehicle Credit and Plug-In Electric Vehicle Credit
(sec. 205 of the Act and sec. 30B and new sec. 30D of the Code)

Present Law

In general

A credit is available for each new qualified fuel cell
vehicle, hybrid vehicle, advanced lean burn technology vehicle,
and alternative fuel vehicle placed in service by the taxpayer
during the taxable year.\433\ In general, the credit amount
varies depending upon the type of technology used, the weight
class of the vehicle, the amount by which the vehicle exceeds
certain fuel economy standards, and, for some vehicles, the
estimated lifetime fuel savings. The credit generally is
available for vehicles purchased after 2005. The credit
terminates after 2009, 2010, or 2014, depending on the type of
vehicle.
---------------------------------------------------------------------------
\433\ Sec. 30B.
---------------------------------------------------------------------------
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-exempt organizations,
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 qualified fuel cell vehicle is a motor vehicle that is
propelled by power derived from one or more cells that convert
chemical energy directly into electricity by combining oxygen
with hydrogen fuel that is stored on board the vehicle and may
or may not require reformation prior to use. A qualified 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.\434\ Table 2, below, shows the base credit amounts.
---------------------------------------------------------------------------
\434\ See discussion surrounding Table 7, below.

TABLE 2.--BASE CREDIT AMOUNT FOR FUEL CELL VEHICLES
------------------------------------------------------------------------
Credit
Vehicle gross weight rating (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 QUALIFIED 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

Qualified hybrid vehicles
A qualified hybrid vehicle is a motor vehicle that draws
propulsion energy from on-board sources of stored energy that
include both an internal combustion engine or heat engine using
combustible fuel and a rechargeable energy storage system
(e.g., batteries). A qualified hybrid vehicle must be placed in
service before January 1, 2011 (January 1, 2010 in the case of
a hybrid 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: (1)
a fuel economy credit amount that varies with the rated fuel
economy of the vehicle compared to a 2002 model year standard
and (2) a conservation credit based on the estimated lifetime
fuel savings of the qualified vehicle compared to a comparable
2002 model year vehicle that is powered solely by a gasoline or
diesel internal combustion engine. A qualified hybrid
automobile or light truck must have a maximum available power
1A\435\ from the rechargeable energy storage system of at least
four percent. In addition, the vehicle must meet or exceed
certain Environmental Protection Agency (``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.
---------------------------------------------------------------------------
\435\ For hybrid passenger vehicles and light trucks, the term
``maximum available power'' means the maximum power available from the
rechargeable energy storage system, during a standard 10 second pulse
power or equivalent test, divided by such maximum power and the SAE net
power of the heat engine. Sec. 30B(d)(3)(C)(i).
---------------------------------------------------------------------------
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:
Credit -------------------------------------------------
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 (gallons of gasoline) 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 vehicles
The amount of credit for the purchase of an advanced lean
burn technology vehicle is the sum of two components: (1) 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 (2) a conservation credit
based on the estimated lifetime fuel savings of a qualified
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 vehicle.
A qualified advanced lean burn technology 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 qualified advanced
lean burn technology vehicle must be placed in service before
January 1, 2011.
Limitation on number of qualified hybrid and advanced lean
burn technology vehicles eligible for the credit
There is a limitation on the number of passenger and light
truck qualified hybrid vehicles and advanced lean burn
technology 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
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 qualified hybrid
vehicles that are passenger vehicles or light trucks and all
sales of qualified advanced lean burn technology 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 qualified 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 qualified 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 qualified vehicles of the manufacturer. After June
30, 2008, no credit may be claimed for purchases of such hybrid
vehicles or advanced lean burn technology vehicles sold by the
manufacturer.
Hybrid vehicles that are medium and heavy trucks
In the case of a qualified hybrid 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 qualified hybrid 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 qualified hybrid 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 qualified
hybrid vehicle weighing more than 26,000 pounds, the maximum
allowable incremental cost amount is $30,000.
A qualified hybrid 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 qualified 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.\436\
---------------------------------------------------------------------------
\436\ 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. The incremental cost of any new qualified
alternative fuel vehicle is the excess of the manufacturer's
suggested retail price for such vehicle over the price for a
gasoline or diesel fuel vehicle of the same model. To be
eligible for the credit, a qualified alternative fuel vehicle
must be purchased before January 1, 2011.
The amount of the credit varies depending on the weight of
the qualified vehicle. The credit is subject to certain maximum
applicable incremental cost amounts. Table 6, below, shows the
maximum permitted incremental cost for the purpose of
calculating the credit for alternative fuel vehicles by vehicle
weight class as well as the maximum credit amount for such
vehicles.

TABLE 6.--MAXIMUM ALLOWABLE INCREMENTAL COST FOR CALCULATION OF
ALTERNATIVE FUEL VEHICLE CREDIT
------------------------------------------------------------------------
Maximum
allowable Maximum
Vehicle gross weight rating (pounds) incremental allowable
cost credit
------------------------------------------------------------------------
Vehicle 8,500................................ $5,000 $4,000
8,500 < vehicle 14,000....................... 10,000 8,000
14,000 < vehicle 26,000...................... 25,000 20,000
26,000 < vehicle.............................. 40,000 32,000
------------------------------------------------------------------------

Alternative fuels comprise compressed natural gas,
liquefied natural gas, liquefied petroleum gas, hydrogen, and
any liquid fuel that is at least 85 percent methanol. Qualified
alternative fuel vehicles are vehicles that operate only on
qualified alternative fuels and are incapable of operating on
gasoline or diesel (except to 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 by vehicle type and vehicle inertia weight class. For
this purpose, ``vehicle inertia weight class'' has the same
meaning as when defined in regulations prescribed by the EPA
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.

Reasons for Change \437\

---------------------------------------------------------------------------
\437\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008," which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that further investments in advanced
technology vehicles are necessary to transform automotive
transportation in the United States to be cleaner, more fuel
efficient, and less reliant on petroleum fuels. Tax benefits
provided directly to the consumer to lower the cost of new
technology and
alternative-fuel vehicles can help lower consumer resistance to
these technologies by making the vehicles more price
competitive with purely petroleum-based fuel vehicles and
creating increased demand for manufacturers to produce the
technologies. The eventual goal is mass production and mass-
market acceptance of new technology vehicles. To this end, the
Congress believes the present-law incentives for alternative
fuel vehicles should be expanded to include benefits for plug-
in electric drive vehicles, which the Congress believes are the
next generation of alternative-fuel vehicles.

Explanation of Provision

The provision allows a credit for each qualified plug-in
electric drive motor vehicle placed in service. A qualified
plug-in electric drive motor vehicle is a motor vehicle that
meets certain emissions standards (except for certain heavy
vehicles), draws propulsion using a traction battery with at
least four kilowatt-hours of capacity, and is capable of being
recharged from an external source of electricity.
The base amount of the plug-in electric drive motor vehicle
credit is $2,500, plus another $417 for each kilowatt-hour of
battery capacity in excess of four kilowatt-hours. The maximum
credit for qualified vehicles weighing 10,000 pounds or less is
$7,500. This maximum amount increases to $10,000 for vehicles
weighing more than 10,000 pounds but not more than 14,000
pounds, to $12,500 for vehicles weighing more than 14,000
pounds but not more than 26,000 pounds, and to $15,000 for
vehicle weighing more than 26,000 pounds.
In general, the credit is available to the vehicle owner,
including the lessor of a vehicle subject to lease. If the
qualified vehicle is used by certain tax-exempt organizations,
governments, or 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.
Once a total of 250,000 credit-eligible vehicles have been
sold for use in the United States, the credit phases out over
four calendar quarters. The phaseout period begins in the
second calendar quarter following the quarter during which the
vehicle cap has been reached. Taxpayers may claim one-half of
the otherwise allowable credit during the first two calendar
quarters of the phaseout period and twenty-five percent of the
otherwise allowable credit during the next two quarters. After
this, no credit is available.
The basis of any qualified vehicle is reduced by the amount
of the credit. To the extent a vehicle is eligible for credit
as a qualified plug-in electric drive motor vehicle, it is not
eligible for credit as a qualified hybrid vehicle under section
30B. The portion of the credit attributable to vehicles of a
character subject to an allowance for depreciation is treated
as part of the general business credit; the nonbusiness portion
of the credit is allowable to the extent of the excess of the
regular tax and the alternative minimum tax (reduced by certain
other credits) for the taxable year.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

F. Exclusion From Heavy Vehicle Excise Tax for Idling Reduction Units
and Advanced Insulation (sec. 206 of the Act and sec. 4053 of the Code)

Present Law

A 12 percent excise tax (the ``heavy vehicle 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.\438\ The heavy vehicle excise 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. 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, or to tractors having a gross vehicle weight of
19,500 pounds or less if such tractor in combination with a
trailer or semitrailer has a gross combined weight of 33,000
pounds or less.
---------------------------------------------------------------------------
\438\ Sec. 4051.
---------------------------------------------------------------------------
If the owner, lessee, or operator of a taxable article
installs any part or accessory within six months after the date
such vehicle was first placed in service, a 12 percent tax
applies on the price of such part or accessory and its
installation.

Reasons for Change \439\

---------------------------------------------------------------------------
\439\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008," which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Idling of the main drive engine of heavy trucks consumes
significant amounts of fuel. For example, truckers may continue
to engage the main drive engines during rest periods to
continue running air conditioning, heat, or electric appliances
during rest stops. The Congress believes it is appropriate to
provide an exemption from the heavy vehicle excise tax for
qualified idling reduction devices, as such devices could lower
fuel consumption, as well as reduce emissions.

Explanation of Provision

The provision provides an exemption from the heavy vehicle
excise tax for the cost of qualifying idling reduction devices.
A qualifying idling reduction device means any device or system
of devices that (1) is designed to provide to a vehicle those
services (such as heat, air conditioning, or electricity),
which would otherwise require the operation of the main drive
engine while the vehicle is temporarily parked or remains
stationary, by using one or more devices affixed to a tractor,
and (2) is determined by the Administrator of the Environmental
Protection Agency, in consultation with the Secretary of Energy
and the Secretary of Transportation, to reduce idling of such
vehicle at a motor vehicle rest stop or other location where
such vehicles are temporarily parked or remain stationary.
The provision also provides an exemption for the
installation of ``advanced insulation'' in a commercial
refrigerated truck or trailer that is subject to the heavy
vehicle excise tax. Advanced insulation means insulation that
has an R value of not less than R35 per inch.
Both exemptions apply regardless of whether the device or
insulation is factory installed or later added as an accessory.

Effective Date

The provision is effective for retail sales or
installations made after the date of enactment (October 3,
2008).

G. Extension and Modification of Alternative Fuel Vehicle Refueling
Property Credit (sec. 207 of the Act and sec. 30C of the Code)

Present Law

Taxpayers may claim a 30-percent credit for the cost of
installing qualified 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.\440\ The credit may
not exceed $30,000 per taxable year per location, in the case
of qualified refueling property used in a trade or business and
$1,000 per taxable year per location, in the case of qualified
refueling property installed on property which is used as a
principal residence.
---------------------------------------------------------------------------
\440\ Sec. 30C.
---------------------------------------------------------------------------
Qualified refueling property is property (not including a
building or its structural components) for the storage or
dispensing of a clean-burning fuel into the fuel tank of a
motor vehicle propelled by such fuel, but only if the storage
or dispensing of the fuel is at the point where such fuel is
delivered into the fuel tank of the motor vehicle. The use of
such property must begin with the taxpayer.
Clean-burning 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, or
hydrogen. In addition, any mixture of biodiesel and diesel
fuel, determined without regard to any use of kerosene and
containing at least 20 percent biodiesel, qualifies as a clean
fuel.
Credits for qualified refueling property used in a trade or
business are part of the general business credit and may be
carried back for one year and forward for 20 years. Credits for
residential qualified refueling property cannot exceed for any
taxable year the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. Generally, in the case of qualified refueling
property sold to a tax-
exempt entity, the taxpayer selling the property may claim the
credit.
A taxpayer's basis in qualified refueling property is
reduced by the amount of the credit. In addition, no credit is
available for property used outside the United States or for
which an election to expense has been made under section 179.
The credit is available for property placed in service
after December 31, 2005, and (except in the case of hydrogen
refueling property) before January 1, 2010. In the case of
hydrogen refueling property, the property must be placed in
service before January 1, 2015.

Reasons for Change \441\

---------------------------------------------------------------------------
\441\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008," which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that widespread adoption of advanced
technology and alternative-fuel vehicles is necessary to
transform automotive transportation in the United States to be
cleaner, more fuel efficient, and less reliant on petroleum
fuels. The Congress further believes that one important method
to encourage this trend is to provide additional tax incentives
for the development and installation of the infrastructure
necessary to deliver clean fuels to drivers of clean-fuel
vehicles.

Explanation of Provision

The provision extends and modifies the credit for
installing alternative fuel refueling property. The provision
extends for one year (through 2010) the credit for installing
non-hydrogen alternative fuel refueling property. The provision
also expands the definition of credit-eligible property to
include property designed to recharge an electrically propelled
vehicle with electricity.

Effective Date

The provision is effective for property placed in service
after the date of enactment (October 3, 2008), in taxable years
ending after such date.

H. Extension and Modification of Election To Expense Certain Refineries
(sec. 209 of the Act and sec. 179C of the Code)

Present Law

In general

Election to expense certain refineries

Section 179C provides a temporary election to expense 50
percent of qualified refinery property.\446\ 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; \447\ (2) which are placed in service
before January 1, 2012; (3) which increase the capacity of an
existing refinery by at least five percent \448\ or increase
the percentage of total throughput \449\ 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.\450\
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\446\ 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
section 45(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 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
includes a facility which processes coal via gas into liquid fuel.
\447\ 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.
\448\ 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.
\449\ For purposes of the provision, the throughput of a refinery
is measured on the basis of barrels per calendar day. Barrels per
calender 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.
\450\ 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.
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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).

Explanation of Provision

The provision extends the qualified refinery property
placed in service requirement to January 1, 2014, and the
binding construction contract requirement to January 1, 2010.
The provision also expands the primary purpose test in the
definition of qualified refinery to include the processing of
shale or tar sands. The production capacity test for processing
qualified fuels is also expanded to include the processing of
shale or tar sands.

Effective Date

The provision is effective for property placed in service
after the date of enactment (October 3, 2008).

I. Extension of Suspension of Taxable Income Limit on Percentage
Depletion for Oil and Natural Gas Produced from Marginal Properties
(sec. 210 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, 2008.
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 provides the present law taxable income
limitation suspension provision for marginal production for
taxable years beginning after December 31, 2008, and before
January 1, 2010.

Effective Date

The provision applies to taxable years beginning after
December 31, 2008.

J. Extension of Transportation Fringe Benefit to Bicycle Commuters
(sec. 211 of the Act and sec. 132(f) of the Code)

Present Law

Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income.\451\
Qualified transportation fringe benefits include parking,
transit passes, and vanpool benefits. In addition, no amount is
includible in income of an employee merely because the employer
offers the employee a choice between cash and qualified
transportation fringe benefits. Up to $220 (for 2008) per month
of employer-provided parking is excludable from income. Up to
$115 (for 2008) per month of employer-provided transit and
vanpool benefits are excludable from gross income. These
amounts are indexed annually for inflation, rounded to the
nearest multiple of $5.
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\451\ Sec. 132(f).
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Under present law, qualified transportation fringe benefits
include a cash reimbursement by an employer to an employee.
However, in the case of transit passes, a cash reimbursement is
considered a qualified transportation fringe benefit only if a
voucher or similar item which may be exchanged only for a
transit pass is not readily available for direct distribution
by the employer to the employee.

Reasons for Change \452\

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\452\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
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As part of a package of alternatives to reduce the nation's
reliance on fossil fuels and to encourage conservation of
energy resources, the exclusion from gross income for qualified
transportation fringe benefits should be extended to cover
expenses incurred by an employee in commuting to work by
bicycle. Bicycle commuting achieves both goals of reducing
fossil fuel reliance and encouraging conservation. Such
commuting involves recurring expenses and incentives should be
provided to encourage this nonmotorized form of commuting.

Explanation of Provision

The provision adds a qualified bicycle commuting
reimbursement fringe benefit as a qualified transportation
fringe benefit. A qualified bicycle commuting reimbursement
fringe benefit means, with respect to a calendar year, any
employer reimbursement during the 15-month period beginning
with the first day of such calendar year of an employee for
reasonable expenses incurred by the employee during the
calendar year for the purchase and repair of a bicycle, bicycle
improvements, and bicycle storage, provided that the bicycle is
regularly used for travel between the employee's residence and
place of employment.
The maximum amount that can be excluded from an employee's
gross income for a calendar year on account of a bicycle
commuting reimbursement fringe benefit is the applicable annual
limitation for the employee for that calendar year. The
applicable annual limitation for an employee for a calendar
year is equal to the product of $20 multiplied by the number of
the employee's qualified bicycle commuting months for the year.
The $20 amount is not indexed for inflation. A qualified
bicycle commuting month means with respect to an employee any
month for which the employee does not receive any other
qualified transportation fringe benefit and during which the
employee regularly uses a bicycle for a substantial portion of
travel between the employee's residence and place of
employment. Thus, no amount is credited towards an employee's
applicable annual limitation for any month in which an
employee's usage of a bicycle is infrequent or constitutes an
insubstantial portion of the employee's commute.
A bicycle commuting reimbursement fringe benefit cannot be
funded by an elective salary contribution on the part of an
employee.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

TITLE III--ENERGY CONSERVATION AND EFFICIENCY PROVISIONS

A. Qualified Energy Conservation Bonds (sec. 301 of the Act and new
sec. 54D of the Code)

Present Law

Tax-exempt bonds
In general
Subject to certain Code restrictions, interest paid on
bonds issued by State and local governments generally is
excluded from gross income for Federal income tax purposes.
Bonds issued by State and local governments 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
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. For
this purpose, the term ``nongovernmental person'' generally
includes the Federal Government and all other individuals and
entities other than States or local governments. The exclusion
from income for interest on State and local bonds does not
apply to private activity bonds, unless the bonds are issued
for certain permitted purposes (``qualified private activity
bonds'') and other Code requirements are met.
Private activity bond tests
Present law provides two tests for determining whether a
State or local bond is in substance a private activity bond,
the private business test and the private loan test.\453\
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\453\ Sec. 141(b) and (c).
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Private business tests
Private business use and private payments result in State
and local bonds being private activity bonds if both parts of
the two-part private business test are satisfied--
More than 10 percent of the bond proceeds is
to be used (directly or indirectly) by a private
business (the ``private business use test''); and
More than 10 percent of the debt service on
the bonds is secured by an interest in property to be
used in a private business use or to be derived from
payments in respect of such property (the ``private
payment test'').\454\
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\454\ The 10-percent private business use and payment threshold is
reduced to five percent for private business uses that are unrelated to
a governmental purpose also being financed with proceeds of the bond
issue. In addition, as described more fully below, the 10-percent
private business use and private payment thresholds are phased-down for
larger bond issues for the financing of certain ``output'' facilities.
The term output facility includes electric generation, transmission,
and distribution facilities.
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Private business use generally includes any use by a
business entity (including the Federal Government), which
occurs pursuant to terms not generally available to the general
public. For example, if bond-financed property is leased to a
private business (other than pursuant to certain short-term
leases for which safe harbors are provided under Treasury
regulations), bond proceeds used to finance the property are
treated as used in a private business use, and rental payments
are treated as securing the payment of the bonds. Private
business use also can arise when a governmental entity
contracts for the operation of a governmental facility by a
private business under a management contract that does not
satisfy Treasury regulatory safe harbors regarding the types of
payments made to the private operator and the length of the
contract.\455\
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\455\ See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13,
1997-1 C.B. 632.
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Private loan test
The second standard for determining whether a State or
local bond is a private activity bond is whether an amount
exceeding the lesser of (1) five percent of the bond proceeds
or (2) $5 million is used (directly or indirectly) to finance
loans to private persons. Private loans include both business
and other (e.g., personal) uses and payments by private
persons; however, in the case of business uses and payments,
all private loans also constitute private business uses and
payments subject to the private business test. Present law
provides that the substance of a transaction governs in
determining whether the transaction gives rise to a private
loan. In general, any transaction which transfers tax ownership
of property to a private person is treated as a loan.
Qualified private activity bonds
As stated, interest on private activity bonds is taxable
unless the bonds meet the requirements for qualified private
activity bonds. Qualified private activity bonds permit States
or local governments to act as conduits providing tax-exempt
financing for certain private activities. Qualified private
activity bonds include exempt facility, qualified mortgage,
veterans' mortgage, small issue, redevelopment, 501(c)(3), and
student loan bonds.\456\ 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.\457\
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\456\ Sec. 141(e).
\457\ Sec. 142(a).
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In most cases, the aggregate volume of tax-exempt qualified
private activity bonds is restricted by annual aggregate volume
limits imposed on bonds issued by issuers within each State.
For calendar year 2008, the State volume cap, which is indexed
for inflation, equals $85 per resident of the State, or $262.09
million, if greater.
Arbitrage restrictions
The exclusion from income for interest on State and local
bonds does not apply to any arbitrage bond.\458\ 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.\459\ 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.
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\458\ Sec. 103(a) and (b)(2).
\459\ Sec. 148.
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Indian tribal governments
Indian tribal governments are provided with a tax status
similar to State and local governments for specified purposes
under the Code.\460\ Among the purposes for which a tribal
government is treated as a State is the issuance of tax-exempt
bonds. However, bonds issued by tribal governments are subject
to limitations not imposed on State and local government
issuers. Tribal governments are authorized to issue tax-exempt
bonds only if substantially all of the proceeds are used for
essential governmental functions or certain manufacturing
facilities.\461\
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\460\ Sec. 7871.
\461\ Sec. 7871(c).
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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 qualified projects. ``Qualified projects'' are
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.\462\ 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 renewable energy
bond lenders. The term ``qualified borrower'' includes a
governmental body (including an Indian tribal government) and a
mutual or cooperative electric company. 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.
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\462\ In addition, Notice 2006-7 provides that qualified projects
include any facility owned by a qualified borrower that is functionally
related and subordinate to any facility described in section 45(d)(1)
through (d)(9) and owned by such qualified borrower.
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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.
In addition to the above requirements, at least 95 percent
of the proceeds of CREBs must be spent 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 $1.2
billion. The maximum amount of CREBs that may be allocated to
qualified projects of governmental bodies is $750 million.
CREBs are required to be issued before January 1, 2009.
Qualified tax credit bonds
Section 54A of the Code sets forth general rules applicable
to qualified tax credit bonds, (defined as qualified forestry
conservation bonds meeting certain requirements specified in
section 54A). Section 54A sets forth requirements regarding the
expenditure of available project proceeds, reporting,
arbitrage, maturity limitations, and financial conflicts of
interest, among other special rules.

Reasons for Change \463\

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\463\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that it is important to encourage
energy conservation. The Congress believes that State and local
governments often are in the best position to assess community
needs and recognizes there are a number of approaches to energy
conservation that State and local governments may wish to
encourage. For example, the Congress recognizes that State and
local governments may wish to encourage the development of
combined heat and power systems, facilities that use thermal
energy produced from renewable resources, smart electrical
grids, the use of solar panels, mass transit, bicycle paths, or
residential property that reduces peak-use of energy. In
addition to these approaches, the Congress believes that State
and local governments will develop numerous other approaches to
energy conservation. Furthermore, the Congress recognizes that
there is great potential for energy conservation in urban areas
and the Congress believes that local officials should have the
flexibility to develop their own approaches to energy
conservation. Therefore, the Congress believes that it is
appropriate to empower State and local governments by providing
them with access to subsidized financing to help promote
energy-efficient policies tailored to the needs of local
communities.

Explanation of Provision

The provision creates a new category of tax-credit bonds,
qualified energy conservation bonds. Qualified energy
conservation bonds may be used to finance qualified
conservation purposes.
The term ``qualified conservation purpose'' means:
1. Capital expenditures incurred for purposes of reducing
energy consumption in publicly owned buildings by at least 20
percent; implementing green community programs; rural
development involving the production of electricity from
renewable energy resources; or any facility eligible for the
production tax credit under section 45 (other than Indian coal
and refined coal production facilities);
2. Expenditures with respect to facilities or grants that
support research in: (A) development of cellulosic ethanol or
other nonfossil fuels; (B) technologies for the capture and
sequestration of carbon dioxide produced through the use of
fossil fuels; (C) increasing the efficiency of existing
technologies for producing nonfossil fuels; (D) automobile
battery technologies and other technologies to reduce fossil
fuel consumption in transportation; and (E) technologies to
reduce energy use in buildings;
3. Mass commuting facilities and related facilities that
reduce the consumption of energy, including expenditures to
reduce pollution from vehicles used for mass commuting;
4. Demonstration projects designed to promote the
commercialization of: (A) green building technology; (B)
conversion of agricultural waste for use in the production of
fuel or otherwise; (C) advanced battery manufacturing
technologies; (D) technologies to reduce peak-use of
electricity; and (D) technologies for the capture and
sequestration of carbon dioxide emitted from combusting fossil
fuels in order to produce electricity; and
5. Public education campaigns to promote energy efficiency
(other than movies, concerts, and other events held primarily
for entertainment purposes).
There is a national limitation on qualified energy
conservation bonds of $800 million. Allocations of qualified
energy conservation bonds are made to the States with sub-
allocations to large local governments. Allocations are made to
the States according to their respective populations, reduced
by any sub-allocations to large local governments (defined
below) within the States. Sub-allocations to large local
governments shall be an amount of the national qualified energy
conservation bond limitation that bears the same ratio to the
amount of such limitation that otherwise would be allocated to
the State in which such large local government is located as
the population of such large local government bears to the
population of such State. The term large local government
means: any municipality or county if such municipality or
county has a population of 100,000 or more. Indian tribal
governments also are treated as large local governments for
these purposes (without regard to population).
Each State or large local government receiving an
allocation of qualified energy conservation bonds may further
allocate issuance authority to issuers within such State or
large local government. However, any allocations to issuers
within the State or large local government shall be made in a
manner that results in not less than 70 percent of the
allocation of qualified energy conservation bonds to such State
or large local government being used to designate bonds that
are not private activity bonds (i.e., the bond cannot meet the
private business tests or the private loan test of section
141).
The provision makes qualified energy conservations bonds a
type of qualified tax credit bond for purposes of section 54A
of the Code. As a result, 100 percent of the available project
proceeds of qualified energy conservation bonds must be used
for qualified conservation purposes. In the case of qualified
conservation bonds issued as private activity bonds, 100
percent of the available project proceeds must be used for
capital expenditures. In addition, qualified energy
conservation bonds only may be issued by Indian tribal
governments to the extent such bonds are issued for purposes
that satisfy the present law requirements for tax-exempt bonds
issued by Indian tribal governments (i.e., essential
governmental functions and certain manufacturing purposes).
The provision requires 100 percent of the available project
proceeds of qualified energy conservation bonds to be used
within the three-year period that begins on the date of
issuance. Available project proceeds are proceeds from the sale
of the issue less issuance costs (not to exceed two percent)
and any investment earnings on such sale proceeds. To the
extent less than 100 percent of the available project proceeds
are used to finance qualified conservation purposes during the
three-year spending period, bonds will continue to qualify as
qualified energy conservation bonds if unspent proceeds are
used within 90 days from the end of such three-year period to
redeem bonds. The three-year spending period may be extended by
the Secretary upon the issuer's request demonstrating that the
failure to satisfy the three-year requirement is due to
reasonable cause and the projects will continue to proceed with
due diligence.
Qualified energy conservation bonds generally are subject
to the arbitrage requirements of section 148. However,
available project proceeds invested during the three-year
spending period are not subject to the arbitrage restrictions
(i.e., yield restriction and rebate requirements). In addition,
amounts invested in a reserve fund are not subject to the
arbitrage restrictions to the extent: (1) Such fund is funded
at a rate not more rapid than equal annual installments; (2)
such fund is funded in a manner reasonably expected to result
in an amount not greater than an amount necessary to repay the
issue; and (3) the yield on such fund is not greater than the
average annual interest rate of tax-exempt obligations having a
term of 10 years or more that are issued during the month the
qualified energy conservation bonds are issued.
The maturity of qualified energy conservation bonds is the
term that the Secretary estimates will result in the present
value of the obligation to repay the principal on such bonds
being equal to 50 percent of the face amount of such bonds,
using as a discount rate the average annual interest rate of
tax-exempt obligations having a term of 10 years or more that
are issued during the month the qualified energy conservation
bonds are issued.
As with present-law tax credit bonds, the taxpayer holding
qualified energy conservation bonds on a credit allowance date
is entitled to a tax credit. The credit rate on the bonds is
set by the Secretary at a rate that is 70 percent of the rate
that would permit issuance of such bonds without discount and
interest cost to the issuer. The amount of the tax credit is
determined by multiplying the bond's credit rate by the face
amount on the holder's bond. The credit accrues quarterly, 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. Unused credits
may be carried forward to succeeding taxable years. In
addition, credits may be separated from the ownership of the
underlying bond similar to how interest coupons can be stripped
for interest-bearing bonds.
Issuers of qualified energy conservation bonds are required
to certify that the financial disclosure requirements that
applicable State and local law requirements governing conflicts
of interest are satisfied with respect to such issue, as well
as any other additional conflict of interest rules prescribed
by the Secretary with respect to any Federal, State, or local
government official directly involved with the issuance of
qualified energy conservation bonds.

Effective Date

The provision is effective for bonds issued after the date
of enactment (October 3, 2008).

B. Extension and Modification of Credit for Nonbusiness Energy Property
(sec. 302 of the Act and sec. 25C of the Code)

Present Law

With respect to property placed in service prior to January
1, 2008, Code section 25C provides a 10-percent credit for
qualified energy efficiency improvements to existing homes. A
qualified energy efficiency improvement is any energy
efficiency building envelope component (1) 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 August 8, 2005 (or, in the
case of metal roofs with appropriate pigmented coatings, meets
the Energy Star program requirements); (2) that is installed in
or on a dwelling located in the United States and owned and
used by the taxpayer as the taxpayer's principal residence; (3)
the original use of which commences with the taxpayer; and (4)
that 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, code section 25C provides specified credits
for specific energy efficient property. The allowable credit 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 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 EER of at least 16.2 and a heating COP of at least 3.6, and
(iii) in the case of a direct expansion (DX) product, has an
EER of at least 15 and a 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.
Under section 25C, 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.

Reasons for Change \464\

---------------------------------------------------------------------------
\464\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Because residential energy consumption represents a large
fraction of national energy use, the Congress believes that
energy savings in this sector of the economy have the potential
to significantly reduce national energy consumption, which in
turn will decrease reliance on foreign suppliers of oil and
reduce pollution in general. The Congress believes that tax
credits for certain energy efficiency improvements will help to
spur savings in this sector of the economy.
Because section 25D includes a new credit for geothermal
heat pumps the credit for geothermal heat pumps in section 25C
is eliminated.

Explanation of Provision

The section 25C credit is expired for 2008. The provision
reestablishes the credit for one year, for property placed in
service after December 31, 2008 and before January 1, 2010. The
provision modifies the energy efficiency requirement for a
natural gas, propane, or oil water heater to include heaters
with a thermal efficiency of at least 90 percent. The provision
modifies the criteria for qualifying roofs to include asphalt
roofs with appropriate cooling granules.
Additionally, the provision adds biomass fuel property to
the qualified energy efficient building property eligible for a
$300 credit. Biomass fuel property is a stove that burns
biomass fuel to heat a dwelling unit located in the United
States and used as a principal residence by the taxpayer, or to
heat water for such dwelling unit, and that has a thermal
efficiency rating of at least 75 percent. Biomass fuel is any
plant-derived fuel available on a renewable or recurring basis,
including agricultural crops and trees, wood and wood waste and
residues (including wood pellets), plants (including aquatic
plants), grasses, residues, and fibers.
The credit for geothermal heat pumps is eliminated to
conform with the establishment by this Act of a residential
geothermal heat pump credit under Code section 25D.

Effective Date

The provision is effective for expenditures after December
31, 2008, for property placed in service after December 31,
2008 and prior to January 1, 2010.

C. Energy Efficient Commercial Buildings Deduction (sec. 303 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 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 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.
The deduction is effective for property placed in service
after December 31, 2005, and prior to January 1, 2009.

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.

Interim rules for lighting systems

In the case of system-specific partial deductions, in
general no deduction is allowed until the Secretary establishes
system-specific targets.\465\ 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 under the interim
rule.
---------------------------------------------------------------------------
\465\ IRS Notice 2008-40 has set a target of a 10 percent reduction
in total energy and power costs with respect to the building envelope,
and 20 percent each with respect to the interior lighting system and
the heating, cooling, ventilation and hot water systems.
---------------------------------------------------------------------------

Reasons for Change \466\

---------------------------------------------------------------------------
\466\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress recognizes that a substantial portion of U.S.
energy consumption is attributable to commercial buildings, and
that the design and construction of commercial buildings is a
multi-year process. Hence, the Congress believes that a long-
term extension of the deduction for energy efficient commercial
buildings is necessary to ensure that buildings currently in
the design phase will be able to claim the deduction.

Explanation of Provision

The provision extends the energy efficient commercial
buildings deduction for five years, through December 31, 2013.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

D. New Energy Efficient Home Credit (sec 304 of the Act and sec 45L of
the Code)

Present Law

The new energy efficient home credit is available 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 achieve either a 30-percent or 50-percent
reduction in heating and cooling energy consumption 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 heating and cooling equipment.
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.
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.
Only manufactured homes are eligible for the $1,000 credit.
In lieu of meeting the 30 percent efficiency improvement
relative to 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.
Manufactured homes are homes that conform to Federal
manufactured home construction and safety standards. 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 is part of the general business 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, 2009.

Explanation of Provision

The provision extends the energy efficient new homes credit
for one year, through December 31, 2009.

Effective Date

The provision is effective for homes purchased after
December 31, 2008.

E. Extension and Modification of Energy Efficient Appliance Credit
(sec. 305 of the Act and sec. 45M of the Code)

Present Law

A credit is allowed for the eligible production of certain
energy-efficient dishwashers, clothes washers, and
refrigerators.
The credit for dishwashers applies to dishwashers produced
in 2006 and 2007 that meet the Energy Star standards for 2007,
and equals $32.31 per eligible dishwasher.\467\
---------------------------------------------------------------------------
\467\ The credit amount equals $3 multiplied by 100 times the
``energy savings percentage,'' but may not exceed $100 per dishwasher.
The energy savings percentage is defined as the change in the energy
factor (EF) required by the Energy Star program between 2007 and 2005
divided by the EF requirement for 2007. The EF required for the Energy
Star program was 0.58 in 2005 and 0.65 in 2007, for a change of 0.07.
The energy saving percentage is thus 0.07/0.65, which when multiplied
by 100 times $3 equals $32.31 per refrigerator.
---------------------------------------------------------------------------
The credit for clothes washers equals $100 for clothes
washers manufactured in 2006-2007 that meet the requirements of
the Energy Star program that 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 that achieve a 15 to 20 percent energy saving and
that are manufactured in 2006 receive a $75 credit.
Refrigerators that achieve a 20 to 25 percent energy saving
receive a (i) $125 credit if manufactured in 2006-2007.
Refrigerators that achieve at least a 25 percent energy saving
receive a (i) $175 credit if manufactured in 2006-2007.
Appliances eligible for the credit include only those
produced in the United States and that exceed the average
amount of U.S. production from the three prior calendar years
for each category of appliance. In the case of refrigerators,
eligible production is U.S. production that exceeds 110 percent
of the average amount of U.S. production from the three 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.

Reasons for Change \468\

---------------------------------------------------------------------------
\468\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H.. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that incentives provided for the
manufacture of energy-efficient household appliances are
desirable to promote the development of energy efficient
appliance technologies and to help reduce energy consumption in
the household sector. Hence the Congress extends the credit and
strengthens the standards that must be met in order to be
eligible for the credits.

Explanation of Provision

The provision extends and modifies the energy efficient
appliance credit. The provision provides modified credits for
eligible production as follows:

Dishwashers

1. $45 in the case of a dishwasher that is manufactured in
calendar year 2008 or 2009 that uses no more than 324 kilowatt
hours per year and 5.8 gallons per cycle, and
2. $75 in the case of a dishwasher that is manufactured in
calendar year 2008, 2009, or 2010 and that uses no more than
307 kilowatt hours per year and 5.0 gallons per cycle (5.5
gallons per cycle for dishwashers designed for greater than 12
place settings).

Clothes washers

1. $75 in the case of a residential top-loading clothes
washer manufactured in calendar year 2008 that meets or exceeds
a 1.72 modified energy factor and does not exceed a 8.0 water
consumption factor, and
2. $125 in the case of a residential top-loading clothes
washer manufactured in calendar year 2008 or 2009 that meets or
exceeds a 1.8 modified energy factor and does not exceed a 7.5
water consumption factor,
3. $150 in the case of a residential or commercial clothes
washer manufactured in calendar year 2008, 2009, or 2010 that
meets or exceeds a 2.0 modified energy factor and does not
exceed a 6.0 water consumption factor, and
4. $250 in the case of a residential or commercial clothes
washer manufactured in calendar year 2008, 2009, or 2010 that
meets or exceeds a 2.2 modified energy factor and does not
exceed a 4.5 water consumption factor.

Refrigerators

1. $50 in the case of a refrigerator manufactured in
calendar year 2008 that consumes at least 20 percent but not
more than 22.9 percent less kilowatt hours per year than the
2001 energy conservation standards,
2. $75 in the case of a refrigerator that is manufactured
in calendar year 2008 or 2009 that consumes at least 23 percent
but no more than 24.9 percent less kilowatt hours per year than
the 2001 energy conservation standards,
3. $100 in the case of a refrigerator that is manufactured
in calendar year 2008, 2009, or 2010 that consumes at least 25
percent but not more than 29.9 percent less kilowatt hours per
year than the 2001 energy conservation standards, and
4. $200 in the case of a refrigerator manufactured in
calendar year 2008, 2009, or 2010 that consumes at least 30
percent less energy than the 2001 energy conservation
standards.
Appliances eligible for the credit include only those that
exceed the average amount of production from the two prior
calendar years for each category of appliance, rather than the
present law three prior calendar years. Additionally, the
special rule with respect to refrigerators is eliminated.
The aggregate credit amount allowed with respect to a
taxpayer for all taxable years beginning after December 31,
2007 may not exceed $75 million, with the exception that the
$200 refrigerator credit and the $250 clothes washer credit are
not limited.
The term ``modified energy factor'' means the modified
energy factor established by the Department of Energy for
compliance with the Federal energy conservation standard.
The term ``gallons per cycle'' means, with respect to a
dishwasher, the amount of water, expressed in gallons, required
to complete a normal cycle of a dishwasher.
The term ``water consumption factor'' means, with respect
to a clothes washer, the quotient of the total weighted per-
cycle water consumption divided by the cubic foot (or liter)
capacity of the clothes washer.

Effective Date

The provision applies to appliances produced after December
31, 2007.

F. Accelerated Recovery Period for Depreciation of Smart Meters and
Smart Grid Systems (sec. 306 of the Act and sec. 168 of the Code)

Present Law

Reasons for Change \471\

---------------------------------------------------------------------------
\471\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that smart electric meters and smart
electric grid systems are integral to the development and use
of technology to conserve energy resources. Therefore, the
Congress believes that investment in smart electric meters and
smart electric grid systems should be encouraged through a
shorter recovery period for depreciation. The Congress also
believes that smart electric meters should be capable of net
metering, which allows customers a credit for providing
electricity to the supplier of electric energy or provider of
electric energy services.

Explanation of Provision

The provision provides a 10-year recovery period and 150
percent declining balance method for any qualified smart
electric meter and any qualified smart electric grid system.
For purposes of the provision, a qualified smart electric meter
means any time-based meter and related communication equipment
which is placed in service by a taxpayer who is a supplier of
electric energy or a provider of electric energy services,
which does not have a class life of less than 10 years, and
which is capable of being used by the taxpayer as part of a
system that (1) measures and records electricity usage data on
a time-differentiated basis in at least 24 separate time
segments per day; (2) provides for the exchange of information
between the supplier or provider and the customer's smart
electric meter in support of time-based rates or other forms of
demand response; and (3) provides data to such supplier or
provider so that the supplier or provider can provide energy
usage information to customers electronically; and (4) provides
net metering.
For purposes of the provision, a qualified smart electric
grid system means any smart grid property used as part of a
system for electric distribution grid communications,
monitoring, and management placed in service by a taxpayer who
is a supplier of electric energy or a provider of electric
energy services and which does not have a class life of less
than 10 years. Smart grid property includes electronics and
related equipment that is capable of (1) sensing, collecting,
and monitoring data of or from all portions of a utility's
electric distribution grid; (2) providing real-time, two-way
communications to monitor to manage such grid; and (3)
providing real-time analysis of an event prediction based upon
collected data that can be used to improve electric
distribution system reliability, quality, and performance.

Effective Date

The provision is effective for property placed in service
after the date of enactment (October 3, 2008).

G. Extension of Issuance Authority for Qualified Green Building and
Sustainable Design Project Bonds (sec. 307 of the Act and sec. 142 of
the Code)

Present Law

In general

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 interest paid on 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 exempt facility bonds.
In most cases, the aggregate volume of tax-exempt qualified
private activity bonds, including most exempt facility bonds,
is restricted by annual aggregate volume limits imposed on
bonds issued by issuers within each State. For calendar year
2008, the State volume cap, which is indexed for inflation,
equals $85 per resident of the State, or $262.09 million, if
greater.

Qualified green building and sustainable design project bonds

The definition of exempt facility bond includes qualified
green building and sustainable design project bonds
(``qualified green bond''). A qualified green bond is defined
as any bond issued as part of an issue that finances a project
designated by the Secretary, after consultation with the
Administrator of the Environmental Protection Agency (the
``Administrator'') as a green building and sustainable design
project that meets the following eligibility requirements: (1)
at least 75 percent of the square footage of the commercial
buildings that are part of the project is registered for the
U.S. Green Building Council's LEED \472\ certification and is
reasonably expected (at the time of designation) to meet such
certification; (2) the project includes a brownfield site;
\473\ (3) the project receives at least $5 million dollars in
specific State or local resources; and (4) the project includes
at least one million square feet of building or at least 20
acres of land.
---------------------------------------------------------------------------
\472\ The LEED (Leadership in Energy and Environmental Design)
Green Building Rating System is a voluntary, consensus-based national
standard for developing high-performance sustainable buildings.
Registration is the first step toward LEED certification. Actual
certification requires that the applicant project satisfy a number of
requirements. Commercial buildings, as defined by standard building
codes are eligible for certification. Commercial occupancies include,
but are not limited to, offices, retail and service establishments,
institutional buildings (e.g. libraries, schools, museums, churches,
etc.), hotels, and residential buildings of four or more habitable
stories.
\473\ For this purpose, a brownfield site is defined by section
101(39) of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 U.S.C. sec. 9601), including a site described
in subparagraph (D)(ii)(II)(aa) thereof (relating to a site that is
contaminated by petroleum or a petroleum product excluded from the
definition of `hazardous substance' under section 101).
---------------------------------------------------------------------------
Qualified green bonds are not subject to the State bond
volume limitations. Rather, there is a national limitation of
$2 billion of qualified green bonds that the Secretary may
allocate, in the aggregate, to qualified green building and
sustainable design projects. Qualified green bonds may be
currently refunded if certain conditions are met, but cannot be
advance refunded. The authority to issue qualified green bonds
terminates after September 30, 2009.
Each green building and sustainable design project must
certify to the Secretary, no later than 30 days after the
completion of the project, that the net benefit of the tax-
exempt financing was used for the purposes described in the
project application. Issuers are required to maintain, on
behalf of each project, an interest bearing reserve account
equal to one percent of the net proceeds of any qualified green
bond issued for such project. Not later than five years after
the date of issuance of bonds with respect to the project, the
Secretary, after consultation with the Administrator, shall
determine whether the project financed with the proceeds of
qualified green bonds has substantially complied with the
requirements and goals of the project. If the Secretary, after
such consultation, certifies that the project has substantially
complied with the requirements and goals, amounts in the
reserve account, including all interest, shall be released to
the project. If the Secretary determines that the project has
not substantially complied with such requirements and goals,
amounts in the reserve account, including all interest, shall
be paid to the United States Treasury.

Reasons for Change \474\

---------------------------------------------------------------------------
\474\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that tax-exempt financing provides
State and local governments with an effective tool for
encouraging private investment in projects that promote energy
conservation. The Congress believes that qualified green bonds
provide such a tool and, thus, it is appropriate to extend the
time period to issue such bonds.

Explanation of Provision

The provision extends the authority to issue qualified
green bonds through September 30, 2012.
The provision also clarifies that the date for determining
whether amounts in a reserve account may be released to a green
building and sustainable design project is the date that is
five years after the date of issuance of the last bond issue
issued with respect to such project.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

H. Special Depreciation Allowance for Certain Reuse and Recycling
Property (sec. 308 of the Act and sec. 168 of the Code)

Present Law

Explanation of Provision

The provision includes an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of any qualified reuse and recycling property. The
additional first-year depreciation deduction is allowed for
both regular tax and alternative minimum tax purposes. 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, there are no adjustments 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.
For purposes of this provision, qualified reuse and
recycling property means any reuse and recycling property: (1)
which has a useful life of at least five years; (2) the
original use of which commences with the taxpayer after August
31, 2008; and (3) which is acquired by purchase (as defined by
section 179(d)(2)) by the taxpayer after August 31, 2008, but
only if no written binding contract for the acquisition was in
effect before September 1, 2008, or acquired by the taxpayer
pursuant to a written binding contract which was entered into
after August 31, 2008. For property manufactured, constructed,
or produced by the taxpayer for the taxpayer's own use, the
acquisition requirement is met if the taxpayer begins
manufacturing, constructing, or producing the property after
August 31, 2008.
For purposes of this provision, the term ``reuse and
recycling property'' means any machinery and equipment (not
including buildings or real estate), along with all
appurtenances thereto, including software necessary to operate
such equipment, which is used exclusively to collect,
distribute, or recycle qualified reuse and recyclable
materials. The term does not include rolling stock or other
equipment used to transport reuse and recyclable materials. The
term ``qualified reuse and recyclable materials'' means scrap
plastic, scrap glass, scrap textiles, scrap rubber, scrap
packaging, recovered fiber, scrap ferrous and nonferrous
metals, or electronic scrap \480\ generated by an individual or
business. The term ``recycling'' or ``recycle'' means a process
(including sorting) by which worn or superfluous materials are
manufactured or processed into specification grade commodities
that are suitable for use as a replacement or substitute for
virgin materials in manufacturing tangible consumer or
commercial products, including packaging.
---------------------------------------------------------------------------
\480\ The term ``electronic scrap'' means any cathode ray tube,
flat panel screen, or similar video display device with a screen size
greater than four inches measured diagonally, or any central processing
unit.
---------------------------------------------------------------------------
Qualified reuse and recycling property does not include any
property to which the special allowance for depreciation under
section 168(k) applies or to which the alternative depreciation
system under section 168(g) applies (determined without regard
to the election to use such system under section 168(g)(7)). In
addition, a taxpayer may elect to not apply the rules of this
provision with respect to any class of property for any taxable
year.

Effective Date

The provision is effective for property placed in service
after August 31, 2008.

TITLE IV--REVENUE PROVISIONS

A. Limitation of Deduction for Income Attributable to Domestic
Production of Oil, Gas, or Primary Products Thereof (sec. 401 of the
Act and sec. 199 of the Code)

Present Law

In general
Section 199 of the Code provides a deduction 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
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 properly allocable to domestic production gross
receipts paid by the taxpayer during the calendar year that
ends in such taxable year.\481\
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\481\ For this purpose, ``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 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; (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 (``QPP'') that was
manufactured, produced, grown or extracted (``MPGE'') 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 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;\482\ or (5) engineering or
architectural services performed in the United States for
construction projects located in the United States.
---------------------------------------------------------------------------
\482\ For this purpose, construction activities include activities
that are directly related to the erection or substantial renovation of
residential and commercial buildings and infrastructure. Substantial
renovation would include structural improvements, but not mere cosmetic
changes, such as painting, that is not performed in connection with
activities that otherwise constitute substantial renovation.
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Congress granted Treasury broad authority to ``prescribe
such regulations as are necessary to carry out the purposes''
of section 199.\483\ In defining MPGE for purposes of section
199, Treasury described the following as MPGE activities:
manufacturing, producing, growing, extracting, installing,
developing, improving, and creating QPP; making QPP out of
scrap, salvage, or junk material as well as from new or raw
material by processing, manipulating, refining, or changing the
form of an article, or by combining or assembling two or more
articles; cultivating soil, raising livestock, fishing, and
mining minerals.\484\
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\483\ Sec. 199(d)(9).
\484\ Treas. Reg. sec. 1.199-3(e)(1).
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The regulations specifically cite an example of oil
refining activities in describing the ``in whole or in
significant part'' test in determining domestic production
gross receipts. QPP is generally considered to be MPGE in
significant part by the taxpayer within the United States if
such activities are substantial in nature taking into account
all of the facts and circumstances, including the relative
value added by, and relative cost of, the taxpayer's MPGE
activity within the United States, the nature of the QPP, and
the nature of the MPGE activity that the taxpayer performs
within the United States.\485\ The following example is
provided in the regulations to illustrate this ``substantial in
nature'' standard:
---------------------------------------------------------------------------
\485\ Treas. Reg. sec. 1.199-3(g)(2).

X purchases from Y, an unrelated person, unrefined
oil extracted outside the United States. X refines the
oil in the United States. The refining of the oil by X
is an MPGE activity that is substantial in nature.\486\
---------------------------------------------------------------------------
\486\ Treas. Reg. sec. 1.199-3(g)(5), Example 1.
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Natural gas transmission or distribution
Domestic production gross receipts include gross receipts
from the production in the United States of natural gas, but
excludes gross receipts from the transmission or distribution
of natural gas.\487\ Production activities generally include
all activities involved in extracting natural gas from the
ground and processing the gas into pipeline quality gas.
However, gross receipts of a taxpayer attributable to
transmission of pipeline quality gas from a natural gas field
(or from a natural gas processing plant) to a local
distribution company's citygate (or to another customer) are
not qualified domestic production gross receipts. Likewise, gas
purchased by a local gas distribution company and distributed
from the citygate to the local customers does not give rise to
domestic production gross receipts.
---------------------------------------------------------------------------
\487\ H.R. Rep. No. 108-755 (conference report for the American
Jobs Creation Act of 2004), footnote 28 at 272.
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Drilling oil or gas wells
The Treasury regulations provide that qualifying
construction activities performed in the United States include
activities relating to drilling an oil or gas well.\488\ Under
the regulations, activities the cost of which are intangible
drilling and development costs within the meaning of Treas.
Reg. sec. 1.612-4 are considered to be activities constituting
construction for purposes of determining domestic production
gross receipts.\489\
---------------------------------------------------------------------------
\488\ Treas. Reg. sec. 1.199-3(m)(1)(i).
\489\ Treas. Reg. sec. 1.199-3(m)(2)(iii).
---------------------------------------------------------------------------
Qualifying in-kind partnerships
In general, an owner of a pass-thru entity is not treated
as conducting the qualified production activities of the pass-
thru entity, and vice versa. However, the Treasury regulations
provide a special rule for ``qualifying in-kind partnerships,''
which are defined as partnerships engaged solely in the
extraction, refining, or processing of oil, natural gas,
petrochemicals, or products derived from oil, natural gas, or
petrochemicals in whole or in significant part within the
United States, or the production or generation of electricity
in the United States.\490\ In the case of a qualifying in-kind
partnership, each partner is treated as MPGE or producing the
property MPGE or produced by the partnership that is
distributed to that partner.\491\ If a partner of a qualifying
in-kind partnership derives gross receipts from the lease,
rental, license, sale, exchange, or other disposition of the
property that was MPGE or produced by the qualifying in-kind
partnership, then, provided such partner is a partner of the
qualifying in-kind partnership at the time the partner disposes
of the property, the partner is treated as conducting the MPGE
or production activities previously conducted by the qualifying
in-kind partnership with respect to that property.\492\
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\490\ Treas. Reg. sec. 1.199-9(i)(2).
\491\ Treas. Reg. sec. 1.199-9(i)(1).
\492\ Id.
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Alternative minimum tax
The deduction for domestic production activities is allowed
for purposes of computing alternative minimum taxable income
(including adjusted current earnings). The deduction in
computing alternative minimum taxable income is determined by
reference to the lesser of the qualified production activities
income (as determined for the regular tax) or the alternative
minimum taxable income (in the case of an individual, adjusted
gross income as determined for the regular tax) without regard
to this deduction.

Explanation of Provision

The provision reduces the section 199 deduction for
taxpayers with oil related qualified production activities
income for any taxable year beginning after 2009 by three
percent of the least of: (1) oil related qualified production
activities income of the taxpayer for the taxable year; (2)
qualified production activities income of the taxpayer for the
taxable year; or (3) taxable income (determined without regard
to the section 199 deduction). For purposes of this provision,
the term ``oil related qualified production activities income''
means qualified production activities income for any taxable
year which is attributable to the production, refining,
processing, transportation, or distribution of oil, gas, or any
primary product thereof during such taxable year.
The term ``primary product'' has the same meaning as when
used in section 927(a)(2)(C), as in effect before its repeal.
The Treasury regulations define the term ``primary product from
oil'' to mean crude oil and all products derived from the
destructive distillation of crude oil, including volatile
products, light oils such as motor fuel and kerosene,
distillates such as naphtha, lubricating oils, greases and
waxes, and residues such as fuel oil.\493\ Additionally, a
product or commodity derived from shale oil which would be a
primary product from oil if derived from crude oil is
considered a primary product from oil.\494\ The term ``primary
product from gas'' is defined as all gas and associated
hydrocarbon components from gas wells or oil wells, whether
recovered at the lease or upon further processing, including
natural gas, condensates, liquefied petroleum gases such as
ethane, propane, and butane, and liquid products such as
natural gasoline.\495\ These primary products and processes are
not intended to represent either the only primary products from
oil or gas or the only processes from which primary products
may be derived under existing and future technologies.\496\
Examples of nonprimary products include, but are not limited
to, petrochemicals, medicinal products, insecticides, and
alcohols.\497\
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\493\ Treas. Reg. sec. 1.927(a)-1T(g)(2)(i).
\494\ Id.
\495\ Treas. Reg. sec. 1.927(a)-1T(g)(2)(ii).
\496\ Treas. Reg. sec. 1.927(a)-1T(g)(2)(iii).
\497\ Treas. Reg. sec. 1.927(a)-1T(g)(2)(iv).
---------------------------------------------------------------------------

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

B. Eliminate the Distinction Between FOGEI and FORI and Apply Present-
Law FOGEI Rules to All Foreign Income from the Production and Sale of
Oil and Gas Product (sec. 402 of the Act and sec. 907 of the Code)

Present Law

In general

Foreign Tax Credit
The United States taxes its citizens and residents
(including U.S. corporations) on their worldwide income.
Because the countries in which income is earned also may assert
their jurisdiction to tax the same income on the basis of
source, foreign-source income earned by U.S. persons may be
subject to double taxation. In order to mitigate this
possibility, the United States generally provides a credit
against U.S. tax liability for foreign income taxes paid or
accrued.\498\ In the case of foreign income taxes paid or
accrued by a foreign subsidiary, a U.S. parent corporation is
generally entitled to an indirect (also referred to as a deemed
paid) credit for those taxes when it receives an actual or
deemed distribution of the underlying earnings from the foreign
subsidiary.\499\
---------------------------------------------------------------------------
\498\ Sec. 901.
\499\ Secs. 902, 960.
---------------------------------------------------------------------------
Foreign Tax Credit Limitations
The foreign tax credit generally is limited to the U.S. tax
liability on a taxpayer's foreign-source income. This general
limitation is intended to ensure that the credit serves its
purpose of mitigating double taxation of foreign-source income
without offsetting the U.S. tax on U.S.-source income.\500\
---------------------------------------------------------------------------
\500\ Sec. 904(a).
---------------------------------------------------------------------------
In addition, this limitation is calculated separately for
various categories of income, generally referred to as
``separate limitation categories.'' The total amount of foreign
taxes attributable to income in a separate limitation category
that may be claimed as credits may not exceed the proportion of
the taxpayer's total U.S. tax liability which the taxpayer's
foreign-source taxable income in that separate limitation
category bears to the taxpayer's worldwide taxable income. The
separate limitation rules are intended to reduce the extent to
which excess foreign taxes paid in a high-tax foreign
jurisdiction can be ``cross-credited'' against the residual
U.S. tax on low-taxed foreign-source income.\501\
---------------------------------------------------------------------------
\501\ Sec. 904(d). For taxable years beginning prior to January 1,
2007, section 904(d) provides eight separate baskets as a general
matter, and effectively many more in situations in which various
special rules apply. The American Jobs Creation Act of 2004 reduced the
number of baskets from nine to eight for taxable years beginning after
December 31, 2002, and further reduced the number of baskets to two
(i.e., ``general'' and ``passive'') for taxable years beginning after
December 31, 2006. Pub. L. No. 108-357, sec. 404 (2004).
---------------------------------------------------------------------------
Special limitation on credits for foreign extraction taxes
and taxes on foreign oil related income
In addition to the foreign tax credit limitations that
apply to all foreign tax credits, a special limitation is
placed on foreign income taxes on foreign oil and gas
extraction income (``FOGEI'').\502\ Under this special
limitation, amounts claimed as taxes paid on FOGEI of a U.S.
corporation qualify as creditable taxes (if they otherwise so
qualify) only to the extent they do not exceed the product of
the highest marginal U.S. tax rate on corporations (presently
35 percent) multiplied by such extraction income. Foreign taxes
paid in excess of that amount on such income are, in general,
neither creditable nor deductible. The amount of any such taxes
paid or accrued (or deemed paid) in any taxable year which
exceeds the FOGEI limitation may be carried back to the
immediately preceding taxable year and carried forward 10
taxable years and credited (not deducted) to the extent that
the taxpayer otherwise has excess FOGEI limitation for those
years.\503\
---------------------------------------------------------------------------
\502\ Sec. 907(a).
\503\ Sec. 907(f). These carryback and carryforward rules are
similar to the general foreign tax credit carryback and carryforward
rules of section 904(c).
---------------------------------------------------------------------------
A similar special limitation applies, in theory, to foreign
taxes paid on foreign oil related income (``FORI'') in certain
cases where the foreign law imposing such amount of tax is
structured, or in fact operates, so that the amount of tax
imposed with respect to foreign oil related income will
generally be ``materially greater,'' over a ``reasonable period
of time,'' than the amount generally imposed on income that is
neither FORI nor FOGEI.\504\ Under the FORI rules, if this
theoretical limitation were to apply, then the portion of the
foreign taxes on FORI so disallowed would be recharacterized as
a (non-creditable) deductible expense.\505\
---------------------------------------------------------------------------
\504\ Sec. 907(b).
\505\ Treas. Reg. sec. 1.907(a)-0(d).
---------------------------------------------------------------------------
As a general matter, the FOGEI and FORI rules of section
907 are informed by two related but distinct concerns. First,
as described by the Staff of the Joint Committee on Taxation in
1982, the rules were designed to address the perceived problem
of ``disguised royalties'' being improperly treated as
creditable foreign taxes:
When U.S. oil companies began operations in a number of
major oil exporting countries, they paid only a royalty for the
oil extracted since there was generally no applicable income
tax in those countries. However, in part because of the benefit
to the oil companies of imposing an income tax, as opposed to a
royalty, those countries have adopted taxes applicable to
extraction income and have labeled them income taxes. Moreover,
because of this relative advantage to the oil companies of
paying income taxes rather than royalties, many oil-producing
nations in the post-World II era have tended to increase their
revenues from oil extraction by increasing their taxes on U.S.
oil companies.\506\
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\506\ Joint Committee on Taxation, Explanation of the Revenue
Provisions of the Tax Equity and Fiscal Responsibility Act of 1982,
(JCS-38-82), December 31, 1982, sec. IV.A.7.a, footnote 63.
---------------------------------------------------------------------------
In addition, the section 907 rules have also been described
as intended to prevent the crediting of high foreign taxes on
FOGEI and FORI against the residual U.S. tax on other types of
lower-taxed foreign source income.\507\ Consistent with this
concern, between 1975 and 1982 the foreign tax credit rules
provided a separate limitation category (or ``basket'') under
the general section 904 limitation for foreign oil income
(broadly defined to include both FORI and FOGEI within the
meaning of present law section 907); this separate basket for
foreign oil income was eliminated when the present law FORI
rules were added and other changes were made by the Tax Equity
and Reform Act of 1982.\508\
---------------------------------------------------------------------------
\507\ H.R. Conf. Rept. No. 103-213, at 646 (1993).
\508\ Pub. L. No. 97-248, sec. 211(c) (1982).
---------------------------------------------------------------------------

Determination of FOGEI and FORI

In general
Determination of a taxpayer's FOGEI and FORI is highly
specific to the taxpayer's relevant facts and circumstances.
Under section 907(c)(1), FOGEI is defined as taxable income
derived from sources outside the United States and its
possessions from the extraction (by the taxpayer or any other
person) of minerals from oil or gas wells located outside the
United States and its possessions or from the sale or exchange
of assets used by the taxpayer in the trade or business of
extracting those minerals.\509\ The regulations provide that
``gross income from extraction is determined by reference to
the fair market value of the minerals in the immediate vicinity
of the well.'' \510\
---------------------------------------------------------------------------
\509\ Sec. 907(c)(1).
\510\ Treas. Reg. sec. 1.907(c)-1(b)(2).
---------------------------------------------------------------------------
The regulations do not provide specific methods for
determining the fair market value of the extracted oil or gas
in the immediate vicinity of the well, but simply provide that
all the facts and circumstances that exist in the particular
case must be considered, including (but not limited to) facts
and circumstances pertaining to the independent market value
(if any) in the immediate vicinity of the well, the fair market
value at the port of the foreign country, and the relationships
between the taxpayer and the foreign government.\511\
---------------------------------------------------------------------------
\511\ Treas. Reg. sec. 1.907(c)-1(b)(6).
---------------------------------------------------------------------------
Section 907(c)(2) defines FORI to include taxable income
from the processing of oil and gas into their primary products,
from the transportation or distribution and sale of oil and gas
and their primary products, from the disposition of assets used
in these activities, and from the performance of any other
related service.\512\
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\512\ Sec. 907(c)(1); Treas. Reg. sec. 1.907(c)-1(d).
---------------------------------------------------------------------------
As a result of these separate rules governing FOGEI and
FORI and the interaction between them, a taxpayer's
determination of the amounts of FOGEI and FORI, as well as the
allocation of foreign taxes to each class of income, can have a
significant impact on the taxpayer's overall U.S. tax
liability.
IRS field directive
An October 12, 2004, IRS field directive (the ``2004 Field
Directive'') sets forth guidance to international examiners and
specialists on the application of what it describes as the two
most commonly used methods for determining FOGEI and FORI when
there is no ascertainable market price for the oil and gas in
the immediate vicinity of the well, namely the residual (rate
of return) method and the proportionate profits method.\513\
---------------------------------------------------------------------------
\513\ Memorandum for Industry Directors (``Field Directive on IRC
Sec. 907 Evaluating Taxpayer Methods of Determining Foreign Oil and Gas
Extraction Income (FOGEI) and Foreign Oil Related Income (FORI)''),
October 12, 2004 (Tax Analysts Doc 2004-23010; 2004 TNT 233-8). By its
terms, the 2004 Field Directive ``is not an official pronouncement of
the law or the Service's position and cannot be used, cited, or relied
upon as such.''
---------------------------------------------------------------------------
Under the residual (rate of return) method, the taxpayer
first calculates FORI by applying an assumed after-tax rate of
return to the cost of its fixed ``FORI assets.'' Then, because
income from the production and sale of oil and gas product is
equal to the sum of FORI and FOGEI, FOGEI is determined by
subtracting FORI (as calculated) from the taxpayer's total
foreign income from the production and sale of oil and gas
product.
Under the proportionate profits method, the taxpayer
allocates total income from the production and sale of the oil
or gas product between FOGEI and FORI based on the relative
costs of the FOGEI and FORI activities.
Under either method, the taxpayer must determine its total
income from the production and sale of oil and gas product, and
must distinguish between costs and assets classified as
relating to FOGEI and those relating to FORI. Under the
residual (rate of return) method, the taxpayer must also
determine appropriate rates of return for FORI assets. The 2004
Field Directive sets forth examples of FOGEI assets \514\ and
FORI assets,\515\ and further provides that assets that support
both FOGEI and FORI may be allocated by any reasonable method.
---------------------------------------------------------------------------
\514\ Examples of FOGEI assets include wells, wellheads, and
pumping equipment; slug catchers, separators, treaters, emulsion
breakers and stock tanks needed to obtain marketable crude (for oil
production); primary separation and dehydration equipment needed to
arrive at a gaseous stream in which hydrocarbons may be recovered (for
gas production); lines interconnecting the above; the infrastructure-
type equipment to provide for the operation of the above; and
structures to physically support the above (such as offshore
platforms).
\515\ Examples of FORI assets include lines that carry natural gas
beyond the primary separator and dehydration equipment and towards its
sales point, and compressors needed to transport through these lines;
lines that carry marketable crude oil from the premises, as well as
pumps needed to transport crude oil through these lines; and assets
used to process crude oil and natural gas.
---------------------------------------------------------------------------

Explanation of Provision

Under the provision, the scope of the present-law FOGEI
rules is expanded to apply to all foreign income from
production and other activity related to the sale of oil and
gas product (i.e., the sum of FORI and FOGEI as classified
under present law). Thus, amounts claimed as taxes paid on such
amount of (combined) foreign oil and gas income are creditable
in a given taxable year (if they otherwise so qualify) only to
the extent they do not exceed the product of the highest
marginal U.S. tax rate on corporations (in the case of
corporations) multiplied by such combined foreign oil and gas
income for such taxable year. As under the present-law FOGEI
rules, excess foreign taxes may be carried back to the
immediately preceding taxable year and carried forward 10
taxable years and credited (not deducted) to the extent that
the taxpayer otherwise has excess limitation with regard to
combined foreign oil and gas income in a carryover year. Under
a transition rule, pre-2009 credits carried forward to post-
2008 years will continue to be governed by present law for
purposes of determining the amount of carryforward credits
eligible to be claimed in a post-2008 year; \516\ similarly,
solely for purposes of determining whether excess credits
generated in 2009 and carried back can be claimed to offset
2008 tax liability, the new rules will be deemed to apply in
determining overall (combined FOGEI-FORI) limitation for the
carryback year.
---------------------------------------------------------------------------
\516\ A technical correction may be necessary so that the statute
reflects this intent.
---------------------------------------------------------------------------
The provision repeals the present-law section 907(b) FORI
limitation.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

C. Broker Reporting of Customer's Basis in Securities Transactions
(sec. 403 of the Act and sec. 6045 and new secs. 6045A and 6045B of the
Code)

Present Law

In general

Gain or loss generally is recognized for Federal income tax
purposes on realization of that gain or loss (for example,
through the sale of property giving rise to the gain or loss).
The taxpayer's gain or loss on a disposition of property is the
difference between the amount realized and the adjusted
basis.\517\
---------------------------------------------------------------------------
\517\ Sec. 1001.
---------------------------------------------------------------------------
To compute adjusted basis, a taxpayer must first determine
the property's unadjusted or original basis and then make
adjustments prescribed by the Code.\518\ The original basis of
property is its cost, except as otherwise prescribed by the
Code (for example, in the case of property acquired by gift or
bequest or in a tax-free exchange). Once determined, the
taxpayer's original basis generally is adjusted downward to
take account of depreciation or amortization, and generally is
adjusted upward to reflect income and gain inclusions or
capital outlays with respect to the property.
---------------------------------------------------------------------------
\518\ Sec. 1016.
---------------------------------------------------------------------------

Basis computation rules

If a taxpayer has acquired stock in a corporation on
different dates or at different prices and sells or transfers
some of the shares of that stock, and the lot from which the
stock is sold or transferred is not adequately identified, the
shares deemed sold are the earliest acquired shares (the
``first-in-first-out rule'').\519\ If a taxpayer makes an
adequate identification of shares of stock that it sells, the
shares of stock treated as sold are the shares that have been
identified.\520\ A taxpayer who owns shares in a regulated
investment company (``RIC'') generally is permitted to elect,
in lieu of the specific identification or first-in-first-out
methods, to determine the basis of RIC shares sold under one of
two average-cost-basis methods described in Treasury
regulations.\521\
---------------------------------------------------------------------------
\519\ Treas. Reg. sec. 1.1012-1(c)(1).
\520\ Treas. Reg. sec. 1.1012-1(c).
\521\ Treas. Reg. sec. 1.1012-1(e).
---------------------------------------------------------------------------

Information reporting

Present law imposes information reporting requirements on
participants in certain transactions. Under these requirements,
information is generally reported to the IRS and furnished to
taxpayers. These requirements are intended to assist taxpayers
in preparing their income tax returns and to help the IRS
determine whether taxpayers' tax returns are correct and
complete. 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.\522\
---------------------------------------------------------------------------
\522\ Sec. 6041(a).
---------------------------------------------------------------------------
Section 6045(a) requires brokers to file with the IRS
annual information returns showing the gross proceeds realized
by customers from various sale transactions. The Secretary is
authorized to require brokers to report additional information
related to customers.\523\ Brokers are required to furnish to
every customer information statements with the same gross
proceeds information that is included in the returns filed with
the IRS for that customer.\524\ These information statements
are required to be furnished by January 31 of the year
following the calendar year for which the return under section
6045(a) is required to be filed.\525\
---------------------------------------------------------------------------
\523\ Sec. 6045(a).
\524\ Sec. 6045(b).
\525\ Id.
---------------------------------------------------------------------------
A person who is required to file information returns but
who fails to do so by the due date for the returns, includes on
the returns incorrect information, or files incomplete returns
generally is subject to a penalty of $50 for each return with
respect to which such a failure occurs, up to a maximum of
$250,000 in any calendar year.\526\ Similar penalties, with a
$100,000 calendar year maximum, apply to failures to furnish
correct information statements to recipients of payments for
which information reporting is required.\527\
---------------------------------------------------------------------------
\526\ Sec. 6721.
\527\ Sec. 6722.
---------------------------------------------------------------------------
Present law does not require broker information reporting
with respect to a customer's basis in property but does impose
an obligation to keep records, as described below.

Basis recordkeeping requirements

Taxpayers are required to ``keep such records * * * as the
Secretary may from time to time prescribe.'' \528\ Treasury
regulations impose recordkeeping requirements on any person
required to file information returns.\529\
---------------------------------------------------------------------------
\528\ Sec. 6001.
\529\ Treas. Reg. sec. 1.6001-1(a).
---------------------------------------------------------------------------
Treasury regulations provide that donors and donees should
keep records that are relevant in determining a donee's basis
in property.\530\ IRS Publication 552 states that a taxpayer
should keep basis records for property until the period of
limitations expires for the year in which the taxpayer disposes
of the property.
---------------------------------------------------------------------------
\530\ Treas. Reg. sec. 1.1015-1(g).
---------------------------------------------------------------------------

Explanation of Provision

In general

Under the provision, every broker that is required to file
a return under section 6045(a) reporting the gross proceeds
from the sale of a covered security must include in the return
(1) the customer's adjusted basis in the security and (2)
whether any gain or loss with respect to the security is long-
term or short-term (within the meaning of section 1222).

Covered securities

A covered security is any specified security acquired on or
after the applicable date if the security was (1) acquired
through a transaction in the account in which the security is
held or (2) was transferred to that account from an account in
which the security was a covered security, but only if the
transferee broker received a statement under section 6045A
(described below) with respect to the transfer. Under this
rule, certain securities acquired by gift or inheritance are
not covered securities.
A specified security is any share of stock in a corporation
(including stock of a regulated investment company); any note,
bond, debenture, or other evidence of indebtedness; any
commodity or a contract or a derivative with respect to the
commodity if the Secretary determines that adjusted basis
reporting is appropriate; and any other financial instrument
with respect to which the Secretary determines that adjusted
basis reporting is appropriate.
For stock in a corporation (other than stock for which an
average basis method is permissible under section 1012), the
applicable date is January 1, 2011. For any stock for which an
average basis method is permissible under section 1012, the
applicable date is January 1, 2012. Consequently, the
applicable date for certain stock acquired through a dividend
reinvestment plan (for which stock additional rules are
described below) and for stock in a regulated investment
company is January 1, 2012. A regulated investment company is
permitted to elect to treat as a covered security any stock in
the company acquired before January 1, 2012. This election is
described below. For any specified security other than stock in
a corporation or stock for which an average basis method is
permitted, the applicable date is January 1, 2013, or a later
date determined by the Secretary.

Computation of adjusted basis

The customer's adjusted basis required to be reported to
the IRS is determined under the following rules. The adjusted
basis of any security other than stock for which an average
basis method is permissible under section 1012 is determined
under the first-in, first-out method unless the customer
notifies the broker by means of making an adequate
identification (under the rules of section 1012 for specific
identification) of the stock sold or transferred. The adjusted
basis of stock for which an average basis method is permissible
under section 1012 is determined in accordance with the
broker's default method under section 1012 (that is, the first-
in, first-out method, the average cost method, or the specific
identification method) unless the customer notifies the broker
that the customer elects another permitted method. This
notification is made separately for each account in which stock
for which the average cost method is permissible is held and,
once made, applies to all stock held in that account. As a
result of this rule, a broker's basis computation method used
for stock held in one account with that broker may differ from
the basis computation method used for stock held in another
account with that broker.
For any sale, exchange, or other disposition of a specified
security after the applicable date (defined previously), the
provision modifies section 1012 so that the conventions
prescribed by regulations under that section for determining
adjusted basis (the first-in, first-out, specific
identification, and average basis conventions) apply on an
account-by-account basis. Under this rule, for example, if a
customer holds shares of the same specified security in
accounts with different brokers, each broker makes its adjusted
basis determinations by reference only to the shares held in
the account with that broker, and only shares in the account
from which the sale is made may be identified as the shares
sold. Unless the election described next applies, any stock for
which an average basis method is permissible under section 1012
(that is, stock in a regulated investment company) which is
acquired before January 1, 2012 is treated as a separate
account from any such stock acquired on or after that date. A
consequence of this rule is that if adjusted basis is being
determined using an average basis method, average basis is
computed without regard to any stock acquired before January 1,
2012. A regulated investment company, however, may elect (at
the time and in the form and manner prescribed by the
Secretary), on a stockholder-by-stockholder basis, to treat as
covered securities all stock in the company held by the
stockholder without regard to when the stock was acquired. When
this election applies, the average basis of a customer's
regulated investment company stock is determined by taking into
account shares of stock acquired before, on, and after January
1, 2012. A similar election is allowed for any broker holding
stock in a regulated investment company as a nominee of the
beneficial owner of the stock.
If stock is acquired on or after January 1, 2011 in
connection with a dividend reinvestment plan, the basis of that
stock is determined under one of the basis computation methods
permissible for stock in a regulated investment company.
Accordingly, an average cost method may be used for determining
the basis of stock acquired under a dividend reinvestment plan.
In determining basis under this rule, the account-by-account
rules described previously, including the election available to
regulated investment companies, apply. The special rule for
stock acquired through a dividend reinvestment plan, however,
applies only while the stock is held as part of the plan. If
stock to which this rule applies is transferred to another
account, the stock will have a cost basis in that other account
equal to its basis in the dividend reinvestment plan
immediately before the transfer (with any proper adjustment for
charges incurred in connection with the transfer). After the
transfer, however, the transferee broker may use the otherwise
applicable convention (that is, the first-in, first-out method
or the specific identification method) for determining which
shares are sold when a sale is made of some but not all shares
of a particular security. It is expected that when stock
acquired through a dividend reinvestment plan is transferred to
another account, the broker executing the transfer will provide
information necessary in applying an allowable convention for
determining which shares are sold. Accordingly, the transferor
broker will be expected to state that shares transferred have a
long-term holding period or, for shares that have a short-term
holding period, the dates on which the shares were acquired.
A dividend reinvestment plan is any arrangement under which
dividends on stock are reinvested in stock identical to the
stock with respect to which the dividends are paid. Stock is
treated as acquired in connection with a dividend reinvestment
plan if the stock is acquired pursuant to the plan or if the
dividends paid on the stock are subject to the plan.

Exception for wash sales

Unless the Secretary provides otherwise, a customer's
adjusted basis in a covered security generally is determined
without taking into account the effect on basis of the wash
sale rules of section 1091. If, however, the acquisition and
sale transactions resulting in a wash sale under section 1091
occur in the same account and are in identical securities,
adjusted basis is determined by taking into account the effect
of the wash sale rules. Securities are identical for this
purpose only if they have the same Committee on Uniform
Security Identification Procedures number.

Special rules for short sales

The provision provides that in the case of a short sale,
gross proceeds and basis reporting under section 6045 generally
is required in the year in which the short sale is closed
(rather than, as under the present law rule for gross proceeds
reporting, the year in which the short sale is entered into).

Reporting requirements for options

The provision generally eliminates the present-law
regulatory exception from section 6045(a) reporting for certain
options. If a covered security is acquired or disposed of by
reason of the exercise of an option that was granted or
acquired in the same account as the covered security, the
amount of the premium received or paid with respect to the
acquisition of the option is treated as an adjustment to the
gross proceeds from the subsequent sale of the covered security
or as an adjustment to the customer's adjusted basis in that
security. Gross proceeds and basis reporting also is required
when there is a lapse of, or a closing transaction with respect
to, an option on a specified security or an exercise of a cash-
settled option. Reporting is required for the calendar year
that includes the date of the lapse, closing transaction, or
exercise. For example, if a taxpayer acquires for $5 a cash
settlement stock option with a strike price of $100 and settles
the option when the stock trades at $120, a broker through
which the acquisition and cash settlement are executed is
required to report gross proceeds of $20 from the cash
settlement and a basis in the option of $5. For purposes of the
reporting requirement for closing transactions, a closing
transaction includes a mark-to-market under section 1256. It is
intended that a specified security for purposes of the
reporting rules described in this paragraph includes a stock
index such as the S&P 500. The reporting rules related to
options transactions apply only to options granted or acquired
on or after January 1, 2013.

Treatment of S corporations

The provision provides that for purposes of section 6045,
an S corporation (other than a financial institution) is
treated in the same manner as a partnership. This rule applies
to any sale of a covered security acquired by an S corporation
(other than a financial institution) after December 31, 2011.
When this rule takes effect, brokers generally will be required
to report gross proceeds and basis information to customers
that are S corporations.

Time for providing statements to customers

The provision changes to February 15 the present-law
January 31 deadline for furnishing certain information
statements to customers. The statements to which the new
February 15 deadline applies are (1) statements showing gross
proceeds (under section 6045(b)) or substitute payments (under
section 6045(d)) and (2) statements with respect to reportable
items (including, but not limited to, interest, dividends, and
royalties) that are furnished with consolidated reporting
statements (as defined in regulations). The term ``consolidated
reporting statement'' is intended to refer to annual account
information statements that brokerage firms customarily provide
to their customers and that include tax-related information. It
is intended that the February 15 deadline for consolidated
reporting statements apply in the same manner to statements
furnished for any account or accounts, taxable and retirement,
held by a customer with a mutual fund or other broker.

Broker-to-broker and issuer reporting

Every broker (as defined in section 6045(c)(1)), and any
other person specified in Treasury regulations, that transfers
to a broker (as defined in section 6045(c)(1)) a security that
is a covered security when held by that broker or other person
must, under new section 6045A, furnish to the transferee broker
a written statement that allows the transferee broker to
satisfy the provision's basis and holding period reporting
requirements. The Secretary may provide regulations that
prescribe the content of this statement and the manner in which
it must be furnished. It is contemplated that the Secretary
will permit this broker-to-broker reporting requirement to be
satisfied electronically rather than by paper. Unless the
Secretary provides otherwise, the statement required by this
rule must be furnished not later than 15 days after the date of
the transfer of the covered security.
Present law penalties for failure to furnish correct payee
statements apply to failures to furnish correct statements in
connection with the transfer of covered securities.
New section 6045B requires, according to forms or
regulations prescribed by the Secretary, any issuer of a
specified security to file a return setting forth a description
of any organizational action (such as a stock split or a merger
or acquisition) that affects the basis of the specified
security, the quantitative effect on the basis of that
specified security, and any other information required by the
Secretary. This return must be filed within 45 days after the
date of the organizational action or, if earlier, by January 15
of the year following the calendar year during which the action
occurred. Every person required to file this return for a
specified security also must furnish, according to forms or
regulations prescribed by the Secretary, to the nominee with
respect to that security (or to a certificate holder if there
is no nominee) a written statement showing the name, address,
and phone number of the information contact of the person
required to file the return, the information required to be
included on the return with respect to the security, and any
other information required by the Secretary. This statement
must be furnished to the nominee or certificate holder on or
before January 15 of the year following the calendar year in
which the organizational action took place. No return or
information statement is required to be provided under new
section 6045B for any action with respect to a specified
security if the action occurs before the applicable date (as
defined previously) for that security.
The Secretary may waive the return filing and information
statement requirements if the person to which the requirements
apply makes publicly available, in the form and manner
determined by the Secretary, the name, address, phone number,
and email address of the information contact of that person,
and the information about the organizational action and its
effect on basis otherwise required to be included in the
return.
The present-law penalties for failure to file correct
information returns apply to failures to file correct returns
in connection with organizational actions. Similarly, the
present-law penalties for failure to furnish correct payee
statements apply to a failure under new section 6045B to
furnish correct statements to nominees or holders or to provide
required publicly-available information in lieu of returns and
written statements.

Effective Date

The provision generally takes effect on January 1, 2011.
The change to February 15 of the present-law January 31
deadline for furnishing certain information statements to
customers applies to statements required to be furnished after
December 31, 2008.

D. One-Year Extension of Additional 0.2 Percent FUTA Surtax (sec. 404
of the Act and sec. 3301 of the Code)

Present Law

Explanation of Provision

The Act extends the temporary surtax rate (for one year)
through December 31, 2009.

Effective Date

The provision is effective for wages paid after December
31, 2008.

E. Oil Spill Liability Trust Fund Tax (sec. 405 of the Act and sec.
4611 of the Code)

Present Law

The Oil Spill Liability Trust Fund financing rate (``oil
spill tax'') is five cents per barrel and generally applies to
crude oil received at a U.S. refinery and to petroleum products
entered into the United States for consumption, use, or
warehousing.
The oil spill tax also applies to certain uses and
exportation of domestic crude oil. If any domestic crude oil is
used in or exported from the United States, and before such use
or exportation no oil spill tax was imposed on such crude oil,
then the oil spill tax is imposed on such crude oil. The tax
does not apply to any use of crude oil for extracting oil or
natural gas on the premises where such crude oil was produced.
For crude oil received at a refinery, the operator of the
United States refinery is liable for the tax. For imported
petroleum products, the person entering the product for
consumption, use or warehousing is liable for the tax. For
certain uses and exports, the person using or exporting the
crude oil is liable for the tax. No tax is imposed with respect
to any petroleum product if the person who would be liable for
such tax establishes that a prior oil spill tax has been
imposed with respect to such product.
The imposition of the tax is dependent in part on the
balance of the Oil Spill Liability Trust Fund. The oil spill
tax does not apply during a calendar quarter if the Secretary
estimated that, as of the close of the preceding calendar
quarter, the unobligated balance of the Oil Spill Liability
Trust Fund exceeded $2.7 billion. If the Secretary estimates
the unobligated balance in the Oil Spill Liability Trust Fund
to be less than $2 billion at close of any calendar quarter,
the oil spill tax will apply on the date that is 30 days from
the last day of that quarter. The tax does not apply to any
periods after December 31, 2014.

Explanation of Provision

The provision extends the oil spill tax through December
31, 2017. Beginning with the first calendar quarter beginning
more than 60 days after the date of enactment, the tax rate is
increased from five cents per barrel to eight cents per barrel.
After December 31, 2016, the tax rate is increased to nine
cents per barrel. The provision also repeals the requirement
that the tax be suspended when the unobligated balance exceeds
$2.7 billion.

Effective Date

The provision is generally effective on the date of
enactment (October 3, 2008). The change in rate applies on and
after the first day of the first calendar quarter beginning
more than 60 days after the date of enactment.

DIVISION C--TAX EXTENDERS AND ALTERNATIVE MINIMUM TAX RELIEF

TITLE I--ALTERNATIVE MINIMUM TAX RELIEF

A. Extend Alternative Minimum Tax Relief for Individuals (secs. 101 and
102 of the Act and secs. 26 and 55 of the Code)

Present Law

Present law imposes an alternative minimum tax (``AMT'') on
individuals. The AMT 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 present exemption amount is: (1) $66,250 ($45,000 in
taxable years beginning after 2007) in the case of married
individuals filing a joint return and surviving spouses; (2)
$44,350 ($33,750 in taxable years beginning after 2007) in the
case of other unmarried individuals; (3) $33,125 ($22,500 in
taxable years beginning after 2007) in the case of married
individuals filing separate returns; 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 or an estate or a trust. These amounts are not indexed
for inflation.
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 credit
\531\, 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).
---------------------------------------------------------------------------
\531\ The child credit may be refundable in whole or in part to a
taxpayer.
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For taxable years beginning before 2008, 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 2007, 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.\532\
---------------------------------------------------------------------------
\532\ The rule applicable to the adoption credit and child credit
is subject to the EGTRRA sunset.
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Reasons for Change \533\
---------------------------------------------------------------------------

\533\ See H.R. 6275, the ``Alternative Minimum Tax Relief Act of
2008,'' which was reported by the House Committee on Ways and Means on
June 20, 2008 (H. Rept. No. 110-728).
---------------------------------------------------------------------------
The Congress is concerned about the projected increase in
the number of individuals who will be affected by the
individual alternative minimum tax and the projected increase
in tax liability for those who are affected by the tax for
2008. The provision will reduce the number of individuals who
would otherwise be affected by the alternative minimum tax and
will reduce the tax liability of the families that continue to
be affected by the alternative minimum tax.

Explanation of Provision

The provision provides that the individual AMT exemption
amount for taxable years beginning in 2008 is (1) $69,950, in
the case of married individuals filing a joint return and
surviving spouses; (2) $46,200 in the case of other unmarried
individuals; and (3) $34,975 in the case of married individuals
filing separate returns.
For taxable years beginning in 2008, the Act allows
individuals to offset their entire regular tax liability and
alternative minimum tax liability by the nonrefundable personal
credits.

Effective Date

The provision is effective for taxable years beginning in
2008.

B. Increase in AMT Refundable Credit Amount for Individuals With Long-
Term Unused Credits for Prior Year Minimum Tax Liability, Etc. (sec.
103 of the Act and sec. 53 of the Code)

Present Law

In general
Present law imposes an alternative minimum tax 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 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.\534\
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\534\ Sec. 422.
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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.\535\ When the stock is sold, the individual's
long-term capital gain or loss is determined 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 basis of the stock is the amount paid for the stock
increased by the amount taken into account as ordinary
income.\536\
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\535\ Sec. 421.
\536\ 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.\537\ 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.
---------------------------------------------------------------------------
\537\ 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.\538\
---------------------------------------------------------------------------
\538\ 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.
---------------------------------------------------------------------------

Allowance of long-term unused credits

Under present law, an individual's minimum tax credit
allowable for any taxable year beginning after December 31,
2006, and beginning before January 1, 2013, is not less than
the ``AMT refundable credit amount.'' The ``AMT refundable
credit amount'' is the amount (not in excess of the long-term
unused minimum tax credit) equal to the greatest of (1) $5,000,
(2) 20 percent of the long-term unused minimum tax credit for
the taxable year, or (3) the amount (if any) of the AMT
refundable credit amount for the preceding taxable year before
any reduction by reason of the reduction for adjusted gross
income described below. 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.

Reasons for Change \539\

---------------------------------------------------------------------------
\539\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The individual alternative minimum tax is intended to
accelerate the tax on certain items of income that are deferred
under the regular tax by initially imposing a tax and later
allowing a minimum tax credit when the deferral ends. One of
these items relates to the exercise of incentive stock options.
However, because of technical problems, the credit may not be
properly allowable where the value of the stock acquired on the
exercise of an incentive stock option has declined in value
when the stock is sold. In 2006, Congress provided certain
relief in these situations. The Congress believes that
additional relief should be provided to correct this problem so
that taxpayers are not paying tax on ``phantom'' income
attributable to incentive stock options.

Explanation of Provision

The provision generally allows the long-term unused minimum
tax credit to be claimed over a two-year period (rather than
five years) and eliminates the AGI phase-out.
The provision provides that any underpayment of tax
outstanding on the date of enactment which is attributable to
the application of the minimum tax adjustment for incentive
stock options (including any interest or penalty relating
thereto) is abated. No tax which is abated is taken into
account in determining the minimum tax credit.
The provision provides that the AMT refundable credit
amount and the AMT credit for each of the first two taxable
years beginning after December 31, 2007, are increased by one-
half of the amount of any interest and penalty paid before the
date of enactment on account of the application of the minimum
adjustment for incentive stock options.

Effective Date

The provision generally applies to taxable years beginning
after December 31, 2007.
The provision relating to the abatement of tax, interest,
and penalties takes effect on date of enactment (October 3,
2008).

TITLE II--EXTENSION OF INDIVIDUAL TAX PROVISIONS

A. Deduction of State and Local General Sales Taxes (sec. 201 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.

Reasons for Change \540\

---------------------------------------------------------------------------
\540\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes an extension of the option to deduct
State and local sales taxes in lieu of deducting State and
local income taxes is appropriate to continue to provide
similar Federal tax treatment to residents of States that rely
on sales taxes, rather than income taxes, to fund State and
local government functions.

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,
2009).

Effective Date

The provision applies to taxable years beginning after
December 31, 2007.

B. Above-the-Line Deduction for Higher Education Expenses (sec. 202 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.\541\ Qualified
tuition and related expenses are defined in the same manner as
for the Hope and Lifetime Learning credits, and includes
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.\542\ The expenses must be in connection with
enrollment at an institution of higher education during the
taxable year, or with an academic period 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.
---------------------------------------------------------------------------
\541\ Sec. 222.
\542\ The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction.
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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, 2007.
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,\543\ and by the amount of such expenses taken into
account for purposes of determining any exclusion from gross
income of: (1) income from certain U.S. savings bonds used to
pay higher education tuition and fees; and (2) income from a
Coverdell education savings account.\544\ 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 eligible for the qualified tuition
deduction. No deduction is allowed for any expense for which a
deduction is otherwise allowed or with respect to an individual
for whom a Hope or Lifetime Learning credit is elected for such
taxable year.
---------------------------------------------------------------------------
\543\ Secs. 222(d)(1) and 25A(g)(2).
\544\ Sec. 222(c). These reductions are the same as those that
apply to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

Reasons for Change \545\

---------------------------------------------------------------------------
\545\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress observes that the cost of a college education
continues to rise, and thus believes that the extension of the
qualified tuition deduction is appropriate to mitigate the
impact of rising tuition costs on students and their families.
The Congress further believes that the tuition deduction
provides an important financial incentive for individuals to
pursue higher education.

Explanation of Provision

The provision extends the qualified tuition deduction for
two years so that it is generally available for taxable years
beginning before January 1, 2010.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

C. Educator Expense Deduction (sec. 203 of the Act and sec. 62(a)(2)(D)
of the Code)

Present Law

In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
generally 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 $159,950 (for 2008).\546\ In addition, miscellaneous
itemized deductions are not allowable under the alternative
minimum tax.
---------------------------------------------------------------------------
\546\ The adjusted gross income threshold is $79,975 in the case of
a married individual filing a separate return (for 2008).
---------------------------------------------------------------------------
Eligible educators are allowed an above-the-line deduction
for certain expenses.\547\ Specifically, for taxable years
beginning after December 31, 2001, and prior to January 1,
2008, 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
section 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), section 529(c)(1) (relating to
qualified tuition programs), and section 530(d)(2) (relating to
Coverdell education savings accounts).
---------------------------------------------------------------------------
\547\ Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
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 that 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, 2007.

Reasons for Change \548\

---------------------------------------------------------------------------
\548\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress recognizes that many elementary and secondary
school teachers provide substantial classroom resources at
their own expense, and believe that it is appropriate to extend
the present law deduction for such expenses in order to
continue to partially offset the substantial costs such
educators incur for the benefit of their students.

Explanation of Provision

The provision extends the deduction for eligible educator
expenses for two years so that it is available for taxable
years beginning before January 1, 2010.

Effective Date

The provision is effective for expenses paid or incurred in
taxable years beginning after December 31, 2007.

D. Additional Standard Deduction for State and Local Real Property
Taxes (sec. 204 of the Act and sec. 63 of the Code)

Present Law

In general

An individual taxpayer's taxable income is computed by
reducing adjusted gross income either by a standard deduction
or, if the taxpayer elects, by the taxpayer's itemized
deductions. Unless an individual taxpayer elects, no itemized
deduction is allowed for the taxable year. The deduction for
certain taxes, including income taxes, real property taxes, and
personal property taxes, generally is an itemized
deduction.\549\
---------------------------------------------------------------------------
\549\ If the deduction for State and local taxes is attributable to
business or rental income, the deduction is allowed in computing
adjusted gross income and therefore is not an itemized deduction.
---------------------------------------------------------------------------

Special rule for State and local property taxes

An individual taxpayer's standard deduction for a taxable
year beginning in 2008 is increased by the lesser of (1) the
amount allowable \550\ to the taxpayer as a deduction for State
and local taxes described in section 164(a)(1) (relating to
real property taxes), or (2) $500 ($1,000 in the case of a
married individual filing jointly). The increased standard
deduction is determined by taking into account real estate
taxes for which a deduction is allowable to the taxpayer under
section 164 and, in the case of a tenant-stockholder in a
cooperative housing corporation, real estate taxes for which a
deduction is allowable to the taxpayer under section 216. No
taxes deductible in computing adjusted gross income are taken
into account in computing the increased standard deduction.
---------------------------------------------------------------------------
\550\ In the case of an individual taxpayer who does not elect to
itemize deductions, although no itemized deductions are allowed to the
taxpayer, itemized deductions are nevertheless treated as
``allowable.'' See section 63(e).
---------------------------------------------------------------------------

Reasons for Change \551\

---------------------------------------------------------------------------
\551\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes an additional standard deduction for
real property taxes is appropriate in order to help lessen the
impact of rising State and local property tax bills on those
individual taxpayers with insufficient total itemized
deductions to elect not to take the standard deduction.

Explanation of Provision

The provision extends for one year (2009) the additional
standard deduction for State and local property taxes.

Effective Date

The provision applies to taxable years beginning in 2009.

E. Tax-Free Distributions from Individual Retirement Plans for
Charitable Purposes (sec. 205 of the Act and sec. 408 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. An exception applies in the case of a qualified
charitable distribution.

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,\552\ or to a Federal, State, or local governmental
entity for exclusively public purposes.\553\ The deduction also
is allowed for purposes of calculating alternative minimum
taxable income.
---------------------------------------------------------------------------
\552\ Secs. 170(c)(3)-(5).
\553\ 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.\554\
---------------------------------------------------------------------------
\554\ 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.\555\
---------------------------------------------------------------------------
\555\ 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.\556\ 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.\557\
---------------------------------------------------------------------------
\556\ Sec. 170(f)(8).
\557\ 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 2008 is
$159,950 ($79,975 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 was reduced by one-third in
taxable years beginning in 2006 and 2007, and is reduced 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.\558\ 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.\559\ For such interests, a
charitable deduction is allowed to the extent of the present
value of the interest designated for a charitable organization.
---------------------------------------------------------------------------
\558\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\559\ 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\.\560\
---------------------------------------------------------------------------
\560\ 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; \561\ (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.
---------------------------------------------------------------------------
\561\ 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.\562\ Elections not to have
withholding apply are to be made in the time and manner
prescribed by the Secretary.
---------------------------------------------------------------------------
\562\ Sec. 3405.
---------------------------------------------------------------------------

Qualified charitable distributions

Present law 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.\563\ 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 otherwise applicable 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 qualified charitable distribution
provision. An IRA does not fail to qualify as an IRA as a
result of qualified charitable distributions being made from
the IRA.
---------------------------------------------------------------------------
\563\ The exclusion does not apply to distributions from employer-
sponsored retirements 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 qualified charitable distribution 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 qualified
charitable distribution 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 qualified charitable distribution provision are not
taken into account in determining the deduction for charitable
contributions under section 170.
The exclusion for qualified charitable distributions
applies to distributions made in taxable years beginning after
December 31, 2005. Under present law, the exclusion does not
apply to distributions made in taxable years beginning after
December 31, 2007.

Reasons for Change \564\

---------------------------------------------------------------------------
\564\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that facilitating charitable
contributions from IRAs will help increase giving to charitable
organizations. Therefore, the Congress believes that the
exclusion for qualified charitable distributions should be
extended.

Explanation of Provision

The provision extends the exclusion for qualified
charitable distributions to distributions made in taxable years
beginning after December 31, 2007, and before January 1, 2010.

Effective Date

The provision is effective for distributions made in
taxable years beginning after December 31, 2007.

F. Extension of Special Withholding Tax Rule for Interest-Related
Dividends Paid by Regulated Investment Companies (sec. 206 of the Act
and sec. 871(k) of the Code)

Present Law

In general

Under present law, a regulated investment company (``RIC'')
that earns certain interest income that would not be subject to
U.S. tax if earned by a foreign person directly may, to the
extent of such income, designate a dividend it pays as derived
from such interest income. A foreign person who is a
shareholder in the RIC generally would treat such a dividend as
exempt from gross-basis U.S. tax, as if the foreign person had
earned the interest directly.

Interest-related dividends

Under present law, a RIC may, under certain circumstances,
designate all or a portion of a dividend as an ``interest-
related dividend,'' by written notice mailed to its
shareholders not later than 60 days after the close of its
taxable year. In addition, an interest-related dividend
received by a foreign person generally is exempt from U.S.
gross-basis tax under sections 871(a), 881, 1441 and 1442.
However, this exemption does not apply to a dividend on
shares of RIC stock if the withholding agent does not receive a
statement, similar to that required under the portfolio
interest rules, that the beneficial owner of the shares is not
a U.S. person. The exemption does not apply to a dividend paid
to any person within a foreign country (or dividends addressed
to, or for the account of, persons within such foreign country)
with respect to which the Treasury Secretary has determined,
under the portfolio interest rules, that exchange of
information is inadequate to prevent evasion of U.S. income tax
by U.S. persons.
In addition, the exemption generally does not apply to
dividends paid to a controlled foreign corporation to the
extent such dividends are attributable to income received by
the RIC on a debt obligation of a person with respect to which
the recipient of the dividend (i.e., the controlled foreign
corporation) is a related person. Nor does the exemption
generally apply to dividends to the extent such dividends are
attributable to income (other than short-term original issue
discount or bank deposit interest) received by the RIC on
indebtedness issued by the RIC-dividend recipient or by any
corporation or partnership with respect to which the recipient
of the RIC dividend is a 10-percent shareholder. However, in
these two circumstances the RIC remains exempt from its
withholding obligation unless the RIC knows that the dividend
recipient is such a controlled foreign corporation or 10-
percent shareholder. To the extent that an interest-related
dividend received by a controlled foreign corporation is
attributable to interest income of the RIC that would be
portfolio interest if received by a foreign corporation, the
dividend is treated as portfolio interest for purposes of the
de minimis rules, the high-tax exception, and the same country
exceptions of subpart F (see sec. 881(c)(5)(A)).
The aggregate amount designated as interest-related
dividends for the RIC's taxable year (including dividends so
designated that are paid after the close of the taxable year
but treated as paid during that year as described in section
855) generally is limited to the qualified net interest income
of the RIC for the taxable year. The qualified net interest
income of the RIC equals the excess of: (1) the amount of
qualified interest income of the RIC; over (2) the amount of
expenses of the RIC properly allocable to such interest income.
Qualified interest income of the RIC is equal to the sum of
its U.S.-source income with respect to: (1) bank deposit
interest; (2) short term original issue discount that is
currently exempt from the gross-basis tax under section 871;
(3) any interest (including amounts recognized as ordinary
income in respect of original issue discount, market discount,
or acquisition discount under the provisions of sections 1271-
1288, and such other amounts as regulations may provide) on an
obligation which is in registered form, unless it is earned on
an obligation issued by a corporation or partnership in which
the RIC is a 10-percent shareholder or is contingent interest
not treated as portfolio interest under section 871(h)(4); and
(4) any interest-related dividend from another RIC.
If the amount designated as an interest-related dividend is
greater than the qualified net interest income described above,
the portion of the distribution so designated which constitutes
an interest-related dividend will be only that proportion of
the amount so designated as the amount of the qualified net
interest income bears to the amount so designated.
This withholding tax rule for interest-related dividends
received from a RIC does not apply to any taxable year of a RIC
beginning after December 31, 2007.

Reasons for Change \565\

---------------------------------------------------------------------------
\565\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Congress believes that, to the extent a RIC distributes to
a foreign person a dividend attributable to amounts that would
have been exempt from U.S. withholding tax had the foreign
person received it directly (such as portfolio interest and
capital gains, including short-term capital gains), such
dividend similarly should be exempt from the U.S. gross-basis
withholding tax. Therefore, Congress believes that it is
desirable to extend the present law provision for two
additional years.

Explanation of Provision

The provision extends the exemption from withholding tax of
interest-related dividends received from a RIC to taxable years
of a RIC beginning before January 1, 2010.

Effective Date

The provision applies to dividends with respect to taxable
years of a RIC beginning after December 31, 2007.

G. Extension of Special Rule for Regulated Investment Company Stock
Held in the Estate of a Nonresident Non-Citizen (sec. 207 of the Act
and sec. 2105 of the Code)

Present Law

The gross estate of a decedent who was a U.S. citizen or
resident generally includes all property--real, personal,
tangible, and intangible--wherever situated.\566\ The gross
estate of a nonresident non-citizen decedent, by contrast,
generally includes only property that at the time of the
decedent's death is situated within the United States.\567\
Property within the United States generally includes debt
obligations of U.S. persons, including the Federal government
and State and local governments, but does not include either
bank deposits or portfolio obligations the interest on which
would be exempt from U.S. income tax under section 871.\568\
Stock owned and held by a nonresident non-citizen generally is
treated as property within the United States if the stock was
issued by a domestic corporation.\569\
---------------------------------------------------------------------------
\566\ Sec. 2031. The Economic Growth and Tax Relief Reconciliation
Act of 2001 (``EGTRRA'') repealed the estate tax for estates of
decedents dying after December 31, 2009. EGTRRA, however, included a
termination provision under which EGTRRA's rules, including estate tax
repeal, do not apply to estates of decedents dying after December 31,
2010.
\567\ Sec. 2103.
\568\ Secs. 2104(c), 2105(b).
\569\ Sec. 2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
---------------------------------------------------------------------------
Treaties may reduce U.S. taxation of transfers of the
estates of nonresident non-citizens. Under recent treaties, for
example, U.S. tax generally may be eliminated except insofar as
the property transferred includes U.S. real property or
business property of a U.S. permanent establishment.
Although stock issued by a domestic corporation generally
is treated as property within the United States, stock of a
regulated investment company (``RIC'') that was owned by a
nonresident non-citizen is not deemed property within the
United States in the proportion that, at the end of the quarter
of the RIC's taxable year immediately before a decedent's date
of death, the assets held by the RIC are debt obligations,
deposits, or other property that would be treated as situated
outside the United States if held directly by the estate (the
``estate tax look-through rule for RIC stock'').\570\ This
estate tax look-through rule for RIC stock does not apply to
estates of decedents dying after December 31, 2007.
---------------------------------------------------------------------------
\570\ Sec. 2105(d).
---------------------------------------------------------------------------

Reasons for Change \571\

---------------------------------------------------------------------------
\571\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
If a RIC satisfies certain income, asset, and distribution
requirements, only one level of income tax generally is imposed
on the income and gains of a RIC, and this tax is imposed on
the RIC stockholders. By extension, Congress believes it is
appropriate to treat a RIC as a conduit under the rules for
determining the extent to which the transfer of the estate of a
nonresident non-citizen is subject to U.S. Federal estate tax.
To the extent the assets of a RIC would not be subject to U.S.
estate tax if held directly by an estate, Congress believes
there should be no estate tax when the assets are owned
indirectly by ownership of stock in a RIC.

Explanation of Provision

The provision permits the estate tax look-through rule for
RIC stock to apply to estates of decedents dying before January
1, 2010.

H. Extend RIC ``Qualified Investment Entity'' Treatment Under FIRPTA
(sec. 208 of the Act and sec. 897 of the Code)

Present Law

Special U.S. tax rules apply to capital gains of foreign
persons that are attributable to dispositions of interests in
U.S. real property. In general, a foreign person (a foreign
corporation or a nonresident alien individual) is not generally
taxed on U.S. source capital gains unless certain personal
presence or effectively connected business requirements are
met. However, under the Foreign Investment in Real Property Tax
Act (``FIRPTA'') provisions codified in section 897 of the
Code, a foreign person who sells a U.S. real property interest
(USRPI) is treated as if the gain from such a sale is
effectively connected with a U.S. business, and is subject to
tax at the same rates as a U.S. person. Withholding tax is also
imposed under section 1445.
A USPRI, the sale of which is subject to FIRPTA tax,
includes stock or a beneficial interest in any U.S. real
property holding corporation (as defined), unless the stock is
regularly traded on an established securities market and the
selling foreign corporation or nonresident alien individual
held no more than 5 percent of that stock within the 5-year
period ending on date of disposition (or, if shorter, during
the period in which the entity was in existence). There is an
exception, however, for stock of a domestically controlled
``qualified investment entity.'' However, if stock of a
domestically controlled qualified investment entity is disposed
of within the 30 days preceding a dividend distribution in an
``applicable wash sale transaction,'' in which an amount that
would have been a taxable distribution (as described below) is
instead treated as nontaxable sales proceeds, but substantially
similar stock is reacquired (or an option to obtain it is
acquired) within a 61-day period, then the amount that would
have been a taxable distribution continues to be taxed.
A distribution from a ``qualified investment entity'' that
is attributable to the sale of a USRPI is subject to tax under
FIRPTA unless the distribution is with respect to an interest
that is regularly traded on an established securities market
located in the United Sates and the recipient foreign
corporation or nonresident alien individual held no more than 5
percent of that class of stock or beneficial interest within
the 1-year period ending on the date of distribution. Special
rules apply to situations involving tiers of qualified
investment entities.
The term ``qualified investment entity'' includes a
regulated investment company (``RIC'') that meets certain
requirements, although the inclusion of a RIC in that
definition is scheduled to have expired, for certain purposes,
on December 31, 2007.\572\ The definition does not expire for
purposes of taxing distributions from the RIC that are
attributable directly or indirectly to a distribution to the
entity from a real estate investment trust, nor for purposes of
the applicable wash sale rules.
---------------------------------------------------------------------------
\572\ Sec. 897(h).
---------------------------------------------------------------------------

Reasons for Change \573\

---------------------------------------------------------------------------
\573\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Congress believes it is desirable to extend the present law
provision for two additional years.

Explanation of Provision

The provision extends the inclusion of a regulated
investment company (``RIC'') within the definition of a
``qualified investment entity'' under section 897 of the Code
through December 31, 2009, for those situations in which that
inclusion otherwise would have expired at the end of 2007.
It is intended that the extension shall not apply to the
application of withholding requirements with respect to any
payments made on or before the date of enactment.\574\
---------------------------------------------------------------------------
\574\ A technical correction may be needed so that the statute
reflects this intent.
---------------------------------------------------------------------------

Effective Date

The provision takes effect on January 1, 2008.

TITLE III--EXTENSION OF BUSINESS TAX PROVISIONS

A. Extend the Research and Experimentation Tax Credit (sec. 301 of the
Act and sec. 41 of the Code)

Present Law

General rule
A taxpayer may claim a research credit equal to 20 percent
of the amount by which the taxpayer's qualified research
expenses for a taxable year exceed its base amount for that
year.\575\ Thus, the research credit is generally available
with respect to incremental increases in qualified research.
---------------------------------------------------------------------------
\575\ Sec. 41.
---------------------------------------------------------------------------
A 20-percent research tax credit is 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 is commonly referred to as the university basic
research credit.\576\
---------------------------------------------------------------------------
\576\Sec. 41(e).
---------------------------------------------------------------------------
Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium. This separate credit computation is commonly
referred to as the energy research credit. Unlike the other
research credits, the energy research credit applies 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, has expired and
does not apply to amounts paid or incurred after December 31,
2007.\577\
---------------------------------------------------------------------------
\577\ The research tax credit was initially enacted in the Economic
Recovery Tax Act of 1981. It has been subsequently extended and
modified numerous times. Most recently, the Tax Relief and Health Care
Act of 2006 extended the research credit through December 31, 2007,
modified the alternative incremental research credit, and added an
election to claim an alternative simplified credit.
---------------------------------------------------------------------------
Computation of allowable credit
Except for energy research payments and certain university
basic research payments made by corporations, the research tax
credit applies only to the extent that the taxpayer's qualified
research expenses for the current taxable year exceed its base
amount. The base amount for the current year generally is
computed by multiplying the taxpayer's fixed-base percentage by
the average amount of the taxpayer's gross receipts for the
four preceding years. If a taxpayer both incurred qualified
research expenses and had gross receipts during each of at
least three years from 1984 through 1988, then its fixed-base
percentage is the ratio that its total qualified research
expenses for the 1984-1988 period bears 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) are assigned a fixed-base percentage of three
percent.\578\
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\578\ 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) is 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 is 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. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is 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).
---------------------------------------------------------------------------
In computing the credit, a taxpayer's base amount cannot 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 provides that all
members of the same controlled group of corporations are
treated as a single taxpayer.\579\ Under regulations prescribed
by the Secretary, special rules apply for computing the credit
when a major portion of a trade or business (or unit thereof)
changes hands, under which qualified research expenses and
gross receipts for periods prior to the change of ownership of
a trade or business are 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.\580\
---------------------------------------------------------------------------
\579\ Sec. 41(f)(1).
\580\ Sec. 41(f)(3).
---------------------------------------------------------------------------
Alternative incremental research credit regime
Taxpayers are allowed to elect an alternative incremental
research credit regime.\581\ 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.
---------------------------------------------------------------------------
\581\ Sec. 41(c)(4).
---------------------------------------------------------------------------
Generally, for amounts paid or incurred prior to 2007,
under the alternative incremental 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. Generally, for amounts paid or
incurred after 2006, the credit rates listed above are
increased to three percent, four percent, and five percent,
respectively.\582\
---------------------------------------------------------------------------
\582\ A special transition rule applies for fiscal year 2006-2007
taxpayers.
---------------------------------------------------------------------------
An election to be subject to this alternative incremental
credit regime can 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.
Alternative simplified credit
Generally, for amounts paid or incurred after 2006,
taxpayers may elect to claim an alternative simplified credit
for qualified research expenses.\583\ The alternative
simplified research 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 six percent if a taxpayer has no
qualified research expenses in any one of the three preceding
taxable years.
---------------------------------------------------------------------------
\583\ A special transition rule applies for fiscal year 2006-2007
taxpayers.
---------------------------------------------------------------------------
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 applies only to the taxable year which includes
that date.
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).\584\ Notwithstanding the limitation for contract
research expenses, qualified research expenses include 100
percent of amounts paid or incurred by the taxpayer to an
eligible small business, university, or Federal laboratory for
qualified energy research.
---------------------------------------------------------------------------
\584\ Under a special rule, 75 percent of amounts paid to a
research consortium for qualified research are 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 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. Sec.
41(b)(3)(C).
---------------------------------------------------------------------------
To be eligible for the credit, the research not only has to
satisfy the requirements of present-law section 174 (described
below) but also 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
constitute elements of a process of experimentation for
functional aspects, performance, reliability, or quality of a
business component. Research does not qualify for the credit if
substantially all of the activities relate to style, taste,
cosmetic, or seasonal design factors.\585\ In addition,
research does 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.\586\ Research does not qualify for
the credit if it is conducted outside the United States, Puerto
Rico, or any U.S. possession.
---------------------------------------------------------------------------
\585\ Sec. 41(d)(3).
\586\ Sec. 41(d)(4).
---------------------------------------------------------------------------
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.\587\ However,
deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year.\588\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\589\
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\587\ 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).
\588\ Sec. 280C(c).
\589\ Sec. 280C(c)(3).
---------------------------------------------------------------------------

Reasons for Change \590\

---------------------------------------------------------------------------
\590\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress acknowledges that research is important to the
economy. Research is the basis of new products, new services,
new industries, and new jobs for the domestic economy.
Therefore, the Congress believes it is appropriate to extend
the present-law research credit.

Explanation of Provision

The provision generally extends for two years (through
2009) all elements of the research credit, except for the
alternative incremental research credit, which is allowed to
expire after 2008. The provision also modifies the alternative
simplified credit by increasing from 12 to 14 percent the
amount of credit available with respect to qualified research
expenses that exceed 50 percent of the average qualified
research expenses for the three preceding taxable years.
Finally, the provision clarifies the computation of the
alternative incremental research credit and the alternative
simplified credit for the taxable year in which the credit
terminates.

Effective Date

The extension of the research credit is effective for
amounts paid or incurred after December 31, 2007. The
termination of the alternative incremental credit and the
modification of the alternative simplified credit are effective
for taxable years beginning after December 31, 2008. The
computational clarification for the year in which the credit
terminates is effective for taxable years beginning after
December 31, 2007.

B. Extend the New Markets Tax Credit (sec. 302 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'').\591\ 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.
---------------------------------------------------------------------------
\591\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554 (2000).
---------------------------------------------------------------------------
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.\592\ 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.
---------------------------------------------------------------------------
\592\ 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,
2007, and 2008.

Reasons for Change \593\

---------------------------------------------------------------------------
\593\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the new markets tax credit has
proved to be an effective means of providing equity and other
investments to benefit businesses in low income communities and
that it is appropriate to provide for the allocation of
additional investments for another calendar year.

Explanation of Provision

The provision extends the new markets tax credit for one
year, through 2009, permitting up to $3.5 billion in qualified
equity investments for that calendar year.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

C. Subpart F Exception for Active Financing Income (sec. 303 of the Act
and secs. 953 and 954 of the Code)

Present Law

Under the subpart F rules,\594\ 10-percent-or-greater 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).
---------------------------------------------------------------------------
\594\ Secs. 951-964.
---------------------------------------------------------------------------
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.\595\
---------------------------------------------------------------------------
\595\ 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, as a securities dealer, or in the conduct of
an insurance business (so-called ``active financing
income'').\596\
---------------------------------------------------------------------------
\596\ Temporary exceptions from the subpart F provisions for
certain active financing income applied only for taxable years
beginning in 1998 (Taxpayer Relief Act of 1997, Pub. L. No. 105-34).
Those exceptions were modified and extended for one year, applicable
only for taxable years beginning in 1999 (the Tax and Trade Relief
Extension Act of 1998, Pub. L. No. 105-277). 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. The Tax Increase Prevention and Reconciliation Act of 2005
(Pub. L. No. 109-222) extended the temporary provisions for two years,
for taxable years beginning after 2006 and before 2009.
---------------------------------------------------------------------------
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 active financing 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 a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
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
under rules specific to the temporary exceptions. Present law
also 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.

Reasons for Change \597\

---------------------------------------------------------------------------
\597\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
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, 2002,
and 2006, 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 year.

Explanation of Provision

The provision extends for one year (for taxable years
beginning before 2010) 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, 2008, and for taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.

D. Look-Through Treatment of Payments Between Related Controlled
Foreign Corporations Under Foreign Personal Holding Company Income
Rules (sec. 304 of the Act and sec. 954(c)(6) of the Code)

Present Law

In general

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.
There are several exceptions to these rules. For example,
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. In addition, 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.

The ``look-through rule'' \598\
---------------------------------------------------------------------------

\598\ The look-through rule was enacted by the Tax Increase
Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, sec.
103(b)(1) (2006).
---------------------------------------------------------------------------
Under the ``look-through rule'' (sec. 954(c)(6)),
dividends, interest (including factoring income which is
treated as equivalent to interest under section 954(c)(1)(E)),
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 income of the
payor that is neither subpart F nor treated as ECI. 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 Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out the look-through
rule, including such regulations as are appropriate to prevent
the abuse of the purposes of such rule.
The look-through rule is effective for taxable years of
foreign corporations beginning after December 31, 2005, but
before January 1, 2009, and for taxable years of U.S.
shareholders with or within which such taxable years of such
foreign corporations end.

Reasons for Change \599\

---------------------------------------------------------------------------
\599\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that this provision should be
extended for an additional year.

Explanation of Provision

The provision extends for one year the application of the
look-through rule, to taxable years of foreign corporations
beginning before January 1, 2010, and for taxable years of U.S.
shareholders with or within which such taxable years of such
foreign corporations end.

Effective Date

The provision is effective for taxable years of foreign
corporations beginning after December 31, 2008 (but before
January 1, 2010), and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.

E. Extension of 15-Year Straight-Line Cost Recovery for Qualified
Leasehold Improvements and Qualified Restaurant Improvements; 15-Year
Straight-Line Cost Recovery for Certain Improvements to Retail Space
(sec. 305 of the Act and sec. 168 of the Code)

Present Law

In general

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 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, 2008. Qualified leasehold
improvement property is recovered using the straight-line
method and a half-year convention. Leasehold improvements
placed in service in 2008 and later will be 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.
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, 2008. 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 and a
half-year convention. Restaurant property placed in service in
2008 and later will be subject to the general rules described
above.

Reasons for Change \601\

---------------------------------------------------------------------------
\601\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that taxpayers should not be required
to recover the costs of certain leasehold improvements beyond
the useful life of the investment. The 39-year recovery period
for leasehold improvements for property placed in service after
December 31, 2007, extends beyond the useful life of many such
investments. Although lease terms differ, the Congress believes
that lease terms for commercial real estate are also typically
shorter than the 39-year recovery period. In the interests of
simplicity and administrability, a uniform period for recovery
of leasehold improvements is desirable. Therefore, the
provision extends the 15-year recovery period for leasehold
improvements.
The Congress also believes that unlike other commercial
buildings, restaurant buildings generally are more specialized
structures. Restaurants also experience considerably more
traffic, and remain open longer than most commercial
properties. This daily use causes rapid deterioration of
restaurant properties and forces restaurateurs to constantly
repair and upgrade their facilities. As such, restaurant
facilities generally have a shorter life span than other
commercial establishments. The provision extends the 15-year
recovery period for improvements made to restaurant buildings,
and applies the 15-year recovery period to new restaurants, to
more accurately reflect the true economic life of such
properties.
The Congress believes that taxpayers should not be required
to recover the costs of certain improvements beyond the useful
life of the investment. The present law 39-year recovery period
for improvements to owner occupied (i.e., not leased) retail
property extends beyond the useful life of many such
investments. Therefore, the provision includes a 15-year
recovery period for qualified retail improvements.
Additionally, the Congress believes that retailers should
not be treated differently based on whether the building in
which they operate is owned or leased. The shorter 15-year
recovery period for leasehold improvements under present law
provides an unfair competitive advantage for those retailers
who lease space. As many small business retailers own the
building in which they operate their business, the Congress
believes this provision will provide relief to small
businesses.

Explanation of Provision

The present law provisions for qualified leasehold
improvement property and restaurant improvements are extended
for two years (through December 31, 2009). In addition, the
three-year rule for restaurant property is repealed for
property placed in service after December 31, 2008, and before
January 1, 2010.\602\ Thus, restaurant improvements made within
the first three years also qualify for the 15-year recovery
period.
---------------------------------------------------------------------------
\602\ Qualified restaurant property placed in service after
December 31, 2008, and before December 31, 2010 does not qualify for
bonus depreciation under section 168(k).
---------------------------------------------------------------------------
The provision provides a statutory 15-year recovery period
and straight-line method for qualified retail improvement
property placed in service after December 31, 2008, and before
January 1, 2010. For purposes of the provision, qualified
retail improvement property means any improvement to an
interior portion of a building which is nonresidential real
property if such portion is open to the general public \603\
and is used in the retail trade or business of selling tangible
personal property to the general public, and such improvement
is placed in service more than three years after the date the
building was first placed in service. Qualified retail
improvement property does not include any improvement for which
the expenditure is attributable to the enlargement of the
building, any elevator or escalator, or the internal structural
framework of the building. In the case of an improvement made
by the owner of such improvement, the improvement is a
qualified retail improvement only so long as the improvement is
held by such owner.
---------------------------------------------------------------------------
\603\ Improvements to portions of a building not open to the
general public (e.g., stock room in back of retail space) do not
qualify under the provision.
---------------------------------------------------------------------------
For the purposes of this provision, retail establishments
that qualify for the 15-year recovery period include those
primarily engaged in the sale of goods. Examples of these
retail establishments include, but are not limited to, grocery
stores, clothing stores, hardware stores and convenience
stores. However, establishments primarily engaged in providing
services, such as professional services, financial services,
personal services, health services, and entertainment, do not
qualify. It is generally intended that businesses defined as a
store retailer under the current North American Industry
Classification System (industry sub-sectors 441 through 453)
qualify for the provision, while those in other industry
classes do not qualify under the provision.

Effective Date

The extension of present law treatment of leasehold and
restaurant improvements applies to property placed in service
after December 31, 2007. The inclusion of new restaurant
construction and the retail improvement provision apply to
property placed in service after December 31, 2008.

F. Modification of Tax Treatment of Certain Payments to Controlling
Exempt Organizations (sec. 306 of the Act and sec. 512 of the Code)

Present Law

In general, organizations exempt from Federal income tax
are subject to the unrelated business income tax on income
derived from a trade or business regularly carried on by the
organization that is not substantially related to the
performance of the organization's tax-exempt functions.\604\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\605\
---------------------------------------------------------------------------
\604\ Sec. 511.
\605\ Sec. 512(b).
---------------------------------------------------------------------------
Section 512(b)(13) provides special rules regarding income
derived by an exempt organization from a controlled subsidiary.
In general, section 512(b)(13) 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 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). However, a special rule enacted as part of the Pension
Protection Act of 2006 \606\ provides that, for payments made
pursuant to a binding written contract in effect on August 17,
2006 (or renewal of such a contract on substantially similar
terms), the general rule of section 512(b)(13) applies only to
the portion of payments received or accrued (before January 1,
2008) in a taxable year that exceeds the amount of the payment
that would have been paid or accrued if the amount of such
payment had been determined under the principles of section 482
(i.e., at arm's length).\607\ In addition, the special rule
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.
---------------------------------------------------------------------------
\606\ Pub. L. No. 109-280 (2006).
\607\ Sec. 512(b)(13)(E).
---------------------------------------------------------------------------
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).

Reasons for Change \608\

---------------------------------------------------------------------------
\608\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
In enacting the special rule described above, the Pension
Protection Act also required that, not later than January 1,
2009, the Secretary shall submit a report 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 special rule
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 is required to 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. Considering that the report is not due until
January 1, 2009, the Congress believes it is appropriate to
extend the special rule.

Explanation of Provision

The provision extends the special rule of the Pension
Protection Act to payments received or accrued before January
1, 2010. Accordingly, under the provision, payments of rent,
royalties, annuities, or interest income by a controlled
organization to a controlling organization pursuant to a
binding written contract in effect on August 17, 2006 (or
renewal of such a contract on substantially similar terms), may
be includible in the unrelated business taxable income of the
controlling organization only to the extent the payment exceeds
the amount of the payment determined under the principles of
section 482 (i.e., at arm's length). Any such excess is subject
to 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.

Effective Date

The provision is effective for payments received or accrued
after December 31, 2007.

G. Basis Adjustment to Stock of S Corporations Making Charitable
Contributions of Property (sec. 307 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.\609\ 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.\610\
---------------------------------------------------------------------------
\609\ Sec. 1366(a)(1)(A).
\610\ Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------
In the case of contributions made in taxable years
beginning after December 31, 2005, and before January 1, 2008,
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 is equal to the shareholder's pro rata share of
the adjusted basis of the contributed property. For
contributions made in taxable years beginning after December
31, 2007, the amount of the reduction is the shareholder's pro
rata share of the fair market value of the contributed
property.

Reasons for Change \611\

---------------------------------------------------------------------------
\611\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the present-law treatment of
contributions of property by S corporations is appropriate and
should be extended.

Explanation of Provision

The Act extends the rule relating to the basis reduction on
account of charitable contributions of property for two years
to contributions made in taxable years beginning before January
1, 2010.

Effective Date

The provision applies to contributions made in taxable
years beginning after December 31, 2007.

H. Suspend Limitation on Rate of Rum Excise Tax Cover Over to Puerto
Rico and Virgin Islands (sec. 308 of the Act and sec. 7652(f) of the
Code)

Present Law

A $13.50 per proof gallon \612\ excise tax is imposed on
distilled spirits produced in or imported (or brought) into the
United States.\613\ 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).\614\
---------------------------------------------------------------------------
\612\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\613\ Sec. 5001(a)(1).
\614\ 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.\615\ 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, 2007).
---------------------------------------------------------------------------
\615\ 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.\616\ 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.\617\ All of the amounts covered over are subject to
the limitation.
---------------------------------------------------------------------------
\616\ Sec. 7652(e)(2).
\617\ Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

Reasons for Change \618\

---------------------------------------------------------------------------
\618\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that it is appropriate to extend the
increase in the amount of the rum excise tax covered over to
these possessions.

Explanation of Provision

The provision suspends for two years 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, 2007 and before January 1, 2010. After December 31, 2009,
the cover over amount reverts to $10.50 per proof gallon.

Effective Date

The change in the cover over rate is effective for articles
brought into the United States after December 31, 2007.

I. Extension of Economic Development Credit for American Samoa (sec.
309 of the Act and sec. 119 of Pub. L. No. 109-432)

Present and Prior Law

In general

For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S.
possessions were eligible for the possession tax credit.\619\
This credit offset the U.S. tax imposed on certain income
related to operations in the U.S. possessions.\620\ For
purposes of the credit, possessions included, among other
places, American Samoa. Subject to certain limitations
described below, the amount of the possession tax credit
allowed to any domestic corporation equaled the portion of that
corporation's U.S. tax that was 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.\621\ No deduction or foreign tax
credit was allowed for any possessions or foreign tax paid or
accrued with respect to taxable income that was taken into
account in computing the credit under section 936.\622\ The
section 936 credit generally expired for taxable years
beginning after December 31, 2005, but a special credit,
described below, was allowed with respect to American Samoa.
---------------------------------------------------------------------------
\619\ Secs. 27(b), 936.
\620\ 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.
\621\ 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.
\622\ Sec. 936(c).
---------------------------------------------------------------------------
To qualify for the possession tax credit for a taxable
year, a domestic corporation was required to satisfy two
conditions. First, the corporation was required to 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 was
required to 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 was available only to a
corporation that qualified as an existing credit claimant. The
determination of whether a corporation was an existing credit
claimant was made separately for each possession. The
possession tax credit was computed separately for each
possession with respect to which the corporation was an
existing credit claimant, and the credit was subject to either
an economic activity-based limitation or an income-based
limitation.

Qualification as existing credit claimant

A corporation was 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.\623\ A corporation
that added 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) ceased 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 was added.
---------------------------------------------------------------------------
\623\ 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.
---------------------------------------------------------------------------

Economic activity-based limit

Under the economic activity-based limit, the amount of the
credit determined under the rules described above was not
permitted to 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 was permitted to elect to apply a limit equal to the
applicable percentage of the credit that otherwise would have
been allowable with respect to possession business income; in
taxable years beginning in 1998 and subsequent years, the
applicable percentage was 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 was
reduced by special limitation rules. These phase-out period
limitation rules did 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 generally was repealed for
all possessions, including Guam, American Samoa, and the
Northern Mariana Islands, for all taxable years beginning after
2005, but a modified credit was allowed for activities in
American Samoa.

American Samoa economic development credit

A domestic corporation that was 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 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 credit is allowed for the first two taxable
years of a corporation that begin after December 31, 2005, and
before January 1, 2008.
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 previously) 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 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 credit is not available for taxable years beginning
after December 31, 2007.

Reasons for Change \624\

---------------------------------------------------------------------------
\624\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Congress believes that it is important to encourage
investment in American Samoa. With the expiration of the
possession tax credit, the American Samoa economic development
credit is an appropriate temporary provision while Congress
considers long-term tax policy toward the U.S. possessions.

Explanation of Provision

The provision allows the American Samoa economic
development credit to apply for the first four taxable years of
a corporation that begin after December 31, 2005, and before
January 1, 2010.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

J. Extension of Mine Rescue Team Training Credit (sec. 310 of the Act
and sec. 45N of the Code)

Present Law

As part of the general business credit, 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.\625\ 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.\626\
---------------------------------------------------------------------------
\625\ Sec. 45N(a).
\626\ Sec. 45N(b).
---------------------------------------------------------------------------
An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\627\ The term ``wages'' has the meaning given to such
term by section 3306(b) (determined without regard to any
dollar limitation contained in that section).\628\
---------------------------------------------------------------------------
\627\ Sec. 45N(c).
\628\ Sec. 45N(d).
---------------------------------------------------------------------------
No deduction is allowed for the amount of the expenses
otherwise deductible which is equal to the amount of the
credit.\629\ The credit does not apply to taxable years
beginning after December 31, 2008.
---------------------------------------------------------------------------
\629\ Sec. 280C(e).
---------------------------------------------------------------------------

Explanation of Provision

The provision extends the termination of the credit for one
year to taxable years beginning after December 31, 2009.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

K. Extension of Election To Expense Advanced Mine Safety Equipment
(sec. 311 of the Act and sec. 179E 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'').\630\ 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 20 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.
---------------------------------------------------------------------------
\630\ Sec. 168.
---------------------------------------------------------------------------
In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to deduct (or
``expense'') such costs under section 179. Present law provides
that the maximum amount a taxpayer may expense for taxable
years beginning in 2008 is $250,000 of the cost of qualifying
property placed in service for the taxable year.\631\ For
taxable years beginning in 2009 and 2010, the limitation is
$125,000. 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. For taxable
years beginning in 2008, the $250,000 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
$800,000. The reduction amount is $500,000 for taxable years
beginning in 2009 and 2010. The $125,000 and $500,000 amounts
are indexed for inflation in taxable years beginning in 2009
and 2010.
---------------------------------------------------------------------------
\631\ Additional section 179 incentives are provided with respect
to qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A) and a renewal community
(sec. 1400J).
---------------------------------------------------------------------------
A taxpayer may elect to treat 50 percent of the cost of any
qualified advanced mine safety equipment property as an expense
in the taxable year in which the equipment is placed in
service.\632\ ``Qualified advanced mine safety equipment
property'' means any advanced mine safety equipment property
for use in any underground mine located in the United States
the original use of which commences with the taxpayer and which
is placed in service after December 20, 2006, and before
January 1, 2009.\633\
---------------------------------------------------------------------------
\632\ Sec. 179E(a).
\633\ Secs. 179E(c) and (g).
---------------------------------------------------------------------------
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.\634\
---------------------------------------------------------------------------
\634\ Sec. 179E(d).
---------------------------------------------------------------------------
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
under section 179E.\635\ In addition, a taxpayer making an
election under section 179E must file with the Secretary a
report containing information with respect to the operation of
the mines of the taxpayer as required by the Secretary.\636\
---------------------------------------------------------------------------
\635\ Sec. 179E(e).
\636\ Sec. 179E(f).
---------------------------------------------------------------------------

Explanation of Provision

The provision extends for one year, to December 31, 2009,
the placed in service termination date for the present-law rule
relating to expensing of mine safety equipment.

Effective Date

The provision is effective for property placed in service
after December 31, 2008.

L. Extension of Deduction for Income Attributable to Domestic
Production Activities in Puerto Rico (sec. 312 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 that income. For taxable years
beginning in 2005 and 2006, the deduction is three percent of
qualified production activities income and for taxable years
beginning in 2007, 2008, and 2009, the deduction is six percent
of qualified production activities income. For taxpayers
subject to the 35-percent corporate income tax rate, the nine-
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 those receipts and (2) other expenses,
losses, or deductions which are properly allocable to those
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 \637\ 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 \638\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.
---------------------------------------------------------------------------
\637\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
\638\ 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 the 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.
---------------------------------------------------------------------------

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.\639\ Wages paid to bona fide
residents of Puerto Rico generally are not included in the wage
limitation amount.\640\
---------------------------------------------------------------------------
\639\ 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.
\640\ Sec. 3401(a)(8)(C).
---------------------------------------------------------------------------

Rules for Puerto Rico

When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\641\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts from sources
within the Commonwealth of Puerto Rico, the term ``United
States'' includes the Commonwealth of Puerto Rico, but only if
all of the taxpayer's gross receipts are taxable under the
Federal income tax for individuals or corporations.\642\ In
computing the 50-percent wage limitation, that taxpayer is
permitted to take into account wages paid to bona fide
residents of Puerto Rico for services performed in Puerto
Rico.\643\
---------------------------------------------------------------------------
\641\ Sec. 7701(a)(9).
\642\ Sec. 199(d)(8)(A).
\643\ Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
The special rules for Puerto Rico apply only with respect
to the first two taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2008.

Reasons for Change \644\

---------------------------------------------------------------------------
\644\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
Congress believes that given the expiration of the Puerto
Rico economic activity credit after 2005, it is appropriate to
use other means to encourage investment in Puerto Rico. In
particular, Congress believes it is appropriate to treat a U.S.
taxpayer's manufacturing activities in Puerto Rico in a manner
similar to the treatment of manufacturing activities in the
United States.

Explanation of Provision

The provision allows the special domestic production
activities rules for Puerto Rico to apply for the first four
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2010.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

M. Extend and Modify Qualified Zone Academy Bonds (sec. 313 of the Act
and new sec. 54E 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. These can include tax-
exempt bonds which finance public schools.\645\ An issuer must
file with the IRS certain information about the bonds issued in
order for that bond issue to be tax-exempt.\646\ 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.
---------------------------------------------------------------------------
\645\ Sec. 103.
\646\ Sec. 149(e).
---------------------------------------------------------------------------
The tax exemption for State and local bonds does not apply
to any arbitrage bond.\647\ 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.\648\ 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.
---------------------------------------------------------------------------
\647\ Sec. 103(a) and (b)(2).
\648\ Sec. 148.
---------------------------------------------------------------------------

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States
and local governments were given the authority to issue
``qualified zone academy bonds.'' \649\ A total of $400 million
of qualified zone academy bonds is authorized to be issued
annually in calendar years 1998 through 2007. 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.
---------------------------------------------------------------------------
\649\ 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. Eligible financial institutions are limited to: (i) a
bank (within the meaning of section 581 of the Code); (ii) an
insurance company to which subchapter L of the Code applies;
and (iii) a corporation actively engaged in the business of
lending money. A taxpayer holding a qualified zone academy bond
on the credit allowance date is entitled to a credit. The
credit is includible 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 Treasury Department sets the credit rate at a rate
estimated to allow issuance of qualified zone academy bonds
without discount and without interest cost to the issuer. The
maximum term of the bond is determined by the Treasury
Department, so that the present value of the obligation to
repay the principal on the bond is 50 percent of the face value
of the bond.
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) at
least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment 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.
The Tax Relief and Health Care Act of 2006 (``TRHCA'')
\650\ imposed the arbitrage requirements which generally apply
to interest-bearing tax-exempt bonds on qualified zone academy
bonds. In addition, an issuer of qualified zone academy bonds
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
qualified zone academy bonds 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 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. Issuers of qualified
zone academy bonds are required to report issuance to the IRS
in a manner similar to the information returns required for
tax-exempt bonds.
---------------------------------------------------------------------------
\650\ Pub. L. No. 109-432 (2006).
---------------------------------------------------------------------------

Reasons for Change \651\

---------------------------------------------------------------------------
\651\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that tax-credit bonds provide an
effective means of subsidizing rehabilitation and repairs to
public school facilities. Thus, the Congress believes that the
extension of authority to issue qualified zone academy bonds is
appropriate in light of the educational needs that exist today.
However, the Congress also recognizes that modifications to the
present law qualified zone academy bond program may be
necessary to increase the marketability of such bonds. These
modifications also will promote additional investment in the
beneficiary public schools.

Explanation of Provision

The provision extends and modifies the present-law
qualified zone academy bond program. The provision authorizes
issuance of up to $400 million of qualified zone academy bonds
annually through 2009.
For bonds issued after the date of enactment, the provision
also modifies the spending and arbitrage rules that apply to
qualified zone academy bonds. The provision modifies the
spending rule by requiring 100 percent of available project
proceeds to be spent on qualified zone academy property. In
addition, the provision modifies the arbitrage rules by
providing that available project proceeds invested during the
three-year period beginning on the date of issue are not
subject to the arbitrage restrictions (i.e., yield restriction
and rebate requirements). The provision defines ``available
project proceeds'' as proceeds from the sale of an issue of
qualified zone academy bonds, less issuance costs (not to
exceed two percent) and any investment earnings on such
proceeds. Thus, available project proceeds invested during the
three-year spending period may be invested at unrestricted
yields, but the earnings on such investments must be spent on
qualified zone academy property.
The provision provides that amounts invested in a reserve
fund are not subject to the arbitrage restrictions to the
extent: (1) such fund is funded at a rate not more rapid than
equal annual installments; (2) such fund is funded in a manner
reasonably expected to result in an amount not greater than an
amount necessary to repay the issue; and (3) the yield on such
fund is not greater than the average annual interest rate of
tax-exempt obligations having a term of 10 years or more that
are issued during the month the qualified zone academy bonds
are issued.

Effective Date

The provision applies to bonds issued after the date of
enactment (October 3, 2008).

N. Indian Employment Tax Credit (sec. 314 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 C.F.R. 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 adjustment for inflation is
currently $40,000).\652\ 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.
---------------------------------------------------------------------------
\652\ See Form 8845, Indian Employment Credit (Rev. Dec. 2006).
---------------------------------------------------------------------------
The Indian employment tax credit is not available for
taxable years beginning after December 31, 2007.

Reasons for Change \653\

---------------------------------------------------------------------------
\653\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that extending the Indian employment
credit will expand business and employment opportunities within
Indian reservations.

Explanation of Provision

The provision extends for 2 years the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2009).

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

O. Accelerated Depreciation for Business Property on Indian
Reservations (sec. 315 of the Act and sec. 168(j) 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:

3-year property......................................... 2 years
5-year property......................................... 3 years
7-year property......................................... 4 years
10-year property........................................ 6 years
15-year property........................................ 9 years
120-year property....................................... 12 years
Nonresidential real property............................ 22 years

``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above 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;
\654\ and (4) is not property placed in service for purposes of
conducting gaming activities.\655\ 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).\656\
---------------------------------------------------------------------------
\654\ For these purposes, related persons is defined in Sec.
465(b)(3)(C).
\655\ Sec. 168(j)(4)(A).
\656\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 or section
4(10) 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 C.F.R. 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 reservations is
available with respect to property placed in service on or
after January 1, 1994, and before January 1, 2008.

Reasons for Change \657\

---------------------------------------------------------------------------
\657\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that extending the depreciation
incentive will encourage economic development within Indian
reservations and expand employment opportunities on such
reservations.

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, 2009).

Effective Date

The provision is effective for property placed in service
after December 31, 2007.

P. Railroad Track Maintenance (sec. 316 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.\658\
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.\659\ 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.
---------------------------------------------------------------------------
\658\ Sec. 45G(a).
\659\ Sec. 45G(b)(1).
---------------------------------------------------------------------------
Qualified railroad track maintenance expenditures are
defined as 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 expenditure given by the Class II or Class III
railroad which made the assignment of such track).\660\
---------------------------------------------------------------------------
\660\ Sec. 45G(d).
---------------------------------------------------------------------------
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.\661\
---------------------------------------------------------------------------
\661\ Sec. 45G(c).
---------------------------------------------------------------------------
The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\662\
---------------------------------------------------------------------------
\662\ Sec. 45G(e)(1).
---------------------------------------------------------------------------
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.

Reasons for Change \663\

---------------------------------------------------------------------------
\663\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that Class II and Class III railroads
are an important part of the nation's railway system.
Therefore, the Congress believes that this incentive for
railroad track maintenance expenditures should be extended.

Explanation of Provision

The provision extends the present law provision for two
years, for qualified railroad track maintenance expenditures
paid or incurred before January 1, 2010. The provision also
permits the railroad track maintenance credit to reduce a
taxpayer's tax liability below its tentative minimum tax.

Effective Date

The extension of present law is effective for expenditures
paid or incurred during taxable years beginning after December
31, 2007. The modification to the alternative minimum tax rules
applies to credits determined under section 45G in taxable
years beginning after December 31, 2007, and to carrybacks of
such credits.

Q. Seven-Year Cost Recovery Period for Motorsports Racing Track
Facility (sec. 317 of the Act and sec. 168 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.\664\ 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. Land improvements (such as roads and
fences) are recovered over 15 years. An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years. Additionally, a
motorsports entertainment complex placed in service before
December 31, 2007 is assigned a recovery period of seven
years.\665\ For these purposes, a motorsports entertainment
complex means a racing track facility which is permanently
situated on land that during the 36 month period following its
placed in service date it hosts a racing event.\666\ The term
motorsports entertainment complex also includes ancillary
facilities, land improvements (e.g., parking lots, sidewalks,
fences), support facilities (e.g., food and beverage retailing,
souvenir vending), and appurtenances associated with such
facilities (e.g., ticket booths, grandstands).
---------------------------------------------------------------------------
\664\ Sec. 168.
\665\ Sec. 168(e)(3)(C)(ii).
\666\ Sec. 168(i)(15).
---------------------------------------------------------------------------

Reasons for Change \667\

---------------------------------------------------------------------------
\667\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that extending the depreciation
incentive will encourage economic development. The Congress
also believes that taxpayers should not be required to recover
the costs of motorsports entertainment complex beyond the
useful life of the investment. Therefore, the provision extends
the seven-year recovery period for motorsports entertainment
complex property.

Explanation of Provision

The provision extends the present law seven-year recovery
period for two years through December 31, 2009.

Effective Date

The provision is effective for property placed in service
after December 31, 2007.

R. Expensing of Environmental Remediation Costs (sec. 318 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.\668\ 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.
---------------------------------------------------------------------------
\668\ Sec. 162.
---------------------------------------------------------------------------
Taxpayers may elect to treat certain environmental
remediation expenditures paid or incurred before January 1,
2008, that would otherwise be chargeable to capital account as
deductible in the year paid or incurred.\669\ 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.\670\ and section 263A, are treated as qualified
environmental remediation expenditures.
---------------------------------------------------------------------------
\669\ Sec. 198.
\670\ 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'') \671\
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, as well as petroleum
products defined in section 4612(a)(3) of the Code.
---------------------------------------------------------------------------
\671\ Pub. L. No. 96-510 (1980)
---------------------------------------------------------------------------
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.
Section 1400N(g) permits the expensing of environmental
remediation expenditures paid or incurred on or after August
28, 2005, and before January 1, 2008, to abate contamination at
qualified contaminated sites located in the Gulf Opportunity
Zone.

Reasons for Change \672\

---------------------------------------------------------------------------
\672\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the expensing of brownfields
remediation costs promotes the goal of environmental
remediation and promotes new investment and employment
opportunities by lowering the net capital cost of a development
project. Therefore, the Congress believes it is appropriate to
extend the present-law provision permitting the expensing of
these environmental remediation costs.

Explanation of Provision

The provision extends the present-law expensing provision
under section 198 for two years through December 31, 2009.

Effective Date

The provision is effective for expenditures paid or
incurred after December 31, 2007.

S. Extension of the Hurricane Katrina Work Opportunity Tax Credit (sec.
319 of the bill)

Present Law

Work opportunity tax credit

In general
The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of nine
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally an employer is eligible for the credit only for
qualified wages paid to members of a targeted group. There are
nine targeted groups: (1) families receiving Temporary
Assistance for Needy Families Program (``TANF''); (2) qualified
veterans; (3) qualified ex-felons; (4) designated community
residents; (5) vocational rehabilitation referrals; (6)
qualified summer youth employees; (7) qualified food stamp
recipients; (8) qualified supplemental security income
(``SSI'') benefit recipients; and (9) qualified long-term
family assistance recipients.
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.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients 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).
There are two exceptions to this general rule. First, 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). Second, with respect to qualified veterans who are
entitled to compensation for a service-connected disability,
the maximum credit is $4,800 because qualified first-year wages
are $12,000 rather than $6,000 for such individuals.\673\
Except for long-term family assistance recipients, no credit is
allowed for second-year wages.
---------------------------------------------------------------------------
\673\ The expanded definition of qualified first-year wages does
not apply to the veterans qualified with reference to a food stamp
program, as defined under present law.
---------------------------------------------------------------------------
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-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 28th 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. For these
purposes, a pre-screening notice is a document (in such form as
the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.
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.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than
fifty-percent owner of the entity. 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 August 31,
2011.

Work Opportunity Tax Credit for Hurricane Katrina Employees

In general
The Katrina Emergency Tax Relief Act of 2005 provided 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 was: (1) an individual who on
August 28, 2005, had a principal place of abode in the core
disaster area and was hired during the two-year period
beginning on such date for a position, the principal place of
employment of which was 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 was 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 was waived
for such individuals. In lieu of the certification requirement,
an individual may have provided 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 was 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.
Definitions
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.
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 the Robert T. Stafford Disaster Relief
and Emergency Assistance Act.

Reasons for Change \674\

---------------------------------------------------------------------------
\674\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the work opportunity tax credit
should continue to be available as an incentive to provide
employment opportunities in the core disaster area of Hurricane
Katrina.

Explanation of Provision

The provision extends through August 28, 2009, the work
opportunity tax credit for certain Hurricane Katrina employees
employed within the core disaster area. For this purpose, a
Hurricane Katrina employee employed within the core disaster
area is an individual who on August 28, 2005, had a principal
place of abode in the core disaster area and is hired on or
after August 28, 2005 and before August 29, 2009 for a
position, the principal place of employment of which was
located in the core disaster area.\675\ The other special rules
(e.g., certification and previous employment) for Hurricane
Katrina employees apply.
---------------------------------------------------------------------------
\675\ The prior-law work opportunity tax credit for Katrina
employees hired to a new place of employment outside of the core
disaster area is not extended by this provision.
---------------------------------------------------------------------------

Effective Date

The provision is effective for individuals hired after
August 28, 2007, and before August 29, 2009.

T. Extension of Increased Rehabilitation Credit for Structures in the
Gulf Opportunity Zone (sec. 320 of the bill and 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.
Present law 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. The provision is
effective for expenditures incurred on or after August 28,
2005, for taxable years ending on or after August 28, 2005.

Explanation of Provision

The provision extends for one additional year the increase
in the rehabilitation credit from 20 to 26 percent, and from 10
to 13 percent, respectively, with respect to any certified
historic structure or qualified rehabilitated building located
in the Gulf Opportunity Zone. Thus, the increase applies for
qualified rehabilitation expenditures with respect to such
buildings or structures incurred before January 1, 2010.

Effective Date

The provision is effective upon enactment (October 3,
2008).

U. Extension of the Enhanced Charitable Deduction for Contributions of
Computer Technology and Equipment (sec. 321 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.\676\
---------------------------------------------------------------------------
\676\ Sec. 170(e)(1).
---------------------------------------------------------------------------
Under present law, a taxpayer's deduction for charitable
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 computer contribution.''
\677\ 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 expires for any contribution made during any
taxable year beginning after December 31, 2007.
---------------------------------------------------------------------------
\677\ Secs. 170(e)(4) and 170(e)(6).
---------------------------------------------------------------------------
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 or assembled the
property, not later than the date construction or assembly of
the property is substantially completed.\678\ The original use
of the property must be by the donor or the donee,\679\ and in
the case of the donee, 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 or assembled by the taxpayer,
the rules applicable to qualified research contributions apply.
Contributions may be made to private foundations under certain
conditions.\680\
---------------------------------------------------------------------------
\678\ 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).
\679\ This requirement does not apply if the property was
reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
\680\ Sec. 170(e)(6)(C).
---------------------------------------------------------------------------

Reasons for Change \681\

---------------------------------------------------------------------------
\681\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that public libraries and educational
organizations continue to benefit from corporate contributions
of computer technology and equipment and that it is appropriate
to extend the enhanced deduction for such contributions.

Explanation of Provision

The provision extends the enhanced deduction for computer
technology and equipment to apply to contributions made during
any taxable year beginning after December 31, 2007, and before
January 1, 2010.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2007.

V. Tax Incentives for Investment in the District of Columbia (sec. 322
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 remained in effect for the period
from January 1, 1998, through December 31, 2007. 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.''
\682\
---------------------------------------------------------------------------
\682\ 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
eligible 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.\683\ 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.\684\
In addition, the $15,000 cap is reduced by any wages taken into
account in computing the work opportunity tax credit.\685\ The
wage credit may be used to offset up to 25 percent of
alternative minimum tax liability.\686\
---------------------------------------------------------------------------
\683\ Sec. 280C(a).
\684\ Secs. 1400H(a) and 1396(c)(3)(A).
\685\ Secs. 1400H(a) and 1396(c)(3)(B).
\686\ 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.\687\ 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
($500,000 for taxable years beginning after 2006 and before
2011). 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.\688\ Special rules are provided in
the case of property that is substantially renovated by the
taxpayer.
---------------------------------------------------------------------------
\687\ Sec. 1397A.
\688\ 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.\689\ 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.
---------------------------------------------------------------------------
\689\ 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.\690\ 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.
---------------------------------------------------------------------------
\690\ 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, 2008. 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.\691\ However, no gain attributable to periods before
January 1, 1998, and after December 31, 2012, is qualified
capital gain.
---------------------------------------------------------------------------
\691\ 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, 2007.\692\
---------------------------------------------------------------------------
\692\ Sec. 1400C(i).
---------------------------------------------------------------------------

Reasons for Change \693\

---------------------------------------------------------------------------
\693\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that it continues to be important to
provide tax incentives to individuals and businesses in the
D.C. Zone and that it is appropriate to extend such incentives.

Explanation of Provision

The provision extends the designation of the D.C. Zone for
two years (through December 31, 2009), thus extending the wage
credit and section 179 expensing for one year.
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, 2009.
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, 2009.

Effective Date

The provision is effective for periods beginning after,
bonds issued after, acquisitions after, and property purchased
after December 31, 2007.

W. Extension of the Enhanced Charitable Deduction for Contributions of
Food Inventory; Suspension of Percentage Limits on Certain
Contributions of Food Inventory (sec. 323 of the Act and sec. 170 of
the Code)

Present Law

Charitable contributions 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 in general

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 under
this provision.

Special percentage limitation rules for qualified conservation
contributions

The 30-percent contribution base limitation on
contributions of capital gain property by individuals does not
apply to qualified conservation contributions (as defined in
section 170(h)). 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.\694\
These contributions are not taken into account in determining
the amount of other allowable charitable contributions.
Individuals are allowed to carry any qualified conservation
contributions that exceed the 50-percent limitation forward for
up to 15 years.
---------------------------------------------------------------------------
\694\ Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
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 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.\695\
---------------------------------------------------------------------------
\695\ Sec. 170(b)(2)(B).
---------------------------------------------------------------------------
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.

General rules regarding contributions of food inventory

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.\696\ In general, a C corporation's charitable
contribution deductions for a year may not exceed 10 percent of
the corporation's taxable income.\697\ 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.
---------------------------------------------------------------------------
\696\ ASec. 170(e)(3).
\697\ Sec. 170(b)(2).
---------------------------------------------------------------------------
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.\698\ 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.
---------------------------------------------------------------------------
\698\ Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
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.\699\
---------------------------------------------------------------------------
\699\ 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).
---------------------------------------------------------------------------

Temporary rule expanding and modifying the enhanced deduction for
contributions of food inventory

Under a temporary provision enacted as part of the Katrina
Emergency Tax Relief Act of 2005 \700\ and extended by the
Pension Protection Act of 2006,\701\ 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.\702\ 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, 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.\703\
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\700\ Pub. L. No. 109-73 (2005).
\701\ Pub. L. No. 109-280 (2006).
\702\ Sec. 170(e)(3)(C).
\703\ 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 temporary provision, the enhanced deduction for
food 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 temporary provision does not apply to contributions
made after December 31, 2007.

Reasons for Change \704\

---------------------------------------------------------------------------
\704\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that charitable organizations benefit
from charitable contributions of food by businesses other than
C corporations and that the enhanced deduction is a useful
incentive for the making of such contributions. Accordingly,
the Congress believes it is appropriate to extend the special
rule for charitable contributions of food inventory.

Explanation of Provision

The Act extends the expansion of, and modifications to, the
enhanced deduction for charitable contributions of food
inventory to contributions made before January 1, 2010.
In addition, the Act temporarily suspends the percentage
limitations on certain contributions of food inventory.
Specifically, in the case of a qualified farmer or rancher (as
defined in section 170(b)(1)(E)), a charitable contribution of
food inventory eligible for the special enhanced deduction
rules described above and made during the period beginning on
the date of enactment (October 3, 2008) and ending on December
31, 2008, is treated as a qualified conservation contribution
for purposes of section 170(b)(1)(E) (in the case of an
individual) or 170(b)(1)(B) (in the case of a corporation).
As a result, in the case of an individual, the deduction
for such contributions is allowed up to the amount by which the
taxpayer's contribution base exceeds the deduction for other
allowable charitable contributions. In the case of a
corporation, the deduction for such 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 allowable charitable contributions. Any excess qualifying
contributions may be carried forward to the succeeding 15
taxable years (in a manner consistent with the rules of section
170(d)(1)).

Effective Date

The extension of the special enhanced deduction rules
regarding contributions of food inventory is effective for
contributions made after December 31, 2007. The temporary
suspension of the percentage limitations on certain charitable
contributions of food inventory is effective for taxable years
ending after the date of enactment (October 3, 2008).

X. Extension of the Enhanced Charitable Deduction for Contributions of
Book Inventory (sec. 324 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.
In general, 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.\705\ In general, a C
corporation's charitable contribution deductions for a year may
not exceed 10 percent of the corporation's taxable income.\706\
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.
---------------------------------------------------------------------------
\705\ Sec. 170(e)(3).
\706\ Sec. 170(b)(2).
---------------------------------------------------------------------------
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.\707\ 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.
---------------------------------------------------------------------------
\707\ Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
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 \708\ expanded
the generally applicable enhanced deduction for C corporations
to certain qualified book contributions made after August 28,
2005, and before January 1, 2006. The Pension Protection Act of
2006 \709\ extended the deduction for qualified book
contributions to contributions made before January 1, 2008. 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 for qualified book contributions 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.
The donee also must make the certifications required for the
generally applicable enhanced deduction, i.e., the donee will
(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.
---------------------------------------------------------------------------
\708\ Pub. L. No. 109-73 (2005).
\709\ Pub. L. No. 109-180 (2006).
---------------------------------------------------------------------------

Reasons for Change \710\

---------------------------------------------------------------------------
\710\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that public schools benefit from
charitable contributions of book inventory and that the
enhanced deduction is a useful incentive for the making of such
contributions. Accordingly, the Congress believes it is
appropriate to extend the enhanced deduction for charitable
contributions of book inventory to public schools.

Explanation of Provision

The provision extends the enhanced deduction for
contributions of book inventory to contributions made before
January 1, 2010.

Effective Date

The provision is effective for contributions made after
December 31, 2007.

TITLE IV--EXTENSION OF TAX ADMINISTRATION PROVISIONS

A. Extension of IRS Authority to Fund Undercover Operations (sec. 401
of the Act and sec. 7608 of the Code)

Present Law

IRS undercover operations are statutorily exempt \711\ from
the generally applicable 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 Code
permits the IRS to use proceeds from an undercover operation,
through 2007. The IRS is required to conduct a detailed
financial audit of large undercover operations in which the IRS
is churning funds and to provide an annual audit report to the
Congress on all such large undercover operations.
---------------------------------------------------------------------------
\711\ Sec. 7608(c).
---------------------------------------------------------------------------

Reasons for Change \712\
---------------------------------------------------------------------------

\712\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes it is appropriate to permanently
extend the IRS's authority to use proceeds from undercover
operations to pay additional enforcement expenses. This
authority provides the IRS with an important enforcement tool
and it is similar to the authority provided to other law
enforcement agencies.

Explanation of Provision

The provision makes permanent the IRS's authority to use
proceeds from an undercover operation to pay additional
expenses incurred in the undercover operation.

Effective Date

The provision is effective for operations conducted after
date of enactment (October 3, 2008).

B. Authority to Disclose Information Related to Terrorist Activity Made
Permanent (sec. 402 of the Act and sec. 6103 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.
Disclosure provisions relating to emergency circumstances
The IRS is authorized to disclose return information to
apprise Federal law enforcement agencies of danger of death or
physical injury to an individual or to apprise Federal law
enforcement agencies of imminent flight of an individual from
Federal prosecution.\713\ This authority has been used in
connection with the investigation of terrorist activity.\714\
---------------------------------------------------------------------------
\713\ Sec. 6103(i)(3)(B).
\714\ See, Joint Committee on Taxation, Disclosure Report for
Public Inspection Pursuant to Internal Revenue Code Section
6103(p)(3)(C) for Calendar Year 2002 (JCX 29-04) April 6, 2004.
---------------------------------------------------------------------------
Disclosure provisions relating specifically to terrorist
activity
Also 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.\715\
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\715\ 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(1).
---------------------------------------------------------------------------
The term ``international terrorism'' means activities that
involve violent acts or acts dangerous to human life that are a
violation of the criminal laws of the United States or of any
State, or that would be a criminal violation if committed
within the jurisdiction of the United States or of any State;
appear to be intended to intimidate or coerce a civilian
population, to influence the policy of a government by
intimidation or coercion, or to affect the conduct of a
government by mass destruction, assassination, or kidnapping;
and occur primarily outside the territorial jurisdiction of the
United States, or transcend national boundaries in terms of the
means by which they are accomplished, the persons they appear
intended to intimidate or coerce, or the locale in which their
perpetrators operate or seek asylum. The term ``domestic
terrorism'' means activities that involve acts dangerous to
human life that are a violation of the criminal laws of the
United States or of any State; appear to be intended to
intimidate or coerce a civilian population, to influence the
policy of a government by intimidation or coercion or to affect
the conduct of a government by mass destruction, assassination,
or kidnapping; and occur primarily within the territorial
jurisdiction of the United States.
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, 2007. 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.

Reasons for Change \716\
---------------------------------------------------------------------------

\716\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the disclosure provisions
relating to terrorist activities assist in the country's
investigations of and response to terrorism. It is the
understanding of the Congress that this assistance has been
impaired by the expiration of the provisions on December 31,
2007. The Congress believes that it is appropriate to make the
provisions permanent to avoid such interruptions in the future.

Explanation of Provision

The provision makes permanent the present-law disclosure
authority relating to terrorist activities.

Effective Date

The provision is effective for disclosures made on or after
the date of enactment (October 3, 2008).

TITLE V--ADDITIONAL TAX RELIEF AND OTHER TAX PROVISIONS

SUBTITLE A--GENERAL PROVISIONS

A. Refundable Child Credit (sec. 501 of the Act and sec. 24(d) of the
Code)

Present Law

An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000 through 2010, and $500 thereafter. A child who is not
a citizen, national, or resident of the United States cannot be
a qualifying child.
The credit is phased out for individuals with income over
certain threshold amounts. Specifically, the otherwise
allowable child tax credit is reduced by $50 for each $1,000
(or fraction thereof) of modified adjusted gross income over
$75,000 for single individuals or heads of households, $110,000
for married individuals filing joint returns, and $55,000 for
married individuals filing separate returns. For purposes of
this limitation, modified adjusted gross income includes
certain otherwise excludable income earned by U.S. citizens or
residents living abroad or in certain U.S. territories.
The credit is allowable against the regular tax and the
alternative minimum tax. To the extent the child credit exceeds
the taxpayer's tax liability, the taxpayer is eligible for a
refundable credit (the additional child tax credit) equal to 15
percent of earned income in excess of a threshold dollar amount
(the ``earned income'' formula). The threshold dollar amount is
$12,050 (2008), and is indexed for inflation.
Families with three or more children may determine the
additional child tax credit using the ``alternative formula,''
if this results in a larger credit than determined under the
earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the
taxpayer's social security taxes exceed the taxpayer's earned
income credit (``EIC'').
Earned income is defined as the sum of wages, salaries,
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EIC, which also includes the
preceding items in its definition of earned income, the
additional child tax credit is based only on earned income to
the extent it is included in computing taxable income. For
example, some ministers' parsonage allowances are considered
self-employment income, and thus are considered earned income
for purposes of computing the EIC, but the allowances are
excluded from gross income for individual income tax purposes,
and thus are not considered earned income for purposes of the
additional child tax credit since the income is not included in
taxable income.

Reasons for Change \717\
---------------------------------------------------------------------------

\717\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes it is appropriate to lower the
threshold earnings level for the refundable child credit in
order to increase the amount of available child credit for
lower income households.

Explanation of Provision

The Act modifies the earned income formula for the
determination of the refundable child credit to apply to 15
percent of earned income in excess of $8,500 for taxable years
beginning in 2008.

Effective Date

The provision is effective for taxable years beginning in
2008.

B. Provisions Related to Film and Television Productions (sec. 502 of
the Act and secs. 181 and 199 of the Code)

Present Law

Section 181

The Modified Accelerated Cost Recovery System (``MACRS'')
does not apply to certain property, including any motion
picture film, video tape, or sound recording, or to any other
property if the taxpayer elects to exclude such property from
MACRS and the taxpayer properly applies a unit-of-production
method or other method of depreciation not expressed in a term
of years. Section 197 does not apply to certain intangible
property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or
similar property not acquired in a transaction (or a series of
related transactions) involving the acquisition of assets
constituting a trade or business or substantial portion
thereof. Thus, the recovery of the cost of a film, video tape,
or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be
determined under either the MACRS depreciation provisions or
under the section 197 amortization provisions. The cost
recovery of such property may be determined under section 167,
which allows a depreciation deduction for the reasonable
allowance for the exhaustion, wear and tear, or obsolescence of
the property. 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, and patents are eligible to be
recovered using the income forecast method of depreciation.
Under section 181, taxpayers may elect \718\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2009, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\719\ A qualified
film or television production is one in which the aggregate
cost is $15 million or less.\720\ The threshold is increased to
$20 million if a significant amount of the production
expenditures are incurred in areas eligible for designation as
a low-income community or eligible for designation by the Delta
Regional Authority as a distressed county or isolated area of
distress.\721\
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\718\ See Treas. Reg. section 1.181-2T for rules on making an
election under this section.
\719\ For this purpose, a production is treated as commencing on
the first date of principal photography.
\720\ Sec. 181(a)(2)(A). A qualifying film or television production
that is co-produced is eligible for the benefits of the provision only
if its aggregate cost, regardless of funding source, does not exceed
the threshold.
\721\ Sec. 181(a)(2)(B).
---------------------------------------------------------------------------
A qualified film or television production means any
production of a motion picture (whether released theatrically
or directly to video cassette or any other format) or
television program if at least 75 percent of the total
compensation expended on the production is for services
performed in the United States by actors, directors, producers,
and other relevant production personnel.\722\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\723\ With respect to
property which is one or more episodes in a television series,
each episode is treated as a separate production and only the
first 44 episodes qualify under the provision.\724\ Qualified
property does not include sexually explicit productions as
defined by section 2257 of title 18 of the U.S. Code.\725\
---------------------------------------------------------------------------
\722\ Sec. 181(d)(3)(A).
\723\ Sec. 181(d)(3)(B).
\724\ Sec. 181(d)(2)(B).
\725\ Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\726\
---------------------------------------------------------------------------
\726\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

Section 199

Section 199 of the Code 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 2008 and 2009, the deduction is six percent
of such income. The deduction for a taxable year is limited to
50 percent of the wages properly allocable to domestic
production gross receipts paid by the taxpayer during the
calendar year that ends in such taxable year.\727\
---------------------------------------------------------------------------
\727\ 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, designated
Roth contributions (as defined in section 402A).
---------------------------------------------------------------------------
In general, qualified production activities income
(``QPAI'') is equal to domestic production gross receipts
(``DPGR''), reduced by the sum of: (1) the costs of goods sold
that are allocable to such receipts; (2) other expenses,
losses, or deductions which are properly allocable to such
receipts.\728\
---------------------------------------------------------------------------
\728\ Sec. 199(c)(1).
---------------------------------------------------------------------------
DPGR 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
(``QPP'') that was manufactured, produced, grown or extracted
(``MPGE'') by the taxpayer in whole or in significant part
within the United States; \729\ (2) any sale, exchange or other
disposition, or any lease, rental or license, of qualified film
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) in the case
of a taxpayer engaged in the active conduct of a construction
trade or business, construction of real property performed in
the United States by the taxpayer in the ordinary course of
such trade or business; \730\ or (5) in the case of a taxpayer
engaged in the active conduct of an engineering or
architectural services trade or business, engineering or
architectural services performed in the United States by the
taxpayer in the ordinary course of such trade or business with
respect to the construction of real property in the United
States.\731\
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\729\ Domestic production gross receipts include gross receipts of
a taxpayer derived from any sale, exchange or other disposition of
agricultural products with respect to which the taxpayer performs
storage, handling or other processing activities (other than
transportation activities) within the United States, provided such
products are consumed in connection with, or incorporated into, the
manufacturing, production, growth or extraction of qualifying
production property (whether or not by the taxpayer).
\730\ For this purpose, construction activities include activities
that are directly related to the erection or substantial renovation of
residential and commercial buildings and infrastructure. Substantial
renovation would include structural improvements, but not mere cosmetic
changes, such as painting, that is not performed in connection with
activities that otherwise constitute substantial renovation.
\731\ Sec. 199(c)(4)(A).
---------------------------------------------------------------------------
DPGR do not include any gross receipts of the taxpayer that
are derived from: (1) the sale of food or beverages prepared by
the taxpayer at a retail establishment; (2) the transmission or
distribution of electricity, natural gas, or potable water; or
(3) the lease, rental, license, sale, exchange, or other
disposition of land.\732\
---------------------------------------------------------------------------
\732\ Sec. 199(c)(4)(B).
---------------------------------------------------------------------------
A special rule for government contracts provides that
property that is manufactured or produced by the taxpayer
pursuant to a contract with the Federal Government is
considered to be DPGR even if title or risk of loss is
transferred to the Federal Government before the manufacture or
production of such property is complete to the extent required
by the Federal Acquisition Regulation.\733\
---------------------------------------------------------------------------
\733\ Sec. 199(c)(4)(C).
---------------------------------------------------------------------------
For purposes of determining DPGR 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 (``EAG'') at all times during the
taxable year of the partnership, then the partnership and all
members of that EAG are treated as a single taxpayer during
such period.\734\
---------------------------------------------------------------------------
\734\ Sec. 199(c)(4)(D).
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QPP generally includes any tangible personal property,
computer software, or sound recordings. ``Qualified film''
includes any motion picture film or videotape \735\ (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) \736\ constitutes compensation for services
performed in the United States by actors, production personnel,
directors, and producers.\737\
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\735\ The nature of the material on which properties described in
section 168(f)(3) are embodied and the methods and means of
distribution of such properties does not affect their qualification
under this provision.
\736\ To the extent that a taxpayer has included an estimate of
participations and/or residuals in its income forecast calculation
under section 167(g), the taxpayer must use the same estimate of
participations and/or residuals for purposes of determining total
compensation.
\737\ Sec. 199(c)(6).
---------------------------------------------------------------------------
With respect to the domestic production activities of a
partnership or S corporation, the deduction under section 199
is determined at the partner or shareholder level.\738\ 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.\739\
Each partner or shareholder is treated as having W-2 wages for
the taxable year in an amount equal to such person's allocable
share of the W-2 wages of the partnership or S corporation for
the taxable year.\740\
---------------------------------------------------------------------------
\738\ Sec. 199(d)(1)(A)(i).
\739\ Sec. 199(d)(1)(A)(ii).
\740\ Sec. 199(d)(1)(A)(iii).
---------------------------------------------------------------------------
The Treasury regulations provide that, except for certain
qualifying in-kind partnerships and EAG partnerships, an owner
of a pass-thru entity is not treated as conducting the
qualified production activities of the of the pass-thru entity,
and vice versa.\741\
---------------------------------------------------------------------------
\741\ Treas. Reg. sec. 1.199-5T(g).
---------------------------------------------------------------------------
The deduction under section 199 is allowed for purposes of
computing alternative minimum taxable income (including
adjusted current earnings), without regard to alternative
minimum tax adjustments.\742\ The deduction in computing
alternative minimum taxable income is determined by reference
to the lesser of the qualified production activities income (as
determined for the regular tax) or the alternative minimum
taxable income (in the case of an individual, adjusted gross
income as determined for the regular tax) without regard to
this deduction.\743\
---------------------------------------------------------------------------
\742\ Sec. 199(d)(6)(A).
\743\ Sec. 199(d)(6)(A).
---------------------------------------------------------------------------

Reasons for Change \744\

---------------------------------------------------------------------------
\744\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that section 181 encourages domestic
film production and that the provision should be extended and
enhanced to include more expensive film productions. The issue
of runaway production affects all productions, regardless of
cost, and therefore the Congress believes that it is
appropriate to treat as an expense the first $15 million ($20
million in certain cases) of production costs of otherwise
qualified films.
The Congress believes that domestic film production is
important to the United States economy and the domestic
production activities deduction under section 199 should be
modified to take into consideration how the film industry
operates. Therefore, the Congress believes that it is
appropriate to modify how the deduction is applied to this
industry with regard to the type of qualifying property, the
methods and means of distributing qualified films, commonly
used structures for film production and distribution, and the
W-2 wage limitation.

Explanation of Provision

The provision extends the section 181 expensing provision
for one year (for qualified film and television productions
commencing prior to January 1, 2010). The provision also
modifies the dollar limitation so that the first $15 million
($20 million for productions in low income communities or
distressed area or isolated area of distress) of an otherwise
qualified film or television production may be treated as an
expense in cases where the aggregate cost of the production
exceeds the dollar limitation. The cost of the production in
excess of the dollar limitation is capitalized and recovered
under the taxpayer's method of accounting for the recovery of
such property.
The provision modifies the section 199 W-2 wage limitation
by defining the term ``W-2 wages'' for qualified films to
include any compensation for services performed in the United
States by actors, production personnel, directors, and
producers. Thus, compensation is not restricted to W-2 wages
for the limitation of qualified films.
The provision provides that a qualified film for purposes
of section 199 includes any copyrights, trademarks, and other
intangibles with respect to the film.
The provision provides that the deduction under section 199
for qualified films is not affected by the methods and means of
distributing an otherwise qualified film.\745\ For example, the
distribution of a qualified film via the internet (whether the
film is viewed online or downloaded or whether or not there is
a fee charged) is considered to be a disposition of the film
for purposes of determining DPGR. Likewise, the distribution of
a qualified film through an open air (free of charge) broadcast
is considered a disposition of the film for these purposes.
---------------------------------------------------------------------------
\745\ This provision is consistent with H.R. Conf. Rep. No. 108-
755, at 262, Footnote 30 (2004).
---------------------------------------------------------------------------
The provision modifies the application of section 199 to
partnerships and S corporations. First, the provision provides
that each partner with at least a 20 percent capital interest
or shareholder with at least a 20 percent ownership interest,
either directly or indirectly, in such entity is treated as
having engaged directly in any film produced by the partnership
or S corporation. For example, Studio A and Studio B form a
partnership in which each is a 50-percent partner to produce a
qualified film. Studio A has the rights to distribute the film
domestically and Studio B has the rights to distribute the film
outside the United States. Under the provision, the production
activities of the partnership are attributed to each partner,
and thus each partner's revenue from the distribution of the
qualified film is not treated as non-DPGR solely because
neither Studio A nor Studio B produced the qualified film
itself. Additionally, a partnership or S corporation is treated
as having engaged directly in any film produced by any partner
with at least a 20 percent capital interest or shareholder with
at least a 20 percent ownership interest, either directly or
indirectly, in the partnership or S corporation. For example,
Studio A and Studio B form a partnership in which each is a 50-
percent partner to distribute a qualified film. Studio A
produced the film and contributes it to the partnership and
Studio B contributes distribution services to the partnership.
Under the provision, the production activities of Studio A are
attributed to the partnership, and thus the partnership's
revenue from the distribution of the qualified film is not
treated as non-DPGR solely because the partnership did not
produce the qualified film. Thus, the Treasury regulation
providing that an owner of a pass-thru entity is not treated as
conducting the qualified production activities of the of the
pass-thru entity, and vice versa,\746\ does not apply to
situations to which this provision applies.
---------------------------------------------------------------------------
\746\ Treas. Reg. sec. 1.199-5T(g).
---------------------------------------------------------------------------

Effective Date

The extension and modification of section 181 applies to
qualified film and television productions commencing after
December 31, 2007.
The modifications of section 199 are effective for taxable
years beginning after December 31, 2007.

C. Exemption From Excise Tax for Certain Wooden Arrows Designed for Use
by Children (sec. 503 of the Act and sec. 4161 of the Code)

Present Law

Under present law, section 4161(b)(2) of the Code imposes
an excise tax of 39 cents, adjusted for inflation, on the first
sale by the manufacturer, producer, or importer of any shaft
(whether sold separately or incorporated as part of a finished
or unfinished product) used to produce certain types of
arrows.\747\ These taxes support the Federal Aid to Wildlife
Restoration Fund.\748\
---------------------------------------------------------------------------
\747\ The tax on arrow shafts is 43 cents per arrow shaft beginning
January 1, 2008.
\748\ 16 U.S.C. sec. 669b
---------------------------------------------------------------------------

Explanation of Provision

The provision exempts from the excise tax on arrow shafts
certain shafts (whether sold separately or incorporated as part
of a finished or unfinished product) that are made of all
natural wood. The shaft cannot be in excess of 5/16 of an inch
in diameter and cannot have any laminations or artificial means
of enhancing the spine of the shaft. The shaft must be of a
type used in the manufacture of an arrow which after its
assembly is not suitable for use with a bow that has a peak
draw weight of 30 pounds or more.

Effective Date

This provision applies to shafts first sold after the date
of enactment (October 3, 2008).

D. Treatment of Amounts Received in Connection With the Exxon Valdez
Litigation (sec. 504 of the Act)

Present Law

Income averaging

Section 1301 provides special income averaging rules for
individuals engaged in a farming business or fishing business.
Under section 1301, such an individual may elect to average the
taxable income attributable to the farming or fishing business
over a 3-year period.

Contributions to qualified retirement plans and IRAs

The Code provides for the favorable tax treatment of a
variety of retirement savings plans sponsored by employers for
the benefit of employees, provided that such plans meet certain
qualification requirements. Such plans are commonly referred to
as ``qualified retirement plans.'' Qualified retirement plans
include the following types of plans: (1) plans qualified under
section 401(a) (such as a ``section 401(k) plan''); (2) section
403(a) employee retirement annuities; (3) tax-sheltered
annuities (described in section 403(b)); and (4) section 457(b)
plans sponsored by State and local governments.
One of the qualification requirements that apply to
qualified retirement plans is limits on the amount of
contributions that may be made to such a plan. For example, in
the case of a defined contribution plan, the annual additions
that can be made to a participant's account balance is limited
to the lesser of 100 percent of the participant's compensation
or $46,000 (for 2008). Elective salary reduction deferrals by a
participant in a section 401(k) plan, a tax-sheltered annuity,
or a section 457(b) plan maintained by a State or local
government are subject to a separate annual limitation. The
limitation on the amount of annual elective deferrals is
generally $15,500 (for 2008), although participants who have
attained age 50 may be eligible to make an additional $5,000
(for 2008) in elective deferrals. In general, a distribution
from a qualified retirement plan is includible in a
participant's gross income except to the extent the
distribution is attributable to employee after-tax
contributions to the plan.
The Code also provides for two types of individual
retirement arrangements (``IRAs''): traditional IRAs and Roth
IRAs.\749\ In general, contributions (other than a rollover
contribution) to a traditional IRA may be deductible, and
distributions from a traditional IRA are includible in gross
income to the extent not attributable to a return of
nondeductible contributions. In contrast, contributions to a
Roth IRA are not deductible, and 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.
---------------------------------------------------------------------------
\749\ Traditional IRAs are described in Code section 408, and Roth
IRAs are described in Code section 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 ($5,000 for 2008); or (2) the amount of the
individual's compensation that is includible in gross income
for the year. As under the rules relating to traditional IRAs,
a contribution of up to the dollar limit for each spouse may be
made to a Roth IRA provided the combined compensation of the
spouses is at least equal to the contributed amount. The
maximum annual contribution that can be made to a Roth IRA is
phased out for taxpayers with adjusted gross income for the
taxable year over certain indexed levels. The adjusted gross
income phase-out ranges for 2008 are: (1) for single taxpayers,
$101,000 to $116,000; (2) for married taxpayers filing joint
returns, $159,000 to $169,000; and (3) for married taxpayers
filing separate returns, $0 to $10,000.
For taxable years beginning after December 31, 2005, a plan
qualified under section 401(a) or a section 403(b) annuity is
permitted to include a qualified Roth contribution program.
Under such a program a participant can designate elective
salary deferrals as designated Roth contributions. A designated
Roth contribution is includible in the participant's gross
income at the time of deferral and is generally excludable from
gross income at the time of distribution.
The foregoing contribution limitations for qualified
retirement plans and IRAs do not apply in the case of a
rollover contribution to a qualified retirement plan or IRA. If
certain requirements are satisfied, a participant in a tax-
qualified retirement plan, a tax-sheltered annuity, a
governmental section 457 plan, or a traditional IRA may roll
over distributions from the plan, annuity or IRA into another
plan, annuity or IRA. For distributions after December 31,
2007, certain taxpayers also are permitted to make rollover
contributions into a Roth IRA (subject to inclusion in gross
income of any amount that would be includible were it not part
of the rollover contribution).

Explanation of Provision

Income averaging

Under the provision, any qualified taxpayer receiving
qualified settlement income in any taxable year shall be
treated as if engaged in a fishing business, and the qualified
settlement income shall be treated as income attributable to a
fishing business for the taxable year for purposes of applying
the income averaging rules applicable to farming and fishing
income under section 1301. The portion of a taxpayer's taxable
income which he or she may elect to be treated as ``elected
farm income'' eligible for income averaging under this
provision is the amount of qualified settlement income reduced
by the otherwise allowable deductions attributable to that
income. Nothing in this provision changes the computation of
taxable income or alternative minimum taxable income.

Contributions to retirement plans

Under the provision, a qualified taxpayer who receives
qualified settlement income during a taxable year may, at any
time before the end of such year, make one or more
contributions to an eligible retirement plan. The amount that
can be contributed under the provision (in aggregate for all
taxable years) is the lesser of (1) the amount of qualified
settlement income or (2) $100,000. If such a contribution is
made, the contribution is excludible from the qualified
taxpayer's gross income (unless the contribution is made to a
Roth IRA or to a designated Roth account established under a
qualified Roth contribution program) and is treated as a
rollover contribution to the eligible retirement plan. Under
the provision, an eligible retirement plan includes an IRA
(traditional or Roth), a section 401(a) plan, a section 403(a)
employee retirement annuity, a tax-sheltered annuity, and a
section 457(b) plan maintained by a State or local government.

Qualified taxpayer; qualified settlement income

Under the provision, the term a ``qualified taxpayer''
means any individual who is a plaintiff in the civil action In
re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska)
or any individual who is a beneficiary of the estate of such a
plaintiff who acquired the right to receive qualified
settlement income from the plaintiff and who was the spouse or
immediate relative of that plaintiff. ``Qualified settlement
income'' means any interest and punitive damage awards which
are includible in taxable income\750\ and are received in
connection with the before-described civil action, whether pre-
or post-judgment and whether related to a settlement or
judgment.
---------------------------------------------------------------------------
\750\ This rule is applied without regard to the retirement plan
contribution rule previously discussed.
---------------------------------------------------------------------------

Effective Date

The provision is effective upon the date of enactment
(October 3, 2008).

E. Certain Farming Business Machinery and Equipment Treated as 5-Year
Property (sec. 505 of the Act and sec. 168 of the Code)

Present Law

Reasons for Change\753\

---------------------------------------------------------------------------
\753\ See S. 2242, the ``Heartland, Habitat, Harvest, and
Horticulture Act of 2007'', which was reported by the Senate Committee
on Finance on October 25, 2007 (S. Rpt. No. 110-206).
---------------------------------------------------------------------------
The Congress believes that the depreciation incentive will
provide important economic benefits to encourage development
within the agricultural sector. The provision lowers the cost
of capital for property used in agricultural trades or
businesses which will lead to additional investment in more
equipment and employment of more workers.

Explanation of Provision

The provision provides a five-year recovery period for any
machinery or equipment (other than any grain bin, cotton
ginning asset, fence, or other land improvement) which is used
in a farming business and placed in service before January 1,
2010, and the original use of which commences with the taxpayer
after December 31, 2008. For these purposes, the term ``farming
business'' means a trade or business involving the cultivation
of land or the raising or harvesting of any agricultural or
horticultural commodity.\754\ A farming business includes
processing activities that are normally incident to the
growing, raising, or harvesting of agricultural or
horticultural products.\755\
---------------------------------------------------------------------------
\754\ Treas. Reg. sec. 1.263A-4(a)(4)(i).
\755\ Treas. Reg. sec. 1.263A-4(a)(4)(ii).
---------------------------------------------------------------------------

Effective Date

The provision is effective for property placed in service
after December 31, 2008.

F. Modified Standard for Imposition of Tax Return Preparer Penalties
(sec. 506 of the Act and sec. 6694 of the Code)

Present Law

In general, a tax return preparer is liable for a penalty
for preparation of a return or refund claim with respect to
which understatement of tax results. If the understatement is
due to an unreasonable position, the penalty is the greater of
$1,000 or 50% of the income derived by the return preparer with
respect to that return.\756\ If the understatement is due to
willful or reckless conduct, the penalty increases to the
greater of $5,000 or 50% of the income derived by the return
preparer with respect to that return.\757\ ``Tax return
preparer'' is broadly defined as any person who prepares for
compensation, or who employs other people to prepare for
compensation, all or a substantial portion of a tax return or
claim for refund.\758\ Under present law, the definition of a
tax return preparer includes persons preparing non-income tax
returns, such as estate and gift, excise, or employment tax
returns, as well as income tax returns. Preparation of a
substantial portion of a return is treated as if it were the
preparation of such return.
---------------------------------------------------------------------------
\756\ 6694(a)(1)
\757\ Sec. 6694(b)
\758\ Sec. 7701(a)(36)(A).
---------------------------------------------------------------------------
Legislation enacted as part of the Small Business and Work
Opportunity Tax Act of 2007 broadened the scope of the preparer
penalty by applying it to all tax return preparers and altered
the standards of conduct a tax return preparer is required to
meet in order to avoid the imposition of penalties for the
preparation of a return with respect to which there is an
understatement of tax. A tax return preparer now can be
penalized for preparing a return on which there is an
understatement of tax liability as a result of an
``unreasonable position.'' Any position that a return preparer
does not reasonably believe is more likely than not to be
sustained on its merits is an ``unreasonable position'' unless
the position is disclosed on the return or there is a
reasonable basis for the position.

Reasons for Change \759\

---------------------------------------------------------------------------
\759\ See H.R. 6049, the ``Renewable Energy and Job Creation Act of
2008,'' which was reported by the House Committee on Ways and Means on
May 20, 2008 (H. Rept. No. 110-658).
---------------------------------------------------------------------------
The Congress believes that the standards of conduct for
taxpayers and return preparers generally should be uniform. The
Congress believes that the present-law standard for return
preparers, which is generally higher than that for taxpayers,
can result in a conflict of interest for return preparers. The
conflict of interest arises because it is in the interest of a
preparer to advise his taxpayer client to either disclose a tax
position or alter such position in order to avoid the preparer
penalty, even though the taxpayer could legally and
appropriately take the position without disclosure or facing
penalties. This may have the unintended consequence of causing
taxpayers to be less inclined to use the services of
professional tax preparers, which could harm the system of tax
collections. Thus, the Congress believes the standards of
conduct for taxpayers and return preparers generally should be
uniform.

Explanation of Provision

The provision revises the definition of an ``unreasonable
position'' and changes the standards for imposition of the tax
return preparer penalty. The preparer standard for undisclosed
positions is reduced to ``substantial authority,'' which
conforms to the taxpayer standard. The preparer standard for
disclosed positions is set at ``reasonable basis.'' For tax
shelters (as defined in section 6662(d)(2)(B)(ii)(I)) and
reportable transactions to which section 6662A applies (i.e.,
listed transactions and reportable transactions with
significant avoidance or evasion purposes), the preparer must
have a reasonable belief that the position would more likely
than not be sustained on its merits.

Effective Date

The provision generally is effective with respect to
returns prepared after May 25, 2007. In the case of tax
shelters and reportable transactions, the provision is
effective for returns prepared for taxable years beginning
after the date of enactment (October 3, 2008).

SUBTITLE B--MENTAL HEALTH PARITY PROVISIONS

A. Modification of Parity Rules for Mental Health Benefits (secs. 511-
512 of the Act and sec. 9812 of the Code)

Present Law

The Code, 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 (generally, an employer who
employs an average of 2 to 50 employees) or if the application
of the requirements would result in an increase of one percent
or more in the cost of the plan. Further, the mental health
parity requirements do not require group health plans to
provide mental health benefits. The term mental health benefits
means benefits with respect to mental health services, as
defined under the terms of the specific group health plan, but
does not include benefits with respect to the treatment of
substance abuse or chemical dependency.
The Code, ERISA and PHSA mental health parity requirements
expire with respect to benefits for services furnished after
December 31, 2008.

Explanation of Provision

The provision expands the scope of mental health benefits
that are subject to the mental health parity requirements of
the Code by including ``substance use disorder benefits'' as
benefits subject to the parity requirements. Substance use
disorder benefits means benefits with respect to services for
substance use disorders, as defined under the terms of the plan
and in accordance with applicable Federal and State law.
The provision also expands the scope of parity that must be
provided between mental health and substance use disorder
benefits and medical and surgical benefits that are provided
under the group health plan. Specifically, the financial
requirements and treatment limitations for mental health and
substance use disorder benefits cannot be more restrictive than
the predominant financial requirements (or treatment
limitations) that are applied to substantially all medical and
surgical benefits covered by the plan, and no separate cost
sharing requirements (or treatment limitations) may apply only
to mental health or substance use disorder benefits. Financial
requirement includes for this purpose deductibles, copayments,
coinsurance, and out-of-pocket expenses, but excludes an
aggregate lifetime and annual limit that are subject to parity
requirements under current law. Treatment limitation includes
limits on the frequency of treatment, number of visits, days of
coverage, or other similar limits on the scope or duration of
treatment. The provision also requires parity of coverage of
mental health and substance use disorder benefits with respect
to out-of-network providers if the group health plan provides
coverage for medical or surgical benefits provided by out-of-
network providers.
Under the new requirements, an administrator of a group
health plan must make the criteria for medical necessity
determinations for mental health and substance use disorder
benefits available upon request to current and potential plan
participants and beneficiaries, and to contracting providers.
Similarly, the reason for a denial of mental health and
substance use disorder benefits must be made available by the
plan administrator upon request by a participant or
beneficiary.
The provision modifies the definition of small employer for
purposes of the small employer exemption from the parity
requirements. The provision also modifies the exemption from
the parity requirements that applies in the case of increased
costs that result from compliance with the parity requirements.
The provision makes parallel changes to the mental health
parity rules of ERISA and PHSA, and directs the Secretaries of
Labor, Health and Human Services, and the Treasury, to issue
regulations within one year of enactment (October 3, 2008) to
carry out the new parity requirements.

Effective Date

The new mental health parity requirements are generally
effective for a group health plan for the first plan year that
begins after the one-year anniversary of enactment of the new
requirements (October 3, 2009). Special effective date rules
apply in the case of a group health plan that is maintained
pursuant to one or more collective bargaining agreements.\760\
The provision extends the application of the present law mental
health parity requirements until the revised requirements
become applicable.
---------------------------------------------------------------------------
\760\ Public Law 110-460 made a technical correction to the
effective date of the new mental health parity requirements for a group
health plan that is maintained pursuant to a collective bargaining
agreement. S. 3712 passed the Senate on November 20, 2008, and passed
the House without amendment on December 10, 2008. The president signed
the bill on December 23, 2008.
---------------------------------------------------------------------------

TITLE VI--DISASTER RELIEF

SUBTITLE A--HEARTLAND AND HURRICANE IKE DISASTER RELIEF

A. Tax Benefits for Midwestern and Hurricane Ike Areas

General Definitions

Midwestern disaster area

For purposes of the Act, the ``Midwestern disaster area''
is defined as an area with respect to which a major disaster
was declared by the President on or after May 20, 2008, and
before August 1, 2008, under section 401 of the Robert T.
Stafford Disaster Relief and Emergency Assistance Act
(``Stafford Act'') by reason of severe storms, tornados, or
flooding occurring in any of the States of Arkansas, Illinois,
Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska,
and Wisconsin, and determined by the President to warrant
individual or individual and public assistance from the Federal
government under such Act with respect to damages attributable
to such severe storms, tornados, or flooding. For certain
provisions, areas eligible for only public assistance are
included in the definition of Midwestern disaster area.

Applicable disaster date

The term ``applicable disaster date'' means, with respect
to any Midwestern disaster area, the date on which the severe
storms, tornados, or flooding giving rise to the Presidential
declaration occurred.

Hurricane Ike disaster area

For purposes of the Act, the `` Hurricane Ike disaster
area'' is defined as an area in the State of Texas or Louisiana
with respect to which a major disaster has been declared by the
President on September 13, 2008, under section 401 of the
Stafford Act by reason of Hurricane Ike, and determined by the
President to warrant individual or individual and public
assistance from the Federal government under such Act with
respect to damages attributable to Hurricane Ike.

Gulf Opportunity Zones

The terms ``Gulf Opportunity Zone'' and ``GO Zone'' refer
to 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
Stafford Act by reason of Hurricane Katrina.\761\
---------------------------------------------------------------------------
\761\ Sec. 1400M(1). These definitions are not changed by the Act.
---------------------------------------------------------------------------
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 the Stafford Act by reason of
Hurricane Rita.\762\
---------------------------------------------------------------------------
\762\ Sec. 1400M(3). This definition is not changed by the Act.
---------------------------------------------------------------------------
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 the Stafford Act by reason of
Hurricane Wilma.\763\
---------------------------------------------------------------------------
\763\ Sec. 1400M(5). This definition is not changed by the Act.
---------------------------------------------------------------------------

Hurricanes Katrina, Rita, and Wilma disaster areas

The ``Hurricane Katrina disaster area'' refers to the area
with respect to which a major disaster had been declared by the
President before September 14, 2005, under section 401 of the
Stafford Act by reason of Hurricane Katrina.\764\ The
``Hurricane Rita disaster area'' refers to the area with
respect to which a major disaster had been declared by the
President before October 6, 2005, under section 401 of the
Stafford Act by reason of Hurricane Rita.\765\ The ``Hurricane
Wilma disaster area'' refers to the area with respect to which
a major disaster had been declared by the President before
November 14, 2005, under section 401 of the Stafford Act by
reason of Hurricane Wilma.\766\
---------------------------------------------------------------------------
\764\ Sec. 1400M(2). This definition is not changed by the Act.
\765\ Sec. 1400M(4). This definition is not changed by the Act.
\766\ Sec. 1400M(6). This definition is not changed by the Act.
---------------------------------------------------------------------------

2. Tax-exempt bond financing for the Midwestern disaster area (sec. 702
of the Act)

Present Law

Gulf Opportunity Zone Bonds

Present law permits 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 before January 1, 2011.
Gulf Opportunity Zone Bonds may be issued by the State of
Alabama, Louisiana, or Mississippi, or any political
subdivision thereof. Gulf Opportunity Zone Bonds are not
subject to the State volume cap (sec. 146). Rather, the maximum
aggregate face amount of Gulf Opportunity Zone Bonds that may
be issued in any eligible State is limited to $2,500 multiplied
by the number of residents of such eligible State who reside
within the Gulf Opportunity Zone. 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, qualified residential rental
projects (as defined in section 142(d) with certain
modifications), and public utility property.
Gulf Opportunity Zone Bonds are treated as qualified
mortgage bonds if the bonds of such issue meet the general
requirements of a qualified mortgage issue and the residences
financed with such bonds are located in the Gulf Opportunity
Zone. For these residences the first-time homebuyer rule is
waived but purchase and income rules for targeted area
residences apply. In addition, 100 percent of the mortgage
loans must be made to mortgagors whose family income is 140
percent or less of the applicable median family income.

Explanation of Provision

The Act provides tax-exempt bond financing like Gulf
Opportunity Zone Bonds with certain modifications to the
Midwestern disaster area. Specifically, it allows the issuance
of qualified private activity bonds (called, ``qualified
Midwestern disaster area bonds'') to finance the construction
and rehabilitation of certain residential and nonresidential
property located in the Midwestern disaster area. Qualified
Midwestern disaster area bonds must be issued before January 1,
2013.
Like Gulf Opportunity Zone Bonds, qualified Midwestern
disaster area bonds are not subject to the State volume cap.
The maximum aggregate face amount of qualified Midwestern
disaster area bonds that may be issued in any State in which a
Midwestern disaster area is located is limited to $1,000
multiplied by the population of the respective State within a
Midwestern disaster area.
Depending on the purpose for which such bonds are issued,
qualified Midwestern disaster area bonds are treated as either
exempt facility bonds or qualified mortgage bonds. Qualified
Midwestern disaster area bonds have certain limitations which
did not apply to Gulf Opportunity Zone Bonds. In the case of
exempt facility bonds, such financing is limited to projects
where the person using the property either: (i) suffered a loss
in a trade or business attributable to the severe storms,
tornados, or flooding giving rise to a Midwestern disaster
area; or (ii) is designated by the Governor as a person
carrying on a trade or business replacing such a business.\767\
In the case of qualified mortgage bonds, such financing is tax-
exempt only if 95 percent or more of the net proceeds of the
issue are used to provide financing to individuals who suffered
damages to their principal residences attributable to the
severe storms, tornados, or flooding giving rise to a
Midwestern disaster area. For these residences, the first-time
homebuyer rule is waived and purchase and income rules for
targeted area residences apply. In addition, 100 percent of the
mortgage loans must be made to mortgagors whose family income
is 140 percent or less of the applicable median family income.
---------------------------------------------------------------------------
\767\ In the case of a project relating to public utility property,
any financing is limited to the repair or reconstruction of public
utility property damaged by reason of the severe storms, tornados, or
flooding giving rise to a Midwestern disaster area.
---------------------------------------------------------------------------
Other tax-exempt bond rules that apply to Gulf Opportunity
Zone Bonds generally apply to qualified Midwestern disaster
area bonds.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

3. Low-income housing tax relief for the Midwestern disaster Area (sec.
702 of the Act)

Present Law

In general

The low-income housing credit may be claimed over a 10-year
period by owners of certain residential rental property for the
cost of rental housing occupied by tenants having incomes below
specified levels (sec. 42). 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.

Volume limits

A low-income housing credit is allowable only if the owner
of a qualified building receives a housing credit allocation
from the State or local housing credit agency. Generally, the
aggregate credit authority provided annually to each State for
calendar years 2008 and 2009 is $2.20 per resident, with a
minimum annual cap for certain small population States. In
2010, the volume limits will return to lower prescribed levels.
These amounts are indexed for inflation. Projects that also
receive financing with proceeds of tax-exempt bonds issued
subject to the private activity bond volume limit do not
require an allocation of the low-income housing credit.

Certain distressed areas

In general
Special allocations of the low-income housing credit are
not provided for distressed areas on a regular basis but rather
must be enacted separately on a case-by-case basis (e.g., Gulf
Opportunity Zones).
Gulf Opportunity Zones
Credit cap
The otherwise applicable low-income 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.
Stacking rule
Within each calendar year (2006, 2007, and 2008), each
applicable State within the Gulf Opportunity 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 Gulf Opportunity 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.

Explanation of Provision

For each of three years (2008, 2009, and 2010), a special
allocation of the low-income housing credit is provided to any
State in which a Midwestern disaster area is located. The
amount of each year's special allocation is limited to $8.00
multiplied by the population of the respective State in a
Midwestern disaster area.
Other low-income housing credit rules (e.g., the stacking
rule) that apply to Gulf Opportunity Zones may apply to these
special allocations.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

4. Expensing for certain demolition and clean-up costs (sec. 702 of the
Act)

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.\768\ Land is not subject to an allowance
for depreciation or amortization.
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\768\ Sec. 280B.
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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 \769\ 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.
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\769\ 1971-1 C.B. 76.
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Under section 1400N(f), a taxpayer is permitted a deduction
for 50 percent of any qualified Gulf Opportunity Zone clean-up
cost paid or incurred during the period beginning on August 28,
2005, and ending on December 31, 2007. The remaining 50 percent
is treated as described above. 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.
A taxpayer is permitted a deduction for 50 percent of any
qualified Recovery Assistance clean-up cost paid or incurred
during the period beginning on May 4, 2007, and ending on
December 31, 2009.\770\ The remaining 50 percent is treated
under the general rules described above. A qualified Recovery
Assistance 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 Kansas disaster area to the extent
that the amount otherwise would 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.
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\770\ Pub. L. No. 110-234, sec. 15345 (2008).
---------------------------------------------------------------------------

Explanation of Provision

The provision permits a taxpayer to deduct 50 percent of
any qualified Disaster Recovery Assistance clean-up cost paid
or incurred during the period beginning on the applicable
disaster date and ending on December 31, 2010. The remaining 50
percent is treated under the general rules described above. A
qualified Disaster Recovery Assistance 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
Midwestern disaster area to the extent that the amount
otherwise would be capitalized, and only if the removal of
debris or demolition of any structure was necessary due to
damage attributable to the severe storms, tornados, or flooding
giving rise to any Presidential declaration described in the
definition of Midwestern disaster area. 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 is effective on the date of enactment
(October 3, 2008).

5. Extension of expensing for environmental remediation costs (sec. 702
of the Act)

Present Law

Present law allows a deduction for ordinary and necessary
expenses paid or incurred in carrying on any trade or
business.\771\ 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 must be
capitalized is based on the facts and circumstances of each
case.
---------------------------------------------------------------------------
\771\ Sec. 162.
---------------------------------------------------------------------------
Taxpayers may elect to treat certain environmental
remediation expenditures paid or incurred before January 1,
2008, that would otherwise be chargeable to capital account as
deductible in the year paid or incurred.\772\ 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 otherwise would be allocated
to the site under the principles set forth in Commissioner v.
Idaho Power Co.\773\ and section 263A, are treated as qualified
environmental remediation expenditures.
---------------------------------------------------------------------------
\772\ Sec. 198.
\773\ 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'') \774\
cannot qualify as qualified sites. 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, as well as petroleum
products defined in section 4612(a)(3) of the Code.
---------------------------------------------------------------------------
\774\ Pub. L. No. 96-510 (1980).
---------------------------------------------------------------------------
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.
Section 1400N(g) permits the expensing of environmental
remediation expenditures paid or incurred on or after August
28, 2005, and before January 1, 2008, to abate contamination at
qualified contaminated sites located in the Gulf Opportunity
Zone.

Explanation of Provision

The provision permits the expensing of environmental
remediation expenditures paid or incurred on or after the
applicable disaster date and before January 1, 2011, to abate
contamination at qualified contaminated sites located in the
Midwestern disaster area. For these purposes, a site is a
qualified contamination site only if the release (or threat of
release) or disposal of a hazardous substance at the site was
attributable to severe storms, tornados, or flooding that gave
rise to any Presidential declaration described in the
definition of Midwest disaster area.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

6. Increase in rehabilitation credit for certain areas damaged by 2008
Midwestern severe storms, tornados, and flooding (sec. 702 of
the bill and sec. 1400N(h) of the Code)

Present Law

Present law provides a two-tier tax credit for
rehabilitation expenditures.\775\
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\775\ Sec. 47.
---------------------------------------------------------------------------
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. The building must be
substantially rehabilitated, a requirement that may be
satisfied only if the qualified 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.
Present law 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 a building or structure are incurred on or after August
28, 2005, and before January 1, 2009.\776\ The provision is
effective for expenditures incurred on or after August 28,
2005, for taxable years ending on or after August 28, 2005.
---------------------------------------------------------------------------
\776\ Sec. 1400N(h).
---------------------------------------------------------------------------

Explanation of Provision

The provision applies the increase in the rehabilitation
credit from 20 to 26 percent, and from 10 to 13 percent,
respectively, with respect to any certified historic structure
or qualified rehabilitated building which was damaged or
destroyed as a result of the severe storms, tornados, or
flooding giving rise to a Presidential declaration of a major
disaster on or after May 20, 2008, and before August 1, 2008,
as required under the provision. The increased rehabilitation
credit percentage applies for qualified rehabilitation
expenditures with respect to such buildings or structures
incurred on or after the applicable disaster date (as
prescribed by the provision) and before January 1, 2012.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

7. Treatment of net operating losses attributable to disaster losses
(sec. 702 of the Act)

Present Law

Under present law, a net operating loss (``NOL'') is,
generally, the amount by which a taxpayer's business deductions
exceed its gross income. In general, an NOL may be carried back
two years and carried over 20 years to offset taxable income in
such years.\777\ NOLs offset taxable income in the order of the
taxable years to which the NOL may be carried.\778\
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\777\ Sec. 172(b)(1)(A).
\778\ Sec. 172(b)(2).
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Different rules apply with respect to NOLs arising in
certain circumstances. 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 applies to NOLs (1)
arising from a farming loss (regardless of whether the loss was
incurred in a Presidentially declared disaster area), or (2)
certain amounts related to the Gulf Opportunity Zone and Kansas
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). Additionally, a special rule applies to certain
electric utility companies.

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
the Midwestern disaster area. 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 Disaster Recovery Assistance casualty losses;
(ii) certain moving expenses; (iii) certain temporary housing
expenses; (iv) depreciation deductions with respect to
qualified Disaster Recovery Assistance property for the taxable
year the property is placed in service; and (v) deductions for
certain repair expenses attributable to severe storms,
tornados, or flooding that gave rise to any Presidential
declaration described in the Midwestern disaster area
definition.

Qualified Disaster Recovery Assistance casualty losses

The amount of qualified Disaster Recovery Assistance
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 Midwestern disaster area and the loss must be
attributable to severe storms, tornados, or flooding that gave
rise to any Presidential declaration described in the
Midwestern disaster area definition. 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 Midwestern disaster area caused by the severe storms,
tornados, or flooding giving rise to any Presidential
declaration described in the Midwestern disaster area
definition.
To the extent that a casualty loss is included in the
eligible NOL and carried back under the provision, the taxpayer
is not also eligible to 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.
A qualified Disaster Recovery Assistance casualty loss does
not include any loss with respect to property used in
connection with 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, or any gambling or
animal racing property (as defined in section 1400N(p)(3)(B)).

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 the applicable disaster date and
before January 1, 2011, with respect to an employee who (i)
lived in the Midwestern disaster area before the applicable
disaster date, (ii) was displaced from their home either
temporarily or permanently as a result of the severe storms,
tornados, or flooding giving rise to any Presidential
declaration described in the Midwestern disaster area
definition, and (iii) is employed in the Midwestern disaster
area 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 the severe storms,
tornados, or flooding giving rise to any Presidential
declaration described in the Midwestern disaster area
definition. 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 Midwestern
disaster area 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 Midwestern disaster
area may be included in the eligible NOL. It is not necessary
for the temporary housing to be located in the Midwestern
disaster area 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 the Midwestern disaster
area. So, for example, if a taxpayer temporarily houses an
employee at a location outside of the Midwestern disaster area,
and the employee commutes into the Midwestern disaster area 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

The eligible NOL includes the depreciation deduction (or
amortization deduction in lieu of depreciation) with respect to
qualified Disaster Recovery Assistance 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 qualified Disaster Recovery Assistance property
does not preclude eligibility for the five-year carryback.
Qualified Disaster Recovery Assistance property does not
include any property used in connection with 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, or any gambling or animal racing property (as defined
in section 1400N(p)(3)(B)).

Repair expenses

The eligible NOL includes deductions for repair expenses
(including the cost of removal of debris) with respect to
damage caused by the severe storms, tornados, or flooding
giving rise to any Presidential declaration described in the
Midwestern disaster area definition. In order to qualify, the
amount must be paid or incurred after the applicable disaster
date and before January 1, 2011, and the property must be
located in the Midwestern disaster area.

Other rules

The amount of the NOL to which the five-year carryback
period applies is limited to the amount of the taxpayer'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. An
irrevocable election not to apply the five-year carryback under
the provision may be made with respect to any taxable year.
In addition, the general rule which limits a taxpayer's NOL
deduction to 90 percent of AMTI does 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 on the date of enactment
(October 3, 2008).

8. Tax credit bonds (sec. 702 of the Act)

Present Law

In general

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.

Gulf tax credit bonds

These tax-credit bonds must be issued in calendar year 2006
by the States of Louisiana, Mississippi, and Alabama. The
taxpayer holding Gulf Tax Credit Bonds on the allowance date is
entitled to a tax credit. The amount of the credit is
determined by multiplying the bond's credit rate (set by the
Secretary of the Treasury) by the face amount on the holder's
bond. The credit is includible in gross income (as if it were
an interest payment on the bond) and can used 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 of alcoholic beverages for consumption off premises).

Explanation of Provision

The Act allows tax credit bonds (``Midwestern Tax Credit
Bonds'') to be issued in 2009 by any State in which a
Midwestern disaster area is located (or any instrumentality of
the State). The operation and effect of these Midwestern Tax
Credit Bonds are otherwise identical to Gulf Tax Credit Bonds
except for different volume caps. Under the provision, the
maximum amount of Midwestern Tax Credit Bonds that may be
issued is: (1) $100 million for any State with an aggregate
population located in all Midwestern disaster areas within the
State of at least 2,000,000; (2) $50 million for any State with
an aggregate population located in all Midwestern disaster
areas within the State of at least 1,000,000 but less than
2,000,000; and (3) $0 for any other State.

Effective Date

The provision is effective for bonds issued after December
31, 2008.

9. Representations regarding income eligibility for purposes of
qualified residential rental project requirements (sec. 702 of
the Act)

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 certify annually
that such projects meet the requirements for qualification,
including meeting the 20-50 test or the 40-60 test.

Special rule for Gulf Opportunity Zone

Under a special provision, the operator of a qualified
residential rental project could rely on the representations of
a prospective tenant displaced by reason of Hurricane Katrina
for purposes of determining whether such project 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. This rule only applied if the individual's
tenancy began during the six-month period beginning on the date
when such individual was displaced by Hurricane Katrina (sec.
1400N(n)).

Explanation of Provision

The Act provides relief for the Midwestern disaster area
identical to the relief for the Gulf Opportunity Zone (except
that this relief relates to the Midwestern disaster rather than
Hurricane Katrina).

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

10. Expansion of the Hope and Lifetime Learning credits for students in
any Midwestern disaster area (sec. 702 of the Act)

Present Law

Hope credit

Individual taxpayers are allowed to claim a nonrefundable
credit, the Hope credit, against Federal income taxes of up to
$1,800 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.\779\
The Hope credit rate is 100 percent on the first $1,200 of
qualified tuition and related expenses, and 50 percent on the
next $1,200 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 $48,000 and $58,000 ($96,000 and $116,000 for married
taxpayers filing a joint return) for 2008. The adjusted gross
income phaseout ranges are indexed for inflation. Also, each of
the $1,200 amounts of qualified tuition and related expenses to
which the 100 percent credit rate and 50 percent credit rate
apply are indexed to inflation, with the amount rounded down to
the next lowest multiple of $100. Thus, for example, an
eligible student who incurs $1,200 of qualified tuition and
related expenses is eligible (subject to the adjusted gross
income phaseout) for a $1,200 Hope credit. If an eligible
student incurs $2,400 of qualified tuition and related
expenses, then he or she is eligible for a $1,800 Hope credit.
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\779\ Sec. 25A. 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, 2008. See
further action that modifies this law in Part Seventeen, Division C,
Title I.
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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.
The Hope credit is available in the taxable year the
expenses are paid, subject to the requirement that the
education is furnished to the student during that year or
during an academic period beginning during the first three
months of the next taxable year. Qualified tuition and related
expenses paid with the proceeds of a loan generally are
eligible for the Hope credit. The repayment of a loan itself is
not a qualified tuition or related expense.
A taxpayer may claim the Hope credit with respect to an
eligible student who is not the taxpayer or the taxpayer's
spouse (e.g., in cases in which the student is the taxpayer's
child) only if the taxpayer claims the student as a dependent
for the taxable year for which the credit is claimed. If a
student is claimed as a dependent, the student is not entitled
to claim a Hope credit for that taxable year on the student's
own tax return. If a parent (or other taxpayer) claims a
student as a dependent, any qualified tuition and related
expenses paid by the student are treated as paid by the parent
(or other taxpayer) for purposes of determining the amount of
qualified tuition and related expenses paid by such parent (or
other taxpayer) under the provision. In addition, for each
taxable year, a taxpayer may elect either the Hope credit, the
Lifetime Learning credit (described below), or an above-the-
line deduction for qualified tuition and related expenses 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.
Qualified tuition and related expenses generally include
only out-of-pocket expenses. Qualified tuition and related
expenses do not include expenses covered by employer-provided
educational assistance and scholarships that are not required
to be included in the gross income of either the student or the
taxpayer claiming the credit. Thus, 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.
Eligible educational institutions generally are accredited
post-secondary educational institutions offering credit toward
a bachelor's degree, an associate's degree, or another
recognized post-secondary credential. Certain proprietary
institutions and post-secondary vocational institutions also
are eligible educational institutions. To qualify as an
eligible educational institution, an institution must be
eligible to participate in Department of Education student aid
programs.
Effective for taxable years beginning after December 31,
2010, the changes to the Hope credit made by the Economic
Growth and Tax Relief Reconciliation Act of 2001 (``EGTRRA'')
no longer apply. The principal 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 a Coverdell education savings account. Thus, after 2010, a
taxpayer cannot claim a Hope credit in the same year he or she
claims an exclusion from a Coverdell education savings account.

Lifetime Learning credit

Individual taxpayers are allowed to claim a nonrefundable
credit, the Lifetime Learning credit, against Federal income
taxes 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.\780\ 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.
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\780\ Sec. 25A. 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,
2008. See further action that modifies this law in Part Seventeen,
Division C, Title I.
---------------------------------------------------------------------------
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 $48,000 and $58,000 ($96,000 and $116,000 for married
taxpayers filing a joint return) in 2008. These phaseout ranges
are the same as those for the Hope credit, and are similarly
indexed for inflation.
The Lifetime Learning credit is available in the taxable
year the expenses are paid, subject to the requirement that the
education is furnished to the student during that year or
during an academic period beginning during the first three
months of the next taxable year. As with the Hope credit,
qualified tuition and related expenses paid with the proceeds
of a loan generally are eligible for the Lifetime Learning
credit. Repayment of a loan is not a qualified tuition expense.
As with the Hope credit, a taxpayer may claim the Lifetime
Learning credit with respect to a student who is not the
taxpayer or the taxpayer's spouse (e.g., in cases in which the
student is the taxpayer's child) only if the taxpayer claims
the student as a dependent for the taxable year for which the
credit is claimed. If a student is claimed as a dependent by a
parent or other taxpayer, the student may not claim the
Lifetime Learning credit for that taxable year on the student's
own tax return. If a parent (or other taxpayer) claims a
student as a dependent, any qualified tuition and related
expenses paid by the student are treated as paid by the parent
(or other taxpayer) for purposes of the provision.
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
above-the-line deduction for qualified tuition and related
expenses.
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 educational 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 Lifetime
Learning 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.\781\ 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.
---------------------------------------------------------------------------
\781\ As explained above, the Hope credit is available only with
respect to the first two years of a student's undergraduate education.
---------------------------------------------------------------------------
As with the Hope credit, qualified tuition and fees
generally include only out-of-pocket expenses. Qualified
tuition and fees do not include expenses covered by employer-
provided educational assistance and scholarships that are not
required to be included in the gross income of either the
student or the taxpayer claiming the credit. Thus, 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.
Effective for taxable years beginning after December 31,
2010, the changes to the Lifetime Learning credit made by
EGTRRA no longer apply. The principal 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 a Coverdell education savings
account. Thus, after 2010, a taxpayer cannot claim a Lifetime
Learning credit in the same year he or she claims an exclusion
from a Coverdell 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. 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.

Special rule for Hurricane Katrina

Section 1400O temporarily expanded the Hope and Lifetime
Learning credits for students attending (i.e., enrolled and
paying tuition at) an eligible educational institution located
in the Gulf Opportunity Zone. The provision applied to taxable
years beginning in 2005 or 2006.
The provision doubled the dollar amounts (as indexed for
inflation) to which the 100 percent and 50 percent Hope credit
rates were applied. Thus, for taxable years beginning in 2005,
the Hope credit was increased to 100 percent of the first
$2,000 (instead of $1,000) of qualified tuition and related
expenses and 50 percent of the next $2,000 (instead of $1,000)
of qualified tuition and related expenses for a maximum credit
of $3,000 (instead of $1,500) per student. For taxable years
beginning in 2006, the Hope credit was increased to 100 percent
of the first $2,200 (instead of $1,100) of qualified tuition
and related expenses and 50 percent of the next $2,200 (instead
of $1,100) of qualified tuition and related expenses for a
maximum credit of $3,300 per student (instead of $1,650). The
Lifetime Learning credit rate was increased from 20 percent to
40 percent. The provision expanded the definition of qualified
tuition and related expenses to include any costs that were
qualified higher education expenses as defined under the rules
relating to qualified tuition programs.

Explanation of Provision

For taxable years beginning in 2008 or 2009, the provision
applies the special rule for Hurricane Katrina to students
attending (i.e., enrolled and paying tuition at) an eligible
educational institution located in any Midwestern disaster
area.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

11. Housing relief for individuals affected by 2008 Midwestern severe
storms, tornados, and flooding (sec. 702 of the Act)

Present Law

Employer-provided housing is generally includible in income
as compensation and as wages for purposes of employment
taxes.\782\ 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 is excludable from income and wages,
but generally only if the employee is required to accept the
lodging on the business premises of the employer as a condition
of employment.\783\ Reasonable expenses for employee
compensation are deductible by the employer.\784\ Section 1400P
provides special rules in the case of individuals affected by
Hurricane Katrina.
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\782\ Secs. 61, 3121(a), 3306(b).
\783\ Secs. 119, 3121(a)(19), 3306(b)(14).
\784\ Sec. 162(a).
---------------------------------------------------------------------------
Section 1400P provides an income exclusion for the value of
in-kind lodging provided for certain months 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 employment taxes.
Section 1400P also provides a credit to a qualified
employer of 30 percent of the value of lodging excluded from
the income of a qualified employee under the section. 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 Zone; and (2) performs
substantially all of his or her employment services in the Gulf
Opportunity Zone for the qualified employer furnishing the
lodging. Qualified employer means any employer with a trade or
business located in the Gulf Opportunity Zone. Section 1400P
applies to lodging provided during the period beginning on
December 21, 2005, and ending on June 21, 2006.

Explanation of Provision

The provision extends the housing relief provided in
section 1400P to certain individuals affected by the 2008
Midwestern severe storms, tornadoes, and flooding. Thus, an
income exclusion is provided for the value of in-kind lodging
provided for certain months 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 cannot
exceed $600, and the exclusion does not apply for employment
tax purposes.
The provision also extends the application of the present
law credit to a qualified employer of 30 percent of the value
of lodging excluded from the income of a qualified employee.
The amount taken as a credit is not deductible by the employer.
Under the provision, qualified employee means, with respect
to a month, an individual who: (1) on the applicable disaster
date had a principal residence in the Midwestern disaster area;
and (2) performs substantially all of his or her employment
services in the Midwestern disaster area for the qualified
employer furnishing the lodging. Qualified employer means any
employer with a trade or business located in the Midwestern
disaster area.

Effective Date

The provision applies to lodging provided during the period
beginning on November 1, 2008, and ending on May 1, 2009.

12. Use of retirement funds from retirement plans relating to the
Midwest disaster area (sec. 702 of the Act)

Present Law

In general

Withdrawals from retirement plans
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. Any
distribution is an eligible rollover distribution unless
specifically excepted. Exceptions include a distribution that
is part of a series of substantially equal periodic payments
made at least annually for the life of the employee.
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.
Loans from retirement plans
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.
Plan amendments
A remedial amendment period applies 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 required 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.

Use of retirement funds related to disaster relief for Hurricanes
Katrina, Rita, and Wilma

In general
To provide disaster relief for Hurricanes Katrina, Rita,
and Wilma, section 1400Q provides exceptions to certain rules
regarding distributions from retirement plans, for loans from
retirement plans, and for plan amendments to retirement
plans.\785\
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\785\ The relief with respect to Hurricane Katrina was initially
provided in the Katrina Emergency Relief Act of 2005 (Pub. L. No. 109-
73). The IRS provided guidance on those relief provisions in Notice
2005-92, 2005-2 C.B. 1165. The relief was codified in section 1400Q and
was expanded to the Hurricanes Rita and Wilma Disaster areas in the
Gulf Opportunity Zone Act of 2005 (Pub. L. No. 109-135).
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Tax favored withdrawals from retirement plans
Section 1400Q(a) provides an exception to the 10-percent
early withdrawal tax in the case of a qualified hurricane
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
distribution may be included in income ratably over three
years, and the amount of a qualified hurricane distribution may
be recontributed to an eligible retirement plan within three
years.
A qualified hurricane distribution includes certain
distributions from an eligible retirement plan related to
Hurricanes Katrina, Wilma, and Rita. Specifically, qualified
hurricane distributions include the following distributions
from an eligible retirement plan: any distribution 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.
Similar rules apply for qualified hurricane distributions with
respect to Hurricanes Rita and Wilma. The total amount of
qualified hurricane 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
periods are not qualified hurricane distributions.
Any amount required to be included in income as a result of
a qualified hurricane 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.
Any portion of a qualified hurricane 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 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 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 distribution is a permissible
distribution from a 401(k) plan, 403(b) annuity, or
governmental 457 plan, regardless of whether a distribution
otherwise would be permissible. A plan is not treated as
violating any Code requirement merely because it treats a
distribution as a qualified hurricane 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. 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 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.
Recontributions of withdrawals for home purchases
Section 1400Q(b) 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, Rita, or Wilma
disaster areas 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,
that is a qualified Katrina distribution, a qualified Rita
distribution, or a qualified Wilma distribution.
A qualified Katrina distribution is a distribution: (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 Katrina
distribution may be recontributed to a plan, annuity or IRA to
which a rollover is permitted, during the period beginning on
August 25, 2005, and ending on February 28, 2006. Any amount
recontributed is treated as a rollover. Thus, the recontributed
portion of the qualified distribution is not includible in
income (and also is not subject to the 10-percent early
withdrawal tax). Similar rules apply to qualified Hurricane
Rita and Hurricane Wilma distributions.
Loans from qualified plans to individuals sustaining an
economic loss
Section 1400Q(c) provides an exception to the income
inclusion rule for loans from a qualified employer plan related
to Hurricanes Katrina, Rita, and Wilma made to a qualified
individual during an applicable period and provides a repayment
delay for loans that are outstanding on or after a qualified
beginning date if the due date for any repayment with respect
to such loan occurs after the qualified beginning date and
December 31, 2006.
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 the qualified beginning date from a qualified
employer plan, if the due date for any repayment with respect
to such loan occurs during the period beginning on the
qualified beginning date, 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.
A qualified individual entitled to this plan loan relief
includes a qualified Hurricane Katrina individual, a qualified
Hurricane Rita individual, or a qualified Hurricane Wilma
individual. A qualified Hurricane Katrina 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
qualified beginning date for a qualified Hurricane Katrina
individual is August 25, 2005, and the applicable period is the
period beginning on September 24, 2005, and ending December 31,
2006. Similar rules apply to qualified Hurricane Rita and
Hurricane Wilma individuals. An individual cannot be a
qualified individual with respect to more than one hurricane.
Plan amendments relating to Hurricanes Katrina, Rita, and
Wilma
Section 1400Q(d) permits certain plan amendments made
pursuant to any provision in section 1400Q, or regulations
issued thereunder, to be retroactively effective. If the plan
amendment meets the requirements of section 1400Q, 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 section 1400Q (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 section 1400Q 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 section 1400Q (or
regulations) if it has an effective date before the effective
date of the provision (or regulations) to which it relates.

Explanation of Provision

The provision provides relief similar to the relief
provided in section 1400Q with respect to use of retirement
funds in connection with the Midwest disaster area. For this
purpose the Midwest disaster area is not limited to areas
determined by the President to warrant individual or individual
and public assistance from the Federal government with respect
to the disaster. The provision makes the relief available for
an area by reference to the applicable disaster date with
respect to that area.
The rules for tax favored withdrawals from retirement
plans, and the special rules for loans from qualified plans
that increase the loan limit and delay the due date for
repayment, are available to any individual whose principal
residence on the applicable disaster date is located in the
relevant Midwest disaster area and who sustained a loss by
reason of the relevant severe storm, tornado, or flood. The
rules for tax favored withdrawals from retirement plans apply
to distributions on or after the applicable disaster date and
before January 1, 2010. The increased loan limit applies to
loans during the period beginning on October 3, 2008 (the date
of enactment) and ending on December 31, 2009, and the one year
extension for the due date of loan payments applies to any loan
payment due during the period beginning on the applicable
disaster date and ending on December 31, 2009.
The special rule allowing recontribution of withdrawals for
home purchases applies to any withdrawal to purchase a home in
the Midwest disaster area that was not purchased or constructed
on account of the relevant severe storm, tornado, or flooding.
The provision applies to withdrawals after the date which is
six months before the applicable disaster date and before the
date which is the day after the applicable disaster date. The
recontribution may be made up until March 3, 2009 (five months
after date of enactment).
The provision also provides a similar delay until the last
day of the first plan year beginning before January 1, 2010,
for making plan amendments to tax qualified employer plans
implementing these provisions. As provided under section 1400Q,
an additional two years is provided for the amendment of
qualified retirement plans of governmental employers.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

13. Employee retention credit (sec. 702 of the Act )

Present Law

For employers affected by Hurricane Katrina, Rita, or
Wilma, section 1400R 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. Public Law 110-246 provides that section 1400R
applies, with modifications, to employers in the Kansas
disaster area.

Hurricane Katrina

An eligible employer is any employer (1) that conducted an
active trade or business on August 28, 2005, in the Gulf
Opportunity Zone 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 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 the Gulf
Opportunity Zone. 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),
but without regard to section 3306(b)(2)(B)) 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 any 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 51(i)(1) and 52 apply to the credit.

Hurricanes Rita and Wilma

The credit for employers affected by Hurricanes Rita and
Wilma follows the same rules as the credit for employers
affected by Hurricane Katrina, except the reference dates for
affected employers, comparable to the August 28, 2005 date for
employers affected by Hurricane Katrina, are September 23,
2005, and October 23, 2005, respectively.

Kansas Disaster Area

Public Law 110-246 extends the retention credit, as
modified to include an employer size limitation, for employers
affected by the storms and tornados in the Kansas disaster
area. The term ``Kansas disaster area'' means an area with
respect to which a major disaster has been declared by the
President under section 401 of the Robert T. Stafford Disaster
Relief and Emergency Assistance Act (FEMA-1699-DR, as in effect
on the date of enactment of this Act) by reason of severe
storms and tornados beginning on May 4, 2007, and determined by
the President to warrant individual or individual and public
assistance from the Federal Government under such Act with
respect to damages attributable to storms and tornados.
The reference dates for these employers, comparable to the
August 28, 2005 and January 1, 2006, dates of present law for
employers affected by Hurricane Katrina, are May 4, 2007, and
January 1, 2008, respectively.
The retention credit for employers affected by the Kansas
storms and tornados includes an employer size limitation. The
credit only applies to eligible employers who employed an
average of not more than 200 employees on business days during
the taxable year before May 4, 2007.

Explanation of Provision

The Act extends the application of the retention credit,
with the employer size limitation, for affected employers in
the Midwestern disaster area.
The reference dates for employers in the Midwestern
disaster area, comparable to the August 28, 2005 and January 1,
2006, dates of present law for employers affected by Hurricane
Katrina, are the ``applicable disaster date,'' and January 1,
2009, respectively. The ``applicable disaster date'' is the
date on which the severe storms, tornados, or flooding giving
rise to the Presidential disaster declaration occurred.
The retention credit for employers affected by the
Midwestern storms, tornados, and floods includes an employer
size limitation. The credit only applies to eligible employers
who employed an average of not more than 200 employees on
business days during the taxable year before the applicable
disaster date.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

14. Suspension of limitations on charitable contributions for disaster
relief (sec. 702 of the Act and sec. 170 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.\786\
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\786\ 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.\787\ 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 under
this provision.
---------------------------------------------------------------------------
\787\ Sec. 170(d).
---------------------------------------------------------------------------

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.\788\ The otherwise
allowable itemized deductions may not be reduced by more than
80 percent. For 2008, the adjusted gross income threshold is
$159,950 ($79,975 for a married taxpayer filing a joint
return). These dollar amounts are adjusted for inflation.
---------------------------------------------------------------------------
\788\ Sec. 68.
---------------------------------------------------------------------------
The otherwise applicable overall limitation on itemized
deductions is reduced 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.

Special rule for Hurricanes Katrina, Rita, and Wilma

Section 1400S(a) includes a special rule that temporarily
suspended the percentage limitations on certain charitable
contributions following Hurricanes Katrina, Rita, and Wilma.
Under section 1400S(a), 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).
Under section 1400S(a), 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 section 1400S, 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, Hurricane Rita, or
Hurricane Wilma. 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.
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 Act generally extends the above-described suspension of
limitations on charitable contributions permitted following
Hurricanes Katrina, Rita, and Wilma to contributions made for
relief efforts in one or more Midwestern disaster areas, with
certain modifications described below.
To be a qualified contribution under the Act, a
contribution must meet the following requirements: (1) it is a
cash contribution paid during the period beginning on the
earliest applicable disaster date for all States and ending on
December 31, 2008, to a charitable organization described in
section 170(b)(1)(A) (generally, public charities); (2) it is
made for relief efforts in one or more Midwestern disaster
areas; (3) the donor obtains from the recipient organization a
contemporaneous written acknowledgment (within the meaning of
section 170(f)(8)) that such contribution was used (or is to be
used) for such relief efforts; and (4) the taxpayer elects to
have the contribution treated as a qualified disaster
contribution. Contributions of noncash property, such as
securities, are not qualified disaster 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.
Qualified contributions do not include a contribution if
the contribution is: (1) to a supporting organization described
in section 509(a)(3), or (2) for establishment of a new, or
maintenance in an existing, donor advised fund (as defined in
section 4966(d)(2)).
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
2009 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 2009
($50,000 determined without regard to qualified contributions
plus $50,000 for the qualified contributions (the lesser of (i)
the $70,000 amount of the qualified contribution or (ii) the
$50,000 excess of the $100,000 contribution base over the
$50,000 amount otherwise deductible)). $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 qualified
contributions (the excess of $70,000 over $50,000).
Example 2.--For calendar year 2009, B, an individual, has a
contribution base of $100,000. On January 10, 2009, 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, 2009, B
makes a $70,000 qualified contribution. In 2008, B made
charitable contributions to organizations described in section
170(b)(1)(A) that exceeded 50 percent of the contribution base
by $5,000.
First, subsections (b) and (d) of section 170 are applied
by disregarding the qualified contribution. For 2009, a $12,000
deduction is allowed under section 170(b)(1)(A)--the $7,000
current year contribution and the $5,000 carryover from 2008.
For 2009, 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
percent 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 2009 ($12,000 plus
$30,000).
In addition, B may deduct $58,000 of the qualified
contribution in 2009 (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 2009 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).

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

15. Suspension of certain limitations on personal casualty losses (sec.
702 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.\789\ 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 for
the taxable year are allowable only if they exceed a $100
limitation per casualty or theft.\790\ 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.\791\ If the disaster occurs in a Presidentially
declared disaster area, the taxpayer may elect to take into
account the casualty loss in the taxable year immediately
preceding the taxable year in which the disaster occurs.\792\
---------------------------------------------------------------------------
\789\ Sec. 165(a).
\790\ Sec. 165(h)(1).
\791\ Sec. 165(h)(2).
\792\ Sec. 165(i).
---------------------------------------------------------------------------
The two limitations on personal casualty or theft losses do
not apply to the extent those losses arise in the Hurricane
Katrina, Rita and Wilma disaster area on or after specified
dates and are attributable to such hurricanes. Specifically,
the 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, these hurricane casualty losses are
disregarded. Thus, such losses are effectively treated as a
deduction separate from all other casualty losses.

Explanation of Provision

The Act generally extends the above-described suspension of
certain limitations on personal casualty losses which arise in
the Midwest disaster area on or after the applicable disaster
date, and which are attributable to the severe storms,
tornados, or flooding giving rise to any Presidential
declaration on or after May 20, 2008, and before August 1,
2008, by reason of the disaster events in the Midwestern
disaster area.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

16. Special look-back rule for determining earned income credit and
refundable child credit (sec. 702 of the Act)

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.\793\ 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.
---------------------------------------------------------------------------
\793\ Sec. 32.
---------------------------------------------------------------------------
Taxpayers with incomes below certain threshold amounts are
eligible for a $1,000 credit for each qualifying child.\794\
The child credit is refundable to the extent of 15 percent of
the taxpayer's earned income in excess of $10,000 (indexed for
inflation).\795\ 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).
---------------------------------------------------------------------------
\794\ Sec. 24.
\795\ This amount does not reflect the modification in Division C,
section 501, of the Act.
---------------------------------------------------------------------------

Hurricanes Katrina, Rita, and Wilma

Certain qualified individuals affected in 2005 by
Hurricanes Katrina, Rita, or Wilma may elect to calculate their
earned income credit and refundable child credit using their
earned income from the prior taxable year.\796\ Such qualified
individuals are permitted to make the election only if their
earned income for the taxable year affected by the hurricanes
is less than their earned income for the preceding taxable
year.
---------------------------------------------------------------------------
\796\ Sec. 1400S(d).
---------------------------------------------------------------------------
Generally, qualified individuals affected by Hurricanes
Katrina, Rita, or Wilma are (1) individuals who, immediately
before the relevant hurricane struck, had their principal place
of abode in the hurricane's disaster area and were displaced
from their home by reason of the hurricane; or (2) individuals
who, immediately before the relevant hurricane struck, lived in
the Gulf Opportunity Zone, the Rita GO Zone, or the Wilma GO
Zone whether or not they were displaced from their home.
In the case of a joint return, an 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 election applies 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 is treated as a mathematical or clerical error. An
election is disregarded for purposes of calculating gross
income in the election year.

Explanation of Provision

The provision extends the special disaster election to the
Midwestern disaster area.

Effective Date

The provision is effective for the taxable year that
includes the date on which the severe storms, tornados, or
flooding giving rise to the Presidential declarations under the
Stafford Act with respect to the Midwestern disaster area
occurred.

17. Secretarial authority to make adjustments regarding taxpayer and
dependency status (sec. 702 of the Act)

Present Law

In general

In order to determine taxable income, an individual reduces
adjusted gross income 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 section 151). Personal exemptions
are not allowed for purposes of determining a taxpayer's
alternative minimum taxable income.
Present law also 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.\797\ 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.
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\797\ Sec. 32.
---------------------------------------------------------------------------
Taxpayers with incomes below certain threshold amounts are
eligible for a $1,000 credit for each qualifying child.\798\
The child credit is refundable to the extent of 15 percent of
the taxpayer's earned income in excess of $10,000 (indexed for
inflation).\799\ 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).
---------------------------------------------------------------------------
\798\ Sec. 24.
\799\ This amount does not reflect the modification in Division C,
section 501, of the Act.
---------------------------------------------------------------------------

Hurricanes Katrina, Rita, and Wilma

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 Hurricanes Katrina, Rita or Wilma.\800\
Such adjustments may include, for example, addressing the
application of the residency requirements relating to
dependency exemptions in the case of relocations due to the
above-named hurricanes. Any adjustments made using this
authority must ensure that an individual is not taken into
account by more than one taxpayer with respect to the same tax
benefit.
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\800\ Sec. 1400S(e).
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Explanation of Provision

The provision applies the special rule for Hurricanes
Katrina, Rita, and Wilma to the Midwestern disaster area.

Effective Date

The provision is effective with respect to taxable years
beginning in 2008 and 2009.

18. Special rules for mortgage revenue bonds (sec. 702 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 that 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

Generally
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. Rehabilitation loans are eligible
for such financing if: (1) the mortgagor receiving the
financing is the first resident after the completion of the
rehabilitation; (2) at least 20 years have elapsed between the
first use of the residence and the start of the physical work
of the rehabilitation; (3) certain percentages of internal and
external walls are retained after the rehabilitation; and (4)
rehabilitation expenditures equal at least 25 percent of the
taxpayer's adjusted basis in the residence after such
rehabilitation (sec. 143 (k)(5)).
The Code imposes several limitations on qualified mortgage
bonds, including purchase price limitations for the home
financed with bond proceeds and income limitations for
homebuyers. In general, the purchase price limitation is met if
the acquisition cost of each residence financed does not exceed
90 percent of the average area purchase price (i.e., the
average single-family residence purchase price purchased for
the most recent one-year period in the statistical area in
which the residence is located) (sec. 143(e)). Also, the income
limitation generally is met if all the owner-financing provided
under the issue is provided to individuals who have family
income of 115 percent or less of the applicable median family
income (sec. 143(f)).
First-time homebuyers
In addition to the purchase price and income 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)
(sec. 143(d)). The first-time homebuyer requirement does not
apply to targeted area residences (described below).
Special rules for 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 (sec.
143(j)).
In addition to the waiver of the first-time homebuyer rule,
targeted area residences have special purchase price
limitations and income limitations. For targeted area
residences, the purchase price limitation is applied by
substituting 110 percent for 90 percent (i.e., the purchase
price limitation is met if the acquisition cost of each
residence financed does not exceed 110 percent of the average
area purchase applicable to the residence) (sec. 143(e)(5)).
For targeted area residences, the income limitation generally
is met if at least two-thirds of all the owner-financing
provided under the issue is provided to individuals who have
family income of 140 percent or less of the applicable median
family income. The other third is not subject to an income
limitation (sec. 143(f)(3)).

Special rule for Gulf Opportunity Zone, Rita GO Zone or Wilma GO Zone

Under section 1400T residences located in the Gulf
Opportunity 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.

Explanation of Provision

The Act provides mortgage revenue bond relief for the
Midwestern disaster area identical to the relief for the Gulf
Opportunity Zone, Rita GO Zone and Wilma GO Zone (except that
this relief relates to the Midwestern disaster).

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

19. Additional personal exemption for housing Hurricane Katrina
displaced individuals (sec. 702 of the Act)

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 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 2008, the amount deductible for each personal exemption
is $3,500. 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 2008 are $159,950 for
single individuals, $239,950 for married individuals filing a
joint return, $199,950 for heads of households, and $119,975
for married individuals filing separate returns. For 2008, the
point at which a taxpayer's personal exemptions are completely
phased out is $282,450 for single individuals, $362,450 for
married individuals filing a joint return, $322,950 for heads
of households, and $181,225 for married individuals filing
separate returns.

Special rule for Hurricane Katrina

The provision provided an additional exemption of $500 for
each Hurricane Katrina displaced individual of the taxpayer.
The taxpayer could claim the additional exemption for no more
than four individuals. Thus, the maximum additional exemption
amount was $2,000. The provision applied only for taxable years
beginning in 2005 and 2006; however, the exemption with respect
to any Hurricane Katrina displaced individual could be claimed
only one time for all taxable years.
A Hurricane Katrina displaced individual was a person (1)
whose principal place of abode on August 28, 2005 was in the
Hurricane Katrina disaster area, (2) who was displaced from
such abode, and (3) who was 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 could not be the spouse or any
dependent of the taxpayer. In order to claim the additional
exemption, the taxpayer must have provided the taxpayer
identification number of the displaced individual.
Additionally, the exemption was not allowed if the taxpayer
received any rent or other amount from any source in connection
with the providing of housing for a displaced individual.
The additional exemption was not subject to the income-
based phaseouts applicable to personal exemptions, and was
allowed as a deduction in computing alternative minimum taxable
income.

Explanation of Provision

The Act provides relief for the Midwestern disaster area
identical to the relief for the Gulf Opportunity Zone for 2008
and 2009 (except that this relief relates to the Midwestern
disaster rather than Hurricane Katrina).

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

20. Increase in standard mileage rate for charitable use of a vehicle
(sec. 702 of the Act)

Present Law

In general

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.\801\ 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.\802\
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\801\ Treas. Reg. sec. 1.170A-1(g).
\802\ 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.\803\ 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.
---------------------------------------------------------------------------
\803\ Sec. 170(i).
---------------------------------------------------------------------------
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 July 1, 2008, the business
standard mileage rate specified by the IRS is 58.5 cents per
mile (IRS Announcement 2008-63 (July 14, 2008)). Also, in lieu
of actual operating expenses, an optional standard mileage rate
may be used in computing deductible transportation expenses for
medical purposes (section 213) or for moving (section 217). The
medical and moving standard mileage rates are determined by the
IRS and updated periodically. For expenses incurred on or after
July 1, 2008, the rate for both such purposes is 27 cents per
mile (IRS Announcement 2008-63 (July 14, 2008)).
The standard mileage rates for charitable, medical, and
moving purposes are lower than the standard business rate
because the charitable, medical, and moving rates generally
cover only 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 or in traveling for medical or moving
purposes. Such rates do not include costs that are not
deductible for charitable, medical, or moving purposes, such as
general maintenance expenses, depreciation, insurance, and
registration fees. Such costs are, however, included in
computing the business standard mileage rate.

Special rule for Hurricane Katrina

Section 303 of the Katrina Emergency Tax Relief Act of 2005
allowed a taxpayer who used 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.
The special rule applied for purposes of contributions made
during the period beginning on August 25, 2005, and ending on
December 31, 2006.

Explanation of Provision

The Act provides relief relating to a Midwestern disaster
area during the period beginning on the applicable disaster
date and ending on December 31, 2008, identical to the relief
provided for Hurricane Katrina (except that this relief relates
to the Midwestern disaster rather than Hurricane Katrina).
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 a Midwestern disaster area. The
present-law statutory rate applies if a taxpayer fails to
substantiate that the expenses are incurred for the provision
of such relief, assuming all other present-law requirements are
met.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

21. Mileage reimbursements to charitable volunteers excluded from gross
income (sec. 702 of the Act)

Present Law

In general

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.\804\ 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.\805\
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\804\ Treas. Reg. sec. 1.170A-1(g).
\805\ 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.\806\ 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.
---------------------------------------------------------------------------
\806\ Sec. 170(i).
---------------------------------------------------------------------------
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 July 1, 2008, the business
standard mileage rate specified by the IRS is 58.5 cents per
mile (IRS Announcement 2008-63 (July 14, 2008)). Also, in lieu
of actual operating expenses, an optional standard mileage rate
may be used in computing deductible transportation expenses for
medical purposes (section 213) or for moving (section 217). The
medical and moving standard mileage rates are determined by the
IRS and updated periodically. For expenses incurred on or after
July 1, 2008, the rate for both such purposes is 27 cents per
mile (IRS Announcement 2008-63 (July 14, 2008)).
The standard mileage rates for charitable, medical, and
moving purposes are lower than the standard business rate
because the charitable, medical, and moving rates generally
cover 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 or in traveling for medical or
moving purposes. Such rates do not include costs that are not
deductible for charitable, medical, or moving purposes, such as
general 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.

Specials rule for Hurricane Katrina

Under section 304 of the Katrina Emergency Tax Relief Act
of 2005, 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 special rule does not permit a
volunteer to claim a deduction or credit with respect to
amounts excluded under the rule.
The special rule applies for purposes of use of a passenger
automobile during the period beginning on August 25, 2005, and
ending on December 31, 2006.

Explanation of Provision

In determining gross income of an individual for taxable
years ending on or after the applicable disaster date, the Act
provides for relief relating to a Midwestern disaster area
during the period beginning on the applicable disaster date and
ending on December 31, 2008, identical to the relief provided
for Hurricane Katrina (except that this relief relates to a
Midwestern disaster area rather than to Hurricane Katrina).

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

22. Exclusion for certain cancellations of indebtedness by reason of
Midwestern disasters (sec. 702 of the Act)

Present Law

In general

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, certain real property
business indebtedness, and qualified principal residence
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
and qualified principal residence 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.

Special rule for Hurricane Katrina disaster

This special rule provides that the 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, 2007.

Explanation of Provision

Effective Date

The provision applies to discharges made on or after the
applicable disaster date.

23. Extension of replacement period for nonrecognition of gain (sec.
702 of the Act)

Present Law

Generally, a taxpayer realizes gain from the sale or other
disposition of property to the extent the amount realized
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 \807\ and principal residences damaged by a
Presidentially declared disaster \808\ 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.\809\
---------------------------------------------------------------------------
\807\ Sec. 1033(g)(4).
\808\ Sec. 1033(h)(1)(B).
\809\ Sec. 1033(e)(2).
---------------------------------------------------------------------------
The replacement period was extended to five years in the
case of converted property located in the Hurricane Katrina
disaster area that is compulsorily or involuntarily converted
on or after August 25, 2005, by reason of Hurricane
Katrina.\810\ Substantially all of the use of the replacement
property must be in the Hurricane Katrina disaster area.
---------------------------------------------------------------------------
\810\ Pub. L. No. 109-73, sec. 405 (2005).
---------------------------------------------------------------------------
The replacement period also was extended to five years in
the case of converted property located in the Kansas disaster
area that is compulsorily or involuntarily converted on or
after May 4, 2007, by reason of the May 4, 2007, storms and
tornados.\811\ Substantially all of the use of the replacement
property must be in the Kansas disaster area.
---------------------------------------------------------------------------
\811\ Pub. L. No. 110-234, sec. 15345 (2008).
---------------------------------------------------------------------------

Explanation of Provision

The provision extends the replacement period to five years
in the case of converted property located in the Midwestern
disaster area \812\ that is compulsorily or involuntarily
converted on or after the applicable disaster date by reason of
a major disaster that has been declared by the President on or
after May 20, 2008, and before August 1, 2008, under section
401 of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act by reason of severe storms, tornados, or
flooding occurring in any of the States of Arkansas, Illinois,
Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska,
and Wisconsin. Substantially all of the use of the replacement
property must be in the Midwestern disaster area.
---------------------------------------------------------------------------
\812\ For purposes of this provision, the limitation to areas
determined by the President to warrant individual or individual and
public assistance from the Federal government does not apply.
---------------------------------------------------------------------------

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

B. Reporting Requirements Relating to Disaster Relief Contributions
(sec. 703 of the Act and sec. 6033 of the Code)

Present Law

Exempt organizations generally are required to file an
annual information return, stating specifically the items of
gross income, receipts, disbursements, and such other
information as the Secretary may prescribe.\813\ The
requirement that an exempt organization file an annual
information return does not apply to certain exempt
organizations, including organizations (other than private
foundations) the gross receipts of which in each taxable year
normally are not more than $25,000. Also exempt from the
requirement are churches, their integrated auxiliaries, and
conventions or associations of churches; the exclusively
religious activities of any religious order; certain state
institutions whose income is excluded from gross income under
section 115; an interchurch organization of local units of a
church; certain mission societies; certain church-affiliated
elementary and high schools; and certain other organizations,
including some that the IRS has relieved from the filing
requirement pursuant to its statutory discretionary
authority.\814\
---------------------------------------------------------------------------
\813\ Sec. 6033(a). An organization that has not received a
determination of its tax-exempt status, but that claims tax-exempt
status under section 501(a), is subject to the same annual reporting
requirements and exceptions as organizations that have received a tax-
exemption determination.
\814\ Sec. 6033(a)(2)(A); Treas. Reg. sec. 1.6033-2(a)(2)(i) and
(g)(1).
---------------------------------------------------------------------------
Section 501(c)(3) organizations that are classified as
public charities must file Form 990 (Return of Organization
Exempt From Income Tax) including Schedule A thereto, which
requests information specific to section 501(c)(3)
organizations. An organization that is required to file an
information return, but that has gross receipts of less than
$100,000 during its taxable year, and total assets of less than
$250,000 at the end of its taxable year, may file Form 990-EZ.
Private foundations are required to file Form 990-PF rather
than Form 990.
On the applicable annual information return, organizations
are required to report their gross income, information on their
finances, functional expenses, compensation, activities, and
other information required by the IRS.\815\
---------------------------------------------------------------------------
\815\ See sec. 6033(b).
---------------------------------------------------------------------------

Explanation of Provision

The Act provides that section 501(c)(3) organizations that
are required to file an annual information return must furnish,
at such time and in such manner as the Secretary may by forms
or regulations prescribe, such information as the Secretary may
require with respect to the organization's disaster relief
activities, including the amount and use of any qualified
contributions eligible for special treatment under section
1400S(a).\816\
---------------------------------------------------------------------------
\816\ Section 1400S(a) generally suspends the percentage limits
under section 170(b) with respect to certain charitable contributions
made for disaster relief.
---------------------------------------------------------------------------

Effective Date

The provision is effective for returns the due date for
which (determined without regard to any extension) occurs after
December 31, 2008.

C. Temporary Tax-Exempt Bond Financing and Low-Income Housing Tax
Relief for Areas Damaged by Hurricane Ike (sec. 704 of the Act and
secs. 41 and 144 of the Code)

Present Law

Gulf opportunity zone bonds

Low-income housing credit

In general
The low-income housing credit may be claimed over a 10-year
period by owners of certain residential rental property for the
cost of rental housing occupied by tenants having incomes below
specified levels (sec. 42). 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.
Volume limits
A low-income housing credit is allowable only if the owner
of a qualified building receives a housing credit allocation
from the State or local housing credit agency. Generally, the
aggregate credit authority provided annually to each State for
calendar years 2008 and 2009 is $2.20 per resident, with a
minimum annual cap for certain small population States. In
2010, the volume limits will return to lower prescribed levels.
These amounts are indexed for inflation. Projects that also
receive financing with proceeds of tax-exempt bonds issued
subject to the private activity bond volume limit do not
require an allocation of the low-income housing credit.
Certain distressed areas
Special allocations of the low income credit are not
provided for distressed areas on a regular basis but rather
must be separately enacted on a case-by-case basis (e.g., Gulf
Opportunity Zones).

Explanation of Provision

Tax-exempt bond financing

The Act provides tax-exempt bond financing like Gulf
Opportunity Zone Bonds with certain modifications to Louisiana,
and Texas (or any political subdivisions thereof).
Specifically, it allows the issuance of qualified private
activity bonds (called, ``Hurricane Ike disaster area bonds'')
to finance the construction and rehabilitation of certain
residential and nonresidential property located in the
Hurricane Ike disaster area. Hurricane Ike disaster area bonds
must be issued before January 1, 2013.
Like Gulf Opportunity Zone Bonds, Hurricane Ike disaster
area bonds are not subject to the State volume cap. The maximum
aggregate face amount of Hurricane Ike disaster area bonds that
may be issued in either Louisiana or Texas is limited to $2,000
multiplied by the number of residents of the respective State
residing within certain specified counties or parishes of the
State. The Texas counties are Brazoria, Chambers, Galveston,
Jefferson and Orange. The Louisiana parishes are Calcasieu and
Cameron.
Depending on the purpose for which such bonds are issued,
Hurricane Ike disaster area bonds are treated as either exempt
facility bonds or qualified mortgage bonds. Hurricane Ike
disaster area bonds have certain limitations which did not
apply to Gulf Opportunity Zone Bonds. In the case of exempt
facility bonds, such financing is limited to projects where the
person using the property either suffered a loss in a trade or
business attributable to Hurricane Ike or is designated by the
Governor as a person carrying on a trade or business replacing
such a business.\817\ In the case of mortgage bonds, an issue
is a qualified mortgage issue only if 95 percent or more of the
net proceeds of the issue are used to provide financing for
mortgagors who suffered damage attributable to Hurricane Ike to
their principal residences. For these residences the first-time
homebuyer rule is waived and purchase and income rules for
targeted area residences apply (sec. 143(k)(11)). In addition,
100 percent of the mortgages must be made to mortgagors whose
family income is 140 percent or less of the applicable median
family income (sec. 143(f)(3)).
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\817\ In the case of a project relating to public utility property,
any financing is limited to the repair or reconstruction of public
utility property damaged by Hurricane Ike.
---------------------------------------------------------------------------

Low-income housing credit

For each of three years (2008, 2009, and 2010), a special
allocation of the low-income housing credit is provided to
Louisiana and Texas. The amount of each year's special
allocation is limited to $16.00 multiplied by the number of
residents of the respective State residing within certain
specified counties or parishes of the State. The Texas counties
are Brazoria, Chambers, Galveston, Jefferson and Orange. The
Louisiana parishes are Calcasieu and Cameron.

Effective Date

The provision is effective on the date of enactment
(October 3, 2008).

SUBTITLE B--NATIONAL DISASTER RELIEF

A. Losses Attributable to Federally Declared Disasters (sec. 706 of the
Act and secs. 63 and 165 of the Code)

Present Law

Casualty Losses

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.\818\ 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 for
the taxable year are allowable only if they exceed a $100
limitation per casualty or theft.\819\ 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.\820\ If the disaster occurs in a Presidentially
declared disaster area, the taxpayer may elect to take into
account the casualty loss in the taxable year immediately
preceding the taxable year in which the disaster occurs.\821\
---------------------------------------------------------------------------
\818\ Sec. 165(a).
\819\ Sec. 165(h)(1).
\820\ Sec. 165(h)(2).
\821\ Sec. 165(i).
---------------------------------------------------------------------------

Standard Deduction

Explanation of Provision

Waiver of Adjusted Gross Income Limitation for Personal Casualty Losses

The provision waives the 10 percent of adjusted gross
income limitation for a ``net disaster loss.'' The term ``net
disaster loss'' means the excess of personal casualty losses
attributable to a ``Federally declared disaster'' declared in
taxable years beginning after December 31, 2007, and occurring
before January 1, 2010, occurring in a ``disaster area,'' over
personal casualty gains. The term ``Federally declared
disaster'' means any disaster subsequently determined by the
President of the United States to warrant assistance by the
Federal Government under the Robert T. Stafford Disaster Relief
and Emergency Assistance Act. The term ``disaster area'' means
the area so determined to warrant assistance.
Net disaster losses are deductible without regard to
whether aggregate net casualty losses exceed 10 percent of a
taxpayer's adjusted gross income. For purposes of applying the
10-percent limitation to other personal casualty or theft
losses, losses deductible under this provision are disregarded.
Thus, the provision has the effect of treating net disaster
losses attributable to Federally declared disasters as a
deduction separate from all other non-disaster casualty and
theft losses.
The following examples show the application of the
provision.
Example 1.--An individual taxpayer with $100,000 of
adjusted gross income has the following personal casualty items
during the taxable year: $5,000 personal casualty gain, $30,000
allowable personal casualty loss attributable to a Federally
declared disaster, and a $7,000 allowable personal casualty
loss.\823\ The deductible net disaster loss is $25,000 ($30,000
disaster casualty loss less the $5,000 personal casualty gain).
The deductible non-disaster casualty loss is $0 ($7,000 non-
disaster casualty loss less $10,000 (10 percent of adjusted
gross income) limitation). The taxpayer's deductible net
personal casualty loss for the taxable year is $25,000 (the sum
of the net disaster loss and the excess of the other casualty
losses over the 10-percent limitation).
---------------------------------------------------------------------------
\823\ The allowable casualty losses are after application of the
limitation per casualty under section 165(h)(1).
---------------------------------------------------------------------------
Example 2.--An individual taxpayer with $100,000 of
adjusted gross income has the following personal casualty items
during the taxable year: $5,000 personal casualty gain, $30,000
allowable personal casualty loss attributable to a Federally
declared disaster, and a $12,000 allowable personal casualty
loss.\824\ The deductible net disaster loss is $25,000 ($30,000
disaster casualty loss less the $5,000 personal casualty gain).
The deductible non-disaster casualty loss is $2,000 ($12,000
non-disaster casualty loss less $10,000 (10 percent of adjusted
gross income) limitation). The taxpayer's deductible net
personal casualty loss for the taxable year is $27,000 (the sum
of the net disaster loss and the excess of the other casualty
losses over the 10-percent limitation).
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\824\ Id.
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Increase of Standard Deduction

The provision increases an individual taxpayer's standard
deduction by the ``disaster loss deduction.'' The ``disaster
loss deduction'' is defined as the net disaster loss (as
defined above).

Increase of Limitation Per Casualty

The provision increases the $100 limitation per casualty to
$500 for taxable years beginning after December 31, 2008, and
before January 1, 2010.
Except for certain conforming amendments, the provisions of
this section of the Act do not apply to any disaster that has
been declared by the President on or after May 20, 2008, and
before August 1, 2008, under section 401 of the Robert T.
Stafford Disaster Relief and Emergency Assistance Act by reason
of severe storms, tornados, or flooding occurring in any of the
States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, and Wisconsin.\825\
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\825\ Section 712 of the Act.
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Effective Dates

The provision generally applies to disasters declared in
taxable years beginning after December 31, 2007, and occurring
before January 1, 2010.
The portion of the provision increasing the limitation per
casualty to $500 applies to taxable years beginning after
December 31, 2008, and before January 1, 2010.

B. Expensing of Qualified Disaster Expenses (sec. 707 of the Act and
new sec. 198A of the Code)

Present Law

In general

Present law allows a deduction for ordinary and necessary
expenses paid or incurred in carrying on any trade or
business.\826\ 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 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.\827\ Amounts paid or incurred for incidental repairs and
maintenance of property that neither materially add to the
value of the property nor appreciably prolong its life are not
considered to be capital expenditures and may be deducted
currently.\828\ The determination of whether an expense is
deductible or capitalizable is based on the facts and
circumstances of each case.
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\826\ Sec. 162.
\827\ Treas. Reg. sec. 1.263(a)-1(b).
\828\ Treas. Reg. sec. 1.162-4 and 1.263(a)-1(b).
---------------------------------------------------------------------------

Environmental remediation costs

Taxpayers may elect to treat certain environmental
remediation expenditures paid or incurred before January 1,
2008, that would otherwise be chargeable to capital account as
deductible in the year paid or incurred.\829\ 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.\830\ and section 263A, are treated as qualified
environmental remediation expenditures.
---------------------------------------------------------------------------
\829\ Sec. 198.
\830\ 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'') \831\
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, as well as petroleum
products defined in section 4612(a)(3) of the Code.
---------------------------------------------------------------------------
\831\ Pub. L. No. 96-510 (1980).
---------------------------------------------------------------------------
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.
Section 1400N(g) permits the expensing of environmental
remediation expenditures paid or incurred on or after August
28, 2005, and before January 1, 2008, to abate contamination at
qualified contaminated sites located in the Gulf Opportunity
Zone.

Debris removal and demolition of structures

Under present law, the cost of demolishing a structure is
generally capitalized into the taxpayer's basis in the land on
which the structure is located.\832\ Land is not subject to an
allowance for depreciation or amortization.
---------------------------------------------------------------------------
\832\ Sec. 280B.
---------------------------------------------------------------------------
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 \833\ 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.
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\833\ 1971-1 C.B. 76.
---------------------------------------------------------------------------
Section 1400N(f) provides a special rule for certain
demolition and clean-up costs. 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 and treated under the general rules. 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. This special rule also applies to the Kansas
disaster area, as added by the Heartland, Habitat, Harvest, and
Horticulture Act of 2008.\834\
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\834\ Pub. L. No. 110-234, sec. 15345(a)(3) (2008).
---------------------------------------------------------------------------

Repair of business property

As described above, 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. In the case of repair expenditures incurred subsequent
to a casualty event, the IRS issued a Chief Counsel memorandum
in 1999 stating that whether the costs of restoring uninsured
property damage caused by severe flooding are deductible as
repairs or capital expenditures ``turns on the taxpayer's
particular set of facts.'' \835\ In other words, the treatment
of the costs to restore the property after a casualty is
determined based on the general treatment of such costs,
regardless of the fact that such costs are incurred as a result
of a casualty event. In August 2006, Treasury issued proposed
regulations providing that amounts paid or incurred to restore
property are required to be capitalized to the extent the
taxpayer deducts a casualty loss under section 165 with respect
to the same property.\836\ This proposal mandates
capitalization of costs incurred by a taxpayer to repair
property after suffering a casualty loss. In an internal legal
memorandum issued after the proposed Treasury regulations were
issued, the IRS stated that the proposed regulations, which
contained a prospective effective date, were ``essentially
reflective of current law.'' \837\ In March 2008, Treasury
reissued the proposed regulations with the same treatment of
restoration expenditures for property destroyed in a casualty.
---------------------------------------------------------------------------
\835\ CCA 199903030.
\836\ Prop. Reg. sec. 1.263(a)-3(f)(3)(iv). 2006-2 C.B. 532.
\837\ AM 2006-006, footnote 2.
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Explanation of Provision

Under the provision, a taxpayer may elect to treat any
qualified disaster expense that is paid or incurred by the
taxpayer as a deduction for the taxable year in which paid or
incurred.
For purposes of the provision, a qualified disaster expense
is any otherwise capitalizable expenditure paid or incurred in
connection with a trade or business or with business-related
property that is: (1) for the abatement or control of hazardous
substances that were released on account of a Federally
declared disaster \838\ occurring before January 1, 2010; (2)
for the removal of debris from, or the demolition of structures
on, real property damaged or destroyed as a result of a
Federally declared disaster occurring before January 1, 2010;
or (3) for the repair of business-related property damaged as a
result of a Federally declared disaster occurring before
January 1, 2010. No inference is intended as to the proper
present law treatment of expenditures to repair business-
related property damaged in a casualty event. The purpose of
this provision is to provide that, in any case in which such
costs are otherwise required to be capitalized, the costs may
be deducted in the taxable year paid or incurred to the extent
incurred as a result of a Federally declared disaster.
---------------------------------------------------------------------------
\838\ See section 706 of the Act for the definition of ``Federally
declared disaster.''
---------------------------------------------------------------------------
For purposes of this provision, ``business-related
property'' is property held by the taxpayer for use in a trade
or business, for the production of income, or as inventory. In
addition, for purposes of recapture as ordinary income, any
deduction allowed under this provision is treated as a
deduction for depreciation and section 1245 property for
purposes or depreciation recapture.
This provision does not apply to any disaster that has been
declared by the President on or after May 20, 2008, and before
August 1, 2008, under section 401 of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act by reason of
severe storms, tornados, or flooding occurring in any of the
States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, and Wisconsin.\839\
---------------------------------------------------------------------------
\839\ Section 712 of the Act.
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Effective Date

The provision is effective for amounts paid or incurred
after December 31, 2007 in connection with a disaster declared
after such date.

C. Net Operating Losses Attributable to Federally Declared Disasters
(sec. 708 of the Act and sec. 172 of the Code)

Present Law

Under present law, a net operating loss (``NOL'') is,
generally, the amount by which a taxpayer's business deductions
exceed its gross income. In general, an NOL may be carried back
two years and carried over 20 years to offset taxable income in
such years.\840\ NOLs offset taxable income in the order of the
taxable years to which the NOL may be carried.\841\
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\840\ Sec. 172(b)(1)(A).
\841\ Sec. 172(b)(2).
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Different rules apply with respect to NOLs arising in
certain circumstances. 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 applies to NOLs (1)
arising from a farming loss (regardless of whether the loss was
incurred in a Presidentially declared disaster area), or (2)
certain amounts related to the Gulf Opportunity Zone and Kansas
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). Additionally, a special rule applies to certain
electric utility companies.

Explanation of Provision

The provision provides a special five-year carryback period
for NOLs to the extent of a qualified disaster loss. For
purposes of the provision, a qualified disaster loss is the
lesser of: (1) the sum of (a) section 165 losses for the
taxable year attributable to a Federally declared disaster
\842\ occurring after December 31, 2007, and before January 1,
2010, and occurring in a disaster area,\843\ and (b) the
deduction for the taxable year for qualified disaster expenses
allowable under section 198A(a) \844\ or which would be
allowable as a deduction under that section if not treated as
an expense in another section of the Code; or (2) the NOL for
the taxable year.
---------------------------------------------------------------------------
\842\ See section 706 of the Act for the definition of ``Federally
declared disaster.''
\843\ See section 706 of the Act for a definition of ``disaster
area.''
\844\ See section 707 of the Act.
---------------------------------------------------------------------------
A qualified disaster loss does not include any loss with
respect to any property used in connection with 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, or any gambling or animal racing property (as defined
in section 1400N(p)(3)(B)).
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.
Any taxpayer entitled to the five-year carryback under this
provision may elect to have the carryback period determined
without regard to this provision. In addition, the general rule
which limits a taxpayer's NOL deduction to 90 percent of
alternative minimum taxable income (``AMTI'') does 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.
This provision does not apply to any disaster that has been
declared by the President on or after May 20, 2008, and before
August 1, 2008, under section 401 of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act by reason of
severe storms, tornados, or flooding occurring in any of the
States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, and Wisconsin.\845\
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\845\ Section 712 of the Act.
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Effective Date

The provision is effective for losses arising in taxable
years beginning after December 31, 2007, in connection with
disasters declared after such date.

D. Special Rules for Mortgage Revenue Bonds in Federally Declared
Disaster Areas (sec. 709 of the bill and sec. 143 of the Code)

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 that 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

Generally
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. Rehabilitation loans are eligible
for such financing if: (1) the mortgagor receiving the
financing is the first resident after the completion of the
rehabilitation; (2) at least 20 years have elapsed between the
first use of the residence and the start of the physical work
of the rehabilitation; (3) certain percentages of internal and
external walls are retained after the rehabilitation; and (4)
rehabilitation expenditures equal at least 25 percent of the
taxpayer's adjusted basis in the residence after such
rehabilitation (sec. 143(k)(5)).
The Code imposes several limitations on qualified mortgage
bonds, including purchase price limitations for the home
financed with bond proceeds and income limitations for
homebuyers. In general, the purchase price limitation is met if
the acquisition cost of each residence financed does not exceed
90 percent of the average area purchase price (i.e., the
average single-family residence purchase price purchased for
the most recent one-year period in the statistical area in
which the residence is located) (sec. 143(e)). Also, the income
limitation generally is met if all the owner-financing provided
under the issue is provided to individuals who have family
income of 115 percent or less of the applicable median family
income (sec. 143(f)).
First-time homebuyers
In addition to the purchase price and income 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)
(sec. 143(d)). The first-time homebuyer requirement does not
apply to targeted area residences (described below).
Special rules for 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 (sec.
143(j)).
In addition to the waiver of the first-time homebuyer rule,
targeted area residences have special purchase price
limitations and income limitations. For targeted area
residences, the purchase price limitation is applied by
substituting 110 percent for 90 percent (i.e., the purchase
price limitation is met if the acquisition cost of each
residence financed does not exceed 110 percent of the average
area purchase applicable to the residence) (sec. 143(e)(5)).
For targeted area residences, the income limitation generally
is met if at least two-thirds of all the owner-financing
provided under the issue is provided to individuals who have
family income of 140 percent or less of the applicable median
family income. The other third is not subject to an income
limitation (sec. 143(f)(3)).
Special rules for Federally declared disaster areas
A temporary provision waives the first-time homebuyer
requirement for residences located in Federally declared
disaster areas (sec. 143(k)(11)). Also, under the provision,
residences located in Federally declared disaster areas are
treated as targeted area residences for purposes of the income
and purchase price limitations. The special rules for
residences located in Federally declared disaster areas applies
to bonds issued after May 1, 2008, and before January 1, 2010.

Explanation of Provision

In general

The Act allows certain taxpayers to elect to waive certain
mortgage revenue bond rules. If a taxpayer makes such an
election, then the otherwise applicable special rules for
Federally declared disaster areas do not apply. If there is no
such election, then the otherwise applicable special rules for
Federally declared disaster areas apply.

Principal residence destroyed

This election is available for principal residences located
in Federally declared disaster areas when the principal
residence of a taxpayer is: (1) rendered unsafe for use by
reason of a Federally declared disaster; or (2) demolished or
relocated by reason of an order of the government of a State of
political subdivision thereof on account of a Federally
declared disaster. This election applies for the two-year
period beginning on the date of the disaster.
The election provides for: (1) a waiver of the first-time
homebuyer requirement; and (2) the purchase price limitation
otherwise applicable to targeted area residences (i.e., the
purchase price limitation is met if the acquisition cost of
each residence financed does not exceed 110 percent of the
average area purchase applicable to the residence).

Principal residence damaged

Also, the provision allows certain taxpayers to elect to
waive the otherwise applicable qualified rehabilitation loans
rules and treat the cost of repair or reconstruction of a
taxpayer's principal residence as a qualified rehabilitation
loan. This election is limited to taxpayers whose principal
residence is damaged as a result of a Federally declared
disaster occurring before January 1, 2010. Such rehabilitation
loans are limited to the lesser of $150,000 or the cost of
repair or reconstruction.

Other rules

Once made, an election under this Act may not be revoked by
the taxpayer except with the consent of the Secretary of the
Treasury.
For purposes of the provision, the term ``Federally
declared disaster'' has the same definition as in section
165(h)(3)(C)(i) of the Code except that it does not apply to
any disaster occurring before January 1, 2008, or after
December 31, 2009.
This provision does not apply to any disaster that has been
declared by the President on or after May 20, 2008, and before
August 1, 2008, under section 401 of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act by reason of
severe storms, tornados, or flooding occurring in any of the
States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, and Wisconsin.\846\
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\846\ Section 712 of the Act.
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Effective Date

The provision is effective for disasters occurring after
December 31, 2007.

E. Special Depreciation Allowance for Qualified Disaster Property (sec.
710 of the Act and new sec. 168(n) of the Code)

Present Law

Explanation of Provision

The provision includes an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of any ``qualified disaster assistance property.'' The
additional first-year depreciation deduction is allowed for
both regular tax and alternative minimum tax purposes. 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, there are no adjustments 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.
For purposes of this provision, qualified disaster
assistance property means any property: (1) to which the
general rules of the MACRS apply with (a) an applicable
recovery period of 20 years or less, (b) computer software
other than computer software covered by section 197, (c) water
utility property (as defined in section 168(e)(5)), (d) certain
leasehold improvement property, or (e) certain nonresidential
real property and residential rental property; (2)
substantially all of which is used in a disaster area with
respect to a Federally declared disaster occurring before
January 1, 2010, in the active conduct of a trade or business
by the taxpayer in such disaster area; (3) which rehabilitates
property damaged, or replaces property destroyed or condemned,
as a result of the Federally declared disaster, except that
property is treated as replacing property destroyed or
condemned if, as part of an integrated plan, the property
replaces property which is included in a continuous area which
includes real property destroyed or condemned, and is similar
in nature to, and located in the same county as, the property
being rehabilitated or replaced; (4) the original use of the
property in the disaster area commences with an eligible
taxpayer (a taxpayer who has suffered an economic loss
attributable to a Federally declared disaster) on or after the
applicable disaster date (the date on which a Federally
declared disaster occurs); (5) which is acquired by an eligible
taxpayer by purchase (as defined under section 179(d)) by the
taxpayer on or after the applicable disaster date (and no
written binding contract for the acquisition was in effect
before such date); and (6) which is placed in service by an
eligible taxpayer on or before the date which is the last day
of the third calendar year following the applicable disaster
date (the fourth calendar year in the case of nonresidential
real property and residential rental property).
Qualified disaster assistance property does not include any
property: (1) to which the special allowance for depreciation
under section 168(k) (regardless of any election under section
168(k)(4)), section 168(l) for cellulosic biofuel property, or
section 168(m) for reuse and recycling property applies; (2) to
which the special allowance for qualified Gulf Opportunity Zone
property under section 1400N(d) applies; (3) used in connection
with 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, or any gambling or
animal racing property (as defined in section 1400N(p)(3)(B));
(4) to which the alternative depreciation system under section
168(g) applies (determined without regard to the election to
use such system under section 168(g)(7)); (5) any portion of
which is financed with proceeds of any obligation the interest
on which is exempt from tax under section 103; and (6) which is
a qualified revitalization building with respect to which the
taxpayer has made an election under section 1400I(a) to either
expense one-half of qualified revitalization expenditures or
recover such expenditures over 120 months. A taxpayer may elect
to not apply the rules of this provision with respect to any
class of property for any taxable year.
The special rules of section 168(k)(2)(E) apply with
modifications. For example, 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
applicable disaster date, and which is placed in service by an
eligible taxpayer on or before the date which is the last day
of the third calendar year following the applicable disaster
date (the fourth calendar year in the case of nonresidential
real property and residential rental property). 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.
Recapture rules similar to section 179(d)(10) apply to any
qualified disaster assistance property that ceases to be
qualified disaster assistance property.

Effective Date

The provision is effective for property placed in service
after December 31, 2007, with respect to disasters declared
after such date.

F. Increased Expensing for Qualified Disaster Assistance Property (sec.
711 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 under section 179. Present law provides
that the maximum amount a taxpayer may expense for taxable
years beginning in 2008 is $250,000 of the cost of qualifying
property placed in service for the taxable year.\852\ For
taxable years beginning in 2009 and 2010, the limitation is
$125,000. 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 2011 is treated as qualifying property. For taxable
years beginning in 2008, the $250,000 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
$800,000. The reduction amount is $500,000 for taxable years
beginning in 2009 and 2010. The $125,000 and $500,000 amounts
are indexed for inflation in taxable years beginning in 2009
and 2010.
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\852\ Additional section 179 incentives are provided with respect
to qualified property meeting applicable requirements that is used by a
business in an empowerment zone (sec. 1397A), and 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.\853\
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\853\ Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, 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 2011 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 for inflation. 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.\854\
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\854\ Sec. 179(c)(2).
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For qualified section 179 Gulf Opportunity Zone property,
the maximum amount that a taxpayer may elect to deduct is
increased by the lesser of $100,000 or the cost of qualified
section 179 Gulf Opportunity Zone property for the taxable
year.\855\ 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. The placed in service date was extended to December
31, 2008 for property substantially all of the use of which is
in one or more specified portions of the Gulf Opportunity Zone.
The threshold for reducing the amount expensed is computed by
increasing the $500,000 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. Neither the $100,000 nor $600,000 amounts are indexed for
inflation.
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\855\ Sec. 1400N(e).
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Qualified section 179 Gulf Opportunity Zone property means
section 179 property (as defined in section 179(d)) that also
meets the following requirements: (1) The property must be
property to which the general rules of the MACRS apply with (a)
an applicable recovery period of 20 years or less, (b) computer
software other than computer software covered by section 197,
(c) water utility property (as defined in section 168(e)(5)),
(d) certain leasehold improvement property; (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
(December 31, 2008 in the case of extension property).
Rules similar to those for the Gulf Opportunity Zone apply
to qualified Recovery Assistance property placed in service in
the Kansas disaster area, which was declared a major disaster
by the President by reason of severe storms and tornados.\856\
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\856\ Pub. L. No. 110-234, sec. 15345 (2008).
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Explanation of Provision

The provision increases the maximum amount that a taxpayer
may elect to deduct by the lesser of $100,000 or the cost of
qualified section 179 disaster assistance property placed in
service during the taxable year. The threshold for reducing the
amount expensed is computed by increasing the present-law
amount by the lesser of (1) $600,000, or (2) the cost of
qualified section 179 disaster assistance property placed in
service during the taxable year. Neither the $100,000 nor
$600,000 amounts are indexed for inflation.
Qualified section 179 disaster assistance property means
section 179 property (as defined in section 179(d)) that also
meets the following requirements: (1) property to which the
general rules of the MACRS apply with (a) an applicable
recovery period of 20 years or less, (b) computer software
other than computer software covered by section 197, (c) water
utility property (as defined in section 168(e)(5)), (d) certain
leasehold improvement property, or (e) certain nonresidential
real property and residential rental property; (2)
substantially all of the use of such property must be in a
disaster area with respect to a Federally declared disaster
occurring before January 1, 2010, in the active conduct of a
trade or business by the taxpayer in such disaster area; (3)
property which rehabilitates property damaged, or replaces
property destroyed or condemned, as a result of the Federally
declared disaster, except that property is treated as replacing
property destroyed or condemned if, as part of an integrated
plan, the property replaces property which is included in a
continuous area which includes real property destroyed or
condemned, and is similar in nature to, and located in the same
county as, the property being rehabilitated or replaced; (4)
the original use of the property in the disaster area commences
with an eligible taxpayer (a taxpayer who has suffered an
economic loss attributable to a Federally declared disaster) on
or after the applicable disaster date (the date on which a
Federally declared disaster occurs); (5) property which is
acquired by an eligible taxpayer by purchase (as defined under
section 179(d)) by the taxpayer on or after the applicable
disaster date (and no written binding contract for the
acquisition was in effect before such date); and (6) property
which is placed in service by an eligible taxpayer on or before
the date which is the last day of the third calendar year
following the applicable disaster date (the fourth calendar
year in the case of nonresidential real property and
residential rental property).
The provision includes rules coordinating increased section
179 amounts included under the provision 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 disaster
assistance property is not treated as qualified zone property
or qualified renewal property, unless the taxpayer elects not
to take such qualified section 179 disaster assistance property
into account for purposes of this provision. Thus, a taxpayer
acquiring property that could qualify as either qualified
section 179 disaster assistance property, 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 similar to section 179(d)(10) apply to any
qualified section 179 disaster assistance property that ceases
to be qualified section 179 disaster assistance property.

Effective Date

The provision is effective for property placed in service
after December 31, 2007, with respect to disasters declared
after such date.

TITLE VII--REVENUE RAISERS

A. Modify Tax Treatment of Offshore Nonqualified Deferred Compensation
(sec. 801 of the Act and new sec. 457A of the Code)

Present Law

In general
Under present law, the determination of when amounts
deferred under a nonqualified deferred compensation arrangement
are includible in the gross income of the person earning the
compensation depends on the facts and circumstances of the
arrangement. A variety of tax principles and Code provisions
may be relevant in making this determination, including the
doctrine of constructive receipt, the economic benefit
doctrine,\857\ the provisions of section 83 relating generally
to transfers of property in connection with the performance of
services, provisions relating specifically to nonexempt
employee trusts (sec. 402(b)) and nonqualified annuities (sec.
403(c)), and the requirements of section 409A.
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\857\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd
per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B.
174.
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In general, the time for income inclusion of nonqualified
deferred compensation depends on whether the arrangement is
unfunded or funded. If the arrangement is unfunded, then the
compensation generally is includible in income by a cash-basis
taxpayer when it is actually or constructively received. If the
arrangement is funded, then income is includible for the year
in which the individual's rights are transferable or not
subject to a substantial risk of forfeiture.
An arrangement generally is considered funded if there has
been a transfer of property under section 83. Under that
section, a transfer of property occurs when a person acquires a
beneficial ownership interest in such property. The term
``property'' is defined very broadly for purposes of section
83.\858\ Property includes real and personal property other
than money or an unfunded and unsecured promise to pay money in
the future. Property also includes a beneficial interest in
assets (including money) that are transferred or set aside from
claims of the creditors of the transferor, for example in a
trust or escrow account. Accordingly, if, in connection with
the performance of services, vested contributions are made to a
trust on an individual's behalf and the trust assets may be
used solely to provide future payments to the individual, the
payment of the contributions to the trust constitutes a
transfer of property to the individual that is taxable under
section 83. On the other hand, deferred amounts generally are
not includible in income if nonqualified deferred compensation
is payable from general corporate funds that are subject to the
claims of general creditors, as such amounts are treated as
unfunded and unsecured promises to pay money or property in the
future.
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\858\ Treas. Reg. sec. 1.83-3(e). This definition, in part,
reflects previous IRS rulings on nonqualified deferred compensation.
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As discussed above, if the arrangement is unfunded, then
the compensation generally is includible in income by a cash-
basis taxpayer when it is actually or constructively received
under section 451.\859\ Income is constructively received when
it is credited to a person's account, set apart, or otherwise
made available so that it may be drawn on at any time. Income
is not constructively received if the taxpayer's control of its
receipt is subject to substantial limitations or restrictions.
A requirement to relinquish a valuable right in order to make
withdrawals is generally treated as a substantial limitation or
restriction.
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\859\ Treas. Reg. sec. 1.451-1 and 1.451-2.
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Prior to the enactment of section 409A, arrangements had
developed in an effort to provide employees with security for
nonqualified deferred compensation, while still allowing
deferral of income inclusion under the constructive receipt
doctrine (which applies to unfunded arrangements). One such
arrangement is a ``rabbi trust.'' A rabbi trust is a trust or
other fund established by the employer to hold assets from
which nonqualified deferred compensation payments will be made.
The trust or fund is generally irrevocable and does not permit
the employer to use the assets for purposes other than to
provide nonqualified deferred compensation, except that the
terms of the trust or fund provide that the assets are subject
to the claims of the employer's creditors in the case of
insolvency or bankruptcy. In the case of a rabbi trust, these
terms had been the basis for the conclusion that the creation
of a rabbi trust does not cause the related nonqualified
deferred compensation arrangement to be funded for income tax
purposes.\860\ As a result, no amount was included in income by
reason of the rabbi trust; generally income inclusion occurs as
payments are made from the trust.
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\860\ This conclusion was first provided in a 1980 private ruling
issued by the IRS with respect to an arrangement covering a rabbi;
hence, the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec.
31, 1980).
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Section 409A

Reason for enactment
The Congress enacted section 409A \861\ because it was
concerned that many nonqualified deferred compensation
arrangements had developed which allowed improper deferral of
income. Executives often used arrangements that allowed
deferral of income, but also provided security of future
payment and control over amounts deferred. For example,
nonqualified deferred compensation arrangements often contained
provisions that allowed participants to receive distributions
upon request, subject to forfeiture of a minimal amount (i.e.,
a ``haircut'' provision). In addition, Congress was aware that
since the concept of a rabbi trust was developed, techniques
had been used that attempted to protect the assets from
creditors despite the terms of the trust. For example, the
trust or fund would be located in a foreign jurisdiction,
making it difficult or impossible for creditors to reach the
assets.
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\861\ Section 409A was added to the Code by section 885 of the
American Job Creation Act of 2004, Pub. L. No. 108-357.
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Prior to the enactment of section 409A, while the general
tax principles governing deferred compensation were well
established, the determination whether a particular arrangement
effectively allowed deferral of income was generally made on a
facts and circumstances basis. There was limited specific
guidance with respect to common deferral arrangements. The
Congress believed that it was appropriate to provide specific
rules regarding whether deferral of income inclusion should be
permitted and to provide a clear set of rules that would apply
to these arrangements. The Congress believed that certain
arrangements that allow participants inappropriate levels of
control or access to amounts deferred should not result in
deferral of income inclusion. The Congress also believed that
certain arrangements, such as offshore trusts, which
effectively protect assets from creditors of the employer,
should be treated as funded and not result in deferral of
income inclusion to the extent the amounts are vested.
General requirements of section 409A
In general.--Under section 409A, all amounts deferred by a
service provider under a nonqualified deferred compensation
plan \862\ for all taxable years are currently includible in
gross income of the service provider to the extent such amounts
are not subject to a substantial risk of forfeiture \863\ and
not previously included in gross income, unless certain
requirements are satisfied. If the requirements of section 409A
are not satisfied, in addition to current income inclusion,
interest at the rate applicable to underpayments of tax 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. Section 409A does not limit the amount that may be
deferred under a nonqualified deferred compensation plan.
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\862\ A plan includes an agreement or arrangement, including an
agreement or arrangement that includes one person. Amounts deferred
also include actual or notional earnings.
\863\ The rights of a person to compensation are subject to a
substantial risk of forfeiture if the person's rights to such
compensation are conditioned upon the performance of substantial
services by any individual.
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The Secretary of the Treasury is authorized to prescribe
regulations as are necessary or appropriate to carry out the
purposes of section 409A. The Secretary of the Treasury
published final regulations under section 409A on April 17,
2007.\864\ Under these regulations, the term ``service
provider'' includes an individual, corporation, subchapter S
corporation, partnership, personal service corporation (as
defined in section 269A(b)(1)), noncorporate entity that would
be a personal service corporation if it were a corporation, or
qualified personal service corporation (as defined in section
448(d)(2)) for any taxable year in which such individual or
entity accounts for gross income from the performance of
services under the cash receipts and disbursements method of
accounting.\865\ Section 409A does not apply to a service
provider that provides significant services to at least two
service recipients that are not related to each other or the
service provider. This exclusion does not apply to a service
provider who is an employee or a director of a corporation (or
similar position in the case of an entity that is not a
corporation).\866\ In addition, the exclusion does not apply to
an entity that operates as the manager of a hedge fund or
private equity fund. This is because the exclusion does not
apply to the extent that management services are provided to a
service recipient by a service provider. Management services
for this purpose means services that involve the actual or de
facto direction or control of the financial or operational
aspects of a trade or business of the service recipient or
investment management or advisory services provided to a
service recipient whose primary trade or business includes the
investment of financial assets, such as a hedge fund.\867\
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\864\ On October 22, 2007, the IRS announced that during 2008,
taxpayers are not required to comply with the final regulations.
Instead, taxpayers must operate a plan in compliance with section 409A
and the otherwise applicable guidance. To the extent an issue is not
addressed, a reasonable, good faith interpretation of the statute must
be used. Notice 2007-86.
\865\ Treas. Reg. sec. 1.409A-1(f)(1).
\866\ Treas. Reg. sec. 1.409A-1(f)(2).
\867\ Treas. Reg. sec. 1.409A-1(f)(2)(iv).
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Permissible distribution events.--Under section 409A,
distributions from a nonqualified deferred compensation plan
may be allowed only upon separation from service (as determined
by the Secretary of the Treasury), death, a specified time (or
pursuant to a fixed schedule), change in control of a
corporation (to the extent provided by the Secretary of the
Treasury), occurrence of an unforeseeable emergency, or if the
service provider becomes disabled. A nonqualified deferred
compensation plan may not allow distributions other than upon
the permissible distribution events and, except as provided in
regulations by the Secretary of the Treasury, may not permit
acceleration of a distribution. In the case of a specified
employee who separates from service, distributions may not be
made earlier than six months after the date of the separation
from service or upon death. Specified employees are key
employees \868\ of publicly-traded corporations.
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\868\ Key employees are defined in section 416(i) and generally
include officers (limited to 50 employees) having annual compensation
greater than $150,000 (for 2008), five percent owners, and one percent
owners having annual compensation from the employer greater than
$150,000.
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Elections.--Section 409A requires that a plan must provide
that compensation for services performed during a taxable year
may be deferred at the service provider's election only if the
election to defer is made no later than the close of the
preceding taxable year, or at such other time as provided in
Treasury regulations. In the case of any performance-based
compensation based on services performed over a period of at
least 12 months, such election may be made no later than six
months before the end of the service period. The time and form
of distributions must be specified at the time of initial
deferral. A plan may allow changes in the time and form of
distributions subject to certain requirements.
Back-to-back arrangements.--Back-to-back service recipients
(i.e., situations under which an entity receives services from
a service provider such as an employee, and the entity in turn
provides services to a client) that involve back-to-back
nonqualified deferred compensation arrangements (i.e., the fees
payable by the client are deferred at both the entity level and
the employee level) are subject to special rules under section
409A. For example, the final regulations generally permit the
deferral agreement between the entity and its client to treat
as a permissible distribution event those events that are
specified as distribution events in the deferral agreement
between the entity and its employee. Thus, if separation from
employment is a specified distribution event between the entity
and the employee, the employee's separation generally is a
permissible distribution event for the deferral agreement
between the entity and its client.\869\
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\869\ Treas. Reg. sec. 1.409A-1(i)(6).
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Offshore funding arrangements.--Section 409A requires
current income inclusion in the case of certain offshore
funding of nonqualified deferred compensation. Under section
409A, in the case of assets set aside (directly or indirectly)
in a trust (or other arrangement determined by the Secretary of
the Treasury) for purposes of paying nonqualified deferred
compensation, such assets are treated as property transferred
in connection with the performance of services under section 83
(whether or not such assets are available to satisfy the claims
of general creditors) at the time set aside if such assets are
located outside of the United States or at the time transferred
if such assets are subsequently transferred outside of the
United States. Any subsequent increases in the value of, or any
earnings with respect to, such assets are treated as additional
transfers of property.
If an impermissible set aside of assets occurs, the tax
otherwise imposed under the Code is increased by an interest
charge. The interest charge is equal to the amount of interest
at the underpayment rate plus one percentage point on the
underpayments of tax that would have occurred had the amounts
set aside 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.
The special funding rule does not apply to assets located
in a foreign jurisdiction if substantially all of the services
to which the nonqualified deferred compensation relates are
performed in such foreign jurisdiction. The Secretary of the
Treasury has authority to exempt arrangements from the
provision if the arrangements do not result in an improper
deferral of U.S. tax and will not result in assets being
effectively beyond the reach of creditors.
Definition of substantial risk of forfeiture
Under the Treasury regulations, compensation is subject to
a substantial risk of forfeiture if entitlement to the amount
is conditioned upon either the performance of substantial
future services by any person or the occurrence of a condition
related to a purpose of the compensation, provided that the
possibility of forfeiture is substantial.\870\
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\870\ Treas. Reg. sec. 1.409A-1(d)(1).
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Definition of nonqualified deferred compensation
Under section 409A, a nonqualified deferred compensation
plan generally includes 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 a simple retirement account
plan. A qualified governmental excess benefit arrangement (sec.
415(m)) and an eligible deferred compensation plan (sec.
457(b)) is a qualified employer plan.
The Treasury regulations also provide that certain other
types of plans are not considered deferred compensation, and
thus are not subject to section 409A. For example, if a service
recipient transfers property to a service provider, there is no
deferral of compensation merely because the value of the
property is either not includible in income under section 83 by
reason of the property being substantially nonvested or is
includible in income because of a valid section 83(b)
election.\871\ Special rules apply in the case of stock
options.\872\ Another exception applies to amounts that are not
deferred beyond a short period of time after the amount is no
longer subject to a substantial risk of forfeiture (the
``short-term deferral exception'').\873\ Under this exception,
there generally is no deferral for purposes of section 409A if
the service provider actually or constructively receives the
amount on or before the last day of the applicable 2\1/2\ month
period. The applicable 2\1/2\ month period is the period ending
on the later of the 15th day of the third month following the
end of: (1) the service provider's first taxable year in which
the right to the payment is no longer subject to a substantial
risk of forfeiture; or (2) the service recipient's first
taxable year in which the right to the payment is no longer
subject to a substantial risk of forfeiture.
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\871\ Treas. Reg. sec. 1.409A-1(b)(6).
\872\ Treas. Reg. sec. 1.409A-1(b)(5).
\873\ Treas. Reg. sec. 1.409A-1(b)(4).
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Special rules apply in the case of stock appreciation
rights (``SARs'').\874\ Under the final Treasury regulations, a
SAR is a right to compensation based on the appreciation in
value of a specified number of shares of service recipient
stock occurring between the date of grant and the date of
exercise of such right. The final regulations generally provide
that a SAR does not result in a deferral of compensation for
purposes of section 409A (and thus is not subject to section
409A) if the compensation payable under the SAR is not greater
than the excess of the fair market value of the underlying
stock on the date the SAR is exercised over the fair market
value of the underlying stock on the date the SAR is
granted.\875\
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\874\ Treas. Reg. sec. 1.409A-1(b)(5).
\875\ Treas. Reg. sec. 1.409A-1(b)(5)(i)(B).
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The Treasury regulations provide exclusions from the
definition of nonqualified deferred compensation in the case of
services performed by individuals who participate in certain
foreign plans, including plans covered by an applicable treaty
and broad-based foreign retirement plans.\876\ In the case of a
U.S. citizen or lawful permanent alien, nonqualified deferred
compensation plan does not include a broad-based foreign
retirement plan, but only with respect to the portion of the
plan that provides for nonelective deferral of foreign earned
income and subject to limitations on the annual amount deferred
under the plan or the annual amount payable under the plan. In
general, foreign earned income refers to amounts received by an
individual from sources within a foreign country that
constitutes earned income attributable to services.
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\876\ Treas. Reg. sec. 1.409A-1(a)(3).
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Timing of the service recipient's deduction

Special statutory provisions govern the timing of the
deduction for nonqualified deferred compensation, regardless of
whether the arrangement covers employees or nonemployees and
regardless of whether the arrangement is funded or
unfunded.\877\ Under these provisions, the amount of
nonqualified deferred compensation that is includible in the
income of the service provider is deductible by the service
recipient for the taxable year in which the amount is
includible in the service provider's income.\878\ Thus, for
example, in the case of an unfunded nonqualified deferred
compensation plan, a deduction to the taxable service recipient
is deferred until the deferred compensation is actually paid or
made available to the service provider.
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\877\ Secs. 404(a)(5), (b) and (d) and sec. 83(h).
\878\ In the case of a publicly held corporation, under section
162(m), no deduction is allowed for a taxable year for remuneration
with respect to a covered employee to the extent that the remuneration
exceeds $1 million. Section 162(m) defines the term ``covered
employee'' in part by reference to Federal securities law. In light of
changes to Federal securities law, the IRS interprets the term covered
employee as the principal executive officer of the taxpayer as of the
close of the taxable year or the three most highly compensated
employees of the taxpayer for the taxable year whose compensation must
be disclosed to the taxpayer's shareholders (other than the principal
executive officer or the principal financial officer). Notice 2007-49,
2007-25 I.R.B. 1429. For purposes of the deduction limit, remuneration
generally includes all remuneration for which a deduction is otherwise
allowable, although commission-based compensation and certain
performance-based compensation are not subject to the limit.
Remuneration does not include compensation for which a deduction is
allowable after a covered employee ceases to be a covered employee.
Thus, the deduction limitation often does not apply to deferred
compensation that is otherwise subject to the deduction limitation
(e.g., is not performance-based compensation) because the payment of
the compensation is deferred until after termination of employment.
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Section 457

Special income recognition rules apply in the case of a
participant in a deferred compensation plan that is sponsored
by a State or local government or an organization that is
exempt from Federal income tax under section 501(a). Section
457 provides for different income inclusion rules for two basic
types of deferred compensation arrangements: (1) arrangements
that limit the amount of compensation that may be deferred
(generally, $15,500 in 2007) and that meet certain other
requirements specified in section 457(b) (referred to as a
``section 457(b) plan'' or an ``eligible deferred compensation
plan''); and (2) arrangements that do not satisfy the
requirements of section 457(b) (referred to as a ``section
457(f) plan'' or an ``ineligible deferred compensation plan'').
Section 457 does not provide a limit on the amount of
compensation that may be deferred under a section 457(f) plan.
A participant in a section 457(b) plan does not recognize
income with respect to the participant's interest in such plan
until the time of actual distribution (or, if earlier, the time
the participant's interest is made available to the
participant, but only in the case of a section 457(b) plan
maintained by a tax-exempt sponsor other than a State or local
government). In contrast, a participant in a section 457(f)
plan must include amounts deferred under such a plan in gross
income for the first taxable year in which there is no
substantial risk of forfeiture of the rights to such
compensation.

Reasons for Change

Under present law, there is a tension in the case of a
nonqualified deferred compensation agreement between a service
provider and a taxable service recipient. This arises because
the timing rule under the Code defers the service recipient's
deduction for nonqualified deferred compensation until the
taxable year in which such compensation is includible in the
service provider's gross income. This tension may limit the
amount of compensation that a service recipient is willing to
permit a service provider to defer under a nonqualified
deferred compensation arrangement. Even when this tension does
not limit the amount of compensation that a service recipient
is willing to permit a service provider to defer under a
nonqualified deferred compensation arrangement, this tension
ensures that the cost of allowing this deferral is borne by the
service recipient.
Under present law, the ability to defer nonqualified
deferred compensation is limited in certain cases in which this
tension is not present. When this tension is not present, the
cost of allowing service providers to defer under a
nonqualified deferred compensation arrangement is not borne by
the service recipient. Instead, this cost is borne by the
Treasury. In order to limit the cost to the Treasury, Congress
passed special rules limiting deferral in certain situations.
Specifically, section 457 provides special rules that limit
deferred compensation arrangements sponsored by State and local
governments and other tax-exempt entities.
Congress became aware of other situations in which the
present law tension does not exist. Specifically, foreign
corporations that are not subject to a comprehensive income tax
and partnerships that are comprised of foreign persons and U.S.
tax-exempt entities are indifferent to the timing of deductions
for nonqualified deferred compensation. Congress believed that
in such cases additional rules should apply that limit the
ability to defer service provider compensation.

Explanation of Provision

In general

Under the provision, any compensation that is deferred
under a nonqualified deferred compensation plan of a
nonqualified entity is includible in gross income by the
service provider when there is no substantial risk of
forfeiture of the service provider's rights to such
compensation. The provision is intended to apply without regard
to the method of accounting of the service provider,\879\ and
applies regardless of whether the service recipient is taxed as
a partnership, trust or corporation. The provision applies in
addition to the requirements of section 409A (or any other
provision of the Code or general tax law principle) with
respect to nonqualified deferred compensation.
---------------------------------------------------------------------------
\879\ Due to the definition of substantial risk of forfeiture under
the provision, an accrual-basis taxpayer might be required to include
compensation as income under the provision at a date earlier than the
accrual accounting method rules would otherwise require.
---------------------------------------------------------------------------

Nonqualified deferred compensation

For purposes of the provision, the term ``nonqualified
deferred compensation plan'' is defined in the same manner as
for purposes of section 409A, subject to certain modifications.
As under section 409A, the term nonqualified deferred
compensation includes earnings with respect to previously
deferred amounts. Earnings are treated in the same manner as
the amount deferred to which the earnings relate.
Under the provision, nonqualified deferred compensation
includes any arrangement under which compensation is based on
the increase in value of a specified number of equity units of
the service recipient. Thus, stock appreciation rights
(``SARs'') are treated as nonqualified deferred compensation
under the provision, regardless of the exercise price of the
SAR. It is not intended that the term nonqualified deferred
compensation plan include an arrangement taxable under section
83 providing for the grant of an option on employer stock with
an exercise price that is not less than the fair market value
of the underlying stock on the date of grant if such
arrangement does not include a deferral feature other than the
feature that the option holder has the right to exercise the
option in the future. The provision is not intended to change
the tax treatment of incentive stock options meeting the
requirements of section 422 or options granted under an
employee stock purchase plan meeting the requirements of
section 423. Similarly, nonqualified deferred compensation for
purposes of the provision generally does not include a transfer
of property to which section 83 is applicable (such as a
transfer of restricted stock), provided that the arrangement
does not include a deferral feature. However, it is not
intended that the provision may be avoided through the use of
an instrument (such as an option to acquire a partnership
interest or a notional principal contract) held or entered into
directly or indirectly by a service provider, the value of
which is determined in whole or part by reference to the
profits or value (or any increase or decrease in the profits or
value) of the business of the entity for which the services are
effectively provided, particularly when the value of such
instrument is not determinable at the time it is granted or
received. Similarly, it is not intended that the purposes of
the provision may be avoided through the use of ``springing''
partnerships or other entities or rights that come into
existence in the future and serve a function similar to a
conversion right.
The short-term deferral exception that applies for purposes
of the provision is different from the short-term deferral
exception that applies for purposes of section 409A. For all
purposes of the provision, compensation is not treated as
deferred if the service provider receives payment of the
compensation not later than 12 months after the end of the
taxable year of the service recipient during which the right to
the payment of such compensation is no longer subject to a
substantial risk of forfeiture. For purposes of this short-term
deferral exception, whether compensation is subject to a
substantial risk of forfeiture is determined under section
457A(d)(1).

Nonqualified entity

The term ``nonqualified entity'' includes certain foreign
corporations and certain partnerships (either domestic or
foreign). A foreign corporation is a nonqualified entity unless
substantially all of its income is effectively connected with
the conduct of a United States trade or business or is subject
to a comprehensive foreign income tax. A partnership is a
nonqualified entity unless substantially all of its income is
allocated to persons other than foreign persons with respect to
whom such income is not subject to a comprehensive foreign
income tax and organizations which are exempt from U.S. income
tax. It is intended that the Secretary of the Treasury issue
guidance addressing the time at which (or period of time over
which) an entity is tested for status as a nonqualified entity,
the circumstances in which an entity's status as a nonqualified
or qualified entity may change, and the consequences of any
such change in status. For example, compensation that is
deferred under a nonqualified deferred compensation plan that
is no longer subject to a substantial risk of forfeiture may be
includible in income when the entity later becomes a
nonqualified entity.
In determining whether a partnership is considered a
nonqualified entity, it is also intended that an organization
that is a partner in the partnership not be considered exempt
from U.S. income tax to the extent that the organization's
share of the partnership's income is subject to U.S. tax as
unrelated business taxable income. Similarly, it is intended
that a foreign person that is a partner in a partnership not be
considered a foreign person with respect to whom partnership
income is not subject to a comprehensive foreign income tax to
the extent that such person's share of partnership income is
subject to U.S. income tax as income that is effectively
connected with the conduct of a U.S. trade or business.\880\
---------------------------------------------------------------------------
\880\ The rules described in the foregoing paragraph were reflected
in H.R. 7060, The Renewable Energy and Job Creation Tax Act of 2008, as
passed by the House of Representatives on September 26, 2008. A
technical correction may be necessary so that the statute reflects this
intent.
---------------------------------------------------------------------------
The term comprehensive foreign income tax means with
respect to a foreign person, the income tax of a foreign
country if (1) such person is eligible for the benefits of a
comprehensive income tax treaty between such foreign country
and the United States, or (2) such person demonstrates to the
satisfaction of the Secretary of the Treasury that such foreign
country has a comprehensive income tax.
Congress intends that the requirement that substantially
all of the income of an entity be ``subject to'' a
comprehensive foreign income tax generally means that the
income in question must be includible in the entity's taxable
income under the laws of the entity's country of residence.
Congress is aware, however, that many jurisdictions (including
jurisdictions with which the United States has income tax
treaties) partially or entirely exempt, under generally
applicable rules (such as exclusions, exemptions and
deductions), certain classes of income (such as foreign-source
dividends or other foreign-source income) when certain
conditions (such as holding period, ownership threshold, or
foreign tax imposition requirements) are satisfied. Congress
also is aware that the principles for determining what
constitutes income under U.S. tax rules sometimes differ from
the principles of other jurisdictions. It is expected that
guidance issued by the Secretary will give due regard to common
variations among income tax systems but will be consistent with
Congress's general intent to treat a foreign corporation as a
nonqualified entity if more than an insubstantial portion of
the entity's income is excluded from the corporation's taxable
income under the laws of the corporation's country of
residence. In determining whether the laws of a corporation's
jurisdiction of residence include an item of income in the
corporation's taxable income, the Secretary should consider
whether such income is received from a corporation organized in
the United States; is effectively connected with the conduct of
a trade or business in the United States or attributable to a
U.S permanent establishment under a U.S. income tax treaty; or
is received from a corporation subsantially all of the income
of which is subject to a comprehensive foreign income tax.
Congress further does not intend to permit a taxpayer to
avoid the application of the provision by availing itself of a
legal entity that is considered resident in a country with
which the United States has an income tax treaty but that pays
little or no tax in that country because of a preferential
regime that is available to certain types of qualified or
special purpose entities (such as financial companies or
holding companies) or specified income (such as investment
income) or that provides liberal profit extraction rules.
Accordingly, it is expected that the Secretary will provide
guidance addressing the question of whether, or in which
circumstances, a corporation is a nonqualified entity because
it is subject to a preferential tax regime in its country of
residence.
It is intended that the Secretary will provide guidance on
the issue of which U.S. income tax treaties are considered
comprehensive income tax treaties. Congress expects that one
factor to be taken into account in this guidance will be
whether a particular income tax treaty includes comprehensive
limitation on benefits rules. A treaty with liberal, or no,
limitation on benefits rules (such as the present treaties with
Hungary and Poland) may, in the Secretary's discretion, be
excluded from treament as a comprehensive income tax treaty
because a corporation may be eligible for the benefits of that
treaty even if most or all of its income is not subject to tax
in the corporation's country of residence. Congess is aware
that the term ``comprehensive income tax treaty'' is also used
in the rules for determining whether dividend income received
from a foreign corporation may be taxed at a reduced rate.\881\
The substance and concerns of the permissive rules of section
1(h)(11) for determining eligibility for a reduced tax rate for
certain dividend income are significantly different from the
substance and concerns of this restrictive provision.
Accordingly, guidance issued on what constitutes a
``comprehensive income tax treaty'' under section 1(h)(11)
should in no way be considered to bind any guidance issued
under this provision.
---------------------------------------------------------------------------
\881\ Section 1(h)(11)(C)(i)(II).
---------------------------------------------------------------------------
In the case of a foreign corporation with income that is
taxable under section 882, the provision does not apply to
compensation which, had such compensation been paid in cash on
the date that such compensation ceased to be subject to a
substantial risk of forfeiture, would have been deductible by
such foreign corporation against such income.

Additional rules

In general, a nonqualified deferred compensation plan is
considered to be a plan of an entity for purposes of the
provision to the extent that compensation deferred under the
plan is deductible by such entity. It is intended, however,
that the Secretary may issue regulations that limit the
application of this general rule as is necessary to prevent
abuse or otherwise reflect the intent of the provision. Under
the general rule, for example, the provision does not apply to
compensation arrangements of employees of a U.S. corporation
that is wholly owned by a nonqualified entity to the extent
that the compensation is deductible by the U.S. subsidiary,
even if both the U.S. corporation and the nonqualified entity
are liable to pay the compensation. This is because the
subsidiary is subject to the timing rule of section 404(a)(5)
with respect to its deduction of its employees' nonqualified
deferred compensation.
For purposes of the provision, compensation of a service
provider is subject to a substantial risk of forfeiture only if
such person's right to the compensation is conditioned upon the
future performance of substantial services by any individual
and the possibility of forfeiture is substantial. Substantial
risk of forfeiture does not include a condition related to a
purpose of the compensation (other than future performance of
substantial services), regardless of whether the possibility of
forfeiture is substantial.
To the extent provided in regulations prescribed by the
Secretary, if compensation is determined solely by reference to
the amount of gain recognized on the disposition of an
investment asset, such compensation is treated as subject to a
substantial risk of forfeiture until the date of such
disposition. Investment asset means for this purpose any single
asset (other than an investment fund or similar entity) (1)
acquired directly by an investment fund or similar entity, (2)
with respect to which such entity does not (nor does any person
related to such entity) participate in the active management of
such asset (or if such asset is an interest in an entity, in
the active management of the assets of such entity), and (3)
substantially all of any gain on the disposition of which
(other than the nonqualified deferred compensation) is
allocated to investors in such entity. The rule only applies if
the compensation is determined solely by reference to the gain
upon the disposition of an investment asset. Thus, for example,
the rule does not apply in the case of an arrangement under
which the amount of the compensation is reduced for losses on
the disposition of any other asset. With respect to any gain
attributable to the period before the asset is treated as no
longer subject to a substantial risk of forfeiture, it is
intended that Treasury regulations will limit the application
of this rule to gain attributable to the period that the
service provider is performing services.
The rule is intended to apply to compensation contingent on
the disposition of a single asset held as a long-term
investment, provided that the service provider does not
actively manage the asset (other than the decision to purchase
or sell the investment). If the asset is an interest in an
entity (such as a company that produces products or services),
the rule does not apply if the service provider actively
participates in the management of the entity. Active management
is intended to include participation in the day-to-day
activities of the asset, but does not include the election of a
director or other voting rights exercised by shareholders.
The rule is intended to apply solely to compensation
arrangements relating to passive investments by an investment
fund in a single asset. For example, if an investment fund
acquires XYZ operating corporation, the rule is intended to
apply to an arrangement that the fund manager receive 20
percent of the gain from the disposition of XYZ operating
corporation if the fund manager does not actively participate
in the management of XYZ operating corporation. In contrast,
the rule does not apply if the investment fund holds two or
more operating corporations and the fund manager's compensation
is based on the net gain resulting from the disposition of the
operating corporations. The rule does not apply to the
disposition of a foreign subsidiary which holds a variety of
assets the investment of which is managed by the service
provider.
Under the provision, if the amount of any deferred
compensation is not determinable at the time that such
compensation is otherwise required to be included in income
under the provision, the amount is includible when such amount
becomes determinable. This rule applies in lieu of the general
rule of the provision, under which deferred compensation is
includible in income when such compensation is no longer
subject to a substantial risk of forfeiture. In addition, the
income tax with respect to such amount is increased by the sum
of (1) an interest charge, and (2) an amount equal to 20
percent of such compensation. The interest charge is equal to
the interest at the rate applicable to underpayments of tax
plus one percentage point 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.

Treasury regulations

It is intended that the Secretary of the Treasury issue
regulations as to when an amount is not determinable for
purposes of the provision. It is intended that an amount of
deferred compensation is not determinable at the time the
amount is no longer subject to a substantial risk of forfeiture
if the amount varies depending on the satisfaction of an
objective condition. For example, if a deferred amount varies
depending on the satisfaction of an objective condition at the
time the amount is no longer subject to substantial risk of
forfeiture (e.g., no amount is paid unless a certain threshold
is achieved, 100 percent is paid if the threshold is achieved,
and 200 percent is paid if a higher threshold is achieved), the
amount deferred is not determinable.
The Secretary of the Treasury is also authorized to issue
such regulations as may be necessary or appropriate to carry
out the purposes of the provision, including regulations
disregarding a substantial risk of forfeiture as necessary to
carry out such purposes.
Entity aggregation rules similar to those that apply under
section 409A apply for purposes of the provision. It is not
intended that the aggregation rules treat every entity within
an aggregated group as a nonqualified entity merely because one
entity in the group is a nonqualified entity.\882\ The
determination of a particular entity's nonqualified entity
status under the provision is generally performed on an entity-
by-entity basis. It is intended, however, that the Secretary
may permit or require (as appropriate under the circumstances)
that the determination of nonqualified entity status be
performed on an aggregated basis, for example, in the case of
an aggregated group of entities that are organized in the same
jurisdiction. Further, the determination of whether a
nonqualified deferred compensation plan is a plan of a
particular entity does not depend on whether such entity is
aggregated with another employer that adopts and maintains the
plan, but is instead determined generally (as discussed above)
on the basis of which entity is entitled to deduct compensation
that is deferred under the plan.
---------------------------------------------------------------------------
\882\ A technical correction may be necessary so that the statute
reflects this intent.
---------------------------------------------------------------------------

Effective Date

The provision is effective with respect to amounts deferred
which are attributable to services performed after December 31,
2008. In the case of an amount deferred which is attributable
to services performed on or before December 31, 2008, to the
extent such amount is not includible in gross income in a
taxable year beginning before 2018, then such amount is
includible in gross income in the later of (1) the last taxable
year beginning before 2018, or (2) the taxable year in which
there is no substantial risk of forfeiture of the rights to
such compensation (as determined for purposes of the
provision). Earnings on amounts deferred which are attributable
to services performed on or before December 31, 2008, are
subject to the provision only to the extent that the amounts to
which such earnings relate are subject to the provision.
No later than 120 days after date of enactment, the
Secretary shall issue guidance providing a limited period of
time during which a nonqualified deferred compensation
arrangement attributable to services performed on or before
December 31, 2008, may, without violating the requirements of
section 409A(a), be amended to conform the date of distribution
to the date the amounts are required to be included in income
under the provision. If the taxpayer is also a service
recipient and maintains one or more nonqualified deferred
compensation arrangements for its service providers under which
any amount is attributable to services performed on or before
December 31, 2008, the guidance shall permit such arrangements
to be amended to conform the dates of distribution under the
arrangement to the date amounts are required to be included in
income of the taxpayer under the provision. An amendment made
pursuant to the Treasury guidance will not be treated as a
material modification of the arrangement for purposes of
section 409A.

PART EIGHTEEN: FOSTERING CONNECTIONS TO SUCCESS AND INCREASING
ADOPTIONS ACT OF 2008 (PUBLIC LAW 110-351) \883\
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\883\ H.R. 6893. H.R. 6893 passed the House on September 17, 2008,
and passed the Senate without amendment on September 22, 2008. The
President signed the bill on October 7, 2008.
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A. Clarify Uniform Definition of Child (sec. 501 of the Act and secs.
24 and 152 of the Code)

Present Law

Uniform definition of qualifying child
In general
Present law provides a uniform definition of qualifying
child (the ``uniform definition'') for purposes of the
dependency exemption, the child credit, the earned income
credit, the dependent care credit, and head of household filing
status. A taxpayer generally may claim an individual who does
not meet the uniform definition (with respect to any taxpayer)
as a dependent if the dependency requirements are satisfied.
The uniform definition generally does not modify other
parameters of each tax benefit (e.g., the earned income
requirements of the earned income credit) or the rules for
determining whether individuals other than children of the
taxpayer qualify for each tax benefit.
Under the uniform definition, in general, a child is a
qualifying child of a taxpayer if the child satisfies each of
three tests: (1) the child has the same principal place of
abode as the taxpayer for more than one half the taxable year;
(2) the child has a specified relationship to the taxpayer; and
(3) the child has not yet attained a specified age. A tie-
breaking rule applies if more than one taxpayer claims a child
as a qualifying child.
The support and gross income tests for determining whether
an individual is a dependent generally do not apply to a child
who meets the requirements of the uniform definition.
Residency test
Under the uniform definition's residency test, a child must
have the same principal place of abode as the taxpayer for more
than one half of the taxable year. Temporary absences due to
special circumstances, including absences due to illness,
education, business, vacation, or military service, are not
treated as absences.
Relationship test
In order to be a qualifying child, the child must be the
taxpayer's son, daughter, stepson, stepdaughter, brother,
sister, stepbrother, stepsister, or a descendant of any such
individual. For purposes of determining whether an adopted
child is treated as a child by blood, an adopted child means an
individual who is legally adopted by the taxpayer, or an
individual who is lawfully placed with the taxpayer for legal
adoption by the taxpayer. A foster child who is placed with the
taxpayer by an authorized placement agency or by judgment,
decree, or other order of any court of competent jurisdiction
is treated as the taxpayer's child.
Age test
The age test varies depending upon the tax benefit
involved. In general, a child must be under age 19 (or under
age 24 in the case of a full-time student) in order to be a
qualifying child. In general, no age limit applies with respect
to individuals who are totally and permanently disabled within
the meaning of section 22(e)(3) at any time during the calendar
year. A child must be under age 13 (if he or she is not
disabled) for purposes of the dependent care credit, and under
age 17 (whether or not disabled) for purposes of the child
credit.
Children who support themselves
A child who provides over one half of his or her own
support generally is not considered a qualifying child of
another taxpayer. However, a child who provides over one half
of his or her own support may constitute a qualifying child of
another taxpayer for purposes of the earned income credit.
Tie-breaking rules
If a child would be a qualifying child with respect to more
than one individual (e.g., a child lives with his or her mother
and grandmother in the same residence) and more than one person
claims a benefit with respect to that child, then the following
``tie-breaking'' rules apply. First, if only one of the
individuals claiming the child as a qualifying child is the
child's parent, the child is deemed the qualifying child of the
parent. Second, if both parents claim the child and the parents
do not file a joint return, then the child is deemed a
qualifying child first with respect to the parent with whom the
child resides for the longest period of time, and second with
respect to the parent with the highest adjusted gross income.
Third, if the child's parents do not claim the child, then the
child is deemed a qualifying child with respect to the claimant
with the highest adjusted gross income.
Interaction with other rules
Taxpayers generally may claim an individual who does not
meet the uniform definition with respect to any taxpayer as a
dependent if the dependency requirements (including the gross
income and support tests) are satisfied. Thus, for example, a
taxpayer may claim a parent as a dependent if the taxpayer
provides more than one half of the support of the parent and
the parent's gross income is less than the personal exemption
amount. As another example, a grandparent may claim a
dependency exemption with respect to a grandson who does not
reside with any taxpayer for over one half the year, if the
grandparent provides more than one half of the support of the
grandson and the grandson's gross income is less than the
personal exemption amount.
Children of divorced or legally separated parents
In the case of divorced or legally separated parents, a
custodial parent may release the claim to a dependency
exemption and the child credit to a noncustodial parent. While
the definition of qualifying child is generally uniform, this
custodial waiver rule does not apply with respect to the earned
income credit, head of household status, or the dependent care
credit.
Other provisions
A taxpayer identification number for a child must be
provided on the taxpayer's return. For purposes of the earned
income credit, a qualifying child is required to have a social
security number that is valid for employment in the United
States (that is, the child must be a U.S. citizen, permanent
resident, or have a certain type of temporary visa).
Dependency rules
In general
An individual may be claimed as a taxpayer's dependent if
such individual is a qualifying child or a qualifying relative
of the taxpayer and meets certain other requirements. An
individual is a taxpayer's qualifying relative if such
individual (1) bears the appropriate relationship to the
taxpayer; (2) has a gross income that does not exceed the
personal exemption amount; (3) receives one-half of his or her
support from the taxpayer; and (4) is not a qualifying child of
the taxpayer. Generally, an individual bears the appropriate
relationship to the taxpayer if the individual is the
taxpayer's lineal descendent or ancestor, brother, sister,
aunt, uncle, niece, or nephew. Some relations by marriage also
qualify, including stepmothers, stepfathers, stepbrothers,
stepsisters, sons-in-law, daughters-in-law, fathers-in-law,
mothers-in-law, brothers-in-law, and sisters-in-law. In
addition, an individual bears the appropriate relationship if
the individual has the same principal place of abode as the
taxpayer and is a member of the taxpayer's household.
Dependents of dependents
Generally, if an individual is a dependent of a taxpayer
for any taxable year, such individual is treated as having no
dependents for such taxable year. Therefore, the individual is
ineligible to claim:
1. head of household filing status; \884\
---------------------------------------------------------------------------
\884\ Sec. 2.
---------------------------------------------------------------------------
2. the dependent care credit; \885\ or
---------------------------------------------------------------------------
\885\ Sec. 21.
---------------------------------------------------------------------------
3. a dependency exemption.\886\
---------------------------------------------------------------------------
\886\ Sec. 151.
---------------------------------------------------------------------------
Married dependents
Generally, an individual filing a joint return with such
individual's spouse is not treated as the dependent of a
taxpayer. Therefore, the taxpayer is ineligible to claim the
earned income credit or a dependency exemption with respect to
such individual.
Citizenship and residency
Children who are U.S. citizens or nationals living abroad
or non-U.S. citizens or nationals living in Canada or Mexico
may qualify as dependents. In addition, a legally adopted child
who does not satisfy the residency or citizenship requirement
may nevertheless qualify as a dependent if (1) the child's
principal place of abode is the taxpayer's home and (2) the
taxpayer is a citizen or national of the United States.

Earned income credit

The earned income credit is a refundable tax credit
available to certain lower-income individuals. Generally, the
amount of an individual's allowable earned income credit is
dependent on the individual's earned income, adjusted gross
income, and the number of qualifying children.
An individual who is a qualifying child of another
individual is not eligible to claim the earned income credit.
Thus, in certain cases a taxpayer caring for a younger sibling
in a home with no parents would be ineligible to claim the
earned income credit based solely on the fact that the taxpayer
is a qualifying child of the younger sibling if the taxpayer
meets the age, relationship, and residency tests.

Explanation of Provision

Limit definition of qualifying child

The provision adds a new requirement to the uniform
definition. Specifically, it provides that an individual who
otherwise satisfies the uniform definition is not treated as a
qualifying child unless he or she is either: (1) younger than
the individual claiming him or her as a qualifying child or (2)
permanently and totally disabled.
The provision also provides that an individual who is
married and files a joint return (unless the return is filed
only as a claim for a refund) will not be considered a
qualifying child for child-related tax benefits, including the
child tax credit.

Restrict qualifying child tax benefits to child's parent

The provision provides that if a parent may claim a
particular qualifying child, no other individual may claim that
child. There is one exception to this rule: if no parent claims
the qualifying child, another individual may claim such child
if such other individual (1) is otherwise eligible to claim the
child and (2) has a higher adjusted gross income for the
taxable year than any parent eligible to claim the child.
The provision further provides that dependent filers are
not eligible for child-related tax benefits.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2008.

PART NINETEEN: MICHELLE'S LAW (PUBLIC LAW 110-381) \887\
---------------------------------------------------------------------------

\887\ H.R. 2851. The House Committee on Energy and Commerce
reported H. R. 2851 on July 30, 2008 (H. Rept. 110-806). H.R. 2851
passed the House on July 30, 2008, and passed the Senate without
amendment on September 25, 2008. The President signed the bill on
October 9, 2008.
---------------------------------------------------------------------------

Present Law

The Code generally excludes employer-provided health care
coverage and amounts received under employer-provided health
plans from an employee's gross income and wages for income and
employment tax purposes.\888\ These exclusions include amounts
paid to an employee for expenses incurred for the medical care
of a spouse or dependent.\889\ For purpose of the exclusions, a
dependent includes a ``qualifying child'' or ``qualifying
relative'' as those terms are defined in the Code. A qualifying
child is a child, sibling, or stepsibling (or a descendent of
such relative) of the employee who (1) has the same principle
abode as the employee for more than 6 months of the taxable
year, (2) is either under age 19 or under age 24 and a full-
time student at an educational institution during at least 5
months of the calendar year, and (3) has not provided more than
half of his or her own support for the calendar year.\890\ A
qualifying relative is an individual who is the employee's
close relative,\891\ provides less than half of his or her own
support for the calendar year, and is not a qualifying child of
the employee or any other taxpayer.
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\888\ Secs. 105, 106, 3121(a)(2), 3306(b)(2).
\889\ Sec. 105(b). Treas. Reg. sec. 1.106-1.
\890\ Sec. 152.
\891\ For these purposes, a close relative generally includes the
employee's child (including children-in-law and the descendants of
children), sibling (including stepsiblings and siblings-in-law), parent
or ancestor (including stepparents and parents-in-law), niece or
nephew, aunt or uncle, or an individual other than a spouse who has the
same principle abode as the employee and is a member of the employee's
household.
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Employer-provided group health plans are not required to
cover dependents. Many plans do extend coverage to dependents
and many plans limit such coverage to dependents whose coverage
is excludable from an employee's gross income and wages.
The Code, ERISA and PHSA provide certain rules that a group
health plan must satisfy. These rules include limits on the
period when a plan is permitted to exclude coverage for pre-
existing conditions \892\ and a prohibition against plans
discriminating among individual employee participants based on
health status.\893\ Generally, the anti-discrimination
requirement prohibits eligibility, for both coverage and
benefits, from being based on certain health related factors.
The Code imposes an excise tax on a group health plan that
fails to satisfy these rules, generally at a rate of $100 per
individual per day of noncompliance.\894\ A group health plan
includes a plan of an employer that covers the employer's
employees and families.
---------------------------------------------------------------------------
\892\ Sec. 9801.
\893\ Sec. 9802.
\894\ Sec. 4980D.
---------------------------------------------------------------------------
If a group health plan covers dependents of employee
participants, the same rules with respect to pre-existing
conditions and discrimination based on health status apply to
the dependents. However, distinctions among groups of similarly
situated employee participants and dependents in a health plan
as to eligibility and benefits are permitted as long as the
distinctions are based on bona-fide employment-based
classifications consistent with the employer's usual business
practice and are not prohibited health based distinctions. In
addition, a plan generally may treat employee participants and
beneficiaries as two separate groups of similarly situated
individuals. Thus, a plan may distinguish between beneficiaries
based on, for example, their relationship to the plan
participant (such as spouse or dependent child) or based on the
age or student status of dependent children.
The Code and ERISA also generally require a group health
plan to offer continuation coverage to certain covered
individuals in the event of a loss of plan coverage (often
referred to as ``COBRA coverage''). Specifically, the plan must
allow any qualified beneficiary who would lose coverage as a
result of a qualifying event to elect, during a specified
election period, continuation coverage under the plan. A
qualified beneficiary includes an individual who, on the day
before a qualifying event is a beneficiary under the plan as
the spouse of an employee covered under the plan or as the
dependent child of the employee. The Code imposes an excise tax
on a group health plan that fails to satisfy the COBRA coverage
rules, generally at a rate of $100 per individual per day of
noncompliance.\895\
---------------------------------------------------------------------------
\895\ Sec. 4980B.
---------------------------------------------------------------------------

Explanation of Provision

If a dependent child of a participant in a group health
plan is eligible for coverage under the plan as a dependent
child on the basis of being a student at a postsecondary
educational institution, the provision requires the group
health plan to continue coverage for the child as a dependent
for the period of a medically necessary leave of absence from
the educational institution.\896\ However, coverage as a
dependent during the leave of absence is only required to
continue until the earlier of (1) one year after the first day
of the leave of absence or (2) the date on which such coverage
would otherwise terminate under the terms of the plan (the
``required coverage period''). The provision applies if, under
the terms of the plan, the child is a dependent who was
enrolled in the plan on the basis of being a student at a
postsecondary educational institution immediately before the
first day of the medically necessary leave of absence. A
medically necessary leave of absence is defined as a leave of
absence (or any other change in enrollment) from a
postsecondary educational institution that (1) begins while the
child is suffering from a severe illness or injury, (2) is
medically necessary, and (3) causes the child to lose student
status for purposes of coverage under the terms of the plan.
The provision only applies if a certification by the child's
treating physician is submitted to the plan stating that the
dependent is suffering from a severe illness or injury and that
the leave of absence (or change in enrollment) is medically
necessary.
---------------------------------------------------------------------------
\896\ Sec. 9813.
---------------------------------------------------------------------------
During the leave of absence, the child must continue to be
entitled to the same benefits as he or she would have been
entitled to if he or she had remained a covered student during
the period. If, after the first day of the leave of absence but
before the end of the required coverage period, the plan
sponsor changes the group health plan and the changed coverage
continues to cover dependent children, the provision applies in
the same manner as if the changed coverage had been the
previous coverage.
The provision makes parallel changes to ERISA and PHSA.

Effective Date

The provision is effective for plan years beginning on or
after October 9, 2009 (one year after the date of enactment)
and applies to medically necessary leaves of absence beginning
during such plan years.

PART TWENTY: INMATE TAX FRAUD PREVENTION ACT OF 2008 (PUBLIC LAW 110-
428) \897\
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\897\ H.R. 7082. H.R. 7082 passed the House on September 27, 2008,
and passed the Senate without amendment on October 2, 2008. The
President signed the bill on October 15, 2008.
---------------------------------------------------------------------------

Present Law

Section 6103 provides that returns and return information
are confidential and 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 Code.\898\
A ``return'' is any tax or information return, declaration of
estimated tax, or claim for refund required by, or permitted
under, the Code, that is filed with the Secretary by, on behalf
of, or with respect to any person.\899\ ``Return'' also
includes any amendment or supplement thereto, including
supporting schedules, attachments, or lists which are
supplemental to, or part of, the return so filed.
---------------------------------------------------------------------------
\898\ Sec. 6103(a).
\899\ Sec. 6103(b)(1).
---------------------------------------------------------------------------
The definition of ``return information'' is very broad and
includes any information gathered by the IRS with respect to a
person's liability or possible liability under the Code.\900\
---------------------------------------------------------------------------
\900\ Sec. 6103(b)(2). Return information is:
a taxpayer's identity, the nature, source, or amount of
his income, payments, receipts, deductions, exemptions, credits,
assets, liabilities, net worth, tax liability, tax withheld,
deficiencies, overassessments, or tax payments, whether the taxpayer's
return was, is being, or will be examined or subject to other
investigation or processing, or any other data, received by, recorded
by, prepared by, furnished to, or collected by the Secretary with
respect to a return or with respect to the determination of the
existence, or possible existence, of liability (or the amount thereof)
of any person under this title for any tax, penalty, interest, fine,
forfeiture, or other imposition, or offense.
any part of any written determination or any background
file document relating to such written determination (as such terms are
defined in section 611(b)) which is not open to public inspection under
section 6110.
any advance pricing agreement entered into by a taxpayer
and the Secretary and any background information related to such
agreement or any application for an advance pricing agreement, and
any closing agreement under section 7121, and any similar
agreement, and any background information related to such an agreement
or request for such an agreement.
---------------------------------------------------------------------------
However, data in a form that cannot be associated with, or
otherwise identify, directly or indirectly a particular
taxpayer is not ``return information'' for section 6103
purposes.
Section 6103 contains a number of exceptions to the general
rule of confidentiality, which permit disclosure in
specifically identified circumstances when certain conditions
are satisfied.\901\ For example, the IRS is permitted to make
investigative disclosures to the third parties to the extent
such disclosure is necessary in obtaining information which is
not otherwise reasonably available, with respect to the correct
determination of tax, liability for tax, the amount to be
collected or with respect to the enforcement of any other
provision of the Code.
---------------------------------------------------------------------------
\901\ Sec. 6103(c)-(o). Such exceptions include disclosures by
consent of the taxpayer, disclosures to State tax officials,
disclosures to the taxpayer and persons having a material interest,
disclosures to Committees of Congress, disclosures to the President,
disclosures to Federal employees for tax administration purposes,
disclosures to Federal employees for nontax criminal law enforcement
purposes and to the Government Accountability Office, disclosures for
statistical purposes, disclosures for miscellaneous tax administration
purposes, disclosures for purposes other than tax administration,
disclosures of taxpayer identity information, disclosures to tax
administration contractors and disclosures with respect to wagering
excise taxes.
---------------------------------------------------------------------------
None of the exceptions permit the IRS to refer the tax-
related misconduct of specific inmates to prison officials for
imposition of administrative sanctions against such
individuals. The IRS does publicize information from
prosecutions which has been made part of the public record of
such proceedings.

Explanation of Provision

The provision permits disclosure to officers and employees
of the Federal Bureau of Prisons of return information with
respect to prisoners whom the Secretary has determined may have
filed or facilitated the filing of false or fraudulent tax
returns. The Secretary may disclose only such information as is
necessary to permit effective tax administration with respect
to prisoners. The disclosure authority does not apply after
December 31, 2011.
The provision also requires the IRS to publish and submit
to Congress an annual report containing statistics relating to
the number of false and fraudulent returns associated with each
Federal and State prison and such other information as the
Secretary deems appropriate.\902\
---------------------------------------------------------------------------
\902\ It is assumed that the report will include, to the extent
possible, the most current data available.
---------------------------------------------------------------------------
The Treasury Inspector General for Tax Administration is to
report to Congress on the implementation of the provision not
later than December 31, 2010. It is expected that such report
will include a description of how the provision has been
implemented, an analysis of the effectiveness of the
disclosures in preventing or reducing Federal tax fraud by
prisoners, and such other information as the Inspector General
deems appropriate.

Effective Date

In general, the provision is effective for disclosures made
after December 31, 2008. The reporting requirements are
effective on the date of enactment (October 15, 2008).

PART TWENTY-ONE: WORKER, RETIREE, AND EMPLOYER RECOVERY ACT OF 2008
(PUBLIC LAW 110-458) \903\
---------------------------------------------------------------------------

\903\ H.R. 7327 passed the House on December 10, 2008, and passed
the Senate without amendment on December 11, 2008. The President signed
the bill on December 23, 2008.
---------------------------------------------------------------------------

TITLE I--TECHNICAL CORRECTIONS RELATED TO THE PENSION PROTECTION ACT OF
2006 (``PPA'')

A. Technical Corrections to the PPA (secs. 101 through 112 of the PPA)

1. Amendments relating to Title I of the PPA: Reform of the Funding
Rules for Single-Employer Defined Benefit Pension Plans
Minimum Funding Standards (PPA secs. 101 and 111)
Prohibition on increases in benefits while a waiver is in effect (ERISA
sec. 302(c)(7)(A) and Code sec. 412(c)(7)(A))
The Pension Protection Act of 2006 (``PPA'') restates the
prior-law provision prohibiting plan amendments that increase
benefits while a waiver or amortization extension is in effect
or if a retroactive amendment was previously made within a
certain period. As under prior law, an exception applies for a
plan amendment increasing benefits that only repeals a
previously made retroactive amendment. The provision provides
that the references to retroactive amendments are limited to
those that reduced accrued benefits.
Minimum funding standards (ERISA sec. 302(d)(1) and Code sec.
412(d)(1))
Under the PPA, the Secretary of the Treasury must approve a
change in a plan's funding method, valuation date, or plan
year. The provision deletes the reference to valuation date
because a change in such date is a change in the plan's funding
method.

Funding Rules for Single-Employer Defined Benefit Plans (PPA secs. 102
and 112)

Determination of target normal cost (ERISA sec. 303(b), (i) and Code
sec. 430(b), (i))
The PPA defines the term ``target normal cost'' for a plan
year as the present value of all benefits which are expected to
accrue or be earned under the plan during the plan year. The
provision clarifies that a plan's target normal cost is
increased by the amount of plan-related expenses expected to be
paid from plan assets during the plan year, and is decreased by
the amount of mandatory employee contributions expected to be
made to the plan during the plan year. This clarification is
effective for plan years beginning after December 31, 2008, and
is elective for the preceding plan year.

Determination of at-risk status (ERISA sec. 303(i)(4)(B) and Code sec.
430(i)(4)(B))

Under the PPA, the 80-percent and 70-percent prongs of the
at-risk status definition are based on funded status for the
preceding plan year. The PPA provides that determination of the
70-percent prong for 2008 may be determined using methods of
estimation provided by the Secretary of the Treasury. The
provision applies this rule also for purposes of the 80-percent
prong (as phased in under the PPA).

Quarterly contributions (ERISA sec. 303(j)(3)) and Code sec. 430(j)(3))

Under the PPA, quarterly contributions are required if a
plan has a funding shortfall for the preceding year. The
provision includes a transition rule for the 2008 plan year;
under this rule, in the case of plan years beginning in 2008,
the funding shortfall for the preceding plan year may be
determined using such methods of estimation as the Secretary of
the Treasury may provide.
The quarterly installment rules require a higher rate of
interest to be charged on required contributions. Small plans
are permitted to use a valuation date other than the first day
of the plan year. The provision provides that the Secretary of
the Treasury is to prescribe rules relating to interest charges
and credits in the case of a plan with a valuation date other
than the first day of the plan year.

Benefit Limitations under Single-Employer Plans (PPA secs. 103 and 113)

Definition of prohibited payment (ERISA sec. 206(g)(3)(E) and Code sec.
436(d)(5))

The PPA provides that certain underfunded plans may not
make prohibited payments, which include accelerated forms of
distribution such as lump sums. Present law provides that if
the present value of a participant's vested benefit exceeds
$5,000,\904\ the benefit may not be distributed without the
participant's consent. If the vested benefit is less than or
equal to this amount, the consent requirement does not apply.
The provision provides that the payment of benefits that may be
immediately distributed without the consent of the participant
is not a prohibited payment.
---------------------------------------------------------------------------
\904\ 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 benefit.
---------------------------------------------------------------------------

Small plans (ERISA sec. 206(g)(10) and Code sec. 436(k))

The benefit restriction provisions are based upon a plan's
adjusted funding target attainment percentage as of the first
day of the plan year. This presents issues for small plans,
which are allowed to designate any day of the plan year as
their valuation date, because a plan's adjusted funding target
attainment percentage cannot be determined until the valuation
date. The provision provides that the Secretary of the Treasury
may prescribe rules for the application of the benefit
restrictions which are necessary to reflect the alternate
valuation date.

Notice requirement (PPA sec. 103(b) and ERISA sec. 101(j))

The provision provides that the Secretary of the Treasury,
in consultation with the Secretary of Labor, has the authority
to prescribe rules applicable to the notice of funding-based
limitations on distributions required under section 101(j) of
ERISA as added by the PPA.

Definition of single employer plan (Code sec. 436(l))

The PPA provides rules under ERISA and the Code that limit
the benefits and benefit accruals that can be provided under a
single employer plan, depending on the funding level of the
plan. The provision adds a definition of the term ``single
employer plan'' for purposes of the limitations in the Code.

Technical and Conforming Amendments (PPA secs. 107 and 114)

The PPA provides for technical and conforming amendments to
reflect the new funding rules. The provision provides that the
effective date for the amendments to the excise tax on a
failure to satisfy the funding rules is taxable years beginning
after 2007 and, for the other technical and conforming
amendments, plan years beginning after 2007.

Restrictions on Funding of Nonqualified Deferred Compensation Plans by
Employers Maintaining Underfunded or Terminated Single-Employer
Plans (PPA sec. 116 and Code sec. 409A(b)(3)(A)(ii))

The PPA provides that if, during any restricted period in
which a defined benefit pension plan of an employer is in at-
risk status, 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 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 PPA further provides that 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 as determined by the Secretary of the 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. The provision provides that
this rule applies with respect to assets that are restricted
under the plan with respect to a covered employee.

2. Amendments relating to Title II of the PPA: Funding Rules for
Multiemployer Defined Benefit Plans

Funding Rules for Multiemployer Defined Benefit Plans (PPA secs. 201
and 211)

Shortfall funding method (PPA sec. 201(b))

The PPA provides that a multiemployer plan meeting certain
criteria may adopt, use or cease using the shortfall funding
method and such adoption, use, or cessation of use is deemed to
be approved by the Secretary of the Treasury. One of the
criteria is that ``the plan has not used the shortfall funding
method during the 5-year period ending on the day before the
date the plan is to use the method'' under the PPA. The
provision changes this so that the criterion is that ``the plan
has not adopted or ceased using the shortfall funding method
during the 5-year period ending on the day before the date the
plan is to use the method'' under the PPA.

Funding Rules for Multiemployer Plans in Endangered or Critical Status
(PPA secs. 202 and 212)

Notice requirements (ERISA secs. 305(b)(3)(D), 305(e)(8)(C), and Code
secs. 432(b)(3)(D), 432(e)(8)(C))

The PPA requires the plan sponsor of a multiemployer plan
to distribute a notice if the plan is in endangered or critical
status and if the plan is required to make reductions to
adjustable benefits. The provision clarifies that the Secretary
of the Treasury, in consultation with the Secretary of Labor,
shall provide guidance with respect to the plan sponsor's
notice obligations.

Implementation and enforcement of default schedule (ERISA secs.
305(c)(7), 305(e)(3)(C), and Code secs. 432(c)(7),
432(e)(3)(C))

Under the PPA, a default schedule applies if a funding
improvement plan or rehabilitation plan is not timely adopted.
The provision removes the rule that provides that the default
schedule is implemented upon the date on which the Department
of Labor certifies that the parties are at impasse. Thus, under
the provisions, the plan trustees are required to implement the
default schedule within 180 days of the expiration date of the
collective bargaining agreement. In addition, the provision
clarifies that any failure to make a default schedule
contribution is enforceable under sec. 515 of ERISA.

Restriction on payment of lump sums while plan is in critical status
(ERISA sec. 305(f)(2)(A) and Code sec. 432(f)(2)(A))

Under the PPA, the payment of accelerated forms of payment,
including lump sums, while a plan is in critical status is
restricted. Under the provision, the restriction on payment of
accelerated forms of payment applies only to participants whose
benefit commencement date is after notice of the plan's
critical status is provided. This change conforms the rule for
multiemployer plans to the rule applicable to single-employer
plans.

Definition of plan sponsor (Code sec. 432(i)(9))

The funding rules for multiemployer plans and the excise
tax rules that apply in the event of a failure to comply with
the funding rules refer to the term ``plan sponsor.'' This term
is not defined in the Code. The provision adds a definition to
the Code that conforms with the applicable ERISA definition.

Excise tax on trustees for failure to adopt a timely rehabilitation
plan (Code sec. 4971(g)(4))

The PPA imposes an excise tax on the sponsor of a
multiemployer plan in the event of a failure to timely adopt a
rehabilitation plan. Under the PPA, the plan sponsor has a 240
day period in which it must adopt a plan. The excise tax for
failure to timely adopt is based on the beginning of this 240
day period, rather than the end of the period. The provision
revises the calculation of the excise tax so that it applies to
the period beginning on the due date for adoption of the
rehabilitation plan.

Effective date of excise tax provisions (PPA sec. 212(e))

The PPA provides that the excise tax provisions relating to
a failure to satisfy the multiemployer plan funding rules are
effective with respect to plan years beginning after 2007. The
provision clarifies that the excise tax provisions are
effective with respect to taxable years beginning after 2007.

3. Amendments relating to Title III of the PPA: Interest Rate
Provisions

Extension of Replacement of 30-Year Treasury Rates (PPA sec. 301)

The Pension Funding Equity Act of 2004 provided for a
temporary interest rate. The Pension Funding Equity Act of 2004
also provided that, if certain requirements were satisfied,
plan amendments to reflect such interest rate did not need to
be made before the last day of the first plan year beginning on
or after January 1, 2006. The PPA extended the temporary
interest rate through 2007 and also extended the required
amendment date by changing ``January 1, 2006'' to ``January 1,
2008.'' The provision further extends the required amendment
date to conform generally to the amendment period permitted
under the PPA.

Interest Rate Assumption for Determination of Lump Sum Distributions
(PPA sec. 302 and Code sec. 415(b)(2)(E))

The PPA amended the interest rate and mortality table used
in calculating the minimum value of certain optional forms of
benefit, such as lump sums. The provision clarifies that the
mortality table required to be used in calculating the minimum
value of optional forms of benefit is also used in adjusting
benefits and limits for purposes of applying the Code section
415 limitation on benefits that may be provided under a defined
benefit plan. This clarification of the required mortality
table is effective for years beginning after December 31, 2008.
However, a plan may elect to use the new mortality table for
years beginning after December 31, 2007, and before January 1,
2009, or for any portion of such a year.

4. Amendments relating to Title IV of the PPA: PBGC Guarantee and
Related Provisions

Missing Participants (PPA sec. 410)

Plans covered by missing participant program (ERISA sec. 4050(d))

The PPA extended the prior-law missing participant program
to terminating multiemployer plans and to certain plans not
subject to the termination insurance program of the Pension
Benefit Guaranty Corporation (``PBGC''). Under the provision,
the missing participant program applies to plans that have at
no time provided for employer contributions. In addition, the
provision limits the program to qualified plans.

5. Amendments relating to Title V of the PPA: Disclosure

Defined Benefit Plan Funding Notice and Disclosure of Withdrawal
Liability (PPA sec. 501 and ERISA sec. 101(f))

Under the PPA, the administrator of a single employer or a
multiemployer defined benefit plan must provide an annual plan
funding notice (section 101(f) of ERISA). The provision
conforms the measurement dates of several of the items that
must be included in the notice and also conforms the
information that must be provided by the administrator of a
multiemployer plan with respect to the assets and liabilities
of the plan to the information that must be provided by the
administrator of a single employer plan.

Access to Multiemployer Pension Plan Information (PPA sec. 502 and
ERISA secs. 101(k), 101(l), and 4221(e))

Under the PPA, the administrator of a multiemployer plan is
required to provide participants and employers copies of
certain financial reports prepared by an investment manager,
advisor or other fiduciary, upon request (section 101(k) of
ERISA). However, the administrator is prohibited from
disclosing ``any individually identifiable information
regarding any plan participant, beneficiary, employee,
fiduciary, or contributing employer.'' The provision clarifies
that this prohibition does not prevent the plan from disclosing
the identities of the investment managers or advisors, or any
other person preparing a financial report (other than an
employee of the plan), whose performance is being reported on
or evaluated.
Under the PPA, the plan sponsor or administrator of a
multiemployer plan must provide upon an employer's request
certain information regarding the employer's withdrawal
liability with respect to the plan (section 101(l) of ERISA).
The provision repeals section 4221(e) of ERISA, which also
requires the disclosure upon an employer's request of
information relating to the employer's withdrawal liability.

Disclosure of Termination Information to Plan Participants (PPA sec.
506 and ERISA secs. 4041 and 4042)

In the case of an involuntary termination of a plan, the
PPA requires the plan sponsor (or administrator) and the PBGC
to disclose certain information to affected parties, and
special rules apply with respect to the disclosure of
confidential information by the plan sponsor (or
administrator). Under the provision, these special rules
relating to the disclosure of confidential information also
apply to the PBGC.
Under the PPA, the plan administrator must provide affected
parties with certain information that it has provided to the
PBGC. The provision clarifies that this information includes
information that the plan administrator is required to disclose
to the PBGC at the time the written notice of intent to
terminate is given as well as information the plan
administrator is required to disclose to the PBGC after the
notice of intent to terminate is given.

Periodic Pension Benefit Statements (PPA sec. 508 and ERISA sec.
209(a))

The PPA revises the rules that apply under ERISA with
respect to a plan administrator's obligation to provide
periodic information relating to a participant's accrued
benefits under a plan (section 105 of ERISA). The provision
makes conforming changes to section 209 of ERISA, which also
imposes recordkeeping and reporting obligations with respect to
participant benefits.

Notice to Participants or Beneficiaries of Blackout Periods (PPA sec.
509 and ERISA sec. 101(i)(8)(B))

The Sarbanes-Oxley Act of 2002 amended ERISA to require
that participants and beneficiaries of an individual account
plan be provided advance notice of a blackout period during
which certain plan operations, such as the ability to make
investment changes, will be restricted. The notice requirement
does not apply to one-participant plans. The PPA amended the
definition of one-participant plan to conform to Department of
Labor regulations. The PPA, however, did not provide complete
conformity with those regulations. The provision amends the PPA
so that the definition of one-participant plan for purposes of
the notice is in conformity with Department of Labor
regulations. Under the provision, a one-participant plan means
a retirement plan that on the first day of the plan year: (1)
covered only one individual (or the individual and the
individual's spouse) and the individual (or the individual and
the individual's spouse) owned 100 percent of the plan sponsor
(whether or not incorporated), or (2) covered only one or more
partners (or partners and their spouses) in the plan sponsor.
Thus, under the provision, plans that are not subject to title
I of ERISA are not subject to the blackout notice
provisions.\905\
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\905\ This provision is effective as if included in the Sarbanes-
Oxley Act.
---------------------------------------------------------------------------

6. Amendments relating to Title VI of the PPA: Investment Advice,
Prohibited Transactions, and Fiduciary Rules

Prohibited Transaction Rules Relating to Financial Investments (PPA
sec. 611, ERISA sec. 408(b)(18)(C), and Code sec. 4975(d)(21)(C))

Under the PPA, an exemption from the prohibited transaction
rules of the Code and ERISA applies in the case of foreign
exchange transactions between a plan and a bank or broker-
dealer if certain requirements are met. Included in the PPA is
a requirement that the exchange rate used by the bank or
broker-dealer for a particular transaction cannot deviate by
more or less than three percent from the interbank bid and
asked rates for transactions of comparable size and maturity.
Under the provision, the exchange rate cannot deviate by more
than three percent.

7. Amendments relating to Title VII of the PPA: Benefit Accrual
Standards

Benefit Accrual Standards (PPA sec. 701)

Preservation of capital (ERISA sec. 204(b)(5)(B)(i)(II) and Code sec.
411(b)(5)(B)(i)(II))

The PPA prohibits an applicable defined benefit plan
account balance from being reduced below the aggregate amount
of contributions. Under the provision, failure to comply with
this rule is treated as a violation of the age discrimination
rules under ERISA or the Code, as applicable.

Application of present-value rules (ERISA sec. 203(f)(1)(B) and Code
sec. 411(a)(13)(A)(ii))

The PPA permits an applicable defined benefit plan to
distribute a participant's accrued benefit under the plan in an
amount equal to the participant's hypothetical account balance
under the plan without violating the present-value rules of
ERISA section 205(g) and Code section 417(e). ERISA section
203(e) and Code section 411(a)(11), which allow automatic cash-
outs of amounts not exceeding $5,000, apply the section 205(g)
and section 417(e) present-value rules by cross-reference. The
provision adds cross-references to apply the new ERISA and Code
provisions for purposes of ERISA section 203(e) and Code
section 411(a)(11).

Effective date (PPA sec. 701(e))

The general effective date under PPA section 701(e)(1) is
periods beginning on or after June 29, 2005, and special
effective dates are provided for certain provisions. The
provision provides that the vesting provisions under PPA
section 701 are effective on the basis of plan years and that
the vesting provisions apply with respect to participants with
an hour of service after the applicable effective date for a
plan.
The PPA established interest credit requirements for
applicable defined benefit plans, which, under the general
effective date, would apply to periods beginning on or after
June 29, 2005. PPA section 701(e)(3) provides that, in the case
of a plan in existence on June 29, 2005, the new interest
credit rules apply to years beginning after December 31, 2007,
unless the employer elects to apply them for any period
beginning after June 29, 2005, and before the rules would
otherwise apply. The provision changes this rule so that it
refers to any period beginning ``on or after'' June 29, 2005.
The PPA established rules with respect to a conversion of a
plan into an applicable defined benefit plan. PPA section
701(e)(5) provides that these rules are applicable to plan
amendments adopted after, and taking effect after, June 29,
2005. Similarly, ERISA section 204(b)(5)(B)(ii) and Code
section 411(b)(5)(B)(ii) apply the conversion rules to
conversion amendments adopted after June 29, 2005. The
provision clarifies that the effective date for the conversion
rules is on or after June 29, 2005.
The PPA establishes a special effective date for the
vesting and interest crediting requirements for applicable
defined benefit plans in the case of a collectively bargained
plan. The provision clarifies that these rules do not apply to
plan years beginning before the earlier of: (1) the later of
the termination of the collective bargaining agreement or
January 1, 2008, or (2) January 1, 2010.

8. Amendments relating to Title VIII of the PPA: Pension Related
Revenue Provisions

Deduction Limitations (PPA secs. 801 and 803)

Increase in deduction limit for single-employer plans (PPA sec. 801 and
Code sec. 404)

Updating deduction rules for combination of plans (PPA sec. 803 and
Code sec. 404(a)(7))

If an employer sponsors one or more defined benefit plans
and one or more defined contribution plans that cover at least
one of the same employees, an overall deduction limitation
applies to the total contributions to all plans for a plan
year. The overall deduction limit is generally the greater of
(1) 25 percent of compensation or (2) the amount necessary to
meet the minimum funding requirement of the defined benefit
plan for the plan year. The PPA provides that the overall
deduction limit applies to contributions to one or more defined
contribution plans only to the extent that such contributions
exceed six percent of compensation. IRS guidance takes the
position that if defined contribution plan contributions are
less than six percent of compensation, contributions to the
defined benefit plan are still subject to limitation of the
greater of 25 percent of compensation or the minimum required
contribution.\906\ The provision provides that if defined
contributions are less than six percent of compensation, the
defined benefit plan is not subject to the overall deduction
limit. If defined contributions exceed six percent of
compensation, only defined contributions in excess of six
percent are counted toward the overall deduction limit.
---------------------------------------------------------------------------
\906\ Notice 2007-28, 2007-14 I.R.B. 880.
---------------------------------------------------------------------------

Improvements in Portability, Distributions, and Contribution Rules (PPA
secs. 824 and 829)

Allow direct rollovers from retirement plans to Roth IRAs (PPA sec. 824
and Code sec. 408A(c)(3)(B), (d)(3)(B))

The PPA permits 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 certain conditions. Such conditions include recognition of
the distribution in gross income (except to the extent it
represents a return of after-tax contributions) and phase-out
of the ability to perform such a rollover pursuant to the
distributee's adjusted gross income. The provision provides
that a rollover from a Roth designated account in a tax-
qualified retirement plan or tax-sheltered annuity (described
in section 402A of the Code) to a Roth IRA is not subject to
the gross income inclusion and adjusted gross income
conditions.

Allow rollovers by nonspouse beneficiaries of certain retirement plan
distributions (PPA sec. 829 and Code sec. 402(c)(11),
(f)(2)(A))

The PPA permits rollovers of benefits of nonspouse
beneficiaries from qualified plans and similar arrangements.
The provision clarifies that the current law treatment with
respect to a trustee-to-trustee transfer from an inherited IRA
to another inherited IRA continues to apply. Under the
provision, effective for plan years beginning after December
31, 2009, rollovers by nonspouse beneficiaries are generally
subject to the same rules as other eligible rollovers.

Health and Medical Benefits (PPA secs. 841 and 845)

Use of excess pension assets for future retiree health benefits and
collectively bargained retiree health benefits (PPA sec. 841
and Code sec. 420)

In the case of a section 420 transfer, present law requires
the funded status of the defined benefit plan to be maintained
by employer contributions or asset transfers from the health
accounts. Under the provision, asset transfers from the health
accounts to maintain the plan's funded status are not subject
to the excise tax on reversions.
The provision also allows assets transferred to a health
benefits account in a qualified section 420 transfer to be used
to pay health liabilities in excess of current-year retiree
health liabilities. In the case of a qualified future transfer,
assets may be used to pay qualified current retiree health
liabilities which the plan reasonably estimates will be
incurred. In the case of a collectively bargained transfer,
assets may be used to pay collectively bargained retiree health
liabilities.

Distributions from governmental retirement plans for health and long-
term care insurance for public safety officers (PPA sec. 845
and Code sec. 402(l))

The PPA provides an exclusion from gross income for up to
$3,000 annually for certain pension distributions used to pay
for qualified health insurance premiums. Under IRS Notice 2007-
7,\907\ Q&A 23, the exclusion applies only to insurance issued
by an insurance company regulated by a State (including a
managed care organization that is treated as issuing insurance)
and thus does not apply to self-insured plans. Under the
provision, the exclusion applies to coverage under an accident
or health plan (rather than accident or health insurance). That
is, the exclusion applies to self-insured plans as well as to
insurance issued by an insurance company.
---------------------------------------------------------------------------
\907\ 2007-5 I.R.B. 395. In anticipation of technical corrections,
the IRS issued Notice 2007-99, 2007-43 I.R.B. 896.
---------------------------------------------------------------------------
Under the provision, when determining the portion of a
distribution that would otherwise be includible in income, the
otherwise includible amount is determined as if all amounts to
the credit of the eligible public safety officer in all
eligible retirement plans were distributed during the taxable
year. The provision also clarifies that the income exclusion
only applies with respect to distributions from the plan (or
plans) maintained by the employer from which the individual
retired as a public safety officer.

United States Tax Court Modernization (PPA secs. 854 and 856)

Annuities to surviving spouses and dependent children of special trial
judges (PPA sec. 854, Code sec. 3121(b)(5)(E), and Social
Security Act sec. 210(a)(5)(E))

Under the PPA, participation in the survivor annuity
program for survivors of judges of the United States Tax Court
is extended to special trial judges of the United States Tax
Court, and conforming changes are made to various provisions of
the Code. One of the conforming changes is to specify that
employment for purposes of the Federal Insurance Contributions
Act (``FICA'') includes service performed as a special trial
judge of the United States Tax Court. Under the provision, this
conforming amendment is repealed. Thus, the provision provides
that employment as a special trial judge of the United States
Tax Court is covered employment for purposes of FICA under the
rules that otherwise apply to Federal employees.

Provisions for recall (PPA sec. 856 and Code Sec. 7443B)

The PPA provides for rules regarding the temporary recall
to judicial duties of retired special trial judges of the
United States Tax Court and the compensation of such judges
during the period of recall. The provision repeals these rules.

9. Amendments relating to Title IX of the PPA: Increase in Pension Plan
Diversification and Participation and Other Pension Provisions

Defined Contribution Plans Required to Provide Employees with Freedom
to Invest Their Plan Assets (PPA sec. 901 and Code sec.
401(a)(35)(E))

Under the PPA, the diversification requirements do not
apply with respect to a one-participant retirement plan. The
provision conforms the Code's definition of the term ``one-
participant retirement plan'' to the definition of the term
under ERISA.

Increasing Participation through Automatic Contribution Arrangements
(PPA sec. 902 and Code sec. 414(w))

The PPA provides rules permitting an employee to withdraw
certain amounts (referred to as ``permissible withdrawals'') in
the case of an eligible automatic contribution arrangement
under an applicable employer plan. The provision repeals the
requirement that an eligible automatic contribution arrangement
satisfy, in the absence of a participant investment election,
the requirements of ERISA section 404(c)(5) (which generally
authorizes the Secretary of Labor to issue regulations under
which a participant is treated as exercising control over the
assets in the participant's account under a plan with respect
to default investments). The provision also extends the
permissible withdrawal rules to SIMPLE IRAs (Code sec. 408(p))
and SARSEPs (Code sec. 408(k)(6)). The provision also provides
that a permissive withdrawal is disregarded for purposes of
applying the annual limitation on elective deferrals that
applies to a taxpayer under Code section 402(g)(1).
The PPA also provides that, in the case of a distribution
of an excess contribution and income allocable to such
contribution in order to satisfy the rules relating to a
qualified cash or deferral arrangement under Code section
401(k) (or the similar distribution rules under Code section
401(m) in the case of excess aggregate contributions relating
to matching contributions or employee contributions), the
income that must be distributed is the income allocable to the
excess contribution (or excess aggregate contribution) through
the end of the year for which the distribution is made. The
provision applies this limit on the amount of income that must
be distributed to the rules that apply to the distribution of
excess deferrals and allocable income under Code section
402(g).

Treatment of Eligible Combined Defined Benefit Plans and Qualified Cash
or Deferred Arrangements (PPA sec. 903, Code sec. 414(x)(1), and ERISA
sec. 210(e))

Under the PPA, a qualified employer may establish a
combined plan that consists of a defined benefit plan and a
qualified cash or deferral arrangement described in Code
section 401(k), provided that certain requirements are
satisfied. The PPA also provides that the rules of ERISA are
applied to the defined benefit component and the individual
account component of a combined plan in the same manner as if
each component were not part of the combined plan. Thus, for
example, the defined benefit component of the combined plan may
be subject to the insurance program in Title IV of ERISA, while
the individual account component is not. The provision provides
that in the case of a termination of a combined plan, the
individual account and defined benefit components must be
terminated separately.

10. Amendments relating to Title X of the PPA: Spousal Pension
Protection Provisions

Extension of Tier II Railroad Retirement Benefits to Surviving Former
Spouses (PPA sec. 1003)

The PPA provides rules relating to the survivor benefits
payable under the Railroad Retirement Act. The provision
clarifies that a former spouse has an independent entitlement
to immediate commencement of benefits if three conditions are
satisfied. First, the employee must have completed 10 years of
service in the railroad industry (or five years of service
after December 31, 1995); second, the spouse or former spouse
must have attained age 62; and third, the employee must have
attained age 62. In addition, the provision provides that a
former spouse's Tier II benefits under the Railroad Retirement
Act continue after the death of the employee. The provision is
effective for payments due for months after August, 2007.

11. Amendments relating to Title XI of the PPA: Administrative
Provisions

No Reduction in Unemployment Compensation as a Result of Pension
Rollovers (PPA sec. 1105)

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. Under the PPA,
rollover contributions are not included in retirement payments
for which States are required to reduce unemployment
compensation under Federal law, however, States are not
prohibited from reducing unemployment compensation by such
rollover contributions. Under the provision, unemployment
compensation payable by a State to an individual may not be
reduced by the amount of a rollover contribution.

B. Other Provisions

1. Amendments Related to Sections 102 and 112 of the Pension Protection
Act of 2006 (sec. 121 of the Act and sec. 430(g)(3)(B) of the
Code)

Present Law

In the case of a single-employer defined benefit pension
plan, the PPA provides new rules for determining minimum
required contributions that must be made to fund the plan.\908\
In general, the minimum required contribution to a single-
employer defined benefit pension plan for a plan year depends
on a comparison of the value of the plan's assets as of the
beginning of the plan year with the plan's funding target and
the plan's target normal cost.\909\ The plan's funding target
for a plan year 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. In
general, a plan has a funding shortfall for a plan year if the
plan's funding target for the year exceeds the value of the
plan's assets. In such a case, the minimum required
contribution for the plan year generally is equal to the sum of
the plan's target normal cost for the year and a portion of the
funding shortfall for that year and prior plan years.\910\
---------------------------------------------------------------------------
\908\ The Code and ERISA contain parallel minimum funding rules.
\909\ A plan with 100 or fewer participants is permitted to
designate any day during the plan year as its valuation date for
purposes of the minimum funding rules.
\910\ A shortfall amortization base is generally established for
each year for which a plan has a funding shortfall, and each base is
amortized over a seven-year period. The base is generally comprised of
the funding shortfall for that year, less the present value of
shortfall amortization installments that apply to the current year and
succeeding years on account of prior-year shortfall amortization bases.
The aggregate of the shortfall amortization installments for the
current plan year is referred to as the shortfall amortization charge,
and this charge is added to the plan's target normal cost in
determining the minimum required contribution.
---------------------------------------------------------------------------
Under the PPA's minimum funding rules, the value of plan
assets generally is the fair market value of the assets.
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; 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. The PPA's rules also
provide that any averaging must be adjusted for contributions
to the plan and distributions to participants as provided by
the Secretary of the Treasury.
Proposed regulations have been issued that permit the value
of plan assets to be determined on the basis of averaging.\911\
Under the proposed regulations, the average value of plan
assets generally is increased for contributions that are
included in the last valuation date during the averaging period
but that were not included in the prior valuation dates during
the averaging period. Similarly, the average value generally is
decreased for distributions included in the last valuation date
during the averaging period but that were not included in the
prior valuation dates during the averaging period.
---------------------------------------------------------------------------
\911\ 72 F.R. 74215 (December 31, 2007).
---------------------------------------------------------------------------

Explanation of Provision

The provision provides that, in determining the value of a
plan's assets under the averaging method, such averaging will
be adjusted for expected earnings as specified by the Secretary
of the Treasury. Such an adjustment is in addition to the
present law adjustments for contributions and distributions.
Expected earnings are to be determined by a plan's actuary on
the basis of an assumed earnings rate for the plan that is
specified by the actuary. The assumed earnings rate specified
by the actuary cannot exceed the applicable third segment
rate.\912\
---------------------------------------------------------------------------
\912\ The minimum funding rules specify the interest rates that
must be used in determining a plan's target normal cost and funding
target. Under the rules, present value generally is determined using
three interest rates, each of which applies to benefit payments
expected to be made from the plan during a certain period. The third
segment rate applies to benefits reasonably determined to be payable
after the end of the 20-year period that applies to the first and
second segment rates. Each segment rate is a single interest rate
determined 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 yield curve used by the Secretary is based on yields
on investment grade corporate bonds that are in the top three quality
levels available.
---------------------------------------------------------------------------

Effective Date

The provision is effective as if included in the PPA.

2. Modification of interest rate assumption required with respect to
certain small employer plans (sec. 122 of the Act and sec.
415(b)(2)(E) 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) $185,000 (for 2008).\913\ 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) 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.
---------------------------------------------------------------------------
\913\ Sec. 415(b)(1).
---------------------------------------------------------------------------

Explanation of Provision

Under the provision, in the case of a plan maintained by an
eligible employer, the interest rate used in adjusting a
benefit in a form that is subject to the minimum value rules
generally must be not less than the greater of: (1) 5.5
percent; or (2) the interest rate specified in the plan. The
term eligible employer is defined in the same manner as under
section 408(p) (describing an employer which is eligible to
sponsor a SIMPLE plan). \914\ Thus, for any year, the term
means an employer which had no more than 100 employees who
received at least $5,000 of compensation from the employer for
the preceding year. An eligible employer who maintains a
defined benefit pension plan for one or more years and who
fails to be an eligible employer in a subsequent year is
treated as an eligible employer for the two years following the
last year the employer was an eligible employer (provided that
the reason for failure to qualify is not due to an acquisition,
disposition, or similar transaction involving the eligible
employer).
---------------------------------------------------------------------------
\914\ Sec. 408(p)(1)(D).
---------------------------------------------------------------------------

Effective Date

The provision is effective for years beginning after
December 31, 2008.

3. Determination of market rate of return for governmental plans (sec.
123 of the Act and sec. 4(i) of ADEA)

Present Law

The PPA amended the Code, ERISA, and ADEA, to provide for
parallel age discrimination rules in the case of an applicable
defined benefit plan. Included among the rules is a requirement
relating to interest credits provided under such a plan. Under
the PPA, an applicable defined benefit plan is a defined
benefit pension 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
PPA also provides that 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.
Under the parallel Code, ERISA, and ADEA rules, an
applicable defined benefit plan satisfies the interest credit
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 greater than a market rate of return. The PPA also
provides that an interest rate (or equivalent amount) of less
than zero shall in no event result in a hypothetical account
balance or similar amount being less than the aggregate amount
of hypothetical contributions credited to the account. The PPA
provides that 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. The Code and ERISA rules do not apply in the case of
an applicable defined benefit plan that is a governmental plan.
A governmental plan is generally defined for this purpose as a
plan that is established and maintained for its employees by
the Government of the United States, by the government of any
State or political subdivision thereof, or by an agency or
instrumentality of any of the foregoing.\915\
---------------------------------------------------------------------------
\915\ Sec. 414(d). The definition of governmental plan in section
414(d) has three provisions. The first provision includes any plan that
is established and maintained for its employees by the Government of
the United States, by the government of any State or political
subdivision thereof, or by an agency or instrumentality of any of the
foregoing. The second provision relates to certain Railroad Retirement
Act plans and plans of international organizations. The third provision
relates to any plan maintained by an Indian tribal government or
political subdivision thereof, or by an agency or instrumentality of
any of an Indian tribal government.
---------------------------------------------------------------------------
In the case of a plan in existence on June 29, 2005, the
interest credit requirements for an applicable defined benefit
plan generally apply to years 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.

Explanation of Provision

Under the provision, ADEA is amended to provide that, in
the case of a governmental plan, a rate of return or method of
crediting interest that is established pursuant to any
provision of Federal, State, or local law (including any
administrative rule or policy adopted in accordance with any
such law) is generally treated as a market rate of return and
as a permissible method of crediting interest for purposes of
the PPA's interest credit requirement.\916\ This special
treatment does not apply, however, if the rate of return or
method of crediting interest violates another requirement of
ADEA (other than the interest credit requirement).
---------------------------------------------------------------------------
\916\ The definition of governmental plan for purposes of this
provision only includes a plan that is established and maintained for
its employees by the Government of the United States, by the government
of any State or political subdivision thereof, or by an agency or
instrumentality of any of the foregoing.
---------------------------------------------------------------------------

Effective Date

The provision is effective as if included in the PPA.

4. Treatment of certain reimbursements from governmental plans for
medical care (sec. 124 of the Act and sec. 105 of the Code)

Present Law

The gross income of an employee generally does not include
employer-provided coverage under an accident or health plan.
With respect to amounts received under such a plan, section
105(a) provides that such amounts are includible in gross
income to the extent (1) such amounts are attributable to
contributions by the employer which were not includible in the
gross income of the employee, or (2) are paid by the employer.
Notwithstanding this general inclusion rule, section 105(b)
provides that gross income does not include amounts received if
such amounts are paid, directly or indirectly, to the taxpayer
to reimburse the taxpayer for medical care expenses of the
taxpayer, the taxpayer's spouse, or the taxpayer's
dependents.\917\
---------------------------------------------------------------------------
\917\ As defined in section 152, but determined without regard to
sections (b)(1), (b)(2), and (d)(1)(B).
---------------------------------------------------------------------------
In Revenue Ruling 2006-36,\918\ the Internal Revenue
Service held that amounts paid to an employee under a medical
expense reimbursement plan are not excludible from an
employee's gross income if the plan permits amounts to be paid
as medical benefits to a designated beneficiary, other than the
employee's spouse or dependents. Thus, under the ruling, none
of the amounts paid by such a plan to any person, including
reimbursements of medical expenses of the employee, the
employee's spouse, or the employee's dependents, are
excludible.
---------------------------------------------------------------------------
\918\ 2006-2 C.B. 353. The ruling is effective for plan years
beginning after December 31, 2008, in the case of plans including
certain reimbursement provisions on or before August 14, 2006.
---------------------------------------------------------------------------

Explanation of Provision

The provision provides that, for purposes of section
105(b), amounts paid (directly or indirectly) to a taxpayer
from a specified health plan shall not fail to be excluded from
gross income solely because the plan provides for
reimbursements of health care expenses of a deceased plan
participant's beneficiary. In order for the provision to apply,
the plan must have provided for reimbursement of a deceased
participant's beneficiary on or before January 1, 2008. A
specified plan is an accident or health plan that is funded by
a medical trust that is established in connection with a public
retirement system if such trust (1) has been authorized by a
State legislature; or (2) has received a favorable ruling from
the Internal Revenue Service that the trust's income is not
includible in gross income under section 115 (providing an
exclusion from gross income for States and their political
subdivisions).

Effective Date

The provision is effective with respect to payments made
before, on, or after enactment.

5. Rollover of amounts received in airline carrier bankruptcy to Roth
IRAs (sec. 125 of the Act)

Present Law

The Code provides for two types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\919\
In general, contributions (other than a rollover contribution)
to a traditional IRA may be deductible, and distributions from
a traditional IRA are includible in gross income to the extent
not attributable to a return of nondeductible contributions. In
contrast, contributions to a Roth IRA are not deductible, and
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.
---------------------------------------------------------------------------
\919\ Traditional IRAs are described in section 408, and Roth IRAs
are described in section 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 ($5,000 for 2008); or (2) the amount of the
individual's compensation that is includible in gross income
for the year. As under the rules relating to traditional IRAs,
a contribution of up to the dollar limit for each spouse may be
made to a Roth IRA provided the combined compensation of the
spouses is at least equal to the contributed amount. The
maximum annual contribution that can be made to a Roth IRA is
phased out for taxpayers with adjusted gross income for the
taxable year over certain indexed levels. The adjusted gross
income phase-out ranges for 2008 are: (1) for single taxpayers,
$101,000 to $116,000; (2) for married taxpayers filing joint
returns, $159,000 to $169,000; and (3) for married taxpayers
filing separate returns, $0 to $10,000.
The foregoing contribution limitations for IRAs do not
apply in the case of a rollover contribution to an IRA. If
certain requirements are satisfied, a participant in an
employer-sponsored qualified plan (which includes a tax-
qualified retirement plan described in section 401(a), an
employee retirement annuity described in section 403(a), a tax-
sheltered annuity described in section 403(b), and a
governmental section 457(b) plan) or a traditional IRA may roll
over distributions from the plan, annuity or IRA into another
plan, annuity or IRA. For distributions after December 31,
2007, certain taxpayers also are permitted to make rollover
contributions into a Roth IRA (subject to inclusion in gross
income of any amount that would be includible were it not part
of the rollover contribution).

Explanation of Provision

Under the provision, a qualified airline employee may
contribute any portion of an airline payment amount to a Roth
IRA within 180 days of receipt of such amount (or, if later,
within 180 days of enactment of the provision). Such a
contribution is treated as a qualified rollover contribution to
the Roth IRA. Thus, the portion of the airline payment amount
contributed to the Roth IRA is includible in gross income to
the extent that such payment would be includible were it not
part of the rollover contribution.
Under the provision, an airline payment amount is defined
as any payment of any money or other property payable by a
commercial passenger airline to a qualified airline employee:
(1) under the approval of an order of a Federal bankruptcy
court in a case filed after September 11, 2001, and before
January 1, 2007; and (2) in respect of the qualified airline
employee's interest in a bankruptcy claim against the airline
carrier, any note of the carrier (or amount paid in lieu of a
note being issued), or any other fixed obligation of the
carrier to pay a lump sum amount. An airline payment amount
shall not include any amount payable on the basis of the
carrier's future earnings or profits. In determining the amount
that may be contributed to a Roth IRA under the provision, any
reduction in the airline payment amount on account of
employment tax withholding is disregarded. A qualified airline
employee is an employee or former employee of a commercial
passenger airline carrier who was a participant in a defined
benefit plan maintained by the carrier which (1) is qualified
under section 401(a) and (2) was terminated or became subject
to the benefit accrual and other restrictions applicable to
plans maintained by commercial passenger airlines pursuant to
paragraphs 402(b)(2) and (3) of the PPA.
The provision also requires certain information reporting
to the Secretary of Treasury and qualified airline employees
with respect to airline payment amounts within 90 days of such
payment (or if later, within 90 days of enactment of this
provision)

Effective Date

The proposal is effective with respect to contributions to
a Roth IRA made after enactment with respect to airline payment
amounts paid before, on, or after such date.

6. Determination of asset value for special airline funding rules (sec.
126 of the Act and sec. 402 of the PPA)

Present Law

The PPA provides for special minimum funding rules for
certain eligible plans. For purposes of the rules, 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, with the minimum required contribution
being determined under a special method. 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.
The employer may select either a plan year beginning in
2006 or 2007 as the first plan year to which the 17-year
amortization period election applies. Under the special method
applicable to a plan that elects the 17-year amortization
period, 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 PPA,
including the benefit limitations applicable to underfunded
plans).
For purposes of the 17-year amortization period election, a
plan's unfunded liability is the unfunded accrued liability
under the plan, determined under the unit credit funding method
and a rate of interest of 8.85 percent is used in determining
the plan's accrued liability. In addition, the value of plan
assets used must be the fair market value.

Explanation of Provision

Under the provision, the value of plan assets for purposes
of determining the minimum required contribution of an eligible
employer under the 17-year amortization period election may be
determined under a valuation method that is permissible under
the minimum funding rules applicable to a single-employer
defined benefit pension plan that is not sponsored by an
eligible employer. Thus, the value of plan assets may be
determined as fair market value or on the basis of the
averaging method specified in section 430(g)(3) of the Code and
section 303(g)(3) of ERISA.

Effective Date

The provision is effective for plan years beginning after
December 31, 2007.

7. Modification of penalty for failure to file partnership returns
(sec. 127 of the Act and sec. 6698 of the Code)

Present Law

A partnership generally is treated as a pass-through
entity. Income earned by a partnership, whether distributed or
not, is taxed to the partners. Distributions from the
partnership generally are tax-free. The items of income, gain,
loss, deduction or credit of a partnership generally are taken
into account by a partner as allocated under the terms of the
partnership agreement. If the agreement does not provide for an
allocation, or the agreed allocation does not have substantial
economic effect, then the items are to be allocated in
accordance with the partners' interests in the partnership. To
prevent double taxation of these items, a partner's basis in
its interest is increased by its share of partnership income
(including tax-exempt income), and is decreased by its share of
any losses (including nondeductible losses).
Under present law, a partnership is required to file a tax
return for each taxable year. The partnership's tax return is
required to include the names and addresses of the individuals
who would be entitled to share in the taxable income if
distributed and the amount of the distributive share of each
individual. In addition to applicable criminal penalties,
present law imposes an assessable civil penalty for the failure
to timely file a partnership return. The penalty generally is
$85 per partner for each month (or fraction of a month) that
the failure continues, up to a maximum of 12 months for returns
required to be filed after December 20, 2007.

Explanation of Provision

Under the provision, the penalty for failure to file
partnership returns is increased by $4 per partner.

Effective Date

The provision applies to returns required to be filed after
December 31, 2008.

8. Modification of penalty for failure to file S corporation returns
(sec. 128 of the Act and sec. 6699 of the Code)

Present Law

In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss. Instead, an S
corporation passes through its items of income and loss to its
shareholders. The shareholders take into account separately
their shares of these items on their individual income tax
returns.
Under present law, S corporations are required to file a
tax return for each taxable year. The S corporation's tax
return is required to include the following: the names and
addresses of all persons owning stock in the corporation at any
time during the taxable year; the number of shares of stock
owned by each shareholder at all times during the taxable year;
the amount of money and other property distributed by the
corporation during the taxable year to each shareholder and the
date of such distribution; each shareholder's pro rata share of
each item of the corporation for the taxable year; and such
other information as the Secretary may require.
Present law imposes an assessable monthly penalty for any
failure to timely file an S corporation return or any failure
to provide the information required to be shown on such a
return. The penalty is $85 times the number of shareholders in
the S corporation during any part of the taxable year for which
the return was required, for each month (or a fraction of a
month) during which the failure continues, up to a maximum of
12 months.

Explanation of Provision

Under the provision, the penalty for failure to file S
corporation returns is increased by $4 per shareholder.

Effective Date

The provision applies to returns required to be filed after
December 31, 2008.

TITLE II--PENSION PROVISIONS RELATING TO ECONOMIC CRISIS

A. Temporary Waiver of Required Minimum Distribution Rules for Certain
Retirement Plans and Accounts (sec. 201 of the Act and sec. 401(a)(9)
of the Code)

Present law

Required minimum distributions
Employer-provided qualified retirement plans and individual
retirement accounts and annuities (IRAs) are subject to
required minimum distribution rules. A qualified retirement
plan for this purpose means a tax-qualified plan described in
section 401(a) (such as a defined benefit pension plan or a
section 401(k) plan), employee retirement annuities described
in section 403(a), tax-sheltered annuities described in section
403(b), and a plan described in section 457(b) that is
maintained by a governmental employer.\920\ An employer-
provided qualified retirement plan that is a defined
contribution plan is a plan which provides (1) an individual
account for each participant and (2) for benefits based on the
amount contributed to the participant's account, and any
income, expenses, gains, losses, and forfeitures of accounts of
other participants which may be allocated to such participant's
account.\921\
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\920\ The required minimum distribution rules also apply to section
457(b) plans maintained by tax-exempt employers other than governmental
employers.
\921\ Sec. 414(i).
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Required minimum distributions generally must begin by
April 1 of the calendar year following the later of the
calendar year in which the individual (employee or IRA owner)
reaches age 70\1/2\. However, in the case of an employer-
provided qualified retirement plan, the required minimum
distribution date for an individual who is not a 5-percent
owner of the employer maintaining the plan is delayed to April
1 of the year following the year in which the individual
retires.
For IRAs and defined contributions plans, the required
minimum distribution for each year generally is determined by
dividing the account balance as of the end of the prior year by
a distribution period,\922\ generally a number in the uniform
lifetime table.\923\ This table is based on joint life
expectancies of the individual and a hypothetical beneficiary
10 years younger than the individual. For an individual with a
spouse as designated beneficiary who is more than 10 years
younger (and thus the number of years in the couple's joint
life expectancy is greater than the uniform life time table),
the joint life expectancy of the couple is used. There are
special rules in the case of annuity payments from an insurance
contract.
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\922\ Treas. Reg. sec. 1.401(a)(9)-5.
\923\ Treas. Reg. sec. 1.401(a)(9)-9.
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If an individual dies on or after the individual's required
beginning date, the required minimum distribution is also
determined by dividing the account balance as of the end of the
prior year by a distribution period. The distribution period is
equal to the remaining years of the beneficiary's life
expectancy or, if there is no designated beneficiary, a
distribution period equal to the remaining years of the
deceased individual's single life expectancy, using the age of
the deceased individual in the year of death.\924\
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\924\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).
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In the case of an individual who dies before the
individual's required beginning date, there are two methods for
satisfying the after death required minimum distribution rules,
the life expectancy rule or the five year rule. Under the life
expectancy rule, annual required minimum distributions must
begin no later than December 31 of the calendar year
immediately following the calendar year in which the individual
died. This rule is only available if the designated beneficiary
is an individual (e.g., not the individual's estate or a
charity). If the designated beneficiary is the individual's
spouse, commencement of distributions can be delayed until
December 31 of the calendar year in which the deceased
individual would have attained age 70\1/2\. The required
minimum distribution for each year is also determined by
dividing the account balance as of the end of the prior year by
a distribution period, which is determined by reference to the
beneficiary's life expectancy.\925\ Under the five-year rule,
the individual's entire account must be distributed no later
than December 31 of the calendar year containing the fifth
anniversary of the individual's death.\926\
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\925\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
\926\ Treas. Reg. sec. 1.401(a)(9)-3, Q&As 1, 2.
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A special after-death rule applies for an IRA if the
beneficiary of the IRA is the surviving spouse. The surviving
spouse is permitted to choose to calculate required minimum
distributions while the spouse is alive, and after the spouse's
death, as though the spouse is the IRA owner, rather than a
beneficiary.
Roth IRAs are not subject to the minimum distribution rules
during the IRA owner's lifetime. However, Roth IRAs are subject
to the post-death minimum distribution rules that apply to
traditional IRAs. For Roth IRAs, the IRA owner is treated as
having died before the individual's required beginning date.
Thus only the life expectancy rule and the five year rule
apply.
Failure to make a required minimum distribution triggers a
50-percent excise tax, payable by the individual or the
individual's beneficiary. The tax is imposed during the taxable
year that begins with or within the calendar year during which
the distribution was required.\927\
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\927\ Sec. 4974(a).
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The tax may be waived if the distribution did not occur
because of reasonable error and reasonable steps are taken to
remedy the violation.\928\
---------------------------------------------------------------------------
\928\ Sec. 4974(d).
---------------------------------------------------------------------------

Eligible rollover distributions

With certain exceptions, distributions from an employer-
provided qualified retirement plan are eligible to be rolled
over tax free into another employer-provided qualified
retirement plan or an IRA. This can be achieved by contributing
the amount of the distribution to the other plan or IRA within
60 days of the distribution, or by a direct payment by the plan
to the other plan or IRA (referred to as a ``direct
rollover''). Distributions that are not eligible for rollover
include (i) any distribution that is one of a series of
periodic payments generally for a period of 10 years or more
(or, if a shorter period, certain life expectancies) and (ii)
any distribution to the extent that the distribution is a
required minimum distribution.\929\
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\929\ Sec. 402(c)(4). Distributions that are not eligible rollover
distributions also include distributions made upon hardship of the
employee and any qualified disaster relief distribution (within the
meaning of section 72(t)(2)(G)).
---------------------------------------------------------------------------
For any distribution that is eligible for rollover, an
employer-provided tax-qualified retirement plan must offer the
distributee the right to have the distribution made in a direct
rollover \930\ and, before making the distribution, the plan
administrator must provide the distributee with a written
explanation of the direct rollover right and related tax
consequences.\931\ If a distributee does not choose to have the
distribution made in a direct rollover, the distribution is
generally subject to mandatory 20-percent income tax
withholding.\932\
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\930\ Sec. 401(a)(31).
\931\ Sec. 402(f).
\932\ Sec. 3405(c). This mandatory withholding does not apply to a
distributee that is a beneficiary other than a surviving spouse of an
employee.
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Explanation of Provision

Under the provision, no minimum distribution is required
for calendar year 2009 from individual retirement plans and
employer-provided qualified retirement plans that are defined
contribution plans (within the meaning of section 414(i)). Thus
any annual minimum distribution for 2009 from these plans
required under current law, otherwise determined by dividing
the account balance by a distribution period, is not required
to be made. The next required minimum distribution would be for
calendar year 2010. This relief applies to life-time
distributions to employees and IRA owners and after-death
distributions to beneficiaries.
In the case of an individual whose required beginning date
is April 1, 2010 (e.g., the individual attained age 70\1/2\ in
2009), the first year for which a minimum distribution is
required under current law is 2009. Under the provision, no
distribution is required for 2009 and, thus, no distribution
will be required to be made by April 1, 2010. However, the
provision does not change the individual's required beginning
date for purposes of determining the required minimum
distribution for calendar years after 2009. Thus, for an
individual whose required beginning date is April 1, 2010, the
required minimum distribution for 2010 will be required to be
made no later than the last day of calendar year 2010. If the
individual dies on or after April 1, 2010, the required minimum
distribution for the individual's beneficiary will be
determined using the rule for death on or after the
individual's required beginning date.
If the five year rule applies to an account with respect to
any decedent, under the provision, the five year period is
determined without regard to calendar year 2009. Thus, for
example, for an account with respect to an individual who died
in 2007, under the provision, the five year period ends in 2013
instead of 2012.
If all or a portion of a distribution during 2009 is an
eligible rollover distribution because it is no longer a
required minimum distribution under this provision, the
distribution shall not be treated as an eligible rollover
distribution for purposes of the direct rollover requirement
and notice and written explanation of the direct rollover
requirement, as well as the mandatory 20-percent income tax
withholding for eligible rollover distributions, to the extent
the distribution would have been a required minimum
distribution for 2009 absent this provision. Thus, for example,
if an employer-provided qualified retirement plan distributes
an amount to an individual during 2009 that is an eligible
rollover distribution but would have been a required minimum
distribution for 2009, the plan is permitted but not required
to offer the employee a direct rollover of that amount and
provide the employee with a written explanation of the
requirement. If the employee receives the distribution, the
distribution is not subject to mandatory 20-percent income tax
withholding, and the employee can roll over the distribution by
contributing it to an eligible retirement plan within 60 days
of the distribution.

Effective Date

The provision is effective for calendar years beginning
after December 31, 2008. However, the provision does not apply
to any required minimum distribution for 2008 that is permitted
to be made in 2009 by reason of an individual's required
beginning date being April 1, 2009.

B. Transition Rule Clarification (sec. 202 of the Act and sec. 430 of
the Code)

Present Law

The PPA modified the minimum funding rules for single-
employer defined benefit pension plans, generally for plan
years beginning after December 31, 2007. Under the PPA, 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. A plan's funding target
is the present value of all benefits accrued or earned as of
the beginning of the plan year and 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. 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, and 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.
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 \933\ 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) was subject to certain
deficit reduction contribution rules for 2007 (i.e., a plan
covering more than 100 participants and with a funded current
liability below a specified threshold).
---------------------------------------------------------------------------
\933\ Plan assets are 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.
---------------------------------------------------------------------------
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 \934\ 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).
---------------------------------------------------------------------------
\934\ Plan assets are reduced by any prefunding balance, but only
if the employer elects to use the prefunding balance to reduce required
contributions for the year.
---------------------------------------------------------------------------

Explanation of Provision

The provision extends the transition rule to plan years
beginning after 2008 even if, for each preceding plan year
after 2007, the plan's shortfall amortization base was not
zero.
The provision provides that in determining a plan's funding
shortfall for the year only the applicable percentage of the
funding target is taken into account, rather than the entire
funding target. The applicable percentage is 92 percent for
2008, 94 percent for 2009, and 96 percent for 2010.\935\ Thus,
for example, if a plan was funded at 91 percent for 2008, the
funding shortfall for 2008 would be 1 percent and the plan
would be able to continue to use the transition rule in 2009.
The plan would then need to fund to 94 percent, rather than 100
percent, in 2009.
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\935\ Sec. 430(c)(5)(B).
---------------------------------------------------------------------------

Effective Date

The provision is effective as if included in the PPA.

C. Temporary Modification of Application of Limitation on Benefit
Accruals (sec. 203 of the Act)

Present Law

A single-employer defined benefit pension plan is required
to comply with certain funding-based limits described in
section 436 on benefits and benefit accruals.\936\ These limits
were added by the PPA and are generally applicable to plan
years beginning after December 31, 2007. Among the limitations
is the requirement 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 (``future benefit accrual
limitation''). This future benefit accrual 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 pursuant to the limitation, service
performed during the freeze period still counts for vesting
purposes. Written notice must be provided to plan participants
and beneficiaries if a section 436 limitation provision applies
to a plan.
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\936\ Secs. 401(a)(29) and 436. Parallel rules apply under ERISA.
---------------------------------------------------------------------------
The term ``funding target attainment percentage'' is
defined in the same way as under the minimum funding rules
applicable to single-employer defined benefit pension plans,
and is the ratio, expressed as a percentage, that the value of
the plan's assets (generally reduced by any funding standard
carryover balance and prefunding balance) bears to the plan's
funding target for the year (determined without regard to
whether a plan is in at-risk status under the minimum funding
rules). 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 rules apply for
determining a plan's adjusted funding target attainment
percentage in the case of a fully funded plan and for plan
years beginning in 2007 and before 2011.
The future benefit accrual 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 future
benefit accrual limitation also does not apply for the first
five years a plan (or a predecessor plan) is in effect.
If a limitation on future benefit accruals ceases to apply
to a plan, all such benefit accruals resume, effective as of
the day following the close of the period for which the
limitation applies. In addition, section 436 provides that
nothing in the rules is to be construed as affecting a plan's
treatment of benefits which would have been paid or accrued but
for the limitation.

Explanation of Provision

Under the provision, in the case of the first plan year
beginning during the period of October 1, 2008, through
September 30, 2009, the future benefit accrual limitation of
section 436 is applied by substituting the plan's adjusted
funding target attainment percentage for the preceding plan
year for the percentage for such first plan year in the period.
Thus, the future benefit accrual limitation of section 436 is
avoided if the plan's adjusted funding target attainment
percentage for the preceding plan year is 60 percent or
greater. The provision is not intended to place a plan in a
worse position with respect to the future benefit accrual
limitation of section 436 than would apply absent the
provision. Thus, the provision does not apply if the adjusted
funding target attainment percentage for the current plan year
is greater than the preceding year.

Effective Date

The provision is effective for the first plan year
beginning during the period beginning on October 1, 2008, and
ending on September 30, 2009.

D. Temporary Delay of Designation of Multiemployer Plans as in
Endangered or Critical Status (sec. 204 of the Act)

Present Law

In General

Under section 432,\937\ additional funding rules apply to a
multiemployer defined benefit pension plan that is in
endangered or critical status. These rules require 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. 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.
---------------------------------------------------------------------------
\937\ Parallel rules apply under ERISA.
---------------------------------------------------------------------------
Section 432 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.

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.
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.

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. The applicable benchmarks are the
requirements of the funding improvement plan (discussed below).
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.\938\ 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.
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\938\ 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. Special rules apply in the case of a seriously endangered
plan that is more than 70 percent funded as of the beginning of
the initial determination year.
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 and during the funding improvement period
(e.g., upon the adoption of a funding improvement plan, the
plan may not be amended to be inconsistent with the funding
improvement plan).
Excise taxes
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.
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.
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.

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.
Reductions to previously earned benefits
Notwithstanding the anti-cutback rules that otherwise apply
under the Code and ERISA, the plan sponsor may generally make
any reductions to adjustable benefits \939\ 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).
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\939\ 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.
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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.
Notice 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.\940\ 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.
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\940\ 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.
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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.\941\
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\941\ The requirement applies with respect to the initial critical
year.
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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.
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.
Restrictions apply during the period beginning on the date
of certification and ending on the day before the first day of
the rehabilitation period and during the rehabilitation period.
For example, 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.
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.
Excise taxes
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.
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
on failures to make such contributions 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.
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.

Explanation of Provision

Under the provision, the sponsor of a multiemployer defined
benefit pension plan may elect for an applicable plan year to
treat the plan's status for purposes of section 432 the same as
the plan's status for the preceding plan year. The applicable
plan year is the first plan year beginning during the period
from October 1, 2008, through September 30, 2009. Thus, for
example, a calendar year plan that is not in critical or
endangered status for 2008 may elect to retain its non-critical
and non-endangered status for 2009, and a plan that was in
either critical or endangered status for 2008 may elect to
retain such status for 2009. If section 432 did not apply to a
plan for the year preceding the applicable plan year, the
plan's sponsor may elect to treat the plan's status for the
applicable plan year as the status that would have applied to
the plan had section 432 applied for the preceding plan year.
An election under the provision may only be revoked with
the consent of the Secretary of the Treasury and special notice
provisions apply with respect to the election and the
notification of participants, the bargaining parties, the PBGC,
and the Secretary of Labor.
In the case of a plan that elects to retain its endangered
or critical status, the plan is not required to update its
funding improvement or rehabilitation plan and schedules until
the plan year that follows the applicable plan year. If an
election is made by a plan under the provision and, without
regard to the election, the plan is certified by the plan's
actuary for the applicable plan year to be in critical status,
the plan is treated as a plan in critical status for purposes
of the special rules that relieve contributing employers from
liability for minimum required contributions (that would apply
under the otherwise applicable minimum funding rules) and the
excise tax that applies in the case of a failure to make such
contributions.

Effective Date

The provision is effective for the first plan year
beginning during the period from October 1, 2008, through
September 30, 2009.

E. Temporary Extension of the Funding Improvement and Rehabilitation
Periods for Multiemployer Pension Plans in Critical and Endangered
Status for 2008 or 2009 (sec. 205 of the Act)

Present Law

Under section 432, additional funding rules apply to a
multiemployer defined benefit pension plan that is in
endangered or critical status. These rules require 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. Section 432 is effective for plan years
beginning after 2007.
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.
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.

Explanation of Provision

Under the provision, a plan sponsor of a multiemployer
defined benefit pension plan may elect for a plan year
beginning in 2008 or 2009 to extend the plan's otherwise
applicable funding improvement or rehabilitation period by
three years.

Effective Date

The provision is effective for plan years beginning after
December 31, 2007.

PART TWENTY-TWO: CUSTOM USER FEES AND CORPORATE ESTIMATED TAXES

A. Extension of Customs User Fees

Present Law

Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (''COBRA'') \942\ authorized the
Secretary of the Treasury to collect certain service fees.
Section 412 of the Homeland Security Act of 2002 \943\
authorized the Secretary of the Treasury to delegate such
authority to the Secretary of Homeland Security. Provided for
under, these fees include: processing fees for air and sea
passengers, commercial trucks, rail cars, private aircraft and
vessels, commercial vessels, dutiable mail packages, barges and
bulk carriers, merchandise, and Customs broker permits.\944\
COBRA was amended on several occasions but most recently prior
to the start of the 110th Congress by the American Jobs
Creation Act of 2004,\945\ which extended authorization for the
collection of these fees through September 30, 2014.\946\
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\942\ Pub. L. No. 99-272.
\943\ Pub. L. No. 107-296.
\944\ 19 U.S.C. sec. 58c.
\945\ Pub. L. No. 108-357.
\946\ For fiscal years after September 30, 2005, the Secretary is
to charge fees in amounts that are reasonably related to the costs of
providing customs services in connection with the activity or item for
which the fee is charged.
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Explanation of Provision

The Andean Trade Preference Act extends the merchandise
processing fees authorized under COBRA for 14 days (through
October 14, 2014).\947\
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\947\ Pub. L. No. 110-42.
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Effective date.--The provision is effective on the date of
enactment (June 30, 2007).
The renewal of the Burmese Freedom and Democracy Act of
2003 extends the merchandise processing fees authorized under
COBRA for 7 days (through October 21, 2014).\948\
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\948\ Pub. L. No. 110-52.
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Effective date.--The provision is effective on July 26,
2007.
The extension of the trade adjustment assistance program
under the Trade Act of 1974 extends the passenger and
conveyance processing fees authorized under COBRA for 7 days
(through October 7, 2014).\949\
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\949\ Pub. L. No. 110-89.
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Effective date.--The provision is effective on the date of
enactment (September 28, 2007).
The United States-Peru Trade Promotion Agreement
Implementation Act extends: (1) the passenger and conveyance
processing fees authorized under COBRA for 67 days (from
October 7, 2014 through December 13, 2014); and (2) the
merchandise processing fees authorized under COBRA for 53 days
(from October 21, 2014 through December 13, 2014).\950\
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\950\ Pub. L. No. 110-138.
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Effective date.--The provision is effective on the date of
enactment (December 14, 2007).
The Andean Trade Preference Extension Act of 2008 extends
the passenger and conveyance processing fees and the
merchandise processing fees authorized under COBRA through
December 27, 2014.\951\
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\951\ Pub. L. No. 110-191.
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Effective date.--The provision is effective on the date of
enactment (February 29, 2008).
The Food, Conservation, and Energy Act of 2008 extends: (1)
the passenger and conveyance processing fees authorized under
COBRA through September 30, 2017; and (2) the merchandise
processing fees authorized under COBRA through November 14,
2017.\952\
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\952\ Pub. L. No. 110-234 and Pub. L. No. 110-246.
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Effective date.--The provision is effective on the date of
enactment (June 18, 2008).
The Renewal of Import Restrictions under the Burmese
Freedom and Democracy Act of 2003 extends the passenger and
conveyance processing fees authorized under COBRA through
October 07, 2017.\953\
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\953\ Pub. L. No. 110-287.
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Effective date.--The provision is effective on July 26,
2008.
The extension of the Andean Tax Preference Act of 2008
extends: (1) the passenger and conveyance processing fees
authorized under COBRA through January 31, 2018; and (2) the
merchandise processing fees authorized under COBRA through
February 14, 2018.\954\
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\954\ Pub. L. No. 110-436.
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Effective date.--The provision is effective on the date of
enactment (October 16, 2008).

B. Modifications to Corporate Estimated Tax Payments Due in July,
August, and September, 2012

Prior and 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.
Under the Tax Increase Prevention Act of 2005 (``TIPRA''),
in the 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.

Explanation of Provision

The U.S. Troop Readiness, Veteran's Care, Katrina Recovery
and Iraq Accountability Appropriations Act of 2007 increases
the 106.25 percent to 114.25 percent.\955\
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\955\ Pub. L. No. 110-28.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (May 25, 2007).
The Andean Trade Preference Act increases the 114.25
percent to 114.50 percent.\956\
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\956\ Pub. L. No. 110-42.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (June 30, 2007).
The renewal of the Burmese Freedom and Democracy Act of
2003 increases the 114.50 percent to 114.75 percent.\957\
---------------------------------------------------------------------------
\957\ Pub. L. No. 110-52.
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Effective date.--The provision is effective on July 26,
2007.
The extension of the trade adjustment assistance program
under the Trade Act of 1974 increases the 114.75 percent to
115.00 percent.\958\
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\958\ Pub. L. No. 110-89.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (September 28, 2007).
The United States-Peru Trade Promotion Agreement
Implementation Act increases the 115.00 percent to 115.75
percent.\959\
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\959\ Pub. L. No. 110-138.
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Effective date.--The provision is effective on the date of
enactment (December 14, 2007).\960\
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\960\ A technical correction may have been necessary but for the
enactment of Pub. L. No. 110-289.
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The Mortgage Forgiveness Debt Relief Act of 2007 increases
the otherwise applicable percentage (115.75) by 1.50 percentage
points.\961\
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\961\ Pub. L. No. 110-142.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (December 20, 2007).
Effective date.--The provision is effective on the date of
enactment (February 29, 2008).
The Food, Conservation, and Energy Act of 2008 increases
the otherwise applicable percentage (117.25 percent) by 7.75
percentage points.\962\
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\962\ Pub. L. No. 110-234 and Pub. L. No. 110-246.
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Effective date.--The provision is effective on the date of
enactment (June 18, 2008).
Effective date.--The provision is effective on July 26,
2008.
The Housing Assistance Tax Act of 2008 reduces the
otherwise applicable percentage (125.00 percent) to 100
percent.\963\ Thus, corporations will make estimated tax
payments in 2012 as if the TIPRA legislation had never been
enacted or amended.
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\963\ Pub. L. No. 110-289.
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Effective date.--The provision is effective on the date of
enactment (July 30, 2008).

C. Modifications to Corporate Estimated Tax Payments Due in July,
August, and September, 2013

Prior and 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.
Under the Tax Increase Prevention Act of 2005 (``TIPRA''),
in the case of a corporation with assets of at least $1
billion, the payments due in July, August, and September, 2013,
were increased to 100.75 percent of the payment otherwise due
and the next required payment shall be reduced accordingly.

Explanation of Provision

The Andean Trade Preference Extension Act of 2008 increases
the otherwise applicable percentage (100.75 percent) by 0.25
percentage points. \964\
---------------------------------------------------------------------------
\964\ Pub. L. No. 110-191.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (February 29, 2008).
The Renewal of Import Restrictions under the Burmese
Freedom and Democracy Act of 2003 increases the otherwise
applicable percentage (101.00 percent) by 0.25 percentage
points.\965\
---------------------------------------------------------------------------
\965\ Pub. L. No. 110-287.
---------------------------------------------------------------------------
Effective date.--The provision is effective on July 26,
2008.
The Housing Assistance Tax Act of 2008 increases the
otherwise applicable percentage (101.25 percent) by 16.75
percentage points.\966\
---------------------------------------------------------------------------
\966\ Pub. L. No. 110-289.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date of
enactment (July 30, 2008).
The extension of the Andean Tax Preference Act of 2008
increases the otherwise applicable percentage (118.00 percent)
by 2.00 percentage points.\967\
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\967\ Pub. L. No. 110-436.
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Effective date.--The provision is effective on the date of
enactment (October 16, 2008).

APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE
110TH CONGRESS

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