[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 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
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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

                              ----------                              
                                                                   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

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

    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 2003 through 2009, is $100,000 of the cost 
of qualifying property placed in service for the taxable 
year.\5\ 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.\6\
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    \5\ 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)).
    \6\ Rev. Proc. 2006-53, sec. 2.19, 2006-2 C.B. 996.
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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.\7\
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    \7\ 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 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.\8\
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    \8\ Sec. 179(c)(2).
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                           Reasons for Change

    The Congress believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of capital for property used in a trade or business. 
With a lower cost of capital, the Congress believes small 
businesses will invest in more equipment and employ more 
workers. Second, it eliminates depreciation recordkeeping 
requirements with respect to expensed property. In 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\

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    \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\

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    \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.
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    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.
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    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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

    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. To prevent double taxation of these items when the 
stock is later disposed of, each shareholder's basis in the 
stock of the S corporation is increased by the amount included 
in income (including tax-exempt income) and is decreased by the 
amount of any losses (including nondeductible losses) taken 
into account. A shareholder's loss may be deducted only to the 
extent of his or her basis in the stock or debt of the S 
corporation. To the extent a loss is not allowed due to this 
limitation, the loss generally is carried forward with respect 
to the shareholder.

                           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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------

    \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.
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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.
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    \71\ See section 115 of Pub. L. 110-245, related to the employment 
tax treatment of these amounts, described in Part Twelve.
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    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

    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.

                        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

    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.
    Under present law, return information may be disclosed to 
the entity making the return or to persons with a material 
interest.

                        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.
---------------------------------------------------------------------------
    \74\ Section 6724(d)(1).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    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\)
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

                              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\
---------------------------------------------------------------------------
    \81\ Sec. 9502(b)(1). The Airport and Airway Trust Fund also is 
credited with interest under sec. 9602(b).
---------------------------------------------------------------------------
           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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------
    \83\ The rule applicable to the adoption credit and child credit is 
subject to the EGTRRA sunset.
---------------------------------------------------------------------------

                           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\
---------------------------------------------------------------------------

    \84\ The provision was subsequently amended for taxable years 
beginning in 2008. See Part Seventeen, Division C, Title I.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
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    \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).
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    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.
---------------------------------------------------------------------------
    \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

    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.

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.
---------------------------------------------------------------------------
    \117\ All the public laws enacted in the 110th Congress affecting 
this provision are described in Part Twenty-Two.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \120\ Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \147\ For this purpose, ``United States'' includes any possession 
of the United States.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \150\ The low-proof blender amount is adjusted accordingly to 33.33 
cents.
---------------------------------------------------------------------------

                             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).
---------------------------------------------------------------------------
    \151\ Sec. 40(d)(4).
---------------------------------------------------------------------------

                           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\
---------------------------------------------------------------------------
    \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

    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'').\156\ The class 
lives of assets placed in service after 1986 are generally set 
forth in Revenue Procedure 87-56.\157\ Any race horse that is 
more than two years old at the time it is placed in service is 
assigned a three-year recovery period.\158\ A seven year 
recovery period is assigned to any race horse that is two years 
old or younger at the time it is placed in service.\159\
---------------------------------------------------------------------------
    \156\ Sec. 168.
    \157\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
    \158\ Sec. 168(e)(3)(A)(i).
    \159\ Rev. Proc. 87-56, 1987-2 C.B. 674, asset class 01.225.
---------------------------------------------------------------------------

                        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).

(c) Employee retention credit (sec. 15345 of the Act and sec. 1400R(a) 
                              of the Code)


                              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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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)).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \175\ 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 \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.
---------------------------------------------------------------------------
    \176\ 1971-1 C.B. 76.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \177\ Sec. 172(b)(1)(A).
    \178\ Sec. 172(b)(2).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \182\ Sec. 401(b).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \184\ Sec. 48A.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \186\ 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.

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \188\ The Secretary issued guidance establishing the certification 
program on February 21, 2006 (IRS Notice 2006-25).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \189\ This is the same definition of ``farming business'' used for 
averaging of farm income under section 1301.
---------------------------------------------------------------------------

                           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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \194\ 2007-33 IRB. 
---------------------------------------------------------------------------

                           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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

                     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 mortgage bonds are issued to make mortgage loans 
to qualified mortgagors for owner-occupied residences. The Code 
imposes several limitations on qualified mortgage bonds, 
including income limitations for homebuyers and purchase price 
limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).
    Under a special rule, qualified mortgage bonds may be 
issued to finance mortgages for veterans who served in the 
active military without regard to the first-time homebuyer 
requirement. Present-law income and purchase price limitations 
apply to loans to veterans financed with the proceeds of 
qualified mortgage bonds. Veterans are eligible for the 
exception from the first-time homebuyer requirement without 
regard to the date they last served on active duty or the date 
they applied for a loan after leaving active duty. However, 
veterans may only use the exception one time and the exception 
only applies to financing provided from bonds issued before 
January 1, 2008.

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)).
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    \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).
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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.
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                           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.
---------------------------------------------------------------------------
    \208\ Traditional IRAs are described in Code section 408, and Roth 
IRAs 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. 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).
---------------------------------------------------------------------------
    \209\ Sec. 403(b).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \210\ Coverdell education savings accounts are described in sec. 
530.
---------------------------------------------------------------------------
    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

    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.

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).
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                        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

    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.

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.

                        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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    \217\ Prop. Treas. Reg. 1.125-5.
---------------------------------------------------------------------------

                        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

    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 
before January 1, 2008, 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.
    The otherwise allowable itemized deduction for these State 
or local taxes is not reduced by the amount of any reduction or 
rebate on account of services performed as a member of a 
qualified volunteer emergency response organization.

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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \219\ For this purpose, however, U.S.-source income has a broader 
scope than it does typically in the Code.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------

    \240\ The provision was subsequently extended and modified. See 
Part 17, Division C, Title IV, Subtitle B.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.

(c) Community service facility eligibility for the credit

                              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.
---------------------------------------------------------------------------
    \246\ In addition, certain businesses under common control are 
related persons for purposes of these rules.
---------------------------------------------------------------------------

                        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).

(c) Repeal of bond posting requirement

                              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.
---------------------------------------------------------------------------
    \247\ See also the discussion of the full-time student rule in item 
I.A.7., below.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \248\ See Treas. Reg. 1.42-9.
---------------------------------------------------------------------------

                        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

    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. 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.
    The military provides the basic housing allowance. The 
recipients of the military basic housing allowance must include 
these amounts for purposes of low-income credit eligibility.

                        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\
---------------------------------------------------------------------------
    \249\ Sec. 147(b).
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \250\ Sec. 42(g)(2)(D)(ii).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \251\ Sec. 142(d)(3)(B).
---------------------------------------------------------------------------

                        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.

(c) Single-room occupancy units

                              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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                             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

    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 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \260\ Sec. 1445(a).
---------------------------------------------------------------------------
          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\
---------------------------------------------------------------------------
    \261\ Sec. 1445(b).
    \262\ Treas. Reg. sec. 1.1445-2(b)(3).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \263\ Sec. 1445(d)(1).
    \264\ Sec. 1445(d)(2)(A).
    \265\ Sec. 1445(d)(2)(B).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                           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\

---------------------------------------------------------------------------
    \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.
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    \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\
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    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
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    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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.
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                           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'').
---------------------------------------------------------------------------
    \332\ Sec. 6041(a).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \336\ Treas. Reg. sec. 1.861-11T(d)(4).
    \337\ Sec. 864(e)(5)(C).
    \338\ Sec. 864(e)(5)(D).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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

    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.

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 \344\

---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

                              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).
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \351\ Sec. 6402(c).
    \352\ Sec. 6402(d).
    \353\ Sec. 6403(e).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \354\ Sec. 6402(c), 6402(d)(1)(C) and 6402(e)(1)(C).
    \355\ Sec. 6402(e)(2).
    \356\ Sec. 6402(f).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \365\ Notice 2007-49, 2007-25 I.R.B. 1429.
    \366\ Treas. Reg. sec. 1.162-27(c)(2).
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \368\ Sec. 280G.
    \369\ Sec. 4999.
---------------------------------------------------------------------------
            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

    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).\371\ 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.
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    \371\ 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 of the taxpayer 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).

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.''
---------------------------------------------------------------------------
    \372\ Sec. 45.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \373\ Sec. 38(b)(8).
    \374\ Sec. 38(c)(4)(B)(ii).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    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\

---------------------------------------------------------------------------
    \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

    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.

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).
---------------------------------------------------------------------------
    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

    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'').\442\ Under MACRS, 
petroleum refining assets are depreciated for regular tax 
purposes over a 10-year recovery period using the double 
declining balance method. Petroleum refining assets are assets 
used for distillation, fractionation, and catalytic cracking of 
crude petroleum into gasoline and its other components.
---------------------------------------------------------------------------
    \442\ Sec. 168.
---------------------------------------------------------------------------
    A small business refiner (as defined by sec. 45H(c)(1)) may 
elect to expense 75 percent of qualified capital costs (as 
defined by sec. 45H(c)(2)) related to compliance with the 
Highway Diesel Fuel Sulfur Control Requirements of the 
Environmental Protection Agency (``EPA'') which are paid or 
incurred by the taxpayer during the taxable year.\443\
---------------------------------------------------------------------------
    \443\ Sec. 179B.
---------------------------------------------------------------------------
    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception--the cooperative may exclude from its taxable 
income distributions of patronage dividends. Generally, 
cooperatives that are subject to the cooperative tax rules of 
subchapter T of the Code \444\ are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative.\445\ 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.
---------------------------------------------------------------------------
    \444\ Sec. 1381, et seq.
    \445\ Sec. 1382.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \451\ Sec. 132(f).
---------------------------------------------------------------------------
    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\

---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \453\ Sec. 141(b) and (c).
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \455\ See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13, 
1997-1 C.B. 632.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \456\ Sec. 141(e).
    \457\ Sec. 142(a).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \458\ Sec. 103(a) and (b)(2).
    \459\ Sec. 148.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \460\ Sec. 7871.
    \461\ Sec. 7871(c).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\

---------------------------------------------------------------------------
    \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

    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.\469\ The class lives of 
assets placed in service after 1986 are generally set forth in 
Revenue Procedure 87-56.\470\ Assets included in class 49.14, 
describing assets used in the transmission and distribution of 
electricity for sale and related land improvements, are 
assigned a class life of 30 years and a recovery period of 20 
years.
---------------------------------------------------------------------------
    \469\ Sec. 168.
    \470\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                        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.
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    \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

    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'').\475\ 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.
---------------------------------------------------------------------------
    \475\ Sec. 168.
---------------------------------------------------------------------------
    A special depreciation allowance is provided for certain 
property acquired after December 31, 2007, and before January 
1, 2009 (January 1, 2010 in certain cases),\476\ cellulosic 
biomass ethanol property,\477\ and certain property used in the 
Gulf Opportunity Zone \478\ and Kansas disaster area.\479\
---------------------------------------------------------------------------
    \476\ Sec. 168(k).
    \477\ Sec. 168(l).
    \478\ Sec. 1400N(d).
    \479\ Pub. L. No. 110-234, sec. 15345 (2008).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \483\ Sec. 199(d)(9).
    \484\ Treas. Reg. sec. 1.199-3(e)(1).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \490\ Treas. Reg. sec. 1.199-9(i)(2).
    \491\ Treas. Reg. sec. 1.199-9(i)(1).
    \492\ Id.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
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    \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.
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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).
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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\
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    \522\ Sec. 6041(a).
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    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\
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    \523\ Sec. 6045(a).
    \524\ Sec. 6045(b).
    \525\ Id.
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    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\
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    \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\
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    \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.
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    \530\ Treas. Reg. sec. 1.1015-1(g).
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                        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

    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 (sec. 3302) 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.
    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 2008.

                        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).
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    \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\
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    \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).
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    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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

    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.\600\ 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.
---------------------------------------------------------------------------
    \600\ Sec. 168.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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

    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'').\751\ The class 
lives of assets placed in service after 1986 are generally set 
forth in Revenue Procedure 87-56.\752\ Asset class 01.1 
includes machinery and equipment, grain bins, and fences (but 
no other land improvements), that are used in the production of 
crops or plants, vines, and trees; livestock; the operation of 
farm dairies, nurseries, greenhouses, sod farms, mushrooms 
cellars, cranberry bogs, apiaries, and fur farms; and the 
performance of agricultural, animal husbandry, and 
horticultural services. These assets are assigned a class life 
of 10 years and a recovery period of seven years.
---------------------------------------------------------------------------
    \751\ Sec. 168.
    \752\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                        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


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)

                          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.
---------------------------------------------------------------------------
    \768\ 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 \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.
---------------------------------------------------------------------------
    \769\ 1971-1 C.B. 76.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \800\ Sec. 1400S(e).
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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

    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).
    The provision does not apply to discharges made after 
December 31, 2009.

                             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

    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.

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)).
---------------------------------------------------------------------------
    \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

    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.\822\ Unless an individual elects, no itemized 
deductions are allowed for the taxable year. The deduction for 
casualty losses is an itemized deduction.
---------------------------------------------------------------------------
    \822\ Sec. 63.
---------------------------------------------------------------------------

                        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).
---------------------------------------------------------------------------
    \824\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \825\ Section 712 of the Act.
---------------------------------------------------------------------------

                            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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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).
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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.
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    \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\
---------------------------------------------------------------------------
    \840\ Sec. 172(b)(1)(A).
    \841\ Sec. 172(b)(2).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \846\ Section 712 of the Act.
---------------------------------------------------------------------------

                             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

    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'').\847\ 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.
---------------------------------------------------------------------------
    \847\ Sec. 168.
---------------------------------------------------------------------------
    A special depreciation allowance is provided for certain 
property acquired after December 31, 2007, and before January 
1, 2009 (January 1, 2010 in certain cases),\848\ cellulosic 
biomass ethanol property,\849\ and certain property used in the 
Gulf Opportunity Zone\850\ and the Kansas disaster area.\851\
---------------------------------------------------------------------------
    \848\ Sec. 168(k).
    \849\ Sec. 168(l).
    \850\ Sec. 1400N(d).
    \851\ Pub. L. No. 110-234, sec. 15345 (2008).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \854\ 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.\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.
---------------------------------------------------------------------------
    \855\ 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 
(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\
---------------------------------------------------------------------------
    \856\ Pub. L. No. 110-234, sec. 15345 (2008).
---------------------------------------------------------------------------

                        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.
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    \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.
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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\
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    \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.
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    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.
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    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------

    \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\
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    \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)

    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. Under the PPA, in the case of a single-
employer plan not covered by the PBGC, the combined plan limit 
is not less than the plan's funding shortfall as determined 
under the funding rules. Under the provision, in the case of a 
single-employer plan not covered by the PBGC, the combined plan 
limit is not less than the excess (if any) of the plan's 
funding target over the value of the plan's assets.

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\
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    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \922\ Treas. Reg. sec. 1.401(a)(9)-5.
    \923\ Treas. Reg. sec. 1.401(a)(9)-9.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \924\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \927\ Sec. 4974(a).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \941\ The requirement applies with respect to the initial critical 
year.
---------------------------------------------------------------------------
    A rehabilitation plan is a plan which consists of actions, 
including options or a range of options to be proposed to the 
bargaining parties, formulated, based on reasonable anticipated 
experience and reasonable actuarial assumptions, to enable the 
plan to cease to be in critical status by the end of the 
rehabilitation period and may include reductions in plan 
expenditures (including plan mergers and consolidations), 
reductions in future benefits accruals or increases in 
contributions, if agreed to by the bargaining parties, or any 
combination of such actions.
    A rehabilitation plan must provide annual standards for 
meeting the requirements of the rehabilitation. The plan must 
also include the schedules required to be provided to the 
bargaining parties.
    If the plan sponsor determines that, based on reasonable 
actuarial assumptions and upon exhaustion of all reasonable 
measures, the plan cannot reasonably be expected to emerge from 
critical status by the end of the rehabilitation period, the 
plan must include reasonable measures to emerge from critical 
status at a later time or to forestall possible insolvency. In 
such case, the plan must set forth alternatives considered, 
explain why the plan is not reasonably expected to emerge from 
critical status by the end of the rehabilitation period, and 
specify when, if ever, the plan is expected to emerge from 
critical status in accordance with the rehabilitation plan.
            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\
---------------------------------------------------------------------------
    \953\ Pub. L. No. 110-287.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \959\ Pub. L. No. 110-138.
---------------------------------------------------------------------------
    Effective date.--The provision is effective on the date of 
enactment (December 14, 2007).\960\
---------------------------------------------------------------------------
    \960\ A technical correction may have been necessary but for the 
enactment of Pub. L. No. 110-289.
---------------------------------------------------------------------------
    The Mortgage Forgiveness Debt Relief Act of 2007 increases 
the otherwise applicable percentage (115.75) by 1.50 percentage 
points.\961\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \962\ Pub. L. No. 110-234 and Pub. L. No. 110-246.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \963\ Pub. L. No. 110-289.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \967\ Pub. L. No. 110-436.
---------------------------------------------------------------------------
    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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